“The Soviet Union was based on socialism, and socialist economic calculation is irrational. Ludwig von Mises in 1920 described why in his article, “Economic Calculation in the Socialist Commonwealth.” He showed in theory exactly what is wrong with all socialist planning. He made it clear why socialism could never compete with the free market. It has no capital goods markets, and therefore economic planners cannot allocate capital according to capital’s most important and most desired needs among by the public.And Austrians might wonder why nobody takes them very seriously.
Mises’s argument was not taken seriously by the academic community. Socialism was so popular by 1920 among academics that they did not respond to Mises for over 15 years. When finally one major economist, who really was not a major economist but was simply a Polish Communist, wrote a response to Mises, it got a great deal of publicity. His name was Oscar Lange. He was a hack. He taught at the University of Chicago. He had no theory of economics. ….
So, the only major supposed academic refutation of Mises was made by a hack who switched sides to Communism when he got a better offer. Yet he was heralded as a brilliant economist because he had supposedly refuted Mises.”
Gary North, “Dancing on the Grave of Keynesianism,” Mises Daily, October 01, 2012.
The “only major supposed academic refutation of Mises” was the work of Oscar Lange? Is this man serious?
I guess all these replies to, and critiques of, Mises in the 1920s and 1930s went down the Austrian memory hole:
Cohn, Arthur Wolfgang. 1920. “Kann das Geld abgeschaft werden?” (“Can Money be Abolished?”), Dissert., University of Jena.And this is only a selection of the literature.
Polanyi K. 1922. “Sozialistische Rechnungslegung,” Archiv für Sozialwissenschaft und Sozialpolitik 49.2: 377–420.
Kautsky, Karl. 1922. Die proletarische Revolution und ihr Programm. Dietz, Stuttgart and Berlin.
Leichter, O. 1923. Die Wirtschaftsrechnung in der socialistische Gesellschaft. Verlag der Wiener Volksbuchhandlung, Vienna.
Polanyi, K. 1924. “Die funktionelle Theorie der Gesellschaft und das Problem der sozialistischen Rechnungslegung,” Archiv für Sozialwissenschaft und Sozialpolitik 52: 218–228.
Neurath, Otto. 1925. Wirtschaftsplan und Naturalrechnung. Laub, Berlin.
Taylor, F. M. 1929. “The Guidance of Production in a Socialist State,” American Economic Review 19 (March): 1–8.
Roper, W. C. 1929. The Problem of Pricing in a Socialist State. Harvard University Press, Cambridge, Mass.
Dickinson, H. D. 1933. “Price Formation in a Socialist Community,” Economic Journal 43 (June): 237–250.
Dickinson, H. D. 1939. Economics of Socialism. Oxford University Press, Oxford.
Lerner, A. 1937. “Statics and Dynamics in Socialist Economics,” Economic Journal 47: 251–270.
Lerner, A. 1938. “Theory and Practice in Socialist Economics,” Review of Economic Studies 6 (October): 71–75.
My purpose here is not to defend the socialist critics of Mises: whatever you think of the merits of their responses to Mises, the fact is that it is absurd to assert to that nobody responded to Mises “for over 15 years,” and that Lange provided the “only major supposed academic refutation” of him.
How could anyone familiar with the history of economics write such rubbish?
In fact, even Hayek said explicitly that soon after 1920 Mises’s socialist critics began to reply to him:
“In the years immediately succeeding its publication [viz. Mises’s “Economic Calculation in the Socialist Commonwealth – LK] a number of attempts were made to meet his challenge directly and to show that he was wrong in his main thesis, and that even in a strictly centrally directed economic system values could be exactly determined without any serious difficulties.” (Hayek 1935: 36).One can consult Appendix B of Hayek (1935: 291–293) for a detailed list of the literature.
Furthermore, Mises’s critique of command economy socialism was hardly unique. Hayek (1935: 34) tells us that Max Weber independently came to much the same conclusions as Mises over the difficulty of a planned socialist economy in his posthumous work Wirtschaft und Gesellschaft (Tübingen, 1921), and a Russian economist Boris Brutzkus (who was actually living in Russia) wrote a critique of Soviet economics published in 1921–1922 in the Russian journal Ekonomist, later reprinted in an English translation called “Problems of Social Economy under Socialism” (Hayek 1935: 35). Brutzkus had also criticised war communism along similar lines to Mises.
