Chapter II

CHAPTER II DEFINITIONS AND ASSUMPTIONS In principiislateterror, latetveritas IT SAVES both time and words, if concepts are clearly defined and their boundaries distinctly traced. For the sake of clarity it is usually helpful to .go back to the origins of the concept, while for its de limitation one must consider adjacent spheres. The word calculationcomes from the Latin calces (chalk used in the Greek and Latin abacus). In a number of languages calculation,or rather the corresponding foreign word of the same origin, means computation in its wide sense, while in others it is used not only of computation of objects or relationships capable of quantitative measurement, but also in the sense of judgment and conjecture. In trade and economics calculation generally means a computation of what a commodity will cost collectively or as a unit, at purchase or sale. The need for calculation arises partly out of competition and partly from the demand and the necessity forsurvt::y. In trade the basis of calculation is the purchase price of the commodity (foreign currency being converted), to which is added freight, packing, insurance (where goods are bought c.i.f.), duty, loss of interest, wastage and other charges. In industrythe object of calculation is to determine what the commodity produced costs the producer. Here the basis is the purchase price of the raw or semi-manufactured materials used, to which is added all the costs connected with its manufacture: wages, power, wear and tear, amortization and wastage, together with the general charges of the producer himself. The size and nature of these depends on whether the concern in question sells through wholesalers or direct to the public. In any circumstances there are the. additional charges of interest on capital, property taxes, administration, office, ware housing and despatching. lq. the last few years much work has been done on cost accounting and the classification of the various items.

The foregoing enumeration of costs pretends neither to be complete nor to coincide with the latest authorized terminology, but is given merely to show that in a society based on private economy calculation is built up of many different data. This does not mean to say that in a socialist society the same data are necessary in order to be able to undertake a calculation. We have already said that calculation signifies "computatio~ of what II 12 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY a commodity will cost, collectively or as a unit, at purchase or on sale". Can this be used as a definition? It does not appear that there need be any hesitation in using the word "computation". The word "commodity" has in Marxist literature been given a special definition which makes the term ambiguous, especially when it has to be used in a treatise on "the socialist community". Let us then substitute for it "economic good or service", leaving aside for the moment what is meant by economic.

The word "cost" is ambiguous and therefore undesirable in itself; it is especially so for our purpose. In ordinary speech "cost" is usually expressed in money and represents an exchange value. However, we do not know whether our socialist society will use money or, therefore, whether money-prices will exist. It is not even permissible to assume the existence of "commodity prices" and "relative barter prices", as we do not know, so far, .whether markets and barter will be allowed in a socialist society. Now, in economic theory "cost" has other meanings. The economist distinguishes between "money cost" and "real cost". This is in reality not a distinction, but only two ways of expressing "cost". "Cost" may be conceived to mean either (1) the efforts and resources which go to produce a thing (also called "pain costs" or "embodied costs") or (2) what is given up to produce (also called "displacement costs", "alternative costs", or "opportunity costs"). The term "sacrifice costs"

can be used both of "embodied costs" and of "displacement costs".! "Embodied costs" tend to be expressed in real terms. They would, therefore, seem to be well suited to our purpose, but this is not the case. Some forms of physical energy and some physical quantities are capable of being measured exactly in real terms, e.g. electric energy and some materials with an unvarying and standard quality, but in most cases quality is not only variable, but very difficult to express in real terms. As an example may be mentioned the general fertility of a piece of land. When it comes to such cost factors as physiological quantities (e.g. human labour, skill and knowledge) the existence of a varying degree of quality is obvious. So is their importance and the difficulty in expressing exactly in real terms the differences in physio logical quality. Even if we concentrate on the second meaning of "cost", i.e. what is given up to produce a thing (the "displacement costs"), the difficulties are not avoided. In the first place "displacement costs" are lSee L. M. Fraser, EconomicThoughtandLanguage,p. 92. Chapter VI op. cit.,Costs, gives an excellent survey and also a good illustration of the difficulty in limiting the concept. Professor Fraser clearly shows the importance of the cost-concept for the value theory and points out-very rightly-that "the tacit adoption of a cost conception of value, and of a money-embodied conception of cost, decided the range of classical value-theory" (p. 96).

