Austrian Economics Forum Fall 2010 #5—MegaPost

Socialism is a failure, but why does it keep coming back? That’s the perennial question. In the latest Austrian Economics readings Group forum at NC State University, we discussed the final Hayek readings on socialism. In particular, "Socialist Calculation II: The State of the Debate (1935)" and "Socialist Calculation III: The Competitive 'Solution.'" These are chapters 8 and 9 in Individualism and Economic Order.

To Hayek, the problem that faces an economic system is one of coordination. How do individuals coordinate their actions with one another without the guidance of a central planner? And if there is a central planner, then will that system be able to incorporate all of the information necessary to not waste resources while satisfying the most intense wants and desires of the consumers? Will the people who live under a central planner still be able to choose their own consumer goods, or will goods just be rationed to them? Will workers get to choose where they work or will they simply be assigned their station in life?

Hayek begins by pointing out that the Russian experiment is a failure. The people are more impoverished than under the Czarist régime. Turning to the theoretical side of the debate, Hayek focuses on the mathematical approach to solving the production and distribution questions. In order to calculate the correct solution, the knowledge of opportunity costs is needed. More than mere “technical” knowledge is needed to run an economy. Just because we know how to build something does not answer the question of should it be built at all.

Furthermore, there is a need for the knowledge of consumer goods. Consumers’ tastes and preferences are continuously changing and the central planner, to be successful, will need some sort of feedback mechanism to incorporate the changes. Bureaucracies move too slowly to accomplish this task. The bottom line of this analysis is that the market processes the information that the central planners cannot. In order to achieve some sort of solution, consumer sovereignty has to be sacrificed. Consumers no longer can choose what they prefer; must simply take whatever goods and services that are placed before them.

In the conclusion, Hayek seems to have left the door open to the possibility of a workable socialist solution. Hayek states,

“that today we are not yet intellectually equipped to improve the working of our economic system by ‘planning’ or to solve the problem of socialist production in any other way without very considerably impairing productivity. What is lacking is not ‘experience’ but intellectual mastery of a problem which so far we have learned only to formulate but not to answer. No one would want to exclude every possibility that a solution may yet be found. But in our present state of knowledge serious doubt must remain whether such a solution can be found.”

I argued that unlike Mises, Hayek is leaving the door open. Cordato said that he thought the Hayek was being gracious towards his academic colleagues. While this may very well be the case, this is not how the debate progressed in the 1940s. The chief rivals to the Austrian challenge, like Lange, thought that Hayek was retreating from Mises’ position that socialism is impossible, even on paper.

It was at this point in our discussion that I read from an article that was published in 1948. The article, “Socialist Economics” was published by the American Economic Association in a collection of papers entitled, A Survey of Contemporary Economics. The article was written by Abram Berson, at that time he was a professor at Columbia University and earned a Ph.D. from Harvard. So his interpretation of the debate is not some fringe interpretation, it was, basically, the mainstream of the time. Furthermore, Bergson cites, not just the two articles that we read for the readings group, but he also cites “The Use of Knowledge in Society,” and Schumpeter and Mises as well.

Here is what Bergson says,

“To come finally to Mises, there are two questions to ask: What does he say and what does he mean?

“On the first question, let Mises speak for himself:”

Then there is a lengthy quote from Mises on how without private property there can be no market and no prices and then no economic calculation. Mises concludes, “Exchange relations between production goods can only be established on the basis of private ownership of the means of production.”

[back to Bergson]

“As to what Mises means, there appear to be two views. According to that which seems to have gained the wider currency, Mises’ contention is that without private ownership of, or…a free market for, the means of production, the rational evaluation of these goods for the purposes of calculating costs is ruled out conceptually. With it goes any rational economic calculation. To put the matter 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.

“Interpreted in this way, the argument is easily disposed of. Lange and Schumpeter, who favor this interpretation of Mises, point out correctly that the theory is refuted completely by the work of Pareto and Barone. …

“According to the other interpretation of Mises, which has the authority of Hayek, the contention is not that rational calculation if logically inconceivable under socialism but that there is no practicable way of realizing it. Imputation is theoretically possible; but, once private ownership of the means of production has been liquidated, it cannot be accomplished in practice.

“Hayek’s own thinking and that of Robbins, seems to be along these lines. Lange, who interprets the views of Hayek and Robbins as being in reality a retreat from the original position of Mises, considers that his own analysis refutes their argument…”

In the second reading, Hayek argues that it is the Socialists who have changed their arguments. And it is he who is chasing after them. Hayek states, “[I]t is surely unfair to say, as Lange does, that the critics, because they deal in a new way with the new schemes evolved to meet the original criticism, ‘have given up the essential point’ and ‘retreated to a second line of defense.’ Is this not rather a case of covering up their own retreat by creating confusion about the issue?”

So each side accuses the other of retreating and shifting the debate because of the other side’s inability to respond to the criticism. Personally, I am less interested in who shifted first. What does interest me is the shift in the debate. I agree with the first Bergson interpretation of Mises that under Mises’ analysis, socialism is unworkable, even on paper. I think that Mises’ argument that grounds itself on the fundamental foundation of socialism—communal property—is the stronger argument, because it attacks the very core of socialism. There is simply no getting around it. Either there is private property and a market that guides production or there is a central planner who controls it all.

I find it amazing that Bergson so easily dismisses the first interpretation of Mises. Bergson, Lange, Taylor, etc, all say that Mises was answer by Pareto and Barone. However, in the second reading, Hayek cites Pareto and shows that Pareto “expressly denied” the mathematical solution. Bergson obviously read this article and makes no attempt to address this point. Why?!?

I liked the second article more than several other people in the group. In section 5 of the article, we can clearly see the famous phrase “the circumstances of time and place” appear before the “Use of Knowledge” article. We also see an early sketch of the “man on the spot” concept a few paragraphs later.

One last point in the article that needs attention comes at the end of section 6. Hayek points out that under central planning there will be no improvements made. He states, “Any improvement, any adjustment, of the technique of production to changed conditions will be dependent on somebody’s capacity of convincing the SEC (Supreme Economic Council) that the commodity in question can be produced cheaper and that therefore the price ought to be lowered. Since the man with the new idea will have no possibility of establishing himself by undercutting, the new idea cannot be proved by experiment until he has convinced the SEC that his way of producing the thing is cheaper. Or, in other words, every calculation by an outsider who believes that he can do better will have to be examined and approved by the authority, which in this connection will have to take over all the functions of the entrepreneur.”

Innovation and creation will die under central planning. There is no incentive for the bureaucrat to take a risk. Bureaucrats, are by their nature, the opposite of risk-takers. They are the opposite of entrepreneurs.

For more on this debate, I found an article written by Murray Rothbard. It is found here:
http://www.lewrockwell.com/rothbard/rothbard132.html