Chapter III

CHAPTER III PROCEDURE-ADDITIONAL ASSUMPTIONS-THE AIM OF SOCIAL ECONOMIC ACTIVITY THERE ARE various forms of socialism imaginable within the frame work of a socialist society as we have defined it, ranging from that of a moneyless economy with compulsory labour to· a community with an elaborate monetary economy and free choice of occupation and goods. It is possible that the need and possibility of economic calcula~ tion will be the same whatever the form of society, and that an investigation of each individual form would not make any fresh contribution to theory. This, however, is not probable,· and we shall therefore examine the individual forms. This can be done in one of two ways: we can either eliminate all irrelevant factors and establish so many simplifying assumptions that our conclusions become logically unassailable, or we can assume conditions which are likely to exist in reality.

The first method, an abstraction from reality, might not be un natural in our case, seeing that we have already renounced (see preface) recourse to empirical material. Yet the practical value of the con clusions will be small if the conditions assumed are completely at variance with reality, as is the case with most assumptions used when discussing static societies. The following examples of such assumptions are typical: (a) that means of production are everlasting and that production does not take time (in order, if possible, to avoid the problem of interest and the interrelation between various changes in time); 1 ( b) that the community in question is completely isolated and does not require imports from outside (in order, if possible, to avoid problems connected with international trade); (c) that no alteration takes place in the size or age-composition of the population, in the amount or. rate of growth of savings, in technical development and in the tastes and customs of the people (in order, if possible, to avoid the problems of the trade-cycle and certain other difficulties).

One can, of course, gradually abandon those assumptions which are unrealistic and so get nearer to reality, but the more factors are introduced, the more uncertain and less logically unassailable the results tend to become. These remarks involve no criticism of economic theories based on static conditions in general. Abstraction IThe question of time's greater or smaller importance in the problem of interest is broached later. 2.2.

PROCEDURE AND ADDITIONAL ASSUMPTIONS 2. 3 from reality may be a first necessary step towards tackling problems from the world of reality. What, however, is a mistake-and a danger -is to apply the results of abstract experimental studies to everyday life. It may be asked whether there is any need to aim at conclusions of practical significance? There is, of course, no necessity to do so. There is nothing to prevent us aiming merely at a theoretical, abstract solution, but since it is the socialist society which we are examining~ it is nevertheless reasonable to look for conclusions which are also tenable in real life, and presumably no one will dispute the advantage of reaching conclusions which also have ·their practical value. (The question of theoretical versus practical conclusions is discussed more thoroughly in Chapter XV.) The second method of procedure, that. of accepting the fact· that economic life is dynamic! and subject to constant change, is all the more natural in a treatise on the socialist society, as the protagonists of "socialism promise more rapid economic progress. This, then~ is the method we shall adopt, although in doing so we shall encounter more theoretical pitfalls and run a far greater risk of arriving at untenable conclusions.

The choice of dynamic analysis introduces a factor which is as confusing as it is important, namely, that of time. There are many interpretations of the distinctions between the static and the dynamic in economic theory. In 1926 Dr. Rudolf Streller enumerated eight groups .of definitions 2 and their number has not diminished since. As is i,ndicated above, we understand by a dynamic society one which undergoes changes in certain directions. Now, changes and variations are also conceivable in a static society, but such are "from their nature not real variations in time, but formal varia tions resulting from a comparison of different and more fully IThe. author does not mean that a static society is unreal-an antithetic con clusion. some might try to draw. There have been static societies by which we mean societies where there are no alterations in the size or age-composition of the population, .or in tastes or customs, where there is no technical development and no change in the size or rate of capital savings. Such societies exist in our day (in Asia). In such societies people will, of course, continue to be born and to die, but that need not necessarily alter the age-composition or size of the population. See Joseph. Schumpeter's Theorie der wirtschaftlichenEntwickJung, Leipzig, 1912, and E. Bohm-Bawerk's review, "Eine dynamische Theorie des Kapitalzinsen", in Zeitschriftfur volkswirtschaftlichenSozialpolitik und Verwaltung, Vol. XXII, and his GesammelteSchriften,Vol. II, Vienna.and Leipzig, 1926.