It is rather curious that Mises’s original article of 1920 was mainly a critique of the marketless, planned, and moneyless economy imagined by Otto Neurath, but the socialist critics of Mises quickly accepted Mises’s view that such a moneyless planned economy would not work (Hayek 1997: 9). Moreover, Mises had never denied that a syndicalist system of production was possible: he admitted that rational economic calculation was possible under syndicalism since he argued that there was a group-collective private ownership of capital goods in such a system (Keizer 1987: 114).
The major responses to Mises and Hayek came from so-called “market socialists,” such Abba Lerner, H. D. Dickinson, and Oscar Lange. These socialists used Walrasian general equilibrium theory, and argued that a decentralized socialist economy would allow the choices of consumers and workers to be free, and that state firms engaged in production competitively would choose cost-minimizing techniques and then expand production until their marginal costs equalled prices. This, they thought, would overcome the difficulties foreseen by Mises.
The foundation was laid by H. D. Dickinson in his article “Price Formation in a Socialist Community” (Economic Journal 43 [1933]: 237–250), where Dickinson argued that the system of equations by which an economy can be represented in a Walrasian economic model would be solved in the socialist economy by planning authorities (Hayek 1997: 13). If the prices were wrong, Dickinson and other socialists argued that, by trial and error, the right prices would be found.
Even Lange accepted Mises’s view the prices are necessary for rational economic calculation (Hayek 1997: 20). By the time Hayek entered the debate he, in essence, conceded that rational economic calculation under socialism might be a theoretical possibility (something which Mises denied), but Hayek thought that in practical terms it was impossible.
The real paradox here is that in his criticisms of market socialists Hayek was driven to question the usefulness of Walrasian general equilibrium theory in understanding real world capitalist economies (Donzelli 1993).
The crucial reason why many perceived that Lange had adequately answered Mises and Hayek was that the mainstream economics profession was taken over by neoclassical theory after 1945.
But it is obvious that the Walrasian basis of the market socialists’ argument for a planned economy is badly mistaken, for Walrasian theory is wrong.
Where that leaves the arguments for planned economies is another question, of course. I will address this in the next post.
BIBLIOGRAPHY
Barone, Enrico. 1908. “Il ministro della produzione nello stato collettivista,” Giornale degli economisti 37: 267-293, 391-414.
Barone, Enrico. 1935. “The Ministry of Production in the Collectivist State,” in F. A. von Hayek (ed.), Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. G. Routledge & Sons, London.
Chaloupek, Günther. 1990. “The Austrian Debate on Economic Calculation in a Socialist Society,” History of Political Economy 22.4: 659–675.
Christainsen, Gregory B. 1993. “What Keynes really Said to Hayek about Planning,”
Challenge 36.4 (July/August): 50–53.
Cohn, Arthur Wolfgang. 1920. “Kann das Geld abgeschaft werden?” (“Can Money be Abolished?”), Dissert., University of Jena.
Dickinson, H. D. 1933. “Price Formation in a Socialist Community,” Economic Journal 43 (June): 237–250.
Dickinson, H. D. 1939. Economics of Socialism. Oxford University Press, Oxford.
Donzelli, F. 1993. “The Influence of the Socialist Calculation Debate on Hayek’s view of General Equilibrium Theory,” Revue européenne des sciences sociales 31.96.3: 47–83.
Halm, Georg. 1935. “Further Considerations on the Possibility of Adequate Calculation in a Socialist Community,” in F. A. von Hayek (ed.), Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. G. Routledge & Sons, London. 131–201.
Hayek, Friedrich A. von. 1935. Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. G. Routledge & Sons, London.
Hayek, Friedrich A. von. 1997. Socialism and War: Essays, Documents, Reviews (ed. Bruce Caldwell). Routledge, London.
Heimann, Eduard. 1922. Mehrwert und Gemeinwirtschaft. Kritische und positive Beiträge zur Theorie des Sozialismus. Engelmann, Berlin.
