Hutchison on the Socialist Calculation Debate

From Hutchison’s paper “Hayek, Mises and the Methodological Contradictions of ‘Modern Austrian’ Economics” (1994):

“As regards the debate on socialism, it may be worth observing, first, that the question as to how a socialist economy would, or could, achieve a more or less ‘efficient’ allocation of resources did not originate with the Austrian school, but with German historical economists, including even, in a rather jocular passage, Friedrich Engels (v. Hutchison, 1953, pp. 293–8; and 1981, pp. 14–16). Mises certainly deserves credit, however, for raising the issue so sharply in 1920. But the argument he employed was seriously exaggerated and oversimplified. Intermittently, underlying his argument is the extreme rationalist assumption of what Kirzner, rather misleadingly, calls ‘static individualism’, and also, of course, of so much economic theorizing since Ricardo of generally full, or even perfect knowledge. It is just too facile to demonstrate that socialist planners may not be able to improve on the allocation of competitive markets if everybody in those markets—more or less by definition—is equipped with full or perfect knowledge. At one point, for example, Mises raised the question of how a ‘socialist commonwealth’ would decide about investing in a new railway line. He explains that ‘under a system of private ownership we could use money calculations to decide these questions’ (1969, p. 104). Certainly ‘money calculations’ could be used, but they would not lead to correct or even efficient decisions without adequate knowledge on the part of the calculators. In fact, the Austro-nihilist wing, of the modern Austrian movement, led by Lachmann and Shackle, insisted that total unpredictability made any kind of economic ‘calculation’ (capitalist or socialist) impossible in any case. Mises, in fact, also failed to recall that it was precisely in the area of railway investment, in the pristine heyday of free-market capitalism in Britain, that some of the most immense and disastrous miscalculations had been perpetrated which plunged the whole economy into years of depression, bringing intense suffering to the poorest in the community (see Hutchison, 1938, p. 186).” (Hutchison 1994: 225–226).

There are three interesting points here:

(1) Mises was not the originator of a critique of planning in command economies in the socialist calculation debate, but the German historical school economists apparently were;

(2) Mises’ belief that a market economy achieves superior economic calculation depends on the assumption of a strong tendency to market clearing and that in turn implies the unrealistic assumption of “full or perfect knowledge” (or least something close to it!).

(3) even within the Austrian school, the wing following Ludwig Lachmann apparently argued that radical uncertainty threw up problems for “economic calculation” as defined by Mises in either a capitalist or socialist economy.

BIBLIOGRAPHY
Hutchison, Terence Wilmot. 1994. “Hayek, Mises and the Methodological Contradictions of ‘Modern Austrian’ Economics,” in T. W. Hutchison, The Uses and Abuses of Economics: Contentious Essays on History and Method. Routledge, London. 212–240.