Has John Roemer resurrected market socialism?

• Author: Wohlgemuth, Michael

John E. Roemer, a leading socialist economist, has recently proclaimed a "Future for Socialism" (Roemer 1994). His book is advertised as being "measured, highly accessible, and most of all compelling." I have come to the opposite conclusions. Roemer's most provocative assertion is his claim to have found "ways of reformulating the concept of market socialism in response to the Hayekian critique" (2). In his attempt to convince central planners as well as communitarians in the socialist camp of the virtues of the market, Roemer indeed goes a long way in accepting the objections that Friedrich A. Hayek and others put forward during the calculation debate of the 1930s. It is helpful to recall the debate on socialist economics from the early warnings of Ludwig von Mises and Havek to the later analyses of Yugoslav and Hungarian market socialism by Svetozar Pejovich or Janos Kornai. These critiques form the background of what Roemer calls the fifth generation" of market-socialist proposals, which he claims lack the defects of those associated with former generations.

Whether this assertion can be substantiated is the central question of this article. First, we must reconstruct Roemer's model of market socialism. Because Roemer leaves important elements of this system unexplained or unconnected, my account can only mirror his eclecticism, but I shall try to avoid unfriendly misreadings. Next I shall describe Roemer's own normative scheme of reference, finding his concept of "equal opportunities" highly ambiguous. Furthermore, whatever the interpretation of equal opportunities, it is hardly reconcilable with the effects that Roemer's proposals for institutional reform must be expected to have. I analyze these effects in the following sections. They all involve substantial obstructions of market competition in different dimensions and can be summarized as evidence of a fundamental conclusion: spontaneous market competition and egalitarian market socialism are as incompatible as Hayek and other critics always believed them to be.

Four Generations of Socialist Miscarriages: The Debates in Retrospect

According to Roemer (1994, chap. 4), the market-socialism debate has now entered its fifth stage. My recapitulation of the preceding four generations of market-socialist ideas and refutations serves a twofold purpose: (1) to show that the debate was a catalyst in the development of Austrian ideas of the market process; and (2) to show the defects of former market-socialist ideas that Roemer now claims to have avoided.

The Calculation Debate

The theoretical deliberations on the economics of socialism began with "the belief that socialism will dispense entirely with calculation in terms of value and will replace it with some sort of calculation in natura based on some units of energy or some other physical magnitude" (Hayek [1940] 1994, 235). This view, traditionally held by European Marxists such as Friedrich Engels or Karl Kautsky, was first challenged by Mises ([1920] 1994). Mises provoked socialist economists to enter the debate with his "impossibility theorem," usually summarized as follows: there is no basis for rational calculations of value if there are no market prices; and there are no market prices without the voluntary exchange of private property rights. Hence, if socialists want to allocate of resources "rationally" -- sacrificing a less-valued opportunity in favor of a more highly valued one in view of consumers' preferences and producers' capabilities -- they cannot at the same time dispense with production goods as objects of market exchange. Only full-fledged capital markets reveal monetary values of production goods and thus provide information and incentives necessary for a rational use of the means of production. One decisive qualification Mises probably considered unnecessary to dwell on at length. Its due consideration by his critics, however, would have avoided many misunderstandings:

The static state can dispense with economic calculation. For here

the same events in economic life are ever recurring.... But... our

economic data are ever changing, so that the static nature of

economic activity is only a theoretical assumption corresponding to

no real state of affairs.... Thus, in the socialist commonwealth every

economic change becomes an undertaking whose success can be

neither appraised in advance nor later retrospectively determined.

There is only groping in the dark. (Mises [1920] 1994, 16)

In addition, appreciating the knowledge problem arising from "the uncertainty of future conditions, which is an inevitable concomitant of the dynamic nature of economic life" (17), Mises clearly foresaw the incentive problems of expropriated socialist actors. Not only the signaling function of market prices but also their controlling and motivating qualities depend on free markets for the exchange of private property. Mises understood that "the exclusion of free initiative and individual responsibility...constitutes the most serious menace to the socialist economic organization" (20).

