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.

Hutchison on the History of Hayek’s Views on Economic Methodology

In “Hayek, Mises and the Methodological Contradictions of ‘Modern Austrian’ Economics,” T. W. Hutchison examines Hayek’s developing views on methodology in economics and the split on this issue within the Austrian school.

Hutchison (1994: 213) notes that Hayek’s original views on methodology were apparently derived from those of Friedrich Wieser and a kind of apriorism called “the psychological method.”

Hayek was then influenced by Mises and his circle and, according to Hutchison, held views close to Mises’ (Hutchison 1994: 215), although this does contradict Hayek’s later statements and his claims to have been a follower of Popper’s empiricism even from 1934 (Hutchison 1994: 216).

Hutchison (1994: 215), however, argues that no traces of this Popperian methodology can be found in Hayek’s writings before 1937, but Popper did recollect that Hayek read his book Logik der Forschung around September/October 1935 (Hutchison 1994: 217).

Hutchison (1994: 215–216) speculates that the economic controversies in the mid and late 1930s, especially about the role of expectations, stimulated Hayek to question his earlier views.

The public statement of his new views was in the talk “Economics and Knowledge” given in November 1936 and then published as an article in 1937 (see Hayek 1937; Hutchison 1994: 216).

But unfortunately Hayek’s break with Mises was so timid and weakly expressed that many, especially modern Austrians themselves, have missed the point of “Economics and Knowledge”:

“In the … letter to this writer of 15 May 1983, Hayek also stated that his ‘main intention’ in ‘Economics and Knowledge’ was ‘to explain gently to Mises why I could not accept his a priorism’. Unfortunately, the message to Mises, which it was Hayek’s ‘main intention’ to deliver in this celebrated article, was imparted so ‘gently’ that forty to fifty years later it had still not got through to most ‘Modern Austrians’, who, of course, found the fact of a vital, fundamental division of views between the two great patron saints of their movement difficult to accept.” (Hutchison 1994: 218).

The paper “Economics and Knowledge” also saw Hayek grappling with questions about how an economist could justify real world tendencies to general equilibrium, when this required perfect knowledge and foresight.

Hutchison (1994: 221–22) even contends that in later life Hayek questioned the characteristic Austrian idea of “methodological dualism.”

The break between (1) Hayek and some later Austrians who endorse some form of empiricist method in economics and (2) the Misesian apriorist praxeologists represents a serious division within, and incoherence in, the Austrian school (Hutchison 1994: 229–230).

Hutchison’s verdict on Misesian apriorism is difficult to fault:

“What Misesian, or ‘Modern Austrian’ praxeology succeeds in achieving is a quite unacceptable combination of dogmatic, ‘apodictic certainties’ with total empirical vacuity. Instead of being left with the traditional, full-knowledge ‘theory’, we are provided with the marvellously rich, enlightening and totally uninformative model—or Misesian ‘apodictic certainty’—that people act with whatever tastes, and whatever kind of knowledge and ignorance, which they happen to possess.” (Hutchison 1994: 228).

Addendum
Philip Pilkington has an interesting and critical post here on George A. Akerlof’s famous, but much overblown, paper “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” (The Quarterly Journal of Economics 84.3: [1970]: 488–500), which can be related to the very issues that Hayek discussed in “Economics and Knowledge” – namely, the unrealistic nature of perfect information and general equilibrium models as related to the functioning of markets:

Philip Pilkington, “The ‘Information Asymmetry’ Paradigm is Vacuous,” Fixing the Economists, August 1, 2014.

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

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.

Hutchison, Terence Wilmot. 1994. The Uses and Abuses of Economics: Contentious Essays on History and Method. Routledge, London.