Collectivist Economic Planning

V THE PRESENT STATE OF THE DEBATE

By F. A. HAYFK

1. THE EFFECTS OF CRITICISM.

2. THE LESSONS OF THE RUSSIAN EXPERIMENT.

3. THE MATHEMATICAL SOLUTION.

4. ABROGATION OF THE SOVEREIGNTY OF THE CONSUMER.

5. PSEUDO-COMPETITION.

6. A WORLD OF COMPETING MONOPOLIES.

7.THE “ECONOMIES” OF RATIONALIZATION.

8. THE CRITERION OF MARGINAL COSTS.

9. THE POSSIBILITY OF REAL COMPETITION UNDER SOCIALISM.

10. THE GENERAL SIGNIFICANCE FOR SOCIALIST THEORY OF THE RECOURSE TO THE “COMPETITIVE SOLUTION”.

11. CONCLUSION.

1. THE EFFECTS OF CRITICISM

IN spite of a natural tendency on the part of socialists to belittle its importance, it is clear that the criticism of socialism epitomized in the foregoing chapters has already had a very profound effect on the direction of socialist thought. The great majority of “ planners ” are, of course, still unaffected by it ; the great mass of the hangers-on of any popular movement are always unconscious of the intellectual currents which produce a change of direction.1 Moreover, the actual existence in Russia of a system, which professes to be planned, has led many of those who know nothing of its development to suppose that the main problems are solved ; in fact, as we shall see, Russian experience provides abundant confirmation of the doubts already stated. But among the leaders of socialist thought not only is the nature of the central problem more and more recognized, but the force of the objections raised against the types of socialism, which in the past used to be considered as most practicable, is also increasingly admitted. It is now rarely denied that, in a society which is to preserve freedom of choice of the consumer and free choice of occupation, central direction of all economic activity presents a task which cannot be rationally solved under the complex conditions of modern life. It is true, as we shall see, that even among those who see the problem, this position is not yet completely abandoned ; but its defence is more or less of the nature of a rearguard action where all that is attempted is to prove that “ in principle ” a solution is conceivable. Little or no claim is made that such a solution is practicable. We shall later have occasion to discuss some of these attempts. But the great majority of the more recent schemes try to get around the difficulties by the construction of alternative socialist systems which differ more or less fundamentally from the traditional types against which the criticism was directed in the first instance and which are supposed to be immune against the objections to which the latter are subject.

In the preceding section, Professor Halm has examined some of the solutions proposed by Continental writers. In this concluding essay, the recent English literature of the subject will be considered and an attempt will be made to evaluate the recent proposals which have been devised to overcome the difficulties which have now been recognized. Before we enter into this discussion, however, a few words on the relevance of the Russian experiment to the problems under discussion may be useful.

2. THE LESSONS OF THE RUSSIAN EXPERIMENT

It is of course neither possible nor desirable to enter at this point into an examination of the concrete results of this experiment. In this respect it is necessary to refer to detailed special investigations, particularly to that of Professor Brutzkus, which will appear simultaneously with the present volume and which forms an essential complement to the more abstract considerations presented here.2 At this moment we are only concerned with the more general question of how the established results of such an examination of the concrete experiences fit in with the more theoretical argument, and how far the conclusions reached by a priori reasoning are confirmed or contradicted by empirical evidence.

It is perhaps not unnecessary to remind the reader at this point that it was not the possibility of planning as such which has been questioned on the grounds of general considerations, but the possibility of successful planning, of achieving the ends for which planning was undertaken. Therefore we must first be clear as to the tests by which we are to judge success, or the forms in which we should expect failure to manifest itself. There is no reason to expect that production would stop, or that the authorities would find difficulty in using all the available resources somehow, or even that output would be permanently lower than it had been before planning started. What we should anticipate is that output, where the use of the available resources was determined by some central authority, would be lower than if the price mechanism of a market operated freely under otherwise similar circumstances. This would be due to the excessive development of some lines of production at the expense of others, and the use of methods which are inappropriate under the circumstances. We should expect to find over-development of some industries at a cost which was not justified by the importance of their increased output, and to see unchecked the ambition of the engineer to apply the latest developments made elsewhere, without considering whether they were economically suited in the situation. In many cases the use of the latest methods of production, which could not have been applied without central planning, would then be a symptom of a misuse of resources rather than a proof of success.

It follows therefore that the excellence, from a technological point of view, of some parts of the Russian industrial equipment, which most strikes the casual observer and which is commonly regarded as evidence of success, has little significance in so far as the answer to the central question is concerned. Whether the new plant will prove to be a useful link in the industrial structure for increasing output depends not only on technological considerations, but even more on the general economic situation. The best tractor factory may not be an asset, and the capital invested in it is a sheer loss, if the labour which the tractor replaces is cheaper than the cost of the material and labour, which goes to make a tractor, plus interest.

But once we have freed ourselves from the misleading fascination of the existence of colossal instruments of production, which is likely to captivate the uncritical observer, only two legitimate tests of success remain : the goods which the system actually delivers to the consumer, and the rationality or irrationality of the decisions of the central authority. There can be no doubt that the first test would lead to a negative result, for the present, at any rate, or if applied to the whole population and not to a small privileged group. Practically all observers seem to agree that even compared with pre-war Russia the position of the great masses has deteriorated. Yet such a comparison still makes the results appear too favourable. It is admitted that Tsarist Russia did not offer conditions very favourable to capitalist industry, and that under a more modern régime capitalism would have brought about rapid progress. It must also be taken into account that the suffering in the past fifteen years, that “ starving to greatness ” which was supposed to be in the interest of later progress, should by now have borne some fruits. It would provide a more appropriate basis of comparison if we assumed that the same restriction of consumption, which has actually taken place, had been caused by taxation, the proceeds of which had been lent to competitive industry for investment purposes. It can hardly be denied that this would have brought about a rapid and enormous increase of the general standard of life beyond anything which is at present even remotely possible.

There only remains, then, the task of actually examining the principles on which the planning authority has acted. And although it is impossible to trace here, even shortly, the varied course of that experiment, all we know about it, particularly from Professor Brutzkus’ study referred to above, fully entitles us to say that the anticipations based on general reasoning have been thoroughly confirmed. The breakdown of “war-communism” occurred for exactly the same reasons, the impossibility of rational calculation in a moneyless economy, which Professor Mises and Professor Brutzkus had foreseen. The development since, with its repeated reversals of policy, has only shown that the rulers of Russia had to learn by experience all the obstacles which a systematic analysis of the problem reveals. But it has raised no important new problems, still less has it suggested any solutions. Officially the blame for nearly all the difficulties is still put on the unfortunate individuals who are persecuted for obstructing the plan by not obeying the orders of the central authority or by carrying them too literally. But although this means that the authorities only admit the obvious difficulty of making people follow out the plan loyally, there can be no doubt that the more serious disappointments are really due to the inherent difficulties of any central planning. In fact, from accounts such as that of Professor Brutzkus, we gather that, far from advancing towards more rational methods of planning, the present tendency is to cut the knot by abandoning the comparatively scientific methods employed in the past. Instead are substituted more and more arbitrary and uncorrelated decisions of particular problems as they are suggested by the contingencies of the day. In so far as political or psychological problems are concerned Russian experience may be very instructive. But to the student of economic problems of socialism it does little more than furnish illustrations of well-established conclusions. It gives us no help towards an answer to the intellectual problem which the desire for a rational reconstruction of society raises. To this end we shall have to proceed with our systematic survey of the different conceivable systems which are no less important for only existing so far as theoretical suggestions.

