Computers and the economic calculation debate

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Computers and the economic calculation debate
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Introduction

• I will be looking at the extent to which
  computing technology has improved the
  possibilities for planned economies.
• Web site discussing these issues
  http//reality.gn.apc.org

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Topics of Discussion

• Plans and computers
• Value and prices under Socialism
• Payment

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Historical Background

• Immediate - the work of Prof Nove of Glasgow
  University and its impact in Britain
• Long term - the work of the Austrian school of
  economics, particularly von Mises and Hayek
• Current relevance - application of Hayekian
  economics to formerly planned economies
• Collapse of of production
• Drastic fall in living standards and life
  expectancy

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Free market deaths

• 7.7 million Excess Russian deaths 1991-2001

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Plans and computers

• Starting with Von Mises, conservative economists
  argued that effective socialist planning was
  impossible for 3 reasons
• No effective cost metric in absence of market
• Complexity too great millions of equations
  argument.
• Impossibility of capturing tacit knowledge

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No Cost Metric

• Von Mises argued that without a market one could
  not cost things and thus had no rational basis
  for deciding between production alternatives.
• One exception he allowed was the use of Labour
  Values we will return to this

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Lack of Metric continued

• Suppose you have to select one of two techniques
  of producing for example polyethelene each is
  technically feasible but which would be the best
  one to chose from the standpoint of the economy
  as a whole.
• In a market economy you cost the two techniques
  in money terms and select the cheapest.
• If money and prices did not exist how could you
  do it?

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Marxian response use labour time as the metric

• The Labour theory of value provides us with an
  immediate response here you select the
  technique which minimises the total expenditure
  of labour.
• Von Mises replies that the use of labour values
  is impractical for two reasons
• The computational complexity of estimating labour
  values is simply to great
• Reduction problem how to reduce complex to
  simple labour

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Millions of equations

• Von Mises asserted that one would need to solve
  millions of equations to come up with the answer.
• Computers obviously change this as they can solve
  millions of equations
• Need to be quite precise about how many million
  equations and just how hard they are to solve
• This is a branch of complexity theory

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Complexity

• The complexity of an algorithm is measured by the
  number of instructions used to compute it as the
  size of a problem grows.
• We will look at a simple example before going on
  to economic planning

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Searching

• Suppose that I have a telephone directory for
  Berlin and a phone number.
• It is clearly possible in principle to look at
  every number in the directory until I find who
  the number belonged to.
• The task would probably take several days.

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Example

• Suppose I have 2 directories
• Has 1000 entries
• Has 1,000,000 entries
• To look up a name will take 1000 times as long in
  the second directory, but to look up a number
  given the name will only take twice as long.

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Indexing

• If I have a name on the other hand, I can
  probably look up the phone number in less than 60
  seconds.
• The complexity of looking up by name is
  proportional to the logarithm of the number of
  people in the town.
• The complexity of lookup by number is
  proportional to the number of people in the town.
• The key is to select methods of low complexity.

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Use of Input Output table

• From the I/O table one can compute how much of
  each intermediate product required to produce
  each final product.
• In particular we can compute the labour content
  of each output.

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Part of the USA Input Output table
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Computability of labour content

• Suppose we have 10,000,000 different types of
  goods produced in an economy (Nove quotes this)
• Labour content given by a simple equation
• lAll
• where l is a vector of labour contents,l a
  vector of direct labour inputs and A an input
  output matrix
• Clearly too big to invert, matrix is even too big
  to store in a computer containing 1014 cells.

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Exact solution impossible
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Simplification

• Matrix is sparse, most elements are zero
• Replace by linked list representation, we
  estimate the number of inputs directly used in a
  product is logarithmic in the size of the
  economy.
• Solve iteratively - use about 10 iterations,
• Complexity of order nLogn in number of products.
  We estimate that it takes a few minutes on a
  modern machine.

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Solution

• We only need to know labour values to about 3
  significant figures.
• Initially just include direct labour inputs.
• The produce second estimate taking into account
  indirect inputs. Repeat this step about 10 times.
• You end up with a figure accurate to about 3
  digits.
• This is accurate as our knowledge of prices
  which are rarely accurate to more than 3 figures.

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Approximate solution is feasible
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Feedback mechanism

• We assume a real time feedback mechanism which
  uses sales of products along with democratically
  determined general goals to set net output
  targets for all goods. The planning computers
  must derive the gross outputs required to meed
  these net outputs.

