Answer Each Question In Using The Reference In Attachment 1-Describe the potential role for markets in a socialist system. In your answer make sure to incl

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Answer Each Question In Using The Reference In Attachment 1-Describe the potential role for markets in a socialist system. In your answer make sure to include a discussion of
· a detailed summary of Mises’ description of the nature of economic calculation and possibility of rational economic calculation in a socialist economy. Could there be a rational calculation in a socialist economy according to Mises, why or why not? How is nationalizing companies is different than having a shareholder-manager conflict according to Mises?
·
how Chinese reformers benefited from the “socialist calculation debate”. Weber pointed out to Oskar Lange’s challenge against Mises, how Chinese reformers adapted these ideas?
2- Duncan Foley discusses socialist system according to Marx. What do we talk about when we talk about socialism, according to Foley? In your answer make sure to include a discussion of
·
Marx’s vision in Critique of the Gotha Programme which claims there are two “stages” to the construction of communism, and the implications of his vision
·
Contributions of the Karl Menger’s “Vienna Circle” and the implications of these contributions for the “top-down” vision of socialism
·
Socialism as a self-organized or “bottom-up” system, and three main properties of a socialist system Duncan Foley

Socialist alternatives to capitalism II: Vienna
to Santa Fe

February 2017
Working Paper 06/2017
Department of Economics
The New School for Social Research

The views expressed herein are those of the author(s) and do not necessarily reflect the views of the New
School for Social Research. © 2017 Duncan Foley. All rights reserved. Short sections of text may be quoted
without explicit permission provided that full credit is given to the source.

Socialist alternatives to capitalism II:
Vienna to Santa Fe

by Duncan K. Foley∗

1 Top-down

Barone and Pareto tackled the problem of socialist allocation using simple
methods of the analysis of static economic equilibrium, centering on the idea
that competition will force an equality between marginal cost and price. In
the nineteen-twenties and thirties a group of mathematicians, statisticians,
and economists, including notably Abraham Wald, John von Neumann and
Oskar Morgenstern coalesced around Karl Menger’s “Vienna Circle”. Their
discussions laid the groundwork for the mathematical approach to economics
that dominated economic theory in the second half of the twentieth century.
In particular this work clarified the problem of how to keep prices from be-
coming negative through the application of “complementary slackness” con-
ditions which allow for non-zero prices only when resources are fully utilized.

One result of this line of thinking was to situate the problem of economic
allocation of resources in the broader context of optimal control theory. The
mathematical theory of optimal control concerns the design of feedback mech-
anisms that can stabilize complex dynamical systems to achieve particular
goals. A paradigmatic example is the problem of anti-aircraft gunnery, which
became a key aspect of military combat in the Second World War. As Philip
Mirowski observes (Mirowski, 2002), the duel between the anti-aircraft gun-
ner (who tries to aim at the point where he thinks the bomber will be when
the shell reaches the aircraft’s altitude) and the bomber pilot (who tries

∗Leo Model Professor, Department of Economics, New School for Social Research, 6
East 16th Street, New York, NY 10003 (foleyd@newschool.edu) and External Professor,
Santa Fe Institute. This talk was prepared for lectures at the Havens Institute at the
University of Wisconsin, Madison, April 6–7, 2011.

1

to evade the shell through maneuvering the plane) inspired von Neumann
and Morgenstern’s zero-sum game theory and the “cybernetics” of Norbert
Wiener. (It is also the root of modern financial theory, where the problem
appears as the task of predicting where asset prices will be when a trader’s
transactions are actually consummated.)

