Will AI Make a Planned Economy Feasible? The Socialist Calculation Debate Revisited

The “socialist calculation debate” happened in the 1920s and 1930s.

The economics profession was developing a vision of the economy as made up of prices and quantities for goods and services, based on supply and demand. Socialist economists (for example, Oskar Lange) sought to build on this framework. Their argument was along the following lines: “Given the advances in economics, it’s now possible to write down how the economy works in terms of supply, demand, prices, wages, and so on. However, free-market economists make the incorrect assumption that the outcome of market forces is (at least close to) the preferred social outcome. Socialists, on the other hand, can carry out the same calculations as to what a market economy would do. But then, the socialists can consider how government planning might improve on the market outcome. At a minimum, the result of socialist planning could reproduce the market outcome–thus, socialism will be at least as good as a market outcome. But socialism offers the possibility of improving the market outcome as well.”

There are two types of responses to the socialist argument. One argument emphasizes that, in practice, government planning is inadequate to the task of handling the economy. Even writers as committed to socialism as Leon Trotsky wrote about how the government bureaucracy imagines that it has a “universal mind,” but it doesn’t, and as a result its attempts at economic planning–inevitably mixed with a degree of unreality from political pressures–cause shortages, low quality of output, and inefficiencies.

The second main argument (often associated with Friedrich Hayek) holds that, even in principle, detailed government economic planning is impossible, because an economy is actually a process of contextual discovery. Firms do not know their costs of production, or how they will react to unexpected shocks or new technologies, until it actually happens. Consumers don’t know what choices they will make, given a range of possible goods and prices, until they actually make those choices. Workers don’t know what jobs they prefer until they consider the options. No one knows in advance what innovations will work well in production, or be highly desired by consumers, until these innovations are tried out. Governments can still have specific roles that put a thumb on the scale of unconstricted market outcomes: redistributing income to the poor, supporting education and infrastructure, reducing pollution, and the like. But from this view, the idea of a central planner foreseeing all outcomes of quantity, quality, innovation, prices, and wages to reproduce the market economy outcomes is literally impossible.

Back in the 1930s, and since then as well, one response of the socialists has been to say that as computing power improves, the feasibility of socialist calculation will improve as well. Perhaps the new developments in artificial intelligence, for example, are leading to a situation where detailed socialist central economic planning will outcompete market outcomes. Peter J. Boettke and Rosolino A. Candela offer some thoughts about this scenario in “On the feasibility of technosocialism” (Journal of Economic Behavior and Organization, 2023 (205), pp. 44-54).

They start with as pure a statement of how additional computing power will make planned-economy socialism possible as you are ever likely to find, from the Chinese business leader Jack Ma, founder of Alibaba. Ma says:

Over the past 100 years, we have come to believe that the market economy is the best system, but in my opinion, there will be a significant change in the next three decades, and the planned economy will become increasingly big. Why? Because with access to all kinds of data, we may be able to find the invisible hand of the market. The planned economy I am talking about is not the same as the one used by the Soviet Union or at the beginning of the founding of the People’s Republic of China. The biggest difference between the market economy and planned economy is that the former has the invisible hand of market forces. In the era of big data, the abilities of human beings in obtaining and processing data are greater than you can imagine. With the help of artificial intelligence or multiple intelligence, our perception of the world will be elevated to a new level. As such, big data will make the market smarter and make it possible to plan and predict market forces so as to allow us to finally achieve a planned economy.

Ma’s comments, of course, is an implicit acknowledgement that planned economies of the past have not worked very well. Will this time be different? Boettke and Candela point out that Ma’s argument has a lot of other modern proponents, but write:

However, we argue that the proposal provided by techno-socialism is analogous to putting old wine into an irrelevant new bottle. What seems to be a novel proposal to deliver the age-old aspiration of socialism is not fundamentally different from the market-socialist model which had been proposed by Oskar Lange and Abba Lerner in the 1930s in response to Ludwig von Mises and F.A. Hayek, both of whom had argued that economic calculation under socialism was impossible. Lange would later propose the following in response to Mises and Hayek: “Let us put the simultaneous equations on an electronic computer and we shall obtain the solution in less than a second. The market process with its cumbersome tâtonnements appears old-fashioned. Indeed, it may be considered as a computing device of the pre-electronic age”(emphasis in original; 1967: 158). … However, Lange’s assessment, like that of techno-socialism, is based on a fundamental misunderstanding of the economic problem of society as being of a computational nature rather than a “knowledge problem” that must be addressed and the nature of how the market process in fact does address the problem.

Boettke and Candela review the players and arguments in the classic socialist calculation debate. However, they take the Hayekian position that a market economy itself is a social device for discovering, using and disseminating information in a wide array of real-world contexts, in a way that no computer can be programmed to replace. They write:

[I]f one assumes perfect knowledge and static conditions, then the problem of economic calculation is solved by hypothesis. Economic calculation is a tool that enables actors to steer a course in a turbulent sea of economic uncertainty, of ceaseless change, of ignorance of the environment, and of alluring hopes and haunting fears. Once all those are assumed away, then the functional significance of economic calculation disappears. But so would opportunities for mutual gain, entrepreneurial innovations, and discovery of new opportunities. In other words, if you assume away change, you assume away the possibility of economic growth and progress. … The market is a social learning process.

Of course, the authors are not arguing that advances in computing power will not affect economies, production, and jobs–as well as key questions in the field of economics. However, they are making a case that thinking of the economy as a ginormous math problem–and a problem where central planners can not only solve it, but tinker with the variables and get different results as desired–misses out on a central aspect of just what an economy is and does.