Why an Economy Can’t Work without Market Prices
It has been a full century since Mises dropped the economic calculation bomb, but the argument apparently still haunts socialists. It should, since Mises managed to show that a socialist economy is not an economy at all but calculational chaos. Yet it is curious that it does, since most have (incorrectly) concluded that Mises’s argument, after decades of debate, was debunked.
Why does a presumably debunked argument still, drive even non-Austrian critics to pen new responses and deliberate on apparent flaws?
Part of the answer might be that the debate ended without a proper conclusion. Mises’s critics, specifically the “market socialists” of the 1930s, misconstrued his argument as being about the existence, rather than meaning, of prices. Their answer, as simple as it was unsatisfying, was to create artificial prices centrally adjusted for emerging shortages and surpluses. The rejoinder then addressed the flaws in the attempted response rather than returning to the fundamental issue.
Part of the answer might also be that Mises’s argument provocatively shows not only that there is order to markets, but also that order cannot exist without them. And he further shows that it is not a matter of finding the answer to a puzzle, but that the answer is the puzzle. To put it very simply, markets work.
This of course makes those who are skeptical or even opposed to markets see red. And Mises goes further and states that not only do markets work, but that they can only work if there is private property. The entrepreneurial bidding that determines market prices, on which individual entrepreneurs appraise their undertakings, is a division of intellectual labor that works because those taking part can earn money profits but also suffer losses. Without the risk of suffering personal losses, bids are not truly economic and therefore cannot determine real market prices. As a result, no real calculation is possible. The system fails.
The issue of private property as a necessary precondition for calculation, as Mises argues, has become a matter of renewed debate. For example, Andy Denis, a professor at City University London, argues that Mises’s argument only requires decentralized decision-making, not necessarily ownership. Proper economic calculation should then, Denis argues, be possible under a system of complete state ownership with several controls. (I respond to this argument in an article coauthored with G.P. Manish and elaborate on it in a follow-up paper.)
Similarly, Kevin Carson of the Center for a Stateless Society, who is decidedly promarket but antiproperty, argues at that “if Mises’ critique proves anything it proves too much.” Carson’s argument differs from Denis’s in that it focuses on the institutional setting for markets as precursors. Writes Cars
Article from Mises Wire