Lange, O., The economic operation of socialist society: I, Contributions to Political Economy, 6 (1987:Mar.) Extracted from PCI Full Text, published by ProQuest Information and Learning Company. Consributions to Political Economy (1987) 6, 3-12 THE ECONOMIC OPERATION OF A SOCIALIST SOCIETY: I OSKAR LANGE The sixth in a series of lectures on Capitalism and Socialism, conducted by Oskar Lange, at the University of Chicago, Department of Economics, presented by The University of Chicago Socialist Club, Friday 8 May 1942, at 7.30 p.m. Prorssor Lance: I am supposed to speak about the economic operation of a socialist society and it is probably only fair if I start by explaining what I mean by a socialist society. The term socialism is a very much abused and misused term. ‘Adolph Hitler calls himself a socialist, too, thus it will not be out of place to explain exactly what I mean by the term socialism before talking about how a socialist economy can or should operate. By a socialist society, I mean a society in which economic activities, particularly production, is carried on in such a way as to maximise the welfare of the population. ‘What these terms of maximise and welfare mean I will explain at a somewhat later stage. Another term which is very similar and very frequently confused with socialism iscollectivism, and we very frequently speak of an individualisticor private enterprise versus a collectivist economy. Now, the first problem I want to clear up is what is exactly the relation between a socialist and acollectivist economy. A socialist economy ‘means both something more than a collectivist economy and also something less. By a collectivist economy, we mean one in which production is carried out by public institutions according to some purposes set up by these institutions. Whether they be government, municipalities or any special institutions created for a specific purpose. But when we speak of collectivism, this is essentially all which we usually mean by this word. We do not mean to indicate anything about the purpose for which those public institutions carry on their economic activities. And in this sense, I say socialism means more because it means not only collectivist economy, but also acollectivist economy which operates its economic agencies for a particular purpose, namely, the purpose which I have stated, the maximisation of the population’s welfare. In this sense, as you see, socialism means more than collectivism. It excludes all types of collectivism where economic activity is carried on for purposes other than social welfare. In another way, however, socialism may mean less than collectivism, because the socialists’ accent is rather on the purpose than on the means. It is the view of the socialists that in present society, this purpose, namely, to maximise the welfare of society, can be only carried out by collectivists’ measures, 0277-5921/87/010003 + 10 $03.00/0 © 1987 Academic Press Limited Copyright (¢)2003 ProQuest Information and Learning Company Copyright (e) Oxford University Press4 ©. LANGE and this means by public ownership or operation of a major part of the productive system. But it does not insist that this is the only way. If there are possibilities of achieving this same purpose by non-collectivist methods, but on the basis of private enterprise in small scale industry, small trade, etc., socialism does not deny the legitimacy of such type of private enterprise. The accent, as I said, is rather on the purpose than on the means, and the means are suited to the purpose. And if socialism and socialists advocate collective ownership in the operation of a major part of our production system, then it is just as a tool to achieve this purpose. They just as decidedly repudiate such collective ownership if it is used for purposes contrary to social welfare, and they just as decidely acknowledge room and place for private entrepreneurial activity if such activity helps to achieve the purpose of maximising social welfare. However, it is more or less agreed among contemporary socialists that this purpose of maximising social welfare requires today collective ownership and operation of a major part of the productive system, and namely of that part which today is operated in opposition to the exigencies and the requirements of social welfare, ‘Now, in this discussion I shall make a certain simplification. I shall assume that the socialist society is a hundred per cent collectivised society. That means that all productive activity is carried on by public agencies which are the owners of all productive resources other than labour. Now I say that is a simplification because practically no serious socialist ever has proposed this and if you go over the socialist literature, you always find discussions about farmers, small business, etc., which is sufficient to indicate that socialism leaves room for private enterprise in this field. But the discussion of these private enterprise fields is not a very interesting problem because it is a thing with which we are rather familiar and do not need to look so very much for new principles. The really interesting and important problem to discuss is the operation of the public agencies which are charged with carrying on economic activity in a socialist society. Because here we have to do with the new form of economic operation with which we are not yet familiar historically or familiar possibly only in certain exceptional and very narrow cases. ‘Thus, I make the simplified assumption that all productive resources other than labour, that means capital, as well as natural resources, are in public ownership and operated by public institutions. Now by saying that they are in public ownership and operated by public operation, I do not mean that they necessarily have to be operated by the institutions of the present political state. That, for instance, social- ised railroad system would have to be operated exactly in the same way as