The Review of Economic Studies Ltd.

Economic Theory and Socialist Economy: A Reply Author(s): Maurice Dobb Source: The Review of Economic Studies, Vol. 2, No. 2 (Feb., 1935), pp. 144-151 Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/2967561 . Accessed: 07/05/2011 06:03
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=oup. . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Oxford University Press and The Review of Economic Studies Ltd. are collaborating with JSTOR to digitize, preserve and extend access to The Review of Economic Studies.

http://www.jstor.org

Economic

Theory

and

Socialist

Economy

A Reply
in the last issue of THE REVIEW OF ECONOMIC STUDIES1, very well expresses the dangers in comparisonsbetween a socialist and a capitalist economy, which it was the intention of my original article in the Economic Journal to emphasise. " Where the concepts have not been sufficientlyrefined, where a complex thing appears simple, there will be transferred from the capitalist to the socialist society institutions and organisations which find themselves in conflict with their environment." " Differences have to (be) detected which were not seen previously because for the previous purposes they were irrelevant." Precisely for this reason, and a fortiori for the reason that a socialist economy is not only something unfamiliar to economists but something still in the realm of historical becoming and as yet only to be imperfectly conceived, I believe that the differences between the two must be emphasisedbeforeone has any hope of correctlyformulatingany true similarities which may exist. If the " dialectical system " to which Mr. Lerner refers has an application here, it is surely this, and not the mere triadic pigeon-hole device which he makes of it ? Mr. Lerner, on the contrary, is primarily concerned to emphasise the similarities between a capitalist and a socialist economy, and the extent to which the latter must be bound by institutions and by laws " transferredfrom the capitalist to the socialist society". Since our ideas on such matters are not without their influence on events, such an emphasis seems likely to have an influence not merely obscurantist but reactionary. It is not without significance, I think, that the most important of those " differences to be detected which were not seen previously" which Mr. Lerner indicates is merely the use of " statistically determined demand curves " constructed " on the assumption that all other prices are constant ". I will not follow Mr. Lerner into his obiterdicta on Trotskyism and the G.P.U. After all, he uses these merely to uncover the " psychological" and not the logical basis of my argument. But in dealing with the central issue between us I am at every point embarrassedby a sense of battling with an invisible opponent. Mr. Lerner is elusive, and I am not at all clear what precise statement he is defending. Naturally, if matters are formulated in a sufficiently formal way, the " similarities" between one economic system and another will be paramount and the contrasting " differences" will disappear. It is the fashion in economic theory to-day for propositions to be cast in such a formal mould, and so devoid of realistic content, that essential differences (such as those between class incomes) disappear, and even the concept of rent no longer has a distinctive meaning. (Because, in Wicksteed's much-praised
MR. LERNER,
1

Vol. II, No.

I, p. 51.

144

ECONOMICTHEORY AND SOCIALIST ECONOMY

I45

statement, a number of variables in an equational system are all alike determined by the " constants ", and if these variables are distinguishedby nothing except their notation, no one is any differently determined from the others.) The distinctive qualities of the laws of a socialist economy and of a capitalist economy, like the contrast between different class incomes, are not, of course, given in the rules of algebra, but in assumptions depending on differences existing in the real world. This should be a commonplace; yet it seems far from common recognition. It is never quite clear whether Mr. Lerner is asserting merely that a socialist economy will need to employ some mode of calculation, and hence utilise the concept of a maximum, or whether he is asserting what is quite a distinct matter: that it will of necessity have to employ a certain concrete system for controlling economic events. It is never clear whether by economic laws he is meaning merely a particulartechnique to be employed by an economist for his calculationsin his mind and at a desk, or a system of relations between men and things, expressing itself in a particular set of " institutions and organisations". If the argument between us has any realistic meaning he must, surely, be maintaining that there exists a necessity for a socialist economy to maintain a process of competitive pricing of commodities on free commodity markets, and for economic planning to be ruled " automatically " (at least in major part) by this objective pricing process. This at any rate was what Mr. Dickinson was maintaining. Yet, while most of Mr. Lerner'sargument asserts no more than the former-that somemode of calculation must be used-he adroitly attaches to it the corollarythat calculation must be harnessed to a particular system of concrete data composed in a particular way. For instance, Mr. Lerner makes the strange statement that " whether it is the consumer himself or whether it is somebody else who decides " (what goods should be supplied), no differenceis made to our theory: " in the formal analysis this person or body now is the consumer". Of course it will make no differencein a " form%l analysis". On a plane of abstraction where consumptioncan be a factor of production (as Wicksteed once suggested) and " consumers" can be made the label for " the personor body who decides," the discussion between us is meaningless. Yet such is the enchantment of algebrathat Mr. Lernerseems unawareof the limitation of his formal analysis; and in the next sentence he parades the corollary: ergo " without the pricing system it is impossible for an economic system of any complexity to function with any reasonabledegree of efficiency". Mr. Lerner's contention seems to be that unless an economic system achieves (or approaches) a maximum, it will be inefficient. To achieve a maximum, the concept of marginal productivity must be employed. Since the concept of marginalproductivity is here no more than part of the definition of a maximum, no one can quarrel with him in this. But what use is it to talk of maxima until one knows what one is maximising ? Mr. Lerneraccuses me of here importing into the argument an irrelevant " transcendental optimum" of which he is innocent. But when one speaks of a maximum in economics, the maximum must necessarily be expressed as a quantum of values; and economic value is not a simple objective quantity like energy or weight or height or any of the things with which the technician deals.
10 Vol.2

