Socialist  Controversy 


Early Beginning: Pierson vs. Kautsky   

Oldrich Kyn and Drago Fiser


First signes of the controversy appeared when the Dutch economists N.G. Pierson claimed that socialism cannot work. (Hayek [1], p. 27—28) The top Marxist theorist of that time, Karl Kautsky took the chalenge and in his Lecture of April 2, 1902 speculated  about „the Morning after Revolution“.Kautsky broke the traditional silence of Marxists about the concrete forms of the organization of the socialist economy, and said that because of the need to preserve the free choice of consumer goods as well as free choice of jobs, money and prices must still exist.

He said: „ Money is the simplest tool we know that allows circulation of goods and distribution to individual people in such a complex mechasnism as the contemporary process of production with extremely detailed divission of labor. (Kautsky , p. 129; qouted by Lange , p. 139.)


Elswhere Kautsky wrote: “Because workers cannot be assigned jobs in various industries against their will as in the army, it can happen, that too many workers would want to work in a certain industry, while there would be shortage of labor in some other.  The necessary equilibrium can be then obtained only by cutting the wages in those industries, where there is too many workers and increasing them in the industries where there is shortage...“ .“(Kautsky , pp. 134 - 135, cit, from Lange, p. 139.)

However, Kautsky did not write anything about the way socialist society would plan the production (Lange, p. 139).  This might have been the reason why Hayek stated that Kautsky was unawere of problems that were clear to economists. (Hayek, pp. 27 – 28) Kautski’s Lecture allowed Pierson to demonstrate that socialism cannot get rid of the value problem. „Value problem? This words may surprise many readers,....who think that if socialism was established, the value and therefore also the value problem would disappear.  Everything would then be just a technical matter. This view is today widespread.... but it is very wrong.“ (Pierson, pp. 43 – 44.)


 It is interersting, that Pierson arguments are primarily about the problems of foreign trade and distribution of income. In the case of distribution, he points out that only net income can be distributed. But how can one calculate net income without valuation. It is not posible to subtract physical quantities of inputs from the physical quantity of output. For example in the textile industry one cannot subtract quantities of cotton, coal, etc. From square meters of the produced cloth. It is only possible to subtract value of used cotton, coal, etc. from the value of produced cloth.  Without valuation it is not possible to know, how much of net income was really created, therefore, it is also not possible to correctly distribute this unknown net income to workers, managers, accumulation funds, etc. without making serious errors.

 And valuation is also needed for many other tasks, that have to be solved in the economy. Another argument of Pierson is about the diversity of peoples preferences.  If the government would want to distribute consumer goods directly in physical units, it would have to use some system of coupons.  It would need to assign people to various groups that would receive the same quotas of coupons, but even then it can hardly be assumed that all the people within certain group have exactly the same preferences. As a result people would start trading some coupons for others and the market exchange reappears. (Pierson, p. 75.)


 The WWI contributed to reappearance or strengthening the views that it is possible to centrally direct the whole economy in physical units without market.  Lenin, Bukharin, Preobrazhensky and some other Soviet economists clearly believed in such a possibility during the period of War Communism.



This belief was based not only on their theoretical views, but also on observations of the government controls instituted during the war especially in Germany. They did not realize that such controls were due to enormous shortages caused by the war, and that they would be impossible or at least highly inefficient under the normal situation in peace time

The similar views appeared also among some West European socialists. For example in 1925 was published a book of O. Neurath (1882 - 1945) in which the author argues that the war experience proved that it is possible to plan and control the economy in physical units without the use of value. 


   Also the well known leader of Austrian Social Democrats, Otto Bauer (1881 - 1938), believed at that time in possibility of the central control of the economy without value and prices.







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