The End of Socialism and the Calculation Debate Revisited

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This article
was originally published in The Review of Austrian Economics
in 1991, during the collapse of the Soviet Union.

At the root
of the dazzling revolutionary implosion and collapse of socialism
and central planning in the “socialist bloc” is what everyone concedes
to be a disastrous economic failure. The peoples and the intellectuals
of Eastern Europe and the Soviet Union are crying out not only for
free speech, democratic assembly, and glasnost, but also for private
property and free markets. And yet, if I may be pardoned a moment
of nostalgia, four-and-a-half-decades ago, when I entered graduate
school, the economics Establishment of that era was closing the
book on what had been for two decades the famed “socialist calculation
debate.” And they had all decided, left, right, and center, that
there was not a thing economically wrong with socialism: that socialism’s
only problems, such as they might be, were political. Economically,
socialism could work just as well as capitalism.

Mises
and the Challenge of Calculation

Before Ludwig
von Mises raised the calculation problem in his
celebrated article
in 1920,[1] 
everyone, socialists and non-socialists alike, had long realized
that socialism suffered from an incentive problem. If, for example,
everyone under socialism were to receive an equal income, or, in
another variant, everyone was supposed to produce “according to
his ability” but receive “according to his needs,” then, to sum
it up in the famous question: Who, under socialism, will take out
the garbage? That is, what will be the incentive to do the grubby
jobs, and, furthermore, to do them well? Or, to put it another way,
what would be the incentive to work hard and be productive at
any job?

The traditional
socialist answer held that the socialist society would transform
human nature, would purge it of selfishness, and remold it to create
a New Socialist Man. That new man would be devoid of any selfish,
or indeed any self-determined, goals; his only wish would be to
work as hard and as eagerly as possible to achieve the goals and
obey the orders of the socialist State. Throughout the history of
socialism, socialist ultras, such as the early Lenin and Bukharin
under “War Communism,” and later Mao Tse-tung and Che Guevara, have
sought to replace material by so-called “moral” incentives. This
notion was properly and wittily ridiculed by Alexander Gray as “the
idea that the world may find its driving force in a Birthday Honours
List (giving to the King, if necessary, 165 birthdays a year).”[2] 
At any rate, the socialists soon found that voluntary methods could
hardly yield them the New Socialist Man. But even the most determined
and bloodthirsty methods could not avail to create this robotic
New Socialist Man. And it is a testament to the spirit of freedom
that cannot be extinguished in the human breast that the socialists
continued to fail dismally, despite decades of systemic terror.

But the uniqueness
and the crucial importance of Mises’s challenge to socialism is
that it was totally unrelated to the well-known incentive problem.
Mises in effect said: All right, suppose that the socialists have
been able to create a mighty army of citizens all eager to do the
bidding of their masters, the socialist planners. What exactly would
those planners tell this army to do? How would they know what products
to order their eager slaves to produce, at what stage of production,
how much of the product at each stage, what techniques or raw materials
to use in that production and how much of each, and where specifically
to locate all this production? How would they know their costs,
or what process of production is or is not efficient?

Mises demonstrated
that, in any economy more complex than the Crusoe or primitive family
level, the socialist planning board would simply not know what to
do, or how to answer any of these vital questions. Developing the
momentous concept of calculation, Mises pointed out that the planning
board could not answer these questions because socialism would lack
the indispensable tool that private entrepreneurs use to appraise
and calculate: the existence of a market in the means of production,
a market that brings about money prices based on genuine profit-seeking
exchanges by private owners of these means of production. Since
the very essence of socialism is collective ownership of the means
of production, the planning board would not be able to plan, or
to make any sort of rational economic decisions. Its decisions would
necessarily be completely arbitrary and chaotic, and therefore the
existence of a socialist planned economy is literally “impossible”
(to use a term long ridiculed by Mises’s critics).

The
Lange-Lerner “Solution”

In the course
of intense discussion throughout the 1920s and 1930s, the socialist
economists were honest enough to take Mises’s criticism seriously,
and to throw in the towel on most traditional socialist programs:
in particular, the original communist vision that workers, not needing
such institutions as bourgeois money fetishism, would simply produce
and place their products on some vast socialist heap, with everyone
simply taking from that heap “according to his needs.”

The socialist
economists also abandoned the Marxian variant that everyone should
be paid according to the labor time embodied into his product. In
contrast, what came to be known as the Lange-Lerner solution (or,
less commonly but more accurately, the Lange-Lerner-Taylor solution),
acclaimed by virtually all economists, asserted that the socialist
planning board could easily resolve the calculation problem by ordering
its various managers to fix accounting prices. Then, according to
the contribution of Professor Fred M. Taylor, the central planning
board could find the proper prices in much the same way as the capitalist
market: trial and error. Thus, given a stock of consumer goods,
if the accounting prices are set too low, there will be a shortage,
and the planners will raise prices until the shortage disappears
and the market is cleared. If, on the other hand, prices are set
too high, there will be a surplus on the shelves, and the planners
will lower the price, until the markets are cleared. The solution
is simplicity itself![3] 

In the course
of his two-part article and subsequent book, Lange concocted what
could only be called the Mythology of the Socialist Calculation
Debate, a mythology which, aided and abetted by Joseph Schumpeter,
was accepted by virtually all economists of whatever ideological
stripe. It was this mythology I found handed down as the Orthodox
Line when I entered Columbia University’s graduate school at the
end of World War II – a line promulgated in lectures by no less
an expert on the Soviet economy than Professor Abram Bergson, then
at Columbia. In 1948, indeed, Professor Bergson was selected to
hand down the Received Opinion on the subject by a committee of
the American Economic Association, and Bergson interred the socialist
calculation question with the Orthodox Line as its burial rite.[4] 

The Lange-Bergson
Orthodox Line went about as follows: Mises, in 1920, had done an
inestimable service to socialism by raising the problem of economic
calculation, a problem of which socialists had not generally been
aware. Then Pareto and his Italian disciple Enrico Barone had shown
that Mises’s charge, that socialist calculation was impossible,
was incorrect, since the requisite number of supply, demand, and
price equations existed under socialism as under a capitalist system.
At that point, F.A. Hayek and Lionel Robbins, abandoning Mises’s
extreme position, fell back on a second line of defense: that, while
the calculation problem could be solved theoretically, in practice
it would be too difficult. Thereby Hayek and Robbins fell back on
a practical problem, or one of degree of efficiency rather than
of a drastic difference in kind. But now, happily, the day has been
saved for socialism, since Taylor-Lange-Lerner have shown that,
by jettisoning utopian ideas of a money-less or price-less socialism,
or of pricing according to a labor theory of value, the socialist
planning board can solve these pesky equations simply by the good
old capitalist method of trial and error.[5] 

Bergson, attempting
to be magisterial in his view of the debate, summed up Mises as
contending that “without private ownership of, or (what comes to
the same thing for Mises) a free market for the means of production,
the rational evaluation of these goods for the purposes of calculating
costs is ruled out…” Bergson correctly adds that to put Mises’s
point

somewhat
more sharply than is customary, let us imagine a Board of Supermen,
with unlimited logical faculties, with a complete scale of values
for the different consumers’ goods, and present and future consumption,
and detailed knowledge of production techniques. Even such a Board
would be unable to evaluate rationally the means of production.
In the absence of a free market for these goods, decisions on
resource allocation in Mises’ view necessarily would be on a haphazard
basis.

