A structured approach for progressive political ambitions – Part 4

March 23, 2026
bill
Fiscal policy, Reclaim the State, Socialism
0 Comments

This is Part 4 of the short series of briefing notes that arose out of discussions I recently had in London about how a progressive political party might want to break out of the shackles that the British Labour Party has bound itself in with its obsession with fiscal rules and an adherence to the fiscal fictions of mainstream macroeconomics. The thoughts, in my view, are relevant for all aspiring progressive political parties that might have fallen prey to the fictional world of mainstream economics and cannot find a way back. In the first part, I suggested a way forward was to shift the focus of what can be done with fiscal policy away from financial matters towards an emphasis on real resource constraints – that is, what productive resources are available for public use. In this sense, the discussion becomes focused on how much nominal spending growth is possible without sparking inflationary pressures as a result of nominal spending growth outstripping the productive capacity of the economy. In Part 2, I focused on aspects of the institutional structure that should be considered to support that shift in focus, including a planning network and a return to a public employment service. In Part 3, I began an examination of the long debate about economic planning, In Part 4, I will continue that discussion and demonstrate that most of the criticisms of it from free market advocates are no longer applicable in an age of rapid, networked communication systems.

Earlier posts:

1. A structured approach for progressive political ambitions – Part 1 (March 2, 2026).

2. A structured approach for progressive political ambitions – Part 2 (March 9, 2026).

3. A structured approach for progressive political ambitions – Part 3 (March 16, 2026).

Market socialism

In Part 3, I introduced he concept of – Market Socialism – which was developed to counter the idea that a mixed economy (combining state and capitalist sectors) would ultimately be a viable solution to advancing human well-being.

When I was an undergraduate student I was exposed to the – Socialist calculation debate – which was a discussion between the major players in the Austrian School (Ludwig von Mises and Friedrich Hayek) who were implacably opposed to even the thought of Socialism, and, various neoclassical and Marxian economists (including Oskar R. Lange, Abba P. Lerner, Fred M. Taylor, Henry Douglas Dickinson and Maurice Dobb) who promoted the feasibility of Socialism.

As an aside, it is interesting (shocking) how the economics curriculum at our universities has changed over the decades to virtually exclude these types of debates.

Today’s students are not exposed to the classical literature, much economic history, discussions of methodology, and an analysis of comparative systems of organising production.

They are the poorer as a result.

In Part 3, I talked about the work of a young German economist named – Cläre Tisch – who completed her PhD thesis in 1932 – Economic Calculation and Distribution in the Centrally Organized Socialist Commonwealth (original German version – which laid out the argument that a socialist planning system could deliver efficient outcomes.

Efficiency in this context is mapped against the extant neoclassical market theory that was dominant in microeconomic thought (and still is).

It is not a concept of efficiency that I agree with nor advocate – more about which later.

I also examined the work of Italian economist – Vilfredo Pareto – and his famous and very influential 1906 book – Manuale di Economia Politica (Italian version).

While he was opposed ideologically to Socialism, he was honest enough to realise the neoclassical economic theory:

… does not provide us with truly decisive criteria for choosing between a system of private property or competition and a socialist system. Such criteria can only be obtained by taking into account other characteristics of phenomena.

Even today, many mainstream economics abuse our trust by claiming that a ‘smaller’ government footprint is best and somehow that ‘belief’ is given authority through appeal to economic theory.

But Pareto knew back then that there is nothing in mainstream economic theory that can tell us about the desirability of the size of government.

The debate about the ‘efficiency’ of a socialist system essentially began in 1908, when Italian neoclassical economist – Enrico Barone – published an elaborate (for its time) mathematical model for a socialist economy.

In Part 3 we learned that Barone showed, that ideology aside, his system of equations for a collectivist equilibrium were identical to those that established a individual, free competitive equilibrium (optimal state).

And so the debate about Market Socialism began.

Market socialism stands in contradistinction to a totally planned economic where resource allocation decisions, in its purest form, are decided by technicians rather than consumer preferences.

In – On the Economic Theory of Socialism – which is a collection of two essays, the first by – Fred M. Taylor – ‘The Guidance of Production in a Socialist State’ – and, the second by – Oskar R Lange – ‘On the Economic Theory of Socialism’ – we see how the work was developed.

Both were known for developing the principles of – Market socialism – which recognises that within a system of – Social ownership – which is the basis of a Socialist state and a rejection of the Capitalist mode of production, the price signals emerging from the interaction between the demand for and supply of a good or service play an intrinsic role in the allocation of productive resources and production decisions.

This is where I left readers in Part 3.

Key members of the – Austrian School of economics – denied that a socialist state could efficiently allocate productive resources.

Notable critics such as – Ludwig von Mises – and Friedrich Hayek – claimed that such a state would lack the necessary price information (signal) to discern where to best allocate productive resources.

They claimed that the only way such information could emerge was via a decentralised, free market where consumers were constantly expressing their preferences through their spending decisions and producers were demonstrating resource costs through their price offers.

The mutual exchanges that actually took place would be those that maximised well-being for consumers and profits for suppliers at the minimum possible resource cost.

That is, the basic proposition of neoclassical perfect competition that is forced on students in first-year microeconomics as if can be applied to reality.

Hayek went further, of course, and claimed that a socialist state would ultimately be – The Road to Serfdom – which was the title of his influential book published in 1944.

He considered that socialism only produced more equality via “restraint and servitude” and that economic planning coerced individuals, who were prevented from expressing their desires via market exchanges.

He is sometimes misunderstood as advocating a total free-for-all.

In fact, while he considered the state had only a minimal role, he did consider the government should ensure environmental protections are in place to offset ‘market failure’ (a well-known issue with a perfectly competitive system) and also that a safety net should be in place to ensure that every member of society has a minimum supply of food, housing, clothing, and health care.

