Do We Need the Market? (1994)

Letter to the editors from the April 1994 issue of the Socialist Standard

Dear Editors,

Thank you for publishing the thoughtful and fair-minded review of my book, From Marx to Mises, in the June 1993 issue of the Socialist Standard. Within the space permitted, I will here reply only to Robin Cox's most important point: his approach to the economic calculation problem.

Decision makers in any industrial system using advanced technology are faced with choices involving comparisons of specific quantities of different factors. These comparisons can never be made in kind.

If you can get the same result with one gallon of oil as you can get with two gallons of oil, it is preferable to use one gallon of oil and save the second gallon for other uses. That purely technical calculation can be done in kind. But faced with a choice where one gallon of oil can be saved by using more of some other resource, no decision can be made in kind. Is the saving of one gallon of oil greater or less than the increased use of some quantity of an other resource (say, five minutes of maintenance labor, or a few days' shorter life of a machine through increased wear and tear, or one ounce of some mineral employed in a chemical reaction)? If such comparisons have to be made, then we need to be able to reduce different factors to common units of cost.

Your review seems to imply that no such comparisons would any longer have to be made under socialism. In From Marx to Mises I give several examples, and many more can be found in the economic literature, or simply by consulting one's own knowledge of economic history or of places where one has worked. If we really do not need to make such comparisons, then the whole Misesian case collapses, and your remarks about stock control are unnecessary. But I maintain that such comparisons have to be made day by day in any unit of industrial production, no matter what the social institutions.

Robin Cox asks us to suppose that the demand for good X increases, and that the current output of resource A is "insufficient to meet this increased demand". He says that "the sensible solution would be to search for some more abundant resource (B) that could substitute for A. At the same time the falling stock of A would constrain the multifarious users of A to economise on it".

I have three comments:

1. Most commonly, every one of the types of resources used in producing X would be simultaneously used in the production of thousands of other things (let us collectively call theseY). So if the output of X is increased, that of Y must be reduced. The current output of A could itself be increased (as well as being withdrawn from production of Y), but any increase in output of A would involve costs (reductions in output elsewhere). Typically, output of A should be increased somewhat, as well as reducing output of Y. Both these developments reduce output of some goods.

2. In the market, people will automatically switch to using more substitutes for A, but the exact degree of this substitution will be different in all the different lines of production which use A. This can be left to the judgement of the people in those different lines of production because there is a public and objective specification of how scarce A is: the price of A. Robin Cox's statement that searching for B, a substitute for A, is "the sensible solution" over simplifies the problem. Aside from the fact that reallocation of resources has to occur immediately, while this "searching" is still going on, such searching occurs all the time, with respect to all factors, and B, like A, will most likely be a factor used in producing many other goods, with a consequent reduction in output of those other goods if more of B is used to make X. The only practicable way to tell how "abundant" B is, by comparison with A, is to look at their relative prices. And B is almost certainly not a perfect substitute for A, so it will still be up to thousands of separate, local decision-makers to determine whether any technical superiority of A is outweighed, in each particular case, by the comparative cheapness of B. This again requires prices (or some other cost indexes) of A and B.

3. Robin Cox states that the falling stocks of A would constrain users of A to economize on A. Are all users simply told that total stocks of A have gone down, and relied upon to reduce their use of it? The stocks might have fallen for many different reasons, so the users all have to act on their theories as to the reasons for the fall; the users have to estimate by precisely how much to cut their rate of use, bearing in mind that such adjustments are always costly (is the use of A to be cut so much, for instance, that any machine which continuously requires inputs of A should be immediately junked?). How does each user of some quantity of A, out of, say, fifty thousand users, knowing that each of the other 49,999 users are making a similar decision, which perhaps ought to be different in every case, determine his response to the news that stocks of A have fallen by ten per cent? If all the users reduce their use of A by the amount they judge best, there is no guarantee that the outcome is the appropriate total reduction in use. Again, a price for A can do things which news about its total stock cannot do. We cannot do without some general unit of cost, to compare the costs of aggregates of different factors, and we do not know of any feasible unit other than prices denominated in money.

DAVID RAMSAY STEELE, Chicago.

