Socialist Entrepreneurs

Economics Economics Questions
1

Hello,

I have been trying to understand why economic calculation is not possible in a socialist society. I think I understand why a completely centrally planned society could not economize. Planners would have no way of determining opportunity costs associated with the factors of production. I also see why planners could not economize merely by solving the various mathematical equations to determine what prices would be in equilibrium. Knowing what prices would be if the economy was in some theoretical equilibrium tells you nothing about how to move toward that equilibrium given that the real world is currently in disequilibrium. However, I do not understand why a so-called market socialist economy is necessarily impossible. Perhaps someone here can help me work out why.

In Human Action, Mises wrote the following regarding market socialism: “One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character. They are no longer businessmen, but just a group of men to whom the director has handed over his main task, the supreme direction of the conduct of affairs. Then they–and not the nominal director–become the true directors and have to face the same problem the nominal director could not solve: the problem of calculation.”

Salerno, in his postscript to Mises’ 1920 article, states basically the same thing: “…any attempt to implement monetary calculation by forcing or inducing managers of socialist enterprises to act as profit-maximizing (or even more absurdly, price-and- marginal-cost-equalizing) entrepreneurs founders on the fact that these managers do not have an ownership interest in the capital and output of their enterprises. Consequently, the bids they make against one another in seeking to acquire investment funds and purchase productive resources must result in interest rates and prices that are wholly and inescapably arbitrary and useless as tools of economic calculation.”

In other words, Mises and appear to be saying that, if people are not risking their own private property, they will not act responsibly enough to be allowed to perform the entrepreneurial function.

My question is this: how does one know a priori that the “socialist entrepreneurs” will not decide to act responsibly with “society’s” property? How does one know that there is no way for the socialist director to devise a system of incentives that would cause the socialist entrepreneurs to behave responsibly?

Elsewhere in Human Action, Mises explains why entrepreneurs under capitalism do behave well: “Society can freely leave the care for the best possible employment of capital goods to their owners. In embarking upon definite projects these owners expose their own property, wealth, and social position. They are even more interested in the success of their entrepreneurial activities than is society as a whole. For society as a whole the squandering of capital invested in a definite project means only the loss of a small part of its total funds; for the owner it means much more, for the most part the loss of his total fortune.”

Entrepreneurs serve the consumers under capitalism because their “property, wealth, and social position” depend on their doing so. What prevents a socialist director from creating an inventive structure whereby the “property [i.e. their consumer goods], wealth, and social position” of the socialist entrepreneurs depended upon their profit-making abilities? If the director did create such a system, would not the socialist entrepreneurs behave the same as capitalist entrepreneurs?

–Gabriel

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I’m not (yet) too familiar with the calculation debate, so I’d also be interested in any responses to this question.

3

Let me quibble just a bit with the word “responsible”. An entrepreneur should seek to act efficiently, productively, proffitably, etc., but responsible is a value laden word of variable meaning.

The problem is that the entrepreneur needs information. To assume that a “socialist entrepreneur” can chose either to take responsible actions or not assumes away the problem, which is that in a socialist economy he doesn’t have the information he needs in order to make a choice in the first place.

If I understand the question, then yes. Except then wouldn’t he be a capitalist and not a socialist?

4

Good catch. You are correct. I should have used a word such as profitably. I noticed my blunder before you pointed it out, but I do not know how to edit posts. Does this forum allow editing past posts?

Let’s assume, as Mises does, “that the director has at his disposal all the technological knowledge of his age. Moreover, he has a complete inventory of all the material factors of production available and a roster enumerating all manpower employable. In these respects the crowd of experts and specialists which he assembles in his offices provide him with perfect information and answer correctly all questions he may ask them.” Even given these assumptions, Mises still says market socialism would be impossible.

Given these assumptions, what piece of information does the socialist entrepreneur lack that a capitalist entrepreneur would have? Or do you think that, if socialist entrepreneurs were given this information, market socialism would work (i.e. Mises was wrong)?

In such a system all the factors of production would still be “publically” owned. Publically owned factors of production is by definition socialism. How can you call an entrepreneurs in such a system capitalists?

–Gabriel

5

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How will he know what questions to ask? Consumer preferences consist of infinite little bits of information that cannot possibly be collected all in one place. Your question assumes away this problem but in real life it can’t be overlooked.

Consumer preferences are not quantifiable. They can be ranked in order but you can’t assign numbers to them. Even if you could my preferences will be different than yours.

How will the great programmer in Moskington know which bits of information actually matter, and to what degree, and at what point in the production process to factor them in and for how long?

In the following examples what variables would you create and what values would you assign?

I used to eat at Fireman’s Sub down the street but they’ve switched to a meat with more grissle and I don’t go there anymore.