Professor Mises' view is that: "a static state is impossible in real life" (Collectivist EconomicPlanning,p. 109). It might be more accurate to speak of a stationarysociety, instead of "static", and for "dynamic" to use evolutionary.Cf. Ragnar Frisch's "Statikk og Dynamikk i den 0konomiske Teori ", National0k.onomiskTidskrift, 1939. 2Statife.undDynamife.in der theoretischenNationalofe.onomie,Leipzig, 1926.

24 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY specified situations, the realization of which are considered as alternatives.In this sense the static law is timelesslaw."l What characterizes dynamic analysis is that the situations compared are a series of successive situations. "Any theoretic law in the formulation of which the concept of rate of growth. or that of rate of reaction (as to time) is implied, is a dynamic law. All other theoretic laws are static."2 By choosing the dynamic form of analysis we have introduced time as a necessary factor, and this means that its significance should be taken into account in every condition discussed. The interval between the points of time chosen for the comparison of changes may totally alter the result. If the interval between the points of time of observa tion is shortened, the result may assume a diametrically opposite character. A month's balance can show a loss, while the year's balance for the same business shows a profit. The result of the first year's working of a ten-year contract can be favourable, while the final result may be unfavourable. In the same way the time fixed for carrying through a plan of production will have a decisive effect in a number of spheres both technical and economic, and, of course, on the possi bility of the members of the community receiving the benefits of the results. "In the long run we are all dead."

It is extremely difficult to give the time-factor the place it deserves at each step of an economic analysis. If this form of analysis is followed, we should, when discussing any factor whatever, take into account (a) how it (and changes in it) affect each of the other factors in the total development on the basis of differentintervals of time, and (b) how the factor itself is affected by each of the other factors (and changes in them) on the basis of different intervals of time. The ever-changing reciprocal influence between each of the economic factors ought to be shown and modifications described, not only quantitatively, but also qualitatively and in reference to the rate of growth. Whether such a task is practicable or not, it at any rate lies outside the scope of this treatise. If by dynamic investigation is understood investigation of the tide of events and of the rate of growth in the different factors and of how one condition grows out of another, then one ought to try to follow the causal chain backwards, which would involve the impossible task of going back to the be ginning of time.

It must suffice to point out here that in a dynamic society there exists an intricate multiplicity of changing reciprocal effects varying with the period of time, and that we shall take up for special discussion lSee Ragnar Frisch, op. cit., p. 322. 20p. cit., p. 325.

PROCEDURE AND ADDITIONAL ASSUMPTIONS 2. 5 only those states of time-relation which are obviously of essential importance for our investigation. In this .connection it is worth mentioning that if we examine a certain form of socialist society disregarding dynamic factors and find that economic calculation is not possible, it will not be made more possible by introducing new variables in the form of fresh dynamic factors .. Let us assume the following conditions: the community we are to discuss is of a certain size, say with a population of at least two millions. But even if it were only a Robinson Crusoe and his man Friday, there would still be the need for economic calculation, but survey and control would be so easy that the calculation would not raise the same problems. We further assume exchange of economic goods and services which excludes from the discussion a society composed of self-supporting family units. It is also assumed-somewhat un realistically-that the community in question is completely self supporting and has no intercourse with other communities, and, further, that the individual members of the community are different, not only as regards sex and age, but also in physique, intelligence, mentality, artistic talent, manual dexterity, energy, vitality, taste and sensibility. It is assumed that these divergences are not exclusively due to upbringing and milieu, but also to biological, hereditary factors and to glandular action, which the society in question neither can nor desires to influence in order to achieve unity of human taste and needs.