the post office, where the local Postmaster would be the Chairman of the Committee of the party in office and where the Postmaster General would be the National Chairman of that party. Rather, the socialist idea is that though socialism advocates public enterprise, it does not advocate government enterprise and activity in the sense indicated, but rather wants to see the public institutions which are charged with the operation of our productive system to be autonomous institutions, independent from the political state. For instance, the Tennessee Valley Authority (TVA) or similar institutions which are public, but notwithstanding, perfectly autonomous to operate 3yFight (c) 2003 ProQuest Information and Learning Company Copyright (c) Oxford U Press‘OPERATION OF A SOCIALIST SOCIETY: I 5 according to certain recognised economic principles and not according to the whim of temporary and changing political influences. Now further, and this has been always the traditional intent of socialism, it is understood that such independent auton- omous public institutions charged with the operation of our production system, or sections of it should be under direct democratic control, a control which may take the form of different channels, may be partly controlled by those who are employed in them, partly controlled by those who consume their products, partly controlled by those who represent some other types of public interests. To give a concrete example of what I mean, I may give an example of the socialisation proposals of the German Socialisation Commission in 1919 after the German Revolution, which proposed that the socialised industries should be controlled by representatives, first of all of the consumers of these industries which may be consumers in the sense of private persons or other industries which consume their products; then by representatives of the employees in these industries, and then by representatives of some other broader agencies, whether it be a political agency of the government or Congress or some special agency charged with coordination and planning of the whole economy. The important thing is that these controlling boards may emerge from direct democratic representation, directly responsible to certain groups which elected them, rather than to the political government which administers, say, the army needs, justice, etc. Now, having said so much about the operation of the socialist society, I shall discuss the principles of economic operation. I think that Maynard Kruger last Friday, talked to you about the type of economic problems which any type of society has to face. You know, and socialists have always been taught, to distinguish the different economic principles and laws in different societies, and ithas always been one of the points made in socialist and Marxist literature to show the specificity of all economic phenomenon and show the economics of capitalism as quite something else than the economics of a medieval manor, of the slave economy in ancient Greece and still something different than the economy of, say, the Navaho Indians was before the Spanish Conquest. However, this recognition of the essential differences between the different economic systems should not blind us to certain common features and certain common economic functions which have to be carried out in all of them. And in the specialist society, like in any other, the basic economic functions would be as follows: first, it would have to decide that all resources available of the society are employed. Obviously, an economy which tolerates unemployed resources—they may be unemployed men or machines or unemployed natural resources—would be a very irrational kind of economy and the most powerful argument for socialism is exactly its claim to be able to do away with this type of waste which is more or less. permanently attached to the capitalist system. Thus, the first problem will be that of assuring that all resources are fully employed. If this problem is solved, there is the second problem, namely, to assure that all resources be employed in the best possible way; by the best possible way meaning the one which maximises the welfare of the society. This would mean two types of decisions: to decide for the production of what kind of goods their resources are to be used, whether we shall produce clothing or shoes or food, what kind of food; and second, in what amounts within, of course, the 3yFight (c) 2003 ProQuest Information and Learning Company Copyright (c) Oxford U PressCopy’ Copyright (c) Oxford Unive 6 ©. LANGE limit of available resources, the different goods should be produced. Whether we should use our labour or machinery or natural resources to produce, for instance, more clothing or better housing or more food. Within the production of food, whether we should produce more, for instance, meator use the meat to feed cattleand produce cattle and produce more meat instead. This is usually what is called in economics the problem of allocation of resources. ‘Thus, we have the two basic problems: that of full employment, which very fre- quently is found under the title of the problem of economic stability, by stability meaning a continuous utilisation of all the resources; and the other the problem of location or use of the location of the resources that are employed. Now, I should discuss these two problems in the reverse order. I shall speak first of the location of resources, assuming that somehow the problem of full employment has been solved, and I shall later discuss the problem of stability or the maintenance of full employ- ment. I shall do it in this order simply because if we solve the second problem, we will see that essentially this supplies us with a major part of the apparatus for solving the first one, too. Thus we assume that all the resources are always made usable in the socialist economy. No unemployment of any resources is tolerated, and then there are the two basic