Vulgar Austrians, Economic Calculation and Capitalist Economies

Updated

Ignorant internet Austrians have a habit of invoking the “socialist calculation debate” and the idea of economic (mis)calculation as if these provide some irrefutable argument against Keynesian macroeconomic management of a capitalist economy. I am principally thinking of this person.

There are two issues here:

(1) the alleged “economic (mis)calculation problems” that a capitalist economy with modern monetary and fiscal policy and some degree of government intervention might be subject to in Austrian theory, and

(2) the core issue of Mises’s socialist calculation debate from the 1920s–1940s.

The original core idea, or problem, of Mises’s socialist calculation debate was that “rational economic calculation” was impossible in a planned, command economy, because the lack of market prices for capital goods eliminated those markets which produce prices for the means of production, and capitalists need these prices to calculate profit and loss. That is to say, a command economy has completely abolished private ownership and production of capital goods, yet the prices of those goods (and other factor inputs) are required to establish costs of production and whether you have made a profit from sales of goods produced.

But it is obvious how that issue cannot be a serious one for modern nations with Keynesian economics, because in these systems the vast majority of capital goods are owned and produced privately, and prices do exist for these means of production and factor inputs. Profit and loss is obviously calculable in the way that it is not in a Communist command economy.

I will repeat this important concept: the point here was, and always has been, that the original issue in the socialist calculation problem (no market prices at all for capital goods eliminating producers’ goods markets) is not what modern Austrians must mean when they complain about “economic (mis)calculation” in a Keynesian economy, for prices for capital goods and factor inputs do exist, and even if Austrians think some of those prices might be “distorted” that is a different issue from saying that there are no prices whatsoever with which to calculate profit and loss.

Fundamentally, “rational economic calculation,” in the sense of the original socialist calculation debate, is possible in a market economy with Keynesian policies. To prove this, we need only note how even Mises conceded that a syndicalist system of production was possible:

“Mises agrees that rational economic calculation is possible under syndicalism or under any other producer cooperative-based system where the cooperative bodies are the owners of the means of production. Thus, there is some kind of group-collective private ownership, what the Maoists during the Chinese cultural revolution used to criticise as Yugoslav group-capitalism. Group-capitalism is also capitalism and allows rational calculation.” (Keizer 1987: 113–114).

So Mises 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.

It follows a fortiori that a modern capitalist state even with Keynesian macro-management where private ownership of capital goods is the norm must also be capable of “rational economic calculation” in the original sense of Mises’s socialist calculation debate.

Now, when confronted with this point, vulgar Austrians will say that it is other alleged “economic (mis)calculation problems” that they are talking about, as follows:

(1) the alleged miscalculation problems caused in the Austrian business cycle theory (ABCT). But even here the issue is alleged price distortions in capital goods, not the non-existence of such prices or lack of private markets for capital goods and other factor inputs.

(2) distortions of prices away from their equilibrium values (as postulated by (4) below) by government spending, deficit spending, central bank fiat money creation, price controls, subsidies etc.

(3) distortions of prices away from their equilibrium values (as postulated by (4) below) by government interventions allegedly leading to Cantillon effects

(4) in general, obstructions to flexible wages and prices and therefore to a price vector that will clear all markets (with flexible wages clearing the labour market), as in this quotation of Hayek:

“The primary cause of the appearance of extensive unemployment, however, is a deviation of the actual structure of prices and wages from its equilibrium structure. Remember, please: that is the crucial concept. The point I want to make is that this equilibrium structure of prices is something which we cannot know beforehand because the only way to discover it is to give the market free play; by definition, therefore, the divergence of actual prices from the equilibrium structure is something that can never be statistically measured.” (Hayek 1975: 6–7).

It is obvious how the problems from (2) to (4) are all very similar to ideas from Walrasian neoclassical theory, and its idea of a tendency to a price and wage vector that would clear all markets.

But the most bizarre thing is that the same vulgar Austrian thinks that Hayek’s equilibrium structure of wages and prices “has nothing to do with ‘market-clearing Walrasian price vectors!’” We have here ignorance of the highest order at work.

First, by the late 1920s, Hayek was influenced by neoclassical economics and Walrasian general equilibrium (GE) theory. It was not until 1937 in his paper “Economics and Knowledge” (Hayek 1937) that Hayek discarded the notion of a set of equilibrium prices for the alternative idea of equilibrium he called “plan coordination.” The notion of a set of equilibrium prices (as we see in the quotation of Hayek above) is derived from Hayek’s beliefs during the time he was under the influence of Walrasian theory.

Secondly, Hayek’s remarks in the quotation above were made on April 9, 1975 in a talk that Hayek gave to the American Enterprise Institute in Washington DC. The real paradox here is that Hayek was using ideas broadly similar to those from Walrasian GE theory at a time when in his other written work he was moving away from GE as a useful concept and had already made strong criticisms of it. Even by the time of The Pure Theory of Capital (1941), Hayek asserted that it was necessary to “abandon every pretence that [sc. equilibrium] … possesses reality, in the sense that we can state the conditions under which a particular state of equilibrium would come about” (Hayek 1976 [1941]: 28). If nothing else, the statement of Hayek from 1975 is just further proof that Hayek was inconsistent in his attitude to GE theory, certainly in the 1970s.

One of the reasons that Hayek abandoned GE theory was that his opponents in the socialist calculation debate had used it to counter the arguments of the Austrians, and to argue that rational economic calculation was possible in a socialist state.

Hayek’s ultimate rejection of GE theory in the context of the socialist calculation debate can be seen towards the end of his life in an interview as transcribed in the book Nobel Prize-Winning Economist: Friedrich A. von Hayek (1983, pp. 187-188):

“HIGH: To what extent do you think that general-equilibrium analysis has contributed to the belief that national economic planning is possible?

HAYEK: It certainly has. To what extent is very difficult to say. Of the direct significance of equilibrium analysis to the explanation of the events we observe, I never had any doubt, I thought it was a very useful concept to explain a type of order towards which the process of economics tends without ever reaching it. I’m now trying to formulate some concept of economics as a stream instead of an equilibrating force, as we ought, quite literally, to think in terms of the factors that determine the movement of the flow of water in a very irregular bed.”

This issue raises the point that there is a schism in Austrian economics between those who accept the basic view that markets have a tendency to an equilibrium state and those who do not, as I have shown here.


BIBLIOGRAPHY

Hayek, F. A. von. 1937. “Economics and Knowledge,” Economica n.s. 4.13: 33–54.

Hayek, Friedrich A. von. 1975. A Discussion with Friedrich A. von Hayek. American Enterprise Institute, Washington.

Hayek, F. A. von. 1976 [1941]. The Pure Theory of Capital. Routledge and Kegan Paul, London.

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.

Nobel Prize-Winning Economist: Friedrich A. von Hayek. Interviewed by Earlene Graver, Axel Leijonhufvud, Leo Rosten, Jack High, James Buchanan, Robert Bork, Thomas Hazlett, Armen A. Alchian, Robert Chitester, Regents of the University of California, 1983.