DEFINITIONS AND ASSUMPTIONS usually expressed in money or as an exchange value, the existence of which we have no right to assume in a discussion of socialist economy. If, secondly, we try to measure "displacement cost" in real, non monetary terms, they are determined by the varying degrees of "dis utility" per unit of work done. We cannot go into all the questions raised by the introduction of this concept; the main thing is that the disutility is a variable factor measured differently by the different contributors to the productive process. It means that costs are determined in psychological. and subjective terms, and this means that we have introduced an element of value.. ~t is possible that such an element is unavoidable in this discussion. The concept of value always has been, and presumably always will be, the central and most debated one in economics, and one which con tinually recurs in any discussion of "economic calculation". However, this is reason enough to avoid the concept in definitions and par ticularly so in a book on socialist theory. If, e.g., we define calculation as "computation of a commodity's value" and then later give a "subjective"! definition of the concept of value, we undertake a priori an inadmissible limitation of the scope of our investigation, in that by doing so we preclude solutions based on an "objective" (Marxist) theory of value. If, on. the other hand, we give an "objective"

definition of the concept of value, we exclude the possibilities of calculation which have to be based on subjective value-reactions. To sum up: "costs" is a motley and undesirable concept to introduce in definitions and especially in a discussion of socialist economy. If we analyse the concept we find that it implies and refers to the existence of factors such as money, prices, exchange, markets, quality and value. It is possible that some of these factors are unavoidable in any society which is based on division of labour and is working towards an end, but it is preferable not to include them when one is still at the definition stage of the discussion. In spite of its undesirability, however, there seems to be no better term at hand, and· we are, therefore, reluctantly forced to use "cost" even in our definition. To avoid any misunder standing it must be emphasized that the term, as it is used in this definition, does not necessarily imply the existence of money, exchange, prices or markets; nor is it implied that the cost elements are reduced to a common denominator; nor is any definite way of determining quality or value prescribed. We do not by definition exclude the possibility of calculation in natura and accept preliminarily any cost in any form of efforts, resources and disutility, irrespective of how measured.

l"Subjective" is here used as the antithesis to the classical theory of value (carried to the extreme in the Marxist "objective" theory of value) and does not indicate any qualitative definition in. the word's meaning of one-sidedness.

14 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY After this the following definition of calculation will be adopted: By calculationis understoodcomputationof what an economicgood, acquiredor self-produced,collectivelYor as a unit, "costs" in its acquisition(or will "cost" at the momentof its di~posal) irrespectiveof how the costs are measured. Wilhelm Keilhau gives. a special definition of calculation in his Wertungslehre, where he speaks of (I) Valuations in pre-time of the economic activity. (2) Valuations in co-time(statusvaluations). (3) Valu ations in post-time(statementsof results).! Incidentally, Professor Keilhau here draws attention to two concepts which, thanks to the "Swedish school", have in recent years been much used in the terms "ex-ante" and "ex-post". (These concepts have, besides, a deeper significance than those· of prospective and retrospective estimates, but this is a question which it would take too long to discuss here.) Professor Gunnar Myrdal similarly speaks of "calculations concerning future development", while on the other hand he speaks of analysis of cost and post facto analysis. 2 It is very useful to distinguish between advance analysis and post facto analysis.

There is a great difference between a postfactocomputation with known data and an advance computation where a number of factors will of necessity be uncertain. By dividing them into advance and post facto analyses there is introduced a factor which, consciously or un consciously, has always played a large part in industrial computations, namely, expectations, a factor which in recent years has assumed an honoured place even in theoretical literature. The writer is not inclined to restrict the meaning of calculation to advance computation. In the first place it is not in accordance with the general use of the word in the Scandinavian and English-speaking countries, and in the second place such a special definition is all the less appropriate in view of Dr. Erik Lindahl's expressions "ex-ante" and "ex-post". Particularly in this treatise, where we are concerned with investigating whether in the socialist community there is any possibility at all of economic computation, irrespective of whether for the future or for the past, there is little reason to define calculation so as merely to cover budgeting and advance computation. What we shall investigate is the basis itself, both for advance computation and for what Keilhau and Myrdal respectively call statements of results and analysis of cost.

