Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

What Remains of Socialism?

Summer 1996


N. Scott Arnold
Oxford University Press, 1994, xiv + 301 pgs.

N. Scott Arnolds outstanding book makes a vital contribution to the debate over socialism; but Arnold has in part misconceived his own achievement. Since the collapse of socialism in the Soviet bloc, the world has had to recognize a fact long known to students of Mises. Centrally planned socialism is not, as its proponents imagined, a system vastly more efficient than the "anarchy of the market." Far from it: socialism cannot solve the calculation problem and thus cannot function at all.

Absent a price system, socialist planners cannot determine which resources should be directed to the consumer goods they wish to produce. Faced with the collapse of their dream, what can socialists do? Oskar Lange offered the most popular socialist response: why not a socialist system that uses market pricing? The schemes that have drawn inspiration from Langes idea have been many and various; but the main instance Arnold wishes to investigate may be simply described. (Incidentally, Lange was not, as Arnold states, Misess first opponent in the calculation debate [p. 39].)

The type of socialism Arnold considers relies heavily on workers cooperatives. Firms are not owned by capitalists--these the socialist regime has banished to outer darkness--but by the workers who labor in them. But like capitalist firms, cooperatives buy and sell on a free market: no central authority directs them to set certain prices. The state does not remain totally idle: its policies largely determine the rate of investment. With this plan, market socialists hope, the advantages of socialism can be retained and the problem posed by Mises avoided.

What is one to think of this system? Arnold establishes, with immense skill at careful argument, that market socialism is far inferior in economic efficiency to the free enterprise system. But he thinks that he is doing something else as well. I propose first to describe the main lines of Arnolds criticism of market socialism and then to explain how he misconceives his own project.

Our author has seized hold of a key point in his assessment of market socialism. In order to function, a market socialist system cannot allow capitalist enterprises in any significant number to exist. Put otherwise, market socialism can be seen as a list of prohibitions: it forbids certain "capitalist acts between consenting adults," in Robert Nozicks famous phrase. By contrast, a free enterprise economy does not forbid workers cooperatives: they, just as much as firms owned by capitalist entrepreneurs, stand free to face the test of market competition.

Does it reduce economic efficiency to ban capitalist firms? If it does, the market socialist system collapses, if judged on economic grounds. And just what Arnold shows is that market socialism drastically interferes with rational conduct of the economy. In doing so, Arnold relies heavily on the "new institutional economics" of the Berkeley economist Oliver Williamson.

To show the superior efficiency of free enterprise a simple argument appears to suffice. In a capitalist economy, as we have said, people are free to form workers cooperatives as they wish. If, then, such cooperatives promoted efficiency, why would they not supplant capitalist firms through the force of competition? If market socialists correctly judge the benefits of their system, efforts to establish it appear unnecessary: the market will accomplish the task by itself. If, on the contrary, capitalist institutions flourish in a free economy while cooperatives occupy only a minor role, is this not prima facie evidence that market socialism fails to work? Legislation to establish market socialism is either unnecessary or harmful.

This argument, which threatens to undermine market socialism with one blow, applies the "evolutionary hypothesis" used by the new institutionalists. On this view, the very existence of an institution on the free market provides evidence of its superior efficiency. Were it not efficient, why would it exist? Though this argument impresses me as a strong one, Arnold does not make use of it. He essays a more difficult task: he endeavors to show in detail the superior economic efficiency of capitalist institutions.

Under capitalism, workers characteristically do not own the firms in which they work. Why do workers consent to such arrangements? Surely workers wish to control their own labor; if they do not do so, have they not been forced by the imperatives of the system to work for others? Arnold uses pioneering work by the economist Armen Alchian to show that the working arrangements of capitalism make eminent good sense.

In "team production," in which workers must coordinate their activities on a joint endeavor, a tendency is present for each individual to shirk. Why not, to the extent that one can get away with it, turn to other things and let ones fellow workers bear the brunt of the task? To deter this, monitoring is necessary. And the question at once arises: what form of monitoring is most efficient? Alchian gave strong reason to think that monitoring works better if the monitor has interests independent from those of the workers. From the workers own viewpoint, it makes sense for them to hire themselves out rather than to manage their own work. They are likely to be more productive, and hence earn more money, if they do so.

But what of the competing Marxist claim that workers labor for capitalists because they are forced to do so? Arnold deals in an especially effective way with one variant of this claim. Sometimes, it is contended, workers are forced into capitalist employment because they lack bargaining power. If they do not accept the jobs offered to them, they face starvation. The capitalist, by contrast, can readily find a replacement for those who find his terms not to their liking. Arnold responds: "The problem with this is that as an explanation, it is a non-starter; it simply restates the allegation to be proved" (p. 156).