problems: What goods to produce and in what amounts? Well, there are different ways in which this problem may be solved in a collectivist society, if we do not want it to be a socialist society. That is, if we do not specify any purpose for which this collectivist economy is to operate. Well, there would be one simple solution. We could have some agency; we might call it the Central Planning Board, or any other name you like to give it, and make it decide simply how much to produce of everything according to what they think the people will need. They think they need so many shoes, so much clothing of a given type, so many houses of a given type, and they produce it, and then distribute it, by a type of rationing. You would get so many pounds of meat, so many pounds of bread, so many pairs of shoes per year, and so on. In such an economy it wouldn’t be only sugar which was rationed, but practically everything which was rationed and allotted. Now, it is not essentially the solution proposed by the socialists because it is not the solution which is likely really to produce the greatest possible social welfare. It will rather be a solution which produces what the people who have the offices in this Planning Board think that the greatest social welfare is. Even assuming that they are very honest and public spirited persons, and will not seek their own power and their own benefit, or of their group, but the benefit of the people, it will rather reflect their desires than the desires of the people. Thus, if we really want to take the term maximizing social welfare seriously, as an objective to be achieved by socialist economy, then this solution has to be discarded, because it would not beone where the people decide what is to be produced and in what quantities, but somebody decided for them. It would be, at best, a kind of benevolent and enlightened economic system. Now, particularly since the decision of what commodities to be produced in what amounts also automatically implies a decision where to employ labour in what occu- pations and what industries. And if this would just be decided by some board in a way that everybody would be told, you have to do this job here, and you have to do ight c) 2003 ProQuest Informat mn and Learning CompanyCony’ OPERATION OF A SOCIALIST SOCIETY: 1 7 this job, and so on, then as you immediately see, it wouldn’t be a set-up which would leave very much individual freedom to the world. Thus, this solution has to be discarded. Well, we can think of a second solution which still lets some kind of Central Planning Board decide what goods and in what quantities to produce, but where the distribution of goods, or the obtaining of the labour in the different occupations necessary to produce the goods decided upon and in the quantities decided upon would be done not by location or demand, but by recourse to a rather old institution, an institution which is so characteristic of capitalism that it is frequently confused with capitalism but which actually is historically much older than capitalism, namely to the market. The Central Planning Board could decide what quantities of commodities to produce and then, instead of allocating them by general rationing system, could give to each person in the community a certain amount of, say, tokens or chips like you use in playing cards, for instance, unless you play for money, and then say, ‘For this commodity you will have to give five chips a pound, and for the other only three chips,’ etc., and set a kind of equivalence between quantities of this commodity and the number of chips which has been given, such as exactly the amount that has been decided to be produced would be taken from the stocks; and instead of commandeering labour just to go into that occupation and do that work, it would rather, again, pay to give us an amount of chips and if a certain occupation particularly wants labour, it gives them more chips for which they can get goods from the stores than another occupation. Now whether you call these chips money or not, it is merely a matter of taste. Obviously, there is no essential difference between them. It will behave exactly like money behaves in the present society and particularly if you give out more chips than there are goods, you will see that people will offer more and the prices of these goods will rise. Now what I have essentially said is that people would be given money, incomes, and with these incomes, they could buy the goods on the market. Now, I still assume that this Planning Board makes its own decisions as to what goods and in what quantities it wants produced and that it does make up its own idea as to what the social welfare is. Instead, it might be more democratically inclined and think that it really doesn’t want to impose upon them their own ideas but it rather wants the people to decide what they think they want to have. And then that is a pretty easy criterion, to find out how to organise its production plan, because if they sell that and people will want more of certain goods than other goods, they will be offering to pay more for them and in consequence the price which will have to be charged for these goods in order to exactly sell the amount which is available will be higher and such a rise in price might serve as an indicator to the Central Planning Board that the production of such goods should be expanded. If, on the other hand, people dislike certain goods and they don’t want them, they don’t want to buy them, in order to sell the available amount, the price has to be lowered, and this would be an indicator again that they aren’t wanted and that the production of them should be diminished. If this is done, the price system would essentially serve as an indicator of what goods people want and in what amounts. If, in addition, the socialist economy, instead of ight c) 2003 ProQuest Information and Learning Company Copyright (c) Oxford University PressCony’ Copyright (c) Oxford