The calculation argument is probably the most difficult to understand piece of Austrian theory in the whole corpus of austrianism. Indeed it is true that many Austrians themselves, at present and certainly in the past, have failed to understand it fully. The purpose of this article then, is to process the argument into a more understandable summary and to show some of the causes that have contributed to its apprehensive difficulty.
Mises delivered the calculation argument in 1920 and sparked what is known as the socialist calculation debate. That debate lasted until the 1950s. One fact worth mentioning is that most opponents of Austrian economics consistently misstate the calculation argument. The calculation argument which they attack is in reality the Hayekian, not the Misesean, version. Hayek’s calculation argument had more to do with the allocation of information under a command economy, an emphasis which, as we shall see, was far and away from that of Mises. <o:p></o:p>
<o:p> </o:p>The Argument Itself
What Mises said was, if one is to build a railroad, under socialism, how would one go about doing it given that there are a thousand ways to organize the workers, mine the metals, harvest the coal, etc. Under free markets, such a problem is already solved; one just adds up the costs and profits of a project and its materials and one can begin or stop depending on the loss/gain ratio. The inability to do this under socialism, Mises maintained, would be an insurmountable obstacle to socialism which would render it impossible in the strict sense. <o:p></o:p>
Mises also is unconvinced by the possible methods of accounting under socialism. He specifically disagreed with the idea of basing the value of products on labor since it is not true that all labor is of the same usefulness –ditchdiggers would be paid hugely incomparison with government directors who would be paid little. He also disagreed with the possibility of basing the allocation of goods in the socialist economy on technological efficiency. This was chiefly because he believed that not all values were reducible to, or necessarily connected with, technological efficiency –that is –technological efficiency was just one in a number of values that the acting man has to balance. So for instance, for any given thing, it could be said that it could be made more technically efficient –using less resources, less movements, less space to produce more output –but it is not at all known whether an acting man would prefer more output or if he has the resources necessary to produce such an efficient machine. <o:p></o:p>
Perhaps, too the socialist state could use money to establish prices but here again Mises would be unconvinced. He responded that money is useless in uncovering the exchange ratio of goods under socialism. The assignment of money prices to items would be totally arbitrary since the state, already controlling all supplies, could hardly be under the necessity or incentive to negotiate market prices for them. <o:p></o:p>
The famous opponent of the Misesean argument, and the winner of the calculation argument, was the socialist-leaning economist Oskar Lange who accepted that a socialist state could use money but that it could solve the impossibility of calculation by just acting like a firm does and through trial and error in setting prices, establish just what the right price of consumer goods would be. This solution also assumes that the state is the owner of capital and the people are freely allowed to buy consumer goods. This is the market socialist solution. <o:p></o:p>
But once more, mises continued in his objections. If the socialist state controlled capital –like bridges, factories, etc. –then the original problems of socialism are just rolled back one more level and still exist but in a more limited scope. Secondly the trial and error method is gravely mistaken about the differences and roles of the entrepreneur and the bureaucrat. The bureaucrat runs the department and makes sure that it is operating within budget and optimizing potential, given certain directives, but the entrepreneur doesn’t just operate within budget but is on the look out for new profit. He realizes that nothing is merely given in reality (but needs action to be discovered) and he looks upon the “given directives” of the bureaucrat as an unreachable ideal for himself. The langean plan envisions the role of markets as a bureaucratic machine which distributes goods at an equilibrium price whereas the correct theory of markets also sees the market as an entrepreneurial machine which makes goods that were hitherto unknown, and finds ways not just to optimize the given but to find new ends to reach for. This is the essential missing factor of the market socialist solution and one that it could not possibly overcome because entrepreneurs, who gain profits by exploiting the differences in value between means and ends (e.g. inventions), implicitly need a private market in capital which is precisely what lange, as we have noted, could not allow. <o:p></o:p>
But is it possible to, perhaps through punishments and rewards, motivate the directors of state bureaus to buy and sell as if they were on the market and so, to produce profit that way? Mises would object that it is impossible because whoever is administering these punishments/rewards would become more important than what is more traditionally thought of as the customer. It would become more important for the leaders of socialist firms to perform to the standards of whoever is regulating them, than to the customers who are buying from them. And secondly, what is the point of acting like an entrepreneur and taking risks when you yourself are not buying or selling your own property? It makes no sense to believe that such a system would approximate the free market one –where a person’s personal property is always at risk. <o:p></o:p>
<o:p> </o:p>This was what Mises belittled as “playing market”. <o:p></o:p>
<o:p> </o:p>But again, could a socialist society use the equations of mainstream economics to solve its allocation needs? Here too, Mises would’ve said no. These equations are only descriptions of equilibrium conditions –conditions where all materials are already allocated to their most important use and where no possible change towards or away from this position is thinkable –as such they leave unanswered the question of what is the most efficient course to reach equilibrium nor can they describe the almost universal fact of life which markets are supposed to overcome namely disequilibrium. So here we see Mises’s emphasis lays not in information allocation but in the subjective value of property. That is, his emphasis lay on ownership since it is the preamble and premise of any allocation including information allocation. This is what allowed him to concede that the socialist central planners could have perfect information of consumer wishes, yet inspite of this, they could still fail in planning the economy. <o:p></o:p>
