Devine and Adaman - the Economic Calculation Debate - Lessons for Socialists

8/3/2019 Devine and Adaman - the Economic Calculation Debate - Lessons for Socialists

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524 F. Adam an and P. Devine

This paper offers an explicit response to the modern Austrian challenge. Section 2briefly rehearses the standard account and evaluates the claim that if the debate isinterpreted as having taken place within a neoclassical framework then neoclassicalmarket socialism won. It then considers the Austrian renaissance in the 1980s, with itsemphasis on discovery and entrepreneurial activity and its claim mat such activity mustnecessarily be based on private ownership. It is this claim that underlies the renewedAustrian challenge to the very possibility of socialism. While neoclassical marketsocialism may have successfully rebutted the original Austrian challenge interpretedwithin a neoclassical framework as relating to rational calculation and incentives, it isirrelevant as a response to the modem Austrian challenge based on the learning anddiscovery aspects of the market process.

In addition to the Austrian and neoclassical market socialist contributions to theoriginal debate there was a third strand, Dobb's contribution, which is discussed inSection 3. Dobb claimed that die decentralised models of the neoclassical socialists didnot capture the essence of socialism since they did not incorporate planning. He stressedthe unavoidable uncertainty associated with atomistic decision making, especially inrelation to investment, and argued diat the neoclassical socialist models were asvulnerable to the weaknesses ofex post as opposed to ex ante coordination of investmentdecisions as was any capitalist economy. However, Dobb's contribution was peripheralto the main debate and the force ofhis argum ent has subsequently been weakened by itsassociation with the Soviet model of central planning.

Section 4 draws some lessons for socialists from the calculation debate, both diehistorical debate and its recent revival. It suggests that although the modern Austriananalysis correctly emphasises the importance of tacit knowledge, its advocacy ofcapitalism as die only effective way of mobilising such knowledge fails to confront

satisfactorily the insights of Dobb's contribution concerning the inefficiencies of atom-istic decision mak ing. D ob b' s analysis, however, fails to recognise d ie imp ortanc e of tacitknowledge and this failure makes his advocacy of central planning unconvincing as its tands.

One guise in which die Austrian socialist referred to by Kirzner in the openingquotation might appear is as an Austrian, as opposed to a neoclassical, market socialist.This possible 'Austrian market socialist' response to die modern Austrian challenge iscons idered in Section 5 and rejected on two gro und s. First, it seeks to simulate capitalismon die basis of state-owned property activated by entrepreneurs in the context of marketforces, and the conditions diat have to be met to achieve this are such as to renderdie retention of formal state ownership artificial and redundant. Second, and moreimportantly from our point of view, as with all Austrian approaches it necessarily fails toaddress the issues raised by Dobb.

Section 6 sets out our explicit response to the modem Austrian challengea model ofparticipatory planning. In it we contest the view that the discovery of tacit knowledge ispossible only dirough entrepreneurial activity in the market process and argue diatparticipatory planning would promote die discovery and social mobilisation of dispersedtacit knowledge more efficiendy. We dien set out die prerequisites for participatoryplanning and provide an oudine of an institutional framework through which a processof negotiated coordination might occur.

Our conclusion, in Section 7, is diat it is a mistake to regard centralised command

planning and market forces as the only ways of coordinating economic activity. TheAustrian insight into the nature of knowledge and Dobb's insight into the nature of

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The economic calculation debate 525

market forces, taken together, point to the superiority of a cooperative as opposed to acoercive or competitive process for promoting discovery.

2. The standard account and the modern Austrian response

According to the standard account, as Lavoie (1985) shows in his comprehensive survey,the first stage of the debate consisted of the Mises (1920) challenge that rationaleconomic calculation is theoretically impossible under public ownership. However, itthen emerged that this challenge had already been refuted by Barone (1908), with theimplication that Mises had either ignored or been unaw are of Baro ne's con tribution. Th esecond stage of the debate, in the standard interpretation, then took the form of Hayek's(1935A) retreat to a second line of defence, based on practical objections to thecomputational and informational problems involved in solving Barone's simultaneousequations. The third stage was associated with the name of Lange (1938), whodefinitively disposed of the alleged practical impossibility of rational calculation under

public ownership by developing a decentralised market socialist model within aWalrasian framework.

