The concept of the structure of production is a valuable tool in the ongoing debate over economic calculation in the socialist economy. In the 1930s, a major dispute developed between the Austrian economists, led by Ludwig von Mises and Friedrich A. Hayek, and the socialist economists, led by Oskar Lange and Fred M. Taylor. In his critique of socialism, Mises argued that central planning would not work because, without competition between firms, prices could not logically be calculated, and without market prices, firms could not produce goods and services efficiently.
Oskar Lange rebutted Mises’ view by contending that central planning boards under socialism could determine prices through “trial and error.” A price could be set and the market of supply and demand could be observed. If shortages occurred, the price should be raised. If surpluses abound, the price should be lowered. Lange even went so far as to state, “Let the Central Planning Board start with a given set of prices chosen at random. . . . If the quantity demanded of a commodity is not equal to the quantity supplied, the price of that commodity has to be changed.”
Surprisingly, most economists concluded that Lange and the other “market” socialists adequately answered the Austrian challenge, although the issue is still debated today.
However, the literature on the socialist calculation debate tends to ignore in large measure the problems arising out of the structure-of-production concept. The debate seems to focus on a “micro” approach of supply-demand factors of individual consumer and factor markets rather than the critical interrelation of economic processes. Specifically, how could a central planning board successfully use a “trial and error” method at each stage of production wherein each successive level of output depends on earlier produced inputs and working capital? After all, the setting up of a socialist state, whereby government controls the means of production, does not eliminate the intermediate stages of output. . . .
Setting prices at random would undoubtedly create massive shortages and surpluses. But the deficiencies in one market are never isolated—they lead to disequilibrium in other related markets before and after the specific market. Moreover, it takes time to eliminate shortages and surpluses—the industrial system under central planning cannot create equilibrium overnight. Random pricing would therefore result in delays and shortages in the long and complex chain of production.
—Mark Skousen, The Structure of Production, new rev. ed. (New York: New York University Press, 2015), 172-173.
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