The concept of socialism is a controversial one. Disputes have, and presumably always will, rage as to what shall be understood by Ipp. 192-193 (author's italics). 2Prisbildningsproblemetoch foranderligheten,Uppsala, 1927.

DEFINITIONS AND ASSUMPTIONS socialisml and as to how the socialist society shall be organized. There are, however, two main criteria for socialism which are generally accepted in scientific discussions: that the State owns the means of production, and that the State controls industrial life. Here the follow ing definition will be adopted: A socialistsociety is a society·in which (1) the privateownershipof means ofproductionis abolished,and (2) business initiativeis investedin a centralauthoritywhichalone directsindustrialactivity. By "means of production" is understoodboth manufacturedmeans of production, such as tools, machinery, factories and means of transport, and "natural" means of production such as land, mines and water P9wer. The term resources will for the time being be used in the sense of material means ofproduction,and the termfactors ofproductionin t?e sense of material meansofproductionplus labour.

As we have spoken of economiccalculation and in defining calculation have used the term economic (of services and· goods), it may be asked what is meant by "economic". Practically every economist who has discussed economic theory or written economic textbooks, has given his own definition of what he understands by economic activity (and by the subjectof economy, also called "economics"). It lies outside the scope of this book thoroughly to discuss these various concepts, but it may be briefly mentioned that these definitions fall into' two main groups, the first of which associates economy with prosperity, riches and welfare, and lays the main stress on the production, inter change, distribution and in part consumption of commodities. The second group connects economy with scarcity. Dr. Johan Akermann gave a neat, comprehensive definition when he wrote: ". . . in order to complete the schematic representation, we shall say that the central question of political economy amounts to a systematic causal analysis of the repetitive phenomena which occur when individuals or groups-through consumption, interchange, production and trade-adopt an attitude to scarce material goods." 2 For Professor Myrdal economy as a subject is taboo. In his opinion it is not only unnecessary, but evidently the unforgivable sin for an economist to occupy himself with· this question. He writes: " Any attempt to define political economy as a science, does violence to reality ... they want to have a definition which lFora survey of this see, inter alia, Professor F. J. C. Hearnshaw: A Survey of Socialism, London, 1929. Dan Griffith gives in What is Socialism? London, 1924, 261 definitions. Werner Sombart in Deutscher Sozialismus,Berlin, 1934, gives the' subject elaborate treatment and the concept a very wide definition.

2Das Problem der So~aljjk.onomischen Synthese, p. 16.

16 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY will make it possible to smuggle a normative content into the scientific experiment." 1 and later: "The only concept which an economist does not need to worry about trying to define, is just that of political economy." It would be thought that particularly those economists who are of the opinion that economics is misused and turned into a normative branch of knowledge, will appreciate a clear-cut formulation and a limitation of the provinces within which an economist qua economist has the right to speak. This does not mean that the economist cannot and may not encroach on adjacent provinces and borrow from other sciences, least of all psychology. Of the definitions which· can be relegated to one or other of the two main groups, those of the first group make the limits of the economist's scope flexible.2 The concepts prosperity, wealth and welfare are in themselves questionable and capable of definition in different ways. The first group gives to the concept of " economic activity" a functional significance, in as far as it is not the activity as such which determines whether it is economic or not economic, but what is intended by it. A round of golf can be an uneconomic employ ment of time, but it can also be an economic factor for a business man wishing to keep fit and increase his economic efficiency. The same can be said of such seemingly uneconomic activities as playing bridge or reading detective stories.

The other group of definitions, as we have said, associates economics with· scarcity. According to these the economic problem is that of how to economize, or of how to be economical. The typical repre sentatives of this school are Professor Gustav Cassel and Professor Lionel Robbins, the basis of whose argument is that in a society composed of individuals with different desires and needs there are not sufficient resources-meaning capital goods and natural assets-to cover all the requirements of all individuals, and that it is therefore necessary to make a choice between alternative uses. 1 Vetensk,ap och politik, i Nationalok,onomien, pp. 230-231. 2Professor A. C. Pigou uses a less flexible definition in as far as he says that economic welfare is a part of social welfare which directly or indirectly can be brought into relation with money as a yardstick. (Economics of Welfare, 3rd Edition, London, 1929.) This restriction cannot be accepted in our case, since we do not want to presuppose the use of money in a socialist society.

