Socialist economics

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Socialist economics is a term which refers in its descriptive sense to the
economic effects of nations with large state sectors where the government
directs the kind and nature of production. In a normative sense, it applies to
economic theories which advance the idea that socialism is both the most
equitable and most socially serviceable form of economic arrangement for
the realization of human potentialities.
There has developed a diverse array of ideas that have been referred to as
"socialist economics," from forms of "market socialism," which advocate
achieving economic justice through taxation and redistribution through state
welfare programs to the hardcore communists who advocate total state
control of all property and the economy, to the unique Chinese variation
known as "socialism with Chinese characteristics."

Contents
[hide]
1 Definition
2 Overview
3 Marxian economics
o 3.1 Das Kapital
o 3.2 Marxian theory after Marx
4 Market socialism
 5 Socialist economics in practice
o 5.1 USSR and East European satellites
o 5.2 China
6 Critique of central planning
7 References
8 Credits

However, particularly when featuring a planned economy, attempts to put

socialist economics into practice have failed. Many critiques of socialist
economics warned of this. Some noted the impossibility of knowing the
economic data necessary to have total control over an economy, finding it
impossible to replace the "invisible hand" that Adam Smith regarded as
guiding free market economies. Placing production goals above consumer
leads to failure, as does removing allmotivation by taking total control over
the economic system. Critics of socialist economics argue that human beings
are beings of free will and their success in any endeavor comes from their
free pursuit of desires and the fulfillment of their individual potentials. No
centralized system run by a distant government, even if well-meaning, can
take into account the diversity of needs and contributions of all people; it is
this diversity that makes human society human. Prosperity and happiness for
all can only, critics maintain, come when each individual is regarded as a
unique and valuable member of society. Socialist economics, despite aiming
to care for all people and provide fair distribution of wealth, lacks sufficient
understanding of human nature to establish a society that can succeed in
doing so.

Definition
Socialist economics is a broad, and mostly controversial, term. Generally,
however, most theoretical economists would agree that the definition of a
socialist economy is based on four main features:
1. Public ownership of the decisive means of production
2. centralized control of the rate of accumulation
3. The existence of a market for consumer goods and for labor (a wages
system)
4. Managed pricing (Nove and Nuti 1972)
Altogether, socialist economics, as these four features suggest, is
characterized by large scale central planning of all possible types and
quantities of consumer goods and machinery for their production (with a
price system attached) and their quantitative regional allocation. Socialist
economics also plans the qualitative and regional distribution of labor and
the appropriate wage system. To be competitive with Western free market
systems, it has to plan for technical and technological innovation and quality
of products that are to be in demand.
Also, the four principles clearly define a necessary political condition for a
socialist economics to become a workable reality in any societys history: A
non-democratic authoritarian or totalitarian regime of one party that can
change the constitution to legally anchor all the above elements. Without
such authority, centralized control by government of the economy cannot be
achieved.

Overview

Karl Marx.
Theories of socialism first arose in the late 18th century in response to
the Industrial Revolution. Factoryowners were becoming wealthy and the
workers were impoverished. Thus, workers wanted a greater share in the
wealth that factories were making. Later a form of socialism called,
somewhat ambitiously, "Communism," emerged based on the writings of Karl
Marx and Friedrich Engels. The economics of Communism had not yet been
precisely defined; not by Marx (nor by anybody else since), as can been seen
in several editions of Das Kapital where the definitions changed (see Marx
I :793, 2nd edition and Marx I:728, 4th edition).
Communism advocated class struggle and revolution to establish a society of
cooperation with strong government control. In other words, this would
amount to politically totalitarian societies where the socialist principles could
be enacted into their constitutions. Such a doctrine with socialist economics
predominated in the former Soviet Union and much of Eastern Europe, as
well as in China and Cuba, at one time. Today its influence has lessened.
Western democracies were not considered to be examples of true socialist
economics at any time. Nationalization (the act of taking an industry or
assets into the public ownership of a national government) of major
industries, which has occurred in several Western European countries, is just
one of the four necessary conditions mentioned above; and this could be
(and has been) reversed when a different political party came to power.

