The calculation problem, as stated by Ludwig von Mises and Friedrich Hayek, has been central to most libertarian arguments against non-market or non-price forms of economic coordination.
The Misesian variant, argued in Economic Calculation in the Socialist Commonwealth and Socialism, is based on the role of factor input pricing in allocating inputs among competing uses. We choose between factors of production, so the argument goes, and decide which ones to economize on, by comparing their prices. We decide which uses to put them to by comparing the economic value produced to the cost of the input.
Hayek’s version of the calculation argument is based on complexity: i.e., the sheer volume of information to be processed. Market prices allocate thousands of different resources among thousands of different kinds of production, in ways that a central planning bureaucracy could not cope with.
I will state up-front that I am an agnostic on the question of whether non-market forms of coordination could be as or more effective than market pricing. I am also an agnostic on the question of whether economic coordination or rational decision-making could exist at all without market pricing, although I am somewhat inclined to say yes. So if you’re looking for a definitive statement on the comparative efficiency of market and non-market coordination, or an endorsement of some specific coordination mechanism, you’ve come to the wrong place.
I will, however, examine various aspects of the problems stated by Mises and Hayek that strike me as particularly interesting or relevant to issues of economic coordination.
To start with Mises: If his argument from input pricing is valid, it proves too much.
For one thing, no particular set of property rights rules is self-evident. There is a wide range of possible property rulesets. The choice between these rule-sets is logically prior to the functioning of the market price mechanism and the determination of market-clearing prices.
One might argue, in Coasean fashion, that the particular set of property rules doesn’t matter so long as they’re tradeable; regardless of how they’re drawn, the market will cause them to gravitate into the most efficient hands. But different rule sets allocate income streams to different actors — which means they vary widely in their incentive effects, depending on how property rights are drawn. The distribution of income and incentives to produce are vastly different, depending on whether (for example) title to arable land is vested in the cultivators or in an enclosing landlord. To say that the specific assignment of property rights doesn’t matter so long as they’re tradeable is as ridiculous as saying it doesn’t matter whether I have a right to not be killed or someone else has a right to compensation for not killing me.
And it’s meaningless to say that market prices reflect value because, depending on how the ruleset assigns property, prices for a given thing might work out to any number of possible values. Economists adhering to the neoclassical or marginalist paradigm under any such hypothetical rules would defend all prices and incomes as reflective of the value created. The prior question is whether the property rights rules themselves are designed, relatively speaking, to reflect real cost more or less accurately.
Indeed, it’s a tautology under any allocation of property rights to say that “wealth rewards value creation,” because value itself is defined as what anyone can charge for anything. According to marginal productivity theory, the marginal productivity of anything is what it adds to the final price of goods or services. So if you can fence off something required for production and charge a toll for access to it, whatever the toll adds to the price people pay for stuff is the “marginal productivity” of the “services” that you “contribute” to production.
On the other hand if we define value creation in terms of the direct production of use value — the human activity involved in converting physical materials into new forms, or thinking up new and better ways of doing this — then it’s clear that (as we will see below) our present system of property rights does the exact opposite of rewarding the actual effort and thought involved in creating use value. After all, it’s Elon Musk who became a billionaire from Tesla, not any of his factory workers or engineers. It’s a situation directly analogous to the middle ages, when it was the feudal landlord’s control of access to land, rather than actually producing turnips, that made him rich.
So it would be more accurate to say that the rational allocation of factor inputs between competing alternative uses requires a properly designed property rules system. And given this criterion, the actual definition of property rules under capitalism is one of the most sub-optimal conceivable.
The property rights system that’s prevailed under the past few centuries of capitalism is not only an illustration of the fact that capitalist property rights did not emerge spontaneously from a state of nature without the intervention of a state, but an illustration of the perverse effects when property rights are badly drawn.
Under the prevailing capitalist model, land and natural resource inputs — which are naturally scarce and costly — are artificially abundant and cheap, as a result of the propertied classes’ access to looted and enclosed land and resources. Capitalism, over the past few centuries, has mostly followed an extensive growth model based on the addition of more material inputs, rather than an intensive one based on making more efficient use of existing inputs. This is why corporate agribusiness is so inefficient in terms of output per acre, compared to small-scale intensive forms of cultivation: it treats land as a free good. So Latin American haciendas hold almost 90% of their ill-gotten land out of cultivation, while neighboring land-poor peasants must resort to working for them as wage laborers. And the U.S. government actually pays farmers to hold land out of use, so that sitting on unused arable land becomes a real estate investment with a guaranteed return.