One continuing tradition of thought takes the technocratic view that the
task of socialism is to identify and implement a socially optimal allocation
of resources and distribution of products. This is a “top-down” vision of
socialism, in which the participants in the division of labor surrender their
autonomy to a (presumably) benevolent centralized mechanism of social con-
trol. The development of sophisticated optimal control theory supports this
top-down vision by revealing mathematically precise characterizations of the
conditions for optimal allocation that are in principle generalizable to an
arbitrary number of produced goods and capable in theory of dealing with
problems of time and uncertainty. In this perspective, establishing social-
ism amounts to putting in place social institutions that can implement the
solutions of optimal control problems. The power of these mathematical
methods and the prestige of mathematics in the natural sciences disposed
many sophisticated thinkers to accept the eventual triumph of optimal con-
trol methods as inescapable. Joseph Schumpeter (Schumpeter, 1942), for
example, seems to have seen himself as fighting a doomed rear-guard action
on behalf of an increasingly obsolescent capitalist entrepreneurial impulse in
the face of an inevitably encroaching bureaucratic rationalization of social
production.

The top-down optimal control program gained momentum from two other
important developments of the nineteen-thirties that the Second World War
greatly accelerated.

One was Wassily Leontief’s input-output system (Leontief, 1966), a com-
pilation of data on inter-sectoral transactions at a previously inconceivable
level of detail (on the order of dozens or even hundreds of economic sectors).
To the technocratic socialist it seemed only a short leap from Leontief’s tables
to implementable plans of production and distribution. Indeed, during the
Second World War, Leontief’s methods contributed significantly to resolving
real-life bottlenecks created by planned armament production.

A second was the invention of the digital computer by Alan Turing, von
Neumann, and others, a result of converging streams from the pure mathe-
matics of proof theory, the combinatorics of code-breaking, devices for guid-
ing artillery, anti-aircraft guns and aerial bombing, and rapid advances in

2

electronics. von Mises had felt confident in attacking the concept of central-
planning socialism in the nineteen-thirties on the ground that it was humanly
impossible to solve all the equations that characterize competitive market
equilibrium except through market interactions. But just a few years later
technocratic socialism had at its disposal a sophisticated mathematical repre-
sentation of the allocation of social resources as an optimal control problem,
a rapidly developing computing technology precisely adapted to solving such
mathematical problems, and a rudimentary but generalizable input-output
data base on which to base calculations relevant to real-world allocation.

The constituency for developing this nascent technology of social plan-
ning extended far beyond head-in-the-clouds socialist idealists. Like nuclear
bombs, these social engineering innovations had played a centrally effective
role in organizing the successful war effort. (In fact, a good argument could
be made that the cumulative impact of the social engineering and planning
innovations on the actual prosecution of the war far exceeded the marginal
importance of nuclear weapons.) In the paranoid mirror-world of the Cold
War, the extension of rational planning institutions seemed to offer a critical
edge in the long twilight struggle.

Perhaps it was an awareness of this threatening consensus that panicked
Hayek into writing The Road to Serfdom, which conflates all varieties of
collective social action into a monolithic “collectivism” threatening individual
human liberty. In any case, it is not hard to see from a Marxist perspective
that the program of technocratic centralized rational allocation would run
into heavy weather with the capitalists themselves. The capitalist backlash
left its mark on the economics profession, in the effective suppression of
Lorie Tarshis’ Keynesian textbook and its replacement by Paul Samuelson’s
carefully sanitized neoclassical synthesis, and in unremitting and ultimately
successful pressure to marginalize and defund Leontief’s research program.

The top-down “hard” program of technocratic centralized rational allo-
cation of resources guided by real data probably reached its high-water mark
in the late nineteen-forties, though it continues to exert a real influence on
political economic thinking and policy discourse to the present day.

2 Bottom-up

There is a curiously close connection between the mathematics of optimal
control theory and the mathematics of thermodynamics. Thermodynamics

3

is the somewhat unlikely but hugely successful branch of physics that deals
with systems that are too complex to be attacked directly by the methods
of dynamics. A paradigmatic example is the behavior of molecules in diffuse
gases such as the earth’s atmosphere: a relatively small volume of such a
gas contains such an enormous number (on the order of 1023) molecules that
it would be beyond human capability to calculate their dynamics in detail
(shades of von Mises’ critique of central-planning socialism). The ingenious
application of statistical reasoning to this type of problem leads to very
powerful and useful predictions about the macroscopic behavior of gases,
regardless of the details of their molecular motions. Thermodynamic methods
lead to deep insights into an enormous range of complex phenomena, though
the results are generally not as simple as the behavior of diffuse gases.