Marxian economics
Marxian economics is one form of socialist economics, and the most
influential for the half of the world's economies during a large part of the
20th century. It was also, through the decades of its existence in
the USSR and the other COMECON (socialist countries of Eastern Europe,
Balkans, Central Asia, China, and Cuba) countries, the only government-
sanctioned economic doctrine. This is why Marx can be considered the
founder of socialist economic thinking.
There are two important points from Marx, drawn from Das Kapital (which is
discussed in more detail below), on which socialist economics rests:
1. First is the relationship between the basis and
the superstructure. "Basis," as defined by Marx, is an economic
(production) environment, and "superstructure" is the
society's culture, ideology, historically developed legal system,
accumulated knowledge,ethics, expectations, goals, and so forth. Marx
proclaimed that the "basis" should be the leading element and any
time there appears a discrepancy between the two, the
"superstructure" should change to accommodate the "basis." Class
struggle, at that point, is the obvious solution (Masaryk 1899: II, 132-
134).
2. The other is surplus value. In Marxian theory, surplus value is the
basis of the capitalist economy. It is generated as a result of ruthless
exploitation of the working class by capitalists. The worker has to
produce surplus value or he is paid less than he needs for living
(Marx I: 194).
Therefore, according to this theory, by destroying the capitalist system
surplus value would no longer be needed (for the enrichment of capitalists)
and, instead, the working class would have the fruit of its labor fully at its
disposal (Masaryk I: 319).
To summarize, from a political point of view socialism, which Marx referred to
as the "first phase," and communism, the "higher phase," involves the
destruction of the bureaucratic state: From the social point of view socialism
is the destruction of the class system, and from the economic point of view
socialism is the destruction of the compulsion to economic growth.
In other words, the capitalists optimized allocation of specific products
produced at competitive wages and logistics vis-a-vis specific markets
offered at competitive priceswhich, due to this constant competition, have
been automatically achieving constant growth in productivity and, hence,
economic growthwould no longer exist. The question is: How to substitute
the void?
Marx explained that, since the first stage of socialism would be "in every
respect, economically, morally, and intellectually, still stamped with the
birthmarks of the old society from whose womb it emerges," each worker
would naturally expect to be awarded according to the amount of labor he
contributes, despite the fact that each worker's ability and family
circumstances would differ, so that the results would still be unequal at this
stage, although fully supported by social provision.
Thus, the problem of substituting the capitalists' optimized allocation
translates into a question of marginal readjustments. Going slowly about the
"substitution," Oskar Lange, a theoretician of socialist economics, assumed
the retention of the existence of money and a wages system at the
beginning, in order to maintain at least some semblance of productivity
growth. Lange suggested that solving these readjustments as the socialist
economic system took shape (when the money and wages might be slowly
withdrawn from the system), would be done by central planning bureaus and
would be based on mathematical (quantity, quality, and logistic) optimizing
models. According to him, this was an adequate solution (Lange 1949).

Das Kapital

Das Kapital by Karl Marx.