Perceiving Mises's twofold argument in this way instead of just picking his bluntly stated conclusions -- "Where there is no free market, there is no pricing mechanism, without a pricing mechanism, there is no economic calculation" (17) -- one is compelled to conclude that the replies of socialist economists badly missed the point. They hardly ever considered the incentive problems of planners and producers. Their "possibility theorems" rested on static economic theories in which all circumstances relevant for economic calculation are assumed to be constant and "given." Hence they referred to a utopian state for which even Mises denied a serious calculation problem. Contrary to the declarations of critics and reviewers throughout the subsequent generations, we must conclude that Mises's criticism was not actually refuted. Still, the discussion led to the "realization by socialists that prices must be used for economic calculation under socialism" (Roemer 1994, 28), as expressed by Oscar Lange in his gibing praise: "Socialists have certainly reason to be grateful to Professor Mises, the great advocatus diaboli of their cause. For it was his powerful challenge that forced socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy" (Lange [1936] 1994b, 252).

This recognition led to a second stage of socialist economics characterized by the view that it would be possible to calculate the prices at which general equilibrium would be reached in a socialist economy by solving a complicated system of simultaneous equations -- and so socialism need only await the invention of powerful computers" (Roemer 1994, 28).(1) The equations of general equilibrium as depicted by Leon Walras, Vilfredo Pareto, and Enrico Barone were presented as proof of the possibility of rational socialist calculation. To prove that abstract equations have an equally abstract solution in terms of equilibrium values that ought to guide central planning agencies was not, however, to prove that they could in practice be of any use in the absence of a market for the exchange of property rights. The debate remained as open as ever. Hayek ([1935] 1948b, 153ff) stressed the inadequacy of the metaphor of the Walrasian auctioneer as a description of market processes and as a prescription for planning purposes. Later he summarized his view as follows:

The problem is thus in no way solved if we can show that all the

facts, if they were known to a single mind (as we hypothetically

assume them to be given to the observing economist), would

uniquely determine the solution; instead we must show how a

solution is produced by the interactions of people each of whom

possesses only partial knowledge. To assume all the knowledge to

be given to us as the explaining economists is to assume the

problem away and to disregard everything that is important and

significant in the real world. (Hayek 1945, 530)

Hayek's insistence on recognizing the practical problems of centralizing the knowledge necessary to mimic the workings of competitive capitalism induced Lange to open the third stage of the debate by making some "practical" proposals. Only then did the term market socialism attain some institutional context as a result of "the realization...that actual markets would indeed be required to find the socialist equilibrium -- and this because the central planning bureau could not possibly have the information necessary to make the calculation" (Roemer 1994, 28f). Prices for consumer goods would be set in actual markets; even wages would be determined by decentralized bargaining in real labor markets. "But there is no market for capital goods and productive resources outside of labour" (Lange [1936] 1994b, 260). Here the Central Planning Board (CPB) would replace market transactions, conducting a procedure of trial and error analogous to the tatonnement of the Walrasian auctioneer (259ff.).

It would start by decreeing randomly chosen prices for the collectively owned producer goods. All managers ("assumed to be public officials" [260]) are instructed to set output so that price equals marginal cost, taking the prices of inputs and of their products as given; hence firms are mandated to act as if they were suppliers under perfect competition. The CPB now checks whether any shortages or surpluses of factors and goods exist and corrects its errors by new trials, altering prices until it finds the market-clearing ones. Thus, Lange argues:

The Central Planning Board performs the functions of the market.

It establishes the rules for combining factors of production and

choosing the scale of output of a plant, for determining the output

of an industry, for the allocation of resources, and for the

parametric use of prices in accounting. Finally, it fixes the prices so as to

balance the quantity supplied and...