How Can We Simulate Competitive Markets Through Full Public Ownership?

How would markets function with the state ownership of capital inputs? Before I present my thoughts on this, I must confess that I am an ardent Social Democrat. I view a robust welfare state, an expansive social wealth fund, and a heavily regulated free market to clear consumer goods as a vastly preferable outcome to state ownership of capital inputs. This is precisely why market socialism is an interesting avenue to visit.

What Central Planning Can’t Solve

Market socialism presents a solution to the rational calculation problem posited by neoclassical economists that has plagued the theoretical and practical applications of centrally planned economies.

In a centrally planned economic model we can lay down some fundamental tenets:

• The state owns all capital goods, that is, any non-labor assets used in the production of a good or a service
• There are no internal markets for the sales of these capital goods, they are allocated by internally decided (centrally planned) mechanisms
• Pricing of these goods is either: non-existent (since the state allocates all economic output) or set by the state

Of course, there are other theoretical features of socialism (worker ownership of capital, etc) but for the sake of explaining the calculation problem, they aren’t in the scope of discussion, nor do they need to be. We just have to be able to discuss whether a system is able to use a finite amount of resources to create an output of goods and services for each person such that it fulfills their maximum welfare (or utility, or satisfaction) in a way that an alternate system cannot.

How do you rationally calculate the output of goods and services within the constraints of centrally planned capital goods? Here’s an (overly) simplistic example of why this trivial problem actually requires a lot more forethought to solve due to its growing complexity:

The Central Planning Board (CPB) for New Nevada wants to build a new gold mine. They draw up two plans: ‘Plan A’ uses 10 engineers and 3 units of steel to build a mining facility through bedrock, ‘Plan B’ uses 3 engineers and 10 units of steel to build a mining facility that circumnavigates the bedrock. All of the engineers, the steel, and the property is at the disposal of the CPB since these are capital and labour inputs. Which plan should they choose?

The CPB rationalizes: New Nevada should choose the plan that uses resources that don’t have more immediate uses in alternate projects that New Nevada needs. Engineers produce bridges, grain silos for farmers, airports, etc. Steel produces cars, transport trucks, trains, etc.

CPB should determine which plan would result in a more optimal outcome for the economy as a whole, as in which plan uses less of a resource that New Nevada needs for other, more urgent projects.

Immediate is subjective. They need to quantify how much more important one of the capital goods is in a different project. So for an engineer, the CPB looks at one of their alternatives (to start): to build a silo. The CPB has to find a collectivized farm where the silo is most needed, then they have to ascertain from that farm how much they could increase yield with a new silo, then they’d have to figure out how much the end consumer actually desires that type of grain. Okay, simple enough. Now, the CPB has to repeat that process for every alternative project for the engineers. The bridges, the building of airports, or train stations, or dams.

The CPB can’t just stop there, now they have to go through and figure out the value of the steel in all its alternative uses. Is using the steel to build a new train going to expedite the shipping of goods to urban centres? How much would consumers in the urban centres want those goods?

So they sit down, and through sheer power of will, they’ve figured out that in fact ‘Plan A’ would be a better way to go since the use of less steel means that it can be diverted to another, more important railroad project. Great! But you see, that’s one project. Within the system that the planners exist in, they have to transfer every single capital good through every production process in their economy. There are no allocative mechanisms except for the planners to assign capital goods through their economy.

They have to decide the production process of other things like spoons, or forks, or cars, or trains, or computers, or phones, etc. This means designing a list of capital goods and raw materials they need for every single one of these projects and then calculating if a particular process of creating it is actually the most optimal outcome for their society or would they be better used in any one of their innumerable other uses. They effectively have to re-do the process they just went through with the steel and the engineers.

Though this is a heavily exaggerated example, the crux of the issue is this: in a market, the information that these planners need is dispersed amongst all the actors involved in an economy. Farmers know how much that silo would benefit them, they are willing to pay for an engineer equal to the increase in the yield they’d have for their crops. The firms building a mining company wouldn’t need to know a single thing about how much value an engineer would have for farmers, all they need to know is which combination of engineers and steel is the cheapest. If these resources are cheap this means that they are generally not urgently needed for a different project. So, without intending to, the firm chooses an option that generates an optimal outcome for the nation, without needing even an iota of the information that the central planners do.

So I’ve ragged on centrally planned socialism for a while now, in the next part of this article, I’ll explain how Marxist theoreticians explain overcoming these constraints by simulating markets.

Market Socialism: Trial-and-Error

Polish economist Oskar R. Lange produced a different solution to centralized planning building on the work of economists Enrico Barone and Fred Taylor. What if instead of having to amass enough information to accurately forecast optimal output, worker-owned firms could work within a simulated market to achieve equilibrium?

In a market socialist economy, here are the fundamental tenets:

• The state owns all capital goods
• Worker managed firms interact in markets to allocate the output of their firms
• The state sets a price such that worker-managed firms have to produce output such that the cost of producing one additional piece of output is equal to the price (this is how firms behave in a free market; Price = Marginal Cost)
• The state readjusts the price so that the output is market-clearing (the supply of goods is equal to the demand of the goods, there is no glut or scarcity)
• Workers in the economy are free to choose the amount of labor and leisure hours they put in

Instead of meaninglessly allocating capital and labor within the economy of a country, the New Nevada CPB does something quite interesting. It will arbitrarily set the prices of all goods and services within a country. Since arbitrarily sounds a bit ‘gropey in the dark’, let’s add a caveat. New Nevada was entirely capitalist last year and is entirely market socialist this year.

Why? This means that instead of setting the prices for the goods and services ‘arbitrarily’, the CPB can look at the prices of goods and services from the previous year and (more) rationally set its prices. This type of ‘shadow pricing’ was common for a lot of consumer goods in the USSR.

Firms are told to produce their output such that the cost of their production equals the price that is set by the CPB, and the CPB has all the factors priced in. This provides some visible solutions to the problems of centrally planned economies:

• Dispersed information. Firms and their workers know best about their production process so they will utilize a combination of factors of productions that will minimize the cost of production
• Firms will mimic markets by maximizing their profits. This is good, any firm profits are channeled back into the hands of the workers since the state owns all capital goods

The CPB continually reassesses the economy, measuring the simulated market signals. If there is a scarcity of a product it raises the price of the product, thereby incentivizing an increase in production of that product, if there is a glut of a product then cut its price to reduce production. This implicitly channels New Nevada’s resources to its most immediate uses by factoring in consumer demand for its output.

Closing Thoughts

I often wonder why a system that is fundamentally based on worker ownership of capital precludes any involvement of a market. If the workers are to own the means of production, then they might derive maximum satisfaction by deciding the direction of their firm, control over refining their production process, and who heads the firm, as peers, through democratic procedures.

If instead they were told to produce a set amount of output by the state with the only possible democratic apparatus being the control over hierarchy within the firm, I am unsure that would be any better than the alienation people face in capitalist firms.