For analogous reasons we must reject the definition of economics which is based on economic theory as the study of market processes (formulated-but not accepted by Barbara Wootton among others-in Lament for Economics, London, 1938). We cannot assume the existence of markets in a socialist society. The above definition involves an unwarrantable and unrealistic restriction whichas a definition-robs economic theory of its general validity.

DEFINITIONS AND ASSUMPTIONS Robbins' point of view, which is shared by many economists and among them many followers of the Vienna School, has on the other hand been fiercely attacked by both economists and others. Thus the biologist Professor Lancelot Hogben said in a Conway Memorial Lecture in May, 1936, during a violent attack on economists in general, that Professor Lionel Robbins offers "a barren dialectic of scarcity . . . as a substitute for a genuine science of the wealth of nations". 1 Professor Edwin Cannan also criticized Robbins' chief point of view when reviewing his book 2 and it has similarly been the subject of an attack by Professor L. M. Fraser. 3 If the economists retire to their own selected areas and restrict their activity to studies of prices, the problems will be ttieated by demagogues and fanatics with no interest in logical reasoning and no knowledge of economic technique.

Fraser throws some light on the matter when he writes that according to Robbins' definitions even discussions as to the nature and significance of economic science might be supposed to belong not to economics, but to logic. or philosophy. It may be said for Professor Robbins' definition, that it has a pre cision and a clarity, which those of the first group lack, and it must be admitted that it is inspired by a sympathetic desire to make economics a theoretical, non-normative science; yet there is no denying that it makes economic theory very formalistic and that it seems doubtful whether economics can be given scientific status on the basis of such a limitation of its subject matter. It may be noted that our problem, the investigation of the possibility of economiccalculation, fits equally well into either group of definitions. Calculation is concerned with the state of production and distribution, thus agreeing with the first group, and represents precisely the study of the distribution of limited resources of the second group. Since the term "economic good" is used in the definition of calculation, it may be remarked that here, too, the element of scarcity comes in.

By "economicgood" is here understoodmaterialobjectsor servicesof any kind, which are desiredand which exist in limited quantity or number. Since the term "economic good" has been introduced into the definition of calculation, it is strictly speaking unnecessary to characterize calcula tion as "economic", but it is done to show that calculation is not only concerned with production and distribution, but with conditions which presuppose scarcity, such as necessitate a choice between alternative uses if it is desired to ensure that the sacrifice does not become greater than the· result ("the economic principle"). Actually lSee The Retreat from Reason, London, 1936, p. 19. 2See EconomicJournal, September, 1932. 3"How Do We Want Economists to Behave?" in EconomicJournal, December, 1932 • DEFINITIONS AND ASSUMPTIONS Robbins' point of view, which is shared by many economists and among them many followers of the Vienna School, has on the other hand been fiercely attacked by both economists and others. Thus the biologist Professor Lance10t Hogben said in a Conway Memorial Lecture in May, 19;6, during a violent attack on economists in general, that Professor Lionel Robbins offers "a barren dialectic of scarcity . . . as a substitute for a genuine science of the wealth of nations". 1 Professor Edwin Cannan also criticized Robbins' chief point of view when reviewing his book 2 and it has similarly been the subject of an attack by Professor L. M. Fraser. 3 If the economists retire to their own selected areas and restrict their activity to studies of prices, the problems will be treated by demagogues and fanatics with no interest in logical reasoning and no knowledge of economic technique.

