Monday, February 29, 2016

Modern Technology and the Calculation Debate (Part 1)

This is an excerpt from a paper presented at ASSC 2016. Full Paper available here.

The socialist calculation debate is a major milestone in Austrian economics in which Mises, followed by Hayek and others, showed that socialism was untenable not just because of unfortunate incentives but because of defects inherent in the structure of the socialist proposal; there simply is no way, they argued, for a central plan to engage in rational economic calculation without freely fluctuating market prices for all orders of goods. One of the central aspects of the argument, emphasized particularly by Hayek, is the knowledge problem inherent in socialist planning. Because information is dispersed and specific to time and place, there is no way to centralize it in a way that would permit central planning to rival the free market. But recent developments in technology and the rise of the Internet have led some to question whether the Austrian position may need to be reexamined in the light of twenty first century advancements.

Leaps in Technology

Obviously technology has evolved in a way no one, including Austrian economists, could have foreseen. In particular, the rise of the Internet has dramatically reshaped the production process. Especially relevant to the calculation debate is the new and growing field called the Internet of Things (IoT). This term refers to the phenomenon of connecting everyday objects, not just specialized computers, to an international network. Watches, cars, refrigerators, lightbulbs, toothbrushes, and pretty much anything else you can think of are now being developed so their status can be viewed and controlled over the Internet. Agriculture is a good example of IoT implementation as it has been one its first major beneficiaries. Devices now exist which allow farmers to receive constant data about the status of individual plants, anticipate weather patterns, and adjust cultivation practices accordingly[1] (Lohr 2015). Other producers are able to make more informed production decisions as the ubiquity of sensors provides a wealth of data about consumer behavior and preferences. Certainly the nature of information has been revolutionized by the Internet, and some have taken this change as a reason to revisit and reject the Austrian position on the necessity of market prices in economic calculation.

Technology as a Solution to Socialism

The position that central planning could be a superior method of making production decisions if only technology were advanced enough goes back to the original calculation debate, but proposals have become more serious as computers became more powerful. Many writers from the early 1970s to now have proposed that Mises and Hayek may have been right back then, but we could eventually (and perhaps now do) have the technology to possess the knowledge necessary to plan the economy. Oskar Lange[2], conducted significant research into “cybernetic economics” in which computers would be used to facilitate central planning. This kind of planning was implemented in Chile in 1971 with project Cybersyn. While that project was abandoned in the midst of a military coup in 1973, some have proposed that the modern Internet can make central planning succeed where all other attempts have failed.
One optimist about the feasibility of socialism is activist Andy Pollack who writes,
The material possibility of socialism, as reckoned in the sheer productivity of industry and the availability of masses of goods and services, has existed for most of this century. Now the technical basis for the process of managing those things, i.e. for the process of socialism, has taken huge leaps forward with the advances in information technology of just the last few years.[3]
One can only assume that Pollack’s resolve has been strengthened by significantly greater technological advances in the past eighteen years. More recently, author and senior editor of The New Republic Evgeny Morozov connected fresh developments in Internet technology directly to overturning the result of the calculation debate in a 2015 interview.
The only way to beat the market… is by relying on cybernetics…. The unfortunate episode in the development of cybernetics is that… most… experiments in the socialist context never had the ability to work on the assumption of constant connectivity and interconnected feedback systems that can communicate in real-time at virtually no cost. If you think about the Soviet experience… it’s actually surprising that it carried on for so long given how poorly informed the planners were. And also how easy it was to cheat the system by submitting false data and so forth. Many of these problems can now be resolved thanks to the Internet of Things on the connectivity front and technologies like blockchains on the trust/security front (imagine: replacing the lying Soviet bureaucrats with a blockchain!). Where the neoliberals won the debate in the 1980s and the 1990s is in convincing all but hardcore believers in the communist project that socialism and even more broadly communism were practically impossible [due] to the implausibility of designing an adequate communication system that can be as effective as the market in allocating knowledge dispersed through the economy. I’m not sure that this argument is still valid today.[4]
As the Internet of Things becomes more ubiquitous, one must expect that Morozov’s position will seem increasingly plausible to socialists. They can admit that socialism was impossible in the past, but that now the world is ready; socialism can finally work!
One distinction must be made at the outset. The terms “prices” and “the price mechanism” as used by Mises and Hayek refer to the existence and use of genuine money prices which are the result of bidding for goods and services in a market. The term has been appropriated by others, like Lange and Taylor, to have a wider meaning, namely “terms on which alternatives are offered.”[5] This broad definition of prices, which may exist under socialism must be held separate from the term as used by Mises in the former sense.

Technical Flaws in Socialist Approach

Despite the high hopes of the above writers, it can truly be said that they all have missed the point. The Austrian critique of socialism is still valid today, and will still be valid regardless of the development of technology. To begin with, the plausibility of central planning even with advanced Internet and computing capabilities fails on a superficial, technical level. First, Morozov’s implication that the modern Internet allows for communication “in real-time at virtually no cost” is highly questionable on both counts. The speed of light is fast, but not negligible on a planet sized scale, and there are obviously large costs to building and maintaining Internet infrastructure. Second, As Jesús Huerta de Soto explains, the same technology that allows one to account for the collection and operationalization of more data also allows for the creation of a greater volume and complexity of data such that the information to be known will always run ahead of the ability to know it.[6] A great virtue of the price mechanism is that it does not, strictly speaking, convey all the information about the goods being priced but rather allows for the use of that information even by those who do not know it. As in Hayek’s example of tin, it does not matter why tin is more scarce; price fluctuations allow for appropriate adjustments in consumption and production without anyone knowing all the details. Through prices, information is encoded into a simple shorthand understood by everyone but designed by no one. It is through the price mechanism that production processes too complex to be contained in any consciousness are able to be realized, and eliminating market prices would eliminate that ability. In addition to these shortcomings, however, hope for a revival of socialism based on improved technology is flawed on a much more fundamental level.

[1] Lohr, S. (2015, August 3). The Internet of Things and the Future of Farming.
[2] Lange, O. (1970). Introduction to economic cybernetics. Warszawa: Polish Scientific.
[3] Pollack, A. (1997). Information technology and socialist self-management. Monthly Review. 49.
[4] Morozov, E. (2015). Internet as common or capture of collective intelligence. 18-19. Retrieved from
[5] Lange, O. & Taylor, F. M. (1938). On the economic theory of socialism. Minneapolis, MN: University of Minnesota Press.
[6] Soto, J. H. (2010). Socialism, economic calculation and entrepreneurship. Cheltenham, Glos, UK: Edward Elgar.