Organizations and Markets

What is the Austrian Critique of Socialism, Really?

4 May 2006 at 9:58 am Nicolai Foss 2 comments

| Nicolai Foss | 

Any self-respecting Austrian or Austrian-influenced blog must have a discussion of the Austrian critique of socialism.  So, here goes.

In conversations with Austrians and when reading articles from the Austro-revival of the last three decades, I have always been struck by the prominence that Austrians tend to give to Hayek and Mises’ critiques of socialism. One senses a feeling that this an area where Austrians made an independent, decisive, and lasting contribution, one that even mainstream economists stand ready to acknowledge. Perhaps for this reason there has been quite a lot of internal debate among Austrians about the true meaning of the Austrian critique of socialism (usually under the rubric of “calculation” (i.e., Mises) versus “knowledge” (i.e., Hayek).  Most of the debate has concerned whether and to what extent Mises and Hayek’s critiques were different (and perhaps who made the most fundamental argument).

I believe, however, that it is time to change the debate to more fundamental terms and issues, specifically the meaning and validity of the Austrian arguments.  Thus, I have a paper forthcoming (written with Kirsten Foss) in the Review of Austrian Economics which takes issue with Hayekian arguments on the "impossibility" of socialist calculation. Essentially, we argue that Hayek does not specify why exactly direction and authority (which are means of implementing plans) falter in the face of "dispersed" or distributed knowledge. One does not need to concentrate all knowledge to plan. Managers/planners can exercise (sound) judgment in the absence of knowledge of for example the precise capabilities of employees, as Frank Knight argued.  What is lacking, in other words, is a precise analysis of the knowledge-related boundaries of conscious planning, akin to the way in which economists address the efficient boundaries of the firm.  

There is of course also the so-called "Misesian" calculation argument, which is traditionally seen as different from the Hayekian argument. I must confess that I have not quite been able to make sense of recent statements of it.  Mises' original paper on the issue is very clear.  However, later attempts, e.g., by Joseph Salerno and others to argue that Lange, Lerner, etc. did not at all meet Mises' charge, as well as their attempts to interpret (reformulate?) the Misesian argument seem to me suffer from lack of clarity.  First, Salerno and others argue that there would there still be Misesian calculation problems, even if there were no Hayekian knowledge problems.  For example, Salerno writes "Mises demonstrates that, even with Hayekian knowledge problems thus banished from consideration, the planners would still be unable to calculate the optimal or any pattern of deployment for the factors of production. The reason is that the existing capital structure and acquired skills and locations of the labor force are initially maladjusted to the newly prevailing equilibrium configuration of the data. The planners therefore would be forced to decide how to allocate the flow of productive services among the myriads of potential technical production processes and labor retraining and relocation projects so as to secure the optimal path of adjustment to equilibrium for the existing stocks of capital goods, labor skills, and housing. The bewildering complexity of this allocation decision rests on the fact that the planners will be confronted with altered conditions at every moment of time during this disequilibrium transition process, since the quantities and qualities of the available productive services themselves are in constant flux due to the circumstance that they originate in the very stocks of physical assets and labor skills that are being progressively transformed."    

It seems to me that Salerno here misses that if there were truly no Hayekian knowledge problems (i.e., the planner had essentially full knowledge/information about all preferences and technologies and resource availabilities and could calculate with infinite speed) (strictly speaking, we also need to abstract from problems of incentive compatibility), then the "bewildering complexity of [the] allocation decision" would be eliminated per assumption.  

Second, the Misesian calculation argument is presented in more recent writings as a mix of a number of conceptually distinct arguments, which makes it very hard to separate what is the distinctly Misesian contribution.  For example, Salerno's emphasis on "appraisal" as the key to the Misesian argument seems to me to rest on arguments on property rights as well as arguments that relate to a picture of the market process as selecting among rival appraisals.  But these are separate arguments that are treated in property rights economics and evolutionary economics, respectively.  What then is unique about the Misesian argument?

Entry filed under: - Foss -, Austrian Economics.