If Only One Owner Establishes Prices, Then They Lose Their Basic Feature as a Denominator for the Competition Process

Socialism is a system organized by one owner, where there are no entrepreneurs competing for the most valuable use of resources. Even if one owner establishes some numerical system, this in no way differs from a straight ranking of all the possible ways of producing things. These centrally administered “prices” do not change anything since one owner establishes them, one owner acts upon them, and one owner changes them ex post. From the very beginning he employs the managers (there is no market for corporate control) and decides what in the accounting books is registered as profits and losses. In contrast, market economy prices are the result of different actions of competing owners and this is their nature: as a common denominator for different property assessments. If only one owner establishes prices, then they lose their basic feature as a denominator for the competition process and become only the expression of one owner’s preferences (hence they cannot be used as an independent economic indicator). Using prices in a socialist system is equivalent to a straight ordinal ranking of the processes by a central planner.

—Mateusz Machaj, “The Nature of Socialism,” in Property, Freedom, and Society: Essays in Honor of Hans-Herman Hoppe, ed. Jörg Guido Hülsmann and Stephan Kinsella (Auburn, AL: Ludwig von Mises Institute, 2009), 344-345.

Cost-Curve Theorists Erroneously Claim that a Firm Should Invest Up to the Point Were MR = MC (Marginal Revenue Equals Marginal Cost)

One fundamental such flaw is the artificial and even disastrous isolation of price theory from monetary and from time (and capital) phenomena. I know that questioning such isolation means bringing into question perhaps the very idea of a textbook devoted solely to price theory, but I’m afraid that this questioning must be done. The abstention from money is unfortunate but not fatal, but the abstention from time and capital analysis is, and this cannot be remedied by an appendix that Kirzner promises us on time. Problems of time, capital, interest must be infused into the price analysis. As a result of the failure to infuse, Kirzner ignores the vital “structure of production” analysis, which he claims makes little difference to one’s view of the economy. Further, the result of abstention from capital leads to all the crucial errors of the “cost-curve” analysis. For example, it is the claim of the “cost-curve” theorists (in the ranks of which Prof. Kirzner joins) that a firm will invest funds in production up to the point where “marginal revenue” equals “marginal cost.” Setting aside the equality fallacy which I will comment on below, this means, e.g. that if an output of 10 more units will bring in $100 of revenue and cost $99, the firm will produce the 10 more units. Now I submit that this is a critical fallacy. Why should the owner of the firm invest a $100 more for an expected return of (approximately) 1%, when he can invest the same $100 for, say, 8% elsewhere—or get 5% at a savings bank? Once we bring investment interest return, into the picture, we see that the whole elaborate cost-curve structure is totally faulty and should be tossed into the discard—but if that should occur, what in the world would happen to that dazzling display of quasi-mathematical pyrotechnics with which “modern” economics professors bedazzle their students?

—Joseph T. Salerno, “Varieties of Austrian Price Theory: Rothbard Reviews Kirzner,” Libertarian Papers 3 (2011): 7-8.

Mises’s Position on Socialist Calculation Emerged Out of His “The Theory of Money and Credit” (1912)

Finally, the unique root of Mises’s position, and one that distinguishes him and his “socialist impossibility” thesis from Hayek and the Hayekians, has been neglected until the present day. And this neglect has persisted despite Mises’s own explicit avowal in his memoirs of the root and groundwork of his calculation thesis. For Mises was not, like Hayek and his followers, concentrating on the flaws in the general equilibrium model when he arrived at his position; nor was he led to his discussion solely by the triumph of the socialist revolution in the Soviet Union. For Mises records that his position on socialist calculation emerged out of his first great work, The Theory of Money and Credit (1912). In the course of that notable integration of monetary theory and “micro” marginal utility theory, Mises was one of the very first to realize that subjective valuations of the consumers (and of laborers) on the market are purely ordinal, and are in no way measurable. But market prices are cardinal and measurable in terms of money, and market money prices bring goods into cardinal comparability and calculation (e.g., a $10 hat is “worth” five times as much as a $2 loaf of bread). But Mises realized that this insight meant it was absurd to say (as Schumpeter would) that the market “imputes” the values of consumer goods back to the factors of production. Values are not directly “imputed”; the imputation process works only indirectly, by means of money prices on the market. Therefore socialism, necessarily devoid of a market in land and capital goods, must lack the ability to calculate and compare goods and services, and therefore any rational allocation of productive resources under socialism is indeed impossible. 

—Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” in Economic Controversies (Auburn, AL: Ludwig von Mises Institute, 2011), 843-844.