Lange's pioneering model has since been modified and fine-tuned, so that there nowexists a wide range of decentralised procedures, differing in their informational require-ments, computational algorithms and the environments within which they can operateefficiently. In these models, prices or quantities are adjusted, or firms' production sets areapproximated, by an iterative procedure that is accomplished within a pseudo-marketme chan ism , and all these mo dels can be shown to replicate the efficiency (Paretooptimality) property of the theoretical neoclassical capitalist economy (see, e.g.,Hurwicz, 1974; Vohra, 1 987).

The earlier models, however, do not address intra-firm organisational problems, sincefirms are treated as 'black boxes'. Once input is supplied output is obtained, with noconsideration of 'shirking' or the costs of monitoring and contract enforcement. Morerecent models seek to overcome this naive conceptualisation by recognising that shirkingmay be partially overcome by supervision and that the 'principal-agent' problems thatarise when firms are run by a managerial body rather than by their beneficial owner(s)may be partially dealt with by monitoring and incentive schemes. It is important to note,however, that these problems are structurally the same whether the owner is the PlanningBureau in a market socialist system or the stockholders in a corporate capitalist system.Given this symmetry between a neoclassical corporate capitalist and a neoclassicalsocialist economy, any mechanisms devised to deal with the problems generated by aprincipal-agent relationship give exactly the same power (or lack of power) to theprincipals of both systems to induce their agents not to act game-theoretically (see, e.g.,Bergson, 1978; Pak-Wai Lui, 1986; Radner, 1986).

The re remains the question as to whether the Planning Bu reau would be as motivatedas stockholders in designing and implementing these schemes. The findings of portfolioand capital market theory suggest that there is no convincing theoretical support for theargument that private property has intrinsic efficiency claims in this regard that areabsent in the case of public property. While individual voters will have difficulty inactively monitoring the Planning Bureau, dispersed shareholders will tend to 'free-ride'rather than actively monitor managers. Although the discipline exerted by the capital

mark et in a capitalist econ om y is absen t in a socialist econom y, the eviden ce suggests tha tcapital markets are inefficient. One response to this has been to propose intermediary

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526 F. Adaman and P. Devine

institutions to monitor management on behalf of shareholders, but this course of actionis equally available in a socialist economy (see, e.g., Fam a, 1977; Stiglitz, 1985; Bardhanand Roemer, 1992).

Thu s, if the calculation debate is interpreted as having taken place within a neoclassicalframework, neoclassical market socialism should indeed be declared the victor. Thereis no theoretical justification for the claim that private ownership is a necessaryprecondition for an efficient economic system. However, this standard interpretationhas been vigorously contested by the Austrian rejoinder of the 1980s (see, e.g., Vaughn,1980).

Lavoie (1985) argues strongly that the discovery and learning aspects of the marketmechanism that are central to the modern Austrian school had already been discussed inthe early contributions of Hayek and Mises in the 1920s and 1930s, with the implicationthat there was no retreat by the Austrian camp during the historical debate. On thisreading, the neoclassical socialist school of the 1930s misinterpreted the basic conceptsused by the Austrians, casting them within a Walrasian paradigm, andipso facto missed

the point. Kirzner (1988), on the other hand, insists that the Austrian approach shouldbe seen as having been developed through the calculation debate, and that itscrystallisation became apparent only after the 1930s. His readingis that Mises and, in hisearly writing, Hayek had not clearly conceptualised their position and differentiated itvis-a-vis that of the neoclassicals, and hence that they invited their opponents to interpretthe Austrian challenge as based on computational and, to a lesser degree, motivationalgrounds. The neoclassical responses based on this interpretation (i.e., Lange-typedecentralised solutions), according to Kirzner, then led the Austrian economists to clarifytheir analysis of the dynamic aspects of markets as processes of discovery and learning.

Whichever reading of the historical calculation debate is preferred, there is general

agreement that the focus of modern Austrian analysis is not the allocation of limitedresources with alternative uses among unlimited wants but the market processitself, theways in which dispersed and fragmented tacit knowledge about an econom ic world thatis continuously changing is socially mobilised through rival entrepreneurial activities.Thus, the means-end nexus of economic life in the Austrian setting turns out to be notgiven but subject to creative hum an action'a voyage of exploration into the unknow n'(Hayek, 1945, p. 101).

