Chapter Ƕ: Ļe Debate about the Efficiency of a Socialist Economy ȆȆwhich a hundred middle-sized engineering firms have to perform in a
week.
It is a crude method to search for an equilibrium by experimentally
varying all the determinants until they fit together, and, although it is
infinitely more economical to carry out these variations on paper than in
reality, a further great economy of effort might be achieved through the
development of mathematical shortcuts. A future generation may look
upon the trial-and-error process very much as a second-year schoolboy,
knowing the use of multiplying and dividing techniques, looks at the
abacus. But in the meantime, the abacus method serves the purpose of
demonstrating that the problem is in any case soluble, practically as well
as theoretically.Ȁ(LandauerȀȈȃȃ, pp.Ȃȃ–ȃȀ)Before proceeding to socialist schemes that assign a large role to prices,
let’s examine the optimum condition that for every product, marginal cost
should equal price. Ļis is Abba Lerner’s famous instruction to managers
of socialized enterprises. Its implications have been one of the hottest
topics of debate in the field of welfare economics.
First, justwhyshould marginal cost and price be equal? Ļe marginal
cost of commodityAis the sum of the prices of the additional factor-units
needed to make an extra unit of commodityA. Ļe price to a producer of
commodityAof each factor-unit equals the factor’s marginal value pro-
ductivity elsewhere. If consumers will pay more for commodityAthan
its marginal cost, this means that the necessary additional factors will pro-
duce more satisfaction (as measured by what consumers are willing to pay)
in the production of commodityAthan in the production of anything else.
If, on the other hand, consumers will not pay as much for commodityAas
its marginal cost, this means that marginal factors will produce more con-
sumer satisfaction elsewhere. Now, an additional unit of any factor should
have the same marginal value productivity—that is, the same marginal
productivity of consumer satisfactions—in all its uses. Ļerefore, produc-
tion of commodityAshould be expanded or contracted to the point at
which marginal cost and price are equal.
If average cost of a commodity decreases throughout the relevant range
as output expands, marginal cost is less than average cost. Ļe total amount
ȀIn a footnote Landauer cites the work of Henry Schultz to show that actual demand
curvescanbe found.
In the book quoted, Landauer, an old-time socialist, is ostensibly arguing for “planning”
rather than for “socialism.” However, it would be mere quibbling about the use of words
to deny that Landauer’s proposals are socialism.