3. THE MATHEMATICAL SOLUTION

As has been pointed out in the Introduction, discussion of these questions in the English literature began relatively late and at a comparatively high level. Yet it can hardly be said that the first attempts really met any of the main points. Two Americans, Professor F. M. Taylor and Mr. W. C. Roper, were first in the field. Their analyses, and to some extent also that of Mr. H. D. Dickinson in this country 3 were directed to show that on the assumption of a complete knowledge of all relevant data, the values and the quantities of the different commodities to be produced might be determined by the application of the apparatus by which theoretical economics explains the formation of prices and the direction of production in a competitive system. Now it must be admitted that this is not an impossibility in the sense that it is logically contradictory. But to argue that a determination of prices by such a procedure being logically conceivable in any way invalidates the contention that it is not a possible solution, only proves that the real nature of the problem has not been perceived. It is only necessary to attempt to visualize what the application of this method would imply in practice in order to rule it out as humanly impracticable and impossible. It is clear that any such solution would have to be based on the solution of some such system of equations as that developed in Barone’s article in the Appendix. But what is practically relevant here is not the formal structure of this system, but the nature and amount of concrete information required if a numerical solution is to be attempted and the magnitude of the task which this numerical solution must involve in any modern community. The problem here is, of course, not how detailed this information and how exact the calculation would have to be in order to make the solution perfectly exact, but only how far one would have to go to make the result at least comparable with that which the competitive system provides. Let us look into this a little further.

In the first place it is clear that if central direction is really to take the place of the initiative of the manager of the individual enterprise and is not simply to be a most irrational limitation of his discretion in some particular respect, it will not be sufficient that it takes the form of mere general direction, but it will have to include and be intimately responsible for details of the most minute description. It is impossible to decide rationally how much material or new machinery should be assigned to any one enterprise and at what price (in an accounting sense) it will be rational to do so, without also deciding at the same time whether and in which way the machinery and tools already in use should continue to be used or be disposed of. It is matters of this sort, details of technique, the saving of one material rather than the other or any other of the small economies which cumulatively decide the success or failure of a firm, and in any central plan which is not to be hopelessly wasteful, they must be taken account of. In order to be able to do so it will be necessary to treat every machine, tool, or building not just as one of a class of physically similar objects, but as an individual whose usefulness is determined by its particular state of wear and tear, its location, and so on. The same applies to every batch of commodities which is situated at a different spot or which differs in any other respect from other batches. This means that in order to achieve that degree of economy in this respect which is secured by the competitive system, the calculations of the central planning authority would have to treat the existing body of instrumental goods as being constituted of almost as many different types of goods as there are individual units. And so far as ordinary commodities, i.e. non-durable semi-finished or finished goods are concerned, it is clear that there would be many times more different types of such commodities to consider than we should imagine if they were classified only by their technical characteristics. Two technically similar goods in different places or in different packings or of a different age cannot possibly be treated as equal in usefulness for most purposes if even a minimum of efficient use is to be secured.

Now since in a centrally directed economy the manager of the individual plant would be deprived of the discretion of substituting at will one kind of commodity for another, all this immense mass of different units would necessarily have to enter separately into the calculations of the planning authority. It is obvious that the mere statistical task of enumeration exceeds anything of this sort hitherto undertaken. But that is not all. The information which the central planning authority would need, would also include a complete description of all the relevant technical properties of every one of these goods, including costs of movement to any other place where it might possibly be used with greater advantage, cost of eventual repair or changes, etc. etc.

But this leads to another problem of even greater importance. The usual theoretical abstractions used in the explanation of equilibrium in a competitive system include the assumption that a certain range of technical knowledge is “given”. This, of course, does not mean that all the best technical knowledge is concentrated anywhere in a single head, but that people with all kinds of knowledge will be available and that among those competing in a particular job, speaking broadly, those that make the most appropriate use of the technical knowledge will succeed. In a centrally planned society this selection of the most appropriate among the known technical methods will only be possible if all this knowledge can be used in the calculations of the central authority. This means in practice that this knowledge will have to be concentrated in the heads of one or at best a very few people who actually formulate the equations to be worked out. It is hardly necessary to emphasize that this is an absurd idea even in so far as that knowledge is concerned which can properly be said to “ exist ” at any moment of time. But much of the knowledge that is actually utilized is by no means “ in existence ” in this ready-made form. Most of it consists in a technique of thought which enables the individual engineer to find new solutions rapidly as soon as he is confronted with new constellations of circumstances. To assume the practicability of these mathematical solutions, we should have to assume that the concentration of knowledge at the central authority would also include a capacity to discover any improvement of detail of this sort.4

There is a third set of data which would have to be available before the actual operation of working out the appropriate method of production and quantities to be produced could be undertaken, data relative to importance of the different kinds and quantities of consumers’ goods. In a society where the consumer was free to spend his income as he liked, these data would have to take the form of complete lists of the different quantities of all commodities which would be bought at any possible combination of prices of the different commodities which might be available. These figures would inevitably be of the nature of estimates for a future period based upon past experience. But past experience cannot provide the range of knowledge necessary. And as tastes change from moment to moment, the lists would have to be in process of continuous revision.

It is probably evident that the mere assembly of these data is a task beyond human capacity. Yet if the centrally run society were to work as efficiently as the competitive society, which as it were decentralizes the task of collecting them, they would have to be present. But let us assume for the moment that this difficulty, the “mere difficulty of statistical technique”, as it is contemptuously referred to by most planners, is actually overcome. This would be only the first step in the solution of the main task. Once the material is collected it would still be necessary to work out the concrete decisions which it implies. Now the magnitude of this essential mathematical operation will depend on the number of unknowns to be determined. The number of these unknowns will be equal to the number of commodities which are to be produced. As we have seen already, we have to take as different commodities all the final products to be completed at different moments, whose production has to be started or to be continued at present. At present we can hardly say what their number is, but it is hardly an exaggeration to assume that in a fairly advanced society, the order of magnitude would be at least in the hundreds of thousands. This means that, at each successive moment, every one of the decisions would have to be based on the solution of an equal number of simultaneous differential equations, a task which, with any of the means known at present, could not be carried out in a lifetime. And yet these decisions would not only have to be made continuously, but they would also have to be conveyed continuously to those who had to execute them.

It will probably be said that such a degree of exactitude would not be necessary, since the working of the present economic system itself does not come anywhere near it. But this is not quite true. It is clear that we never come near the state of equilibrium described by the solution of such a system of equations. But that is not the point. We should not expect equilibrium to exist unless all external change had ceased. The essential thing about the present economic system is that it does react to some extent to all those small changes and differences which would have to be deliberately disregarded under the system we are discussing if the calculations were to be manageable. In this way rational decision would be impossible in all these questions of detail, which in the aggregate decide the success of productive effort.

It is improbable that any one who has realized the magnitude of the task involved has seriously proposed a system of planning based on comprehensive systems of equations. What has actually been in the minds of those who have mooted this kind of analysis has been the belief that, starting from a given situation, which was presumably to be that of the pre-existing capitalistic society, the adaptation to the minor changes which occur from day to day could be gradually brought about by a method of trial and error. This suggestion suffers, however, from two fundamental mistakes. In the first instance, as has been pointed out many times, it is inadmissible to assume that the changes in relative values brought about by the transition from capitalism to socialism would be of a minor order, so permitting the prices of the pre-existing capitalistic system to be used as a starting-point, and making it possible to avoid a complete re-arrangement of the price-system. But even if we neglect this very serious objection, there is not the slightest reason to assume that the task could be solved in this way. We need only to remember the difficulties experienced with the fixing of prices, even when applied to a few commodities only, and to contemplate further that, in such a system, price-fixing would have to be applied not to a few but to all commodities, finished or unfinished, and that it would have to bring about as frequent and as varied price-changes as those which occur in a capitalistic society every day and every hour, in order to see that this is not a way in which the solution provided by competition can even be approximately achieved. Almost every change of any single price would make changes of hundreds of other prices necessary and most of these other changes would by no means be proportional but would be affected by the different degrees of elasticity of demand, by the possibilities of substitution and other changes in the method of production. To imagine that all this adjustment could be brought about by successive orders by the central authority when the necessity is noticed, and that then every price is fixed and changed until some degree of equilibrium is obtained is certainly an absurd idea. That prices may be fixed on the basis of a total view of the situation is at least conceivable, although utterly impracticable; but to base authoritative price-fixing on the observation of a small section of the economic system is a task which cannot be rationally executed under any circumstances. An attempt in this direction will either have to be made on the lines of the mathematical solution discussed before, or else entirely abandoned.

