Plan and Market   Marx and Mechanism



Let us now examine the system of centralized economic control, from which the function of the market mechanism had been eliminated. According to earlier believes such a system should completely remove the spontaneity that was considered a negative outcome of the market mechanism. It was assumed that all economic relations and processes would become transparent and easy to observe and that the social character of production would be ensured by a conscious and planned allocation of labor, means of production and finished commodities among the individual spheres of production and consumption. This assumption was based on the concept of the directly social character of labor under socialism. The term "directly social character of labor" presumably meant that the social character of individually performed labor does not have to be assessed at a later stage, when the result of labor are confronted with the real needs of society, but are assured beforehand, that is before the labor itself has been done. On the basis of conscious decision-making only such goods would be produced, which society really needs, so that a subsequent proof by the market would not be needed. In other words decision ax ante would be so perfect, that no ex post correction would be necessary.

The experience we have gained from the functioning of such a model has shown us, that the concept of the directly social character of labor was unfounded. Elimination of the market and creation of a system of centralized planning is not a sufficient condition for achieving so perfect ex ante decisions, that ex post corrections would be superfluous. Somebody may object that such a conclusion could be valid only if we assume the use of imperfect planning methods as in the past. Presumably with newly developed optimization methods and with the help of computers much can be improved in this respect. But our conclusion about the impossibility of entirely correct ex ante decisions can be sustained theoretically and does not have to be based only in practical experience. At the same time however we should not see the economy through the eyes of classical economics of the last century. Rather we should use a contemporary approach of the theory of information and decision-making.

Why did Marx as well as some other socialist thinkers of the 19th century believe in the possibility of substituting centralized planning for the market mechanism? Why they wanted to develop a directly social character of labor? Perhaps a general comparison of scientific approaches in the 19th and 20th centuries will shed some light on this questions. In 19th century the natural as well as social sciences were undergoing very fast development. Physics, which was the most exact among the sciences, had a dominating role in the formation of scientific thinking. The methods employed by physics seemed at that time to be prototypes for the methodology of all branches of science. This fact caused that virtually all the scientific thinking in the 19th century concentrated its attention primarily to problems concerning matter end energy and their relationships in various systems. The question of the role of information had practically not been posed. The state of economic reality contributed to this orientation of science. For any society the main limiting factor for the growth of its wealth was its productive capacity, that is the quantity of material and energy resources. The problem of information and the ability to make decisions did not seem as important. The fact that information is never "free", that to acquire information society has to spend both material and energy was entirely overlooked. Equally overlooked was the fact that there are natural limits as to the amount and speed of information transmission.



This does not mean that the existing network of information and decision-making was considered ideal. On the contrary, Marx's criticism of the market mechanism is implicitly also a criticism of the poor organization of the information and decision-making network of the society. In Marx we find the approach typical for science of the last century: no distinction between phenomena that were the result of the material and energy limitations and those that were the result of poor organization of society's information network. Because science in the 19th century had not formulated laws concerning information and decision-making, it was possible to imagine that by a radical restructuring of the information and decision-making network of society, it might be possible to achieve perfect economic coordination ex ante.

Keeping in mind the laws of information transmission and decision-making processes we can say

  • absolutely correct ex ante decisions are impossible for principal reasons ;

  • the goal of making prognosis more precise is not always economically rational;

  • removal of the market mechanism make thing's worse, not better.

What are the reasons for these conclusions? None of the exogenous factors, that must be taken into account when computing the plan can be anticipated with absolute certainty. Many of these factors can be guessed only with low probability. This is especially true, of such exogenous factors as the weather, natural disasters, innovations, conditions prevailing in international trade and politics, changes in consumer's tastes etc. During preparation of the plan we assume certain specific configuration of these exogenous factors, whereas during the implementation of the plan the situation is almost always different. The plan worked out from the originally presumed configuration either cannot be fulfilled at all, or if it is carried out, it does not represent the optimum solution, in view of the changed conditions. In other words in such a situation scarce resources are not being used in the best way to maximize final benefits of the society.



Decisions that need to be taken ex ante can only be derived from the probabilistic estimates of future conditions and thus will always involve some risk. If the dynamics of the economy were dependent only upon such decisions, economic disequilibrium, inefficiency and waste of scarce resources would be inevitable. It is therefore necessary for optimum development of the national economy, that besides ex ante decisions also a system of supplementary feeds-backs exists to ensure ex post corrections. This can be done most efficiently by the market. One can imagine methods other then the market, for implementation of ex post corrections, but experience has shown that none of the other methods known are superior to the market. 

 To understand why the goal of making forecasts more precise is not necessarily economically rational, we must take into consideration that all gathering and processing of information incurs costs in terms of labor and material. The more information we want to collect, the higher costs are incurred. It means that a large share of scarce resources of the society has to be withheld from the production of commodities. The inaccuracy of our anticipation of the future is not only the result of the principal impossibility of gaining certain types of information about the future, but also stems from the fact that we do not make full use of information that would be possible to acquire. To increase the amount of information gathered would have two consequences. First of all our forecasts would be somewhat more accurate, and thus the risks connected with planned decision-making would be reduced. But at the same time the cost of the information process would grow. It is evident that this will be efficient for society when the gain from reduced risks of decision-making would be higher then costs incurred by the gathering and compilation of further information. This leads us to an important conclusion: For optimum development of the national economy it is useful to leave a certain number of processes to ex post correction even in cases where ex ante decisions might be possible..

