Real problems of socialism and some answers

In the post Soviet Period the left lost confidence in socialism. This was partly a response to the immediate situation, but partly a realisation that socialist economies had real problems. Since socialists themselves had not come up with any real answers to these problems, and Western socialists never went beyond platitudes here, the arguments of Friedman and Hayek seemed to gain credibility. I will look at some of these real problems and what the potential solutions are.


The main criticism levelled at the socialist economies was that a planned economy was inherently less efficient than a market one, due to the sheer scale of the bureaucratic task involved with planning a major economy. If there are hundreds of thousands, or perhaps millions, of distinct products, no central planning authority could hope to keep track of them all. Instead they were forced to set gross targets for the outputs of different industries. For some industries like gas or electric power, this was not a problem. Electricity and gas are undifferentiated, a kilowatt is a kilowatt – no argument. But even for another bulk industry like steel, there was a wide variety of different rolled plate and bars, different grades of steel with different tensile strength etc. If the planners could not keep track of all these different varieties and just set rolling mills targets in tons, the mills would maximize their tonnage of whatever variety was easiest to produce.

The steel example is a little forced, that degree of differentiation was still fairly readily handled by conventional administrative means. Tonnage targets could still be set in terms of distinct types of steel. But when you turn to consumer goods: clothes, crockery etc the range of products was too big and targets were started to be set in terms of monetary output.

The plan would specify a growth in the value of output of clothing, furniture etc. What this translated into then depended on the price structure. In order to prevent other forms of gaming the plan by enterprises it was important the the prices were economically realistic. If the price for chairs is set too high compared to tables, it becomes rational for factories to concentrate on chair production.

By resorting to monetary targets, the socialist economies were already conceding part of Mises’s argument. They were resorting to the monetary calculation that he had declared to be vital to any economic rationality. Liberal economists argue that it was impossible for planners to come up with a rational set of prices, only the competitive market could do so. Planning required aggregation. Aggregation implied monetary targets. Monetary targets required rational prices. Rational prices required the market. But if you had the market you could dispense with planning. Planning dialectically implied the super-cession of planning.

It is worth noting that this is a largely theoretical argument. It was, in late Soviet days backed up with lots of anecdotal evidence, but empirical evidence for the greater macro-economic efficiency of markets even when compared to classical Soviet planning is much thinner on the ground. As Allen, [2003] shows, the only capitalist economy whose long term growth rate exceeded that of the USSR was Japan, whose own model was some way from unplanned capitalism. Compared to other countries starting out at the same economic level in the 1920s, the USSR grew considerably faster. One could argue that this was due to marcro-economic advantages of planning: that, by removing uncertainty about future market demand, it encouraged a higher level of investment. It is possible that this macro-economic advantage outweighed any micro-economic inefficiency associated with plans.

The strongest evidence that markets may perform better than plans would come from China, and that certainly the orthodox Chinese view. Their claim is that a socialist market economy avoids the macro-economic instability of capitalism whilst harnessing the micro-economic efficiency of the market. As evidence they cite a higher rate of growth after Deng’s restructuring. But China since Deng has followed a mercantilist road. It has the effect of relatively beggaring the workers of China whose products are exported to the US in return for US paper. The latter is of no benefit for the Chinese workers, though it does enable private Chinese companies to buy up assets in the US. From the standpoint of the Chinese state it is a more nuanced issue. On the one hand Chinese state companies too, can buy up overseas firms, but whether this is a long term advantage is a moot point since real goods which could have been used to improve the Chinese economy and living standards have been sacrificed.

Historically the process of having an export led economy allowed China to avoid the technology bans that the West imposed on the USSR, allowing rapid catch-up in manufacturing techniques. Now that China is overtaking the US in some areas of mass production, that advantage is less clear, and a shift towards higher domestic consumption and higher wages makes sense, and is indeed being followed in China unlike Germany. It could be that the growth advantage that China experienced post-Deng owed a lot to a new ability to import the latest productive techniques instead of micro-economic efficiency. But what is abundantly clear is that the pro-market restructuring had the effect of drastically widening economic inequalities and giving rise to a new domestic billionaire class. This in turn produces political pressure to extend private ownership and undermine the still dominant position of state industry.