Over the past century or so, the socialization of corporate inputs has become the primary expense of the state. The state subsidized the railroad and interstate highway networks, built the civil aviation system at taxpayer expense, gives oil and other extractive industries priority access to public lands, fights wars for oil, and uses the Navy to keep sea lanes open for oil tankers and container ships (See Carson, Organization Theory, pp. 65-70).
Capitalist industry follows a model based on subsidized waste and planned obsolescence, in order to avoid idle capacity. The very accounting models used by corporate management and econometricians treats the expenditure of resources as the creation of value.
On the other hand capitalist property rights make ideas, techniques, and innovations artificially costly, erect barriers and toll-gates against their adoption, and make cooperation artificially difficult.
Intellectual property causes gross price distortions, so that owners can charge monopoly rents for the replication of information (songs, books, articles, movies, software, etc.) whose marginal reproduction cost is zero. And in the case of copying new designs for physical goods or techniques for producing them, the majority of a product’s price often comes from embedded monopoly rents on patents rather than actual material and labor costs.
Copyrights on scientific research and patents on new inventions also impede the “shoulders of giants” effect, by which technological progress results from ideas being aggregated or combined in new ways. For example, according to Johann Soderberg (Hacking Capitalism), further refinement of the steam engine came to a near stop until James Watt’s patent expired.
Patents enable transnational corporations to control who is and is not allowed to produce. As a result, they’re able to offshore production to independent contractors in low-wage countries, retain a legal monopoly on the right to sell the product, and charge enormous markups over actual production cost.
Yet another input which is artificially expensive, as a result of capitalist property rules, is credit. In his 1825 pamphlet Labour Defended Against the Claims of Capital, Thomas Hodgskin debunked the “labor fund” argument (i.e., that employers advance the necessities of life to their workers from a fund of savings accumulated from past abstention, and hence are entitled to a return for their sacrifice) by arguing that in actuality different groups of workers engaged in production constantly advance each other their necessities of life, along with material inputs and prerequisites of production, out of their own output. The capitalist’s wealth isn’t the source of these necessities and inputs, but only a property claim on the right to supply inputs produced by others.
Betwixt him who produces food and him who produces clothing, betwixt him who makes instruments and him who uses them, in steps the capitalist, who neither makes nor uses them, and appropriates to himself the produce of both. With as niggard a hand as possible he transfers to each a part of the produce of the other, keeping to himself the large share. Gradually and successively has he insinuated himself betwixt them, expanding in bulk as he has been nourished by their increasingly productive labours, and separating them so widely from each other that neither can see whence that supply is drawn which each receives through the capitalist. While he despoils both, so completely does he exclude one from the view of the other that both believe they are indebted him for subsistence. He is the middleman of all labourers….
Credit, in a rational system, could be organized cooperatively by the workers themselves as a system of horizontal flows, advancing each other from their output with no previous stock of wealth required. But capitalist law restricts the supply of credit to those with preexisting stocks of accumulated wealth, enabling them to extract rents from the supply of credit. (Oddly enough the bulk of right-libertarians of the “hard money” variety object, not to the restriction of the credit function to those with stocks of wealth, but to the “insufficiency” of credit in some cases in the form of fractional reserve banking.)
One specific example of the irrationality of this credit system has emerged from the coronavirus pandemic. In discussions of the inability of tens of millions of newly unemployed people to pay their rent, the parasitic nature of landlordism has arisen (and rightly so). In response, landlords and their apologists complain that they acquired their rental properties as investments, and depend on rent payments to pay their own mortgages. Any interruption in the constant flow of rental payments will cause the landlords to default on their debt. But stop and think about what this reveals. If the tenants’ rent is going directly to paying the mortgage on a property, with the landlord acting only as a middleman who receives the money from tenants and in turn passes it on to the bank — and extracting a fee for the “service” of standing between tenant and bank — that says a lot about how irrationally our credit system is organized.
Similar irrationalities result from the way ownership and governance rights are drawn for the business firm. Because governance authority is vested in a hierarchy of managers who (at least theoretically) represent a class of absentee shareholders, rather than in those whose efforts and distributed knowledge are actually needed for production, the firm is riddled with information and incentive problems and fundamental conflicts of interest.
