Twofish's Blog

September 7, 2007

China and the socialist calculation debate

Filed under: austrian economics, china — twofish @ 7:39 am 

One big prediction…..

If the essential problem with socialist systems is calcuation, then a government owned system in which the institutions have been set up so that these calculations can be performed in a real market (and not an Oskar Lange pseudo-market) will work.

That’s the system currently in place in China, and Chinese economic reform can be seen in the context of creating a real market to resolve the socialist calculation problem in the context of public ownership. A lot of this works because there aren’t vertical command and control systems, which means that actual decisions are taking place at a lower level.

Also there is a fundamental tension between prediction and human freedom. If something is predictable than that means that you don’t have the freedom to change it, whereas if you to have the freedom to change something that renders it less predictable.



  1. I respond to:
    “a government owned system in which the institutions have been set up so that these calculations can be performed in a real market … will work”

    As I understand “ownership”, it means that the owner has power to make certain choices. So if government owns something that must mean that there some decisions which are made by officers of the government, and not by markets. So in “a government owned system” there must be some of these system-level decisions which have not necessarily been subject to market economic calculation. Each such decision may be economically stupid; the state may fail economically.

    Comment by Richard O. Hammer — September 7, 2007 @ 2:13 pm

  2. Foss and Klein’s blog guided me here.The current situation of Chinese market econmoy is quited different from Lange’s social market. To some extent, we can say Chinese maket economy is a spontaneous one, especially at the Zhejiang province, eastern China,and the state ownerships quit step by step,much more output created by private sectors, though state ownership strengthed at the central level and at some industries, so the economy calculation made mainly by the entrepren.rather than by the state.

    But a problem that puzzled me is the capital market of China, Most of the shares issued by state company, it is the unique one in the world which charactered by state owned share , will the market be sucessful in the coming days? though it is booming now.

    Maybe Chinese market economy is a Challenge to Austrian economics.

    Comment by Zhu Haijiu — September 8, 2007 @ 6:19 am

  3. One really fascinating issue is what do we mean by “ownership” especially when we talk about large public companies. When we say that Exxon-Mobil is “owned” by its shareholders, what does that mean, given the reality that shareholders really have very little individual or collective power in large corporations.

    There is a school of thought that says that “ownership” is the wrong way of thinking about large companies, and that large companies are really a “nexus of contracts.” One other point is that there is huge diversity among “owners” in different companies. What is common in one country (ownership of large companies by banks) can be uncommon or in some cases illegal in another. Given that there is such large differences in the identity of the shareholders, there isn’t anything that I can think of that would keep the government from being the “owner” in China.

    This all requires a system of law that defines the powers and roles of the state, and separates the power of the state as regulator and the power of the state as shareholder. One reason it works in China is that in all cases that “state agents” who exercise ownership rights are different people who are separate from those that do regulation. In particular you have different levels of government which can and do have interest conflicts. None of this would work in a hierarchical centrally planned system which is unconstrained by law.

    As far as the relevance of the Chinese experience to Austrian economics, we have to ask what is “Austrian economics”? I doubt that Murray Rothbard would care much for the Chinese economic system, but I do think that the success of the Chinese system can be explained in terms of economic calculation.

    Comment by twofish — September 14, 2007 @ 6:21 am

  4. If the central government can not make economic calculation, can the local governments do ? In fact, governments sometime play the role of entrepreneur,especially in eastern Asia countries.

    Comment by Zhu Haijiu — September 14, 2007 @ 10:21 am

  5. Certainly local governments *can* do economic calculation. One key fact about local governments in China is that they cannot (legally) set their own taxes, which means that they cannot bail out a failing company by raising taxes.

    This I think is the key difference between “market” agents and “non-market” agents. Market agents must maintain a balance sheet and must maintain solvency. Non-market agents do not have a balance sheet and can make up for short-falls from tax revenue.

    Comment by twofish — September 15, 2007 @ 5:38 am

  6. i think that was one of schumpeter’s ideas…

    the trick is getting the ‘shadow prices’ right and i don’t think anyone’s come up with a good way of ‘valuing’ relative externalities, capitalist or otherwise; then it comes down to ‘culture’ 😛

    Comment by kenny — September 25, 2007 @ 12:14 am

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