Visual Basic 6 was a great programming language because you could easily translate from script to compiled code; but then everyone and their brother started claiming to be VB programmers and the odds were that if you hired a contractor he’d be doing on the job training on your dime.

Cotton is grown in by slave labor Uzbekistan, trucked across Iran with it’s bad roads and labor problems, then made into textiles in Pakistan. The goods get floated across the Pacific throught Panama Canal, unloaded by Longshoremen and wholesaled to a retailer in the US who pays UCI, WCI, minimum wage, etc.

If I tell you the rainfall in Uzbekistan was lower by two inches this year can you tell me the delta price of a shirt? If the shirt was an unpopular style and sat on the shelf for two years would the rainfal the year the cotton was grown matter?

Even if a central beureau could somehow overcome all of these problems, the premise that prices can be calculated centrally implies that cost determines price. After all, what is the beureau calculating but cost factors? But cost does not determine price; consumers determine price.

7

Gabriel, a quick point to help you from falling into the same errors in the future: Mises never said market socialism is impossible. I believe he said efficient calculation is. That is quite a different statement. Boettke clarifies this point as well in his reply to Bryan Caplan on Socialist calculation.

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Yes, and in fact that founds a lot like capitalism under a state. But the problem is, what keeps the director in check? He does not respond to market forces. He has a monopoly on violence, and the market is subservient to him. He has no reason to behave in ways which serve the consumer.

He lacks prices. Prices are the means by which all of the production in a market economy is directed. Prices are the product of the preferences of consumers, and preferences can only be demonstrated by action. Thus, prices can only be determined by the actions of consumers in the marketplace.

Of course, we could imagine a world where the minds of consumers were read and their choices predicted with perfect foresight, but if that were possible economic debate on the issue would be pointless. A capitalist system would use such technology to serve consumers in the same manner a benevolent socialist director would.

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From Human Action, “It is important to realize that this problem has nothing at all to do with the valuation of the ultimate ends. It refers only to the means by the employment of which the ultimate ends chosen are to be attained. We assume that the director has made up his mind with regard to the valuation of ultimate ends. We do not question his decision. Neither do we raise the question of whether the people, the wards, approve or disapprove of their director’s decisions. We may assume for the sake of argument, that a mysterious power makes everyone agree with one another and with the director in the valuation of ultimate ends.”

Mises assumes that the director has already solved the problem you describe. Yet he still says market socialism would not work.

I agree that the problem you present is probably insurmountable and very relevant to real life, but it is nonetheless a different problem than what Mises was describing.

I do not understand why you say “the premise that prices can be calculated centrally implies that cost determines price.” Would you elaborate further?

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Mises called market socialism “paradoxical”, “nonsensical”, and “as self-contradictory as is the notion of a triangular square.” He may not have used the word impossible, but the conclusion that market socialism is impossible necessarily follows from the words he did use to describe it.

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But remember that the problem Mises describes was supposed to have nothing to do with how well the director was serving the consumer. From Human Action, “Our problem, the crucial and only problem of socialism, is a purely economic problem, and as such refers merely to means and not to ultimate ends.” Mises’ problem was supposed to be that the socialist director could not know the means to reach his end, whatever his end may be. Whether the director tries to serve the consumer or not is irrelevant to Mises.

But with a proper incentive structure, what would prevent the socialist entrepreneurs from determining the price structure in the same way that the capitalist entrepreneurs have created the price structure in our world today?

In Human Action, Mises makes that very assumption: “We may assume for the sake of argument, that a mysterious power makes everyone agree with one another and with the director in the valuation of ultimate ends.” Yet the problem Mises describes has nothing to do with that.

–Gabriel

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Gabriel,

I’m glad you’re asking these questions as I am new to the topic too. Though some of the replies so far have been helpful, I think you correctly point out that most of them miss the point. Mises was willing to assume for argument’s sake that all these other complications were manageable and that socialism still could not calculate since there was not priviate ownership in the means of production. I guess your question boils down to, is it possible for a socialist government to design an incentive structure so that managers act as private owners of the factors of production under their control? One possible answer is: In order for managers to really act like private owners they must be able to do whatever they want with the resources under their control – i.e. save them, sell them, destroy them, or employ them in any way they desire – and answer to no one regarding their use. But if this were the case, and the central authority gave up its control over the resources, wouldn’t we in effect have a private property system? We could no longer say that there was a socialization of the means of production. This would be my first guess at a response.

If you’ll excuse the minor hijack Gabriel, this brings up a related issue that I’d love to read some discussion on: Do all interventions in a free market cause some degree of calculational chaos? If so, what is the nature of this effect? For example, if the goverment socializes healthcare insurance, but the factors of production (to be employed in the healthcare field) are still privately owned, what are the consequences for economic calculation?