This assumption-which must be accepted or rejected for reasons which lie outside economics-may appear far-fetched and superfluous, but it is not. Economic activity and with· it the question of economic calculation assume a different and simpler aspect, if the society deals with entirely homogenous individuals. That one may not assume that the type of person in the socialist community will be· the same as in the capitalist society is evident from Dr. Clare Tisch's treatise! in which she writes that: " Socialism is absolutely unthinkable with people who have the egoistic, individualistic idea of economy of capitalism."2 Actually there are a number of socialists who consider this a sine qua non of the socialist order of society. This is easily seen in the case of the so-called Utopian socialists, but the same idea can also be found, more or less clearly expressed, among modern socialists. Dr. Eduard Heimann, for example, says: 1 Wirtschaftsrcchnung und VcrtcHung im zcntralistisch organisicrtcn sozialistischcn Gcmcinwcsen,Wuppettal-Elberfeld, 1932.

20p. cit., p. 8, footnote. C 26 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY "True Socialism can only be based on fundamental partnership, and not on material interest."! As we do not wish to discuss the ethical and psychological character of the socialist community, we shall for the time being accept reluctantly-the doubtful assumption that in such a society there is no such thing as an egoistic-individualistic disposition. However, the fact that egoistic interests are presumed to be absent, does not mean that differences between individuals have also ceased to exist. Another assumption which must be discussed is that of the aim or" the community's economic activity, a question which academic economists as a rule are disinclined to discuss, in the same way as they are shy of expressing sympathies. This timidity comes from their desire to be objective and as such is very creditable. It is an attitude, however, which not only has its drawbacks, but is not always possible to maintain, as when, for example, there are only two alternatives and an economist in pointing out certain consequences of one of them, consequences which are generally considered disastrous, indirectly recommends the other, whether or not this was intended.

One lamentable consequence of this reluctance to express sympathies is that many economists refrain from discussing ends at all. There might be little harm in this at a time when the aim of the community's activity was generally recognized, but when, as at present, this is not the case, much of economic discussion dissolves into thin air, because the aim and, consequently, the yardstick for economic activity have not yet been decided upon. It is the aim which determines the yardstick for valuation, and, if one goes deeper, it is the aim of the community which decides what is the official and social value. We shall not go into all the implications of this question, but merely point out that in communities where, broadly speaking, the aim of economic activity is to satisfy the needs of the members of the community, where distribution of the com munity's income takes place directly in or with the production and exchange of economic goods and this production and exchange is allowed, the concept of value will appear differently than in com munities where all power over economic activity is transferred to a central authority, where the production and exchange of economic goods is forbidden to individuals, and where the division of the community's goods can be made independently of and without relation to the individual's contribution to production and distribution and even independently of his subjective valuations.

The individual's subjective valuation may be, and as a rule is, lSee Mehrwert und Gemeinwirtschaft, Berlin, 1922, p. 112.

PROCEDURE AND ADDITIONAL ASSUMPTIONS 27 different from that of the c·ommunity, whether the latteris determined by free or monopolistic fixation of price or by more or less arbitrary official decrees. Differences between an individual's subjective valua. tions and those of the community will be found in socialist as well as in capitalist societies. If, however, the members of the community are denied faci~ities for giving expression to their subjective valuations and the central authority has, by definition, every opportunity to do so, for example,by abolishingmarkets,and reservesfor itselfthe right to fix prices and values, it is self-evident that this.may result in valuations and concepts of value different from those usually represented in economic theory. The need for some yardstick of valuation is clearly stated by Professor Frisch in the following, which· has our full agreement: "What in the long run interests the economist is to make a comparisonbetween results which have been arrived at by different processes and by different ways of arranging .the factors of production in one and the same process. This is essentially a problem of valuation,and the condition for its solution is not only that one employs concepts and standards technically defined, but that one either explicitly or implicitly accepts a definite scale of valuation, a definite principle by which the various things with a technically different nomenclature can be compared. If one starts to analyse this valuation side of the production problem, without fully realizing the necessity for fixing a basic scale for valuation, the whole thing degenerates into subjective fantasies."!