Das Kapital is one of several famous incomplete works of economic
theory: Marx had planned four volumes, completed two, and left his
collaborator Engels to complete the third. In many ways the work is modeled
onAdam Smith's Wealth of Nations, seeking to be a comprehensive logical
description of production, consumption, and finance in relation
to morality and the state.
It is a work of philosophy, anthropology, and sociology as much as one of
economics. However, it has several important economic statements:
Theory of surplus value
Marx employed systematic analysis in an ambitious attempt to explain
capitalism's contradictory laws of motion, as well as to expose the specific
mechanisms by which it exploits and alienates. He radically modified
classical political economic theories. Notably, the labor theory of value,
developed by Adam Smith and David Ricardo, was transformed into his
characteristic "law of surplus value and capital" which is, according to Marx,
not only an economic but also an ethical issue. Thus, the whole concept and
explanation of capitalism transforms into the statement of workers
exploitation (Masaryk I: 157).
In such a context the accumulated wealth, which is the source of the
capitalist's social power, derives itself from being able to repeat this cycle:
Money Commodity Money +,
where the + the capitalist receives is an increment or "surplus value"
higher than their initial money (Marx I, 271).
This surplus value, the stepping stone of the Marxs thesis, is of two forms:
"Relative surplus value," which is attained whenever the worker gets
less money for the same amount of work
"Absolute surplus value," which is based on surplus (or extension) of
labor hours at the same wage (Marx I, 179)
This has one negative side-effect, however. One part of the labor force works
still longer labor hours, hence there still exists an increasing part of the labor
force that is unemployed. Hence, the net effect is relative overpopulation.
(This can be seen as different fromMalthus absolute overpopulation theory,
which Marx did not accept.)
The theory of Basis and Superstructure
In his Theses on Feuerbach (1845) Marx famously concluded: "Philosophers
have hitherto only interpreted the world in various ways; the point is to
change it." This brilliantly encapsulates Karl Marx's philosophy. It explains his
priorities by choosing the economic interrelations to be of primary and
indelible importance in any society. These were supposed to be the very
basis of the society's history and future (what can be called economic
materialism) while the web of historical norms of
law, ethics, religion, philosophy, culture, arts, and just about everything that
holds the society together was relegated into the superstructure. And,
obviously, according to this model, the superstructure is only the mirror of
the basis, which for Marx is the real foundation of the society.
As the base for economic materialism, having been taught to generations in
all the Socialist (and/or Communist) regimes of the 20th century, this model
may have had at least a theoretical value. The problem is that neither Marx
nor Engels had provided any proof of this mainstay of Das Kapital, and
neither did anyone else since.
The value theorem
Capitalist production is the production of an immense multitude of
commodities or generalized commodity production. A commodity has two
essential qualities: firstly, they are useful, they satisfy some human want,
the nature of such wants, whether, for instance, they spring from the
stomach or from fancy, makes no difference, and secondly, they are sold on
a market or exchanged (Marx I: 59).
Notice that Marx deleted from his theory any subjective element whatsoever.
Critically, the exchange value of a commodity is independent of the amount
of labor required to appropriate its useful qualities. Rather, it depends on
the amount of socially necessary labor required to produce it. All
commodities are sold at their value, so the origin of the capitalist profit is not
in cheating or theft but in the fact that the cost of reproduction of labor
power, or the worker's wage, is less than the value created during their time
at work, enabling the capitalists to yield a surplus value or profit on their
investments (Marx I :158).
This is tantamount to the surplus value theory described above.
Critique of religion and economic fetishism
As noted above, Marx did not allow any subjective element in his theory of
value. This can be better understood through his theory of economic
fetishism, which encapsulates Marx's entire economic system, and, in
particular, his theory of value. In the first chapter of Das Kapital Marx
explains his view:
For Germany, the critique of religion is practically done (by Feuerbach), and
the critique of religion is the very basis of the critique of everything (in
society). As religion is the fetishism of ones head, economic fetishism is
driven by ones hand, that is goods (products). Thus, by the critique of the
consumers goods, the fetishism will be driven forever out of existence, since
the religious reflection of the real world will be substituted by the reflection
between the practical life and peoples natural environment (Marx I, 46).

Marx, however, also showed that the structure of the commodity economy
causes things to play a particular and highly important social role and thus to
acquire particular social properties. He discovered the objective economic
bases which govern commodity fetishism:
Illusion and error in men's minds transform reified economic categories into
"objective forms" (of thought) of production relations of a given, historically
determined mode of a specific commodity production (Marx I, 72).

Thus, for Marx,

Characteristics which had appeared mysterious because they were not
explained on the basis of the relations of producers with each other were
assigned to the natural essence of commodities. Just as the fetishist assigns
characteristics to his fetish which do not grow out of its nature, so the
bourgeois economist grasps the commodity as a sensual thing which
possesses pretersensual properties (Rubin 1976, 8).