Universi 8 ©. LANGE commandeering labour, rather attracts labour to different occupations by paying a money income, then, if people particularly dislike an occupation, it would have to pay a very high wage for people to enter it, and if we would keep a kind of cost accounting, we would find out that the cost of this particular commodity is very high, and if it would somehow then compare the price and the cost, it would produce fewer such commodities which would mean that there would be relatively little requirement for people to go into occupations which are rather disliked. If people, on the other hand, like very much certain occupations, just the reverse would happen. Thus, you see that the price system may serve as an indicator of what the people desire—what people’s desires for certain products are, as well as their desires for the occupations they prefer to work in. And if the Central Planning Board follows the movement of these prices, that is an index of what the people’s desires are, and it would be much more likely to produce the maximum possible social welfare by following these indexes than by simply acting according to what it thinks it is that the people need or want. Now at first you may say, ‘Well, if that is what the socialist society would do, then what is the difference between this and capitalism?’ And that is actually a criticism which has been brought forward, particularly by opponents of socialism, who have said, ‘Well, after all, the best thing a social economy could do is to do exactly what capitalism does under a different name.’ Some other people would make the decisions, but essentially it is the same. Except under capitalism those goods are produced and in the amounts which the people want to buy and the people go into those occupations they prefer, and the market in a capitalist economy acts more or less like, it has been said, a constant poker, whereby each dollar a consumer spends ‘ona commodity induces producers to produce that commodity, and for each dollar he refused to spend on a commodity, he induces them to stop production on this commodity. Now there would really be very much to that argument if this were exactly the way in which the capitalist economy would work, but as you all know, that is not exactly the way it works. First, I disregard the problem of full employment which I postponed for our next meeting, but even assuming this full employment, there are certain rather important differences. At best we might say the capitalist economy works so only insofar as it is competitive, because it is only under compe- tition that you have this type of response of producers to changes in the market. We know that certainly modern or present capitalism isn’t very competitive, that it is rather a typical monopolistic economy, where production does not at all react to changes in consumers’ demands in the way I have indicated. It reacts in certain ways, but quite different ones, and thus, we certainly do not mean that those goods are produced and those quantities which best satisfy the desires of the consumers. This point alone really would be sufficient to refute that argument, because even if it is true about the capitalism which existed fifty or sixty years ago, there is very litue it helps us today, because today’s capitalism is definitely monopolistic and not competitive. But it is not wholly true in any case, even if capitalism is competitive. ‘Because even in this case there is a very important difference. If we go back to this ‘comparison which has been made between the price system and the continuous poll nt (c) 2003 ProQuest Information and Learning Company PressCony’ OPERATION OF A SOCIALIST SOCIETY: 1 9 which decides what goods are to be produced or not, then it should rather be compared not with a poll where there is equal suffrage, but a poll where there are strong pluralities where different people and different social groups have very different amounts of votes to be cast. And obviously you know what these pluralities consist of. Simply the unequal distribution of income. The argument is simply that if somebody needs more of a commodity, he will be ready to pay more for it and then if exactly the commodity is produced for which consumers want to pay, well then exactly the commodities are produced which consumers want most. But this is, not true obviously if the consumers have different amounts of money to spend on commodities. If there is one person who has little money and needs the commodity very urgently and can offer for it very little, and the other person has lots of money and really doesn’t need it very much, if he had less money he wouldn’t buy it possibly at all, but still he can offer a much higher price. And thus it is really not an equal vote, but a vote with a plurality in which the price system under capitalism represents — we might compare it, to give another example, to political democracy under capital- ism. Of course, it is true about this argument that in a way production is adapted to consumers’ demand. It is true also under capitalism, say, in a capitalist democracy, politics in a way is adapted to the people’s wishes, and there are certain limits, and it is exactly these limits which make the whole difference between capitalist democracy and fascism, and whoever has lived in a fascist country probably knows the difference. ‘Notwithstanding all that, in the capitalist democracy, the influence and public opinion which different groups can exercise is not the same, but it is different according to the economic power which this group exercises, and that the democracy, though a certain element of it always remains present, becomes strongly distorted. And it is exactly the same, we might say, with the price system or market under capitalism and just as socialists do not propose to abolish democracy because it is distorted under capitalism, but rather to abolish its distortions and make it real by supplementing it with the