Kautsky, Karl. 1922. Die proletarische Revolution und ihr Programm. Dietz, Stuttgart and Berlin.
Keizer, W. 1987. “Two Forgotten Articles by Ludwig von Mises on the Rationality of Socialist Economic Calculation,” Review of Austrian Economics 1.1: 109–122.
Keizer, W. 1989. “Recent Reinterpretations of the Socialist Calculation Debate,” The Journal of Economic Studies 16.2: 63-83.
Keizer, W. 1997. “Schumpeter’s Walrasian Stand in the Socialist Calculation Debate,” in W. Keizer, B. Tieben and R. van Zijp (eds.), Austrian Economics in Debate. Routledge, London and New York. 75–94.
Lange, O. 1936. “On the Economic Theory of Socialism (Part I),” Review of Economic Studies 4: 53–71.
Lange, O. 1937. “On the Economic Theory of Socialism (Part II),” Review of Economic Studies 5: 123–142.
Leichter, O. 1923. Die Wirtschaftsrechnung in der socialistische Gesellschaft. Verlag der Wiener Volksbuchhandlung, Vienna.
Lerner, A. 1937. “Statics and Dynamics in Socialist Economics,” Economic Journal 47: 251–270.
Lerner, A. 1938. “Theory and Practice in Socialist Economics,” Review of Economic Studies 6 (October): 71–75.
Mises, L. von. 1920. “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen,” Archiv fur Sozialwissenschaften 47: 86–121.
Mises, L. von. 1935. “Economic Calculation in the Socialist Commonwealth,” in F. A. von Hayek (ed.), Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. G. Routledge & Sons, London. 87–131.
Neurath, Otto. 1925. Wirtschaftsplan und Naturalrechnung. Laub, Berlin.
Pierson, N. 1935. “The Problem of Value in the Socialist Society,” in F. A. von Hayek (ed.), Collectivist Economic Planning: Critical Studies on the Possibilities of Socialism. Geonze Routledee & Sons, London. 41–86.
Polanyi, K. 1922. “Sozialistische Rechnungslegung,” Archiv für Sozialwissenschaft und Sozialpolitik 49.2: 377–420.
Polanyi, K. 1924. “Die funktionelle Theorie der Gesellschaft und das Problem der sozialistischen Rechnungslegung,” Archiv für Sozialwissenschaft und Sozialpolitik 52: 218–228.
Rothbard, Murray N. 2006 [1991]. “The End of Socialism and the Calculation Debate Revisited,” Mises Daily, 8 December
http://mises.org/daily/2401
Roper, W. C. 1929. The Problem of Pricing in a Socialist State. Harvard University Press, Cambridge, Mass.
Taylor, F. M. 1929. “The Guidance of Production in a Socialist State,” American Economic Review 19 (March): 1–8.
Weber, Max. 1921. Wirtschaft und Gesellschaft. J.C.B. Mohr, Tübingen.
Well, that's actually a pretty good post, even if started off on a pointless attack.
ReplyDeleteThanks for the info!
Its worth to note that Mises's idea of needing a price system in a market was already said by the Austrian Friedrich von Wieser.
ReplyDeleteThe economists of the Austrian school present the Socialist Calculation Debate as one of their major victories, but I've always felt that this whole debate was meaningless. Who cares? The problem of devising a fully administrated economy is not the most relevant one in the modern world.
ReplyDeleteBesides, it is not like we lack empirical results. USSR's history suggests that socialistic planning is able to work: it allowed the Soviet Union good rates of economic growth and military build-up. We also know that it wasn't without problems: over the years, USSR accumulated a lot of structural disbalances, some resources were wasted and the inflexibility did not allow the Soviet Union to enter the post-industrial stage of development.
So, I don't know why the SCD matters. The actual mechanics of the central planning are interesting (how the planning was implemented and how it changed during the years, why there was a proposal for ОГАС (economy wide MRP-network), how private enterprise coexisted with the state system, etc), but they have almost nothing to do neither with Mises, nor with Lange.
I think most people can agree that USSR was not really a socialistic country, or at least it was not a country without a price system. So using the USSR as evidence of the 'socialistic' side of the debate is not a good example.