Bergson sharply
comments that this “argument is easily disposed of.” Lange and Schumpeter
both point out that, as Pareto and Barone had shown,

once tastes
and techniques are given, the values of the means of production
can be determined unambiguously by imputation without the intervention
of a market process. The Board of Supermen could decide readily
how to allocate resources so as to assure the optimum welfare.
It would simply have to solve the equations of Pareto and Barone.[6] 

So much for
Mises. As for the Hayek-Robbins problem of practicality, Bergson
adds, that can be settled by the Lange-Taylor trial-and-error method;
any remaining problems are only a matter of degree of efficiency,
and political choices. The Mises problem has been satisfactorily
solved.

Some
Fallacies of the Lange-Lerner Solution

The breathtaking
naïveté of the Orthodox Line should have been evident even
in the 1940s. As Hayek later chided Schumpeter on the assumption
of “imputation” outside the market, this formulation “presumably
means … that the valuation of the factors of production is
implied in, or follows necessarily from, the valuation of consumers’
goods. But … implication is a logical relationship which can
be meaningfully asserted only of propositions simultaneously present
to one and the same mind.”[7] 

Economists
were convinced of the Lange solution because they had already come
under the sway of the Walrasian general equilibrium model; Schumpeter,
for example, was an ardent Walrasian. In this model, the economy
is always in static general equilibrium, a changeless world in which
all “data”  – tastes or value scales, alternative technologies,
and lists of resources – are known to everyone, and where costs
are known and always equal to price. The Walrasian world is also
one of “perfect” competition, where prices are given to all managers.
Indeed, both Taylor and Lange make the point that the socialist
planning board will be better able to calculate than capitalist
markets, since the socialist planners can ensure “perfect competition,”
whereas the real world of capitalism is shot through with various
sorts of “monopolies”! The socialist planners can act like the absurdly
fictional Walrasian “auctioneer,” bringing about equilibrium rapidly
by trial and error.

Set aside the
obvious absurdity of trusting a coercive governmental monopoly to
act somehow as if it were in “perfect competition” with parts of
itself. Another grievous flaw in the Lange model is thinking that
general equilibrium, a world of certainty where there is no room
for the driving force of entrepreneurship, can somehow be used to
depict the real world. The actual world is one not of changeless
“givens” but of incessant change and systemic uncertainty. Because
of this uncertainty, the capitalist entrepreneur, who stakes assets
and resources in attempting to achieve profits and avoid losses,
becomes the crucial actor in the economic system, an actor who can
in no way be portrayed by a world of general equilibrium. Furthermore,
it is ludicrous, as Hayek pointed out, to think of general equilibrium
as the only legitimate “theory,” with all other areas or problems
dismissed as mere matters of practicality and degree. No economic
theory worth its salt can be worthwhile if it omits the role of
the entrepreneur in an uncertain world. The Pareto-Barone-Lange,
etc. “equations” is not simply excellent theory that faces problems
in practice; for in order to be “good,” a theory must be useful
in explaining real life.[8] 

Another grave
flaw in the Lange-Taylor trial-and-error approach is that it concentrates
on consumer goods pricing. It is true that retailers, given the
stock of a certain type of good, can clear the market by adjusting
the prices of that good upward or downward. But, as Mises pointed
out in his original 1920 article, consumers’ goods are not the real
problem. Consumers, these “market socialists” are postulating, are
free to express their values by using money they had earned on a
range of consumers’ goods. Even the labor market – at least
in principle[9]  –
can be treated as a market with self-owning suppliers who are free
to accept or reject bids for their labor and to move to different
occupations. The real problem, as Mises has insisted from the beginning,
is in all the intermediate markets for land and capital goods. Producers
have to use land and capital resources to decide what the stocks
of the various consumer goods should be. Here there are a huge number
of markets where the State monopoly can only be both buyer and seller
for each transaction, and these intra-monopoly, intra-state transactions
permeate the most vital markets of an advanced economy – the
complex lattice-work of the capital markets. And here is precisely
where calculational chaos necessarily reigns, and there is no way
for rationality to intrude on the immense number of decisions on
the allocation of prices and factors of production in the structure
of capital goods.

Mises’s
Rebuttal: The Entrepreneur

Moreover,
Mises’s brilliant and devastating rebuttal to his Lange-Lerner-”market
socialism” critics has virtually never been considered – neither
by the economics establishment nor by the post–World War II
Hayekians. In both cases, the writers were eager to dispose of Mises
as having safely made his pioneering contribution in 1920, but being
superseded later, either by Lange-Lerner or by Hayek, as the case
may be. In both cases, it was inconvenient to ponder that Mises
continued to elaborate his position with a penetrating critique
of his critics, or that Mises’s “extreme” formulation may, after
all, have been correct.[10] 

Mises began
his rebuttal in Human
Action
by discussing the “trial-and-error” method, and
pointing out that this process only works in the capitalist market.
There the entrepreneurs are strongly motivated to make greater profits
and to avoid losses, and further, such a criterion does not apply
to the capital goods or land market under socialism where all resources
are controlled by one entity, the government.

Continuing
his reply, Mises pressed on to a brilliant critique, not only of
socialism, but of the entire Walrasian general equilibrium model.
The major fallacy of the “market socialists,” Mises pointed out,
is that they look at the economic problem from the point of view
of the manager of the individual firm, who seeks to make profits
or avoid losses within a rigid framework of a given, external allocation
of capital to each of the various branches of industry and indeed
to the firm itself. In other words, the “market socialist” manager
is akin, not to the real driving force of the capitalist market,
the capitalist entrepreneur, but rather to the relatively economically
insignificant manager of the corporate firm under capitalism. As
Mises brilliantly puts it:

the cardinal
fallacy implied in [market socialist] proposals is that they look
at the economic problem from the perspective of the subaltern
clerk whose intellectual horizon does not extend beyond subordinate
tasks. They consider the structure of industrial production and
the allocation of capital to the various branches and production
aggregates as rigid, and do not take into account the necessity
of altering this structure in order to adjust it to changes in
conditions…. They fail to realize that the operations of
the corporate officers consist merely in the loyal execution of
the tasks entrusted to them by their bosses, the shareholders….
The operations of the managers, their buying and selling, are
only a small segment of the totality of market operations. The
market of the capitalist society also performs those operations
which allocate the capital goods to the various branches of industry.
The entrepreneurs and capitalists establish corporations and other
firms, enlarge or reduce their size, dissolve them or merge them
with other enterprises; they buy and sell the shares and bonds
of already existing and of new corporations; they grant, withdraw,
and recover credits; in short they perform all those acts the
totality of which is called the capital and money market. It is
these financial transactions of promoters and speculators that
direct production into those channels in which it satisfies the
most urgent wants of the consumers in the best possible way.[11] 

Mises goes
on to remind the reader that the corporate manager performs only
a “managerial function,” a subsidiary service that “can never become
a substitute for the entrepreneurial function.” Who are the capitalist-entrepreneurs?
They are “the speculators, promoters, investors and moneylenders,
[who] in determining the structure of the stock and commodity exchanges
and of the money market, circumscribe the orbit within which definite
tasks can be entrusted to the manager’s discretion.” The crucial
question, Mises continues, is not managerial activities, but: “In
which branches should production be increased or restricted, in
which branches should the objective of production be altered, what
new branches should be inaugurated?” In short, the crucial decisions
in the capitalist economy are the allocation of capital to firms
and industries. “With regard to these issues,” Mises adds, “it is
vain to cite the honest corporation manager and his well-tried efficiency.
Those who confuse entrepreneurship and management close their eyes
to the economic problem … The capitalist system is not a managerial
system; it is an entrepreneurial system.”