Reply

You may not be able to conceive of production without money and prices, but we can. The definitive answer to your supposed "economic calculation problem" is a (largely) self-regulating system of stock control in which calculations are made in kind rather than in terms of a common unit like money. A self-regulating system of stock control will permit producers in a socialist society (workplace councils, industry councils etc) to ascertain more or less immediately the availability of stocks of any particular item throughout the system; the communications technology to enable this to happen is already in place. Given this, your assertion that the "only practicable way to tell how 'abundant' B is, by comparison with A, is to look at the relative prices" is absurd.

'Abundance' is a relationship between supply and demand, where the former exceeds the latter. In socialism a buffer of surplus stock for any particular item, whether a consumer or a producer good, can be produced, to allow for future fluctuations in the demand for that item, and to provide an adequate response time for any necessary adjustments.

Achieving 'abundance' can be understood as the maintenance of an adequate buffer of stock in the light of extrapolated trends in demand. The relative abundance or scarcity of a good would be indicated by how easy or difficult it was to maintain such an adequate buffer stock in the face of a demand trend (upward, static, downward). It will thus be possible to choose how to combine different factors for production, and whether to use one rather than another, on the basis of their relative abundance/scarcity. By following the rule of using the minimum necessary amounts of the least abundant factors it will be possible to ensure their efficient allocation. Money as a "general unit of cost" would not come into it.

In further asserting that "if the output of X is increased, output of Y must be reduced" you are begging the question at issue, which is precisely whether or not resources are and always will be scarce. It is to assume that society's resources are fully stretched and that there are no reserves to draw upon. But given the productivity of modem technology and the elimination of capitalist waste, there are likely to be substantial untapped reserves. In addition, socialist society can, as just explained, deliberately plan to produce surpluses of various items just to meet the eventuality you have in mind.

With regard to human resources in particular, even today under capitalism tens of millions of people are unemployed. Though of course in socialism no one will be "employed" as such, the average workload for individuals is likely to be much less (thus resulting in a sizeable reservoir of labour) and the opportunities for individuals to move flexibly from one kind of work to another much greater. This will make much less likely the occurrence of the bottlenecks you foresee in the production of any particular good following an unexpected increase in demand for it.

But scarcity is not simply a function of supply; it is also a function of demand. It is in this area that the anarcho-capitalist critique of socialism, based on its premise of infinite demand, is particularly weak and unrealistic. For it takes little, if any, account of the effect of the social environment on the likely structure and size of demand in socialism.

In a system of capitalist competition, there is a built-in tendency to stimulate demand to a maximum extent. Firms, for example, need to persuade customers to buy their products or they go out of business. They would not otherwise spend the vast amounts they do spend on advertising those products. At the same time, there is in capitalist society a tendency for individuals to seek to validate their sense of worth through the accumulation of possessions. This is not surprising for if, as Marx contended, the prevailing ideas of society are those of its ruling class then we can understand why, when the wealth of that class so preoccupies the minds of its members, such a notion of status should be so deep-rooted. It is this which helps to underpin the myth of infinite demand. In socialism, status based upon the material wealth at one's command, would be a meaningless concept. Why take more than you need when you can freely take what you need? In socialism the only way in which individuals can command the esteem of others is through their contribution to society, and the more the movement for socialism grows the more will it subvert the prevailing capitalist ethos, in general, and its anachronistic notion of status, in particular. Nor do we accept your premise that prices arise out of conditions of scarcity. They arise out of conditions of private property. So even if genuine shortages occur in the conditions of common ownership that will exist in socialism - it is likely that some shortages (e.g. decent housing) will persist (if only as a receding problem) into the early stages of socialism - this will not undermine the new society by leading to the re-emergence of money and prices.

For socialism to be established, there are two fundamental preconditions that must be met. Firstly, the productive potential of society must have been developed to the point where, generally speaking, we can produce enough for all. This is not now a problem as we have long since reached this point. However, this does require that we appreciate what is meant by "enough" and that we do not project on to socialism the insatiable consumerism of capitalism.

Secondly, the establishment of socialism presupposes the existence of a mass socialist movement and a profound change in social outlook. It is simply not reasonable to suppose that the desire for socialism on such a large scale, and the conscious understanding of what it entails on the part of all concerned, would not influence the way people behaved in socialism and towards each other. Would they want to jeopardise the new society they had helped create? Of course not.

One must therefore assume that whatever shortages may persist can be tackled by some system of direct rationing and will be borne with forbearance - even, one might say, with a sense of altruistic restraint. For whatever the problems that socialism may have to contend with, and there will still be many, if the alternative has to be the re-instatement of capitalism then there would not be a real alternative

Editors.