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,  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:
- 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.
- 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.
- 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:
- 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.
- 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.
- 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.
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1 Cockshott and Cottrell , Cottrell and Cockshott [1993b], Cottrell et al. , Cottrell and Cockshott [1993a],Peters .
2 The original paper was Kantorovich , I explained for a modern readership how his technique worked in Cockshott .
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.