But here, Mises
triumphantly concludes, no “market socialist” has ever suggested
preserving or carrying over, much less understood the importance
of, the specifically entrepreneurial functions of capitalism:

Nobody has
ever suggested that the socialist commonwealth could invite the
promoters and speculators to continue their speculations and then
deliver their profits to the common chest. Those suggesting a
quasi-market for the socialist system have never wanted to preserve
the stock and commodity exchanges, the trading in futures, and
the bankers and money-lenders as quasi-institutions.[12] 

Mises has been
cited as stating, in Human Action, that it is absurd for
the socialist planning board to tell their managers to “play market,”
to act as if they are owners of their firms in trying to maximize
profits and avoid losses. But it is important to stress that Mises
was focusing, not so much on the individual managers of socialist
“firms,” but on the speculators and investors who decide the crucial
allocations of capital throughout the structure of industry. It
is at least conceivable that one can order a manager to play market
and act as if he were enjoying the profits and suffering losses;
but it is clearly ludicrous to ask investors and capital speculators
to act as if their fortunes were at stake. As Mises adds:

one cannot
play speculation and investment. The speculators and investors
expose their own wealth, their own destiny. This fact makes them
responsible to the consumers, the ultimate bosses of the capitalist
economy. If one relieves them of this responsibility, one deprives
them of their very character.[13] 

One time, during
Mises’s seminar at New York University, I asked him whether, considering
the broad spectrum of economies from a purely free market economy
to pure totalitarianism, he could single out one criterion according
to which he could say that an economy was essentially “socialist”
or whether it was a market economy. Somewhat to my surprise, he
replied readily: “Yes, the key is whether the economy has a stock
market.” That is, if the economy has a full-scale market in titles
to land and capital goods. In short: Is the allocation of capital
basically determined by government or by private owners? At the
time, I did not fully understand the vital importance of Mises’s
answer, which I realized recently when poring over the great merits
of the Misesian, as compared to the Hayekian, analysis of the socialist
calculation problem.

For Mises,
in short, the key to the capitalist market economy and its successful
functioning is the entrepreneurial forecasting and decision-making
of private owners and investors. The key is emphatically not the
more minor decisions made by corporate managers within a framework
already set by entrepreneurs and the capital markets. And it is
obvious that Lange, Lerner, and the other market socialists merely
envisioned the relatively lesser managerial decisions. These economists,
who had never grasped the function of speculation or capital markets,
therefore had no idea that they would need to be or could be replicated
in a socialist system.[14] 
And this is not surprising, since in the Walrasian general micro-equilibrium
model, there is no capital structure, there is no role for capital,
and capital theory has become totally submerged into “growth theory,”
that is, growth of a homogeneous “level,” or blob, of aggregate
macro-capital. The allocation of capital is considered external
and given, and receives no consideration.

The
Structure of Capital

Joseph Schumpeter
and Frank H. Knight are interesting examples of two eminent economists
who were personally anti-socialist but were seduced by their Walrasian
devotion to general equilibrium and their lack of a genuine capital
theory into strongly endorsing the orthodox view that there is no
economic calculation problem under socialism. In particular, in
capital theory, both Schumpeter and Knight were disciples of J.B.
Clark, who denied any role at all for time in the process of production.
For Schumpeter, production takes no time because production and
consumption are somehow always “synchronized.” Time is erased from
the picture, even to assuming away the existence of any accumulated
stocks of capital goods, and therefore of any age structure of such
goods. Since production is magically synchronized, there is then
no necessity for land or labor to receive advances in payment from
capitalists out of accumulated savings. Schumpeter achieves this
feat by sundering capital completely from its embodiment in capital
goods, and limiting the concept to a money fund used to purchase
such goods.[15] 

Frank Knight,
the doyen of the Chicago School, was also an ardent believer in
the Clarkian view that time preference has no influence on interest
paid by producers, and that production is synchronized so that time
plays no role in the production structure. Hence, Knight believed,
along with modern orthodoxy, that capital is a homogeneous, self-perpetuating
blob that has no lattice-like, time-oriented structure.
Knight’s fiercely anti–Böhm-Bawerkian, anti-Austrian
views on capital and interest led him to a then-famous war of journal
articles over capital theory during the 1930s, a war he won by default
when Austrianism disappeared because of the Keynesian evolution.[16] 

In his negative
review of Mises’s Socialism, Frank Knight, after hailing
Lange’s “excellent” 1936 article, brusquely dismisses the socialist
calculation debate as “largely sound and fury.” To Knight, it is
simply “truistical” that the “technical basis of economic life”
would continue as before under socialism, and that therefore “the
managers of various technical units in production – farms, factories,
railways, stores, etc. – would carry on in essentially the same
way.” Note, there is no reference whatever to the crucial capital
market, or to the allocation of capital to various branches of production.
If capital is an automatically renewing homogeneous blob, all one
need worry about is growth in the amount of that blob. Hence, Knight
concludes that “socialism is a political problem, to be discussed
in terms of social and political psychology, and economic theory
has relatively little to say about it.”[17] 
Certainly, that is true of Knight’s orthodox-Chicagoite brand of
economic theory!

It is instructive
to compare the naïveté and the brusque dismissal of the problem
by Schumpeter and Knight with the penetrating Misesian critique
of socialism by Professor Georg Halm:

Because capital
is no longer owned by many private persons, but by the community,
which itself disposes of it directly, a rate of interest can no
longer be determined. A pricing process is always possible only
when demand and supply meet in a market…. In the socialist
economy … there can be no demand and no supply when the
capital from the outset is in the possession of its intending
user, in this case the socialistic central authority.

Now it might
perhaps be suggested that, since the rate of interest cannot be
determined automatically, it should be fixed by the central authority.
But this likewise would be quite impossible. It is true that the
central authority would know quite well how many capital goods
of a given kind it possessed or could procure…; it would
know the capacity of the existing plant in the various branches
of production; but it would not know how scarce capital was. For
the scarcity of means of production must always be related to
the demand for them, whose fluctuations give rise to variations
in the value of the good in question…

If it should
be objected that a price for consumption-goods would be established,
and that in consequence the intensity of the demand and so the
value of the means of production would be determinate, this would
be a further serious mistake…. The demand for means of production,
labor and capital goods, is only indirect.

Halm goes on
to add that if there were only one single factor of production in
making consumers’ goods, the socialist “market” might be able to
determine its proper price. But this can not be true in the real
world where several factors of production take part in the production
of goods in various markets.

Halm then adds
that the central authority, contrary to his above concession, would
not even be able to find out how much capital it is employing. For
capital goods are heterogeneous, and therefore how “can the total
plant of one factory be compared with that of another? How can a
comparison be made between the values of even only two capital-goods?”
In short, while under capitalism such comparisons can be made by
means of money prices set on the market for every good, in the socialist
economy the absence of genuine money prices arising out of a market
precludes any such value comparisons. Hence, there is also no way
for a socialist system to rationally estimate the costs (which are
dependent on prices in factor markets) of any process of production.[18] 

Mises’s
Rebuttal: Valuation and Monetary Appraisement

In his original
1920 article, Mises emphasized that “as soon as one gives up the
conception of a freely established monetary price for goods of a
higher order, rational production becomes completely impossible.”
Mises then states, prophetically:

One may anticipate
the nature of the future socialist society. There will be hundreds
and thousands of factories in operation. Very few of these will
be producing wares ready for use; in the majority of cases what
will be manufactured will be unfinished goods and production goods.
All these concerns will be interrelated. Every good will go through
a whole series of stages before it is ready for use. In the ceaseless
toil and moil of this process, however, the administration will
be without any means of testing their bearings. It will never
be able to determine whether a given good has not been kept for
a superfluous length of time in the necessary processes of production,
or whether work and material have not been wasted in its completion.
How will it be able to decide whether this or that method of production
is the more profitable? At best it will only be able to compare
the quality and quantity of the consumable end-product produced,
but will in the rarest cases be in a position to compare the expenses
entailed in production.

