Wednesday, March 2, 2016

Rivalry and Central Planning (Modern Technology and the Calculation Debate Part 3)

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.




[1] Machaj, M. (2014). Market socialism and economic calculation. Argumenta Oeconomica, 1(32).
[2] Lavoie, D. (1985). Rivalry and central planning. Arlington, VA: Mercatus Center at George Mason University.

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