Perestroika's Missing Ingredient; E.C. Pasour, Jr.

The SocialistCalculationDebate In the 1920sand 1930s,Ludwig von Mises and E A. Hayek demonstrated that successful economic planning is impossible in a centrally directed social ist economy in which market prices are necessarily absent.1 Without market prices there is no possibil ity of calculating costs, no meaningful profit and losssignals,and no way to determine the goods and services most highly valued by consumers. Decentralized markets bring about economic coordination in two ways. First, market prices coordinate and transmit information to various participants in the competitive entrepreneurial market process more completely and accurately than can be done through central direction. Indeed, Hayek showed that a great deal of eco nomic information is highly specialized to time Dr. Pasour is prOfessor of economics at North Carolina State University at Raleigh. and place and that these data cannot be conveyed in statistical form to central planners.

Consider the land market. A tract of land may have a number of alternative uses, including hous ing, industry, recreation, and agricultural produc tion. The land market is uniqu,e in its ability to channel land to different uses, taking into account the supply of land and the demands for its various uses. For example, when the demand for com ris es, producers tend to bid up the price of land that is suitable for growing corn and increase the amount of land used in com production. Further more, producers need not know why the demand for com has risen in order to take the action that is socially beneficial. The correct action occurs as profit-seeking entrepreneurs respond to price sig nals. No method of central direction in allocating resources can match market prices in effectively usingthe data held by present and prospective mar ket participants to achieve the pattern of produc tion most consistent with consumer preferences.

The second way that decentralized markets bring about economic coordination is through the entrepreneurial discoveryprocess.Expected profits provide the inducement for alert entrepreneurs to become aware of profit opportunities and to search for more profitable production methods, including the development of new products.2 A major short coming of all alternatives to extensive use of free markets is in the area of economic change and inno vation. The lesson of the economic calculation debate isthat there is no alternative to decentralized markets as a means of discoveringand achievingthe most productive pattern of resource use. Stated dif ferently, a socialist economy is necessarily 'ineffi cient as a means of organizing production.

220 THE FREEMAN • JUNE 1990 MarketSocialismand the Missing Ingredientin Perestroika Despite the cogency of their argument that socialism is less productive than a market system, Mises and Hayek failed to convert the proponents of socialist planning during the 1920s and 1930s. Indeed, the issues discussed in the economic calcu lation debate at that time were largely forgotten as government control of the economy increased fol lowing the Great Depression and Keynesian revo lution of the 1930s. In convincing their critics of the importance of prices, Mises and Hayek inspired attempts through "market socialism" to simulate or dupli cate the end results of the operation of a free mar ket economy and to use those results to run the economy. The oxymoron "market socialism" refers to mathematical procedures developed by Oskar Lange and other economists to refute the finding by Mises and Hayek that socialism is nec essarily inefficient. Using mathematical optimiza tion techniques, it was demonstrated that a central planner, if given data on available resources, pro duction alternatives, and consumer preferences, can determine the pattern of resource use that most fully accommodates consumer preferences for goods and services.3 Hayek, however, showed that this mathematical exercise has little significance for economic plan ning under real wprld conditions. In assuming that the planner is given information which can be revealed only through the operation of the market process, the market socialism approach assumes away the most important economic problem-the efficient utilization of knowledge. The required information to determine the most productive pat tern of resource use is not given to planners. Fur thermore, there is no way that much of the highly specialized information relevant to economic deci sions can be assembled, coordinated, and trans mitted through central direction. The result is that while "market socialism" may not be logicallycon tradictory, it is practically impossible because of information problems.

