In 1925, some twenty Soviet economists under the direction of P. I. Popov developed a fairly crude national economic accounting balance—focusing on six main branches of the economy and a number of subsectors—akin to how bookkeepers prepare a balance sheet. The innovation here is the mental leap of viewing the national economy as a sort of giant, single firm. That same year, Leontief published a review of the work on national balance sheets by Popov and his colleagues. Even earlier, economist Alexander Bogdanov had proposed an iterative procedure to steadily ratchet upward the granularity of national economic tables, and Nikolai Bukharin, whom we have already met, drew on Bogdanov’s work to devise a mathematical formalization of Marx’s economic tables for expanded reproduction, which in turn laid the groundwork for Popov and his team.
But as we have seen, Stalin’s Terror meant that little developed at Gosplan beyond these national material balances. Indeed, as contemporary economic historian Amana Akhabbar argues, most of the economists of the 1920s would go unpublished or untaught in universities until their revival during the Khrushchev Thaw. At the end of the ’50s, input-output analysis, which appeared to economists amid the Thaw as a rigorous, statistical technique with considerably more precise forecasts than the crude economic sketches they had up till then been depending upon, was “imported” from corporate America back into Russia by Soviet economist and mathematician Vasily Nemchinov. Nemchinov, stressing, and perhaps exaggerating, their Soviet origins, is credited with the introduction of mathematical methods to central planning and with establishing, in 1958, the first group in the country to study mathematical economics, which would later become the Central Economic Mathematical Institute.
Conversely, throughout his career in the United States, Leontief would insist that his work did not really rely on Soviet economics. An early refugee from a Stalinizing Russia, this is more than understandable. After World War II, Leontief quickly lost governmental and US Army financial supports following accusations that federal funds were being used to develop “Communist technology,” and again during the height of McCarthyism for the same reasons. It is some irony that it was only as a result of interest from private companies—notably Westinghouse Electric Corporation, who saw utility in his technique—that he was able to continue his research.
This Cold War performance of dressing up American economics in Soviet drag, and vice versa, even to the point of it taking a vast and venerable American conglomerate to rescue a Soviet economic technique, entirely out of self-interest, is a trope that we will see repeated over and over.
The initial development of linear programming, a branch of mathematics today available to an undergraduate in any discipline with a couple years’ worth of math, was heavily influenced by input-output analysis. Simply put, linear programming explores methods to find the best outcome given a series of constraints. It would go on to be adopted widely within microeconomics and within corporations in the West to plan production, transportation, technology and indeed any tasks that involve multiple variables and that aim at maximization of profits while minimizing costs and resources.
Firms routinely use linear programming tools to solve complex decision problems involved in supply chain logistics, production scheduling, transportation, or any form of resource allocation. Developed in the Soviet Union by Leonid Kantorovich and published in a 1939 booklet, Mathematical Methods of Organizing and Planning Production, the discovery of linear programming followed a request from a plywood factory that wanted to optimize production. The technique, by taking data from input-output matrices, offered a way to solve a whole class of similar conundrums.
It was first applied during the Second World War to solve military supply problems, but it was subsequently forgotten about, or rather repressed. The main problem, among many, was that Kantorovich counterposed “mathematical economics” to conventional Soviet “political economy.” Opponents sniffed something un-Marxist. In a 2007 mathematical-biographical sketch of Kantorovich by his student A. M. Vershik, he talks of an “internal veto”—a self-censorship not only of economic matters, but even of the mathematical aspect upon which they were built—that lasted until 1956. The “declassification” of the subject arrived with the new hope presented by Khrushchev’s Thaw.
Largely independently of Kantorovich, Dutch American mathematician and economist Tjalling Koopmans devised a similar method for the analysis of the optimum allocation of resources. The pair of them would be awarded another economics Nobel in 1975 for their joint discovery. A third individual, US mathematician George Dantzig, again independently of the other two but slightly later, just after the war, developed a formulation of linear programming to solve planning problems for the US Air Force. In 1947, he devised the “simplex method,” or simplex algorithm, within linear programming. It would quickly be adopted by industries for their internal planning, and it remains in use today; New Scientist magazine recently called this American twist on the question of Soviet optimization “the algorithm that rules the world.”
Mirroring the American arch-capitalists who saved the work of Leontief, in the Soviet Union, it was military specialists who were the first to delve into linear programming, as they were the only ones with access to foreign texts on the subject, translated into Russian though not yet published domestically. Their interest was not the broader question of economic planning, but systems control, itself a subset of the topic of distribution of resources, which is in the end of course the alpha and omega of economics. Not a colonel, nor a single general, had heard of Kantorovich. Vershik recalls visiting a Ministry of Defense research institute in Moscow in 1957 and telling them about his mentor Kantorovich’s work. “For them, who had just started to study the American literature on linear programming, this was a revelation.”