necessary economic and social democracy, so we need not abolish the market because capitalism distorts it, but rather have to readapt our system so that the market will actually perform the functions it can and should perform. I have indicated that the main difference here between the operation of prices under capitalism and under socialism would be the difference as to the distri- bution of incomes. Under socialism the distribution of incomes would be much more equal. Now, what would be actually the sources of incomes in a socialist society? Well, if we want to maintain freedom of choice of occupation and thus rely to a certain extent upon peculiar motives in the choice of occupation that people will choose a certain occupation because they are offered something for it in return, then this would mean that part of the people’s incomes would have to be connected with the occupation or would have the form of wages. But this in a socialist society would not be the only income because there is a remaining part of the income which comes from the resources of capital and natural resources which are owned by the whole community and not by individuals, and which provide a fund out of which incomes can be paid to individuals, a fund form of incomes which I shall propose to call social dividends. We might, therefore, think of each citizen of a social society as ight c) 2003 ProQuest Information and Learning Company Copyright (c) Oxford University PressCopy’ Copyright (c) Oxford Unive 10 ©. LANGE being like a shareholder in a big corporation, this corporation being the society’s productive enterprises, deriving some wages in return for his labour and some social dividend which he got as a shareholder of this communal enterprise. Now, it is this social dividend which leaves to a socialist society a considerable amount of freedom of how income can be distributed. Essentially, the social dividend can be distributed according to any criteria which we would regard as desirable. In a socialist society, this social dividend would be distributed more or less equally, with certain possible allowances for special situations. There might be special allowances for sick people, or according to age, family obligations or some other factors. There would, of course, be some additional differentiation in incomes in a socialist society also on account of differences in wages paid in different occupations or possibly different places. Because obviously if we do not want to commandeer labour or conscript labour, but rely on free choice of occupation or place of labour, then the only way to induce people to go into one occupation rather than another or live in one place rather than another would be to pay them in return. Now, these differ- ences in income probably could not become very substantial because they would be rather minor differences which result from differences of work. Then we could regard them as only just. For instance, less desirable and more difficult labour is Paid higher. Probably the result would be that what today are regarded as the lowest ‘occupations might be paid the highest simply because nobody would want to take them and you might have to give very high inducements to induce people to enter such occupations. But otherwise, as you know from experience, preferences, likings as well as talents are more or less evenly spread. One man has his likings and talents for one type of job and the other has his likings and talents for another type of job, so it is not likely that this should create serious inequalities. Today’s inequalities are, of course, largely due to inequalities of income pre-existent to a choice of occupation, or inequalities of income because certain occupations require expensive training and only people with the necessary income or the necessary income of their parents have access to these expensive trainings and can enter such occupations, or they are more or less monopoly situations. For instance, in a lot of corporations you may have to have certain personal conduct, be somebody’s nephew or brother-in-law or something to get the well paid jobs, etc. Now, with these factors being removed, there would be no cause for great inequalities of incomes to develop and such inequalities which would develop would be just inequalities due to higher efficiency and thus be an improvement and an inducement to improve the efficiency, or would be inequalities due to disagreeableness of the job, etc., both types of inequalities which certainly are just and desirable. ‘Now, I said that the present capitalism is largely monopolistic and that the main difference between a socialist economy will be that the economic system will not operate on a monopoly basis. Now, let us see what this would mean in terms of the criteria by which it is decided what quantities, what commodities and in what quantities are to be produced. Well, the simple criterion for the socialist society would be to produce that amount of each commodity which can be sold at a price which covers costs. If it can be sold at a price higher than cost, that simply would ight c) 2003 ProQuest Informat mn and Learning CompanyOPERATION OF A SOCIALIST SOCIETY: 1 u mean that the people are ready to offer for that commodity more than the costs to produce, and that, therefore, they should get more, because they want it more urgently, with a greater intensity, and are ready to pay the higher price. Thus, it doesn’t cost so much to produce it and there is a good reason to produce more of it, and as much more until the price will fall to a level covering costs. If, on the other hand, the price of the commodity would be less than the costs of producing it, this, would mean that the people are not ready to pay so much as it costs, that they don’t want it with such intensity, and, therefore, they should get less of it, the production of it should be curtailed until the price rises sufficiently to cover costs. We may call this principle of determining