For example, although most improvements in efficiency and productivity result from workers’ distributed knowledge of the work process and the human capital they’ve built up through their relationships on the job, they have a rational incentive to hoard knowledge because they know any contribution they make to productivity will be expropriated by management in the form of bonuses, and used against them in the form of speedups and downsizing. And even though workers’ knowledge of the production process is the primary source of efficiency improvements, management cannot afford to trust workers with the discretion to use that knowledge because their interests are fundamentally at odds with those of management. With information flow so grossly distorted by authoritarian hierarchy, management lives in a bubble and is forced to reduce its reliance on workers’ knowledge, simplifying the work process from above to make it more “legible” (see James Scott, Seeing Like a State) through dumbed-down Taylorist work rules. And management is forced to devote enormous resources to internal surveillance and enforcement of discipline, compared to self-managed enterprises.
Mises dismissed Oskar Lange’s market social model as “playing at capitalism,” because enterprise managers would be risking capital that they themselves did not own or stand to lose. So they would be rewarded on the upside for returns on investment without suffering personal consequences for losses.
But corporate managers under American capitalism are playing at markets every bit as much as the managers in Lange’s proposed model. Shareholders are the residual claimant of the enterprise only in theory, and even then actual legal ownership is vested in a fictional person distinct from any or all shareholders, either severally or collectively. In reality, corporate management has the same relation to the corporation’s capital (which it claims to be administering in the name of the shareholders) that the Soviet bureaucracy had over the means of production it claimed to administer in the name of the people: That is, it’s a self-perpetuating oligarchy in control of a large mass of capital which it has absolute discretion over, but did not itself contribute and does not personally stand to lose. In this environment, corporate managers’ standard approach is to hollow out long-term productive capacity and gut human capital in order to massage the short term numbers and game their own compensation, leaving the consequences to their successors after they move on.
Murray Rothbard argued that the Soviet planned economy was able to survive only because planners had the Western market economies and their prices as reference points for assigning prices internally. So even though the transfer prices assigned by Gosplan and by enterprise managers were unsatisfactory, as a result of not reflecting the immediate spot conditions of the Soviet Union, they were at least able to work after a fashion because they were indirectly tied to market prices somewhere.
But under corporate capitalism, the great majority of intermediate goods in the production process are specific to the products produced by a particular enterprise, so that there is no market for them. DoohickeyCo may buy steel on the market, but it manufactures its doohickeys from widgets which are made out of that steel to a design specific to their particular model of doohickey. So the corporate bureaucracy assigns internal transfer prices to the widgets, so they can be “sold” from one division of the corporation to another, in exactly the same way a Soviet planner would have: through indirect reference to external market prices (the prices of the steel, labor, electricity and so on that went into their construction).
In short, if any environment could be seen as conducive to “calculational chaos,” it’s the environment created in the capitalist economy Mises and Hayek defended. In every one of these cases, a more “socialistic” set of property rules — commons-based land and resource governance, free information, worker ownership and management of the enterprise — would result in more rationality than we have now.
In every case, property rights are assigned not only to someone other than those with the most stake in increasing efficiency, but to someone whose interests are diametrically opposed to those of actual producers and whose wealth and income derive from extracting rents from them. As Kropotkin wrote in Words of a Rebel,
Political economy — that pseudo-science of the bourgeoisie — does not cease to give praise in every way to the benefits of individual property… [yet] the economists do not conclude, “The land to him who cultivates it.” On the contrary, they hasten to deduce from the situation, “The land to the lord who will get it cultivated by wage earners!” [Iain McKay, ed., Direct Struggle Against Capital: A Peter Kropotkin Anthology]
So if it’s correct that inputs cannot be allocated efficiently without a rationally designed property system, then Mises’s economic calculation argument is an indictment of the very capitalist system he sought to defend.
As a secondary matter, Mises’s own understanding of what was entailed by markets in factor inputs or producer goods was less than coherent. He argued that syndicalism would result in calculational chaos because there would be no market in the means of production. And his standard for whether an economy was sufficiently market-oriented for economic calculation was the existence of a stock market. So he conflated markets in actual producer goods with markets in firm equity, even though it’s perfectly possible to have a market in raw materials and machinery without a stock market.
At any rate, it seems plausible at least that a market economy with well-designed property rules — say, with commons-based resource governance, community land trusts, worker-managed firms, and public services set up as stakeholder cooperatives — would function quite efficiently compared to the existing capitalist system.
