• The Invisible Hand

Can Communism overcome the calculation problem?

Is economic calculation only possible when productive assets are privately owned?

For decades advocates of free-markets (privately-owned assets) and socialists (state-owned assets) have clashed over the idea of whether economic calculation is possible in a socialist economy. Socialists insist their ideology can create a more prosperous, equitable society yet free-marketers claim the prosperity of the world is down to the private ownership of property. Nye Bevan said ‘the language of priorities is the religion of socialism’, but could the priorities of a socialist economy be effectively achieved and could the necessary calculations be done?

Undoubtedly, there are significant flaws with calculation in free-market economies. The paradisiacal world of free-market advocates where everybody always maximises their utility and achieves prosperity is totally unrealistic. It is virtually impossible to achieve a perfect equilibrium which so many economists put forward as an achievable target.

It is impossible for a consumer to select the single item out of a supermarket of thousands of items that maximises their utility. People may be influenced by other factors (behavioural economics) which means they don’t maximise their utility, for example people rarely consider the long-term benefits of their decisions. Information gaps mean consumers can be exploited so they will not purchase items which actually maximise utility.

No producer always produces exactly the right amount even in a free market as the transmission mechanism of a change in demand to a change in price, rarely occurs in the short-term as it takes producers time to recognise changes and they are often reluctant to change printed prices regularly.

Clearly, there are flaws with calculation in free-markets, which poses the question: does a more effective method of economic calculation exist? And could this be socialism?

Traditionally, there are three methods of calculation proposed by socialists for a planned economy: money would still be used, labour-time would be a unit of calculation or payments in kind would occur.

The first method of calculation involves retaining the use of money but also the socialist principles of state industry and equality of income. People would be free to spend their money how they would like and producers could respond to shortages by expanding production. Supply would reflect demand, but the problem of determining price and quantity remains and there is no profit motive for companies so inefficiencies would inevitably occur.

Secondly, the value of resources could be determined by the amount of labour involved in producing them, which satisfies the communist principle of equal value of labour. However, this doesn’t allocate resources in the most beneficial way for society because the amount of labour doesn’t reflect the value of product to society and the productive value of labour varies.

Thirdly, payments could be made in terms of physical units rather than money because socialists believe money fails to capture enough information regarding the material-well being of people. This would make the transfer of resources more efficient but it would make the economy as a whole less allocatively efficient because people would have a limited choice of goods making it unlikely that they would receive the good which maximises their utility.

Optimistically, David McMullen has proposed an unlikely situation where calculation isn’t necessary because workers would be motivated by the satisfaction from work and the desire to better the economy.

Clearly, none of these methods of calculation are more efficient than the free market. As seen in the Soviet Union where they used the labour-value method of calculation, however, they used little calculation and relied on guesswork. The fact a free-market economy is more efficient than a traditional socialist economy doesn’t mean a socialist economy can’t be a more equitable, pleasant place to live; it just can’t do calculation better.

Although traditional socialist arguments can’t effectively make economic calculations, perhaps our modern day mathematical principles can.

A centralised industrial structure using correct economic calculation could create an economy closer to the general equilibrium because while individual producers are hesitant to estimate demand, a government would control the whole market. In 1908, Enrico Barone demonstrated an equilibrium could be reached as easily as in a free-market economy.

Socialist mathematicians, such as Leonid Kantorovich, believe solving the right system of equations could create the optimal allocation of resources.

Critical economists such as Hayek admit this is possible, but say that the maths is too complex and would take an enormous length of time to solve by which time the situation would have changed so much the original calculation would not be applicable; Jason Kuznicki says that ‘equilibrium is a moving target’. While, this may have been the case in the 1930s, computer technology has since developed so in 1993 Allin Cottrell and W. Paul Cockshott found the calculations involved in the Soviet economy in 1983 could be done using a computer in 17 minutes and computer power has massively increased since then.

Despite the ability to do calculations using maths, one of the main issues with this is the inability to gain the data necessary for these calculations. Instead most socialist planners estimate the needs of society but it is extremely difficult to estimate the needs of society even by consumers themselves.

A socialist economy often lacks the diverse range of goods seen in free-markets because categories of goods have to be simplified to make mathematical calculation possible which is why communism is often seen as being plain and boring with a lack of variety. When discovery or invention does occur in a socialist economy calculations become more complex but a free-market can adapt and thrive. Therefore, free-markets accept innovation while for planned economies it is an inconvenience.

Considering the issues with calculation in a socialist economy highlights the power of the profit motive and makes the invisible hand more visible.

Though this problem seems complex and difficult, mathematical breakthroughs have been made to problems which seem impossible today.

When most of this debate occurred, in the 1930s, modern computing power was unheard of; in fact computer meant a person who could do calculations quickly.

Some suggest that to solve the problem of a lack of data, in the future we could use sensory systems to track and collect information as seen in many major commercial warehouses today. Even today companies are using sensors and sophisticated tracking systems to understand rates of demand. Amazon Go, a staff-less supermarket, is a fascinating project because it provides the opportunity to monitor and record consumers transactions and therefore demand. Trends in demand could be tracked and a central government could use this data to dictate production levels and price. This technology would still be expensive and many would resent the invasion of their privacy, but the future of technology is uncertain and like previous generations we are likely to have little comprehension of technology in 50 or 100 years time.

So far the free market has contributed to astonishing prosperity in some parts of the world and socialism as an ideology has been discredited by many politicians and citizens of the western world. In the present this is logical as a socialist economy has proved inefficient at economic calculation, but the future brings hope for those who would want a socialist society to be achieved.


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