Saturday, October 4, 2008

The Second Shoe, Part II

by the Sandwichman

"I hate to sound like a Marxist about this, but…" -- Doug Muzzo, Political Science Professor, Baruch College, commenting on Michael Bloomberg’s decision to seek a third term as mayor of New York City.

Hate it or not, in the context of a really, really big economic crisis, making sense of the conjuncture may indeed require that we occasionally "sound like a Marxist."

In his introduction to the 1891 edition of Marx's Wage Labor and Capital, Frederick Engels stressed the importance of the distinction that Marx subsequently made (years after writing WL&C) between labor and labor power. Engels called this distinction, "one of the most important points in the whole of political economy."

Engels framed his discussion of this most important point by remarking on the relationship between political economy and book-keeping:

Classical political economy took over from industrial practice the current conception of the manufacturer, that he buys and pays for the labor of his workers. This conception had been quite adequate for the business needs, the book-keeping and price calculations of the manufacturer. But, naively transferred to political economy, it produced there really wondrous errors and confusions.

Twenty-six years later, on the eve of the Russian Revolution these "wondrous errors and confusions" had been miraculously resolved, at least in the eager imagination of V.I. Lenin:

The accounting and control necessary for [the socialization of industry] have been simplified by capitalism to the utmost, till they have become the extraordinarily simple operations of watching, recording and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.

Nothing had changed. Book-keeping still offered a wondrously erroneous and confused approach to political economy. Lenin simply didn’t know what he was talking about.

Then in the 1930s along came Oskar Lange and Ludwig von Mises and their debate about economic calculation under socialism. Lange won the debate at the time -- in theory. But, with the collapse of the Soviet system in the early 1990s, von Mises came to be seen as the winner on the ground. The dysfunctional Soviet accounting system, inspired by Lange’s arguments, had played an important role in that collapse. The unspoken assumption is that it was the Langian amendments to the accounting system -- not some intrinsic flaw in accounting-in-general -- that led to that collapse.

The joker in this deck is that the calculation debate revolved around comparing centralized state planning with some hypothetical competitive market. There is no such thing. In the real world, domination of markets by a few key players (bond rating agencies, the Federal Reserve, banks too-big-to-fail) and the principal-agent problem engendered by the separation between corporate shareholder ownership and management render the competitive scenario moot.

Oskar Lange wasn't alone in recognizing how the latter separation distorted economic incentives. Adolph Berle and Gardiner Means stipulated that the separation of risk and control in the modern corporation left a choice between conservatively protecting the assets of shareholders but thereby ['possibly'] inhibiting enterprise or granting free rein to the controlling group and risking "corporate oligarchy" and "corporate plundering". Berle and Means’s analysis was influential in establishing the securities regulatory policies of the Roosevelt New Deal. And guess what? The deregulation mania of the last three decades did indeed unleash enterprise, oligarchy and plundering.

But there’s no returning to the New Deal regulatory security blanket. In offering their fixes of financial regulation, on the one hand, and socialist calculation, on the other, Berle and Means and Oskar Lange ignored the old critique of political economy Engels had highlighted.

"Labor" may be a perfectly coherent book-keeping category from the limited perspective of the individual firm, but it is the source of error and confusion when brought over into political economy. National economic statistics rely heavily on the collection and collation of firm-level data based on accounting conventions. If firm-level data are silent on social costs than so will be national statistics.

Soviet accounting failed because state owned enterprises carried unsold goods on their books at official prices. It made no difference whether those goods were even salable. That created a perverse managerial incentive to produce shoddy goods.

Capitalist accounting fails because private firms are oblivious to the social cost of their labor and raw materials inputs. Those 'inputs' include byproducts of waste, pollution and worker health impacts. That has created a perverse managerial incentive to subsidize their input costs through off-the-book social and environmental "externalites".

The capitalist accounting fault is the mirror image of the Soviet one but the end result is the same. Accounting incentives encourage managers to count the destruction of value in the wider world as a plus for their own narrow enterprises.

Next: Accounting for labor power


Anonymous said...

Man, what an angle. Beautiful, I love it.

The Big Mook said...

Tom, you said:
"Accounting incentives encourage managers to count the destruction of value in the wider world as a plus for their own narrow enterprises."

Count or ignore? In the tragedy of the commons story the herder who overgrazes his sheep on the commons benefits by his overproduction of wool and mutton. How does the shepherd benefit from the degradation of the meadow?

I can cite cases where the manager counts the degradation of the meadow as a plus for the firm - such as a real estate firm specializing in selling foreclosures, but aren't companies that thrive off of bad times self qualifying rule exceptions?

Kevin Carson said...

Very nice, Tom. The calculation problem in the large corporation directly parallels that in the old Soviet economy.

Leave aside, for the moment, all the Hayekian problems of the sheer quantity of information and the ability of large organizations to process it (what R.A. Wilson called the Snafu Principle: the tendency of hierarchies to filter the upward flow of information, so that--as Kenneth Boulding said--those at the top of the pyramids live in completely imaginary worlds).

The large corporation is an island of calculational chaos for the reasons Mises pointed out: the absence of any rational basis for pricing inputs. IOW the problem is not (as Peter Klein pointed out) so much the quantity of data, but how the data is generated at all.

Murray Rothbard explicitly applied the calculation argument to the corporation, considering in particular the possibility that a firm might become so vertically integrated that no external markets existed for some of its production inputs.

But Rothbard greatly underestimated the extent to which such size actually prevails. If you take into account intermediate goods, which are product-specific rather than generic, then most large manufacturing corporations have crossed Rothbard's threshold. The majority of intermediate goods are unique to the firm, and are assigned internal transfer prices by the very same arbitrary methods that Lange proposed.

Even when external markets exist, their prices are far removed from the spot conditions of supply and demand that prevail in a firm, and are therefore of little relevance for the pricing of goods within the firm so as to reflect internal conditions. If such recourse to an "external market" is sufficient, regardless of how tangentially connected its conditions to those prevailing inside the firm--and Rothbard thought it was--then the old Soviet planning system ought to have worked OK so long as a single market economy remained in Switzerland or someplace.

This is the subject of an article I wrote last year: "Economic Calculation in the Corporate Commonwealth"