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A Model of a Socially Owned Economy that Relies on Decentralized Prices - a challenge to the “Austrians” on economic calculation

David McMullen

This paper sets out a model of social ownership based on decentralized pricing with the aim of challenging the view that the Austrian School economists won the socialist economic calculation debate. It is not the only challenge. The other challenge I am aware of is a model of central planning by Paul Cockshott and Allin Cottrell. Their model relies on modern information technology and also a defence of labor hours as a measure of cost. I will give a brief overview of that model as an appendix.

I am not making any claims about what would actually transpire after a revolution that dispossesses the capitalists. The purpose is simply to argue that there is nothing about social ownership that prevents the use of decentralized pricing.

The following eight dot points describe the model.

1. It is an economy where the means of production are socially owned. So there is no private ownership.
2. Income is divided between return on investments and wages. The former arises from the interest charge on investments and from economic rent, and is spent on net investment. From their wages workers pay tax. This tax revenue is spent on public goods, on transfers to people who are not expected to work, on the cost of government administration and also possibly on additional net investment. With their after tax wages, workers purchase consumer goods and either add to their savings or pay off consumer debt.
3. Production is driven by final demand and this provides derived demand for intermediate goods and services. An example of derived demand would be the demand for leather which relies on the demand for shoes, handbags, jackets, furniture etc.
4. Production facilities bid for the intermediate inputs and labor they require based on the expected demand for their products and also on the cost of alternative or substitute inputs.
5. The transfer of goods from one production facility to another is not a transfer of ownership. It is just a transfer of custody over socially owned property. And in this transaction no one has a financial interest. No individual receives net revenue nor incurs a net loss. Workers are not motivated by material gain but by the satisfaction they receive from their work and the desire to contribute to the common purpose. Net revenue received by production facilities after current expenses would be paid to some agency established for the purpose. If it had been a good investment this would at least equal depreciation and the rate of interest.
6. Production facilities endeavor to produce at least cost both through seeking out the cheapest inputs and by minimizing waste.
7. Funds for investment would come from repayments on previous investments and possibly also from taxation. These funds are then distributed to a large number of investment agencies. This would allow both for a diversity of views in an uncertain investment world and also for expertise in different industry sectors. In their assessment of projects, agencies would employ a discount rate when comparing near term costs with longer term benefits.
8. Production units would apply to these agencies for investment funds either to expand their existing operations or to move into related areas. You would also have groups of individuals establishing startups and applying for funding.

In many ways, it is what you would expect from a market economy. Firstly, it is driven by effective demand from individuals and from the government. Secondly, production facilities bid for resources in order to meet that demand. And thirdly, these facilities seek investment funds from a range of sources. So, it is quite decentralized. However, where it differs from a market economy is that nobody owns anything and people’s motivation is quite different.

Austrian Critique

The Austrians have used various terms to describe this kind arrangement. Von Mises called it an artificial market or quasi market while Hayek called it pseudo competition. However, as far as I can tell they didn’t say a great deal about it. In his book Socialism, von Mises has a short section called “the artificial market as the solution of the problem of economic calculation” and in Human Action a section called "the quasi market". In Collectivist Economic Planning, Hayek has a section called “the possibility of real competition under socialism”. Interestingly, Don Lavoie in his book Rivalry and Central Planning, the Socialist Calculation Debate Reconsidered only devotes two paragraphs on page 76 to the whole matter. And this is a book that is considered the ultimate summing up of the Austrian position on socialist calculation.

After their withering attack on central planning, their attack on “pseudo competition” is an anti-climax. While the former is described as impossible and operating in the dark, the latter is simply seen as a pale shadow of capitalism and a total retreat by socialists from eliminating the anarchy of the market.

Furthermore, while they endeavor to present the source of the problem as a calculation question, it appears to me to be very much a motivational and behavioral one. Their primary point is that socialism would lack capitalist entrepreneurs who perform a vital function that no one under socialism could perform. However, their main argument for this is that they would not have financial skin in the game and this would lead to a poor risk assessment. Also von Mises remarks that under socialism there would be decisions by committee rather by individuals, and we know what committees are like.

I will need to do a bit more work to fully unravel the mystery of “entrepreneurship”, however, I can make a few preliminary comments on why I think “socialist angels” would have no trouble being entrepreneurial.

I cannot imagine people having any difficulty practicing the entrepreneurial “alertness” that Israel Kirzner has made a career out of. No longer just being mere workers, they will be very alert to opportunities to improve production methods and come up with better products, and to divert existing means of production and intermediate goods to where they will be most valued.