Within these discovery and learning processes, the Austrian view underlines the vitalrole, or roles, assumed by the entrepreneur. The Misesian-Kirznerian entrepreneur playsan equilibrating role by detecting and exploiting what others fail to notice, while theSchumpeterian entrepreneur plays a disequilibrating role by innovating new productionsystems (Schumpeter, 1942; Mises, 1940/1963; Kirzner, 1973).' As many commen-tators have noted (see, e.g, Barry, 1984), in die Austrian vision the concepts ofentrepreneurship and rivalry replace the neoclassical concept of the Walrasian auctioneeradjusting the prices to which economic agents respond in an automated way.2 Under-lying this change is a fundamental difference in understanding of the nature ofinformation, with the Austrians insisting that knowledge cannot be objectified, codifiedor transferred, but must rather be discovered in the course of entrepreneurial activity in

1 Here we follow the traditional Mises-Kirzner/Schumpeter line as opposed to the anarcho-Austrianapproach of Lachman; for recent discussions, see Boehm (1992) and Vaughn (1992).

2 Although for the most part Austrians do not discuss recent neoclassical models addressing theprincipal-agent problem, their vision renders these models also largely irrelevant since they are based onobjectifiablc knowledge, albeit asymmetrically distributed.

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The economic calculation debate 527

the market process. Only through knowledge which is revealed during this marketprocess is the participant able to surpass the limits of her/his ignorance. As Lavoie putsit: 'Like verbal conversation, the dialogue of the market depends on the specificgive-and-take of interaction, a creative process of interplay in which the knowledge that

emerges exceeds that of any participants' (Lavoie, 1990, p. 78, emphasis added).Th ese epistemiological stand points draw a very distinctive frontier between theAustrian and neoclassical perspectives. Hence, while neoclassical market socialism mayhave successfully rebutted the original Austrian challenge interpreted within a neo-classical framework, it turns out to be irrelevant as a response to the modem Austrianchallenge based on the centrality of tacit knowledge and the learning and discoveryaspects of the market process.

One possible response to the modern Austrian challenge would be to design theAustrian socialist model for which Kirzner, tongue in cheek, says he is waiting. MostAustrians would object to such a project, on the basis that market economic institutionsare necessarily dependent on private property rights. However, since the neoclassicalliterature on portfolio and capital market theory cited above suggests that a necessary linkbetween private property and market incentives cannot be convincingly established, andsuch a link has not been demonstrated by Austrian economists either, the Austrianmarket socialist project cannot be ruled outa priori. Before discussing this possibility,however, the position of Dobb, the third contributory party to the debate, will bepresented.

3. Dobb's contribution to the economic calculation debate

Dobb's crucial contribution to the economic calculation debate was to insist that thedefinition of socialism as an economic system should not be confined to a change in thelegal ownership status of the means of production but should also embrace economicplanning. He argued that the neoclassical economists on the socialist side werepreoccupied with the static issue of the allocation of given resources among alternativeuses and paid little or no attention to dynamic issues (Dobb, 1935A,B, 1937, 1939,1953, 1960, 19 69; see, also, Ad am an, 1993). W iden ing the analysis from the static to thedynamic dimension is of great importance in Dobb's perspective. As he put it, oncedynamic considerations are taken into account 'an atomistic market economy will beessentially short-sighte d' owing to the narrow horizon ofa firm's vision necessarily set by

'uncertainty as to what the macroscopic constellation ofthe economy is likely tobe at future dates'(D obb , 1969, p. 148, emphasis add ed). Only planning, according to Do bb, cou ldovercome this short-sightedness.

For Dobb, the advantages of planning on the production side are threefold. First,where there are close interconnections among different sectors and industries it is mucheasier to coordina te decisions before they are imp lem ented than after. Similarly, plannin ghas the ability to embrace the wider social effects of production that fall outside theprivate calculations of atomised decision-making units. These wider effects Dobbidentifies as, inter alia, the influence of the development of one industry or sector on thepossibilities for other s, joint dem and and supply, the infrastructure, infant industries, a nd

the existence of substantial indivisibilities in capital equipment.Second, through planning it is possible to overcome the uncertainties which are'inherent in production for a market when each autonomous decision is necessarily

