Update of the Socialist-Calculation Debate

Mises did not believe that the argument in favor of socialist calculation had made any progress. But the new pro-socialist arguments provided an opportunity for further elaboration from his side. He distinguished four types of proposed solutions to the problem he had pointed out in 1920.

The first candidate solution seeks to perform economic calculation in terms of labor time à la Neurath. But this approach cannot work because of the material factors of production and the heterogeneity of different types of labor.

The second candidate parallels the first in that it seeks to unearth a substitute for money prices as a medium of calculation. Only here the proposed substitute is not labor time, but utility, as in Wieser's theory. In his rebuttal, Mises points out that human beings cannot measure utility but only rank it. The utilities of units in differently sized supplies are necessarily unequal. Because of this lack of homogeneity, they cannot serve as units in a calculus of value.

According to the third proposal, socialist communities could create an artificial market by ordering the plant managers to behave as if they were employed in capitalist firms. The idea was to combine the benefits of a price system and “social” control through government-appointed managers, but without creating bureaucracy and monopoly. Such schemes had become fashionable during the 1930s, and by the time Nationalökonomie was published they were achieving the status of a new orthodoxy that would survive half a century.⁴¹

One of the new theoreticians, the Polish socialist Oskar Lange thought some compensation for Mises might be in order, given that it was his “powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy.” Lange therefore proposed that “a statue of Professor Mises ought to occupy an honorable place in the great hall of the... Central Planning Board of the socialist state.”⁴²

No socialist state was generous enough to follow up on this suggestion, but the University of Wroclav created a statue of Oskar Lange and preserved it into our day, surely as a monument to the perennity of his message. Generations of students were taught that socialism was, in theory at least, a viable economic system; some authors even went so far as to argue—statistics in hand—that the Soviet economies of Eastern Europe were superior or about to become superior to the capitalist economies of the West.⁴³ This notion evaporated in 1989.⁴⁴ The fall of the Berlin Wall opened everyone's eyes to the stark reality that seventy years of socialism had created nothing but misery, pollution, and slavery. The world learned the hard way what it could have learned in 1922 from a readily available book. In Socialism, Mises had analyzed the idea of market socialism even before any socialist had thought of it. And he had already identified its Achilles heel: moral hazard.

Artificial markets would make managers irresponsible. Some of the benefits of successful management would still be private (the increased reputation and career advancement of successful managers), but all of the costs of mismanagement would have to be borne by the citizenry at large. As a consequence, the managers of the state would take on excessive risks; they would squander society's capital. Eighteen years later, in Nationalökonomie, Mises did not miss the opportunity to note the irony that, according to this proposal, the market economy was such a bad thing that it had to be reintroduced through the back door as soon as the new socialist regime is established. He went on to chastise the champions of artificial markets for narrow-mindedness. The problem of the allocation of resources is not primarily a managerial problem within each plant. It is a problem of choosing where to place available capital. Which of the existing plants should be expanded, which ones should be cut back, which new production sites should be established? These decisions lay in the hands of “capitalists, entrepreneurs, and speculators.” And it was out of the question to extend the scheme of the artificial market to them. Restating the analysis of moral hazard along the lines given in Socialism, Mises argued that “playing capitalists” would be completely irresponsible. No risk would be too high for the make-believe capitalists because they themselves would hardly bear any negative consequences. Such a system would be neither socialism nor capitalism. It would be no system at all. “It would be chaotic.”⁴⁵

He then turned to the fourth scheme, according to which socialist societies should use the equations of mathematical economics to solve the problem of economic calculation. Here Mises restates the argument he had presented in his 1938 French-language article of the same title: those mathematical equations describe a state of affairs that is already in equilibrium, but not the concrete steps through which any equilibrium could ever be reached.

It was an error to suppose that one could calculate the equilibrium state with data taken from an economy that is not in equilibrium. It was another error to believe that acting man, for his present-day calculations, needs to know the evaluations and appraisals that would obtain in the equilibrium state.⁴⁶

He went on to conclude that this fundamental conceptual problem made it superfluous to deal with the practical problems of central planning that Pareto and Hayek had raised.