Socialism

2. Efficiency, planning and markets

Socialist critics of capitalism have frequently pointed to its economic failings. Its reliance on anarchic market forces makes it liable to cycles of booms and slumps, subjects workers to recurrent periods of unemployment and permanent insecurity, and fails systematically to make effective use of human and natural resources. For all its dynamism in producing goods to satisfy increasingly exotic consumer preferences, it leaves many basic needs unmet. It underprovides public goods, cannot incorporate the social costs of economic activity and is destructive of environmental and other preconditions of long term economic development. For many socialists the solution has been seen to lie in a centrally planned economy in which resources can be effectively and rationally directed to satisfy human needs while also meeting other social and ethical objectives.

This case against the market and in support of planning has been met by three main kinds of argument: neoclassical, motivational and epistemic. Neoclassical economic theorists claim that a market economy is demonstrably ‘efficient’ in the sense of being Pareto-optimal: the outcomes it produces cannot be departed from without at least some individual(s) experiencing a reduced level of preference satisfaction (see Economics and ethics §3). Admittedly this can be shown only for ‘ideal’ markets: for example, where there are no public goods or externalities. But such cases of (actual) ‘market failure’, it is claimed, can be dealt with either by limited forms of state intervention, or by assigning property rights to currently unowned goods and resources.

The motivational argument is that socialism must fail because it makes unrealistic demands on the potential altruism of economic agents. Workers must be expected to perform their tasks without the promise of differential material rewards, and planners to put aside their own interests in making economic decisions. But humans are by nature primarily self-interested beings: the supply of altruism is strictly limited and cannot be relied upon as the basis for economic organization. The market takes advantage of this fact by providing incentives for workers and managers that ensure the allocation of resources to those spheres of production where they will be most beneficially employed. Without such incentives, socialist alternatives to the market will inevitably fail.

The epistemic argument, developed in the Austrian school of economics and especially by Hayek, is that only the market can solve the economic problem of ignorance (see Hayek, F.A. von §2). This problem is due to the division of knowledge in society – its dispersal among different economic agents; and to the practical nature of much of this knowledge (knowledge ‘how’ rather than knowledge ‘that’), which cannot be articulated in propositional form, and hence cannot in principle be acquired by a centralized planning agency. Thus no economic plan can gain access to and utilize all the knowledge relevant to economic decisions. By contrast, the price mechanism manages to distribute the knowledge relevant for economic coordination while allowing individual agents to rely on their own ‘local’ knowledge in the decisions that concern them.

Two main responses to these arguments may be made by socialists. The first is broadly to accept them, but to argue that they do not amount to a defence of capitalism but only of the market, which may itself take either capitalist or non-capitalist forms. This is the line taken by market socialists. The market is, ceteris paribus, the most efficient and dynamic economic mechanism, but it can be constructed in a form compatible with socialism by eliminating its distinctively capitalist features, notably private ownership in the means of production and wage labour. Among numerous versions of market socialism, probably the closest to traditional socialist aspirations involves social ownership in the form of workers’ cooperatives whose assets are either directly owned by their members or leased to them by the state.

The second response is to challenge those arguments for the economic superiority of the market. For example, the neoclassical concept of efficiency may be criticized for defining this in relation to the satisfaction of individual wants or preferences, whatever their specific content or rationale. To show that markets are efficient in this sense is to show very little: it ignores the distinction between wants and needs, and fails to discriminate between preferences in terms of their contribution to human flourishing or wellbeing.

To the motivational argument that socialism makes unrealistic demands on altruism, there are several possible replies. One is to say that egoism is not a part of human nature, but the product of living in a capitalist society: a far greater degree of altruism can be expected in the different institutional context of socialism, either because such altruism is itself natural to humans, but inhibited by capitalism, or because human motivations are highly malleable in this respect. Alternatively, the ways in which self-interest and altruism are typically conceived and contrasted in these debates may be challenged. Actions oriented towards the wellbeing of others, and the relationships within which these take place, are often themselves a significant source of wellbeing to those concerned (see Human nature §3). The kinds of self-interest the market relies upon are unduly narrow and restrictive in character: socialism does not require self-sacrificial forms of altruism, but instead makes possible the satisfaction of a more extensive and fulfilling range of interests. But the problem remains of how workers in a non-market economy are to be motivated to move to where they are most needed.

Against the epistemic argument for the market it may be objected that the market’s informational virtues are much exaggerated. The price mechanism by no means distributes all the information relevant for economic coordination: indeed competitive pressures often generate disincentives to communicate relevant information about other producers’ plans, scientific and technical innovations, and so on. Nor is the information required for coordination the only information relevant for economic activity, as the frequent exclusion of environmental impacts from market decisions illustrates. Admittedly, even if such criticisms of the informational virtues of the market can be sustained, there remains a strong epistemic case against centralized economic planning. Yet there may be institutional forms superior both to markets and to centralized planning for at least some tasks, such as those involved in the organization of scientific communities. Whether these provide plausible models for economic coordination is unclear.