Home › Forums › Discuss Austrian Economics, Step by Step › Market Socialism and Economic Calculation:
- This topic has 3 replies, 2 voices, and was last updated 2 years, 3 months ago by jmherbener.
February 18, 2021 at 4:32 pm #18977kristianParticipant
Let’s say we have a socialized system that requires the management to play market to the full extent (ie to play market with anticipation) and base the managements pay loosely off this (bonus them when they do well, beat them with a stick when they perform poorly). The idea being that they replicate the entrepreneurial function of capital allocation in an anticipation of future demands, but limit the inequality of the market system by limiting their personal ability to consume to be much closer to the bounds of the average income in the society. Of course the savings of the overall society would be socialized, but the control of the recourses would be moved between “firms”. Wouldn’t this constitute a working market socialist system (however inefficient? This seems like we would be best suited to fall back on the incentives arguments at least against this particular case?March 5, 2021 at 7:41 am #18978jmherbenerParticipant
Ludwig von Mises deals with this very case in his book, Human Action. As he points out, central planners allocate capital funding to the managers. The central planners, then and not managers, must perform the entrepreneurial function of anticipating what use of resources will economize for consumers at large not the managers. In a market economy this function of allocating capital funding is done by capitalists, i.e., private investors, who invest their saving into lines of production that they anticipate will render monetary profits and not losses. Central planners cannot refer to the structure of prices to determine how to allocate resources for the benefit of consumers at large.
Take a look at chapter 26 in Human Action:March 5, 2021 at 4:08 pm #18979kristianParticipant
Thank you for the response, I seem to remember first learning this point loosely in Klein’s book The Capitalist & The Entrepreneur and appreciating the distinction between the control of resources (as Klein seems to argue the real entrepreneur function is in capital control not in say the firm level control; ie Elon Musks’ investors may be more important from a calculation standpoint than Elon Musk; correct me if I’m off the mark here). I guess where I struggle is in not so much the firm level but the allocation function itself. Say we have allocation managers who use a proxy currency as a unit of account, but they themselves cannot consume the units of account, rather they can only allocate them. So in essence I’m curious more on the possibility or lack thereof not of the internal firm managers playing market, but the intra firm function of resource allocation (in a dynamic sense, not a static sense). So the process by which these proxy entrepreneurs are added or removed is somewhat indirect, but related (I’m thinking like generals in WW2 where there is a performance evaluation and a shifting of rank, or in the case of our managers if they invest a bunch of funds and lose it all they are stripped of rank and back to picking up the garbage). Using a proxy currency we have their control over the allocation of resources based on the profit and loss magnitudes, but the actual ability to consume would be largely removed from those managing the intra firm allocation of resources. Obviously there is one weakness I can think of here and that’s the fact that the majority of our members of society are to however a small degree capitalists so you have many more heads in the game than say with managed intra firm allocation system. But I’m trying to see if and when the impossibility condition breaks down and is supplanted with an incentives issue (ie high profits and innovation are probably gone since like we see with the FDA the incentive is usually higher to not mess up rather than to succeed because the costs outweigh benefits). To add to my final point I assume that the incentive issue itself is a perversion of price since the costs are artificially inflated relative to benefits (or vice versa). So obviously because there is a small calculation issue present, the efficiency of the system is hampered, but seemingly not impossible (I guess it depends on how that’s defined; essentially I’m thinking this works in the same way France works, wasteful of resources, but its citizens are not eating their pets). I trust I might be still missing something here, and again I really appreciate your time on this Dr. Herbener.March 7, 2021 at 9:32 am #18980jmherbenerParticipant
Mises’s argument about the impossibility of economic calculation, and therefore economizing resource allocation, under central planning refers to socialism, i.e., state ownership of the means of production. If the state owns the means of production, then there can be no trade in the means of production and therefore no prices for the means of production. Without prices, all the central planners have on which to base their allocation decisions is their subjective valuations and the technical facts of production. These are inadequate for economizing decisions since the more efficient arrangement of factors of production cannot be determined by either adding up resources in-kind (e.g., labor hours with machines with materials) or imputing subjective value to the higher-order goods.
Market socialism fails to solve this fundamental problem. “Prices” set by the central-planners in their “currency” are completely arbitrary with respect to entrepreneurial problem, which is anticipating which lines of production and investment for which resource will be allocated today will prove to be justified by satisfying higher-value preferences in the future.
In addition to Mises’s discussion of Market Socialism in Human Action, take a look at Joe Salerno’s epilogue to Mises’s article on Economic Calculation:
In contrast, you seem to be posing a problem of interventionism, not socialism. Mises does not claim that it is impossible in an interventionist state, like France, for there to be economic calculation. If there is some outlet for private property and exchange in a general medium of exchange, then there will be money prices useful for economic calculation.
Alternatively, if all you are saying is that the three problems of socialism (incentives, knowledge, and calculation) are intertwined in applied analysis, then nobody disagrees with you.
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