Marxian theory after Marx

In the wake of Marx, "Marxist" economists developed many different,
sometimes contradictory tendencies. Some of these tendencies were based
on internal disputes about the meaning of some of Marx's ideas, especially
the "Law of Value." Other variations were elaborations that subsequent
theorists made in light of real world developments. For example the
monopoly capitalist school saw Paul A. Baran and Paul Sweezy attempt to
modify Marx's theory of capitalist development, which was based upon the
assumption of price competition, to reflect evolution toward a stage where
both economy and state were subject to the dominating influence of giant
corporations. World-systems analysis restated Marx's ideas about the
worldwide division of labor and the drive to accumulate from the holistic
perspective of capitalism's historical development as a global system.
Accordingly, Immanuel Wallerstein, writing in 1979, maintained that
There are today no socialist systems in the world-economy any more than
there are feudal systems because there is only oneworld-system. It is a
world-economy and it is by definition capitalist in form. Socialism involves
the creation of a new kind of world-system, neither a redistributive world-
empire nor a capitalist world-economy but a socialist world-government. I
don't see this projection as being in the least utopian but I also don't feel its
institution is imminent. It will be the outcome of a long social struggle in
forms that may be familiar and perhaps in very few forms, that will take
place in all the areas of the world-economy (Wallerstein 1979).

Market socialism
Market socialism is a variation of socialist economics that combines
government control with free market forces. It refers to various economic
systems in which the government owns the economic institutions or major
industries but operates them according to the rules of supply and demand. In
a traditional market socialist economy, prices would be determined by a
government planning ministry, and enterprises would either be state-owned
or cooperatively-owned and managed by their employees.
The earliest models of this form of market socialism were developed by
Enrico Barone (1908) and Oskar R. Lange (Hahnel 2005, 170). Several
suggestions on this topic were discussed in the 1930s, most notably by
Lange (1939), H. D. Dickinson (1933, 1934), and Fred M. Taylor (1939).
Lange and Taylor (1929) proposed that central planning boards set prices
through "trial and error," making adjustments as shortages and surpluses
occurred rather than relying on a free price mechanism. If there were
shortages, prices would be raised; if there were surpluses, prices would be
lowered (Skousen 2001, 414-415). Raising the prices would encourage
businesses to increase production, driven by their desire to increase their
profits, and in so doing eliminate the shortage. Lowering the prices would
encourage businesses to curtail production in order to prevent losses, which
would eliminate the surplus. Therefore, it would be a simulation of the
market mechanism, which Lange thought would be capable of effectively
managing supply and demand (Kornai 1992, 476).
In this system, a regime, assuming ownership of all means of production,
could use markets to find relevant consumers' prices and valuations while
maintaining social and state control over production, income determination,
investment, and economic development. Managers would be instructed to
minimize costs, while the planning board would adjust producers' prices to
eliminate disequilibria in the markets for final goods. Thus, at a socialist
market equilibrium, the classical marginal conditions of static efficiency
would be maintained, while the state would ensure equitable distribution of
incomes through its allocation of the surplus (profit) from efficient production
and investment in socially desirable planned development.
Dickinson (1933, 1934) proposed a mathematical solution whereby the
problems of a socialist economy could be solved by a central planning
agency. The central agency would have the necessary statistics on the
economy, as well as the capability of using statistics to direct production.
The economy could be represented as a system of equations. Solution values
for these equations could be used to price all goods at marginal cost and
direct production. Dickinson (1939) eventually adopted the Lange-Taylor
proposal to simulate markets through trial and error.
The Lange-Dickinson version of market socialism kept capital investment out
of the market as Abba Lerner (1944) admitted that capital investment would
be politicized in market socialism. Lange insisted that a central planning
board would have to set capital accumulation rates arbitrarily. Lange and
Dickinson (1938, 1939) saw potential problems with bureaucratization in
market socialism. According to Dickinson the attempt to check
irresponsibility will tie up managers of socialist enterprises with so much red
tape and bureaucratic regulation that they will lose all initiative and
independence" (Dickinson 1939, 214).
In sum, Oscar Lange, Abba Lerner, and H. D. Dickinson proposed state
control over credit and financial capital. While these market socialists
accepted trade and the use of money with consumer goods, markets for
capital goods would be simulated and markets for financial capital would be
wholly replaced by central planning. Capital investment would therefore be
determined by state officials, rather than by competition for funds in
financial markets. Lange was particularly clear about how the state would
determine the overall rate and pattern of capital investment. State officials
would set the overall rate of capital accumulation, instead of interest rates.
State officials would also determine the pattern of investment, instead of
profit-seeking capitalists and entrepreneurs.