So the question arises, could a planning system work in a modern economy with a highly diversified product range, and how would it overcome the socialist calculation argument of Mises. I and others have since the late 80s1 been arguing that the answer is yes.

The Mises critique of socialism focused on the need to compare the costs of alternative ways of making things. Unless you can do that you can not chose the most efficient. Our response has been not only that labour time in principle an alternative, which Mises conceded, but that with modern computer technology it is perfectly possible to maintain up to date figures for the labour cost of each input to the production process. Using these, workplaces will have data that are as good as prices for choosing between techniques.

There are limitations to labour values as there are to any scalar measure like price, since the constraints on production are multifactorial. Not only labour power, but also natural resources and ecological considerations constrain what we can make. No single scalar measure can handle this. But the problem of how to deal with multiple constraints like this was already solved by socialist economics way back in the 30s. Kantorovich came up with a completely general technique for how to meet a socialist plan subject to constraints additional to labour time2. Kantorovich’s method is an form of calculation in-kind, ie non-monetary. It was not practical to use it at the level of the whole Soviet economy during his lifetime as the computing resources were too poor, but by the 1990s computers were up to the job. You can get a good lay-person’s introduction to it in the novel Red Plenty by Francis Spufford.

So the basic problem of socialist economic calculation without money had been solved since Mises wrote. It was impractical in the USSR for two reasons: a) the computer technology was not there; b) it would have involved replacing money calculation and payment with non transferable labour accounts. This would have been a radical step towards greater social equality.


Labour time accounting demystifies or de-fetishizes social relations. Rather than relations appearing to be between people and an objective `thing’ called money, they make it evident that what is involved are people’s lives. If I get with 1 hour of social credit for each hour I work, and can for this credit acquire goods which themselves took an hour to make, then it is clear that I am participating as an equal in social exchange. If, instead, I am only credited with 40mins time for working an hour, it is clear that there is something odd going on. If the difference is made of a 33% income tax that I had a chance to vote on, that is one thing. If instead I see that someone else is getting credited with more than an hour for each hour that they work, I am going to be asking some hard questions.

Labour time accounting has a presumption of equality and equity. If one person gets credited more than they actually work, the a-priori implication is that there is something dodgy about it. Its adoption would thus involve a big pressure towards levelling. Levelling between different categories of work, and levelling between men and women. It of course eliminates completely the possibility of unearned capital income. It makes the moral presumption that labour is the only legitimate source of income. Any other income, to the old, the sick, to families with children has to be an explicit voluntary deduction from the incomes of those who work.

The significance of labour tokens is that they establish the obligation on all to work by abolishing unearned incomes; they make the economic relations between people transparently obvious; and they are egalitarian, ensuring that all labour is counted as equal. It is the last point that ensured that they were never adopted under the bureaucratic state socialisms of the twentieth century. What ruler or manager was willing to see his work as equal to that of a mere labourer?

There is nothing terribly original in this scheme: set out briefly here, but in much more detail in our other articles. It is simply a detailed and literal elaboration of the proposals Marx made in his comments on the draft of the 1875 program of the German Socialists.

The assumption is that people would have electronic labour credit cards whose credits could only be cancelled out not circulated3. You could not pay credits into somebody else’s account but you could get things form communal stores. This completely eliminates the possibility of a black market.

It is absolutely essential that distribution labour values of goods be realistic. A socialist government must avoid the temptation to undervalue necessities in the communal stores. If they are undervalued, there will be excess purchasing power in terms of labour credits. If bread used 300 million person hours to make but was sold for 100 million hours, an excess of 200 million credits would have been issued to the bakers, millers, farmers etc. Such undervaluation, we know from bitter experience, just leads to queues and apparent shortages.

If prices are equal to labour content, then deviations of sales from actual production can be used to adjust plan targets on a real time basis, reallocating labour from products whose demand falls short of production to those that are selling out.