As to whether market pricing is necessary to rationally allocate resource inputs at all, I find Mises’s categorical assertion less than persuasive. For one thing, although Mises frames his calculation argument around the need to assign values to basic factor inputs for any calculation to take place at all, he lets it slip that his argument shades considerably into Hayek’s argument based on complexity or the volume of information.
Mises himself conceded, in Economic Calculation in the Corporate Commonwealth, that inputs could be rationally assigned (“with more or less accuracy”) between alternative uses, and the effects of changes in the production process assessed, without market prices in a household economy. “…[I]t is possible throughout to review the process of production from beginning to end, and to judge all the time whether one or another mode of procedure yields more consumable goods.”
This, however, is no longer possible in the incomparably more involved circumstances of our own social economy. It will be evident, even in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e., economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location….
…[T]he mind of one man alone — be it ever so cunning, is too weak to grasp the importance of any single one among the countlessly many goods of higher order. No single man can ever master all the possibilities of production, innumerable as they are, as to be in a position to make straightway evident judgements of value without the aid of some system of computation.
So in fact calculation in kind or “in natura” is not logically impossible, as one might gather from the framing of the calculation argument, but becomes a practical problem depending on the volume of information.
There are two implications here. The first is that, if it is indeed a practical problem of the volume and complexity of information, then the advances in cybernetic technology since Mises wrote (he wrote Economic Calculation in the Socialist Commonwealth over twenty years before the first crude vacuum tube computers were built) quite plausibly have some bearing on the possibility of processing that information. In that case it strikes me as likewise plausible that, starting with some ranking of factor inputs in terms of relative scarcity, based on calculations in kind from the previous year’s experience of production, a computerized planning system could achieve some approximation of rationality in allocating inputs between uses.
The second is that the practical issue of calculation is not absolute or qualitative, but one of degree. If we have a household economy in which non-money calculations are clearly possible on the one end of the spectrum, and at the other end a centrally planned economy where it is either impossible or done with a large degree of calculational chaos, the closer the actual state of affairs approaches to the former rather than the latter, the more relatively feasible non-money calculation will become.
But as Iain McKay argued in the Anarchist FAQ (), even communist anarchists by and large consider central planning grossly inefficient, and expect most production to be organized within communes, agro-industrial villages, and the like.
As such, removing the assumption of a central planning body automatically drains Mises’ critique of much of its force — rather than an “the ocean of possible and conceivable economic combinations” faced by a central body, a specific workplace or community has a more limited number of possible solutions for a limited number of requirements. Moreover, any complex machine is a product of less complex goods, meaning that the workplace is a consumer of other workplace’s goods. If, as Mises admitted, a customer can decide between consumption goods without the need for money then the user and producer of a “higher order” good can decide between consumption goods required to meet their needs.
In terms of decision making, it is true that a centralised planning agency would be swamped by the multiple options available to it. However, in a decentralised socialist system individual workplaces and communes would be deciding between a much smaller number of alternatives. Moreover, unlike a centralised system, the individual firm or commune knows exactly what is required to meet its needs, and so the number of possible alternatives is reduced as well (for example, certain materials are simply technically unsuitable for certain tasks).
At this point let me once again restate my agnosticism regarding the comparative efficiency of market pricing of factor inputs and other ways of processing and conveying economic information. I simply regard with skepticism any claims that non-money economic coordination is impossible. And as I’ll argue at greater length below, I doubt that any particular economic model — whether based on market, non-market, or any particular form of coordination — will serve as a monolithic template around which society is organized.
So much for Mises. If some shadow of doubt has fallen across his framing of the calculation problem in terms of how value is assigned to basic inputs, then even more doubt falls, a fortiori, on Hayek’s framing in terms of volume and complexity of information.
So the question of the comparative efficiency of prices and other coordination mechanisms, as conveyors of large volumes of information, becomes one which is highly technology-dependent. And in regard to this issue, I believe that the advocates of non-market coordination mechanisms are correct that more recent generations of cybernetics technology are at least capable of coordinating a working economic system on a rational, functional basis. Whether non-market coordination can process the volume and complexity of data equally well with market pricing is a different question — one on which, again, I am agnostic.
It does seem that there is an increasing set of technical possibilities for non-market coordination. A number of projects use blockchain ledgers for coordination, like Ethereum and Sensorica. While such projects still involve some market elements in assigning value to their production flows, they also to varying degrees use open value accounting systems to assign value based on other judgements as well. In The Ethical Economy: Rebuilding Value After the Crisis, Adam Arvidsson and Nicolai Peitersen survey the possibilities for a model of economic valuation that takes ethical issues into account in ways not done by traditional market pricing methods. Monika Hardy is another person who’s devoted considerable interest to the use of blockchain and other digital mechanisms to coordinate productive activities outside the market.