DeleteFurthermore, I think most people fail to get the overall implications of the whole debate. While the price system is important, I dont think it was the main meat of the debate. The socialists tried to use the neoclassical framework to explain how socialism may work. Hayek especially tried to explain the market as a disequilibrium process while the socialists were stuck because of its neoclassical framework. In this sense, the debate is now important for it was an event that showed the limitations of neoclassical economics.
I just read a paper not too long ago that highlighted this, which the authors a far from Austrians (I know one is a marxist) http://eprints.kingston.ac.uk/23463/1/Auerbach-P-23463.pdf
The problem is that you could define 'socialistic' in different ways; but I think that saying that the USSR was not socialistic as in 'not a dedicated welfare state' is actually less controversial than implying that it wasn't a centrally planned economy.
DeleteI will have to note three things. The USSR had a monetary system and prices for goods, but they behaved quite differently than in the capitalistic economies. Essentially, there were two monetary systems, one for ordinary people and the second for the industries. Your average worker from streets shopped for goods in the stores, using government-issued rubles and kopecks, and factories also used rubles and kopecks in the accounting papers, but those rubles and kopecks were not created equal and could not substitute each other. You could not, for example, buy convert factory funds into cash and go buy some commodities from the market - at least, not without taking a long trip to the resorts of the Northern Siberia. For the state enterprises, credit was extended automatically by any department of the state bank. So, inside the industrial system, money flows meant not a flow of resources, but rather 'donor-acceptor' relations between the socialistic institutions.
Second, central planning in the USSR underwent historical changes. Leaving aside the chaotic 'military communism' and NEP periods, first the central planning was made in natural terms by Gosplan. It was... kind of like a big Sraffian model, yeah. It was fine as long as there was a relatively small number of commodities, but when the economy began to become more sophisticated after the WWII the planning of this kind was no longer viable. In 1953 Gosplan was disbanded, and departments started to plan in gross terms (planning by the gross values of produced commodities). Essentially, planning became less accurate and more decentralized. There was a project of uniting the country in a big online network of computers with MRP-like capabilities (to solve the problem of the optimal allocation of resources) and thus returning to the natural planning, but it was scraped because of the costs and complexity. This project was called ОГАС/'OGAS' and it was promoted by the cybernetics professors Kitov and Glushkov.
Third, throughout the USSR history the state system of production co-existed with a private enterprise. Ironically, it was during Stalin's reign that the private enterprises prospered: they were called 'artels' and 'manufacturing cooperatives' and amongst them were big factories and even several military research institutes. It was during Khruschev's and Brezhnev's years that a crackdown on the artels occured. Still, the existence of the private enterprise during some decades did not preclude the central planning of the state-controlled parts of the economy, so I don't think it is viable to deny the USSR the traits of the socialistic planning. State controlled both the flow of real resources and the extension of credit to all institutions of the country.
All in all, it is a rather obscure topic. Not many Russians are interested in the Soviet economic mechanisms nowadays, and in the West it is mostly a domain of the rare sovietologists. I am, to my shame, not very educated in this sphere either.
Overall, my point is that the SCD did not decide the fate of the socialistic planning and failed to manifest itself in the paradigm shift in the economics. For Hayek, maybe, its implications were important, but most economists acknowledged static equilibrium states as only metaphors before and after the debate.
Re: I've read the article, and the North's arrogance is astounding. "The Soviet Union was always economically bankrupt. It was poverty-stricken in 1991. It was, in conservative journalist Richard Grenier's magnificent phrase, Bangladesh with missiles. Outside of Moscow, Russians in 1990 lived in poverty comparable to mid-19th-century America, but with far less freedom."
ReplyDeleteYeah, real tough life all these subhuman Russians had.
Everything else is a drivel of the same quality. It makes me remember V. Lenin's quote that the intelligentsia isn't a nation's brain, it is its crap.
Leaving aside whoever the Soviet-style Austrian bureaucrat that wrote the above propaganda, the calculation debate was a massive turning point for the NEO-Austrians. It is at this point that they manifested their true colours -- that is, as rabid ideologues and political propagandists first and economists second.