Deviations from of distribution price from labour content would, however, still occur in a planned economy for environmental reasons. If the planning system had a constraint that total production of fossil fuel had to decline by 2% a year, then the planning authorities would be forced either to raise the distribution price of fuel above its labour content, or to ration petrol. If petrol was distributed at a premium, goods which did not contain fossil fuels would have to be distributed to consumers at a discount. There might be a case for the environmental premiums or discounts being displayed on the label.

Free communist distribution of goods and services is only viable for those goods or services for which certain special conditions are met:

  1. The actual allocation can be rationed by deliberate decisions or by queues – this is how the NHS is able to function. You can get free treatment but only if a doctor decides you need it, and you are willing to wait your turn. This rules out, for example, resources being wasted on penis or breast enlargement surgery.
  2. Where the actual usage is easily pre-calculable. We know that demand for primary schooling is set by the number of children reaching school age. Making schools free increased demand up to this limit and no further.
  3. The resources being used would otherwise go to waste. Examples are the free district heating provided in the USSR from waste heat of power stations; providing free travel to pensioners outside of rush hours; free use of Internet once the basic infrastructure has been installed.


Socialist planned economy has a distinct form of surplus extraction. The magnitude of the surplus is determined by the planned allocation of labour between that devoted to the reproduction of the working population versus other activities. This is the inverse of the mechanism that operates under capitalism where the monetary division of the value added between wages and profits comes first. In a capitalist economy the allocation of labour between reproduction and other activities occurs as a second order effect when the wages and profits are spent. In a socialist economy it is the allocation of labour that comes first.

If the socialist country retains money, but delivers many services free, has to balance the monetary demand in the hands of workers from their wages with the amount of social labour going into consumer commodities. Since a part of the social working day had been allocated to producing free goods and services, and another part to the accumulation of new buildings, infrastructure and machinery, the disposable income of the working class had to be limited to the money equivalent of the number of hours spent making consumer commodities.

There are a number of ways this could in principle be done:

  1. By selling consumer goods at a mark-up or profit. This profit, since it accrues to state factories, can then become government revenue and be used to fund free services, accumulation etc. In the USSR this was formalized as a turnover tax levied on all government factories.
  2. By levying a sales tax, ie, one that is raised as a percentage of the selling price like VAT4. Both this and the turnover tax are indirect taxation, they differ in where they are collected: at production or at sale.
  3. By levying an income tax or poll tax on employees. This was the consistent policy advocated by Marx5.

I think that there are strong arguments to favour the last option. It may initially have been politically popular to claim that under socialism there was no need for income tax, but that is dishonest, since indirect taxation remained. Wages were still held down to a level that would allow the turnover tax to fund government services, so in terms of take home pay people were no better off. A direct deduction of income tax is more visible, but the converse of that is that something visible is easier to understand, and as a result easier to make open democratic decisions about6.

But more serious than this, the policy of holding down wages and funding public services out of profits had adverse effects on economic efficiency. Suppose that 40% of labour goes on accumulation, 30% on free services and 30% on consumer goods. It follows that the wage has to be only 30% of the real value of labour. The average wage for a 40hr week would only be the monetary equivalent of 12 hours. This made labour appear to be artificially cheap. If machinery was priced at full value, a rational factory management would use 4 workers instead of one machine and 1 worker if the depreciation of the machine amounted to 40 hours a week.

Mechanized production cost mis-valued at : 40 for machine + 12 for labour = 52

Manual production cost mis-valued at : 48 for labour

but the true relative costs of the techniques are reversed

Mechanized production true value : 40 for machine + 40 direct labour = 80

Manual production cost 4 x 40 hrs = 160 hours

So a manual process that was really twice as costly to society would be preferred to a mechanized one. Use of direct labour time calculation would of course have revealed the right answer.

The Soviet solution of a turnover tax was short term populism that hampered efficiency.


[Allen 2003]
Robert Allen. Farm to factory: A reinterpretation of the Soviet industrial revolution. Princeton University Press, 2003.

[Cockshott and Cottrell 1989]
Paul Cockshott and Allin Cottrell. Labour value and socialist economic calculation. Economy and Society, 18 (1): 71-99, 1989.