Mises points
out that while the government may be able to know what ends it is
trying to achieve, and what goods are most urgently needed, it will
have no way of knowing the other crucial element required for rational
economic calculation: valuation of the various means of production,
which the capitalist market can achieve by the determination of
money prices for all products and their factors.[19] 

Mises concludes
that, in the socialist economy “in place of the economy of the ‘anarchic’
method of production, recourse will be had to the senseless output
of an absurd apparatus. The wheels will turn, but will run to no
effect.”[20] 

Moreover, in
his later rebuttal to the champions of the Pareto-Barone equations,
Mises points out that the crucial problem is not simply that the
economy is not and can never be in the general equilibrium state
described by these differential equations. In addition to other
grave problems with the equilibrium model (e.g.: that the socialist
planners do not now know their value scales in future equilibrium;
that money and monetary exchange cannot fit into the model; that
units of productive factors are neither perfectly divisible nor
infinitesimal – and that marginal utilities, of different people
cannot be equated – on the market or anywhere else), the equations
“do not provide any information about the human actions by means
of which the hypothetical state of equilibrium” has been or can
be reached. In short, the equations offer no information whatever
on how to get from the existing disequilibrium state to the general
equilibrium goal.

In particular,
Mises points out, “even if, for the sake of argument, we assume
that a miraculous inspiration has enabled the director without economic
calculation to solve all problems concerning the most advantageous
arrangement of all production activities and that the price image
of the final goal he must aim at is present to his mind,” there
remain crucial problems on the path from here to there. For the
socialist planner does not start from scratch and then build a capital
goods structure most perfectly designed to meet his goals. He necessarily
starts with a capital goods structure produced at many stages of
the past and determined by past consumer values and past technological
methods of production. There are different degrees of such past
determinants built into the existing capital structure, and anyone
starting today must use these resources as best he can to meet present
and expected future goals. For these heterogeneous choices, no mathematical
equations can be of the slightest use.[21] 

Finally, the
unique root of Mises’s position, and one that distinguishes him
and his “socialist impossibility” thesis from Hayek and the Hayekians,
has been neglected until the present day. And this neglect has persisted
despite Mises’s own explicit avowal in his memoirs of the root,
and groundwork of his calculation thesis.[22] 
For Mises was not, like Hayek and his followers, concentrating
on the flaws in the general equilibrium model when he arrived at
his position; nor was he led to his discussion solely by the triumph
of the socialist revolution in the Soviet Union.

For
Mises records that his position on socialist calculation emerged
out of his first great work, The
Theory of Money and Credit
(1912). In the course of that
notable integration of monetary theory and “micro” marginal utility
theory, Mises was one of the very first to realize that subjective
valuations of the consumers (and of laborers) on the market are
purely ordinal, and are in no way measurable. But market prices
are cardinal and measurable in terms of money, and market money
prices bring goods into cardinal comparability and calculation (e.g.,
a $10 hat is “worth” five times as much as a $2 loaf of bread).[23] 
But Mises realized that this insight meant it was absurd to say
(as Schumpeter would) that the market “imputes” the values of consumer
goods back to the factors of production. Values are not directly
“imputed”; the imputation process works only indirectly, by means
of money prices on the market. Therefore socialism, necessarily
devoid of a market in land and capital goods, must lack the ability
to calculate and compare goods and services, and therefore any rational
allocation of productive resources under socialism is indeed impossible.[24] 

For Mises,
then, his work on socialist calculation was part and parcel of his
expanded integration of direct and monetary exchange – of “micro”
and “macro” – that he had begun but not yet completed in The
Theory of Money and Credit.[25] 

Fallacies
of Hayek and Kirzner

The orthodox
line of the 1930s and ’40s was wrong in claiming that Hayek and
his followers (such as Lionel Robbins) abandoned Mises’s “theoretical”
approach by bowing down to the Pareto-Barone equations, falling
back on “practical” objections to socialist planning.[26] 
As we have already seen, Hayek scarcely ceded to mathematical equations
of general equilibrium the monopoly of correct economic theory.
But it is also true that Hayek and his followers fatally and radically
changed the entire focus of their “Austrian” position, either by
misconstruing Mises’s argument or by consciously though silently
shifting the crucial terms of the debate.

It is no accident,
in short, that Hayek and the Hayekians dropped Mises’s term “impossible”
as embarrassingly extreme and imprecise. For Hayek, the major problem
for the socialist planning board is its lack of knowledge. Without
a market, the socialist planning board has no means of knowing the
value-scales of the consumers, or the supply of resources or available
technologies. The capitalist economy is, for Hayek, a valuable means
of disseminating knowledge from one individual to another through
the pricing “signals” of the free market. A static, general equilibrium
economy would be able to overcome the Hayekian problem of dispersed
knowledge, since eventually all data would come to be known by all,
but the ever-changing, uncertain data of the real world prevents
the socialist planning board from acquiring such knowledge. Hence,
as is usual for Hayek, the argument for the free economy and against
statism rests on an argument from ignorance.

But to Mises
the central problem is not “knowledge.” He explicitly points out
that even if the socialist planners knew perfectly, and eagerly
wished to satisfy, the value priorities of the consumers, and even
if the planners enjoyed a perfect knowledge of all resources and
all technologies, they still would not be able to calculate, for
lack of a price system of the means of production. The problem is
not knowledge, then, but calculability. As Professor Salerno points
out, the knowledge conveyed by present – or immediate “past”
– prices is consumer valuations, technologies, supplies, etc.
of the immediate or recent past. But what acting man is interested
in, in committing resources into production and sale, is future
prices, and the present committing of resources is accomplished
by the entrepreneur, whose function is to appraise – to anticipate
– future prices, and to allocate resources accordingly. It is precisely
this central and vital role of the appraising entrepreneur, driven
by the quest for profits and the avoidance of losses, that cannot
be fulfilled by the socialist planning board, for lack of a market
in the means of production. Without such a market, there are no
genuine money prices and therefore no means for the entrepreneur
to calculate and appraise in cardinal monetary terms.