146

THE REVIEW OF ECONOMICSTUDIES

(Underlaissez-faireconditions, of course, it played the role of such an objective quantity, but it ceases to do so in the degree that these conditions recede.) Mr. Lerner'sengineeringanalogy is beside the point. In economics there will be n possible maxima according to the n possible price-structureswhich may prevail. Hence, to discuss the relative appropriatenessof alternative pricestructures is inevitably implied in any discussion such as that which Messrs. Dickinson and Lerner have raised. It is rather as though in connection with researchesinto the upperatmosphereMr.Lernerwere to assert the fundamental importance of arriving at a definition of " the top of a mountain " (in terms, for instance, of the slope of the mountain sides) ; and I were to retort that this was of little use until first one had determined which were the tallest mountains. Mr. Lerner would then presumably charge me with introducing the irrelevant concept of " height ". Mr. Lerner would seem to be preoccupied with the case (which he does not mention here explicitly, but to which he has referredin private conversation), where a transfer of resources between two lines of production would result in an increase in the quantity of bothproducts. As long as these conditions prevail, it is true that the concept of maximising the quantum of output is a simple and direct one, and no question of relative valuation arises. But neitlherdoes any question arise of reliance on a pricing system to achieve this maximum. To the problem of maximising (in this context) the output of two products A and B the market valuation of A and B is irrelevant: it is simply a problem of comnparing(with the aid of technical knowledge or experience) a more with a less productive combination of the different factors of production'-of discoveringthe effect on output in each instance of installing additionalmachinesor using morelabour. This is somethingwhich an engineer might tell one, but the economistor the market could not. In the case, however, where the transfer of resources involves the question of an increase of either A or B (and cannot result in an increase of both),then " maximising output " can only mean " maximising the value of output as a whole "; and this has mleaningonly on the basis of a certain scale of relative valuations. The fact that when he spoke of his " non-transcendental" maximum, Mr. Lerner had -in mind only the former case and not the latter is suggested by his statement (p. 53) that his maximum will be attained " if the marginal productivity of all factors bear to each other the same proportionin all industries". Where, however, one is speaking (as Mr. Dickinson presumably was) of a maximum in the sense of equalising the marginal yield of a homogeneous " dose" of resources in all industries, then this can only be expressed in terms of the value of output.
1" The most productive combination " being here defined as that combination of the factors of production, beyond wvhichan increase of any one factor alone will result in a less than proportionate increase of output. The case where the transfer of, say, labour from A to B and conversely of capital from B to A will result in an increase of output in both cases, will be one where there is diminishing returns to additional applications of labour in A and diminishing returns to additional applications of capital in B; or else, diminishing returns to additional applications of the same factor in both industries, but acting more strongly in one industry than in the other. Whether such a situation exists or not is a matter to be judged only on the basis of technical data relating to the industries, and is independent of the market valuation of product A and product B.