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"blind" in part with respect to related decisions' (Dobb, 1935A, p. 535), thus minimis-ing time-lags in adjustment. In this context, Dobb points out that the consequence ofex post coordination are particularly severe in relation to investment decisions:

[FJirstly, because fixed investment is concerned with crystallising labour and resources in durableforms, so that once this has been undertaken the process of 'revision' of initial decisions bysubsequent shifts in market prices can operate only after a considerable lapse of time; secondly,since current investment by changing both productive capacity and employment can exercise animportant influence upon market prices. (Dobb, 1960, p. 6)

Thus, he concludes that taking decisions concerning major economic activities in acoordinated way and in advance of any commitment of resources would overcome thelikely occurrence of fluctuations and bottlenecks, and hence would increase economicefficiency.

Third, things which figure as 'data' in the static problem can be converted throughplanning into 'variables' in a dynamic framework. Among these decisions Dobb counts:the rate of investment; the distribution of investment between capital goods andconsumer goods industries; the choice of techniques; the regional distribution ofinvestment; the relative rates of growth of transport, fuel and power, and agriculture, inrelation to industry; the rate of introduction of new products and their character; and thedegree of standardisation or variety in production that the economy at any stage of itsdevelo pm ent feels able to afford (D ob b, 195 3, p . 77et seq.).

Dobb also indicates the need for planning in consumption, in order to deal with issuessuch as collective wants, external economies of consumption, and complementarity incons um er dema nd. In sum mary , the planning of produ ction and consu mp tion, accord-ing to Dobb, would make possible the overcoming of the imperfections of knowledgenecessarily associated with the market process. It is this dimension that Dobb argued forduring the debate, insisting that the need for planning was as valid in relation to theiterative models of the neoclassical market socialist school, based on mimicking theworking of a capitalist economy, as it was in relation to the capitalist economyitself.

We consider Do bb 's analysis to be of fundamental impo rtance for an unde rstanding ofthe capitalist economic system and the design ofa model of socialist planning. However,it is important to remember that Dobb's view of knowledge was essentially the same asthat of the neoclassical school. In arguing that the uncertainties necessarily associatedwith the atomistic decision m aking that lies at the heart of the opera tion of market forces

could be overcome through ex ante planning and coordination he assumed that majorinterconnections and interdependencies would be objectively known. Hence he failed totake account of the Austrian insight into the subjective and tacit nature of knowledge.

4. Lessons from the economic calculation debate

The static nature of the neoclassical contribution to the calculation debate has beencriticised by both the modern Austrians and Dobb, albeit clearly from different angles.Since the decentralised and uncoordinated organisational form of a market economyinevitably gene rates imperfections of know ledge, Dob b em phasised the desirability ofcoordinating economic activity in advance through planning. However, he perceivedthese imperfections as having a technical nature and argued that they could be relatively

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easily corrected by a Planning Bureau. He thus failed to take account of the Austrianinsight regarding the tacit nature of knowledge and the processes of learning anddiscovery.1

According to the Austrian vision, on the other hand, the crux of the matter of

economic calculation is the fact that dispersed knowledge exists only in a tacit form,waiting to be discovered by active participants vying to outstrip one another in theprocess of searching out attractive buying and selling opportunities and creating newproduc ts and prod uction processes. W hen the issues with which Do bb w as concerned areraised, the Austrian school does not deny that theex post coordination of the marketmechanism produces these effects, but argues that this is inherent in the nature ofeconomic reality. As expressed by Kirzner(1973, p. 232): 'To describe the competitiveprocess as wasteful because it corrects mistakes only after they occur seems similar toascribing the ailment to the medicine which heals it, or even blaming the diagnosticprocedure for the disease it identifies.'

Thus, both Dobb and die Austrian school were almost totally occupied during thedebate with a critique of the neoclassical socialist school an d, as suc h, they did n ot reallyconsider one another's respective visions (with die exception of an early exchangebetween Hayek (1935A) and Dobb (1935B)). What has emerged from our evaluation isthat we have identified two sources from which imperfections of knowledge arise: first,the tacit nature of dispersed knowledge, as argued by the Austrian school, with theconsequence that knowledge cannot be transferred, objectified or codified; and, second,the decentralised and uncoordinated form of a (real or pseudo) market economy, whichleads Dobb to advocate central planning in order to replaceex post by ex antecoordination (see Ad am an, 19 93).2