When the interactions of the constituents of complex systems are more
intricate than the collisions through which gas molecules exchange energy,
such as commodity purchases and sales, the system can produce macroscopic
emergent, adaptive behavior. Except in unusually tractable cases like diffuse
gases, it is possible to study these emergent properties of complex systems
only through simulation methods of limited precision. There is considerable
reason to believe that the division of labor and the capitalist economy are
best understood as complex systems (see Foley, 2003; Duncan K. Foley (ed.)
and Peter S. Albin, 1998). In fact, as I have suggested, classical political
economy can be understood as an attempt to reason through the implications
of regarding commodity production as such a complex system.

The last half of the twentieth century saw an upsurge in interest in
bottom-up self-organized systems, such as ant-hills and bees’ nests, bird
flocks, computer networks, unsupervised learning algorithms such as neu-
ral nets, the capitalist economy, possibly the human brain and a host of
other similar examples. Several features of these bottom-up systems draw
the attention of systems thinkers.

For one thing, compared to top-down optimal control systems, bottom-
up self-organized systems tend to be more “resilient” or “robust”. Self or-
ganized systems often (though not invariably) continue to function (possibly
in a degraded mode) despite the disruption or even destruction of important
subsystems, and in important cases can recover from such damage sponta-
neously. Top-down systems can be built with considerably “redundancy”,
but tend to be more vulnerable to disruption of key elements, particularly
the feedbacks that implement their optimal control properties.

Another intriguing property of bottom-up self-organized systems is that

4

although they are not designed to achieve optimal performance, they often
do perform surprisingly well. Ant-hills, for example, are remarkably efficient
in locating and exploiting food sources.

Bottom-up self-organized systems also exhibit a high degree of adaptabil-
ity to new situations. Optimal control systems tend to be optimized for some
particular context in which they are designed to operate. Self-organized sys-
tems can adapt to a wide range of environmental changes (though there are
typically limits to the magnitude of shocks any such system can survive).

Capitalism itself is a good example of all these features of spontaneously
organized bottom-up systems: historically capitalist institutions tend to re-
produce themselves even after the destruction wrought by wars, revolutions
and financial meltdowns; capitalist allocation of resources approximates ef-
ficiency to some degree; and capitalism has proven to be highly adaptable
in the face of massive environmental changes (many of which, such as world
population growth and technical innovations, arise from the dynamics of
capital accumulation itself).

The vision of the economy as a complex system gives rise to a “bottom-
up” understanding of how commodity production is organized, a la Hayek.
It also suggests a parallel bottom-up vision of socialism as arising from the
spontaneous organization of production through some framework of institu-
tions different from private appropriation and exchange of products.

This bottom-up vision of social organization resonates with important po-
litical currents of the late twentieth century. The “New Left” movements of
the nineteen-sixties rebelled against the centralizing and regimenting tenden-
cies of “Old Left” socialism and communism by calling for decentralization,
participation, and the political primacy of individual freedom and expression.
The Left, such as it is in the contemporary world of globalized capitalism, is
much more attracted to the vision of spontaneous political expression than
to the unpleasant chore of organizing political institutions.

This enthusiasm for spontaneity without central coordination or direction
has attached different parts of the Left to various economic experiments,
plans, philosophies, and models. Some of these, such as micro-credit in-
stitutions, amount to very minor modifications of the capitalist commodity
system (or could indeed be regarded as systematic extensions of the logic of
the commodity system).

