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Excerpts from
Economic Calculation
in Socialist Commonwealth |
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Without
calculation, economic activity is impossible.
Since under socialism economic calculation is
impossible,
under socialism there can be no economic activity
in our sense of the word.
In small and insignificant things
rational action might still persist.
But, for the most part, it would no longer be possible
to speak
of rational production. In the absence of criteria of
rationality,
production could not be consciously economical. |
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For some time possibly the accumulated tradition
of thousands of years of economic freedom would preserve
the art of economic administration from complete
disintegration. Men would preserve the old processes not
because they were rational, but because they were
sanctified by tradition. In the meantime, however,
changing conditions would make them irrational. They
would become uneconomical as the result not changes
brought about by the general decline of economic
thought. It is true that production would no longer be
"anarchical." The command of a supreme authority would
govern the business of supply. Instead of the economy of
"anarchical" production the senseless order of an
irrational machine would be supreme. The wheels would go
round, but to no effect. |
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Let us try to imagine the position of a
socialist community. There will be hundreds and
thousands of establishments in which work is going on. A
minority of these will produce goods ready for use. The
majority will produce capital goods and
semi-manufactures. All these establishments will be
closely connected. Each commodity produced will pass
through a whole series of such establishments before it
is ready for consumption. Yet in the incessant press of
all these processes the economic administration will
have no real sense of direction. It will have no means
of ascertaining whether a given piece of work is really
necessary, whether labor and material are not being
wasted in completing it. How would it discover which of
two processes was the more satisfactory? At best, it
could compare the quantity of ultimate products. But
only rarely could it compare the expenditure incurred in
their production. It would know exactly, or it would
imagine it knew, what it wanted to produce. It ought,
therefore, to set about obtaining the desired results
with the smallest possible expenditure. But to do this
it would have to be able to make calculations. And such
calculations must be calculations of value. They could
not be merely "technical"; they could not be
calculations of the objective use-value of goods and
services. This is so obvious that it needs no further
demonstration. |
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Under a system based upon private ownership of
the means of production, the scale of values is the
outcome of the actions of every independent member of
society. Everyone plays a two-fold part in its
establishment, first as a consumer, second as a
producer. As consumer, he establishes the valuation of
goods ready for consumption. As producer, he guides
production-goods into those uses in which they yield the
highest product. In this way, all goods of higher orders
also are graded in the way appropriate to them under the
existing conditions of production and the demands of
society. The interplay of these two processes ensures
that the economic principle is observed in both
consumption and production. And, in this way, arises the
exactly graded system of prices which enables everyone
to frame his demand on economic lines. |
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Under socialism, all this must necessarily be
lacking. The economic administration may indeed know
exactly what commodities are needed most urgently. But
this is only half the problem. The other half, the
valuation of the means of production, it cannot solve.
It can ascertain the value of the totality of such
instruments. That is obviously equal to the value of the
satisfactions they afford. If it calculates the loss
that would be incurred by withdrawing them, it can also
ascertain the value of single instruments of production.
But it cannot assimilate them to a common price
denominator, as can be done under a system of economic
freedom and money prices. |
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It is not necessary that socialism should
dispense altogether with money. It is possible to
conceive arrangements permitting the use of money for
the exchange of consumer goods. But since the prices of
the various factors of production (including labor)
could not be expressed in money, money could play no
part in economic calculations. |
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Suppose, for instance, that the socialist
commonwealth was contemplating a new railway line. Would
a new railway line be a good thing? If so, which of many
possible routes should it cover? Under a system of
private ownership we could use money calculations to
decide these questions. The new line would cheapen the
transportation of certain articles, and, on this basis,
we could estimate whether the reduction in transport
charges would be great enough to counterweigh the
expenditure which the building and running of the line
would involve. Such a calculation could be made only in
money. We could not do it by comparing various classes
of expenditure and savings in kind. If it is out of the
question to reduce to a common unit the quantities of
various kinds of skilled and unskilled labor, iron,
coal, building materials of different kinds, machinery,
and the other things which the building and upkeep of
railways necessitate, then it is impossible to make them
the subject of economic calculation. We can make
systematic economic plans only when all the commodities
which we have to take into account can be assimilated to
money. True, money calculations are incomplete. True,
they have profound deficiencies. But we have nothing
better to put in their place. And, under sound monetary
conditions, they suffice for practical purposes. If we
abandon them, economic calculation becomes absolutely
impossible. |
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This is not to say that the socialist community
would be entirely at a loss. It would decide for or
against the proposed undertaking and issue an edict.
