The Socialist Calculation Problem: Part 2

After Mises’ Socialism was published, the top Socialist scholars attempted to respond against the book’s arguments, to little avail at first. Over time, one of the main arguments that rose to challenge Mises was based on technology. It was argued that with current technology, Mises’ arguments are completely valid, and Socialism is doomed to failure. However, as technology advances, and the means society will have at its disposal for the collection and processing of data increase, the ability to centrally plan will become a more viable alternative to laissez-faire.

Market socialism was one of the main schools of thought that arose from the socialist calculation debate in order to challenge Mises. Market socialists believed that the efficient allocation of capital and means of production require market structures. However, by socializing the entrepreneurial aspects of the economy, and diverting profits earned by these cooperatives into the hands of workers instead of traditional reinvestment into the firm as done by entrepreneurs, the economy can achieve more equitable, as well as more efficient allocations of resources.

Men such as Oskar Lange and Fred M. Taylor used neoclassical economic models to justify the market socialist position. These models used standard supply and demand curves, along with classical equilibrium theory and Pareto optimality in order to construct their market socialist models. With these aspects in place, and assuming their validity, the market socialists postulated that central planners could, armed with the appropriate tools of data collection, through trial and error discover the proper quantities of goods and services, and achieve equilibrium.

Enter Friedrich Hayek. Hayek had worked with Ludwig Von Mises for the Austrian Government after the Great War. It was during this time that Mises worked on his book Socialism, and it is here where Hayek would be introduced to the socialist calculation debate. Hayek’s main points of contention with the market socialists regarded the role knowledge played in planning. Market socialists assumed that central planners, as well as the individuals their models represented, would have perfect, or at least near perfect, knowledge of the market. This assumption is the Achilles heel of the market socialist rebuttal.

One of the distinguishing features between Austrian economists and other schools of economic thought is the collection, generation, and nature of knowledge in the market sphere. Mainstream economics states that there is nothing inherent about information with regard to market actions. By constructing adequate models one can effectively plan for many different individuals and markets, ultimately reaching equilibrium if done correctly. For the Austrian, however, this is far from reality.

The standard supply and demand models fail to take into account the very important role of entrepreneurship. It is the entrepreneur, who by having to anticipate future consumption and speculate on what it is that consumers will demand in the near, medium, and sometimes long run, makes economic decisions using the price signals at his disposal. The information required in order to solve the pertinent models of the central planners can only be gathered after the exchange has occurred between entrepreneur and consumer. This tacit knowledge, as Hayek puts it, is the result of subjective preferences of individuals realizing themselves at the moment. The subjective nature of these preferences, as well as the spontaneity of human action, makes foreknowledge of said preferences impossible.

Therefore, not only is the abolishment of price signals doomed to failure (regarding the efficient allocation of resources) but even by maintaining a semblance of prices, the central planner will always be inadequately equipped to determine the most efficient use of resources. Furthermore, the market socialist’s structure of cooperative ownership eliminates another crucial role in the management and allocation of resources, the entrepreneur. For, in accordance with Say’s Law, it is the entrepreneur who, anticipating the future demands of consumers, drives production, which then leads to consumption.

The abolishment of the role of the entrepreneur in favor of the socialization of firms will lead to an increase in indecision, accompanied by a decrease in firm action and effectiveness at planning due to having to deal with the issues of unanimity and consent for making decisions. Thanks to the work of Hayek, the socialist calculation debate is generally considered over, with the Austrians standing victorious (depending on who one asks of course).

Friedrich Hayek would go on to win the Nobel Prize in Economics thanks to his definitive work in outlining the role of knowledge and markets. Ludwig Von Mises, however, would fail to receive similar amounts of recognition for his contributions from Academia, but his work continues to inspire and educate the masses all across the world, helping arm them with the necessary information to fight for liberty.

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