A for­got­ten duel

The so­cial­ist cal­cu­la­tion de­bate on cen­tral plan­ning has lessons for us to­day


In the 1961 edi­tion of his best­selling eco­nomics text­book, Amer­i­can econ­o­mist Paul A. Sa­muel­son pre­dicted that the Soviet Union’s cen­trally planned economy would sur­pass the size of the Amer­i­can economy in just a few decades. As the coun­try failed to per­form as well as he ex­pected, Sa­muel­son kept post­pon­ing the year when the Soviet Union would race past the U.S. un­til it even­tu­ally dis­in­te­grated. Not all econ­o­mists, how­ever, were as blind to the fa­tal weak­nesses of the Com­mu­nist eco­nomic sys­tem as Sa­muel­son. In fact, dur­ing the nascent years of the Soviet Union, a time when most econ­o­mists were in awe of cen­tral plan­ning, a few rebel econ­o­mists raised se­ri­ous doubts about the utopian plans of Com­mu­nist rev­o­lu­tion­ar­ies. This led to a fa­mous, but now for­got­ten, eco­nomic de­bate over the pos­si­bil­ity of col­lec­tivist eco­nomic plan­ning. The 100th an­niver­sary of the Rus­sian rev­o­lu­tion is a good time to re­mem­ber it.

The Hayek view

Fa­mously known as the so­cial­ist cal­cu­la­tion de­bate, the duel hap­pened be­tween two groups of econ­o­mists with dif­fer­ent world views. On the one side were so­cial­ist econ­o­mists like Oskar R. Lange from Poland who be­lieved that an economy led by cen­tral plan­ners could vastly outdo West­ern mar­ket economies. In par­tic­u­lar, they be­lieved that cen­tral plan­ners could force the economy to save and in­vest a lot more than oth­er­wise and help achieve rapid gains in liv­ing stan­dards.

On the other side of the de­bate were the scep­tics who be­lieved that cen­tral plan­ning would be a dis­as­trous fail­ure. The most prom­i­nent among them was Aus­trian econ­o­mist Friedrich A. Hayek, who ar­gued that with­out pri­vate prop­erty, cen­tral plan­ners would be left hand­i­capped when try­ing to man­age the economy. This is for at least two rea­sons. One, in a mar­ket economy, re­sources are al­lo­cated by the means of free trade wherein millions of pri­vate in­di­vid­u­als try to guess the tastes of strangers to whom they hope to sell their goods. In a cen­trally planned economy like the erst­while Soviet Union, where just a small group of cen­tral plan­ners was in charge of man­ag­ing all re­sources, the amount of knowl­edge used to guess the tastes of cit­i­zens is lim­ited. This leads to the mis­al­lo­ca­tion of re­sources, as in the the Soviet Union where there was a chronic shortage of es­sen­tial goods at the same time when there was a huge sur­plus of other goods. Two, in a mar­ket economy, pri­vate own­er­ship of­fers peo­ple the in­cen­tive to pre­serve the re­sources they own and op­ti­mise their use as they get to en­joy the ben­e­fits from it. In Com­mu­nist coun­tries like the Soviet Union, where most re­sources were owned by no­body, there could only be vast de­struc­tion of re­sources.

The fall of the Soviet economy proved scep­tics like Hayek right. In fact, the im­por­tance of pri­vate prop­erty and the price sys­tem is to­day recog­nised by econ­o­mists across the board, al­beit with the ben­e­fit of hind­sight. Yet the fact that many fa­mous econ­o­mists ral­lied be­hind a dan­ger­ous idea like Com­mu­nism in the past should of­fer econ­o­mists a les­son in hu­mil­ity.

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