The Austrian approach recognises both sources of imperfection, but does not acceptany need to address the second type.Ex ante coordination of economic activity,according to this school, is an impossibility, since planning as a way of controlling andcoordinating entrepreneurial activities necessarily brings about the loss of agents'autonomy, and hence the potentiality for them to discover their tacit knowledge and putit to use. However, although the Austrian analysis correctly emphasises the importanceof tacit knowledge, its advocacy of capitalism as die only effective way of mobilising suchknowledge does not deal with the insights of Dobb's contribution concerning theinefficiencies of atomistic decision making. Dobb, on the other hand, while insisting ondie need to deal with die consequences of atomised decision making, fails to recognisedie imp ortan ce of tacit knowledge and this failure m akes his advocacy of central planning

unconvincing as it stands.In our view, the lesson for socialists from the calculation deb ate is m at a ttention should

be focused on die possibility of combining planning widi the articulation of tacitknowledge. In this context, we start by asking whether an Austrian market socialism isfeasible and, if it is, whether it is desirable in the sense of successfully incorporating dieinsights of Dobb as well as those of die Austrians.

1 The neoclassical school, from the 1960s onwards, has been developing 'long-term' models whichincorporate many of the issues raised by D obb (see, e.g., Heal, 1973). They share with D obb the neoclassical

epistemologjcal stance, namely that knowledge is objectifiable, codifiable and transferable.2 By imperfections of knowledge here we do not mean the asymmetric distribution of objectively givenknowledge, but a situation in which knowledge of the outcome ofa given action can only be discovered oncethe action has been taken.

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5. Austrian socialismfeasible and if so desirable?

Could the conflict alleged to exist within the Austrian framework between stateownership and entrepreneurship be resolved, or are these two concepts necessarilycontradictory to each other within that framework? An early attempt to replace the'socialist manager' by the 'socialist entrepreneur' is found in Liska's model, based on theleasing of state-owned production units to private entrepreneurs through competitivebidding. Although nobody can appropriate the ownership of a production unit, sinceboth the existing means of production and new investment are in the hands of the state,the highest bidder can acquire control of it and use it to pursue the most profitableopportunities he/she perceives. In the case of subsequent overbidding, the operatingentrepreneur must either accept the higher valuation or leave the business to theoverbidder (Liska, 1963; see also Barsony, 1982; Varga, 1982; Macrea, 1983; Nuti,1988A,B, 1990). Liska's emphasis is on the 'human assets' of entrepreneurs, which arein the end manifested as a residual surplus that belongs to the entrepreneur. Hence his

model can be seen as a design for the use of state-owned production units in anentrepreneurial way.Liska's model seems to cover only the better utilisation of existing production units,

paying no attention to the question of innovation and new investment. Brus and Laski,however, adopt a more fully developed Austrian approach, as is evident in their critiqueof the Lange model:

The neoclassical theory, and consequently the [Lange model], takes thetaumnement mechanismwith the auctioneer as a justified abstract generalization of an actual process occurring in a marketeco nom y. H ow ever, . . . the Wa lrasian m odel overlooks the true central figure of the capitalistsystem, namely the entrepreneursensu strtcto. Formally there are entrepreneurs in the Walrasian

model, but they behave like robots, minimizing costs or maximizing profits with the data given.Their behaviour is that of pure optimisers operating in the framework of exclusively passivecom petition, reduc ed to reactive adjustment of positions to an exogenous chan ge. (Brus and Laski,1989, p. 57)

In their model of 'market socialism proper', Brus and Laski face the issue of innovationand new investment head on, seeking to combine 'state ownership in one form oranother' with 'full independence of firms and true entrepreneurship' by introducing acapital market alongside product and labour markets (Brus and Laski, 1989, pp. 105 and132).

This line of reasoning appears to provide what Kirzner has been waiting for, since theneed to foster entrepreneurial activity is explicitly recognised and mechanisms to achievethis within a public ownership environment are built into the model. Thus, although noone has yet labelled herself/himselfas an 'Austrian socialist', there seems to be no logicalbarrier to using Austrian premises in designing an economy based on public ownership.Not surprisingly, however, the conditions that have to be m et to achieve this are such asto render the retention of formal state ownership both artificial and redundant. Indeed,Brus and Laski themselves end by raising the question ofwhy have state ownership at allin such a model (Brus and Laski, 1989, p. 146et seq.). Thus, while the model may belogically possible, the question remains as to whether it is economically coherent.