Socialist economics in practice

Joseph Stalin, Vladimir Lenin and Mikhail Kalinin in 1919.

Before discussing some of the problems of socialist economies as they
appeared over the decades of its practice, one issue appeared immediately.
It was the problem of how to substitute the invisible hand that guides the
economy in a free market economy in a centrally planned economy. Vladimir
Ilyich Lenin observed this problem right away shortly after taking power in
Russia in 1918. Hence, he introduced his New Economic Policy (NEP), that
allowed for a private ownership of small businesses. However, he did not live
long enough and under his successor, Joseph Stalin, the NEP was abolished.
Market socialism, developed in the 1930s as described above, has suggested
several ways of squaring this circle.

USSR and East European satellites

The Soviet Union and some of its European satellites aimed for a fully
centrally planned economy. They dispensed almost entirely with private
ownership of capital. Workers were still, however, effectively paid a wage for
their labor. The characteristics of this model of economy were:
Production quotas for every productive unit
A farm, mine, or factory was judged on the basis of whether its production
met the quota. It would be provided with a quota of the inputs it needed to
start production, and then its quota of output would be taken away and given
to downstream production units or distributed to consumers. Critics of both
left and right persuasions have argued that the economy was plagued by
incentive-related problems. To ensure locative efficiency central planners
would have required accurate information about the productive capabilities
of each enterprise (including labor), however the system incentivized
enterprise managers to under-report their unit's productive capacities so that
their quotas would be easier to achieve, especially since the managers'
bonuses were linked to the fulfillment of quotas.
Allocation through political control
In contrast with systems where prices determined allocation of resources, in
the Soviet Union, allocation, particularly of means of production, was
determined by a bureaucratic elite, which was notable for its exclusion of any
democratic process. The prices that were constructed were done so after the
formulation of the economy plan, and such prices did not factor into choices
about what was produced and how it was produced in the first place.
Full employment
Every worker was ensured employment. However, workers were generally
not directed to jobs. The central planning administration adjusted relative
wage rates to influence job choice in accordance with the outlines of the
current plan.
Clearing goods by planning
If a surplus of a product was accumulated, then the central planning
authority would either reduce the quota for its production or increase the
quota for its use.
Five-year plans
Five Year Plans were made for the long-term development of key industries.
According to some interpretations of Marxist theory this should have been a
step towards a genuine workers' state. However, other Marxists consider this
a misunderstanding of Marx's views of historical materialism, and his views
of the process of socialization.
Whatever beliefs anybody harbored, one thing was clear: The USSR and all
its COMECON economic allies were officially still only socialist countries.
Therefore, wages and prices under the socialist umbrella were still bona
fide economic tools. They might become obsolete under the communist
label. The problem was not only was it not clear how to transition into the
communist phase, or how that would actually work in reality, it appeared
impossible to successfully navigate the economies in practice even through
the socialist phasewhich must precede the communist oneeven after
several generations in all of the socialist countries.