One idea which flowers perennially on the Left as an alternative to cap-
italism is workers’ control. In its simplest form this vision accepts the
commodity-money framework of the organization of the division of labor,

5

but proposes to replace capitalists as the organizers of production at the
point of production by workers. Enterprises would be owned by collectives
or cooperatives of workers, who rent or borrow capital and constitute what
economists call the “residual claimants” of commodity production. Work-
ers’ control has features of spontaneity, adaptability, and resiliency, partly
as a result of inheriting them from capitalist-commodity production itself.
Like capitalist firms, worker-controlled enterprises could form and dissolve
in response to market signals to accomplish a decentralized reallocation of
resources as society changes and evolves. It is possible to imagine capital-
allocating institutions that would permit the free formation of new enter-
prises and hence a substantial degree of competition. Worker cooperatives,
as producers of commodities, can co-exist with (and compete with) capitalist
firms, so it is possible to imagine an evolutionary process of transformation
of a capitalist economy into a socialist economy, if the content of socialism
is workers’ control. The vision of workers’ control, by accepting the broad
framework of commodity production and money, solves many of the puzzles
that haunt more radical visions of socialism.

In fact, workers’ cooperatives do function as a subsidiary sector of most
capitalist economies, and even have flourished in some circumstances. They
have a long history in the Basque country of Spain, the American midwest,
and Italy, among many other places. For some years a major European econ-
omy, Yugoslavia, was committed to the workers’ control form of organization
of social production, and its economy functioned largely on this basis, provid-
ing some invaluable historic experience to shed light on the actual workings
of such a system. Economic theorists (for example Vanek, 1970) have pro-
duced a rigorous analysis of the properties of workers’ controlled enterprises
and economies.

Some points stand out in surveying the history and experience of work-
ers’ control. One is central to the economic analysis: the role of the ac-
tual workers in enterprises as residual claimants of enterprise income biases
worker-controlled enterprises against hiring because new workers dilute the
claim of existing workers to the surplus revenues of the enterprise. This
phenomenon in turn gives rise to pressures to differentiate claims to surplus
revenues among different strata of workers. When worker-controlled enter-
prises become very successful, the resulting hierarchy of workers begins to
resemble that of capitalist firms. When the contradictions between the ju-
ridical form of organization of the enterprise and the substantive claims of
different strata of workers to the surplus revenues become acute, it is com-

6

mon for worker-controlled enterprises to privatize themselves spontaneously,
converting into traditional capitalist firms. A second point is that despite
the demonstrated capability of worker-controlled firms to compete success-
fully with capitalist firms under particular circumstances, there has been no
tendency for worker controlled enterprises to grow spontaneously to crowd
out capitalist firms in any economy: workers’ control remains a relatively
small sector even in societies where tradition and practice favor this form of
productive organization.

Another noteworthy bottom-up alternative model to capitalist firms as
organizers of production is the “open source” or “peer production” movement
that has been highly successful in developing computer software and gener-
alized to some other similar fields such as pharmaceutical drug development
and gene technology. Peer production is a decentralized, spontaneous form
of organization of productive resources, through which a group of interested
and participants contribute time, energy, and capital to the production of so-
cially useful products. TeX and LaTeX, type-setting programs widely used
for scholarly and scientific writing, Apache web servers, and the Linux oper-
ating system are products of peer production. The software created through
peer production, aside from being “free”, works enough better and more re-
liably than for-profit competing products to dominate important branches of
computer technology. Peer production is a quite convincing demonstration of
the feasibility (and even superiority) of organizing a technically sophisticated
division of labor through spontaneous and primarily non-commodity/money
mediated social relations of production.

There are some major obstacles to peer production as a universal model
of social production. The capital involved in software development is rela-
tively small compared to human labor input. Much of the capital required to
carry on software development, mainly computers and network connections,
are cheap and already available to participants in open source projects. (The
network itself, the internet, is provided socially through a complicated mix-
ture of top-down and bottom-up institutions.) The participants in open
source projects typically have “day jobs” that provide them with incomes
to pay the rent and keep food on the table through participating in the
commodity-capitalist organized division of labor. Participants in peer pro-
duction are motivated by their own needs and interests, like more humble
hobbyists, as well as by powerful forces of social approbation and recogni-
tion for achievement. Many “volunteers” in peer production are actually
participating at the instruction of their capitalist for-profit employers, who

7

see commercial advantages in being involved in open source program devel-
opment. The products of many peer-production efforts are what economists
call “non-rival” goods like programs or information for which the marginal
cost of provision to an additional user is negligible compared to the fixed
cost, for example, of program development. If we think about generalizing
peer production to sectors like food or textiles or construction many contra-
dictions are immediately apparent.