4. ABROGATION OF THE SOVEREIGNTY OF THE CONSUMER

In view of these difficulties, it is not surprising that practically all, who have really tried to think through the problem of central planning, have despaired of the possibility of solving it in a world in which every passing whim of the consumer is likely to upset completely the carefully worked out plans. It is more or less agreed now that free choice of the consumer (and presumably also free choice of occupation) and planning from the centre are incompatible aims. But this has given the impression that the unpredictable nature of the tastes of the consumers is the only or the main obstacle to successful planning. Dr. Maurice Dobb5 has recently followed this to its logical conclusion by asserting that it would be worth the price of abandoning the freedom of the consumer if by the sacrifice socialism could be made possible. This is undoubtedly a very courageous step. In the past, socialists have consistently protested against any suggestion that life under socialism would be like life in a barracks, subject to regimentation of every detail. Dr. Dobb considers these views as obsolete. Whether he would find many followers if he professed these views to the socialist masses is not a question which need concern us here. The question is, would it provide a solution to our problem?

Dr. Dobb openly admits that he has abandoned the view, now held by Mr. H. D. Dickinson and others, that the problem could or should be solved by a kind of pricing system under which the prices of the final products and the prices of the original agents would be determined in some kind of a market while the prices of all other products would be derived from these by some system of calculation. But he seems to suffer from the curious delusion that the necessity of any pricing is only due to the prejudice that consumers’ preferences should be respected, and that in consequence the categories of economic theory and apparently all problems of value would cease to have significance in a socialist society. “If equality of reward prevailed, market valuations would ipso facto lose their alleged significance, since money cost would have no meaning.”

Now it is not to be denied that the abolition of free consumers’ choice would simplify the problem in some respects. One of the unpredictable variables would be eliminated and in this way the frequency of the necessary readjustments would be somewhat reduced. But to believe, as Dr. Dobb does, that in this way the necessity of some form of pricing, of an exact comparison between costs and results, would be eliminated, surely indicates a complete unawareness of the real problem. Prices would only cease to be necessary, if one could assume that in the socialist state production would have no definite aim whatever—that it would not be directed according to some well-defined order of preferences, however arbitrarily fixed, but that the State would simply proceed to produce something and consumers would then have to take what had been produced. Dr. Dobb asks what would be the loss. The answer is: almost everything. His attitude would only be tenable if costs determined value, so that so long as the available resources were used somehow, the way in which they were used would not affect our well-being, since the very fact that they had been used would confer value on the product. But the question whether we have more or less to consume, whether we are to maintain or to raise our standard of life, or whether we are to sink back to the state of savages always on the edge of starvation, depends mainly on how we use our resources. The difference between an economic and an uneconomic distribution and combination of resources among the different industries is the difference between scarcity and plenty. The dictator, who himself ranges in order the different needs of the members of the society according to his views about their merits, has saved himself the trouble of finding out what people really prefer and avoided the impossible task of combining the individual scales into an agreed common scale which expresses the general ideas of justice. But if he wants to follow this norm with any degree of rationality or consistency, if he wants to realize what he considers to be the ends of the community, he will have to solve all the problems which we have discussed already. He will not even find that his plans are not upset by unforeseen changes, since the changes in tastes are by no means the only, and perhaps not even the most important, changes that cannot be foreseen. Changes in the weather, changes in the numbers or the state of health of the population, a breakdown of machinery, the discovery or the sudden exhaustion of a mineral deposit, and hundreds of other constant changes will make it no less necessary for him to reconstruct his plans from moment to moment. The distance to the really practicable and the obstacles to rational action will have been only slightly reduced at the sacrifice of an ideal which few who realized what it meant would readily abandon.

5. PSEUDO-COMPETITION

In these circumstances it is easy to understand that Dr. Dobb’s radical solution has not had many followers and that many of the younger socialists seek for a solution in quite the opposite direction. While Dr. Dobb wants to suppress the remnants of freedom or competition which are still assumed in the traditional socialist schemes, much of the more recent discussion aims at a complete reintroduction of competition. In Germany such proposals have actually been published and discussed. But in this country thought on these lines is still in a very embryonic stage. Mr. Dickinson’s suggestions are a slight step in this direction. But it is known that some of the younger economists, who have given thought to these problems, have gone much farther and are prepared to go the whole hog and to restore competition completely, at least so far as in their view this is compatible with the State retaining the ownership of all the material means of production. Although it is not yet possible to refer to published work on these lines, what one has learnt about them in conversations and discussions is probably sufficient to make worth while some examination of their content.

In many respects these plans are very interesting. The common fundamental idea is that there should be markets and competition between independent entrepreneurs or managers of individual firms, and that in consequence there should be money prices, as in the present society, for all goods, intermediate or finished, but that these entrepreneurs should not be owners of the means of production used by them but salaried officials of the State, acting under State instructions and producing, not for profit, but so as to be able to sell at prices which will just cover costs.

It is idle to ask whether such a scheme still falls under what is usually considered as socialism. On the whole, it seems it should be included under that heading. More serious is the question whether it still deserves the designation of planning. It certainly does not involve much more planning than the construction of a rational legal framework for capitalism. If it could be realized in a pure form in which the direction of economic activity would be wholly left to competition, the planning would also be confined to the provision of a permanent framework within which concrete action would be left to individual initiative. And the kind of planning or central organization of production which is supposed to lead to organization of human activity more rational than “chaotic” competition would be completely absent. But how far this would be really true would depend of course on the extent to which competition was reintroduced—that is to say, on the crucial question which is here crucial in every respect, namely of what is to be the independent unit, the element which buys and sells on the markets. At first sight there seem to be two main types of such systems. We may assume either that there will be competition between industries only, and that each industry is represented as it were by one enterprise, or that within each industry there are many independent firms which compete with each other. It is only in this latter form that this proposal really evades most of the objections to central planning as such and raises problems of its own. These problems are of an extremely interesting nature. In their pure form they raise the question of the rationale of private property in its most general and fundamental aspect. The question, then, is not whether all problems of production and distribution can be rationally decided by one central authority but whether decisions and responsibility can be successfully left to competing individuals who are not owners or are otherwise directly interested in the means of production under their charge. Is there any decisive reason why the responsibility for the use made of any part of the existing productive equipment should always be coupled with a personal interest in the profits or losses realized on them, or would it really be only a question whether the individual managers, who deputize for the community in the exercise of its property rights under the scheme in question, served the common ends loyally and to the best of their capacity?

6. A WORLD OF COMPETING MONOPOLIES

We may best discuss this question when we come to deal with the schemes in detail. Before we can do that, however, it is necessary to show why, if competition is to function satisfactorily, it will be necessary to go all the way and not to stop at a partial reintroduction of competition. The case which we have therefore to consider next is that of completely integrated industries standing under a central direction but competing with other industries for the custom of the consumer and for the factors of production. This case is of some importance beyond the problems of socialism which we are here chiefly concerned with, since it is by means of creating such monopolies for particular products that those who advocate planning within the framework of capitalism hope to “rationalize” the so-called chaos of free competition. This raises the general problem, whether it is ever in the general interest to plan or rationalize individual industries where this is only possible through the creation of a monopoly, or whether, on the contrary, we must not assume that this will lead to an uneconomic use of resources and that the supposed economies are really diseconomies from the point of view of society.

The theoretical argument which shows that under conditions of widespread monopoly there is no determinate equilibrium position and that in consequence under such conditions there is no reason to assume that resources would be used to best advantage, is now fairly well accepted. It is perhaps not inappropriate to open the discussion of what this would mean in practice by a quotation from the work of the great scholar who has been mainly responsible for establishing it.