While they will not have financial skin in the game, they would have moral skin. “Socialist angels” would want to do a good job of estimating the upside and downside of a project. Furthermore, some of the risks and uncertainty of capitalism would disappear as the ownership walls of capitalism come tumbling down and information flows more freely.

I personally don’t see how capable and qualified workers who enjoy what they are doing and want to do their best for society could not participate in the kind of decision making work presently performed by entrepreneurs. And I think that is where the debate lies. It is not the calculation debate. It is a debate over human behavior.

We also have Hayek’s critique of the Lange model. It is a different model from the one I am presenting but it is the one that is mentioned in any discussion of socialism and decentralized pricing. What makes it different is that only the prices of consumer goods are decentralized. The prices of intermediate goods are determined by a central agency which monitors the movement of inventories. In other words, If there is oversupply of a product, its price will be lowered. If a shortage is emerging prices will be raised. Hayek points to various problems with this. In particular, these prices are given to enterprises rather than being the result of their bidding for the resources that they need in order to meet the demand for their products. Also adjustment would be slow and there is also the problem that a lot of goods and services are one-offs made to order. So there are no inventories that you can observe. OK that’s all very true but as I say it is not relevant to the model I am discussing.

Now what about Don Lavoie’s stress on rivalry or competition in the process of discovering better products and ways of producing them?

Lavoie is correct in his view that in the presence of uncertainty, there needs to be numerous participants trying out their own approaches to problems on the basis of their own opinions. If you come up with the best and most highly valued products using the cheapest methods you win out in this contest. However, I don’t think the socialist model presented here throws up any inherent obstacles to a diversity of approaches.

It would still be very common for an individual production facility to be just one of many producing the same good or close substitutes and each of them could be free to try out different production methods and product designs. Some will be new entrants that are either existing enterprises moving into a related area or starts ups established by enthusiasts with ideas that the incumbents are not open to or capable of developing. This diversity could be greatly assisted by the numerous funding agencies I referred to earlier. Also, in this model production facilities are free to choose their suppliers on the basis of cost and quality.

Motivation

With the calculation argument crumbling away, the debate over behavior should take center stage.

So, can we envisage people wanting to do work for its own sake and the desire to contribute? Of course this does not rule out financial considerations still playing some role. If you don’t work you won’t get paid and if there is a poll tax you won't be able to pay it. Furthermore, wage differentials can play a role where there is a supply and demand mismatch.

To my mind there are both material and social conditions needed for self-motivated work.

On the material side we have the need for a high level of economic development. There are two reasons for this:

1. Most of the nasty and tedious work has to be eliminated if there is to be any prospect of work being something people want to do for its own sake. In developed economies, that’s on the way to being achieved at the moment with robots and computers increasingly taking over this sort of work.
2. You need really high levels of productivity so that income equality would mean sharing affluence rather than sharing poverty. The prospect of shared affluence is conducive to working for a common purpose whereas poverty is more conducive to people scrambling over each other to get a bigger slice of the pie. Once again, I think developed economies are fairly close to the levels of productivity required.

These material conditions can be seen as prerequisites. It is then up to the working class to transform themselves and society, and this includes new relations in production that turn work into something people want to do. This is the social and political side of things.

With the bourgeoisie removed from power and the means of production expropriated, the real job begins. This requires a large number of people who are seriously committed to making everything happen - a mass movement.

There would be lots of challenges. In order to transform work you would need to combat a whole range of negative behavior that can seriously impact on people’s working lives and make it hell in some cases.

This means dealing with bullying, personal conflicts, blaming others for their mistakes, misuse of authority. monopolizing decision making and misappropriating of resources. Then there is also helping people with psychological problems who are having a hard time battling their demons and possibly also causing problems for other people.

Dealing with this will require people to be quite rebellious and possess moral and perhaps physical courage. They will need to resist the temptation to keep quiet or just look for another job. In fact, people will need to invite trouble by going to the assistance of others who are having problems.

As conditions change, people will increasingly feel that doing their bit is important to them. We do the right thing and do our share knowing that most others are doing the same thing and we are all contributing to a shared prosperity. And generally they would have to feel that they are part of a society that is working in their interest. In other words, they do not feel alienated from it. There has to be a culture of mutual regard - The Golden Rule - Do unto others as you would have them do unto you.

Something else that is important to note is that if people are self-motivated there is a positive feedback on the quality of work in that they don’t need to be supervised as much. And that means that there does not have to be the same division between thinking and doing. People can be relied on to organize themselves and assess their own performance.

