Wednesday, December 12, 2012

Vulgar Austrians, Economic Calculation and Capitalist Economies


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.


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.


  1. Internet austrians (the ignorant variety) all mix neoclassical economics with their supposed austrian leanings constantly and every single one of them ignores this when I point it out to them.

  2. You obviously haven't read Human Action. Mises has a section on syndicalism in it and my impression is that he didn't think it was a viable system because of its lack of entrepreneurial control. I mean really, what is to stop a bunch of worker/owners from paying themselves higher than deserved wages?
    Slippery word -believe- you use interchangeably to mean he acknowledged its existence and thought it was a great system. He didn't write about syndicalism's virtues in Human Action but I haven't read everything he wrote. I guess somewhere he may have?
    Agreed - Keynesianism is a degenerate form of socialism and it allows things that are called prices to exist on a comparatively free market.
    The subjective nature of value does make economic calculation impossible by any other means than a free market. You can get things called prices in any other system but they are not market prices. They are someone's guess at the market price. No math or complex equations or computers will make such a system more likely to arrive at the market price.
    What Keynesians want to believe is that markets fail. Markets never fail. People feed themselves in the Soviet Union using a black market for food when great effort was expended by the the state to eliminate a free market. The black market is the market! It always works.
    The task of economics is not to design markets but to figure out how they work.
    Keynes thought he needed to make economies work toward certain goals.
    Mises knew that markets always work for the benefit of the most people possible. His task was to figure out how

    1. Statement (1):

      "What Keynesians want to believe is that markets fail. Markets never fail. "

      Statement (2):

      Mises knew that markets always work for the benefit of the most people

      Those statements contradict one another for (2) leaves open the possibility of negative externalities. That requires that (1) is false.

    2. **Agreed - Keynesianism is a degenerate form of socialism and it allows things that are called prices to exist on a comparatively free market.**
      Wha? Are you shooting down your own argument here or something? If not for Keynesianism there'd be no prices?

      Considering free markets. Read "A Critique of Interventionism", on the first few pages Mises states that it is sufficient that government only sells and buys a minority of available goods for the market system to function. As is the case for pretty much any country now. If the government invests into building something or producing something, no, this will not devastate the system of prices for goods and capital.

      **Markets never fail.**

    3. Negative externalities-grist for the interventionist mill!
      Violation of property rights are easily handled in the most efficient way by markets.
      NEs are invoked by the government every time someone sqeeks.
      You assume NEs are proof of market failure but I contend they are not and do not need more intervention by government to fix them.
      As an example of this a recent Marketplace piece highlighted how the United States was actually closer than Europe was to meeting Kyoto Treaty goals for reduced CO2 emissions even though we never signed the treaty as they had.
      Here's a link to a market-biased piece at

      So called negative externalities are truly indicators of private property violations but the problem is between the violator and violated not the violator and the government.
      I'll contend that negative effects of one party's actions require no intervention except by those truly harmed. This is again accomplished by peacefull action on the part of the violated not through a dubious, costly and forceful intervention by government.

    4. Quote: " I mean really, what is to stop a bunch of worker/owners from paying themselves higher than deserved wages?"

      So a more centralized authority in the form of a corporate board of capitalists owners is better at self management of settling their own wages and thereby everyone wages rather than than any collective choice of laborers cause the collective choice of capitalist is apriori superior cause capitalist are just better people? Yeah....

      History and logic implies that Egocentric bias are more likely in a scenario of concentrated power of elite "entrepreneurial controllers" than democratically allocated power between laborers.

      Mises's idea is based on nothing more than the patronizing idea that workers are children unable to run their own affairs without an aristocratic class of Big Daddy "entrepreneurial controllers."

      There is no economic logic in anything Von Mises wrote only classism and racism cause he was hired by a former KKK member to write his nonsense. There is no substance to anything these frauds have to say. They are merely the rantings of a dying racist European oligarchy protesting modernization caused by progressive humanism.

    5. "Mises has a section on syndicalism in it and my impression is that he didn't think it was a viable system because of its lack of entrepreneurial control. I mean really, what is to stop a bunch of worker/owners from paying themselves higher than deserved wages?"

      How amusing. The 'libertarian' requires hierarchy to control the rabble, else they will obviously do something stupid.

      Nothing to see here; it's the same as the Greek philosopher: freedom for the slave owners.

  3. Bravo.

    Appeals to "calculation" are always the last defense of a cornered internet austrian.

  4. I think the case is not as strong as most Austrians would like, but it's pretty clear that fiscal and monetary policy can shield bad investments from the forces of the market, no? Look at FHA.

    The basic question is whether government is stabilizing or destabilizing? And is the answer different depending on time scale?

  5. Hi LK, you may want to read a couple of post in FT Alphaville regarding credit and monetary conditions in late Roman times. Here are both: and the other is this one:

    1. Yes, I see one of them is an analysis of
      W.V. Harris, “A Revisionist View of Roman Money”, JRS 96 (2006).

      That is an excellent article, and I've read it myself.

    2. And the second one is an excellent discussion of the "hyperinflation caused the fall of the Roman Empire" myth.

      I've discussed that myself here:

      The author of this FT Alphaville post has an outstanding grasp of the specialist literature and issues too.

    3. Yes, she has. She said in the comments that she has a BA in Ancient History at UCL. I've already sent her some of your posts on the topic.

  6. The argument is completely disproved by the fact that firms that were nurtured by the state in many countries are among some of the most successful in the world (Renault etc.). By the reasoning of the Austrians these should have gone belly up years ago. Hasn't happened. Won't happen.

  7. "markets never fail"

    If you define whatever markets produce as "success" (no matter what it is), then you're right. And that's what you do, isn't it.