The explosive increase in computing power and the emergence of com-
puter networks potentially solves problems for the bottom-up approach to
socialism just as it does for the top-down approach. The central issue in
organizing a complex social division of labor is, as Hayek pointed out, infor-
mation. (That is not the only issue, of course, since incentives and coordina-
tion of effort at the point of production also pose important questions.) The
capitalist-commodity system depends to a considerable degree on markets
and the formation of market prices to generate and diffuse the information
required for the organization of the division of labor. A socialist system
that either de-emphasizes markets or dispenses with them altogether will
have to depend on other sophisticated decentralized methods of processing
and diffusing large quantities of information. The availability of powerful
computers and networks at least holds out possibility of creating interactive
systems that could function in place of markets in this respect.

The top-down vision of an optimally controlled society stemming from
the Vienna Circle’s mathematicians has morphed through thermodynamics
into a Santa Fe Institute bottom-up vision of a self-organized, decentralized
system of social dynamics.

3 What do we talk about when we talk about

socialism?

Socialism is the dialectic negation of capitalist commodity production, and
it is inevitable that the discussion of socialism is motivated by the desire
to mitigate or eliminate features of capitalist commodity production that
socialists dislike. Since there are many things about human social interaction
to dislike, this discussion can become quite diffuse. (Can socialism eliminate
war? racial and ethnic discrimination? gender oppression?) In order to
focus our thinking, let me list three key aspects of capitalism that play a

8

central role in socialist discussions of radical economic change: commodity
production and inequality; private ownership of the means of production;
and wage labor and exploitation.

3.1 Commodity production and inequality

In principle, as neoclassical general equilibrium theory asserts, we could imag-
ine a commodity production system in which the distribution of wealth and
income were highly egalitarian. In the traditional economic Walrasian model,
for example, inequalities in the final allocation of produced goods and services
arise only from inequalities in the ownership of productive resources, like la-
bor, means of production, and land. One popular fantasy among egalitarian-
minded economists and other social scientists is a society of decentralized
commodity production with equally distributed ownership of productive re-
sources, which would magically reconcile the goals of fairness, efficiency, and
individual liberty.

The first point to make about this idea is that it is an historic empty
box. One of the better-attested “regularities” of human social life is that
commodity production is associated with a highly unequal distribution of
income and an even more unequal distribution of wealth. Typically the top
fifth of incomes and the top tenth of wealth amount to about one half of the
totals in commodity producing societies.

There are several plausible explanations of just why this sharp degree of
inequality, which is perhaps the most salient experiential feature of capitalist
society, exists.

Human beings differ, for example, in their genetic endowments. Perhaps
these enormous differences in economic outcomes reflect these differences.
Some highly visible instances, such as the high incomes of sports stars, lend
credence to this notion. It is interesting that the classical political economists
tended to view inborn differences in human talent as negligible in their think-
ing about human society (and certainly neither Smith nor Ricardo were radi-
cal critics of capitalist social relations). One reason to doubt this explanation
of observed inequality is that independent non-economic measures of human
capacities tend to show rather small, normally distributed differences among
individuals. It is not easy to understand how the commodity production
system could systematically amplify these differences and transform their
statistical properties into the extremely skewed exponential and power-law
distributions of income and wealth we observe.