It has been proposed as an economic ideal [wrote the late F. Y. Edgeworth6] that every branch of trade and industry should be formed into a separate union. The picture has some attractions. Nor is it at first sight morally repulsive; since, where all are monopolists, no one will be the victim of monopoly. But an attentive consideration will disclose an incident very prejudicial to industry—instability in the value of all those articles the demand for which is influenced by the prices of other articles, a class which is probably very extensive,

Among those who would suffer by the new regime there would be one class which particularly interests readers of this Journal, namely abstract economists, who would be deprived of their occupation, the investigation of the conditions which determine value. There would survive only the empirical school, flourishing in the chaos congenial to their mentality.

Now the mere fact that the abstract economists would be deprived of their occupation would probably be only a matter of gratification to most advocates of planning if it were not that at the same time the order which they study would also cease to exist. The instability of values, of which Edgeworth speaks, or the indeterminateness of equilibrium, as the same fact can be described in more general terms, is by no means a possibility only to disturb theoretical economists. It means in effect that in such a system there will be no tendency to use the available factors to the greatest advantage, to combine them in every industry in such a way that the contribution which every factor makes is not appreciably smaller than that which it might have made if used elsewhere. The actual tendency prevailing would be to adjust output in such a way, not that the greatest return is obtained from every kind of available resources, but so that the difference between the value of factors which can be used elsewhere and the value of the product is maximized. This concentration on maximum monopoly profits rather than on making the best use of the available factors is the necessary consequence of making the right to produce a good itself a “scarce factor of production.” In a world of such monopolies this may not have the effect of reducing production all around in the sense that some of the factors of production will remain unemployed, but it will certainly have the effect of reducing output by bringing about an uneconomic distribution of factors between industries. This will remain true even if the instability feared by Edgeworth should prove to be of a minor order. The equilibrium that would be reached would be one in which the best use would have been made only of one scarce factor: the possibility of exploiting consumers.

7. THE “ECONOMIES” OF RATIONALIZATION

This is not the only disadvantage of a general re-organization of industry on monopolistic lines. The so-called economies which it is claimed would be made possible if industry were “reorganized” on monopolistic lines prove on closer examination to be sheer waste. In practically all the cases where the planning of individual industries is advocated at present, the object is to deal with the effects of technical progress.7 Sometimes it is claimed that the desirable introduction of a technical innovation is made impossible by competition. On other occasions it is objected against competition that it causes waste by forcing the adoption of new machines, etc. when producers would prefer to continue using the old ones. But in both cases, as can be easily shown, planning which aims to prevent what would happen under competition would lead to social waste.

Once productive equipment of any kind is already in existence it is desirable that it should be used so long as the costs of using it (the “prime costs”) are lower than the total cost of providing the same service in an alternative way. If its existence prevents the introduction of more modern equipment this means that the resources which are necessary to produce the same product with more modern methods can be used with greater advantage in some other connection. If older and more modern plants exist side by side and the more modern firms are threatened by the “cut-throat competition” of the more obsolete works, this may mean either of two things. Either the newer method is not really better, i.e. its introduction has been based on a miscalculation and should never have taken place. In such a case, where operating costs under the new method are actually higher than under the old the remedy is, of course, to shut down the new plant, even if it is in some sense “technically ” superior. Or—and this is the more probable case—the situation will be that while operating costs under the new method are lower than under the old, they are not sufficiently lower to leave at a price which covers the operating costs of the old plant, a margin sufficient to pay interest and amortization on the new plant. In this case, too, miscalculation has taken place. The new plant should never have been built. But once it exists the only way in which the public can derive at least some benefit from the capital which has been misdirected is for prices to be allowed to fall to the competitive level and part of the capital value of the new firms to be written off. Artificially to maintain capital values of the new plant by compulsory shutting down the old would simply mean to tax the consumer in the interest of the owner of the new plants without any compensating benefit in the form of increased or improved production.

All this is even clearer in the not infrequent case where the new plant is really superior in the sense that if it had not already been built it would be advantageous to build it now, but where the firms using it are in financial difficulties because it has been erected at a time of inflated values they are in consequence loaded with an excessive debt. Instances like this, where the technically really most efficient firms are at the same time the financially most unsound, are said to be not infrequent in some English industries. But here again any attempt to preserve capital values by suppressing competition from the less modern firms can only have the effect of enabling producers to keep prices higher than they otherwise would be, solely in the interests of the bondholders. The right course from the social point of view is to write down the inflated capital to a more appropriate level, and potential competition from the less modern concerns has therefore the beneficial effect of bringing prices down to a level appropriate to present costs of production. The capitalists who have invested at an unfortunate moment may not like this, but it is clearly in the social interest.

The effects of planning in order to preserve capital values are perhaps even more harmful when it takes the form of retarding the introduction of new inventions. If we abstract, as we are probably entitled to do, from the case where there is reason to assume that the planning authority possesses greater foresight and is better qualified to judge the probability of further technical progress than the individual entrepreneur, it should be clear that any attempt in this direction must have the effect that that which is supposed to eliminate waste is in fact the cause of waste. Given reasonable foresight on the part of the entrepreneur, a new invention will only be introduced if it makes it either possible to provide the same services as were available before at a smaller expenditure of current resources (i.e. at a smaller sacrifice of other possible uses of these resources) or to provide better services at an expenditure which is not proportionately greater. The fall in the capital values of existing instruments which will undoubtedly follow is in no way a social loss. If they can be used for other purposes, a fall of their value in their present use below that which they would attain elsewhere is a distinct indication that they should be transferred. And if they have no other use but their present one their former value is of interest only as an indication how much cost of production must be lowered by the new invention before it becomes rational to abandon them entirely. The only persons who are interested in the maintenance of the value of already invested capital are its owners. But the only way this can be done in these circumstances is by withholding from the other members of society the advantages of the new invention.

8. THE CRITERION OF MARGINAL COSTS

It will probably be objected that these strictures may be true of capitalist monopolies aiming at maximum profits, but that they would certainly not be true of the integrated industries in a socialist state whose managers would have instructions to charge prices which just covered costs. And it is true that the last section has been essentially a digression into the problem of planning under capitalism. But it has enabled us not only to examine some of the supposed advantages which are commonly associated with any form of planning but also to indicate certain problems which will necessarily accompany planning under socialism. We shall meet some of these problems again at a later stage. For the moment, however, we must once more concentrate upon the case where the monopolized industries are conducted not so as to make the greatest profit but where it is attempted to make them act as if competition existed. Does the instruction that they should aim at prices which will just cover their (marginal) cost really provide a clear criterion of action ?

It is in this connection that it almost seems as if perhaps excessive preoccupation with the conditions of a hypothetical state of stationary equilibrium has led modern economists in general, and especially those who propose this particular solution, to attribute to the notion of costs in general a much greater precision and definiteness than can be attached to any cost phenomenon in real life. Under conditions of widespread competition the term cost of production has indeed a very precise meaning. But as soon as we leave the realm of extensive competition and a stationary state and consider a world where most of the existing means of production are the product of particular processes that will probably never be repeated ; where, in consequence of incessant change, the value of most of the more durable instruments of production has little or no connection with the costs which have been incurred in their production but depends only on the services which they are expected to render in the future, the question of what exactly are the costs of production of a given product is a question of extreme difficulty which cannot be answered definitely on the basis of any processes which take place inside the individual firm or industry. It is a question which cannot be answered without first making some assumption as regards the prices of the products in the manufacture of which the same instruments will be used. Much of what is usually termed cost of production is not really a cost element that is given independently of the price of the product but a quasi-rent, or a depreciation quota which has to be allowed on the capitalized value of expected quasi-rents, and is therefore dependent on the prices which are expected to prevail.