 It has been shown that the market is a necessary and useful corrective, but actually the role of the market is more important. It can be shown, that for optimum development of the national economy the market is also a necessary prerequisite of planned decision making




At each moment of time the volume of production is constrained by available scarce resources. These limited resources can be combined in numerous ways to produce many distinct combinations of final products. Consumers have their individual preference scales by which they rank resulting combinations. An optimal plan should find among the multitude of possibilities those particular combinations of products that make best use of scare resources as judged by individual and social preferences.

According to Marx, removal of market mechanism would make "relations of production" so transparent, that it will be simple to set an optimum plan directly in physical units. There would be no need to use calculation in value terms. While it may be true that the market form obscures some productive relations and that it leads to "fetishism", Marx seems to have been mistaken when he thought that removal of market would make all relations within the economy completely transparent. This point was discussed in the well-known "socialist contraversy" (von Mises, Hayek, Lange, Lerner and others) on planning and economic calculation under socialism. The fact that relations in the modern economy are obscured and complicated stems from very complex division of labor and from the great number of interrelated technologies. It has been convincingly shown that under the intricate modern productive and technological relations, mere common sense cannot grasp the whole picture, without converting diverse units of measurement to some sort of "common denominator". Marxist economist Oskar Lange, had to admit that categories of the market such as prices, wages, interest etc., are a necessary prerequisite, which enables people who make economic decisions to find their way in the incomprehensible maze of technological combinations. Abolishing the market does not make it easier, but on the contrary, makes it more difficult to make ex ante decisions. Without the help of calculation in monetary units it is impossible to achieve coordination of decisions, that would ensure the smooth functioning of the economy.

Since prices emerge as important parameters which is necessary for the measurement of efficiency, it is not irrelevant what prices are being used. If the price system is distorted, then economic decisions are misguided i.e. what seems to be the optimum decision for a given problem, may not be the optimum solution for society as a whole. In order to find optimum solutions for society as a whole it is necessary that prices reflect scarcity of resources relative to individual and social preferences. But such prices cannot be centrally calculated and therefore the optimal development of the national economy cannot be ensured if all prices are rigidly fixed by the center. Prices which reflect the scarcity of resources in relation to the preference systems can be obtained only by the market. Since without such prices optimum decision-making is impossible, we come to the conclusion that the market is indispensable for the functioning of the socialist economy. Market is needed because it provides the parameters for ex ante optimum decision-making.




In the above discussion the necessity for the existence of the market is based on three facts:

  • The scarcity of productive resources,

  • The fact that the social productive process is immensely complex.

  • The need for taking individual and social preferences into consideration.

Insofar as these three facts exist it is impossible to achieve optimum development without the market mechanism. In Marxist literature we however find the idea that the existence of the market is determined only at certain level of development of the productive forces of society. It is taken for granted that further development of productive forces will make it possible to abolish market forms. It follows from what has been said above that this would be possible only if the development of productive forces would lead to the elimination of at least one of the three above facts.

It cannot be assumed that the development of productive forces will lead to a situation where it will not be necessary to respect individual and social preferences. Therefore we must assume that productive resources will cease to be scarce or that such a simplification of productive processes will take place, that the calculation of an optimum plan could be possible without the help of calculation in terms of money units. Neither one or the other situation can realistically be foreseen. Marxist theory has mostly considered only a single limiting factor - labor. Thus it has been assumed that the development of productive forces would gradually lead to a lesser and lesser dependence of the volume of production on the amount of labor used, until finally the situation would he reached where production would be carried out completely automatically. If this were true then categories of value would indeed loose their relevance and society would have complete abundance of products. The only problem would remain how to produce such goods that are wanted. The problem of optimum use of scarce resources would be eliminated. But if we take into account that labor is not the only limited productive factor, that other resources exist, of which we cannot assume that they will cease to be scarce, then this means that prices as an expression of the scarcity of resources in relation to human preferences will not loose their importance for optimum planning even under conditions of complete automation.

Marxist theory has also assumed that the development of productive forces will, in a certain sense, lead to a simplification of the social process of production. This idea was based on the fact that the development of productive forces goes hand in hand with the gradual concentration and centralization of production. A number of Marxist authors (for instance  Kautsky, Hilferding, Lenin and Bucharin), assumed that the process of concentration would culminate in the formation of an "ultramonopoly", that is a single firm which will contain the whole sphere of production in the nation. A socialist national economy was thus thought of as such an "ultramonopoly" in which inequitable income distribution based on class would be eliminated. At first glance it may indeed seem that the relations between production and consumption within such an "ultramonopoly" are very simple: all production is done by one unit and the whole problem is then reduced to specifying the wants of society according to which the mixture of products of this "ultramonopoly" is set. However two aspects in this vision are debatable. First of all it does not seem credible that under conditions of contemporary capitalism a tendency toward the formation of a single all-embracing monopoly really exists. Even though it has been proven that the largest firms' share of the national economy has been steadily growing, the predicted disappearance of small and middle-sized firms is not taking place. At the same time experience has shown, that the formation of huge productive units does not eliminate the problem of coordination of economic decision-making. All problems which had earlier developed between legally independent enterprises are reproduced inside the larger unit. Economic decision-making inside this larger unit must, to a certain extent, be decentralized and therefore information channels between various places where decisions are made must again exist. Even inside a "ulttramonopoly" prices would retain their function as parameters which make optimum decision-making possible.










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