ECONOMICTHEORY AND SOCIALIST ECONOMY

I47

Clearly, as determinant of such relative valuations it would be possible to construct a scale of prioritiesentirely a priori: for instance, for the planner to model them on his own preferences. This would be the extreme of authoritarianism. As long as these priorities were successfully applied as the basis of all economic calculations, a perfect " maximum " would be achieved, relative to this priority scale, without the intervention of a market. Contrasted with this stands the method of laissez-faireindividualism,by which the ruling scale of priorities is fixed by the " automatic" determinations of a market. This is what Mr. Lerner describes as " giving people what they want "; and this is what I presume to be meant by a socialist economy being " ruled by a competitive pricing system ". Mr. Lerner'sview of the situation seems to be at the same time too simple and too complex. Too complex because I believe he overestimates the complexity of satisfactorily arriving at what people need by processes of judgment and inference, apart from the directives of a pricing system, in the case of a very large range of commodities-a range within which I should include nearly all basic necessities and probably the majority of the simpler comforts of life. Too simple, because he seems to think in terms of a simple antithesis between authoritarian determination, on the one hand, and completely democratic determination, on the other hand, and too naively to identify the latter with the market system. Actually, there is a large number of possible intermediate positions between the two extremes. (When one's or doctor prescribesa diet for one, is it arbitraryauthoritarianism is it democratic determinationof " what one wants " tempered by expert advice ?) Moreover, I deny that the second of the two alternatives is necessarily a democratic one. Mr. Lernerwould agree with me, I think, in saying that under capitalism it is the reverse of democratic and is in a high degree authoritarian. The masses have dangled before their eyes the illusion of free choice-freedom to have what they want if they had the money-and are then handed over to the rack devised for them by the advertising agent, the commercialsalesman, and the social conventions of a ruling class. Is not Mr. Lerner rather like one who, having adopted the principle that the ballot-box is the essence of democracy, is led to conclude both that any regime employing a plebiscite is democratic, and that every government decision must necessarily be made the subject of a popular vote ? As we know to-day, a Hitler can use a plebiscite and mould it to autocratic ends. On the other hand, would Mr. Lerner in a socialist society deny to the collectivity any influenceon the individual,whether through education, institutions, or the social standards and conventions which these engender? In the question of new wants, the major part of the initiative, even (probablymore) under a market system, must necessarily come from the side of producers, since consumers cannot express a market demand for new commodities until these are made and supplied. Certain wants are only competent to express themselves when done on a sufficiently large scale, i.e., in some collective form; for instance, the choice between a wide range of " varieties " and a narrower range of more standardised but cheaper products.' Again, since all choices are in fact made in time (and only in the
1 In other words, not only is consumers' choice as expressed through a market limited to the alternatives which the producers actually place before them; but when two alternatives are
10*

I48

THE REVIEW OF ECONOMICSTUDIES

economist's abstraction instantaneously) a time-element enters into all individual choices. The time-preferenceof an individual, acting qua individual, may differ considerably from that of individuals thinking and acting as a collective unit. I have heard it suggested that there may be here a sort of Gresham's Law by which short-sighted tastes cumulatively elbow out longsighted. Why at any rate should it be more democratic to " give people what they want " according to the former interpretation than according to the latter ?1 Moreover, one can conceive of a State producing commodities and adhering slavishly to a pricing system in the sale of them, and yet using to the full the devices of the advertisingracket and of social pressureto ensure that the populace " wants" what the State workshops have to sell. Would this be democracy or authoritarianism? Would it not, like Parliamentarism in a class society, be formal democracywith the substance of authoritarianism? On the other hand, are there not methods as or more democratic than the market for ascertaining the wants of the consumer? What, for instance, of the influence of consumers' co-operatives and their local committees or the possibilities of questionnairesto sample opinion ? In the case of new wants it seems probable that such methods might give much greater initiative to consumersthan consumerscan exert to-day. Once distributive inventiveness, at present devoted to making consumersbuy whatever distributorscan profitably sell, were devoted to finding what consumers really required, it seems probablethat a large numberof similarmethods of ascertainingand registering popular choices would be found. I am far from suggestingthat in retail distributionthe method of distributing goods by a pricing system might not generally be the most convenient. Nor do I wish to suggest that the verdict of such a retail pricing system would not constitute an important index of what should be produced. At the same time I believe that it would need to be modified by collective judgments in a large number of cases (e.g., in questions of new wants, in decisions concerning standardisation versus variety, in certain questions as to quality of tastes, and in questions of long-sighted versusshort-sighteddemands), and by supplementary methods of registering consumers' verdicts, operating outside the pricing system. Moreover,I am ready to believe that such cases might become sufficientlylarge in numberto constitute no longer exceptions but the predominant rule. How far this is to be so I am content to treat as a matter of
for practical purposes unable to be simultaneously presented to consumers (e.g., an industry organised on the basis of ioo plants each specialised to producing one of ioo varieties as compared with the industry organised on the basis of io larger plants producing only Io varieties), the consumers are impotent to register (through a market) their choice between the two. At any rate, the individual will here, of course, have to fall in line with the verdict of the majority; and probably with the verdict, simply, of tradition. I For instance, it is clear that the demand-curve for durable consumption-goods which involve large initial expenditures is different when consumers can pay by instalments from what it is when they have to pay the purchase-price in a lump-sum-how different depending on the consumer's individual time-preference. Which is to be taken as the " real wants " of the consumer ? Does instalment-selling exaggerate the " real wants " of consumers for vacuum cleaners and musical instruments ? Or does the absence of such facilities cause the poorer consumer unduly to discount his desire for such things ? An example of a short-sighted demand is the preference for the somewhat cheaper jerry-built house as against the more durable residence, which has no other reason than the occupier's high time-preference.