I am not only an agnostic on the question of which particular forms of coordination are more efficient. I also refrain, as a matter of principle, from prescribing any particular form of coordination or privileging it over alternative forms. I consider myself an anarchist without adjectives, and I think it’s a near certainty that post-state, post-capitalist society will be an anarchy without adjectives. Let a Hundred Flowers Bloom, as the saying goes. Like David Graeber, I am open to whatever expedients that groups of people come up with and agree to, dealing with one another as equals.
However, I will venture a few predictions. I think we can assume that a hundred flowers will, in fact, bloom. There will be an eclectic, ad hoc mix of expedients for ownership and coordination, growing out of the diverse collection of seeds of the future society that are sprouting among us right now. And I believe that markets will almost certainly be one of them, simply because eliminating them would require the establishment of some uniform organizing model that would prohibit or crowd them out as a matter of principle. And I don’t believe post-capitalist society will be organized according to any such template. It will be an emergent phenomenon.
At the same time, I believe market exchange and prices will be a much, much smaller part of the mix than they are now. It strikes me as extremely likely that, in the face of failing state- and employer-based social safety nets, and as rising unemployment and underemployment make direct production for use a necessity, people will increasingly aggregate into larger primary social units like extended family or multi-family compounds, cohousing units, micro-villages and the like. These social units will provide mechanisms for the pooling of risk and costs, along with whatever outside incomes some members bring in, and their members will meet a large share of their consumption units through commonly owned workshops and gardens. Their guarantees of food, shelter, and support against infirmity will be something like the “irreducible minimum” offered by hunter-gatherer groups, as described by Bookchin in The Ecology of Freedom. In this case, a great deal of production will take place outside the cash nexus, and what market does still occur seems likely to involve mostly machinery and other large-scale producer goods beyond the capability of such communities, natural resources, and the exchange of surpluses between the communities.
And stipulating that market exchange will exist as some part of the mix, I think it’s safe to say that the property rules will be far from capitalistic. In the case of land, as Graeber argued, it’s hard to imagine the population respecting anyone’s property claim to a large tract of land they fenced off, being willing to work it for them for wages or pay rent to live on it, rather than just ignoring their claim and living on it and cultivating it for themselves. It’s also hard to imagine an anarchist population reacting to something like a Nestle pumping huge volumes of water out of an aquifer in any other way than forcibly dismantling their operation and telling them never to come back.
The nature of money and credit, likewise, will almost certainly be quite different. Ancap visions of a society in which money is a commodity with a market value — whether precious metals or bitcoin — rather than a simple denominator of value, strike me as especially fanciful. The function of providing credit or liquidity to facilitate the exchange of ongoing production outputs is entirely a matter of flows, and there is no rational basis for requiring the possession of stocks of wealth to issue such flows. And it strikes me as exceedingly unlikely that groups of workers exchanging their outputs would willingly rely on the possessor of stocks of wealth to issue credit to facilitate their exchange, and pay interest, when they could simply advance credit to each other as ongoing flows without any backing.
So in conclusion, I’ll just say I don’t know if an economy could function without money prices and exchange. I don’t know if non-money coordination would be as efficient as money exchange. I don’t know what mix between money and non-money forms of coordination would sort itself out, if people and groups of producers were free to sort it out among themselves.
What we do know is that authority, hierarchy, power differentials, and artificial property rights create irrationality. They create conflicts of interest. They incentivize information hoarding and conservation of effort. So let’s abolish those things, and let people work out for themselves what they want to replace it with. Whatever works will be good.
Mutual Exchange is C4SS’s goal in two senses: We favor a society rooted in peaceful, voluntary cooperation, and we seek to foster understanding through ongoing dialogue. Mutual Exchange will provide opportunities for conversation about issues that matter to C4SS’s audience.
Online symposiums will include essays by a diverse range of writers presenting and debating their views on a variety of interrelated and overlapping topics, tied together by the overarching monthly theme. C4SS is extremely interested in feedback from our readers. Suggestions and comments are enthusiastically encouraged. If you’re interested in proposing topics and/or authors for our program to pursue, or if you’re interested in participating yourself, please email firstname.lastname@example.org or email@example.com.