[Cockshott and Renaud 2010]
Paul Cockshott and Karen Renaud. Extending handivote to handle digital economic decisions. In Proceedings of the 2010 ACM-BCS Visions of Computer Science Conference, page 5. British Computer Society, 2010.

[Cockshott 2006]
W Paul Cockshott. Von mises, kantorovich and in-natura calculation. Intervention. European Journal of Economics and Economic Policies, 7 (1): 167-199, 2006.

[Cockshott and Zachriah 2012]
W Paul Cockshott and D Zachriah. Arguments for socialism. 2012.

[Cockshott 2011]
William Paul Cockshott. Comments on the “China model”. International Critical Thought, 1 (2): 148-157, 2011.

[Cottrell and Cockshott 1993a]
AF Cottrell and WP Cockshott. Towards a new socialism. Spokesman Books, 1993a.

[Cottrell and Cockshott 1993b]
Allin Cottrell and W Paul Cockshott. Socialist planning after the collapse of the Soviet Union. Revue européenne des sciences sociales, pages 167-185, 1993b.

[Cottrell et al. 2009]
Allin Cottrell, WP Cockshott, and Greg Michaelson. Cantor diagononlalisation and planning. Journal of Unconventional Computing, 5 (3-4): 223-236, 2009.

[Jones et al. 1979]
Terry Jones, Graham Chapman, John Cleese, Terry Gilliam, Eric Idle, and Michael Palin. Monty Python’s life of Brian. Hand Made Films, 1979.

[Kantorovich 1960]
L.V. Kantorovich. Mathematical Methods of Organizing and Planning Production. Management Science, 6 (4): 366-422, 1960.

[Marx 1970]
K. Marx. Marginal Notes to the Programme of the German Workers’ Party [Critique of the Gotha Programme]. Marx and Engels Selected Works, 3, 1970.

[Marx and Engels 1977]
Karl Marx and Friederick Engels. Manifesto of the Communist Party, trans. S. Moore. Moscow: Progress.(First published 1848.), 1977.

[Marx and Guesde 1880]
Karl Marx and Jules Guesde. The programme of the parti ouvrier. tomado de:, revisado el, 2, 1880.

[Peters 2000]
A. Peters. Computersozialismus:Gespräche mit Konrad Zuse. Vaduz, 2000.

[Renaud and Cockshott 2009]
Karen Renaud and Paul Cockshott. Handivote: simple, anonymous, and auditable electronic voting. Journal of Information Technology & Politics, 6 (1): 60-80, 2009.

[Renaud and Cockshott 2007]
Karen Renaud and WP Cockshott. Electronic plebiscites. 2007.

[Surowiecki et al. 2007]
J. Surowiecki, M.P. Silverman, et al. The wisdom of crowds. American Journal of Physics, 75: 190, 2007.


Cockshott and Cottrell [1989], Cottrell and Cockshott [1993b], Cottrell et al. [2009], Cottrell and Cockshott [1993a],Peters [2000].

2 The original paper was Kantorovich [1960], I explained for a modern readership how his technique worked in Cockshott [2006].
3 For a rather old fashioned idea of how this might work read Bellamy’s utopian socialist novel Looking Backward(1888). He invented the whole idea of credit cards. His cards were based on good 19th century punched card technology. You got a new card each month, and for each purchase from a social store an appropriate number of credits were punched out from your card. The store was envisaged as a cross between Argos and Amazon.
You selected goods from a catalogue at the store, and then they were delivered direct to your house by a system of pneumatic tubes.

4 Note that the EU mandated VAT is in German mehrwertsteuer, literally surplus value tax.
5 See Marx and Engels [1977], Marx [1970], Marx and Guesde [1880]
6 How to carry out such democratic budgeting is beyond the scope of this paper but is a topic of our book- Cockshott and Zachriah [2012] and of papers including Cockshott and Renaud [2010].

10 Responses to “Real problems of socialism and some answers”

  1. Nikolai Stavrogin Says:

    Very interesting post. I would just like to ask you your views on the following matter.

    You treat labour as being of undifferentiated quality.