For every single firm in a competitive industry these quasi-rents, although dependent on price, are not a less reliable and indispensable guide for the determination of the appropriate volume of production than true cost. On the contrary, it is only in this way that some of the alternative ends which are affected by the decision can be taken into account. Take the case of some unique instrument of production which will never be replaced and which cannot be used outside the monopolized industry and which therefore has no market price. Its use does not involve any costs which can be determined independent from the price of its product. Yet if it is at all durable and may be used up either more or less rapidly, its wear and tear must be counted as true cost if the appropriate volume of production at any one moment is to be rationally determined. And this is not only true because its possible services in the future have to be compared with the results of a more intensive use at present, but also because while it exists it saves the services of some other factor which would be needed to replace it and which can meanwhile be used for other purposes. The value of the services of this instrument is here determined by the sacrifices involved in the next best way of producing the same product ; and these services have therefore to be economized because some alternative satisfactions depend on them in an indirect way. But their value can only be determined if the real or potential competition of the other possible methods of producing the same product is allowed to influence its price.

The problem which arises here is well known from the field of public utility regulation. The problem how, in the absence of real competition, the effects of competition could be simulated and the monopolistic bodies be made to charge prices equivalent to competitive prices, has been widely discussed in this connection. But all attempts at a solution have failed, and as has recently been demonstrated by Mr. R. F. Fowler,8 they were bound to fail because fixed plant is extensively used and one of the most important cost elements, interest and depreciation on such plant can only be determined after the price which will be obtained for the product is known.

Again it may be objected that this is a consideration which may be relevant in a capitalistic society, but that since even in a capitalistic society fixed costs are disregarded in determining the short run volume of production, they might also with much more reason be disregarded in a socialist society. But this is not so. If rational disposition of resources is to be attempted, and particularly if decisions of this sort are to be left to the managers of the individual industry, it is certainly necessary to provide for the replacement of the capital out of the gross proceeds of the industry, and it will also be necessary that the returns from this reinvested capital should be at least as high as they would be elsewhere. And it would be as misleading under socialism as it is in a capitalistic society to determine the value of the capital which has thus to be recouped on some historic basis such as the past cost of production of the instruments concerned. The value of any particular instrument and therefore the value of its services which have to be counted as cost must be determined from a consideration of the returns expected, having regard to all the alternative ways in which the same result may be obtained and to all the alternative uses to which it may be put. All those questions of obsolescence due to technical progress or change of needs, which were discussed in the last section, enter here into the problem. To make a monopolist charge the price that would rule under competition, or a price that is equal to the necessary cost, is impossible, because the competitive or necessary cost cannot be known unless there is competition. This does not mean that the manager of the monopolized industry under socialism will go on, against his instructions, to make monopoly profits. But it does mean that since there is no way of testing the economic advantages of one method of production as compared with another, the place of monopoly profits will be taken by uneconomic waste.

There is also the further question whether under dynamic conditions profits do not serve a necessary function, whether they are not the main equilibrating force which brings about the adaptation to any change. Certainly when there is competition within the industry the question whether it is advisable to start a new firm or not can only be decided on the basis of the profits made by the already existing industries. At least in the case of the more complete competition which we have yet to discuss, profits as an inducement to change cannot be dispensed with. But one might conceive that where any one product is manufactured only by one single concern it will adapt the volume of its output to the demand without varying the price of the product except in so far as cast changes. But how is it then to be decided who is to get the products before supply has caught up with an increased demand? And even more important, how is the concern to decide whether it is justified in incurring the initial cost of bringing additional factors to the place of production? Much of the cost of movement of transfer of labour and of other factors is of the nature of a non-recurrent investment of capital which is only justified if interest at the market rate can permanently be earned on the sums involved. The interest on such non-tangible investments connected with the establishment or expansion of a plant (the “ goodwill ”, which is not only a question of popularity with the buyers but equally one of having all the required factors assembled in the proper place) is certainly a very essential factor in such calculations. But once these investments have been made it cannot in any sense be regarded as cost but will appear as profit which shows that the original investment was justified.

And these are by no means all the difficulties which arise in connection with the idea of an organization of production on State monopolistic lines. We have said nothing about the problem of the delimitation of the individual industries, the problem of the status of a firm providing equipment needed in many different lines of production, nor of the criteria on which the success or failure of any of the managers would be judged. Is an “industry” to include all processes that lead up to any single final product or is it to comprise all plants which turn out the same immediate product, in whatever further process it is used ? In either case the decision will involve also a decision on the methods of production to be adopted. Whether every industry is to produce its own tools or whether it has to buy them from another industry which produces them at large scale will essentially affect the question whether it will be advantageous to use a particular instrument at all. But these or very similar problems will have to be discussed in some detail in connection with proposals for readmitting competition in a much more complete form. What has been said here seems however sufficient to show that if one wants to preserve competition in the socialist state in order to solve the economic problem, it would not really help to get a satisfactory solution to go only half-way. Only if competition exists not only between but also within the different industries can we expect it to serve its purpose. It is to the examination of such a more completely competitive system that we have now to turn.

9. THE POSSIBILITY OF REAL COMPETITION UNDER SOCIALISM

At first sight it is not evident why such a socialist system with competition within industries as well as between them should not work as well or as badly as competitive capitalism. All the difficulties one might expect to arise seem likely to be only of that psychological or moral character about which so little definite can be said. And it is true that the problems which arise in connection with such a system are of a somewhat different nature from those arising in a “planned” system, although on examination they prove not to be so different as may appear at first.

The crucial questions in this case are, What is to be the independent business unit ? Who is to be the manager ? What resources are to be entrusted to him and how his success or failure is to be tested ? As we shall see, these are by no means only minor administrative problems, questions of personnel such as those which have to be solved in any large organization to-day, but major problems whose solution will affect the structure of industry almost as much as the decisions of a real planning authority.

To begin with, it must be clear that the need for some central economic authority will not greatly diminish. It is clear, too, that this authority will have to be almost as powerful as in a planned system. If the community is the owner of all material resources of production, somebody will have to exercise this right for it, at least in so far as the distribution and the control of the use of these resources is concerned. It is not possible to conceive of this central authority simply as a kind of super-bank which lends the available funds to the highest bidder. It would lend to persons who have no property of their own. It would therefore bear all the risk and would have no claim for a definite amount of money as a bank has, It would simply have rights of ownership of all real resources. Nor can its decisions be confined to the redistribution of free capital in the form of money, and perhaps of land. It would also have to decide whether a particular plant or piece of machinery should be left further to the entrepreneur who has used it in the past, at his valuation, or whether it should be transferred to another who promises a higher return from it.

In imagining a system of this sort it is most charitable to assume that the initial distribution of resources between individual firms will be made on the basis of the historically given structure of industry and that the selection of the managers is made on the basis of some efficiency test and of previous experience. If the existing organization of industry were not accepted it could be improved or rationally changed only on the basis of very extensive central planning, and this would land us back with the systems which the competitive system is an attempt to replace. But acceptance of the existing organization would solve the difficulties only for the moment. Every change in circumstance will necessitate changes in this organization and in the course of a comparatively short space of time the central authority will have to effect a complete reorganization.

On what principles will it act ?

It is clear that in such a society change will be quite as frequent as under capitalism. It will also be quite as unpredictable. All action will have to be based on anticipation of future events and the expectations on the part of different entrepreneurs will naturally differ. The decision to whom to entrust a given amount of resources will have to be made on the basis of individual promises of future return. Or, rather, it will have to be made on the statement that a certain return is to be expected with a certain degree of probability. There will, of course, be no objective test of the magnitude of the risk. But who is then to decide whether the risk is worth taking? The central authority will have no other grounds on which to decide but the past performance of the entrepreneur. But how are they to decide whether the risks he has run in the past were justified? And will its attitude towards risky undertakings be the same as if he risked his own property?