But, at best, such a decision would be based on vague
valuations. It could not be based on exact calculations
of value. |
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A stationary society could, indeed, dispense
with these calculations. For there, economic operations
merely repeat themselves. So that, if we assume that the
socialist system of production were based upon the last
state of the system of economic freedom which it
superseded, and that no changes were to take place in
the future, we could indeed conceive a rational and
economic socialism. But only in theory. A stationary
economic system can never exist. Things are continually
changing, and the stationary state, although necessary
as an aid to speculation, is a theoretical assumption to
which there is no counterpart in reality. And, quite
apart from this, the maintenance of such a connection
with the last state of the exchange economy would be out
of the question, since the transition to socialism with
its equalization of incomes would necessarily transform
the whole "set" of consumption and production. And then
we have a socialist community which must cross the whole
ocean of possible and imaginable economic permutations
without the compass of economic calculation. |
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All economic change, therefore, would involve
operations the value of which could neither be predicted
beforehand nor ascertained after they had taken place.
Everything would be a leap in the dark. Socialism is the
renunciation of rational economy. |
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. . . Some of the younger socialists believe
that the socialist community could solve the problem of
economic calculation by the creation of an artificial
market for the means of production. They admit that it
was an error on the part of the older socialists to have
sought to realize socialism through the suspension of
the market and the abolition of pricing for goods of
higher orders; they hold that it was an error to have
seen in the suppression of the market and of the price
system the essence of the socialist ideal. And they
contend that if it is not to degenerate into a
meaningless chaos in which the whole of our civilization
would disappear, the socialist community, equally with
the capitalist community, must create a market in which
all goods and services may be priced. On the basis of
such arrangements, they think, the socialist community
will be able to make its calculations as easily as the
capitalist entrepreneurs. |
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Unfortunately, the supporters of such proposals
do not see (or perhaps will not see) that it is not
possible to divorce the market and its functions in
regard to the formulation of prices from the working of
a society which is based on private property in the
means of production and in which, subject to the rules
of such a society, the landlords, capitalists, and
entrepreneurs can dispose of their property as they
think fit. For the motive force of the whole process
which gives rise to market prices for the factors of
production is the ceaseless search on the part of the
capitalists and the entrepreneurs to maximize their
profits by serving the consumers' wishes. Without the
striving of the entrepreneurs (including the
shareholders) for profit, of the landlords for rent, of
the capitalists for interest, and of the laborers for
wages, the successful functioning of the whole mechanism
is not to be thought of. It is only the prospect of
profit which directs production into those channels in
which the demands of the consumer are best satisfied at
least cost. If the prospect of profit disappears, the
mechanism of the market loses its mainspring, for it is
only this prospect which sets it in motion and maintains
it in operation. The market is thus the focal point of
the capitalist order of society; it is the essence of
capitalism. Only under capitalism, therefore, is it
possible; it cannot be "artificially" imitated under
socialism. |
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The advocates of the artificial market, however,
are of the opinion that an artificial market can be
created by instructing the controllers of the different
industrial units to act as if they were entrepreneurs in
a capitalist state. They argue that even under
capitalism the managers of joint stock companies work
not for themselves but for the companies, that is to
say, for the shareholders. Under socialism, therefore,
it would be possible for them to act in exactly the same
way as before, with the same circumspection and devotion
to duty. The only difference would be that under
socialism the product of the manager's labors would go
to the community rather than to the shareholders. In
such a way, in contrast to all societies who have
written on the subject hitherto, especially the
Marxians, they think it would be possible to construct a
decentralized, as opposed to a centralized, socialism. |
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In order to judge properly these proposals, it
is necessary in the first place to realize that these
controllers of individual units would have to be
appointed. Under capitalism the manager of the
joint-stock companies are appointed either directly or
indirectly by the shareholder. In so far as the
shareholders give to the managers the power to produce
by means of the company's (i.e., the shareholders')
stock they are risking their own property or a part of
their own property. The speculation (for it is
necessarily speculation) may succeed and bring profit:
it may misfire and bring about the loss of the whole or
a part of the capital concerned. This committing of
one's own capital to a business whose outcome is
uncertain and to men whose future ability is still a
matter of conjecture, whatever one may know of their
past, is the essence of joint stock company enterprise. |
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Now it is a complete fallacy to suppose that the
problem of economic calculation in a socialist community
relates solely to the matters which fall into the sphere
of the daily routine of the managers of joint stock
companies. It is clear that such a belief can only arise
from exclusive concentration on the idea of a stationary
economic system a conception which no doubt is useful
for the solution of many theoretical problems but which
has no counterpart in fact and which, if exclusively
regarded, can even be positively misleading. It is clear
that under stationary conditions the problem of economic
calculation does not arise. When we think of the
stationary society, we think of an economy in which all
the factors of production are already used in such a way
as, under the given conditions, to provide the maximum
of things which are demanded by consumers. That is to
say, under stationary conditions there no longer exists
a problem for economic calculation to solve. The
essential function of economic calculation has by
hypothesis already been performed. There is no need for
an apparatus of calculation. To use a popular but not
altogether satisfactory terminology we can say that the
problem of economic calculation is of economic dynamics;