No effort is made here to try to guess how difficult it would be to achieve this kind of change. We are certainly talking about a transition period during which the working class has quite a struggle to overcome their opponents and their own inherited limitations before reaching the home stretch.

How does it compare with capitalism?

Finally we ought to ask how the performance of such a transformed society would compare with capitalism. I would say more than favorably and here are some reasons why I think that is so.

• There would be better motivation. There is no employee incentive system that can compete with people just wanting to work. And entrepreneurial activity would be its own reward.
• Any level of final consumption will give a better result because there are no rich people around taking a big chunk out of the pie.
• There would better relations between production facilities:
  1. More honest relations between them.
  2. No commercial secrecy.
  3. No seeking or exploiting market power.
• It would be better able to deal with external costs and benefits given that no one benefits from ignoring them.
• It could have a simpler tax system with taxes only paid by individuals on their wages or by a poll tax.
• It couldn’t help but have better interest rates and exchange rates which at the moment don’t seem to have any rational basis whatsoever.
• I cannot see the system having economic crises and the resulting unemployment. There will alway be sufficient aggregate demand. And there are no stock market or massive debts that can cause financial crises.
• It could reduce the problem of so-called government failure. This is something that is never mentioned when listing the failings of capitalism. People tend to see the problem as an exogenous imposition on capitalism and fail to see that it is actually endogenous to the system. It's inherent to it. I can think offhand of three ways that this occurs
  1. You have people wanting their vested interests protected by the government. Vested interest is just another term for private property. I am thinking here of measures like regulations, tariffs or subsidies that benefit one industry at the expense of the consumer.
  2. You have people wanting to defend capitalism from itself. I am thinking here of how in a lot of countries, welfare systems were introduced out of a concern that if they didn’t introduce them workers would go bolshie.
  3. Then you have officials trying to further their careers. This is a problem that would also have to be combated under social ownership. But I would suggest that if you have a rebellious working class it would be more effectively dealt with.
• There will be no equivalent of the problem we have under capitalism where companies have little interest in devoting resources to developing innovations that would devalue their existing investments.

Appendix

Cockshott and Cottrell Planning Model

In 1993 Paul Cockshott and Allin Cottrell published a book called Towards a New Socialism in which they argue in support of central planning using modern information technology .

The Austrians argue that central planning was far too complicated and even if it were possible, labour hours would be the only common denominator for economic calculation, and they considered them to be an unsatisfactory measure for a number of reasons.

Cockshott and Cottrell argue that the planning calculations are now possible because of modern information technology and that there is no great difficulty in modifying the use of labour hours to address the objections raised by the Austrians.

With computers making rapid calculations you could have a new plan every week. Even though solving millions of simultaneous equations is impossible, you can get around that by using a method of approximation that relies on the fact that most of the values in the equations are zero. For example, toothpaste is not an input into anything or a certain variety of glue would only be used in a limited range of products.

Modern telecommunications such as the Internet can constantly and rapidly gather information about the labor and the intermediate inputs required by each product. The product information would take the form of product codes.

Workers would be paid in vouchers denominated in labor units. Consumer goods would have a labor value but workers would pay a market price that may be above or below this value depending on supply and demand conditions. And the disparity between the two would be a factor in determining future supply of consumer goods. Workers would pay a fixed poll tax which would cover public goods, transfers to those who are not expected to work, the cost of government and net investment. There would be a political process that determines the level of the tax and exactly how it would be spent.

The authors propose a number of mathematical techniques for determining the optimal output, given final demand and the supply of labor, means of production and inventory.

Von MIses raised four objections to the use of labor hours as a unit of account and as a cost metric to be minimized. Cockshott and Cottrell address these objections by suggesting the following four modifications to the labor values.

1. A discount rate would be used when making investment decisions. This would mean that labor with a later time date should be valued less when assessing the cost of a project. This is because we are poorer now than we will be in the future.
2. Labor with above average skill would include the labor embodied in its training.
3. Workers would be graded by their experience and performance. So, for a more experienced or capable worker in a particular field one hour of labor would be worth more than one hour and for a less experienced or capable worker one hour of labor would be worth less than one hour.
4. When exploiting depletable resources, you would take into account the need to invest in discovering new resources and deem this to be an additional cost of using that resource.

So the authors contend that with these adjustments, labor values would then be an excellent economic tool.

Let's sum up the model. Detailed information can be gathered and processed quickly. In the planning process goods will be costed at labor values and final consumption output will have prices that diverge from labor values because of excess demand or supply.

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