The lesson of the socialist calculation debate is that there is no way,efficiently to "reform prices" in a socialist system. However, the Soviet planners appear to have learned nothing from it. In an attempt to deal with the economic crisis, Soviet Prime Minister Nikolai Ryzhkov outlined the government's new perestroika plans in December 1989. He pledged to "reform prices" and to boost output of consumer goods, but indicated no plans to make fundamental changes in the system of government ownership and control of the econo my. Consequently, it is predictable that the ne~ perestroika plan, consisting merely of cosmetic\ reforms of the Soviet central planning system, will have little effect on the lagging economy. The missing ingredient of perestroika is private property with decentralized markets. Mises and Hayek demonstrated that the "market socialism" goal of maintaining socialism while determining market prices through mathematical procedures is a vain hope. A socialistsystem cannot be organized through the market because markets without divis ible and transferable property rights are a "sheer illusion."4 Therefore, meaningful economic reforms are ruled out so long as Gorbachev remains adamant in his resolve to search for answers to the economic crisis withinsocialism,as he wrote in his 1987 book Perestroika:"To put an end to all the rumors and speculations that abound in the West about this, I would like to point out once again that we are conducting all our reforms in accordance with the socialist choice. We are looking within socialism,rather than outside it, for the answers to all the questions that arise. . . . Every part of our program of perestroika . . . is fully based on the principle of more socialism. . . ."5 Perestroika will not bring about a significant improvement in living standards without reforms that are incompatible with socialism. Gorbachev wants the material productivity associated with a market economy,but he is unwillingto forgo social ism. Yet, the "socialistchoice" is incompatible with market prices that provide the correct signals to producers and consumers in the entrepreneurial market discovery process. Consequently, little improvement will be forthcoming without the institution of private property and the associated sweeping reduction in powers of central planners that are required to overcome the current ineffi cient system.

Perestroika isn't working because it is merely a reworking of the old five-year planning methods that have culminated in the current Soviet eco nomic crisis. Gorbachev's concept of perestroika within socialism was brilliantly satirized by Soviet economist G. K. Popov in the Soviet Congress when the new perestroika plans were announced PERESTROIKA'S MISSING INGREDIENT 221 Jlikhaill70rbachev l&st December. Using an example of the precise, hyperbolic predictions of seven decades of central planning, Popov memorably contrasted the Gos plan technique of ordering production to meet national goals with the decentralized approach: "This hen will produce 180eggs this year, 183 eggs the next, then 185. Why don't we finally leave this hen alone and let her live with her rooster? Thank ing us for her independence, this hen will provide us with enough eggs."6 Popov, at least implicitly, accepts the lesson from the economic calculation debate-central planning is no substitute for economic freedom as a means of determining the mix of production and of organizing production to achieve this result.

The unplanned nature of the decentralized free market economy also is highly significant from an ethical standpoint. However, consideration of the moral implications of the planned economy is beyond the purview of this essay.? Conclusions Private property is the most important missing ingredient in perestroika. There is no satisfactory alternative to a widespread use of the free market, but this is incompatible with government ownership of resources. The lesson of the socialist calculation debate suggeststhat the attempt to solve the Soviet economic crisisby "looking within socialism,rather than outside it" will fail. Gorbachev's perestroika plan, which holds that prices can perform their role in productively allocating resources in a collectivist economic system, is a grand illusion. 0 1. See F. A. Hayek, ed., Collectivist Economic Planning (Clifton, N.J.: Augustus M. Kelley, 1974 reprint of 1938edition); F. A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948); and Ludwig von Mises, Socialism (London: Jonathan Cape, 1951).

2. Israel M. Kirzner, "The Economic Calculation Debate: Lessons for Austrians," The Review of Austrian Economics, Vol. 2 (1988), pp. 1-18. 3. Oskar Lange and F. M. Taylor, On the Economic Theory of Socialism, Benjamin E. Lippincott, ed. (Minneapolis: University of MinnesotaPress,1938). 4. G. Warren Nutter, "Markets Without Property: A Grand Illu sion," ch. 15 in The Economics of Property Rights, ed. by Eirik Furubotn and Svetozar Pejovich (Cambridge, Mass.: Ballinger, 1974). 5. Mikhail Gorbachev, Perestroika (New York: Harper and Row, 1987), p. 22. 6. Francis X. Clines, "Soviets Try Shift to Ease Economic Ills," Raleigh News and Observer, December 14, 1989. 7. For a discussion of these issues see E. C. Pasour, Jr., "Benevo lence and the Market," Modern Age 24 (Spring 1980), pp. 168-78.