On the Economic Theory of Socialism

by Oskar; Taylor Lange, Fred Manville Taylor

Economic theory of Socialism

Genres: Economics, Politics, Nonfiction, Philosophy

143 pages, Hardcover

First published January 1, 1938

Reviews

[T · Rating 4 out of 5]

"Since the clear and distinct formulation of a problem is certainly a major contribution to science, the economist will have to join the socialists in their recognition of Professor Mises' work on economic calculation in a socialist economy..."

A great exposition of market socialism! Lange, using Walrasian equilibrium theory, responds to Mises' claim that a socialist economy cannot have a rational pricing policy, by arguing that the socialist planner can use trial and error to mirror the market. A number of scholars have disputed whether 'actually existing socialist' countries had this in practice (Szymanski, 1979; Kornai, 2006). However, despite the faults of Lange's model or implementation, Lange's place in the history of economics is secure with this beautiful and occasionally funny contribution. Take that Austrians!

[Dan · Rating 5 out of 5]

Toward the end of Lange’s classic essay on market socialism, he argues that a socialist government must socialize the means of production “at one stroke” or give up the goals of socialism altogether.

This is not market socialism for the timid!

The Calculation Debate

This essay is Lange’s to answer the “calculation problem” raised by Ludwig von Mises. Mises claimed that without markets, socialist society would not be able to correctly estimate the value of the inputs of the production process. Shortage and poor quality would inevitably follow.

Lange predicts that a future socialist government will erect statues to von Mises for helping to identify and solve this problem of socialism. He attempts to show that a socialist Central Planning Board could set and adjust prices in much the same way as a competitive market — through the successive correction of prices by trial and error until supply and demand meet.

I think Lange’s central insight — that a socialist society must use the price system and supply and demand to maximize the use of its productive resources — is correct.

In order for Lange's plan to work, production managers must make every effort to economize their use of inputs, and use the prices set by the Central Planning Board in all accounting. But Lange does not say how planners would enforce these requirements. There are really only two methods: one is the method of Soviet central planners — impose control and strict accounting from above, however imperfectly. The other is to have a market for capital goods themselves.

Lange is silent on which he would endorse, but he does show that his method could work without an actual market for consumer goods, if the Central Planning Board diligently tracks shortages and over-production and adjusts prices by supply and demand.

I see three difficulties here: one is of course the sheer diversity of production inputs — from different grades of raw materials, to tools and spare parts.

Another difficulty is how to determine when an equilibrium price has been reached. Detecting over-production is easy — there’s too much of a particular product. But how is a Central Planning Board to detect shortage? In the case of shortage, the price (which is too low) would clear the market of the good even though many more producers would be willing to buy it at that price. I think the only way to detect and eliminate a shortage would be to — by trial and error — raise the price of products until a slight surplus appears.

And there is a final difficulty. Without a market for producer goods, producers may be forced to use low-quality inputs even if they would prefer — and pay more for — higher-quality inputs. This was the situation in the Soviet Union, where for example, makers of heavy equipment did not provide installation, maintenance, or spare parts for the machinery they produced. Nove points out that central planning can work best for commodities that are uniform in quality — like water or electricity — or that require national centralization in order to function properly — like national rail networks.

Lange says that the Central Planning Board would allow supply and demand to set the price and production levels of consumer goods. The experience of the USSR shows the pitfalls of not following this practice. There were often multiple prices for consumer goods — an official, lower price, and then the actual price at which they were sold. Officials often lowered the official prices in a bid to win popular support. Chronic shortage was the result.

“At one stroke"

I have often associated market socialism with a gradual transition to socialism. Lange blows that idea to shreds — and for a simple reason: any industry that expects it can or will be next to be socialized will be ruined by its owner long before socialization happens. The experience in Chile, where a revolt of owners and professionals created chaos and set the stage for the coup, certainly bears out his prediction.