More philosophically,
the entire Hayekian emphasis on “knowledge” is misplaced and misconceived.
The purpose of human action is not to “know” but to employ means
to satisfy goals. As Salerno perceptively summarizes Mises’s position:

The price
system is not – and praxeologically cannot be – a mechanism for
economizing and communicating the knowledge relevant to production
plans [the Hayekian position]. The realized prices of history
are an accessory of appraisement, the mental operation in which
the faculty of understanding is used to assess the quantitative
structure of price relationships which corresponds to an anticipated
constellation of economic data. Nor are anticipated future prices
tools of knowledge; they are instruments of economic calculation.
And economic calculation itself is not the means of acquiring
knowledge, but the very prerequisite of rational action within
the setting of the social division of labor. It provides individuals,
whatever their endowment of knowledge, the indispensable tool
for attaining a mental grasp and comparison of the means and ends
of social action.[27] 

In a recent
article, Professor Israel Kirzner argues for the Hayekian position.
For Hayek and for Kirzner, the market is a “discovery procedure,”
that is, an unfolding of knowledge. There is, in this view of the
market and of the world, no genuine recognition of the entrepreneur,
not as a “discoverer,” but as a dynamic risk taker, risking losses
if his appraisal and forecast go awry. Kirzner’s commitment to the
“discovery process” fits all too well with his own original concept
of the entrepreneurial function as being that of “alertness,” and
of different entrepreneurs as being variously alert to the opportunities
that they see and discover. But this outlook totally misconceives
the role of the entrepreneur. The entrepreneur is not simply “alert”;
he forecasts; he appraises; he meets and bears risk and uncertainty
by questing for profits and risking losses. As Salerno points out,
for all their talk of dynamism and uncertainty, the Hayek-Kirzner
“entrepreneur” is curiously bloodless and passive, receiving and
passively imbibing knowledge imparted to him by the market. The
Hayek-Kirzner entrepreneur is far closer than they like to think
to the Walrasian
automaton
– to the fictional “auctioneer” who avoids all real
trades in the marketplace.[28] 

Unfortunately,
while lucidly expounding the Hayekian position, Kirzner obfuscates
the history of the debate by claiming that the later Mises, along
with Hayek, changed his position (or, at the least, “elaborated”
it) from his original, “static” view of 1920. But on the contrary,
as Salerno points out, the “later” Mises explicitly spurned uncertainty
of the future as the key to the calculation problem. The key to
the calculation question, stated Mises in Human Action,
is not that “all human action points to the future and the future
is always uncertain.” No, socialism has

quite a different
problem. Today we calculate from the point of view of our present
knowledge and of our present anticipation of future conditions.
We do not deal with the problem of whether or not the [socialist]
director will be able to anticipate future conditions. What we
have in mind is that the director cannot calculate from the point
of view of his own present value judgments and his own present
anticipation of future conditions, whatever they may be. If he
invests today in the canning industry, it may happen that a change
in consumers’ tastes or in the hygienic opinions concerning the
wholesomeness of canned food will one day turn his investment
into a malinvestment. But how can he find out today how to build
and equip a cannery most economically?

Some railroad
lines constructed at the turn of the century would not have been
built if the people had at that time anticipated the impending
advance of motoring and aviation. But those who at the time built
railroads knew which of the various possible alternatives for
the realization of their plans they had to choose from the point
of view of their appraisements and anticipations and of the market
prices of their day in which the valuations of the consumers were
reflected. It is precisely this insight that the director will
lack. He will be like a sailor on the high seas unfamiliar with
the methods of navigation…[29] [30] 

Solving
Equations and Lange’s Last Word

One of the
unfortunate formulations of Hayek and the Hayekians in the 1930s,
giving rise to the general misunderstanding that the only problems
of socialist planning are “practical” not “theoretical,” was their
stress on the alleged difficulty of socialist planners in computing
or solving all the demand and supply functions, all the “simultaneous
differential equations” needed to plan prices and the allocation
of resources. If socialistic planning is to rely on the Pareto-Barone
equations, then how will all of them be known, especially in a world
of necessarily changing data of values, resources, and technology?

Lionel Robbins
began this equation-difficulty approach in his study of the 1929
depression, The Great Depression. Conceding, with Mises,
that the planners could determine consumer preferences by allowing
a market in consumer goods, Robbins correctly added that the socialist
planners would also have to “know the relative efficiencies of the
factors of production in producing all the possible alternatives.”
Robbins then unfortunately added:

On paper
we can conceive this problem to be solved by a series of mathematical
calculations. We can imagine tables to be drawn up expressing
the consumers demands … And we can conceive technical information
giving us the productivity … which could be produced by
each of the various possible combinations of the factors of production.
On such a basis a system of simultaneous equations could be constructed
whose solution would show the equilibrium distribution of factors
and the equilibrium production of commodities.

But in practice
this solution is quite unworkable. It would necessitate the drawing
up of millions of equations on the basis of millions of statistical
tables based on many more millions of individual computations.
By the time the equations were solved, the information on which
they were based would have become obsolete and they would need
to be calculated anew.[31] 

While Robbins’s
strictures about changes in data were and still are true enough,
they helped divert the emphasis from Mises’s even-if-static and
full-knowledge calculation approach, to Hayek’s emphasis on uncertainty
and change. More important, they gave rise to the general myth that
Robbins’s strictures against socialism, unlike Mises’s, were only
“practical” in the sense of not being able to calculate all these
simultaneous equations. Furthermore, in the concluding essay in
his Collectivist Economic Planning, Hayek set forth all
the reasons why the planners could not know essential data, one
of which is that they would have to solve “hundreds of thousands”
of unknowns. But

this means
that, at each successive moment, every one of the decisions would
have to be based on the solution of an equal number of simultaneous
differential equations, a task which, with any of the means known
at present, could not be carried out in a lifetime. And yet these
decisions would … have to be made continuously…[32] 

It is fascinating
to note the twists and turns in Oskar Lange’s reaction to the equation-solving
argument. In his 1936 article, which was long considered the last
word on the subject, Lange ridiculed the very terms of the problem.
Adopting his “quasi-market” socialist approach, and ignoring the
crucial Misesian problem of the necessary absence of any market
in land or capital, Lange simply stated that there is no need for
planners to worry about these equations, since they would be “solved”
by the socialist market:

Neither would
the Central Planning Board have to solve hundreds of thousands
… or millions … of equations. The only “equations”
which would have to be “solved” would be those of the consumers
and the managers of production plants. These are exactly the same
“equations” which are solved in the present economic system and
the persons who do the “solving” are the same also. Consumers
… and managers … “solve” them by a method of trial
and error… And only few of them have been graduated in higher
mathematics. Professor Hayek and Professor Robbins themselves
“solve” at least hundreds of equations daily, for instance, in
buying a newspaper or in deciding to take a meal in a restaurant,
and presumably they do not use determinants or Jacobians for that
purpose.[33] 

Thus, the orthodox
neoclassical economic establishment had settled the calculation
dispute with Lange-Lerner the acclaimed winner. Accordingly, when
the end of World War II brought communism/socialism to his native
Poland, Professor Oskar Lange left the plush confines of the University
of Chicago to play a major role in bringing his theories to bear
on the brave new world of socialist Poland. Lange became Polish
ambassador to the United States, then Polish delegate to the United
Nations Security Council, and finally chairman of the Polish Economic
Council. And yet not once in this entire period or later, did Poland
– or any other communist government, for that matter – attempt to
put into practice anything remotely like Lange’s fictive accounting-type,
play-at-market socialism. Instead, they all put into effect the
good old Stalinist command-economy model.

It did not
take long for Oskar Lange to adjust to the persistence of the Stalinist
Model. Indeed, it turns out that Lange, in post-war Poland, argued
strongly for the historical necessity of the persistence of the
Stalinist model as opposed to his own market socialism. Arguing
against his own quasi-decentralized market-socialist solution, Lange,
in 1958, revealed that “in Poland, we had some discussions whether
such a period of highly centralized planning and management was
historical necessity or a great political mistake. Personally, I
hold the view that it was a historical necessity.”