how much of acommodity to produce, the public service principle, which would mean just to produce and distribute the commodities at the cost price. Now, as you know, the publicservice principle has to be distinguished from the profit principle or maximum profit principle which is applied under capitalism where that amountofa commodity is produced which gives the highest possible profit to the producer. Now, itis true that under certain cases under capitalism, the private profit principle or maximum profit principle works out exactly in the same way as the public service principle, namely, in a case where there is real effective compe- tition between producers, because then, as you all probably know, the competition of producers will put it to a point where exactly it can be sold only at the cost price, and itis true, therefore, that insofar as competition would be effective, really effective, which is pretty seldom under capitalism, then capitalism, disregarding the question of distribution of income, which I have discussed before, would lead to a similar result as socialism. We know, however, that actually competition is not effective usually under capitalism, at least there are large parts where it is not, Then and therefore, the maximum profit principle leads to quite different results than the public service principle. However, the fact that under certain conditions the private profit principle leads to the same result as the public service principle gives us a rather important indication, namely, what kind of private enterprise a socialist society can cultivate, exactly that kind of private enterprise where the private profit seeking of the producer will lead to substantially the same results to which a public ownership and operation would lead. Now, in defining the social public service principle as producing that amount of goods which can be disposed of at the price covering costs, I have to make one qualification as to the term cost, namely, in economics, you usually distinguish between private and social costs of production, and it is social costs which would be relevant for a socialist economy. Now, to indicate the distinction between private and social costs, I will give a famous example. A factory is established, say, in a certain community and produces some- thing, we will let it be steel, for instance, at a certain cost, which is scattered very carefully by accountants, bookkeepers, etc., and after the introduction of this factory, and there is a big smoke stack, several of them that make lots of smoke, and itis found that later all the owners of the houses have to repaint their houses more frequently. Formerly they did it once in five years and now they have to repaint them in a year. Now obviously this is part of the cost of production of this steel, the labour, paint used to repaint the houses, because it occurred because the steel plant has been introduced. 3yFight (c) 2003 ProQuest Information and Learning Company Copyright (c) Oxford U Press12 ©. LANGE ‘Then you find, for instance, the air has been polluted and that people get sick, hospitals have to be built and people have to go to doctors, and so that is again part of the cost of producing steel. There are industrial accidents and some people get disabled, are not able to work for the rest of their lives, must be supported by the community in one way or another; that is a part of the cost of producing steel. Now those are all what we call the social costs. Now, this cost does not appear in the private bookkeeping of the corporation which produces steel. In a socialist society, obviously, all of these additional costs have to be taken into account. It is the social costs, as I said, which have to be taken into account. Sometimes social costs may be negative. There may be certain social benefits. For instance, a farmer plants a forest, and this affects the soil, improves the climate and improves the crops obtained by the farms in the whole neighbourhood. Now, this is a part that is a negative cost, that is a certain social benefit, you see, which was produced by this farmer, but which nobody pays him for, and it will never appear in his bookkeeping. It will be just the price of the lumber he expects to get for his forest which will appear in his bookkeeping. But it should be put in there; the socialist economy would put it in there. And thus, the very type of cost accounting under socialism would be pretty different from that under capitalism and it would take into account all social effects of any productive activity, both detrimental, such as costs, and advantages. There is here again a difference between socialism and capitalism. Capitalism operates only on the basis of private costs, only private costs are rewarded and repaid, and not social costs. And even in a competitive capitalism where competition forces producers to sell at cost price takes into account only private costs and not social costs Thus we have now, I think, a certain basic principle for the allocation of the productive resources in the socialist society, namely, it seems that the most desir- able type of allocation would be that on the basis of market prices in distributing the goods and on the basis of a free labour market in allocating labour to different locations, and that the principle, according to which the market of consumers’ goods and market of labour, the authorities in the socialised society would decide what to produce and in what quantities, would be what I call the public service principle. They would produce a commodity, such commodities in such amounts which can be disposed of to the consumers at the price which covers the social costs of their production. This is, so to speak, the socialist solution of the first problem. Next time we are going to discuss the second problem, that of securing full employment of all resources. Copyright (c) 2003 ProQuest Information and Learning Company Copyright (c) Oxford University Press