    Yet, a socialist government will be immediately faced with issues relating to the heterogeity of labour under capitalism as this is reflected in wage differentials. Since socialism is not a mode of production that could be introduced immediately, it seems that during the period of transition from capitalism to socialism, the labour time of a doctor would be treated, in a labour accounting scheme, as a multiple of the labour time of, say, a garbage collector.

    If this is true, then a numeraire of unskilled labour would have to be set relative to which different gradations of skilled labour would have to be measured, in terms of labour time. And, moreover, it will have to be decided what multiple of the numeraire of unskilled labour each type/gradation of skilled labour would have to be, in labour time terms.

    How would you propose tackling this issue?

    • Paul Cockshott Says:

      Well the answer we gave in our book was:
      Up to this point, we have been assuming that labour is essentially homogeneous.
      We have said that socialism was originally based upon the democratic presump-
      tion that human beings were equal, and that their labour should thus be treated
      alike. We implicitly assume that each hour of labour produces the same amount
      of value and all workers should on this account be paid at an equal rate of, let us
      say, one labour token per hour. While we might argue on philosophical grounds
      that all people were equal, we can not deny that there are real differences in
      people’s ability to work. Let us explore the consequences of this inequality of
      labour. We want to see what the implications are for social inequality: Must
      inequality in skills or training lead to class differences?
      We don’t think so. Workers differ in at least two ways—with respect to the
      degree and form of their education or training, and with respect to ‘personal
      qualities’ such as their willingness to work hard, their ability to cooperate well
      with colleagues and so on. These two kinds of distinction give rise to two issues.
      The first issue is whether people with greater skills or ability need to be paid
      more than those with less. The second issue is whether, for all its philosophy of
      human equality, any socialist economy is going to be forced to recognise distinct
      types of labour for planning (allocation) purposes. We shall deal with these
      issues in turn.
      Differential payment for education/skill?
      We first examine the relationship between skill or education level and individual
      payment for work. In capitalist economies relatively skilled or educated workers
      are generally better paid. What are the reasons for this? To what extent do
      these reasons also apply in a socialist economy?
      One generally accepted explanation for at least part of this salary premium
      is that it functions as compensation for the expense of education or training, and
      for earnings foregone. The extent to which workers in capitalist economies are
      responsible for the financing of their own education or training is variable, but
      in all cases there is an element of earnings foregone, in that people could earn
      more—at first—by going straight into employment after the completion of basic
      education than they receive during the years of additional education. In order
      to generate a sufficient supply of educated labour, therefore, the more highly
      educated workers must be paid a premium once they move into employment.
      So the argument goes.
      How realistic is this? Is it really a ‘sacrifice’ to be a student compared, for
      instance, to leaving school and working on a building site? Compared to many
      working-class youngsters, students have an easy time. The work is clean. It is
      not too demanding. There are good social facilities and a rich cultural life. Is
      this an experience that demands financial compensation in later life?
      Even if the compensation argument is an accurate reflection of reality in
      capitalist countries this does not mean that professional workers should obtain
      the same sort of differentials in a socialist system. The costs of education and
      training then would be borne fully by the state. Not only would the education
      itself be free, as it has been in Britain, but in addition students could receive a
      regular wage during their period of study. Study is a valid and socially necessary
      form of work. It produces skilled labour as its ‘output’, and should be rewarded
      accordingly. So there need be no individual expense or earnings-loss on the part
      of a student, for which compensation is required.
      In present day society, the class system prevents a large part of the pop-
      ulation from ever reaching their full potential. Children grow up in working-
      class neighbourhoods without ever realising the opportunities that education
      presents. Their career aspirations are stunted from infancy. Many assume, with
      some realism, that all that is open to them is menial work, and who needs an
      education for that?
      Some of this is just a reflection of the jobs that children see open to their
      parents, and these jobs would not themselves change if a revolution in society
      instituted equal pay. Equal pay would not raise the educational and cultural
      level of people overnight; but the democratic presumption behind it would, over
      time, work in this direction. Equal pay is a moral statement. It says that one
      person is worth as much as any other. It says, ‘Citizens, you are all equal in
      the eyes of society; you may do different things but you are no longer divided
      into upper and lower classes.’ Talk of equality of educational opportunity is
      hollow so long as hard economic reality reminds you that society considers you
      inferior. Beyond what it buys, pay is a symbol of social status; and a levelling
      of pay will produce a revolution in self-esteem. Increased comfort and security
      for the mass of working class people would be accompanied by a rise in their
      expectations for themselves and their children.
      If society values people equally in terms of money, it encourages them to
      aspire to equality in terms of education and culture. Education is an enrichment
      that goes beyond money, but ‘to him that hath shall be given’. At present
      educational opportunity runs alongside money. Once working-class people win
      economic equality they will have the confidence to seek cultural and educational
      equality for themselves and their children. In the process a huge economic
      potential will be liberated. Human creativity and ingenuity is our ultimate
      resource—develop that through education and economic progress follows.