Why? Lange
now claimed:

  1. that the
    “very process of the social revolution which liquidates one social
    system and establishes another requires centralized disposal of
    resources by the new revolutionary state, and consequently centralized
    management and planning.”
  2. second,
    in underdeveloped countries – and which socialist country was
    not underdeveloped? – “Socialist industrialization, and particularly
    very rapid industrialization, which was necessary in the first
    socialist countries, particularly in the Soviet Union …
    requires centralized disposal of resources.” Soon, however, Lange
    promised, the dialectic of history will require the socialist
    government to organize quasi-market, decentralized decision-making
    within the overall plan.[34] 

Shortly before
his death in 1965, however, Oskar Lange, in his neglected last word
on the socialist calculation debate, implicitly revealed that his
socialist-market “solution” had been little more than a hoax, to
be jettisoned quickly when he indeed saw a way for the planning
board to solve all those hundreds of thousands or millions of simultaneous
equations! Strangely gone was his gibe that everyone “solves equations”
every day without having to do so formally. Instead, technology
had now supposedly come to the rescue of the planning board! As
Lange put it:

Were I to
rewrite my essay ["On the Economic Theory of Socialism"] today
my task would be much simpler. My answer to Hayek and Robbins
would be: so what’s the trouble? 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.[35] 

Indeed, Lange
claims that the computer is superior to the market, because the
computer can perform long-range planning far better, since it somehow
already knows “future shadow prices” which markets cannot seem to
obtain.

Lange’s nave
enthusiasm for the magical planning qualities of the computer in
its early days can only be considered a grisly joke to the economists
and the people in the socialist countries who have seen their economies
go inexorably from bad to far worse despite the use of computers.
Lange apparently never became familiar with the computer adage,
GIGO (“garbage in, garbage out”). Nor could he have become familiar
with the recent estimate of a top Soviet economist that, even assuming
that the planning board and its computers could learn the correct
data, it would take even the current generation of computers 30,000
years to process the information and allocate the resources.[36] 

But there is
a more important flaw in Lange’s last article than his naïveté
about the magical powers of the then-new technology of the computer.
His eagerness to embrace a way of solving those equations he earlier
had claimed didn’t need conscious solving demonstrates that he had
been disingenuous in claiming that his pseudomarket trial-and-error
method would provide a facile way for the socialist society to solve
the calculation problem.

Socialist
Impossibility and the Argument from Existence

Ever since
1917, or at least since Stalin’s great leap forward into socialism
in the early 1930s, the defenders of the possibility of socialism
against Mises’s strictures had one final, clinching, fallback argument.
When all the arguments over general equilibrium or equations or
entrepreneurship or Walrasian ttonnements or the command
economy or pseudo-markets had been hashed over, the defenders of
socialism could simply fall back on one point: Well, socialism exists,
doesn’t it? When all is said and done, it exists, and therefore
it must be, for one reason or another, possible. Mises must clearly
be wrong, even if the “practical” arguments of Hayek or Robbins,
arguments of mere degrees of efficiency, need to be soberly considered.
At the end of his celebrated survey essay on socialist economics
Professor Abram Bergson put the point starkly:

there can
hardly be any room for debate: of course, socialism can work.
On this, Lange certainly is convincing. If this is the sole issue,
however, one wonders whether at this stage such an elaborate theoretic
demonstration is in order. After all, the Soviet planned economy
has been operating for thirty years. Whatever else may be said
of it, it has not broken down.[37] 

In the first
place, this triumphal conclusion now rings hollow, since the economies
of the Soviet Union and the other socialist bloc countries have
now manifestly broken down. And now it also turns out that the Soviet
GNP and production figures that Bergson, the CIA, and other Sovietologists
have been taking at face value for decades have been nothing but
a pack of lies, designed to deceive not the United States, but the
Soviet managers’ own ruling elite. Even now, Western Sovietologists
are reluctant to believe the Soviet economists who are finally trying
to tell them the truth about these alleged and much revered data.

But apart from
all that, this sort of seemingly decisive empiricist counter to
the Misesian critique reveals the perils of using allegedly simple
and brute “facts” to rebut theory in the sciences of human action.
For why must we assume that the Soviet Union and the Eastern European
countries ever really enjoyed full and complete socialism? There
are many reasons to believe that, try as they might, the communist
rulers were never able to impose total socialism and central planning.
For one thing, it is now known that the entire Soviet economy and
society has been shot through with a vast network of black markets
and evasions of controls, fueled by a pervasive system of bribery
known as blat to allow escape from those controls. Managers
who could not meet their annual production quotas were approached
by illegal entrepreneurs and labor teams to help them meet the quotas
and get paid off the books. And black markets in foreign exchange
have long been familiar to every tourist. Long before the Eastern
European collapse of communism, these countries stopped trying to
stamp out their black markets in hard currency, even though they
were blatantly visible in the streets of Warsaw, Budapest, and Prague.
Without uncontrolled black markets fueled by bribery, the communist
economies may well have collapsed long ago.[38] 
This historical point has also been bolstered by Michael Polanyi’s
“span of control” theory, which denies the possibility of effective
central planning from a rather different viewpoint than Mises’s.[39] 

But the decisive
rebuttal has, once again, been leveled by Mises in Human Action:
the Soviet Union and Eastern European economies were not fully socialist
because they were, after all, islands in a world capitalist market.
The communist planners were therefore able, albeit clumsily and
imperfectly, to use prices set by world markets as indispensable
guidelines for the pricing and allocation of capital resources.
As Mises pointed out:

People did
not realize that these were not isolated social systems. They
were operating in an environment in which the price system still
worked. They could resort to economic calculation on the ground
of the prices established abroad. Without the aid of these prices
their actions would have been aimless and planless. Only because
they were able to refer to these foreign prices were they able
to calculate, to keep books, and to prepare their much talked
about plans.[40] 

Mises’s insight
was confirmed as early as the mid-1950s, when the British economist
Peter Wiles visited Poland, where Oskar Lange was helping to plan
Polish socialism. Wiles asked the Polish economists how they planned
the economic system. As Wiles reported:

What actually
happens is that “world prices”, i.e. capitalist world prices,
are used in all intra-[Soviet] bloc trade. They are translated
into rubles … entered into bilateral clearing accounts.

Wiles then
asked the Polish communist planners the crucial question. Since
the Poles were, as good Marxist-Leninists, presumably committed
to the triumph, as soon as possible, of world-wide socialism, Wiles
asked: “What would you do if there were no capitalist world” from
which you could obtain all those crucial prices? The Polish planners’
rather cynical answer: “We’ll cross that bridge when we come to
it.” Wiles added that “In the case of electricity the bridge is
already under their feet: there has been great difficulty in pricing
it since there is no world market.”[41] 

But fortunately
for the world and for the Polish planners themselves, they were
never truly forced to cross that bridge.

Epilogue:
The End of Socialism and Mises’s Statue

In
his supposedly definitive article of 1936 vindicating economic calculation
under socialism, Oskar Lange delivered a once-famous gibe at Ludwig
von Mises. Lange began his essay by ironically hailing Mises’s services
to socialism: “Socialists have certainly good reason to be grateful
to Professor Mises, the great advocatus diaboli of their
cause. For it was his powerful challenge that forced the socialists
to recognize the importance of an adequate system of economic accounting
… the merit of having caused the socialists to approach this
problem systematically belongs entirely to Professor Mises.” Lange
then went on to taunt Mises:

Both as an
expression of recognition for the great service rendered by him
and as a memento of the prime importance of sound economic accounting,
a statue of Professor Mises ought to occupy an honorable place
in the great hall of the Ministry of Socialization or of the Central
Planning Board of the socialist state.