Even the Bolsheviks embraced nationalization and socialization months after the October Revolution, once it became clear that capitalists were intent on sabotaging production. Lange says that socialization must be the first step of any socialist government that wants to succeed.

This does not mean everything will be nationalized. Lange prefers to leave production in areas where there are many competing producers — and supply and demand still sets prices — alone. If there are certain sectors — like small agriculture or small tradespeople — that the government intends to leave in private hands, it must say so up front. Otherwise these sectors would be thrown into chaos too.

That does not mean that we should only take power when we have a mass movement behind us that can carry through a thorough socialization of the economy. Lange says that socialists can and should seek to win office on “a labor platform” of taking on capital to restart a depressed economy and protect working people. But when the time is right to embark on socialization, we must not hesitate. Socialist politics “is not for the timid” Lange says.

Conclusion

Lange’s key insight — that a socialist system must use supply and demand to set the price of production inputs — is correct. There may be some instances where this could happen inside a central plan. But I believe that we will have to go further — socialized industries will have to buy their inputs on a market, from other socialized industries, and sell on a market to consumers and other producers. That is the only way — short of a massive, top-down bureaucracy, to enforce accounting rules, maximize our use of scarce resources, and ensure a good life for all.

[Σταμάτης Καρασαββίδης · Rating 4 out of 5]

Lange here does a pretty interesting classification of certain things related to revolution, historical materialism and central planning under the different periods of socialist construction.

First, Lange highlights how, until the rise of the USSR, bourgeois economics did not really delve much into the concept of "economic development" as it was always a given. Pre 1920 economic bibliography rarely posits the importance of development. The one thing they were focused on was economic equilibrium.
When socialist or independent revolutionary ex colonial states came into existence, the reality they had to deal with forced them to deal with the very real problem of economic development.

Lange classifies 3 different types of economic development:

1. The standard capitalist type
2. The socialist type
3. The national liberation type

All three deal with one core question: How to develop the productivity of labour. This is also achieved in three ways:

1. The accumulation of a certain part of total national production for the purpose of productive investments
2. The development of technology (R&D)
3. The improvement of the efficiency of economic activity

Lange highlights the fact that for most capitalist countries, development was a given due to colonial plunder and imperialist exploitation so the practice of centralised economic planning was not needed, but for socialist and newly independent ex colonial states, due to the historical circumstances they found themselves when they came into existence, economic development would be impossible without active, centralized economic planning.

Another classification Lange makes is the 2 problems that centralised planning presents:

1. The direction of natural productive resources towards productive investments.
2. The allocation of these productive investments to suitable sectors of the economy. This is split into 3 sub-categories:

2.1. How to allocate these investments in order to ensure the fastest possible development of production
2.2. How to ensure the isometric development of the economy
2.3. How to ensure the adequacy of the natural productive forces in the economic development


Lange also discerns 3 different categories of investments:

1. Investments in the productive forces/means of production.
2. Investments in agriculture.
3. Investments in consumer products.
4. Investments in economic infrastructure (buildings, roads, services, etc).

After that he goes on in some interesting detail to analyse how interest would function in a socialist country by the central bank, what kind of economic calculations would be needed in order to ensure economic equilibrium in supply and demand by answering to some "criticisms" made by neolibs like Mises and Hayek, and how the introduction of the computer technically solved this issue in economics.

Some very interesting ideas in general, super useful and specific regarding the idea of economic planning especially in the framework of how the market functions and relates to planning in socialism.

4/5

[Neal · Rating 5 out of 5]

Written in 1938, Lange was responding to work by Von Mises and Hayek that argued that socialism would not be feasible because the number of decisions a planning board would have to make would be impossibly large. Lange argues that a Central Planning Board could direct investment in a socialized production sector by setting accounting prices that would track supply and demand. The profits made would go back into further development of the socialized production sector. The benefit of this setup would be that socialist firms would make decisions based on the needs of consumers rather than the dictates of a planning board.