He also advocated a state pension system for those who were unable to look after themselves in retirement.

But relevant here is the fact that the Austrian school challenged the fundamental tenets of Market Socialism.

This opposition stimulated Oskar Lange into action.

The – Lange Model – which is sometimes referred to as the ‘Lange-Lerner theorem’ after its proponents, Oskar Lange and Abba Lerner (who also contributed the notion of ‘functional finance’), was a neoclassical approach to justifying the viability of a socialist economy.

The essence is that:

1. The material means of production shift from private (Capitalist) ownership to state ownership – Lange advocated a ‘democratic state’.

2. There are three levels of decision-makers: (a) households and state-owned firms; (b) state industrial departments; and (c) at the top, the central planning board.

3. The technocrats in the CPB imposes a set of prices and communicates them to the firms.

4. The state-owned firms then adopt the neoclassical profit-maximisation principle – price equals marginal cost – to set the output level they supply.

5. The state industrial ministries plan the type of industries that will be developed.

6. Households act as they do in a capitalist economy – choose what to buy and how much labour to supply.

So what happens next?

The CPB techocrats then iterate using trial-and-error to eliminate surplus output (prices fall) and encourage more production in other goods that are in high demand (prices rise).

This is just the way a market economy operates, except the price adjustments are made by the firms rather than a CPB-type body.

The other difference is that the profits of the state-owned firms are not appropriated by private wealth holders but flow to the CPB, which then uses them to advance well-being and growth targets.

The profits also form the basis of the – Social dividend – where every citizen is ensured material security.

If you think about it, such a way of organising the economy would be the easiest way to achieve degrowth in the modern setting because it is the CPB that determines the growth targets.

Lange knew that a major problem with unfettered market capitalism was the likelihood of negative externalities (market failure).

The problem of pollution is the classic case where private firms impose costs on society that are not priced into the final price of the good being supplied, which leads to oversupply.

In Lange’s model this would be much easier to manage because the CPB would ensure the price passed down to the firms would embody all the resource costs including the environmental damage.

The other important consideration was (and think about when he was writing – in the midst of the Great Depression) that the vagaries of private investment, which depended on what John Maynard Keynes referred to as ‘animal spirits’ of the business firms, and which caused the large fluctuations in the economic cycle (and mass unemployment) would be eliminated because the CPB would be in charge of investment in the capital used by the state-owned firms.

Lange’s approach was attacked by the libertarians.

They said that the state-owned firms would not be subject to competition from new entrants.

In Capitalism it is called ‘creative destruction’ where new entrants challenge the dominant firms and if the latter are inefficient they fail.

In effect, they argued that the role of the ‘entrepreneur’ was eliminated – riffing the familiar claim that we owe our wealth to this small group of risk takers.

However, the proponents of market socialism responded by saying that creative individuals are not eliminated and would influence the system at all levels.

The difference was that they would be motivated by moral incentives (advancing good) rather than private profit, the latter being unable to guarantee general well-being advances.

The Austrians, however, claimed that the ‘entrepreneur’ was vital to ensure the market quickly resolved so-called disequilibrium resource allocation patterns – too many goods that were unwanted at the price being produced and/or too few goods that were wanted at the price being produced.

The entrepreneur is alleged to quickly realise that over- and under-production is bad for their profits and can quickly reconfigure their production processes.

For the entrepreneur to undertake these shifts, a high quality information system is required.

The free marketeers point to the role of inventories – they rise in an unwanted fashion when there is overproduction and run out in the opposite situation.

They falsely claim that Lange’s typification of the ‘market’ would not allow these sorts of shifts to occur, in part, because the access to high quality information at the CPB level would be limited.

They argue that thousands of entrepreneurs all sniffing out opportunities cannot be replaced by a CPB-type structure because of the difference in information available.

Before I deal with the information requirements in detail, it is, of course, a myth to suggest that Capitalism does not produce massive waste because these entrepreneurs react quickly.

Every day, capitalist entrepreneurs make massive errors in their expected outcomes only to find out some weeks, months or whenever later that they have totally misunderstood consumer preferences.

There are countless examples: Kodak, Zerox, Nokia, Western Union, Decca, Enron, Walmart’s attempted German expansion, South Sea Bubble, the Tulip Mania, etc

Some decision mistakes are catastrophic , others less so, but they all involved waste and destruction.

The fact that Capitalism is prone to become stuck with mass unemployment is testament to its propensity to failure.

The errors that the CPB might make in its initial pricing decisions are thus not unique.

It is claimed by the critics that the CPB would take too long to correct any errors.

Certainly, at the time that Lange conceived of the approach, the ability of the CPB in a complex and large economy to quickly assess all the disequilibrium price settings would be limited.

However, as modern proponents of planning note, the advances in computerisation and networks have changed things dramatically.

Markets in modern capitalism also rely to a not insignificant extent on computerisation to extract consumer information.

The ABS released some data last year – Retail Trade, Australia – which showed that on-line sales accounted for 12.7 per cent of total sales in June 2025.

For non-food items that proportion was 19 per cent.

Modern inventory systems that are networked back to suppliers track every sale instantaneously, to give factories and suppliers relevant production information at the current prices.

Quantity engineers are fully networked to assess unit cost etc.

Modern distributed networks can deliver much faster information than even the capitalists could glean from the market at the time Lange was writing and von Mises and Hayek were criticising.

The old planning systems that are often used to disabuse us of the idea were flawed from the start.

The Soviet model was effectively a military production system in the face of Cold War threats from the US and its allies.

Its downplaying of consumer preferences was a product of that emphasis.

This leads us to discuss computation and the applications of – Cybernetics – and – Management cybernetics – have provided powerful intellectual support to the viability of a planned economy.

That will be Part 5.