Consider first the question how his success or failure will be tested. The first question will be whether he has succeeded in preserving the value of the resources entrusted to him. But even the best entrepreneur will occasionally make losses and sometimes even very heavy losses. Is he to be blamed if his capital has become obsolete because of an invention or a change in demand? How is it to be decided whether he was entitled to take a certain risk? Is the man who never makes losses because he never takes a risk necessarily the man who acts most in the interest of the community? There will certainly be a tendency to prefer the safe to the risky enterprise.

But risky and even the purely speculative undertakings will be no less important here as under capitalism. Specialization in the function of risk-bearing by professional speculators in commodities will be as desirable a form of division of labour as it is to-day. But how is the magnitude of the capital of the speculator to be determined and how is his remuneration to be fixed? How long is a formerly successful entrepreneur to be suffered to go on making losses? If the penalty for loss is the surrender of the position of “entrepreneur” will it not be almost inevitable that the possible chance of making a loss will operate as so strong a deterrent that it will outbalance the chance of the greatest profit? Under capitalism, too, loss of capital may mean loss of status as capitalist. But against this deterrent is always the attraction of the possible gain. Under socialism this cannot exist. It is even conceivable that general reluctance to undertake any risky business might drive the rate of interest down to nearly zero. But would this be an advantage to society? If it were only due to the satiation of all the absolutely safe channels of investment it would be bought at a sacrifice of all experimentation with new and untried methods. Even if progress is inevitably connected with what is commonly called waste, is it not worth having if on the whole gains exceed losses?

But, to turn back to the problem of the distribution and control of resources: there remains the very serious question of how to decide in the short run whether a going concern is making the best use of its resources. Even whether it is making profit or losses is a matter which will depend on one’s estimate of the future returns to be expected from its equipment. Its results can only be determined if a definite value is to be given to its existing plant. What is to be the decision if another entrepreneur promises to get a higher return out of the plant (or even an individual machine) than that on which the present user bases his valuation? Is the plant or machine to be taken from him and to be given to the other man in his mere promise? This may be an extreme case, yet it illustrates only the constant shift of resources between firms which goes on under capitalism and which would be equally advantageous in a socialist society. In a capitalist society the transfers of capital from the less to the more efficient entrepreneur is brought about by the former making losses and the latter making profits. The question of who is to be entitled to risk resources and with how much he is to be trusted is here decided by the man who has succeeded in acquiring and maintaining them. Will the question in the socialist state be decided on the same principles? Will the manager of a firm be free to reinvest profits wherever and whenever he thinks it is worth while? At present he will compare the risk involved in further expansion of this present undertaking with the income which he will obtain if he invests elsewhere or if he consumes his capital. Will consideration of the alternative advantages which society might derive from that capital have the same weight in this computation of risk and gain as would have his own alternative gain or sacrifice?

The decision about the amount of capital to be given to an individual entrepreneur and the decision thereby involved concerning the size of the individual firm under a single control are in effect decisions about the most appropriate combination of resources.9 It will rest with the central authority to decide whether one plant located at one place should expand rather than another plant situated elsewhere. All this involves planning on the part of the central authority on much the same scale as if it were actually running the enterprise. And while the individual entrepreneur would in all probability be given some definite contractual tenure for managing the plant entrusted to him, all new investment will necessarily be centrally directed. This division in the disposition over the resources would then simply have the effect that neither the entrepreneur nor the central authority would be really in a position to plan, and that it would be impossible to assess responsibility for mistakes. To assume that it is possible to create conditions of full competition without making those who are responsible for the decisions pay for their mistakes seems to be pure illusion. It will at best be a system of quasi-competition where the person really responsible will not be the entrepreneur but the official who approves his decisions and where in consequence all the difficulties will arise in connection with freedom of initiative and the assessment of responsibility which are usually associated with bureaucracy.10

10. THE GENERAL SIGNIFICANCE FOR SOCIALIST THEORY OF THE RECOURSE TO THE “COMPETITIVE SOLUTION”

Without pretending any finality for this discussion of pseudo-competition it may at least be claimed that it has been shown that its successful administration presents considerable obstacles and that it raises numerous difficulties which must be surmounted before we can believe that its results will even approach those of competition which is based on private property of the means of production. It must be said that in their present state, even considering their very provisional and tentative character, these proposals seem rather more than less impracticable than the older socialist proposals of a centrally planned economic system. It is true, even more true than in the case of planning proper, that all the difficulties which have been raised are “only” due to the imperfections of the human mind. But while this makes it illegitimate to say that these proposals are impossible in any absolute sense, it remains not the less true that these very serious obstacles to the achievement of the desired end exist and that there seems to be no way in which they can be overcome.

Instead of discussing any further the detailed difficulties which these proposals raise, it is perhaps more interesting to consider what it really implies that so many of those of the younger socialists who have seriously studied the economic problems involved in socialisms have abandoned the belief in a centrally planned economic system and pinned their faith on the hope that competition may be maintained even if private property is abolished. Let us assume for the moment that it is possible in this way to come very near the results which a competitive system based on private property achieves. Is it fully realized how much of the hopes commonly associated with a socialist system are already abandoned when it is proposed to substitute for the centrally planned system, which was regarded as highly superior to any competitive system, a more or less successful imitation of competition? And what are the advantages which will remain to compensate for the loss of efficiency which, if we take account of our earlier objections it seems will be the inevitable effects of the fact, that without private property competition will necessarily be somewhat restricted and that therefore some of the decisions will have to be left to the arbitrary decision of a central authority?

The illusions which have to be abandoned with the idea of a centrally planned system are indeed very considerable. The hope of a vastly superior productivity of a planned system over that of chaotic competition has had to give place to the hope that the socialist system may nearly equal the capitalist system in productivity. The hope that the distribution of income may be made entirely independent of the price of the services rendered and based exclusively on considerations of justice, preferably in the sense of an egalitarian distribution has to be replaced by the hope that it will be possible to use part of the income from the material factors of production to supplement income from labour. The expectation that the “wage system” would be abolished; that the managers of a socialized industry or firm would act on entirely different principles from the profit-seeking capitalist has proved to be equally wrong. And although there has been no occasion to discuss this point in detail, the same must be said of the hope that such a socialist system would avoid crises and unemployment. A centrally planned system, although it could not avoid making even more serious mistakes of the sort which lead to crises under capitalism, would at least have the advantage that it would be possible to share the loss equally between all its members. It would be superior in this respect in that it would be possible to reduce wages by decree when it was found that this was necessary in order to correct the mistakes. But there is no reason why a competitive socialist system should be in a better position to avoid crises and unemployment than competitive capitalism. Perhaps an intelligent monetary policy may reduce their severity for both, but there are no possibilities in this respect under competitive socialism which would not equally exist under capitalism.

Against all this there is of course the advantage that it would be possible to improve the relative position of the working class by giving them a share in the returns from land and capital. And this is, after all, the main aim of socialism. But that it will be possible to improve their position relative to that of those who were capitalists does not mean that their absolute incomes will be increased or that they will even remain as high as before. What will happen in this respect depends entirely on the extent to which general productivity is reduced. It must again be pointed out here that general considerations of the kind which can be advanced in a short essay can lead to no decisive conclusions. Only by intensive application of analysis on these lines to the phenomena of the real world is it possible to arrive at approximate estimates of the quantitive importance of the phenomena which have been discussed here. On this point opinions will naturally differ. But even if it could be agreed that what exactly the effects of any of the proposed systems on the national income would be, there would still be the further question of whether any given reduction, either of its present absolute magnitude or its future rate of progress, is not too high a price for the achievement of the ethical ideal of greater equality of incomes. On this question, of course, scientific argument must give way to individual conviction.

But at least the decision cannot be made before the alternatives are known, before it is at least approximately realized what the price is that has to be paid. That there is still so little clarity on this point, that it is still possible to deny that it is impossible to have the best of both worlds, is mainly due to the fact that most socialists have little idea of what the system they advocate is really to be like, whether it is to be a planned or a competitive system. It is at present one of the strongest tactics of contemporary socialists to leave this point in the dark, and, while claiming all the benefits which used to be associated with central planning, refer to competition when they are asked how they are going to solve a particular difficulty. But nobody has yet demonstrated how planning and competition can be rationally combined; and so long as this is not done one is certainly entitled to insist that these two alternatives are kept clearly separate, and that anybody who advocates socialism must decide for one or the other and then demostrate how he proposes to overcome the difficulties inherent in the system he has chosen.

