Economic Calculation in the Non-Socialist Enterprise

     

In the first half of his lead essay, Storr articulates the ways in which prices make rational economic calculation possible by turning tacit knowledge into actionable information. The essay then explores the ways in which Mises’s Socialism outlined how the socialist system interferes with this allocation and rationalization of resources, rendering economic calculation impossible.  Amidst resurgent interest in socialism, Mises’s work is certainly as relevant as ever today, but we must be careful not to overstate the centrality of the price mechanism and economic calculation to the operation of a well-functioning economy. 

While the economic calculation debate is of central theoretical and historical importance, the idea that under a free market system the price mechanism actually enables calculation per se ignores the ways in which prices are themselves both guesses and constantly shifting. As long as prices are directionally correct and allowed to move freely in a contestable market, they incrementally shift the allocation of resources in the appropriate direction, but they never actually allow precise economic calculation (Wirtschaftsrechnung) to take place.

For example, Storr points out that “the socialist State cannot rationally calculate; it must guess.” Yet in the market economy, the majority of activity within the economic system is undertaken by entities who also cannot calculate: decisions within organizations from corporations to civil society groups are guesses as well.  Storr correctly observes that Mises’s claim is best understood to be offering a sense of directionality and guideposts for the allocation of resources. However, though firms and social organizations are subject to displacement in a way that the State is not, Mises obscures the importance of contestability and overstates the importance of prices as a feedback loop in his analysis. In his focus on contrasting socialism with capitalism as binaries in how they relate to the “unit of calculation,” he paints too narrow a picture of how market decisions are undertaken in the real world—in both capitalist and mixed systems.

As Peter Klein discusses in his 1996 “Economic Calculation and the Limits of Organization,” the central questions of the economic theory of the firm intersect in fundamental ways with the economic calculation debate.[1] Namely, both are interested in why the market for corporations exists at all rather than economic activity organizing into a single, large corporation.  Yet while the debate over what limits firm size and vertical integration continues in the literature, firms in the real world have grown to enormous size, with multinational corporations employing 43 million worldwide as of 2018. The average multinational employs tens of thousands of employees, with the largest employing hundreds of thousands.  Although firms are bounded by market prices in terms of inputs, an enormous amount of decision-making regarding day-to-day operation and resource allocation takes place within an unpriced environment.  Even in the case of inputs, a large number of vertically integrated firms produce a dazzling variety of specialized, proprietary inputs which do not have comparable replacements on the open market, as the case of semiconductor manufacturing has recently demonstrated. 

Despite these apparent formal similarities and parallels, even very large firms at this scale do not seem to resemble socialist economies in their character. Flipping the binary of socialism and capitalism on its head, we might wonder why this is the  case. Mises’s Socialism perhaps overstates the case for economic calculation as the keystone of the economy. But the central importance of contestability as a driver for this difference in character comes into clearer relief when we contrast unpriced decision-making within a socialist state with unpriced decision-making under private ownership, both in corporations and in non-market, non-state third spaces.

Consistent with Mises’s focus on the individual, his discussion of economic calculation primarily explores the micro-level decision-making that people undertake within various roles in the economy, whether as consumers, as firm managers, or as private citizens in the family.  However, for an individual organization to be efficient and respond to market pressures, it is sufficient for a corporation or group to be under competitive pressures at the macro-level, as this will inform the directionality of individual decisions within the environment, even in the absence of an internal price mechanism within a division or department.  

Concomitant with contestability is the importance of residual claimancy through private ownership. Again, in the case of claimancy, it is often sufficient for ownership to be directionally correct rather than calculable to a very precise degree. Armen AlchianHarold Demsetz and ’ team production comes to mind in this analysis.[2] For example, if a team member within a corporation or civil society group clearly contributes a significant amount to particular projects or strategic decision making, although there may be unpriced outputs at stake, this should be reflected in his compensation even if the extent to which this is the case is not ultimately calculable to a particularly precise degree. Furthermore, this type of alignment need only exist on average, rather than in each individual case, in order for a firm to operate with substantial efficiency relative to others on the market. The extent of contestability within a given market coupled with the extent of competitive pressure exerted by other firms and organizations will determine what level of managerial efficiency is required to persist.

Seen through this lens, the shortcomings of socialism become much clearer. Even without the burden of successfully engaging in economic calculation, a socialist State does not meet the basic criteria for contestability nor does it allow participants to accrue benefits through a system of private ownership.  Instead, both principles are perverted. 

Contestability still appears in the form of competition over market share, but market share entails competition over state power and control. Similarly, with private property abolished, claimancy can only be established over control of others rather than over resources. It is this centralization of control and power without recourse to an alternative choice or entity that leads to the authoritarian character of socialist states but not of private enterprises and social institutions within a market economy.

[1] Klein, Peter G, “Economic Calculation and the Limits of Organization,” Review of Austrian Economics, Vol. 9, No. 2 (1996): 3-28.

[2]  Alchian, Armen A. and Harold Demsetz, “Production, Information Costs, and Economic Organization.” The American Economic Review, Vol. 62, No. 5 (Dec., 1972): 777-795.