China
Mao Zedong at Stalin's side on a ceremony arranged for Stalin's 71th birthday in Moscow in December 1949.
In 1950, China embraced a wholehearted socialist model after
the Communist victory in its Civil War. Private property and capital were
abolished, and in the large agricultural sector, the state simply
replaced peasants' existing warlord or landlord. The first attempt, the so-
called Great Leap Forward (GLF), saw a remarkable large-scale experiment in
entirely abolishing wages based on work. Agricultural workers were assured
that they would receive food regardless of the output of their village.
The central idea behind the Great Leap was that rapid development of
China's agricultural and industrial sectors should take place in parallel.
Substantial effort was expended on large-scale but often poorly planned
capital construction projects, such as irrigation works often built without
input from trained engineers. The hope was to industrialize by making use of
the massive supply of cheap labor and avoid having to import heavy
machinery.
To achieve the targets, Mao Zedong advocated that a further round of
collectivization modeled on the USSR's "Third Period" was necessary in the
Chinese countryside, where the existing collectives would be merged into
huge people's communes. An experimental commune was established at
Chayashan in Henan in April 1958. There for the first time private plots were
entirely abolished and communal kitchens introduced. At the Politburo
meetings in August 1958, it was decided that these people's communes
would become the new form of economic and political organization
throughout rural China.
This system was abolished soon afterward, and is often considered to be one
of the reasons for a significant famine in China in the 1960s, in which millions
of Chinese starved. Ironic considering its name, the Great Leap Forward is
now widely seen, both within China and outside, as a major economic
disaster, effectively being a "Great Leap Backward" that would adversely
affect China in the years to come. The official toll of excess deaths recorded
in China for the years of the GLF is 14 million, but scholars have estimated
the number of famine victims to be between 20 and 43 million (Xizhe 1987).
The subsequent economic reforms that led to China's rapid GDP growth
and poverty reduction at the end of the 20th century passed thirty in
number. The conventional wisdomoften called the Beijing Consensus"is
that incremental privatization is the key to China's economic growth.
China's economic system became known as a "Socialist market economy." It
is a market economy that combines substantial state ownership of large
industries with private enterprise, where both forms of ownership operate in
a free-pricing market environment. In contrast to the proposal of market
socialism put forth by Oskar Lange in the early 20th century, prices were not
set by a government central planning board. The transition to this socialist
market economy began in 1978 when Deng Xiaoping introduced his program
of "Socialism with Chinese characteristics."
The reforms in the 1980s were very far reaching and substantial for private
sector development, especially in rural areas led by township and village
enterprises (TVEs). In the 1990s, however, those reforms slowed, and rural
privatization was rolled-back (Pei et al 2008). Although a large part of the
Chinese population lives in rural regions, a new focus was put on developing
the urban regions. To pay for these urban reforms, the government heavily
taxed rural citizens and reduced services in rural health and education. The
migration from rural China to urban centers thus began.
The question became whether urban or rural economic growth should be
given higher priority. In the early years of the 21st century, the Chinese
Communist Party (CCP) returned to some of the policies of the 1980s: In rural
regions, they abolished the rural tax, reduced education and health fees, and
revised rural finance. The logic of such steps is easy to grasp. Most people
live in rural areas and to reverse the world crisis that hit China as a net
exporter, its own manufacturers turned to Chinese villagers rather than
American consumers. Nationwide schemes offering tax breaks to rural
buyers of such items as televisions and washing machines are evidence that
China began looking to tap its own potentiala milestone in the global
rebalancing story.
Regardless of whether urban or rural economic growth is given the higher
priority, it is clear that China's economic success in the early 21st century
came from abolishing its original socialist economy and replacing it with a
form that did not involve the setting of prices by a central planning board.