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Model we propose

• Drawn on the principles of Robert Owen (of New
  Lanark), and Karl Marx

New Lanark
Robert Owen
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Payment in labour

• Workers paid in labour tokens, 1 per hour. Goods
  priced in labour tokens proportional to the
  labour required to make them. (some discounting
  possible )
• Industry publicly owned and planned in physical
  units.

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Owenite Labour Note
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Labour notes not money

• Marx points out that labour notes are no more
  money than a theatre ticket is.
• They presuppose not commodity exchange but the
  direct socialisation of production

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Market clearing prices used for finished goods

• If stocks of unsold goods grow then reduce
  selling price
• If stocks fall then increase selling price
• If price above labour value - then increase
  output
• If price below labour value then reduce output

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How close are prices to labour values?
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International correlations of prices to labour
values
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Comparison with today

• Today market prices are an imprecise estimate of
  the labour cost of producing a commodity.
• True labour values more accurate estimate of
  costs
• Capitalism only accounts for the paid portion of
  the working day. As a result it systematically
  underestimates the costs of labour as compared to
  machinery whose cost it pays in full.
• This encourages the wasteful use of labour and
  the under-use of machinery in capitalist
  economies.

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The reduction problem

• How do we reduce complex labour to simple labour
  the work of an airline pilot to the work of a
  cook?
• In principle it is simple we add up the labour
  cost of training a person and divide it by the
  number of hours they will work during their life.

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Why the fuss?

• Behind this technical objection by Mises hides
  class prejudice.
• How, the upper class intellectual thinks, can my
  work possibly be compared to that of an ordinary
  worker.

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Why computers better than markets

• The market can be viewed as computing engine -
  this is explicit in Hayek.
• Cycle time is slow, measured in months or years.
• Arrives at answer by physically adjusting
  production up or down.
• Constantly tends to overshoot in an unstable way.
• Human costs to these adjustments

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Computers are faster

• Computers can predict where an ideal market
  economy would get to if it ever had the chance.
• Production can then be adjusted directly to this
  target.
• Cycle time for computation is in the order of
  hours not years or months.

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Tacit Knowledge

• Hayek argued that socialism could never handle
  the tacit dispersed knowledge that enables an
  economy to function. The price mechanism was a
  cybernetic control system that transmitted
  private information to where it was needed.
• Example he gave was of a shipping clerk who has
  private expert knowledge of the sailings and
  arrivals at various ports.

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Boadicea

• Paradoxically transport air transport at least
  was the first industry to be subjected to
  comprehensive computerised planning. The Boadicea
  airline booking system opened in the 1960s
• Now all airline booking is computerised and
  shipping clerks are a thing of the past.

Boadicea early anti-imperialist
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Boadicea computer of 1960s
I have an affection for Boadicea, this B5700
buffer processor was my first personal computer
in the 1970s, when Greg Michaelson and I salvaged
it from scrap.
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Objectivist tacit knowledge

• Clearly it is the Airbus factories that have the
  information about what parts are used to make an
  A340. This information corresponds to what Hayek
  called tacit knowledge---but it is of course no
  longer human knowledge.
• Literally nobody knows what parts go into an
  A340. The information, too vast for a human to
  handle, is stored in a relational database.

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Industrial records

• At an earlier stage of industrial development it
  would have been dealt with by a complex system of
  paper records.
• Again the knowledge would have been objective,
  residing in objects rather than in human brains.
• The very possibility of large scale, coordinated
  industrial activity rests upon the existence of
  such objectivised information.
• Hayeks subjectivism makes him misunderstand the
  objectivity of industrial information.

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Computers and democratic control

• We propose system of online electronic voting on
  key issues like the proportion of national income
  to be allocated to health, eduction, research
  etc.
• This done in terms of the fraction of the working
  week in labour units that is to go on it.
• Taxes automatically adjusted to the democratic
  vote on social labour allocation.

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Payment

• Payment assumed to be 1 hour per hour worked
  minus taxes.
• No differentials for different grades of labour.
• Enterprises charged more by the state for skilled
  labour since this costs more to educate.
• Prevent accumulation of human capital but ensures
  efficient use of scarce labour.

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Incentives

• Would there still be an incentive to aquire
  skills
• Yes because skilled work is more interesting
  and enjoyable than unskilled work even aside from
  payment questions.
• Equal pay is fundamentally democratic.

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References

• Alternativen aus dem Rechner Cockshott and
  Cottrell,
• A number of related papers from web pages.
• http//reality.gn.apc.org
• http//www.dcs.gla.ac.uk/wpc/reports/
• http//ricardo.ecn.wfu.edu/cottrell/socialism_boo
  k/
• Book now available in English, Swedish, German,
  Czech. Bengali and Spanish translations in
  progress

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