ECONOMICTHEORY AND SOCIALIST ECONOMY

I49

expediency, to be learned by experience, and not as a " necessity" deduced from the nature of " the economic problem " as such. But when it comes to the valuation of intermediate products and of factors of production, I see no sufficient necessity for a competitive pricing system. When I postulated in reply to Mr. Dickinson the dilemma that he could adequately register either costs or demands in a market system, but not both, Mr. Dickinson replied that he was content that labour of different sorts should in fact be paid the same wage and only for accounting purposes be assigned different values. But this representsa retreat from his position towards mine. It is essentially to say that in the case of this factor of productionthere shouldbe no competitive market and hence no " automatic " pricing-index,and that instead its distribution should be determined in terms of a purely accounting valuation. Personally, I should prefer not to approachthe matter in terms of optima and discussions about " the desirable". I am merely maintaining that the question as it is posed inevitably implies discussion in such terms, since to discuss whether a particulararrangementof productionis " economic " implies a judgment in terms of the value of output, and this is necessarily relative to the scale of valuation that is adopted. As Mr. Lerner'sown argument shows, the " necessity " of a pricing system does not follow as a corollary of any ((universal economic principle ", but of some imported postulate such as his dictum that it is desirable " to give people What they want "-which I have suggested is by no means an unambiguous conception. That we should be so obsessed with enquiries of this kind in terms of optima, and impotent to avoid them even when we would, is, I think, part of the pernicious heritage of subjective economics. The economic laws of which classical Political Economy spoke were objective laws, which bound men, whatever their conscious designs, as by " an invisible hand "-a reign of law in the social realm akin to the determinism which science was finding in the realm of nature. Either such laws-such objective tendencies-exist or they do not; if they do not, then Political Economy as traditionally conceived is a complete illusion. But to-day economic law is increasingly conceived, not in these terms, but as certain formal relationships which hold between economic quantities; their concrete shape depending on certain subjective factors, the determination of which goes undefined. Hence any discussion of practical policy very soon and inevitably resolves itself into an ethical discussion as to which of the n possible subjective constants it is " desirable" to postulate (or else it postulates them dogmatically and parades its conclusions as the product, not of ethics, but of science). Little more than scholasticism seems destined to follow a search for " the economic laws" of a socialist economy by such a road. The economic laws which rule a socialist economy, whatever they be, will have this resemblanceto those of classical Political Economy: they will be objective relations between events, which determine the actions of man and to which an effective plan will have to be adapted. Engels once said that socialism would represent the transition " from the realm of necessity to the realm of freedom", by which he meant, not that economic law would cease to operate, but that it would no longer operate " blindly ", " behind the backs of individual producers", achieving ends different from the ends which