Critique of central planning

The Socialist Economic Calculation Debate (SECD) was first proposed
by Ludwig von Mises in 1920 and later expounded by Friedrich Hayek, both
of the Austrian school of economics. The thrust of Hayek's argument was
that Oskar Lange (1949) and his fellow socialists had become excessively
preoccupied with the use of the static equilibrium models that were (and still
are) the framework of neoclassical economic theory. Langes exposition of
the workings of market socialism relied on all of the crucial data being
given to the Central Planning Bureau (CPB), when in fact the totality of
such data is not only unknown but unknowable.
While the models used by the socialists were not logically contradictory,
Hayek argued that they were being misapplied. He noted that they failed to
capture the actual process by which markets elucidate information about
such things as least-cost production methods and available supplies
(Vaughn, 1980).
To the Austrians, the role of markets is one of discovery rather than
allocation. Much of the knowledge that is utilized in production in a market
economy is not scientific in nature, but rather is knowledge of particular
time, places, and circumstances. Many production techniques and
possibilities simply do not exist until they are uncovered during the
competitive process, a process which does not exist under socialism. So
called tacit or qualitative knowledge about particular firms and resources
presents additional problems, since they cannot be communicated
objectively as statistics to the CPB. By its very nature, this crucial information
is highly dispersed and fragmentary, and therefore is not ever known to any
one agent in the economy (Hayek, 1945).
The model of perfect competition that is the core of neoclassical welfare
economics was also seen by the Austrians as a misleading description of
what actually occurs in a market economy. The concept of equilibrium,
argued Hayek, presupposes that the facts have already all been discovered
and competition therefore has ceased (Hayek 1978a, 259). In particular, the
traditional model of perfect competition says nothing about how firms ever
come to raise or lower prices, for example, when they are assumed to be
externally determined constants.
Most attempts to answer the Austrians claims have focused on the non-
essential parts of their critique of central planning. By pointing to recent
advances in computer technology, for example, advocates of market
socialism claimed to have refuted Hayeks entire position by showing that
data transmission and equation solving would not pose serious problems
under socialism (Cottrell and Cockshott, 1993).
Hayeks central argument, however, was not so much that a socialist
economy could not transmit the necessary data, but rather that it could not
generate it to begin with. Without the processes of discovery and innovation,
a socialist economy would have available only a small fraction of the
knowledge that is utilized in a competitive economy. The task faced by
proponents of market socialism is to explain exactly how spontaneous
discovery is to occur within a planned economic system (Chamberlain 1998).
In fact, despite Langes theoretical assumptions about central planning being
solved by mathematical programming via computers, the economists who
were doing just that were not so optimistic. Hungarian socialist republic chief
economist Janos Kornai, together with mathematician Tamas Liptak,
produced what they termed "Two-Level Planning," (Kornai and Liptak 1965),
making their names known in the world of mathematical economics. These
two authors produced an idealized model of central planningwhat "perfect"
planning would look like if a number of conditions were fulfilled.
However, Kornais attempts to produce a mathematical scheme for socialist
planning convinced him that mathematical techniques would never be able
to solve Hayek's question about economic information: "How will central
planners be able to trace the supply and demand of a million types of
products at once" (Kornai 2007).
The second implication of the SECD has to do with the methodology of
neoclassical economics in general. It is no coincidence that (1) market
socialism was developed by neoclassical economists, (2) that free-market
neoclassical economists were unable to produce a theoretical case against
central planning, and that (3) neoclassical economic theory has shown to be
of limited value in reforming the former Communist states (Murrell, 1991).
The common theme among these points is that there are important
institutions and processes in a competitive economic order that are assumed
away within most general equilibrium models. The static approach of these
models and their fixation on a unique and stable equilibrium misrepresents
some very important aspects of reality (Chamberlain 1998).
From Kornai's point of view, general equilibrium theory failed to explain why
a capitalist system works better than a socialist system. For example, in
neither system did "agents" (planners or firms and households) have perfect
information. But capitalism provides incentives to improve the quality of
information, since individuals may profit from having better information. In a
centrally planned system, such an incentive is lacking; in fact the incentive
for the officials in charge may be to expand the sphere of disinformation in
order to demonstrate their administrative success. "Capitalism," Kornai
wrote, "receives an enormous boost from its combination of decentralized
information and decentralized incentive (Kornai 2007).
The core argument of Hayek (1982) and others is that market socialism as a
method of organizing production would be unable to discover and make
socially useful the dispersed, tacit, and ultimately subjective knowledge that
is available for use within a competitive economic system based on private
property rights.
Overall, the inability of modern market socialists to answer all these
arguments casts serious doubt on the practical workability of market
socialism, or any other form of socialist economics based on central
planning, in any possible fashion and in any country.

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