Fraser throws some light on the matter when he writes that according to Robbins' definitions even discussions as to the nature and significance of economic science might be supposed to belong not to economics, but to logic. or philosophy. It may be said for Professor Robbins' definition, that it has a pre cision and a clarity, which those of the first group lack, and it must be admitted that it is inspired by a sympathetic desire to make economics a theoretical, non-normative science; yet there is no denying that it makes economic theory very formalistic and that it seems doubtful whether economics can be given scientific status on the basis of such a limitation of its subject matter. It may be noted that our problem, the investigation of the possibility of economiccalculation, fits equally well into either group of definitions. Calculation is concerned with the state of production and distribution, thus agreeing with the first group, and represents precisely the study of the distribution of limited resources of· the second group. Since the term "economic good" is used in the definition of calculation, it may be remarked that here, too, the element of scarcity comes in.

By "economicgood" is here understoodmaterialobjectsor servicesof any kind, which are desired and which exist in limited quantity or number. Since the term "economic good" has been introduced into the definition of calculation, it is strictly speaking unnecessary to characterize calcula tion as "economic", but it is done to show that calculation is not only concerned with production and distribution, but with conditions which presuppose scarcity, such as necessitate a choice between alternative uses if it is desired to ensure that the sacrifice does not become greater than the result ("the economic principle"). Actually lSee The Retreat from Reason, London, 1936, p. 19. 2See EconomicJournal, September, 1932. 3"How Do We Want Economists to Behave?" in Economic Journal, December, 1932 • 20 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY "In that sense a commodity remains scarce as long as the supply of it is not sufficient to satisfy all conceivable demands without any price whatever being charged for it-a condition which is hardly anywhere in sight of being realized, even if we imagine all monopolistic restraints upon production to be removed.

Everything which has a price is by that very fact demonstrated to be in some degree scarce, even if its physical output is reckoned in astronomical figures."! She also seems to be giving her own opinion when she writes: ". . . gluts are quite easily explicable in terms of the orthodox market mechanism for distributing scarce means, even though they may appear temporarily and superficially to belie the fact of 'scarcity'." Thus Mrs. Wootton is quite aware what non-scarcity implies and she speaks ironically of the possible consequences of digging holes in the ground and filling them up again-a reflection which presumably most of those who have read Keynes' book will have made. She also draws the logical conclusion from the assumption of non-scarcity and points out that those who build on it must stop criticizing "pump priming", unproductive middlemen, the construction of warships and the maintenance of unproductive classes of society, "for what more effective way of spending is there than the maintenance of an unproductive class?"2 In the best Veblen style she says that both unproductive middlemen and warships are "conspicuous forms of supposedly prosperity bringing waste". 3 In spite of all her reservations and despite the fact that some of her comments almost reduce the assumption of non-scarcity to absurdity, the upshot is that Mrs. Wootton has placed this assumption on an almost equal footing with that of scarcity. In doing so she refers to Professor Keynes' General Theory and to Professor Hayek's Prices and Production. Whether Keynes and Hayek will accept this implication we do not know, but that such an implication can be made, has necessitated this review of the question and forces us to state expressly that this book is based on the assumption of scarcity of resources.

The periodical non-utilization of available factors of production is no proof at all that we have left the stage of scarcity. Such periodical non-utilization can to a great extent be explained as a natural link in the process of adaptation, which from time to time is necessary in an industrialized, dynamic society with a monetary economy and a highly lLament for Economics, p. 93. 2/bid., p. 101. 3/bid., p. 101.

DEFINITIONS AND ASSUMPTIONS 21 developed division of labour. The permanently unsold stocks of commodities (and the consequent deliberate destruction of stocks) can be explained as a natural consequence of the price mechanism having been put more or less out of action, partly through the establishment of private monopolies and partly owing to public intervention which both restricts foreign trade and prescribes high minimum prices which stimulate production and reduce the number of buyers.! Irrespective of whether or not one shares these points of view, it is a decisive objection against accepting the assumption of non-scarcity, that it-and this is of importance in discussing the question of calculation-implies that there exist resources sufficient to satisfy all requirements of all individuals. This is obviously not the case and is scarcely likely ever to be so in view of both man's capacity for develop ing fresh needs and the almost infinite elasticity of certain needs.

This means that when employing resources a choice must be made between alternative uses, that one must economize, that economic calculation must be undertaken. IJ\-frs. Wootton is besides fully aware of the existence of these interfering factors and their importance. See several passages in Plan or No Plan and Lament for Economics,p. 139.