Furthermore, even if it is accepted that this approach refutes the modern Austrianchallenge that socialism is logically impossible, by showing that learning and discoveryprocesses (and thus the articulation of tacit knowledge) can be combined with public

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ownership, the question of desirability still needs to be considered. The Austrian marketsocialist approach aims to replicate capitalism on the basis of state-owned propertyactivated by entrepreneurs in the context of market forces. However, it fails to addressthe issues raised by Dobb and therefore it does not meet our test of desirability, dennedas the incorporation of the insights of both the Austrians and Dobb.

The following section, on the other hand, attempts to give an explicit response tothe modern Austrian challenge by setting out the framework of an economicorganisation, which we call participatory planning, in which the two insights areeffectively incorp orated and th e discovery and social mo bilisation of dispersed knowledgeare more efficiently promoted than in either Austrian capitalism or Austrian marketsocialism.1

6. Participatory planning2

Dobb's insight into the necessary imperfection of knowledge associated with atomistic

decision making and the Austrians' insight into the tacit nature of knowledge are bothpowerful. At a technical level, Dobb identifies the fundamental systemic problem ofcapitalism (and also of market socialism; see Devine 1992), while the Austrians identifythe fundam ental systemic problem of centralised administrative c om m and planning (andalso of neoclassical market socialism). Yet Dobb's advocacy of central planning fails toaddress the Austrians' insight, and the Austrians' advocacy of the capitalist market failsto address Dobb's insight. Participatory democratic planning (unlike market socialism)offers a way of combining the two insights (Adaman, 1993).

The Austrian school recognises the imperfections of knowledge arising from both tacitknowledge and ex post coordination. It identifies market processes activated by entre-preneurs as the way in which tacit knowledge is discovered and mobilised, but holdsthat ex post coordination and the problems arising from it must be accepted, sinceplanned coordination ex ante is impossible. Dobb recognises the imperfection ofknowledge arising from ex post coordination and argues that it can be overcomeby planned coordination ex ante. However, he does not recognise the tacit natureof knowledge and his model of planning is based on the neoclassical assumption ofgiven data.

The participatory planning alternative seeks to combine planning with the articulationof tacit knowledge. At first sight, such a task seems impossible. Planning, for Dobb,involves restrictions on the autonomy of enterprises and hence affords little scope foreconomic agents to participate actively in decision-making processes in order to discoverand articulate their tacit knowledge. Yet the way in which the Austrians understand theprocess of discovery and articulation categorically rules out planning. The contradictionarises, however, because in neither context are there institutions that facilitate partici-pation. Instead, people are subject to the coercive power of either administrativecommands from the hierarchically organised planning mechanism or market forcesoperating with inherently unpredictable and unintended consequences.

Democratic participatory planning is envisaged as a process in which the values andinterests of people in all aspects of their lives interact and shape one another throughnegotiation and cooperation. In the course of this process tacit knowledge is discovered

1 Other models of participatory planning have been developed (e.g. Albert and Hahnel, 1991) but none

of them adequately addresses both the Austrian critique based on the subjective and tacit nature ofknowledge and Dobb's argument for theex ante coordination of investment.2 This section draws on Adaman and Devine (1994) and Devine (1992).

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and articulated and, on the basis of that knowledge, economic decisions are consciouslyplanned and coordinated. Before oudining a model of participatory planning, however,two prerequisites should be noted.

First, if participation in the social process of discovery is to be real, people m ust haveaccess to the necessary material and personal resources and opportunities. Thishighlights a striking paradox in the Austrians' position. While insisting on the universalimportance of tacit knowledge, they also insist that such knowledge can only bediscovered by entrepreneurs comp eting in a market process based o n private ow nership.This necessarily excludes the tacit knowledge of non-entrepreneurs from the socialproce ss of discovery an d mo bilisation. It follows that if Kirzn er's criterion for judging theefficiency of institutional arran gem ents ('their ability to pro m ote d iscovery'1) is adopted,there is a prima facie case that market processes based on private ownership are sociallyinefficient. A set of institutional arrangements that generalises access to the socialprocess of discovery would not only be more democratic and more just but also moreefficient.