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And that was the calculation argument in summary. But why did this Misesean argument fall out of favor with the academic community in favor of hayek’s and why is it that this theory is so hard to grasp, even for Austrians? <o:p></o:p>
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An Inquiry Into the Reasons for the Rise of the Hayekian Version<o:p></o:p>
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The Hayekian version of the argument was raised to such importance ultimately because of two things: the victory of Lange and the scholarship of Joseph Schumpeter. The former, by presenting answers to Mises’s objections which were accepted by all orthodox economists, and the latter; by recording and transmitting Lange’s answers throughout the academic world, completely steamrolled and indeed, erased any memory of the Misesean argument. Also, Hayek’s vision of the scarcity and value of information implied the existence of an economics of information and an economics of evolution. These implications were drawn out, becoming two new fields of economic inquiry. His impact on academia, and the consequent perpetuation of his theory of the market as information allocator; within the bodies of two new scholarly areas, maintained the popularity of his version of the calculation argument. <o:p></o:p>
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Reception of Mises’s Argument <o:p></o:p>
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Quite oppositely the reception of Mises’s argument was nothing but negative. Firstly, Hayek himself, before Lange, felt that Mises’s argument was weak and was already answered by Pareto and Barone in the late 1800s. The fact was, he thought, that equations could be used to calculate as the mainstreamers thought. Later even his argument, that the central planners could never accumulate all the knowledge needed to calculate, was considered defeated by the Langean solution where the planner could just use trial and error to find the right price. Of course Hayek would retort that such a solution already assumed that information was in one place (“implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind”). After the largely unexpected fall of the soviet union though, the Misesean argument has been revived and become a subject of study once more. <o:p></o:p>
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Of the Difficulty of Mises’s Argument<o:p></o:p>
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Indeed one can also say that the difficulty of Mises’s calculation argument also doomed it and here one can analyze why his argument was especially difficult. For one, most economists including Hayek believed that Mises had left himself exposed to attack by the mathematical economists who argued thusly: “If a human can solve the equations which describe free markets, then central planners could solve the same equations, solving the problem of calculation under any central system.” What these economists did not understand was that their equations were not to be taken literally as a guide precisely because these equations simplified economic reality too much such that any knowledge that could be gained from them, was only analogous and not unequivocal, information. For instance, the equations for equilibrium, if taken literally, describe a person or group of people who simply use given resources to maximize their satisfaction. But since resources must be discovered, and since satisfaction can never last, the model erases and absorbs the uniquely Austrian theory of the entrepreneur who searches for resources and discovers new preferences –as we have seen, a very important point of the calculation argument. <o:p></o:p>
Another source of misunderstanding is the fact that once someone reads the calculation argument for the first time, they are led into thinking, since the argument hinges on the correct use of money, that the only problem with socialism is a lack of money or bookkeepers or accountants. But Mises is not emphasizing the role of these latter (though they are important) but is rather emphasizing the correct use of their services. To try and solve economic problems of scarcity and choice, the planner, without profit and loss, has to go and solve it by some objective means -whether philosophical, political, or scientific but never based on the subjectivity of buying/selling. But to try to do this is the same as trying to answer the question, “is the cup half-full or half-empty” without any recourse to thirst. When water has no physical meaning, one will simply adjust the levels arbitrarily, when property has no economic meaning, one will simply adjust its relations arbitrarily. So the lack of profits and losses in socialism is in fact the crux of the issue.<o:p></o:p>
The final reason why the calculation argument is hard to grasp is that people hold a wrong view of capital. To most people capital is the money value of machinery and tools or money itself. Also, since it is expressed as a number, capital is an essentially uniform substance. But for Austrians, capital is a very diverse thing and is best seen under the aspect of its real (e.g. as tools, machines, etc.), not nominal (e.g. money), manifestation. The diversity of capital is illustrated in the fact that capital is simply machines, tools, etc. But it is in this that another implication that is momentous for the calculation argument can be seen –namely that capital is unspecific or can be used to make many different things. This fact, that there are many ways to skin a cat, makes it impossible for the planner of an economy to know, without money and private ownership of capital; what the most efficient use a capital good is. So the complexity of capital items is another indispensable piece to the calculation argument. <o:p></o:p>
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In summary, having explored the argument, and the reasons for its unpopularity, and the reasons for its difficulty; even among Austrians, I now come to the answers for my original topic and to the end of this article.
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<o:p>sources: economic calculation in a socialist commonwealth, economic calculation in a socialist commonwealth: Postscript, The Socialist Calculation Debate Revisited, Wikipedia: Joseph Schumpeter, Wikipedia: FA Hayek, Wikipedia: Information Economics, Wikipedia: Evolutionary Economics</o:p>
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