Get Ready for the Socialist Calculation Debate Redux
It has been just over a century since Ludwig von Mises started the socialist calculation debate, one of the main contenders for fight of the century in economic theory. The debate raged primarily throughout the 1930s, but was also active in the 1920s and 1940s. Although Austrians started and comprised the one side of the debate, historians of economic thought have typically concluded that they ultimately lost.
Austrians disagree and maintain that the responses, primarily by Taylor (1929) and Lange (1936, 1937) missed the point. Specifically, they forced Mises’s argument into a general equilibrium framework within which a solution was readily available. But Mises’s actual argument is fundamentally based in entrepreneurship: the value-creative undertakings of imaginative, uncertainty-bearing promoters and producers seeking to make profits from satisfying consumers’ future wants.
The ‘Solution’ to Mises’s Challenge
First Fred M. Taylor and then Oskar Lange drafted a solution to Mises’s problem that produced a trial-and-error structure to mimic the market but without private ownership of the means of production. Specifically, they suggested that the government can keep a master list of prices (or, simply, numbers) for all factors of production and then update it in response to revealed shortages and surpluses. In other words, local producers would call in their status and the master list would be updated to reflect reality: factors in short supply would get an increased list price and relatively abundant factors would get a price reduction.
Their solution accepts Mises’s identification that socialism without prices could not rationally allocate scarce factors of production toward their higher-valued uses. Lange even sarcastically suggested that Mises should be honored for having allowed socialists to produce a solution to the previously unknown problem. Writes Lange (1936, p. 53), “a statue of Professor Mises ought to occupy an honourable place in the great hall of the Ministry of Socialisation or of the Central Planning Board of the socialist state.”
The problem with this solution, however, is that it places the cart before the horse. The calculation problem is not simply that there are no numbers to use when allocating resources, but that those numbers in a market economy mean something: they refer to the best guesses of what consumers will value. This is accomplished through the “division of intellectual labor” as entrepreneurs, aiming to create value for future consumers, compete and bid for the resources, thereby establishing present prices as reflections of expected future prices. Taylor and Lange, in contrast, determine prices of factors after the fact—their prices in the present reflect shortages and surpluses of the past.
Under general equilibrium, this important difference disappears because the m
Article from Mises Wire