This is an excerpt from a paper presented at ASSC 2016. Full Paper available here.
Not only can the information relevant to economic calculation not be collected by any agent by any means, the information that can be collected and used for central planning makes calculation more difficult, not less. Mateusz Machaj[1] writes of the fundamental difference between centrally planned “prices” and prices which emerge from free exchange. The “planners” in a free market, he argues, are the various entrepreneurs who attempt to make plans using price signals as clues and who then subject these plans to the judgement of profit or loss. In this way, productive enterprises are allowed to persist while those which are unproductive, and, thus, waste resources, are forced to shut down. In a centrally planned scheme, however, prices do not control the planners; planners control the prices. So production will be driven in the direction of the planners’ preferences regardless of economic reality because the forces which would constrain entrepreneurs are themselves under the control of the planners.
This
critique is made more fully by Don Lavoie[2]
who emphasizes the role of rivalry between competing production plans in the
formation of prices that allow for rational economic calculation. Lavoie
recounts the Austrian critique specifically toward the more recent proposal of
so-called “market socialism.” Later in the calculation debate, proponents of
central planning like Lange and Lerner retreated from full socialism and essentially
conceded half the argument to the Austrians by defending, instead, market
socialism. This model entailed allowing markets to allocate consumer goods and
using the information generated by that process to centrally plan the production
side of the market. The Austrians would agree that allowing the price mechanism
to work on the consumer side does solve the calculation problem for that side
of the market (that is merely a concession of the Austrian thesis), but they
further held that free prices are necessary for all orders of goods on both
sides of the market for rational economic calculation to occur throughout the
whole economy. As Lavoie demonstrates, centrally planned production still does
not work under the market socialist model; free capital markets are indeed
necessary in addition to free markets for consumer goods.
This point
is precisely where the modern socialist arguments about the use of technology
may appear to function best. Perhaps, as noted above, consumer preferences are
of a nature that they cannot be assimilated into a central plan by any
technological means, but surely the producer side of the market does not suffer
from this same shortcoming. The argument might go that planners could simply
take the information from freely fluctuating prices in markets for consumer goods
as sufficient to centrally plan production of those goods which consumers value
if they also have access to the wealth of information produced by radically
interconnected technologies like the Internet of Things. Are not these two sets
of data sufficient to establish a rational allocation of higher order goods? To
go back to Hayek’s tin, why would one need market prices to adjust exchange
ratios in response to changes in the availability of tin if a computer can
provide the information even more quickly? This position once again fails on a
fundamental level, as Lavoie emphasizes, because the information bearing
properties of prices in a free market are the result of rivalry between various
plans.
Because
factors of production are scarce and have alternative uses, producers have to
bid them away from alternative production plans. This rivalrous bidding process
is what makes factor prices the bearers of economic information that can be
used to engage in economic calculation. Rivalry means that each producer has
his own ends in mind and will judge potential production decisions by his
expectations of how they will achieve his ends. His use of scarce factors is
then judged based on its ability to satisfy others’ preferences, and this information
is communicated as either a profit or a loss. The producer can then use the understandable
unit of money prices to engage in economic calculation and determine his
preferred course of future action. But if there is central planning, then there
is one goal of production not many competing goals. In that case, the
allocation of capital is directed toward the goal of the planners. Even if the
planners set up some sort of exchange ratio between factors, these “prices”
will not carry with them the information necessary to economic calculation. The
old dream of mandating that price equal marginal cost fails because marginal
cost is not given, and it is not a characteristic of the inputs themselves. All
costs are opportunity costs and the opportunity cost of using particular inputs
is discovered by the process of bidding factors away from alternative uses. Centrally
planned exchange ratios for factors of production will not have encoded within
them information about the alternative uses of factors because they acquire
that property from being bid away from alternative uses of which there are none
under central planning.
Conclusion
The crucial
fact about the flaws in even the market socialist thesis is that it is not a
technical problem but a fundamental flaw in the idea of central planning.
Proposing to solve the calculation problem with ever more advanced and
connected computers is, therefore, to misdiagnose the problem. It is quite likely
that very interesting and useful innovations will be produced by solving
technical problems with the IoT, block chains, and related technologies, but to
set these phenomena as solutions to the socialist calculation problem gives the
right answer to the wrong question.