ReplyDeleteDuring the debates, from what I've read, they came to see that the equilibrium framework in itself has "socialistic" tendencies and it was at this point that they started highlighting entrepreneurial discovery (i.e. entrepreneur as mythic hero) and their version of radical uncertainty (which was not properly uncertain and far from radical).
The shift of emphasis, on my reading, also came at a time when Hayek could no longer defend his own economic theories in the face of his critics (Sraffa, Keynes etc.) and was basically engaging in a hermeneutic reading of the General Theory to try to pick it apart. This, I think, inspired Hayek to focus on what he called "political philosophy" -- but which I call "propaganda" -- instead.
Meanwhile, Mises was constructing a weird a priori ethical system that he could use to back the new "subjectivist" (read: non-rational and strictly normative) theories.
And that, my friends, is what we today call "Austrian economics". Next week: how L. Ron Hubbard "discovered" dianetics. ;-)
These are good points.
DeleteHayek gave up his business cycle research for one reason because he came to see that the equilibrium framework required to work it work was not sustainable.
With "POST KEYNESIAN" emblazoned across the top of your blog, it seems to me that you should be in agreement with the main point of Gary North's assessment that Keynesian economics is dead. Of course it has been dead intellectually since at least 1959, when Henry Hazlitt in his book, THE FAILURE OF THE NEW ECONOMICS, critically analyzed and thoroughly refuted essentially everything that J.M. Keynes had posited in his now discredited GENERAL THEORY OF EMPLOYMENT INTEREST AND MONEY.
ReplyDeleteThe notion that Hazlitt refuted Keynes is a fantasy.
DeleteE.g., Keynes believed that expectations are subjective in the GT. Austrian these days agree.
Keynes argued that there is no convergence to full employment general equilibrium. Most Austrians in recent years from Rizzo, Lachmann, radical subjectivists etc. agree.
Henry Hazlitt is really talking about very simplistic, say, Econ 1 macroeconomics. If you take that class, there is a 'short run' and a 'long run' and classical economics is relegated to the 'long run' and neo-Keynesian/Monetarism is relegated to the 'short run'. So all the very simplistic criticisms of macroeconomics are already dealt with. What Hazlitt does not understand is *why* economists believe in the 'short run'. I could list them here, but you won't believe it anyway. As I have read Hazlitt, perhaps you can read Keynes. Or Fischer. Or any good econ book.
DeleteJan said:This is absurd.Another stupidity from the highly politizised, Mises Institute.Leaving apart the validity of the arguments from relativly heterodox spectrum of "Socialist economists" and the grade of connection to Walrasian Equlibrium etc ideas,it either ignorant,or just another attempt to rewrite history from agitators like G.North. 1)To leave out a whole bunch of higly esteemed economist that responded like Polanyi,Lerner, Kautsky,and claim that Oscar Lange "was a hack" is utterly disingenuous. What ever one think of those very different types of "Socialist economists",they all belong to the classics and did contributs that they are rembembered today in many topics. 2)And since the key figure in von Mises attack on Otto Neurath,and his claim that a moneyless planned economy would not work,and this critique was shared by as well Soviet economist Boris Brutzkus etc.it become comical, and lay to that "Mises had never denied that a syndicalist system of production was possible: he admitted that rational economic calculation was possible under syndicalism since he argued that there was a group-collective private ownership of capital goods in such a system (Keizer 1987: 114)" this becomes another evidence of von Mises very idiosyncratic nature. There have been, long before,(and after) much more valid deeper argumentation on advantages and disadvantages with planning in the economic debate then this contradictonary,excentric argumentation from Ludwig von Mises and his pale epigones.
ReplyDeleteLord Keynes, thank you for another good post.
ReplyDeleteAlthough irrelevant to this post, I'd like for you to accept my contribution to the debate about Sraffa-Hayek and "natural" rates of interest:
http://www.blazingtruth.com/wicksell-natural-rate-interest/
Best wishes.
"And Austrians might wonder why nobody takes them very seriously." No truer words were said.
ReplyDeleteI have a friend who is an Austrian economist, but he did his PhD at Unicamp, which is a center of Post-Keynesianism in Brazil and he said that he wants distance from Mises.org.