All Commentary
Tuesday, April 1, 1986

Book Review: Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered by Don Lavoie and National Economic Planning: What is Left? by Don Lavoie

Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered by Don Lavoie

Cambridge University Press, 32 E. 57th St., NY 10022 • 208 pages.

National Economic Planning: What is Left? by Don Lavoie

Ballinger Publishing Co., Cambridge, MA 02138 • 291 pages, $25.00 cloth; Cato Institute, 224 Second Street, SE, Washington, D.C. 20003.

Ever since the days of Karl Marx, opponents of the “establishment” have argued that socialism is the answer to all social ills. But Marx gave few clues as to the precise form that socialist society would take, and he attacked as “utopians” any who sought to describe it. Nevertheless, the inevitable inference to be drawn from his writings is that socialism would substitute central planning for the capitalist “anarchy of production” and for the isolated mercantilist interventions against which Adam Smith (1776) had directed his barbs.

After World War I, Marxian socialists gained control in several European nations. They set up commissions to study how to implement central planning, but they had no clear idea how to go about it and, except in Russia, the power of the central planners waned.

Into this controversy in 1920 ventured the late Ludwig von Mises, then a rising young economist in Vienna, Austria. Mises pointed out that if the factors of production were owned and controlled by a central planning authority there would be no markets for them. With no market for the factors of production, there would be no market prices for them. And without market prices, the planners would have no guideposts to help them decide what, when, where, how or how much to produce.

Mises’ position that central plan-ning couldn’t be made to work with any degree of efficiency was largely ignored by the would-be planners. Thus Lenin tried to introduce Marxian planning in Russia in one fell swoop after the 1917 Communist Revolution. The attempt proved a disaster. The country was thrown into utter chaos. Lenin was forced to retreat and in 1921 introduced his New Economic Policy, which restored some function to the market. This Russian experience lent support to Mises’ thesis that central planning couldn’t be made to work.

In the 1930s, the economic calculation debate was revived. F. A. Hayek and the late Lord Lionel Robbins, especially, made important contributions, supporting, elaborating and helping to clarify Mises’ reasoning. A number of Marxian socialists attempted to respond. Dr. Don Lavoie reviews the controversy anew in Rivalry and Central Planning, originally his doctoral dissertation

Lavoie begins with Marx’s writings, extracting from them Marx’s prescription for socialism, a painstaking process for it must be inferred from Marx’s negative remarks about capitalism. Then Lavoie shows that all at tempts to respond to Mises’ 1920 challenge have failed to answer his critique of economic planning. Socialists over the years who have tried to answer Mises still do not realize that the central planning they advocate means state ownership and control of the factors of production, which precludes the development of market prices, disrupts the vital transmission of knowledge through the price system and, therefore, makes realistic economic calculation impossible. Mises’ fundamental critique still stands.

The title of Lavoie’s second book is National Economic Planning: What is Left?, a double entendre. In the first place, Lavoie asks, is anything to the ideological “left” of national economic planning? And secondly, he speculates, now that all serious attempts to introduce economic planning on a national scale have been abandoned, just what is left of them?

Lavoie begins by discussing three systems through which social activities may be coordinated—tradition, the market and planning. Tradition is admittedly suitable only as a means for coordinating activities in simple societies. The market, on the other hand, has led to the coordination of extensive and complex social activities. It has facilitated rapid experimentation and the development of countless new productive techniques. Impartial observers must admit that the extent of social cooperation and specialization under market coordination and the increase in production it has brought with it are remarkable. Lavoie then discusses the third possibility: economic planning. He concludes it has two fatal flaws.

The first flaw inherent in national planning is the totalitarian threat, the danger that a Hitler or a Stalin will gain control.

The second flaw is due to the knowledge problem, expertly developed by Lavoie in Chapter 3. How, Lavoie asks, will the central planners obtain the tremendous amount of widely dispersed information they need to coordinate successfully the complex activities of an entire economy, especially since much of this knowledge is unarticulated, existing only in the minds of scattered per, sons, in the form of ideas, plans or dreams?

The crux of Mises, and Lavoie’s thesis, is that property should be privately owned and production planned by the private property owners. With free markets and competition among them, prices develop for goods, services and factors of production, indicating their relative value to consumers. For instance, as F. A. Hayek points out in “The Use of Knowledge in Society”:

Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter . . . which of these two causes has made tin more scarce [and thus more expensive] . . . . All that the users of tin need to know is that . . . they must economize tin.

Free and flexible market prices furnish private entrepreneurs with almost instantaneous knowledge about consumer wishes and also about the constantly changing supply of, and demand for, resources. When pro duction is centrally planned, there are no market prices for the factors of production. Thus, national economic planning must inevitably founder for lack of the knowledge entrepreneurs obtain on the market from instant to instant through the medium of constantly fluctuating free competitive prices.

Lavoie’s critique of National Economic Planning is masterful! It is also pertinent to the 1980s. Lavoie extends his analysis to many post-Marxian schemes, including such recent schemes as those of Wassily W. Leon-tief, Felix Rohatyn, Robert Reich and even Tom Hayden. Let’s hope these recent planners read not only the few pages devoted to them but also earlier portions of the book where Lavoie demolishes the theory of planning.

I have two bones to pick with Lavoie. The first concerns his use of the labels “radical” and “reactionary.” These words have no clear ideological meaning in themselves. A “radical” change in politics, according to Webster, is a sweeping or fundamental change in law or method of government. But the word itself does not specify the direction the change should take. Similarly, to advocate a policy of “reaction” gives no indication in itself as to what political or social condition one wishes to return to. Lavoie could have avoided confusion by using more descriptive terms such as “classical liberal” or “free trade internationalist” for “radical,” and “interventionist,” “statist,” “militant nationalist” or “socialist” for “reactionary.”

Secondly, i was most disappointed to find a scholar and economist of Lavoie’s understanding and stature revealing such historical naivete as to attribute the idea of protectionist legislation to special groups of businessmen, bankers and industrialists. According to Lavoie, “the origins of planning in practice constituted nothing more nor less than governmentally sanctioned moves by leaders of the major industries to insulate them selves from risk and from the vicissitudes of market competition.”

The responsibility for our present hodgepodge of interventionist programs that help some and hurt others must be laid at the door of well meaning if misguided voters and politicians, misled by mistaken intellectuals—“economists,” professors, journalists and others—who believe that the remedy for almost any economic problem is a law. Businessmen, bankers and industrialists were not generally the culprits. Before the enactment of protectionist legislation, their interests are diverse; they are competitors. It is only after government grants them special favors that they acquire interests in common and form combinations to sponsor more legislation. To be sure, once protectionist legislation is in place many of them profit in the short run. Also many now seek continued government protection, privileges and benefits. This is not surprising, for once a program is established and businessmen have adjusted to it, they have a special interest in keeping that legislation in force. However, special interest groups are products of intervention, not vice versa.

Both these books make important contributions to economic understanding. It is Lavoie’s hope that his Rivalry and Central Planning, which deals with the classical argument over economic calculation under socialism, will stimulate renewed discussion of this debate. National Economic Planning, which analyzes partial as well as total planning, should lead some modern-day advocates of government controls and regulations to question their own proposals.

  • Contributing editor Bettina Bien Greaves was a longtime FEE staff member, resident scholar, and trustee. She attended Ludwig von Mises’s New York University seminar for many years and is a translator, editor, and bibliographer of his works.