Great discussion. Thanks.

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The terms taken together are paradoxical. It says nothing of the viability of the institution though - it is certainly possible for it to exist; Mises would argue though that it is not possible for it to calculate efficiently. To answer why that is so I’d need to be versed in Mises’s arguments on the matter, which I am not, so I will defer to someone with greater expertise.

Socializes it in what regard then? Providing it for free, for instance? In that example it’d have to finance this “free” provision somehow, i.e. via taxation. Wealth would have to be extracted by productive individuals, and redistributed to the nonproductive. This alone deprives those individuals of putting those resources to uses they value more highly.

14

If I said, “Market socialism is impossible,” I would mean that it would be impossible to have an economy that is completely socialist and completely market-based because that would be contradictory. You seem to be saying, “Market socialism could exist,” whereby you mean that a society could call itself “market socialist” and try to implement socialism and markets simultaneously although it could not actually do so (since doing so would be a contradiction). Thus, I think we both agree but are using the phrase market socialism differently. :slight_smile:

By the way, Mises did not merely argue that socialism could not calculate efficiently, he argued that it could not calculate at all (i.e. any calculations performed by the socialist director would have to be completely arbitrary and thus irrelevant to the real world).

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What I mean is that it’d be a pseudo-market, at best. One could call it a market socialist system and implement all its relevant features (not necessarily both a market and socialism; just concepts borrowed from the market.) It still would not be a market in the real sense of the word (free exchange of private property), and if Mises is correct, it’d not even be able to calculate.

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What you’ve said may hold the answer to the puzzle.

I just read Man, Economy, and State where Rothbard states, “ownership is, de facto, the control of a resource.” So the answer to your question “if this were the case, and the central authority gave up its control over the resources, wouldn’t we in effect have a private property system?” appears to be “Yes.”

In other words, the only way to get the “socialist entrepreneurs” to behave like capitalists would be to give them complete control over the factors of production. But then, by definition, that would be giving them private property and thus returning to a market economy.

That explains why Mises kept calling market socialism self-contradictory.

Very interesting question. My first guess would be “no, interventions do not necessarily cause some calculational chaos.” Calculational chaos, as we call it, happens when there is an absense of a market or when the market is not allowed to function (e.g. price controls). Not all interventions involve eliminating or manipulating markets so not all interventions would cause calculational chaos. As a quick example off the top of my head, the government could pass a law requiring everyone to drink 10 cups of RC Cola per day. The entrepreneurs would merely adjust their plans to account for the fact that the demand for RC Cola will rise. People everywhere (except for RC Cola stockholders) would be inconvenienced, but I do not see why the markets would work any less efficiently.

I guess a better answer would depend on exactly how you define “calculation chaos” though.

–Gabriel

17

I’m not really sure exactly what you are referring to here. Market socialism? The director still needs to set prices in that scheme, but you may need to turn to Hayek for his criticism of that system. The director would simply not have the knowledge to set prices correctly, because that knowledge is dispersed throughout society.

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Market socialism is a system whereby a central director sets prices for various goods, in order to direct the the economy. The state is just assumed to have ownership over certain property rights, namely the rights of exchange (since they set prices).

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There are different versions of market socialism. In one version, the director sets prices for all goods and services and then tells the managers of the firms to go out and start profiting. The director then watches for surpluses and shortages. If there is a surplus of a good or service, the director lowers the corresponding price. If there is a surplus of a good or service, the director raises the corresponding price. In such a system, yes, the director does set all prices. In “Oskar Lange and the Impossibility of Economic Calculation,” MacKenzie describes this system as follows: “Lange argued that officials can arrive at market clearing prices by observing inventories- ‘any mistake by the central planning board would announce itself in a very objective way: by a physical surplus or shortage’ (1936 p64). Managers could find equilibrium prices through repeated trials.” And elsewhere: “Taylor’s proposal merely suggested that officials could clear existing inventories by adjusting prices.” This system would not work because “While the competitive solution aimed at clearing existing inventories of goods, economic calculation aimed at estimating the demand for future inventories. This required speculation performed by entrepreneurs in financial markets.”

However, this is not the only version of market socialism. In Human Action, Mises wrote, “In recognition of the fact that such an idea [the version of market socialism described above] would be simply nonsensical, the advocates of the quasi-market plan sometimes vaguely recommend another way out. The director should act as a bank lending the available funds to the highest bidder.” In such a system, prices would be not be determined directly by the director. This is the version of market socialism that I was concerned with.

–Gabriel

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For those interested, Mises deals with calculation and socialism in Human Action on pages 689 - 715.