II. CONCLUSION

No pretence is made that the conclusions reached here in the examination of the alternative socialist constructions must necessarily be final. One thing, however, seems to emerge from the discussions of the last years with incontrovertible force: that to-day we are not intellectually equipped to improve the working of our economic system by “planning” or to solve the problem of socialist production in any other way without very considerably impairing productivity. What is lacking is not “experience” but intellectual mastery of a problem which so far we have only learnt to formulate but not to answer. No one would want to exclude every possibility that a solution may yet be found. But in our present state of knowledge serious doubt must remain whether such a solution can be found. We must at least face the possibility that for the past fifty years thought has been on the wrong lines, attracted by a notion which on examination at close range proved not to be realizable. If this were so, it would be no proof that it would have been desirable to stay where we were before this tendency set in, but only that a development in another direction would have been more advantageous. And there is indeed some reason to suppose that it might, for instance, have been more rational to seek for a smoother working of competition than to obstruct it so long with all kinds of attempts of planning that almost any alternative came to seem preferable to existing conditions.

But if our conclusions on the merits of the beliefs which are undoubtedly one of the main driving forces of our time are essentially negative, this is certainly no cause for satisfaction. In a world bent on planning nothing could be more tragic than that the conclusion should prove inevitable that persistence on this course must lead to economic decay. Even if there is already some intellectual reaction under way, there can be little doubt that for many years the movement will continue in the direction of planning. Nothing, therefore, could do more to relieve the unmitigated gloom with which the economist to-day must look at the future of the world than if it could be shown that there is a possible and practicable way to overcome its difficulties. Even for those who are not in sympathy with all the ultimate aims of socialism there is strong reason to wish that now the world is moving in that direction it should prove practicable and a catastrophe be averted. But it must be admitted that to-day it seems, to say the least, highly unlikely that such a solution can be found. It is of some significance that so far the smallest contributions to such a solution have come from those who have advocated planning. If a solution should ever be reached this would be due more to the critics, who have at least shown what the problem is, even if they have despaired of finding a solution.

 

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11 This applies, unfortunately, also to most of the organized collective efforts which profess to be devoted to the scientific study of the problem of planning. Anyone who studies such publications as the Annales de l’economie collective, or the material contributed to the “World Social Economic Congress, Amsterdam, 1931”, and published by the “International Relations Institute” under the title World Social Economic Planning (The Hague, 2 vols., 1931-2), will search in vain for any sign that the problems are even recognized.

12 B. Brutzkus, Economic Planning in Russia, London (Routledge), 1935.

13 For exact references to the writings of these authors, see the bibliography in Appendix B.

14 On the more general problem of experimentation and the utilization of really new inventions, etc., see below, p. 223 et seq.

15 See the article in the Economic Journal quoted in Appendix B.

16 Cf. Collected Papers, Vol. 1, p. 138.

17 On these problems cf. A. C. Pigou, Economics of Welfare, 4th ed., 1932, p. 188, and F. A. Hayek, “The Trend of Economic Thinking” Economica, May, 1933, p. 132.

18 R. F. Fowler, The Depreciation of Capital, Analytically Considered, London, 1934, pp. 74 et seq.

19 For a more detailed discussion of how the size of the individual firm is determined under competition and of the way in which this affects the appropriateness of different methods of production and the costs of the product, cf. E. A. G. Robinson, The Structure of Competitive Industry (Cambridge Economic Handbooks, Vol. VII), London, 1931.

20 For further very illuminating discussion of these problems, see the works of Mr. R. G. Hawtrey and Mr. J. Gerhardt quoted in Appendix B.

