More Thoughts on Market Socialism
By Arnold Kling
My first thoughts were here. Below are some further thoughts.1. Does market socialism suffer from information problems? It would seem that government calling out prices to profit-maximizing firms might be no worse than market prices from an information standpoint. According to Lawrence White, even Mises reverted to saying that the problem was incentives. Mises suggested that even if you could present socialist managers with a list of shadow prices, without the ability to share in profits the managers would tend to ignore prices and do what is easiest.
2. Perhaps you could solve the incentive problem. For example, the Masonomic view (and that of Adam Smith) is that people care about status. Suppose that a society can award status points to managers who maximize “profits” based on shadow prices given out by the government.
3. Clearly, one thing that government cannot know is subjective valuation. With government-set prices, how does anyone figure out that some people like to play golf and others like to folk dance?
4. A market socialist would counter with, “how does the market know social benefit?” With market-set prices, how does anyone figure out that automobiles cause pollution or that the social benefit of $10,000 of medical services for Joe is higher than having that amount of services go to Fred?
5. A challenge for market socialism is to figure out what is a final good and what is an intermediate product. For example, if movies and video games are final goods, then government has to fix the right relative price between the two. If the final good is “entertainment,” then government can just fix the price of entertainment and let the market determine the relative prices of movies and video games. Similarly, there is a challenge in distinguishing fundamental inputs from intermediate outputs. Is human capital a fundamental input, or is it an intermediate output that results in part from schooling decisions and other choices?
6. If under market socialism the government only sets prices for final outputs and fundamental inputs, then new products and new technologies can emerge just as in a market economy (assuming the incentive problem is solved by issuing status points). However, if it is too hard to come up with workable definitions and measures of final outputs and fundamental inputs, then new products and new technologies must be valued by central planners, which will create severe information problems.
7. Going back to a question I raised in an earlier post, why do large firms rely primarily on command and control, rather than using shadow prices? We can see the use of something like shadow prices when firms use formulas to determine compensation, including sales commissions, worker bonuses, and executive stock option awards. One flaw with such formulas is that they can be gamed. Just as Soviet managers tended to game the quotas that came from the planning board, any clever salesman can game a commission structure. As I have argued in the past, management has to constantly tinker with incentive structures in order to stay one step ahead of employees learning to game the system.
8. It seems to me that within a firm, the valuation of what Garett Jones calls organizational capital is highly arbitrary and subjective. To put this another way, senior management has great difficulty articulating exactly what each employee contributes to the organization. In fact, I think that our current high unemployment rate reflects the fact that in many organizations senior management decided arbitrarily and subjectively to reduce their implicit valuation of what their employees were doing. It would be extremely difficult and time-consuming for management to come up with a shadow price on the output of its accountants, marketing departments, research and development units, and so on. It is quicker and easier to use command-and-control.
I think that is what the socialist calculation debate boils down to. Setting shadow prices from the top down is an extremely difficult and time-consuming process. If you have the power, it is much easier to exercise it using command-and-control techniques than to try to articulate your goals by using shadow prices. Your shadow prices will inevitably be incompletely specified, which leaves you subject to being gamed by managers lower down the chain of command.
Markets set prices much more quickly and responsively than any central planner can do. The problem, from a socialist point of view, is that market prices are a seemingly arbitrary function of individual subjective preferences, rather than an expression of what is “known to be correct for society as a whole.”
Market socialism is an intellectual attempt to avoid the trade-off between having an efficient, real-time pricing system on the one hand or reverting to crude command and control on the other. But in fact there is no middle ground between the two.
In my view, if you centralize power, you inevitably pay a price in terms of having an inferior information flow. In that regard, I side with the Austrians in the socialist calculation debate. I think that the recent trend toward greater centralization of power here in the United States is one for which we will pay a large price. Of all the phenomena that represent potential threats to our quality of life, the hubris of our ruling class is the one that concerns me the most.