At this time, a broader rehabilitation of cybernetics was occurring, and the urgency of introducing computers into the army had increased. Kantorovich was invited to give a public lecture on his pet subject. The military specialists, who up until this point had only been using American sources obtained through secret channels, were thrilled to find that it was one of their own who had been a pioneer in this field. Kantorovich wrote:
I discovered that a whole range of problems of the most diverse character relating to the scientific organisation of production (questions on the optimum distribution of the work of machines and mechanisms, the minimisation of scrap, the best utilisation of raw materials and local materials, fuel, transportation, and so on) lead to the formulation of a single group of mathematical problems (extremal problems) … But the process of solving them with which one is faced is practically completely unusable, since it requires the solution of tens of thousands or even millions of systems of equations for completion.
Kantorovich’s idea was for the planners to assess optimal pricing, a scheme in which objectively determined valuations or “shadow prices”—a notional number assigned to items in place of a price—would be calculated from opportunity costs without the need for the “total information awareness” that the likes of Mises and Hayek said would be demanded for planning to work. Contra Mises and like Lange, Kantorovich demonstrated that rational economic calculation outside of market mechanisms was, in principle, possible.
Remember that economic planning can be useful to both capitalist firms and socialist economies. Internally, firms are planned economies no different to the Soviet Union: hierarchical, undemocratic planned economies to be sure, but planned economies all the same. The difference lies in their objective function (the goal) and how it is determined. In the capitalist firm, the technique is put in the service of maximizing profit for the gain of the owners, and indeed, most linear programming textbooks and software manuals assume profit as the objective. In the socialist society, the objective function may still be an increase in wealth, but that of the society as a whole; that is, mathematically akin to profit-maximization, but socially determined. The steady expansion of leisure time might be another objective function, as might the maximiz
ation of ecosystem services and minimization of their disruption. In this way, we see how while the replacement of market allocation with economic planning may be a necessary condition for the realization of socialism, it is not a sufficient condition: it must be married to democracy.
The Yugoslav Centrifuge
There is a simple squaring of the circle here, partisans of the notion of market socialism maintain. Capitalism uses the market to allocate resources; therefore, there can be no capitalism without the market. But there can be a market without capitalism.
Note that market socialism is distinct from social democracy. We can describe social democracy as a philosophy that accepts the insurmountability of the market while recognizing its inevitable inequalities, thus aiming for a mixed economy that balances market and nonmarket allocation between the state and the private sector, while promoting robust labor rights. In a social democratic society, the public sector retains the responsibility for essential goods and services such as healthcare, education, and emergency services; natural monopolies such as electricity generation, water management and the railroads; and strategically important industries such as steel manufacture, forestry, oil and mining. (Although in most countries, since the 1970s, few public services—bar policing, necessary for the impartial protection of property rights upon which the market depends, and the armed forces, necessary for the maintenance of integrity of the state—remain decommodified, most utilities have been privatized, and there is almost no public ownership of industry at all.)
Market socialism, however, is something different entirely. Under market socialism, there is no private ownership of industry, but allocation of goods and services still occurs via the market. Workers own their own enterprises, in the form of cooperatives, which in competition with each other sell their wares, and survive, expand or fail depending on the demand for them. Due to the vagaries of the market, as in social democracy, some key sectors, such as healthcare, may still be held by the public sector, but it remains a market society. Such a system benefits from the alleged efficient allocation of the market, avoiding bureaucratic sclerosis while eliminating the “owning class,” the bourgeoisie. Further, there are no bosses, and the workplace is democratically managed.
But partisans of market socialism have to set aside the reality that the goods and services produced in markets, even socialist markets, will still only be those that can turn a profit. And, as we have discussed, the set of things that are beneficial overlaps only in part with the set of things that are profitable. New classes of antibiotic, rural high-speed internet, and crewed spaceflight would all be as difficult to deliver under a socialist market as under a capitalist one, without significant, planned intervention into the market. Meanwhile, items that are profitable but actively harmful, such as fossil fuels, would still likely be produced.
The anarchy of the market also inevitably suffers from duplication and overproduction, and their concomitant manufacture of economic crisis. Just as capitalist markets run on profit—the difference between how much it costs to produce something, including wages paid to workers, and how much the product can then be sold for—under market socialism, use of the price signal would also generate excess revenues for the more efficient firms (even if transformed into worker cooperatives) and losses for the unlucky ones. Market socialists, then, have to explain how this system would redistribute “profits” equitably among the population. More importantly, how would their solution ensure that the profit motive—one that squeezes more work out of workers and creates incentives to overproduce—does not reemerge? Scaled up, the market and the profit motive create economy-wide cycles of boom and bust that hurt people and waste resources. By their very nature, markets produce inequalities—inequalities that, so long as a market exists, are only ameliorable, not eradicable. And it has consistently been inequality that has driven extra-economic conflict throughout history.