I50

THE REVIEW OF ECONOMICSTUDIES

men consciously willed and intended. Economic activity would be ruled by conscious recognition of the objective laws which bound it; and collective man, being conscious of his limitations, would suit his purposes to the objectively possible. Human plans would thereby be made more effective by subordination to objective forecast. At the same time objective forecast would itself be altered by the fact that human action was now subordinated to a collective plan, in place of the unco-ordinatedaction of individual wills. I will close with a reference to one final point in Mr. Lerner's article. My original article suggested that a socialist state would in fact distribute its capital investments according to a different principle from an individualist economy. Mr. Lerner replies that " to say that there will be more foresight in a socialist economy does not mean that the economic principles are different ", and that if a competitive economy had the same degree of foresight, it would do precisely the same. Here Mr. Lerner's formal approach to the matter is, I think, perfectly illustrated. If he conceives of " economic principles" as purely formal in character-if he means that relations between events could be expressed algebraicallyin equations of similar form, or something like that-he is probablyright. But as soon as his " economicprinciples" are given any realisticcontent, the contrast emerges. If we mean by " economic principles" a descriptionof how in fact things tend to happen (which appears to me the only sufficient meaning of an economic law), then it becomes clear that the principle will have essential differences in the two cases. To speak of a competitive economy achieving the same result, if it had the same degree of foresight, is to ignore the fact that its essential nature is that it does not and cannot possess the same degree of foresight. One might as well say that, if all engine-drivershad perfect foreknowledge,a railway system run without time-tables might producethe sameresultsas a railwaysystem plannedaccording to a time-table; and hence that the "principles " which ruled in the two cases would be the same. Mr. Lerner may, perhaps, retort: "Even so, it is enough if the socialist state were to announce a certain programme of capital investment over a ten-year period, and then employ the capitalist device of hiring out loans on a competitive basis to such industries as were willing to pay a competitive price for them. The resulting shifts of interest rates would then efficiently determine the actual distribution of investment among different projects." But to conceive the decisions relating to State saving and the decisions relating to State investment separated in this way, and linked only through a loan market, is, surely, to ignore the fact that decisions of this character must necessarily be made in concrete terms and in the particular before they are expressed in abstract form and in general terms. The decision to start the constructionnow of a palace instead of a house, of a blast-furnacein preference to a clothing factory, is a constituent element in the decision as to how much to invest. It is not a subsequent decision taken by the State's left hand out of foresight of an independent decision taken by the State's right hand: they are one and the same decision. How much of the national income the State decides to " save" will depend upon knowledge of concrete investment possibilities and the choice between them; just as the choice between different

ECONOMICTHEORY AND SOCIALIST ECONOMY

I5I

investment possibilities will itself depend on the choice which is made both to-day and to-morrow between them and the requirements of immediate consumption. The director of a combine does not announce "out of the blue" (unless it be simply as a preliminarymode of enquiry) that he intends to apply ?x million from reserve to development work in the forthcomingyear and then leave the various works managers to bid for their share of the sum on a competitive basis; nor does he, as an alternative, announcemechanically that he will satisfy by allocation from reserve all development work for which works managers are willing to guarantee five per cent. Nor does a housewife decide a priori before going into the market that she will spend x per cent. of her household allowance on meat and y per cent. on vegetables: these proportionsare the general form which a series of particular decisions take in contact with the concrete alternatives and possibilities which she meets in the market. So the State in drawing up a capital programmewill do so in the form of decidingon a scale of prioritybetween certain blast-furnaceprojects (of a similar type) and certain clothing factory projects, in relation to one anotherand in relationto the resourcesavailable. Its own judgmentin choosing between the range of known alternatives will determine how resources are to be distributed, and in doing so will ipso facto determine the " rate of saving ",
"the rate of time-discount
",

"the time-pattern of investment ", etc., etc.'

True, to introduce uniformity into such a complex of decisions, the relevant data on which the prioritiesare based (estimated costs and estimated outputs) will have to be expressed quantitatively-the data will have to be available in statistical form. Mr. Lerner can give to these ratios all the old labels if he likes, and work them into equations of a familiar form. Nevertheless, this will not be the same thing as a socialist State abandoning the decisions as to saving and investment to the " automatic " mechanismof a competitive capital market such as exists in the caDitalistworld.
1 Mrs. Wootton, in a passage in her Plan or No Plan ? (pp. 99-IOO) which I find hard to understand, seems to suggest that there is some objective factor, " popular willingness to suffer abstinence ", to which a State investment programme would need to adapt itself, which would settle some " true " rate of interest, and with which State decisions as to investment might be out of equilibrium. But I fail to understand what this " abstinence " can be except one facet of the State's own decision, which is the State plan for the distribution of resources between their various uses. True, if retail commodities are sold on a free pricing-system, equilibrium will require that the aggregate value of consumption-goods should equal aggregate wages (on the assumption that wages and consumers' income are synonymous). If no net addition to capital is being made, then it would seem that the prices of commodities will on the average equal the wage-cost involved in their production, although those things produced with much capital and little labour will be priced at more than their wage-cost, and things produced with much labour and little capital will be priced at less than their wage-cost, and so will be involved in monetary losses. If a net addition is being made to capital equipment, it will follow that current commodities will be priced in this measure at a level on the average higher than their wage-cost, thereby yielding a monetary surplus to the State. This surplus (if one cares to express it so) is the money measure of society's " abstinence

Cambridge.

MAURICE DOBB.