To return to Arnolds use of the new institutional economics, the institutions of capitalism can quite readily be shown to make sense from an economic point of view. In particular, Arnold shows that the two forms of organization most characteristic of a free enterprise economy, the classical capitalist firm and the open corporation, have strong advantages over workers cooperatives.

It is here that Arnold relies most heavily on the work of Williamson. The Berkeley economist places great stress on what he terms "asset specificity." This inelegant phrase designates an inescapable fact: many assets are tied to very specific uses, and lose much of their value in alternative employment. The skill of a champion baseball pitcher may be worth millions; in its next most valuable use, the players athletic ability might gain him next to nothing. Given asset specificity, it is important for market participants to build close relations with particular suppliers and consumers; they become tied-in to firms whose production is exactly suited to their needs.

But this raises a further problem. If two firms become closely tied together through repeated transactions, what are they to do should they arrive at an unexpected situation that neither contemplated? No contract can anticipate all contingencies, since human beings have only "bounded" or limited rationality. The chief theme of Williamsons career has been to discover how institutions are shaped to cope with the situation just described.

Arnolds application of Williamsons analysis proceeds in intricate detail, but his results admit of little doubt. The classic capitalist firm, in which one person owns the business and directs production, efficiently deals with the problems to which Williamson calls attention. The open corporation, though it separates ownership from control of production, preserves many of the efficiency advantages of the classical firm. In addition, it enables vast sums of money for investment to be raised.

I fear that my account of Arnolds book has so far been misleading. I have presented matters as if his principal contention was this: capitalist firms are much more efficient than workers cooperatives; thus market socialism is not a viable alternative to the free enterprise system. I shall not conceal my belief that it would have been better had Arnold offered his results in just this way.

But he does not. Arnold is a philosopher, not an economist; and what principally concerns him is the justice of free enterprise and market socialism. More specifically, he concentrates on the Marxist claim that under capitalism, workers are exploited. Using his efficiency results, he turns the tables on the socialists: it is socialism, not capitalism, that exploits workers.

Arnold at first crisply disposes of the Marxist charge of exploitation. The Marxist contention rests on the labor theory of value, and "[t]he fatal flaw in this account is that the labor theory of value is not true" (p. 58). But the failure of the Marxist claim should not, Arnold thinks, lead us to cast exploitation entirely aside.

Economic value, as economists now see it, is a subjective affair; but it does not follow from this that it is senseless to say that someone does not receive the value of his services. To receive less than one is worth is to be subject to exploitation; and Arnold thinks he has an account of this fully consistent with the modern understanding of value. An advantage of his analysis is that it applies generally to any transaction: exploitation is not confined to relations between employers and workers.

Put briefly, the "value of something" is "what it would fetch in an ideal market" (p. 72). If something exchanges at its value, the exchange is fair. (Arnolds account does not require that a fair exchange take place in an ideal market: the requirement for fairness is that the price be the same as what would be obtained there.) If this condition is not met, the exchange is unfair, but this does not suffice for exploitation. The victim of the unfair exchange must have no better alternative available to him; if he can secure his value in another exchange, he is not exploited. (I have here simplified a rather involved definition that Arnold presents on p. 86.)

I admire the ingenuity and care with which Arnold develops his definition; but I cannot see that his notion of unfair exchange has the slightest moral significance. Why has someone any cause for complaint at all if the price he receives differs from that found under conditions of an ideal market? (By "ideal market" Arnold means, roughly, a perfectly competitive market.) Why should one call the perfectly competitive price a goods value? Prices are determined by values, but are not values themselves. Contrary to Arnold, the subjective theory of value does indeed render senseless the notion of someones failing to receive the value of his services in a free exchange.

Arnolds rejoinder is obvious. Are we to rule out, by a stroke of the pen, exploitation in the free market? Surely an argument from definition will avail little in a clash with market critics. But I have not ruled out exploitation by definition. It does not follow from the fact that exploitation cannot be defined in terms of the subjective theory of value that no account of exploitation is legitimate. All that follows is that the theory of value is the wrong place to look for one.

If Arnolds account of economic exploitation were correct, he would indeed have contributed in a major way to the dispute over the justice of capitalism and socialism. Since exploitation, in his analysis, depends on deviations from competitive market prices, his demonstration of the superior efficiency of capitalism at once has an important consequence. Because market socialism is less efficient than capitalism, the conditions for exploitation are more readily met in the former system. But, once more, I am not sure why this matters, where justice is concerned.

Even if this criticism is correct, Arnolds discussion is a first-rate achievement. He has provided the best and most carefully worked out account of market socialism that I have read. His book is a model of how philosophers can use economic theory in their work--and in this department there can be no doubt of Arnolds efficiency. As if this were not enough, the book contains a superb assortment of sarcastic remarks about lawyers.


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