This is no abstract discussion. After World War II, Yugoslavia under Marshal Tito embraced a variation of market socialism. The Stalin/Tito split of 1948 sent leaders of the young multinational republic off to seek an alternative path to the bureaucratic Soviet model for the construction of socialism, leading them to experiment with what they called “workers’ self-management,” or radnicˇko samoupravljanje. Under this system, while factories remained formally under state ownership, the workers directed production (again, admittedly not with full control) at their workplace, the commodities produced were sold on the market, and then the workers at a particular enterprise kept the surplus revenue themselves.
As the role of market forces steadily expanded under Tito, particularly with the abolition of central determination of wages and the advent of personal income’s dependence upon the success or failure of a particular enterprise, competition between enterprises increased, and inequality grew between workers, skill categories, workplaces, sectors and, most ominously, regions. Inevitably, some factories will be superior to others at producing commodities, or have the luck of being located in a more developed region, with higher education levels, better transport infrastructure or any number of advantages. The state tried to balance this out through redistribution: regionally preferential policies such as the taxation of more profitable enterprises to fund the industrialization of less developed regions or to support agricultural areas. But this in turn provoked regionally based contestation of policies and investment decisions. University of Glasgow economic historian Vladimir Unkovski-Korica has argued that particular workplaces tended to identify less with the polity as a whole than with the interests of their enterprise management or their regional government. The first labor strike in the young country occurred as early as 1958, in an older mine in the wealthy republic of Slovenia, driven by resentment at the channeling of what workers viewed as their wealth into the amelioration of regional inequality. But this was not merely better-off workers getting humpty about high taxes; any effort to balance out inequality, necessarily a centralized endeavor, risked being seen as a return to Serb hegemony.
As if it were not enough to be caught between the twin dangers of an egalitarian centralism viewed as Serbian chauvinism, on the one hand, and a revival of regional nationalism, on the other, Yugoslavia also faced the challenge of a rising balance of trade deficit, and as much as a third of inward investment being dependent on foreign aid. Worse still, while initially this aid had come in the form of grants, by the ’60s, these grants had turned into loans. The government responded with a greater orientation toward exports, which in turn benefitted some factories and regions more than others. The strategy of integrated development of the whole country was ultimately abandoned in 1963 via the dissolution of the Federal Investment Fund under regionalist pressure, its funds distributed to local banks, which only accelerated the centrifugation of Yugoslavia while undermining economies of scale and a rational, regionally appropriate division of labor. The market logic of enterprise competing against enterprise predictably drove the reestablishment of workplace hierarchies, as well as ever-greater emphasis on financial shenanigans and marketing skills at the expense of production—the latter largely historically viewed by socialists as a wasteful carbuncle that squanders otherwise useful resources, the quintessence of capitalist irrationality. Wasteful investment and unsustainable loans proliferated as underperforming enterprises attempted to improve their position in the market. To service these onerous debts, the reestablished managerial hierarchy, aided by a withered self-management apparatus, did what any normal capitalist manager does: squeeze wages and conditions. Unemployment made its return to the land. And all this before the global economic crises and oil shocks of the 1970s.
Does this mean there is no room for market socialism or cooperatives in any conception of a just society? It depends on what time frame we consider. Let us abandon the view of market socialism and democratic planning as rivals. Instead, view cooperatives and market socialism (or elements of it) as bridging mechanisms toward decommodification and planning that build the confide
nce of ordinary people in their own capacity to govern a workplace without bosses—and ultimately to govern the entirety of the economy.
There may also be particular commodities or sectors that are harder to decommodify than others. As we saw in the early Soviet Union and Mao’s China, while much of heavy industry was relatively straightforward to decommodify (at least as easy as was its decommodification by any capitalist state, such as for steel and coal production in postwar Western Europe), attempts at decommodification of agriculture underlay the barbarisms for which these two regimes are most known: the Holodomor and the Great Leap Forward.
One of the key lessons from the history of “really-existing socialism,” that is, the Stalinist, Maoist or Titoist variety, is that we need to keep an open mind as to what works, experimenting with different economic forms and being comfortable with changing course, abandoning hypotheses in the face of new evidence.
Planning in Practice (Again)
So what went wrong in the Soviet Union? Francis Spufford’s novel Red Plenty is, at least in part, the tale of how Kantorovich failed in his efforts to have his scheme adopted, but was nevertheless so convinced of the strategy that, as Spufford notes, he was still writing letters to the Politburo pushing it until he died in 1986. The challenge was the need to go beyond “in principle” and toward “in practice.”
The practical algorithm Kantorovich offered, in an appendix to his 1960 work on the subject, could be solved with paper and pencil, but it was only tractable for problems of limited scale. When it came to solving more complex problems, Kantorovich recommended an approximative technique of aggregating similar production processes and treating them as a single process. At this time, in the USSR as in the United States, such exercises were largely performed by human “computers” (demonstrated in the 2016 film Hidden Figures, about the women “computers” who made NASA’s early space missions possible). While Kantorovich’s ideas were met with varying levels of enthusiasm, computing power at the time was too limited to employ the technique for detailed economy-wide planning, and it was instead used for drawing up plans for particular enterprises, or at most, sectors.
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