Lange went
on to say that “I am afraid that Professor Mises would scarcely
enjoy what seemed the only adequate way to repay the debt of recognition
incurred by the socialists … ” For one thing, Lange concluded,
to complete Mises’s discomfiture

a socialist
teacher might invite his students in a class on dialectical materialism
to go and look at the statue, in order to exemplify the Hegelian
List der Vernuft [cunning of Reason] which made even
the staunchest of bourgeois economists unwittingly serve
the proletarian cause.[42] 

Curiously enough,
Lange, during his years as socialist planner in Poland, never got
around to erecting the statue to Mises at the Ministry of Socialization
in Warsaw. Perhaps socialist planning was not successful enough
to accord Mises that honor – or perhaps there were not enough resources
to build the statue. In any case, the opportunity has been lost.
The countries of Eastern Europe now stand in the rubble wrought
by what used to be called in the 1930s “the great socialist experiment.”
Emerging gloriously out of the rubble of the collapse of socialism
are a myriad of Misesian economists, to whom socialism is little
more than a grisly joke. Even as early as the 1960s it was a common
quip among economists that, at international economic conferences,
“the Western economists talk about the glories of planning while
the Eastern economists talk about the virtues of the free market.”
Now Misesian economists are springing out of the ruins of socialism
in Poland, Lithuania, Czechoslovakia, Hungary, Yugoslavia (especially
Croatia and Slovenia) and the Soviet Union. Neither socialist planning
nor Marxism-Leninism hold any charms for the economists of the once-socialist
nations.

In all of these
countries, the giant statues of Lenin are being unceremoniously
toppled from the public squares. Whether or not the coming free
societies of Eastern Europe choose to replace them with statues
of Ludwig von Mises, as the prophet of their liberation, one thing
seems certain: there will be no statues erected to Oskar Lange in
Cracow or Warsaw. It is hard to see how even the cunning of Reason
and the Hegelian dialectic can make Lange out to be a prophet or
an important contributor to the laissez-faire Polish economy of
the future. Perhaps the closet approach was a bitter quip pervading
Eastern Europe during the revolutionary year of 1989: “Communism
can be defined as the longest route from capitalism to capitalism.”

Notes

[1] 
Mises’s article, published in 1920 in German, “Die Wirtschaftsrechnung
im sozialistischen Gemeinwesen,” was only made available in English
in 1935: Mises, “Economic Calculation in the Socialist Commonwealth,”
in F. A. Hayek, ed., Collectivist Economic Planning (London:
Routledge and Sons, 1935), pp. 87–130. The article was republished
as a monograph
by the Mises Institute with a notable postscript
by Professor Joseph T. Salerno (Ludwig von Mises, Economic Calculation
in the Socialist Commonwealth [Auburn, Ma.: Ludwig von Mises
Institute, 1990]).

[2] 
Alexander Gray, The Socialist Tradition (London: Longmans,
Green, 1946), p. 90.

[3] 
Oskar Lange’s well-known article was originally in two parts: “On
the Economic Theory of Socialism,” Review of Economic Studies
4 (October 1936): 53–71, and ibid. 5 (February 1937): 132–42;
Fred M. Taylor’s article was “The Guidance of Production in a Socialist
State,” American Economic Review 19 (March 1929); Taylor
was reprinted and Lange revised and published in Oskar Lange and
Fred M. Taylor, On the Economic Theory of Socialism, B.
Lippincott, ed. (Minneapolis: University of Minnesota Press, 1938).

[4] 
Abram Bergson, “Socialist Economics,” in H.S. Ellls, ed., A
Survey of Contemporary Economics (Philadelphia: Blakiston,
1948), pp. 412–48.

[5] 
Lange was aided in this construction by being able to use Hayek’s
collection of articles on the subject, which had just been published
the year before his first article, as a useful foil. Hayek’s volume
included the seminal article by Mises, other contributions by Pierson
and Halm, two articles by Hayek himself, and the alleged refutation
of Mises by Barone. See Hayek, Collectivist Economic Planning.

[6] 
Bergson, “Socialist Economics,” p. 446.

[7] 
F.A. Hayek, “The Use of Knowledge in Society” (1945), in Hayek,
Individualism
and Economic Order
(Chicago: University of Chicago Press,
1948), p. 90.

[8] 
The silliness of hailing Barone’s essay as a refutation of Mises
is highlighted by the fact that Barone’s article was published in
1908, twelve years before Mises’s article which it is supposed to
have refuted. The data was well known to, and made no impression
upon, Ludwig von Mises. Moreover, Barone and Pareto themselves had
only scorn for any notion that their equations could aid socialist
planning. See Trygve J. B. Hoff, Economic Calculation in the Socialist
Society (1949; Indianapolis, Ind.: Liberty Press, 1981), pp. 222–23.

[9] 
Here, as in other parts of his argument – as we shall see further
below – Mises is leaning over backward to concede the market socialists
their best case, and is not considering whether such free consumer
or labor markets are really likely in a world where the state is
the only seller, as well as the only purchaser, of labor.

[10] 
Mises’s later rebuttal is in his Human
Action
(New Haven: Yale University Press, 1949), pp. 694–711.
For the establishment, the debate was supposed to be over by 1938.
For an example of a Hayekian survey of the debate that does not
bother to so much as mention Human Action, see Karen I.
Vaughn, “Introduction,” in Hoff, Economic Calculation,
pp. ix-xxxvii. Indeed, in an earlier paper, Vaughn had sneered that
“Mises’ so-called final refutation in Human Action is mostly
polemic and glosses over the real problems….” Vaughn, “Critical
Discussion of the Four Papers,” in Lawrence Moss, ed. The
Economics of Ludwig von Mises
(Kansas City: Sheed and Ward,
1976), p. 107. The Hayekian doctrine will be treated further below.

For
a refreshing example of an outstanding Misesian contribution to
the debate that does not neglect or deprecate Human Action
but rather builds upon it, see Joseph T. Salerno, “Ludwig von Mises
as Social Rationalist,” Review of Austrian Economics 4 (1990): 36–48.
Also see Salerno, “Why Socialist Economy is Impossible,” a Postscript
to Mises, Economic Calculation in the Socialist Commonwealth (Auburn,
Ala.: Ludwig von Mises Institute, 1990).

[11] 
Mises, Human Action, pp. 703–04.

[12] 
Ibid., pp. 704–05.

[13] 
Ibid., p. 705.

[14] 
The fact that some socialist bloc countries, such as Hungary, now
permit a stock market, albeit small and truncated, and that other
ex-communist countries are seriously considering introducing such
capital markets, demonstrates the enormous importance of the de-socialization
now under way in Eastern Europe.

[15] 
See Murray N. Rothbard, “Breaking Out of the Walrasian Box: The
Cases of Schumpeter and Hansen,” Review of Austrian Economics
1 (1987): 98–100, 107. (Available
in PDF.
)

[16] 
On Knight vs. Hayek, Machlup, and Boulding in the 1930s. see F.
A. Hayek, “The Mythology of Capital,” in W. Fellner and B. Haley,
eds., Readings in the Theory of lncome Distribution (Philadelphia:
Blakiston, 1946), pp. 355–83. For a Knightian attack on the
Austrian discounted marginal productivity theory on behalf of what
is now the orthodox undiscounted (by time-preference) marginal productivity
theory, see Earl Rolph, “The Discounted Marginal Productivity Doctrine,”
ibid., pp. 278–93. For an Austrian rebuttal, see Murray N.
Rothbard, Man,
Economy, and State
, vol. 1 (Los Angeles: Nash, 1970), pp.
431–33; and Walter Block, “The DMVP-MVP Controversy: A Note,”
Review of Austrian Economics 4 (1990): 199–207. (Available
in PDF.
)

[17] 
“Frank H. Knight, “Review of Ludwig von Mises, Socialism,”
Journal of Political Economy 46 (April 1938): 267–68.
In another review in the same issue of the journal, Knight claims
that there would be a “capital market” under socialism, but it is
clear that he is referring only to a market for loans, and not to
a genuine market in equities throughout the production structure.
Here again, Mises has a devastating critique of this sort of scheme
in Human Action, pointing out that managers bidding for
governmental planning board funds would not be bidding for or staking
their own property, and hence they would “not be restrained by any
financial dangers they themselves run in promising too high a rate
of interest for the funds borrowed…. All the hazards of this
insecurity fall only upon society, the exclusive owner of all resources
available. If the director were without hesitation to allocate the
funds available to those who bid most, he would simply … abdicate
in favor of the least scrupulous visionaries and scoundrels.” See
Knight, “Two Economists on Socialism,” Journal of Political
Economy 46 (April 1938): 248; and Mises, Human Action,
p. 705.