  2. Alex Says:

    I read ‘Towards a New Socialism’ some years ago, and am extremely enthusiastic about its proposals. I wish that you and your co-author would give more attention to the issue of how it might actually be brought about. As I understand it, when originally conceived, the USSR had not quite yet dissolved, and the book was a contribution to thinking about its economic reform. So, there was a State with full political/legal control over production units, and an existing planning infrastructure.

    But in a contemporary capitalist society, the situation is very different.

    Obviously, one can imagine a gradual transition, from something like indicative planning and State ownership of only a few top corporations initially, to a more encompassing arrangement over time.

    But when one thinks about pursuing this, practically, today, all sorts of issues come up.

    I can certainly agree that it would be politically less forbidding if the Left were much more unified around the necessity for such a proposal. And that this is half the battle.

  3. Paul Cockshott Says:

    Well we have written a couple of things about that. First is the intro to the Czech edition of the book which is available in English here and which deals at an overall level with these strategic questions, but I agree we need to do more. Also the book here addresses these issues. My feeling now, is that whilst overall the approach may be right, we were overoptimistic about what could be achieved in the EU. The experience of Greece has put paid, in my opinion, to the possibility of radical democratic change in the EU.

    • Alex Says:

      Thank you for these references.

      The total abolition of money, and the payment instead of non-transferable credits, makes me a little nervous. It seems to have the implication of an absolute concentration of power (in the hands of the authority that allocates productive resources). Does this not concern you? It also seems to have the implication that you are obliged to “collectivise babysitters”.

      Would there not be relatively simple means of monitoring whether capital accumulation were occurring, so that you could prevent this possible implication of having money – if that is the motivation for this?

      • Paul Cockshott Says:

        There is no denying that the communist objective of getting rid of commodity economy is very radical. It is only going to be acceptable to people if there are intermediate stages during which popular trust is built up in the new mechanisms of participatory bugetary control.

        I think it is almost inevitable that one intermediate stage would be one in which the direct private employment of labour is effectively prohibited, but inter personal labour credit transfers are still allowed.

        There are various ways you could, at this stage prevent capital accumulating : limit the maximum transfer into a person’s account per year to be equal to 40*52 hours assuming a legal limit on the working week to 40 hours. Alternatively you could make labour credits dated, so that they expire after a certain number of months – analogous to the credits on gift cards. Either measure would prevent the accumulation of capital. There would still, however be a problem of tax evasion so long as some trades carried out payments in cash.

  4. Vicenc Melendez Says:

    Even if in a socialist economy, with labour time accounting and with no equalization of the sectoral rates of profit, the concept of sraffian prices may still hold, both for free services and for wage products, no matter if actual industries are naturally born or ar statal decisions, provided that each industry has its own relation between dirct live and objectified labour time. There are not values because the concept corresponds to a capital driven society.
    With such a framework, effect on prices and real wage can be evaluated, deriving from a part of state employees working more or less of what is considered the standard.
    A question that arises is how to reward those employees that develop, by their own, new techniques that diminish labour time or how to limit working less than establish socially.
    And related to this, how to convince this high technical workers that today still give strategic suport to capital that they would be better if capital is just socialized.

  5. Paul Cockshott Says:

    I would think the obvious way to reward innovators is by prizes which are publicly presented, bring prestige, and a certain amount of spending power, with the prize fund coming from general taxation.

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  7. Maryann Pullis Says:

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