A clarification may be in ord er here . One interpretation of the Austrian po sition is thatanyone who is alert to the possibility of new opportunities and through action discoverswhether her/his perceptions and expectations are realised is an entrepreneur. Thus, onthis interpretation, workers participating in a firm's internal activities might qualify asentrepreneurs. However, both the historical and the modern Austrian critiques of thetheoretical possibility of socialism are based on the premise that state ownership and themarket process are incompatible, with the consequence that for modern Austrians it isthe absence of private ownership that makes discovery through entrepreneurial partici-pation in the 'dialogue of the market' (Lavoie, 1990, p. 78) impossible. On this secondinterpretation, entrepreneurship is denned as active participation in the market processby privately-owned enterprises acting independently of one another, and entrepreneursare those who control the enterprise and decide how it will engage in that process. Sincecapitalist enterprises are controlled either by owner managers or by corporate managersaccess to the social process of discovery is therefore narrowly restricted.

The second prerequisite for participatory planning is that decision makingat all levelstakes place through a participatory process involving all those affected by the decision.This contrasts sharply with the Austrian position, in which participation is confined tothe micro level. For Austrians, this is not a matter of choice but a necessary fact of life.As Hayek put it:

The main point of emphasis is that the conflict between, on the one hand, advocates of the

spontaneous extended human order created by a competitive market, and on the other hand thosewho demand a deliberate arrangement of human interaction by central authority based oncollective command over available resources, is due to a factual error by the latter about howknowledge of these resources is and can be generated. (Hayek, 1988, p. 7)

How ever, it is mere as sertion to s tate that social processes of discovery can only take theform of rivalrous behaviour in markets based on private ownership. Participatoryplanning at each level of decision making would enable knowledge of previouslyunarticulated interests, possibilities, and interdependencies to be discovered andarticulated, through a process of social interaction among those affected.

1 'Instead of judging policies or institutional arrangements in terms of the resource-allocation pattern theyarc expected to produce (in comparison with the hypothedcally optimum pattern), we can now understandthe possibility of judging them in terms of their ability to promote discovery* (Kirzner, 1988, p. 13).

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changes in an enterprise's capacity would arise as a result of its performance relative tothat of other enterprises in the industry and/or as a result of an imbalance betweenindustry supply and demand.

In capitalist economies changes in capacity and the structure of productive assets come

about not through market exchange but as a result of the operation of market forces,through individual enterprises acting atomistically in response to their perceptions ofprofit opportunities and engaging in investment or disinvestment. In the neoclassicalvision this is a purely passive response; in the Austrian vision it involves entrepreneurialactivity and the process of discovery integrally associated with it. In our model ofparticipatory p lanning market forces are replaced by a process of negotiated coordinationamong those who would be affected by changes in capacity and the structure ofproductive assets. This would take place in what can be called negotiated coordinationbodies, made up of representatives ofthe stakeholders, the social ow ners, comprising theset of affected interests. The negotiated coordinated body for each industry or sectorwould include: all the enterprises in the industry; customers, i.e., consumer organis-ations, government agencies, or major user industries; major supplying industries; thesections of the global, national or regional planning commission concerned withinnovation, new investment and regional distribution; and other groups w ith a legitimateinterest in the set of decisions at issue.

Negotiated coordination bodies would be responsible for deciding what changes in thecapacity of their industry were desirable, how they should be achieved, and howdifferential performance among enterprises in the industry should be dealt with. Theywould have three sorts of quantitative information available to them: first, accountingdata on the performance of each enterprise, generated by the use of their existing capacity(i.e., by market exchange); second , estimates of expected changes in demand or costs in

relation to existing activities; third, estimates of expected demand and costs in relation topotential product or process innovations. They would also have available to them twosorts of qualitative information, supplied by the representatives of the different interestsparticipating in the negotiation process: first, judgements about the reasons underlyingdifferential performance by enterprises; second, the views of those affected about theeconomic and social situation prevailing in the communities and regions in whichinvestment or disinvestment might occur, the priorities for regional distribution agreedthrough the democratic political process, and the concerns of other interests represen ted.