Because the model Lange puts forward is designed to mimic much of what makes a capitalist market work, the question naturally arises: how is this preferable to capitalism? According to Lange it's preferable for two reasons.

First, the Central Planning Board can incorporate externalities (stuff like pollution) into the price of goods. And second, because capital is owned by society and directed by a Central Planning Board, it's possible to design a very different system of income distribution. Under capitalism, income distribution is determined by whether or not someone happens to own capital (capitalists earn a ton of money) and whether or not people have natural skills that command a high reward in the capitalist labor market. This leads to vast inequalities (obviously) and so consumer preferences do not reflect what's best for all of society, but what's best for those with the most income. Under Lange's model of a socialist economy, because capital is owned by society, income can be distributed very differently. First, everyone can be guaranteed a "social dividend" just for being a member of society (we'd call this a universal basic income today). And then, income can be used to compensate people for doing work, with higher rewards going to people who take jobs that are less desirable.

It's worth noting that Lange's arguments for why a workable socialist economy would be more desirable than a capitalist economy — even if it mimicked to a great extent the setup of a free market — only considers the advantages of a socialist economy in production and distribution. By eliminating the power of the capitalist class, other opportunities for expanding democracy, developing culture, eliminating war, etc, also become apparent and these should also be considered advantages of Lange's model.

Lange's work was part of the first debate on market socialism in the 1930s. A new debate started in the 1980s, I'm looking forward to reading through that material next.

[Donald · Rating 4 out of 5]

Mainly an essay by Lange discussing the credibility of prices under socialism. His central point is that planners can achieve credible prices through a process of trial-and-error. This is against the conservative viewpoint that the absence of a real market for capital goods would make such prices arbitrary. The most interesting part, for me, was the discussion of what Lange calls "revolutionary courage" - arguing that socialists must be clear about the counter-attack that failure to socialize large industries "at one stroke" would cause.

[Paul Nelson · Rating 2 out of 5]

A classic example of “handwaving”. In response to criticisms of socialist economic proposals along the lines of “it won’t work”, the authors of the two papers reprinted in this volume say “yes it will.” To a reader not sympathetic to the socialist cause, the amazing thing is the hubris with which these authors are prepared to tear down an existing economic system and replace it with one that has never worked anywhere it has been tried. And it has been tried, both on small scales and on large. The fundamental flaw in Marxist thought is a complete misreading of human nature. It is true that the capitalist system sometimes brings out the worst in human nature, but a democratic system under the rule of law provides a means for correcting abuse. When all economic and political power is placed in the hands of a bureaucracy, it is shear folly to think that they will not be corrupted and become abusers. But with them, any corrective mechanism will also be corrupted. The horrors of Stalinist Russia should silence any objection to the contrary. Further, it is abundantly clear that when people do not perceive the possibility of reward for exceptional effort, exceptional effort will not be forthcoming. The result is a reduction of the labor force to the lowest common denominator, a level of mediocrity.

[Samppa Sirnö · Rating 5 out of 5]

Kirja käsittelee markkinasosialismin ideaa. Se on sosialistinen vastine mm. Von Misesin väitteisiin että sosialismi ei voi toimia. Vaikka kovin erilainen kirja, on se edeltäjä nykyaikaisille markkinasosialismin teorioille, mm. John Roemer viittaa siihen.

[Aravena · Rating 3 out of 5]

Buku ini memuat esai panjang dari pakar ekonomi Polandia, Oskar R. Lange, tentang karakteristik sistem ekonomi sosialis, sekaligus merupakan sanggahan terhadap argumen Ludwig von Mises tentang kelemahan pada sistem tersebut (khususnya dari segi kalkulasi ekonomis). Secara garis besar, Lange menjelaskan tentang manfaat ekonomi sosialis di atas kertas , yang bisa menjadi panduan pembelajaran sistem ini bagi pemula/orang awam. Ada rumus dan bahasan teknis yang ‘lewat’ dari pemahaman saya (yang pengetahuan teori ekonominya masih cetek), tapi pokok –pokoknya sebagai berikut cukup bisa dipahami:

-Sistem ekonomi sosialisme berbeda dengan komunisme dalan hal bahwa pemerintah mengontrol faktor-faktor produksi, tapi tidak mendikte rakyat dalam konsumsi/kepemilikan barang serta memberi kesempatan kepada kalangan yang bekerja lebih keras untuk mendapat lebih banyak pemasukan

-Keunggulan utama sosialisme (khususnya dibandingkan kapitalisme) adalah jika penerapannya tepat, kesenjangan sosial antara yang kaya dan yang miskin akan menipis dan tenaga kerja tidak akan dieksploitasi dalam rangka mencari laba sebanyak-banyaknya

-Kapitalisme sebenarnya tidak selaras dengan konsep ‘persaingan bebas’, karena ujungnya pasar akan berkembang jadi oligopoli atau bahkan monopoli; yang bermodal besar akan menyingkirkan yang bermodal kecil. Sosialisme mencegah hal ini, dan juga tetap mengizinkan kepemilikan individual untuk industri rakyat seperti pertanian

-Menanggapi argumen Von Mises tentang ketidakmampuan sistem sosialis dalam menciptakan ekonomi fungsional karena tidak adanya titik keseimbangan (ekuilibirum) yang tercipta melalui pasar bebas, Lange mengemukakan bahwa ekonomi sosialis pun mampu mencapai titik tersebut melalui proses trial-and-error dan penyesuaian dengan jumlah permintaan & penawaran, yang sebenarnya tidak jauh beda dengan mekanisme serupa di ekonomi kapitalis

-Walau demikian, Lange mengakui bahwa keberhasilan ekonomi sosialis sangat bergantung pada aspek birokrasi atau dewan yang bertugas melakukan perencanaan ekonomi. Eksekusi menuju negara sosialis pun harus dilakukan dengan secepat dan segesit mungkin—“ini bukan sistem ekonomi untuk penakut”.

Begitulah, kalau membaca buku ini, rasanya ekonomi sosialis adalah solusi ideal bagi perekonomian dunia dan harusnya sudah diterapkan semua negara untuk mencapai kesejahteraan bersama. Jadi, pertanyaannya: kenapa hal itu tidak terjadi?

Kenapa lebih banyak cerita tentang negara sosialis yang mengalami krisis (seperti Kuba dan Venezuela) atau ujungnya berpindah haluan mengadopsi prinsip kapitalisme? Apa idealisme sosialis tentang “rakyat yang bekerja sesuai kemampuan tapi mendapat fasilitas sesuai kebutuhan” benar-benar bisa realistis terwujud dalam jangka panjang? Apa saran Lange tentang revolusi sistem ekonomi alih-alih evolusi secara bertahap benar-benar sehat, dan bukannya menjurus ke totalitarian?

Jujur, setelah membaca ini, lebih banyak pertanyaan yang muncul di benak saya ketimbang jawaban. Penuturan Lange di sini masih agak terlalu bias memihak ekonomi sosialis dan kurang mendalam membahas kelemahan-kelemahannya. Patut diingat juga konteks sejarah saat buku ini pertama diterbitkan (1934), dan betapa sudah banyak sekali perubahan dunia yang terjadi sejak saat itu, termasuk runtuhnya Uni Soviet pada 1991 dan kondisi negara-negara yang sekarang mayoritas menerapkan ‘ekonomi campursari’ alih-alih murni sosialisme/kapitalisme/-isme2 lainnya. Sudah banyak pula materi publikasi yang membahas sosialisme dalam konteks yang lebih objektif dan relevan dengan perkembangan zaman, walau sumbangsih Lange jelas tidak bisa diabaikan, dan buku ini sendiri tetap layak dibaca sebagai acuan akademis maupun historis dalam menelaah sejarah teori perekonomian.