• 1It was largely owing to this temporary eclipse of analytical economics that the real problems connected with the suggestions of a planned economy have received so surprisingly little careful examination. But this eclipse itself was by no means only due to the inherent weaknesses and the consequent need for reconstruction of the old economics. Nor would it have had the same effect if it had not coincided with the rise of another movement definitely hostile to rational methods in economics. The common cause which at the same time undermined the position of economic theory and furthered the growth of a school of socialism, which positively discouraged any speculation of the actual working of the society of the future, was the rise of the so-called historical school in economics. For it was the essence of the standpoint of this school, that the laws of economics could only be established by the application to the material of history of the methods of the natural sciences. And the nature of this material is such that any such attempt is bound to degenerate into mere record and description and a total scepticism concerning the existence of any laws at all.
• 2The fact that this most influential school of socialism was so closely related to the general antitheoretical tendencies in the social sciences of the time had a most profound effect on all further discussion of the real problems of socialism. Not only did the whole outlook create a peculiar inability to see any of the permanent economic problems which are independent of the historical framework, but Marx and the Marxians also proceeded, quite consistently, positively to discourage any inquiry into the actual organization and working of the socialist society of the future. If the change was to be brought about by the inexorable logic of history, if it was the inevitable result of evolution, there was little need for knowing in detail what exactly the new society would be like. And if nearly all the factors which determined economic activity in the present society would be absent, if there would be no problems in the new society except those determined by the new institutions which the process of historical change would have created, then there was indeed little possibility of solving any of its problems beforehand. Marx himself had only scorn and ridicule for any such attempt deliberately to construct a working plan of such an “utopia”. Only occasionally, and then in this negative form, do we find in his works statements about what the new society would not be like. One may search his writings in vain for any definite statement of the general principles on which the economic activity in the socialist community would be directed.
• 3It is impossible within the scope of this discussion of socialism to enter further into this separate problem of state intervention in a capitalistic society. It is mentioned here only to say explicitly that it is excluded from our considerations. In our opinion well-accepted analysis shows that it does not provide an alternative which can be rationally chosen or which can be expected to provide a stable or satisfactory solution of any of the problems to which it is applied.
• 4The omnipresence of this problem of value wherever there is rational action was the basic fact from which a systematic exploration of the forms, under which it would make its appearance under different organizations of economic life, could proceed. And up to a certain point from the very beginning the problems of a centrally directed economy found a prominent place in the expositions of modem economics. It was obviously so much simpler to discuss the fundamental problems on the assumption of the existence of a single scale of values consistently followed than on the assumption of a multiplicity of individuals following their personal scales, that in the early chapters of the new systems the assumption of a communist state was frequently used—and used with considerable advantage—as an expository device. But it was used only to demonstrate that any solution would necessarily give rise to essentially the same value phenomena—rent, wages, and interest, etc.—which we actually observe in a competitive society, and the authors then generally proceeded to show how the interaction of independent activities of the individuals produced these phenomena spontaneously without inquiring further whether they could be produced in a complex modern society by any other means. The mere absence of an agreed common scale of values seemed to deprive that problem of any practical importance. It is true that some of the earlier writers of the new school not only thought that they had actually solved the problem of socialism but also believed that their utility calculus provided a means which made it possible to combine individual utility scale into a scale of ends objectively valid for society as a whole. But it is now generally recognized that this latter belief was just an illusion and that there is no scientific criterion which would enable us to compare or assess the relative importance of needs of different persons, although conclusions implying such illegitimate interpersonal comparisons of utilities can probably still be found in discussions of special problems.
• 5But it is evident that as the progress of the analysis of the competitive system revealed the complexity of the problems which it solved spontaneously, economists became more and more sceptical about the possibility of solving the same problems by deliberate decision. It is perhaps worth noting that as early as 1854 the most famous among the predecessors of the modern “marginal utility” school, the German, H. H. Gossen, had come to the conclusion that the central economic authority projected by the communists would soon find that it had set itself a task which far exceeded the powers of individual men. Among the later economists of the modern school the point in which already Gossen based his objection, the difficulty of rational calculation when there is no private property, was frequently hinted at. It was particularly clearly put by Professor Cannan, who stressed the fact that the aims of socialists and communists could only be achieved by “abolishing both the institution of private property and the practice of exchange, without which value, in any reasonable sense of the word, cannot exist”. But beyond general statements of this sort, critical examination of the possibilities of a socialist economic policy made little headway, for the simple reason that no concrete socialist proposal of how these problems would be overcome existed to be examined.
• 6But it is evident that as the progress of the analysis of the competitive system revealed the complexity of the problems which it solved spontaneously, economists became more and more sceptical about the possibility of solving the same problems by deliberate decision. It is perhaps worth noting that as early as 1854 the most famous among the predecessors of the modern “marginal utility” school, the German, H. H. Gossen, had come to the conclusion that the central economic authority projected by the communists would soon find that it had set itself a task which far exceeded the powers of individual men. Among the later economists of the modern school the point in which already Gossen based his objection, the difficulty of rational calculation when there is no private property, was frequently hinted at. It was particularly clearly put by Professor Cannan, who stressed the fact that the aims of socialists and communists could only be achieved by “abolishing both the institution of private property and the practice of exchange, without which value, in any reasonable sense of the word, cannot exist”. But beyond general statements of this sort, critical examination of the possibilities of a socialist economic policy made little headway, for the simple reason that no concrete socialist proposal of how these problems would be overcome existed to be examined.
• 7All the further discussions of the economic problems of socialism which appeared before the War confined themselves more or less to the demonstration that the main categories of prices, as wages, rent and interest, would have to figure at least in the calculations of the planning authority in the same way in which they appear to-day and would be determined by essentially the same factors. The modern development of the theory of interest played a particularly important rôle in this connection, and after Böhm-Bawerk it was particularly Professor Cassel who showed convincingly that interest would have to form an important element in the rational calculation of economic activity. But none of these authors even attempted to show how these essential magnitudes could be arrived at in practice. The one author who at least approached the problem was the Italian economist Enrico Barone who in 1908 in an article on the Ministry of Production in the Collectivist State developed certain suggestions of Pareto’s. This article is of considerable interest as an example of how it was thought that the tools of mathematical analysis of economic problems might be utilized to solve the tasks of the central planning authority. An English translation will be found as an appendix to this volume.
• 8All the further discussions of the economic problems of socialism which appeared before the War confined themselves more or less to the demonstration that the main categories of prices, as wages, rent and interest, would have to figure at least in the calculations of the planning authority in the same way in which they appear to-day and would be determined by essentially the same factors. The modern development of the theory of interest played a particularly important rôle in this connection, and after Böhm-Bawerk it was particularly Professor Cassel who showed convincingly that interest would have to form an important element in the rational calculation of economic activity. But none of these authors even attempted to show how these essential magnitudes could be arrived at in practice. The one author who at least approached the problem was the Italian economist Enrico Barone who in 1908 in an article on the Ministry of Production in the Collectivist State developed certain suggestions of Pareto’s. This article is of considerable interest as an example of how it was thought that the tools of mathematical analysis of economic problems might be utilized to solve the tasks of the central planning authority. An English translation will be found as an appendix to this volume.
• 9Among these early socialist contributions to the discussions, in many ways the most interesting and in any case the most representative for the still very limited recognition of the nature of the economic problems involved, is a book by Dr. O. Neurath which appeared in 1919, in which the author tried to show that war experiences had shown that it was possible to dispense with any considerations of value in the administration of the supply of commodities and that all the calculations of the central planning authorities should and could be carried out in natura, i.e. that the calculations need not be carried through in terms of some common unit of value but that they could be made in kind. Neurath was quite oblivious of the insuperaole difficulties which the absence of value calculations would put in the way of any rational economic use of the resources and even seemed to consider it as an advantage. Similar structures apply to the works published about the same time by one of the leading spirits of the Austrian social-democratic party, Dr. O. Bauer. It is impossible here to give any detailed account of the argument of these and a number of other related publications of that time. They have to be mentioned, however, because they are important as representative expression of socialist thought just before the impact of the new criticism and because much of this criticism is naturally directly or implicitly concerned with these works.
• 10In Germany discussion centred round the proposals of the “socialization commission” set up to discuss the possibilities of the transfer of individual industries to the ownership and control of the State, It was this commission or in connection with its deliberations that economists like Professor E. Lederer and Professor E. Heimann and the ill-fated W. Rathenau developed plans for socialization which became the main topic of discussion among economists. For our purpose, however, these proposals are less interesting than their Austrian counterparts because they did not contemplate a completely socialized system but were mainly concerned with the problem of the organization of individual socialized industries in an otherwise competitive system, For this reason their authors did not have to confront the main problems of a really socialist system. They are important, nevertheless, as symptoms of the state of public opinion at the time and in the nation where the more scientific examination of these problems began. One of the projects of this period deserves perhaps special mention not only because its authors are the inventors of the now fashionable term “planned economy”, but also because it so closely resembles the proposals for planning now so prevalent in this country. This is the plan developed in 1919 by the Reichswirtschaftsminister R. Wissel and his under-secretary of state W. v. Moellendorf. But interesting as their proposals of organization of individual industries are and relevant as is the discussion to which they gave rise to many of the problems discussed in England at the present moment, they cannot be regarded as socialist proposals of the kind discussed here, but belong to the halfway house between capitalism and socialism, discussion of which for reasons mentioned above has been deliberately excluded from the present work.
• 11Some of the points on which I can only touch here I have developed at somewhat greater length in my inaugural address on the Trend of Economic Thinking, Economica, May, 1933.
• 12A useful collection of the different allusions to this problem in Marx’s works, particularly in the Randglossen zum Gothaer Programm (1875), will be found in K. Tisch, Wirtschaftsrechnung und Verteilung im zentralistisch organisierten sozialistischen Gemeinwesen, 1932, pp. 110-15.
• 13Cf. L. V. Mises, Interventionismus, Jena, 1929.
• 14Cf. particularly F. v. Wieser, Natural Value, London, 1893, passim.
• 15H. H. Gossen, Entwicklung der Gesetze des Menschlichen Verkehrs und der daraus fliessenden Regeln für menschliches Handeln, Braunschweig, 1854, p. 231 : “Dazu folgt aber ausserdem aus den im vorstehenden gefundenen Sätzen über das Geniessen, und infolgedessen über das Steigen und Sinken des Werthes jeder Sache mit Verminderung und Vermehrung der Masse und der Art, dass nur durch Feststellung des Privateigenthums der Massstab gefunden wird zur Bestimmung der Quantität, welche den Verhältnissen angemessen am Zweckmässigsten von jedem Gegenstand zu produzieren ist. Darum würde denn die von Communisten projectierte Zentralbehörde zur Verteilung der verschiedenen Arbeiten sehr bald die Erfahrung machen, dass sie sich eine Aufgabe gestellt habe, deren Lösung die Kräfte einzelner Menschen weit übersteigt” (italics in the original).
• 16A completely neglected attempt to solve the problem from the socialist side, which shows at least some realization of the real difficulty, was made by G. Sulzer, Die Zukunft des Sozialismus, Dresden, 1899.
• 17In addition to his general work on interest, his essay on “Macht und ökonomisches Gesetz” (Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1914) should be specially mentioned, which in many ways must be regarded as a direct predecessor of the later critical work.
• 18V. Pareto, Cours d’Economie Politique, Vol. II, Lausanne, 1897, pp. 364 et seq.
• 19O. Neurath, Durch die Kriegswirtschaft zur Naturalwirtsckaft, München, 1919.
• 20This plan was originally developed in a memorandum submitted to the Cabinet of the Reich on May 7, 1919, and later developed by R. Wissel in two pamphlets, Die Planwirtschaft, Hamburg, 1920, and Praktische Wirtschaftspolitik, Berlin, 1919.