The crucial distinction between theuse of existing capacity and changes in capacity hasbeen crystallised by disaggregating the concept of the market intomarket exchange (use

of existing capacity) and the operation ofmarket forces (the way in which changes incapacity occur in the market mechanism). The model of participatory planning we haveoud ined retains market exchange, bu t replaces market forces by die process of negotiatedcoordination. Thus the problem of 'too many meetings' often raised in relation toparticipatory models does not arise with the same force that might apply if it were beingproposed to replace market exchange by the negotiatedex ante coordination of alltransactions.1 Furthermore, the amount of time spent in meetings in modern capitalisteconomies should not be underestimated. North (1984) has suggested that in theadvanced capitalist countries as much as half of GNP may be accounted for by

1

It is the failure to appreciate this that leads Blackburn (1991) to develop a critique based on afundamental misunderstanding of the model being proposed. For a response to Blackburn's critique, secDevine (1992).

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The econom ic calculation debate 535

transactions costs arising from increasing division of labour and organisational comp lex-ity, and the growth of alienation, self-interested behaviour and policing associated withantagonistic social relationships. Participatory plann ing based on social own ership w ouldenable the articulation of tacit knowledge and the process of discovery to be combinedwith the planned ex ante coordination of interdependent investment decisions. It wouldtake place in an institutional context which promoted cooperation and the recognition ofinterdependent common interest rather than individualistic self-seeking behaviour.

A central principle of the model is openness of information. All the availableinformation relating to enterprises would be publicly available. Given the cross-cuttingrepresentation of affected interests on enterprise boards and negotiated coordinationbodies, information bias and principal-agent problems would be minimised. Regularaudits would provide accounting information on the use being made by each enterpriseof the part of society's productive assets entrusted to it. The decision-making processwould be informed by the input of all parties to the negotiation, in the course of whichtheir latent tacit knowledge would be discovered and mobilised. As part of this process,past decisions would be evaluated in the light of their outcomes, mistakes would becorrected, impossibilities and new possibilities would be discovered, and learning wouldoccur. Thus, while interdependent decisions would be coordinated as far as possibleex ante, through a process of negotiation that enabled discovery and learning beforeresources were committed, implementation would result in further discovery andlearning ex post that would enable subsequent correction in the next round of decisionmaking. However, these integrated processes ofex ante and ex post decision makingwould be based on cooperative negotiation rather than coercion or competition.

In summary, a model of participatory planning through negotiated coordination,based on social ownership, allows the insights of both the Austrians and Dobb to be

taken into account. Tacit knowledge is discovered and mobilised, interdependentinvestment decisions are planned and as far as possible coordinatedex ante, andgeneralised participation enables the social process of discovery to be accom plished mo reefficiently than in either administrative command or capitalist economies.

7. ConclusionWe have argued that if socialism is defined as state ownership of the means ofproduction, both neoclassical and Austrian market socialism are theoretically possible intheir own terms. However, we rejected neoclassical market socialism because of itsvulnerability to the insights of both the Austrians and Dobb into the sources of

imperfections of knowledge. We rejected Austrian market socialism because of itsvulnerability to Dobb's insight, and also Dobb's model of central planning because of itsvulnerability to the Austrians' insight. Finally, we identified participatory planning as aprocess that incorporates both insights, noted two prerequisites for such a process, andoutlined a possible model of participatory planning.

T h u s , the theme of this paper has been that the economic calculation debate can stillprovide important insights for thinking about whether a socialist economy is possibleand, if so, how it might be organised. The intellectual climate of our postmodern agediscounts the possibility of purposeful, rational human action. Planning, understandably,has come to be associated with grand designs gone wrong. The sobering experience ofthe Soviet experiment has reinforced Hayek's judgement of socialism as 'The FatalConceit ' and his advocacy of a more modest 'spontaneous extended human order'(Hayek, 1988, p. 7).

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However, the lessons of the calculation debate for socialists are misspecified if they arepresented as establishing the need to choose between 'collective command' and'spontaneity'. By drawing on the Austrian insight into the nature of knowledge, andcombining it with Dobb's insistence on the benefits of planning, socialists may be able torediscover and reinforce their underlying belief in the ability of people to create aself-governing society of self-activating subjects. The key to any future that socialism mayhave is likely to be found in the combined concepts of participatory democracy andparticipatory planning.

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Devine and Adaman - the Economic Calculation Debate - Lessons for Socialists

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