it is no problem of economic statics. |
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The problem of economic calculation is a problem
which arises in an economy which is perpetually subject
to change, an economy which every day is confronted with
new problems which have to be solved. Now in order to
solve such problems it is above all necessary that
capital should be withdrawn from particular lines of
production, from particular undertakings and concerns
and should be applied in other lines of production, in
other undertakings and concerns. This is not a matter
for the for the managers of joint stock companies; it is
essentially a matter for the capitalists the capitalists
who buy and sell stocks and shares, who make loans and
recover them, who make deposits in the bank and draw
them out of the banks again, who speculate in all kinds
of commodities. It is these operations of speculative
capitalists which create those conditions of the money
market, the stock exchanges and the wholesale markets
which have to be taken for granted by the manager of the
joint stock company, who, according to the socialist
writers we are considering, is to be conceived as
nothing but the reliable and conscientious servant of
the company. It is the speculative capitalists who
create the data to which he has to adjust his business
and which therefore give direction to his trading
operations. |
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It follows, therefore, that it is a fundamental
deficiency of all these socialist constructions which
invoke the "artificial market" and artificial
competition as a way out of the problem of economic
calculation, that they rest on the belief that the
market for factors of production is affected only by
producers buying and selling commodities. It is not
possible to eliminate from such markets the influence of
the supply of capital from the capitalists and the
demand for capital by the entrepreneurs, without
destroying the mechanism itself. |
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Faced with this difficulty, the socialist is
likely to propose that the socialist state as owner of
all capital and all means of production should simply
direct capital to those undertakings which promise the
highest return. The available capital, he will contend,
should go to those undertakings which offer the highest
rate of profit. But such a state of affairs would simply
mean that those managers who were less cautious and more
optimistic would receive capital to enlarge their
undertakings while more cautious and more skeptical
managers would go away empty-handed. Under capitalism,
the capitalist decides to whom he will entrust his own
capital. The beliefs of the managers of joint stock
companies regarding the future prospects of their
undertakings and the hopes of project makers regarding
the profitability of their plans are not in any way
decisive. The mechanism of the money market and the
capital market decides. This, indeed, is its main task:
to serve the economic system as a whole, to judge the
profitability of alternative openings, and not blindly
to follow what the managers of particular concerns,
limited by the narrow horizon of their own undertakings,
are tempted to propose. |
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To understand this completely, it is essential
to realize that the capitalist does not just invest his
capital in those undertakings which offer high interest
or high profit; he attempts rather to strike a balance
between his desire for profit and his estimate of the
risk of loss. He must exercise foresight. If he does not
do so, than he suffers losses losses that bring it about
that his disposition over the factors of production is
transferred to the hands of others who know better how
to weigh the risks and the prospects of business
speculation. |
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Now if it is to remain socialist, the socialist
state cannot leave to other hands that disposition over
capital which permits the enlargement of existing
undertakings, the contraction of others, and the
bringing into being of undertakings that are completely
new. And it is scarcely to be assumed that socialists of
whatever persuasion would seriously propose that this
function should be made over to some group of people who
would "simply" have the business of doing what
capitalists and speculators do under capitalist
conditions, the only difference being that the product
of their foresight should not belong to them but to the
community. Proposals of this sort may well be made
concerning the managers of joint stock companies. They
can never be extended to capitalists and speculators,
for no socialist would dispute that the function which
capitalists and speculators perform under capitalism,
namely directing the use of capital goods into that
direction in which they best serve the demands of the
consumer, is only performed because they are under the
incentive to preserve their property and to make profits
which increase it or at least allow them to live without
diminishing their capital. |
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It follows, therefore, that the socialist
community can do nothing but place the disposition over
capital in the hands of the state or to be exact in the
hands of the men who, as the governing authority, carry
out the business of the state. And that signifies
elimination of the market, which, indeed, is the
fundamental aim of socialism, for the guidance of
economic activity by the market implies organization of
production and a distribution of the product according
to that disposition of the spending power of individual
members of society which makes itself felt on the
market; that is to say, it implies precisely that which
it is the goal of socialism to eliminate. |
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If the socialists attempt to belittle the
significance of the problem of economic calculation in
the socialist community, on the ground that the forces
of the market do not lead to ethically justifiable
arrangements, they simply show that they do not
understand the real nature of the problem. It is not a
question of whether there shall be produced cannons or
clothes, dwelling houses or churches, luxuries or
subsistence. In any social order, even under socialism,
it can very easily be decided which kind and what number
of consumption goods should be produced. No one has ever
denied that. But once this decision has been made, there
still remains the problem of ascertaining how the
existing means of production can be used most
effectively to produce these goods in question. In order
to solve this problem, it is necessary that there should
be economic calculation. And economic calculation can
only take place by means of money prices established in
the market for production goods in a society resting on
private property in the means of production. That is to
say, there must exist money prices of land, raw
materials, semi-manufactures; that is to say, there must
be money wages and interest rates. |
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Thus the alternative is still
either socialism or a market economy. |
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