There are two reasons why it is particularly important that the aim of the socialist community should be clearly defined. Firstly, since all initiative is relegated to the central authority, every decision taken will have far greater consequences than in··a society composed of individuals who each procure their daily bread by assisting in satisfying the needs of the others; and, secondly, because the necessity and possibility of economic calculation will depend on the character of the aim. Again, the aim must be known, if we are to be able to judge whether the means employed to attain the end are being used con sistently. Anything at all can be taken as the aim •of the socialist society, even the-at any rate seemingly-absurd one of creating chaos. If the latter, there will, of course, be no need for calculation and: survey. An actual underlying aim might be the desire to build up a strong war machine, of impressing the rest of the world with special achievements in various spheres, or the desire of an individual person or group to 1Tekniske og 0konomiske produkfivitetslover, a mimeographed, undated pamphlet based on R. Frisch's"lectures and notes.

28 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY gain power, 1 just as it is possible to imagine a combination of com petitive aims. The aims most often given as those of the socialist community fall into two main groups: (I) increasedproduction of goods and (2) their just distribution. Both are indefinite and thus difficult to treat, quite apart from the fact that it is objectively impossible to determine what "just distribution" is. Disregarding the ethical problem set by the second, and confining ourselves for the time being to the first aim, it will generally be found that by "increased production" is not meant blind production of all and sundry, but of "useful" goods. There are different ways of expressing this, such as that the goods shall be "socially" useful, or "useful to the community", and in references to the "weal of the people", "social welfare", etc. Closer investigation reveals that underlying this there is always the idea of satisfying needs or, more accurately, of attaining "maximum satisfaction of needs". It is possible that this is merely a pretext and that the real aim is what V. Pareto calls "derivation", Karl Mannheim "ideology", and the psychologist "rationalization". However, we can neither concern ourselves here with possible underlying motives or incidental aims, nor with all conceivable conditions of economic activity in a socialist society. The discussion must be restricted to the aim as it is generally declared and even if the nature of the aim is merely of technical interest in such an examination as this, it may be said that economic activity which aims at satisfying the needs of the people and at raising the standard of living can hardly be characterized as absurd.

Most who have taken partin this discussion of the possibility of calculation in a socialist society have, more or less explicitly, accepted satisfaction of needs as a natural aim for the economic activity of a socialist society. This view is expressed by Dr. A. P. Lerner thus: "As a human being and a sympathizer with socialist ends, it seems to me that maximization on such lines is completely in the spirit of all socialist ideals and particularly sympathetic to the slogan of 'scientific socialism' -'to each according to his needs'. A superior contempt for the tastes and judgment of the 'masses', and a paternal solicitude in choosing for the people what is good for them, does not seem to me to be the .avoidance of an unscientific major premise about 'sacredness' (of consumers' preferences)."2 1The explanation of the enthusiasms of some political economists for socialism is not, as is often assumed, conscious desire for power. In addition to sympathy for their fellow-men there undoubtedly exists an altruistically coloured conviction among them that it would be best for the common weal if leadership was placed in their hands.

2"Economic Theory and Socialist Economy" in Review of Economic Studies, 1934-35, pp. 53-4· PROCEDURE AND ADDITIONAL ASSUMPTIONS 29 Now, it must be admitted that the "concept of welfare" as an aim is most unpopular in theoretical economics. It has been pointed outi with considerable acerbity, that the moral philosophers of the nine teenth century and a few economists of the twentieth have made use of this concept, particularly in its form of "maximum welfare" and "maximum satisfaction of needs", as a political slogan in defence of the existing social order and institutions. Such an objection is quite irrelevant where "the satisfaction of needs" is given as the aim of other and different forms of society. Thus, its acceptance as a reason able aim no more implies adherence to the view that the existing capitalist "institutions" are the expression. of the highest, divine wisdom, than it does to the view, so often put forward as the opposite one, that human nature is determined first and foremost by such "institutions" .

Other objections can, however, be raised against this aim, or rather against the way it is formulated. The term "maximum" or "maximal ization" is not a good one, as it conjures up a possibility of summation which does not exist in reality, since the valuations of the different individuals and social groups as to what satisfies their needs,· are not commensurable data. It would be much better to speak of "maximum· exploitation of the factors of production with a view to satisfying the needs of the members of the society". As· the members of the society are not only recipients of the com munity's goods, but also represent an important factor of production, "maximalization" can imply that this factor is so intensely exploited as to go beyond satisfaction of needs. If it is maintained that disutility must also be taken into account, then "optimalization" .(of needs) might be a better expression than "maximalization". On the other hand this expression has a slightly moral flavour. What is "best" for man? Not only the priest, but also the dietician has very definite opinions on this matter. This objection to maximalization may be overcome by regarding leisure as a "good" and by requiring that this need must be satisfied too.