9

The inheritance of wealth, either directly in the form of ownership of
resources, or indirectly through inter-generational transfers in the form of
education and other social advantages, is another popular explanation of
the highly skewed distribution of income and wealth. But bourgeois revo-
lutionary values are hostile to inherited privilege, and not very consistently
supportive of concentration of wealth through inheritance. Large family es-
tates are regularly dissipated through the multiplication of descendants, mis-
management, and extravagant consumption. It is not easy to produce models
based only on inheritance that predict extreme concentrations of wealth and
income. Furthermore, some quasi-experiments dramatically call this hypoth-
esis into question. In Eastern European countries in the nineteen-nineties, for
example, privatization of very substantial state assets was sometimes based
on distributing “vouchers” or shares on an egalitarian basis and allowing
the recipients to sell their claims (or buy others’ claims) freely according to
the rules of commodity exchange. Within a very short time, much shorter
than the dynamics of inheritance would imply, the ownership of these claims
became highly concentrated through speculation. Similar outcomes are com-
mon after land reforms and other redistributive measures. This suggests that
even if it were possible hypothetically to equalize ownership of productive re-
sources completely at one moment of time, there are powerful equilibrium
tendencies of commodity exchange that would tend to reproduce a highly
unequal distribution of income and wealth.

These equilibrium tendencies are, in fact, observed in thermodynamic
systems with large numbers of degrees of freedom, which tend to reproduce
exponential and power-law distributions. It seems likely that mass, decen-
tralized social interactions, such as market exchange, share these powerful
equilibrium tendencies. The Walrasian theorem that final allocations merely
reflect the underlying distribution of ownership of productive resources de-
pends crucially on the incorrect assumption that all market transaction take
place at equilibrium prices. When we make the more realistic assumption
that commodity owners very often exchange at disequilibrium prices as they
grope their way toward the determination of the equilibrium price, abstract
models of commodity exchange imply skewed, highly unequal distributions
of income and wealth (Foley, 2010).

These considerations suggest that Marx was correct in arguing that the
socialist reforms of the commodity system of exchange could not by them-
selves transform social relations. Similar conclusions flow from both the the-
oretical analysis of schemes like worker-controlled enterprises (which predict

10

sharp inequalities) and even the historical experience of Yugoslav society,
which experienced sharp increases in regional and class inequality during its
experience with workers’ control.

3.2 Private ownership of the means of production

Classical Marxist analysis tends to characterize capitalism in terms of the
private ownership of the means of production. In Marx’s theory of capi-
talism, the “monopoly” (in a class sense, not in the usual economic theory
sense) control of means of production by a small capitalist class is a neces-
sary condition for exploitation (though not a sufficient condition, since the
availability of exploitable wage laborers is also essential).

Thus classic socialism has centered its political energies on the “expro-
priation of the expropriators” through the elimination of private property in
means of production.

The elimination of private property in the means of production has rami-
fications in various dimensions. One question is what happens to any incomes
(profits) that accrue to owners of the means of production. Another question
is how ongoing or new productive enterprises get access to means of produc-
tion required to carry on production. A third, related, question is how scarce
means of production are to be allocated among competing potential uses.

The experience of the Soviet experiment and various state socialist episodes
make it clear that eliminating private ownership of the means of production
in and of itself does not eliminate exploitation of the direct producers. In
the Soviet case there is strong evidence that a class division of society arose
between members of the ruling elite who practically controlled the means
of production on the one hand and direct producers on the other. A case
can be made that the collapse of the Soviet system was the result of classic
Marxist pressures to bring juridical relationships into line with substantive
social relations of production by formalizing the “private” control over pro-
ductive resources. (The historic transformation of major parts of the Soviet
nomenklatura into the nascent capitalist class of post-Soviet society is possi-
ble confirmation of this view.) When western European nations flirted with
state ownership of the means of production, the facilities nationalized were
often in declining industries where the state enterprises could not make prof-
its anyway. The motive of nationalization in these episodes was more often
the preservation of jobs threatened by competition than redistribution of
profits among social classes.

11

The relevance of private property in the means of production is closely
related to the distributional questions just discussed. If the distribution of
ownership of productive resources were equal, the system of private ownership
of means of production in itself would not pose so many social drawbacks.

From the point of view of bottom-up, decentralized visions of socialism,
private ownership, or at any rate some type of private control over means
of …

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