[18] 
Georg Halm, “Further Considerations on the Possibility of Adequate
Calculation in a Socialist Community,” in Hayek, Collectivist
Economic Planning, pp. 162–65. Also see ibid., pp. 13–200.

[19] 
Mises, “Economic Calculation in the Socialist Commonwealth,” pp.
106–08.

[20] 
Ibid., p. 106. This conclusion of 1920 is strikingly close
to the quip common in the Poland of 1989, as reported by Professor
Krzyztof Ostazewski of the University of Louisville: that the socialist
planned economy is “a value-shredding machine run by an imbecile.”

[21] 
Mises, Human Action, pp. 706–09: As Mises puts it:
“socialists of all shades of opinion, repeat again and again that
what makes the achievement of their ambitious plans realizable is
the enormous wealth hitherto accumulated. But in the same breath,
they disregard the fact that this wealth consists to a great extent
in capital goods produced in the past and more or less antiquated
from the point of view of our present valuations and technologica1
knowledge.” Ibid. p. 710.

[22] 
In Mises’s Notes
and Recollections
(Spring Mills, Penn.: Libertarian Press,
1978), p. 112. Also see the discussion in Murray N. Rothbard, Ludwig
von Mises: Scholar, Creator, Hero
(Auburn, Ala.: Ludwig
von Mises Institute, 1988), pp. 35–38.

[23] 
On the market, then, consumers evaluate goods and services ordinally,
whereas entrepreneurs appraise (estimate and forecast future prices)
cardinally. On valuation and appraisement, see Mises, Human
Action, pp. 327–330; Salerno, “Mises as Social Rationalist,”
pp. 39–49; and Salerno, “Socialist Economy is Impossible.”

[24] 
Mises says in his memoirs: “They [the socialists] failed to see
the very first challenge: How can economic action that always consists
of preferring and setting aside, that is, of making unequal valuations,
be transformed into equal valuations, by the use of equations? Thus
the advocates of socialism came up with the absurd recommendation
of substituting equations of mathematical catallactics, depicting
an image from which human action is eliminated, for the monetary
calculation in the market economy.” Mises, Notes and Recollections,
p. 112.

[25] 
This integration was later completed by his business-cycle theory
in the 1920s, and then in his monumental treatise Human Action.

[26] 
Except for the unfortunate emphasis of Hayek and Robbins on the
alleged socialist difficulty of computing or “counting” the equations.
See below.

[27] 
Salerno, “Mises as Social Rationalist,” p. 44.

[28] 
Israel M. Kirzner, “The Economic Calculation Debate: Lessons for
Austrians,” Review of Austrian Economics 2 (1988): 1–18
[PDF].
Hayek coined the term “discovery procedure” in F. A. Hayek, “Competition
as a Discovery Procedure,” in New Studies in Philosophy, Politics,
Economics and the History of Ideas (Chicago: University of
Chicago Press, 1978), pp. 179–90. For a critique of Kirzner’s
concept of entrepreneurship, see Murray N. Rothbard, “Professor
Hébert on Entrepreneurship,” Journal of Libertarian Studies
7 (Fall 1985): 281–85 [PDF].
For Hayek’s own contributions to the socialist calculation debate
after Lange-Lerner, see F.A. Hayek, “Socialist Calculation 111:
The Competitive ‘Solution’” (1940), and “The Use of Knowledge in
Society,” (1945), in Individualism and Economic Order,
pp. 181–208; 77–91.

[29] 
Mises, Human Action, p. 696. Also see Salerno, “Mises as
social Rationalist,” pp. 46–47ff.

[30] 
Kirzner apparently believes that Mises’s concentration on entrepreneurship
in his Human Action discussion of socialism demonstrates
that Mises had gone over to the Hayek position. Kirzner seems to
overlook the vast difference between Mises’s forecasting and appraisement
view of entrepreneurship and his own “alertness” doctrine, which
totally leaves out the possibility of entrepreneurial loss.

[31] 
Lionel Robbins, The Great Depression (New York: Macmillan,
1934), p. 151.

[32] 
F.A. Hayek, The Present State of the Debate,” in Hayek, Collectivist
Economic Planning, p. 212.

[33] 
Oskar Lange, “On the Economic Theory of Socialism, Part One,” p.
67. The Norwegian economist and defender of Mises’s position, Trygve
Hoff, commented that “Quite apart from the fact that the equations
the central authority would have to solve are of quite a different
nature to those of the private individual, the latter tend to solve
themselves automatically, which Dr. Lange must admit the former
do not.” Hoff, Economic Calculation in the Socialist Society,
pp. 221–22. This excellent book on the socialist calculation
controversy was originally published in Norwegian in 1938. In contrast
to Bergson’s almost contemporaneous survey article, Hoff’s English-language
translation, published in 1949 in Britain but not in the United
States, sank without a trace.

[34] 
Oskar Lange, “The Role of Planning in Socialist Economy,” in The
Political Economy of Socialism (1958) in M. Bornstein, ed.,
Comparative Economic Systems, rev. ed. (Homewood, Ill.:
Richard D. Irwin, 1969), pp. 170–71.

[35] 
Oskar Lange, “The Computer and the Market,” in A. Nove and D. Nuti,
eds. Socialist Economics (London: Penguin Books, 1972),
pp. 401–02.

[36] 
Yuri M. Maltsev, “Soviet
Economic Reforms: An Inside Perspective,”
The Freeman
(March 1990).

[37] 
Bergson, “Socialist Economics,” p. 447.

[38] 
One source on this pervasive system in the Soviet Union is Konstantin
M. Simis, USSR: The Corrupt Society (New York: Simon &
Schuster, 1982).

[39] 
Michael Polanyi, The Logic of Liberty (Chicago: University
of Chicago Press, 1951), pp. 111–37 and passim.

[40] 
Mises, Human Action, pp. 698–99.

[41] 
Peter J. D. Wiles, “Changing Economic Thought in Poland,” Oxford
Economic Papers 9 (June 1957): 202–03. Also see Murray
N. Rothbard, “Ludwig von Mises and Economic Calculation Under Socialism,”
in Lawrence Moss, The Economics of Ludwig won Mises, pp.
67–77.

[42] 
Lange, “The Economic Theory of Socialism,” p. 53.

Murray
N. Rothbard
(1926–1995) was the author of Man,
Economy, and State
, Conceived
in Liberty
, What
Has Government Done to Our Money
, For
a New Liberty
, The
Case Against the Fed
, and many
other books and articles
. He was
also the editor – with Lew Rockwell – of The
Rothbard-Rockwell Report
.

Murray
Rothbard Archives

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