Actually it is not so important for the purpose of our discussion to have a precise definition of this, as the main thing is to make it quite clear that the society in question has satisfaction of the individual's needs in mind. As we shall see later, there are economists who think that the problem of calculation can be solved if, and onlY if, the central authority has sovereign powers and does not have to take the expressed needs of the community into consideration. What is important for our purpose is to be clear whether the community in question aims at satisfying the needs of its members, or not. To begin with we shall lSome particulars of the literature on the subject are given in the footnote on p. 5.

30 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY base our discussion on the assumption: that the aim will be the maximum exploitationof the community'sresourceswith the objectof satisfyingthe needs of its members, includingthat of leisure. As this is a long and awkward formula and one to which it will often be necessary to refer, we shall reduce it to: "maximumproductionfor needs". This formula is, both in its full and contracted form, incomplete, as it omits the factor of time. The possibility of satisfying the needs of the living members of the community will be greatly influenced by whether the central authority aims at the maximum utilization of factors of production for the manufacture of consumer goods or for the production of capital goods. In other words, whether it aims at attaining the maximum in the present orin the future, to the advantage of the present or future generations. The individual in the socialist community-and this is a point to which we· shall return later-in contrast to the one in a private capitalist society, will be unable to exercise any influence in this respect. All decisions regarding savings and investments will be made by the central authority. It is very difficult to know the basis on which such decisions will be made, and we must confine ourselves to assuming that the periods allotted for developing the machinery of production will not be so long as to neglect the possibility of satisfying the needs of the living generation.

Before passing to the actual discussion, the author would like to draw attention to the remarks on the price mechanism in Appendix A. Economists well know that it is the price mechanism which in the private-economic. society! enables the production and distribution of goods to proceed in more or less perfect order without a central authority and without public regulation. But non-economists are not always aware of the importance of the price mechanism, and, according to Dr. R. L. Hall, this is also true of many who have formed a definite opinion as to which form of society is to be preferred: "In the opinion of the writer, few Socialists have grasped the complexity of the modern economic structure, which functions so unobtrusively that it is easy to take for granted the inter relations of its parts, and to assume that we shall retain our present co-ordination in a new economic order without the deliberate organization of an alternative system. It is the duty of lAs any society, even a socialist one, after a certain degree of development uses capital in the form of implements and manufactured means of production, it is more correct to use the expression "private-economic" or "private-capitalist"

instead of "capitalist", if a contrast to "socialist" is looked for. "Private-economic" is probably the best expression to use adjecti~ely, but sin.ce "private econ~~y:' has a special meaning of its own, the best substanuve to use WIll presumably be private capitalism" .

PROCEDURE AND ADDITIONAL ASSUMPTIONS 3I all who advocate a change to acquaint themselves with the probable implications of that change." 1 It is not irrelevant in such a book as· this to draw attention to the existence of such a mechanism, considering that it is this mechanism which in the private-economic society provides the necessary data for calculation. An idea of it provides a better background for discussing the need and possibility of calculation· in the socialist and centrally managed communities. However, the examination must not make us prejudiced. It must be stated beforehand that that which is a necessary assumption for calculation in a capitalist society, need not necessarily be so in a socialist one. There is a priori nothing to prevent calculation in the socialist society from being conducted on other and better lines. In other words, our preliminary examination does not intend to set up any ideal form.

To avoid a violent break in the argument and owing to its more elementary character, this examination has been relegated to an appendix, but it is recommended that all who are in doubt as to the function and significance of the price mechanism read it at this point of the discussion. (See Appendix A.) IThe EconomicSystem in a Sociali.rtState, London, 1937, p. x of the preface.