The Values of the Factors of Production (FoP) DO NOT Depend Solely on the Valuation of the Consumers’ Goods But Also on the Conditions of Supply of the Various FoP

 A recent statement by Joseph Schumpeter in his Capitalism, Socialism, and Democracy provides a clear illustration of one of the methodological differences which I have in mind. Its author is pre-eminent among those economists who approach economic phenomena in the light of a certain branch of positivism. To him these phenomena accordingly appear as objectively given quantities of commodities impinging directly upon each other, almost, it would seem, without any intervention of human minds. Only against this background can I account for the following (to me startling) pronouncement. Professor Schumpeter argues that the possibility of a rational calculation in the absence of markets for the factors of production follows for the theorist “from the elementary proposition that consumers in evaluating (‘demanding’) consumers’ goods ipso facto also evaluate the means of production which enter into the production of these goods.”

Taken literally, this statement is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter’s “ipso facto” presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers’ goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind. It is evident, however, that the values of the factors of production do not depend solely on the valuation of the consumers’ goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it. The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.

—Friedrich A. Hayek, “The Use of Knowledge in Society,” in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), 89-91. 

Hayek Chides Schumpeter on the Assumption of “Imputation” Outside the Market

The breathtaking naivete of the Orthodox Line should have been evident even in the 1940s. As Hayek later chided Schumpeter on the assumption of “imputation” outside the market, this formulation “presumably means . . . that the valuation of the factors of production is implied in, or follows necessarily from the valuation of consumers’ goods. But . . . implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind.”

Economists were convinced of the Lange solution because they had already come under the sway of the Walrasian general equilibrium model; Schumpeter, for example, was an ardent Walrasian. In this model, the economy is always in static general equilibrium, a changeless world in which all “data” — tastes or value scales, alternative technologies, and lists of resources — are known to everyone, and where costs are known and always equal to price. The Walrasian world is also one of “perfect” competition, where prices are given to all managers. Indeed, both Taylor and Lange make the point that the Socialist Planning Board will be better able to calculate than capitalist markets, since the socialist planners can ensure “perfect competition,” whereas the real world of capitalism is shot through with various sorts of  “monopolies”! The socialist planners can act like the absurdly fictional Walrasian “auctioneer,” bringing about equilibrium rapidly by trial and error.

—Murray N. Rothbard, “The End of Socialism and the Calculation Debate Revisited,” Review of Austrian Economics 5, no. 2 (1991): 55-56.

Owing to Schumpeter’s Influence, Mises and Hayek Were Considered to Have “Lost” the Rational Economic Calculation Debate

Considering the extent to which Mises’ approach to economics ran completely counter to prevailing views during his lifetime, recent interest in his writings is nothing short of phenomenal. Two striking examples may suffice. For a long time, the most celebrated controversy in comparative economic systems theory — that is, the debate raging during the inter-war period over “rational economic calculation” in a socialist society, which was sparked off by a famous article by Mises — seemed to be a closed chapter in the history of economic thought. Not least owing to Schumpeter’s influence, Mises and Hayek were commonly considered to have “lost” the debate. Indeed, “victory” for the kind of market socialism espoused by Lange and Lerner was held to be so overwhelming that modern treatments of welfare economics do not even care to mention that there ever was such a controversy. (Layard and Walters (1978, p. 27) is illustrative of a general tendency.) Most recently, the standard account of the calculation debate has been seriously called into question, largely as a result of its iconoclastic reexamination by Don Lavoie (1985). 

—Stephan Boehm, “The Austrian Tradition: Schumpeter and Mises,” in Neoclassical Economic Theory, 1870-1930, ed. Klaus Hennings and Warren J. Samuels, Recent Economic Thought Series 20 (Boston: Kluwer Academic Publishers, 1990), 210. 

The Enthusiast for Macroeconomics and Co-Founder of the Econometric Movement, Joseph Schumpeter, Had Previously Supported ‘Methodological Individualism’

In 1908, when Joseph Schumpeter at the age of twenty-five published his Wesen und Hauptinhalt der theoretischen Nationalökonomie, it attracted much attention by the brilliance of its exposition. Moreover, though he had been trained at the University of Vienna and had been a leading member of the famous seminar of Eugen von Böhm-Bawerk, he had also absorbed the teaching of Léon Walras, who had received little notice by the Austrians and had adopted the positivist approach to science expounded by the Austrian physicist Ernst Mach. In the course of time he moved further away from the characteristic tenets of the Austrian school so that it became increasingly doubtful later whether he could still be counted as a member of that group.

Schumpeter was very much a ‘master of his subject’, in contrast to the ‘puzzlers’ or ‘muddlers’ who follow their own distinct ideas; he also showed a strong receptivity to the dominant opinions in his environment and the prevailing fashion of his generation. Nowhere does this show more clearly than in the still entirely Mengerian chapter of his early book, now translated into English for the first time and regarded as the classic exposition of a view which he later abandoned. Many of his students will be surprised to learn that the enthusiast for macroeconomics and co-founder of the econometrics movement had once given one of the most explicit expositions of the Austrian school’s ‘methodological individualism’. He even appears to have named the principle and condemned the use of statistical aggregates as not belonging to economic theory. 

That this first book of his was never translated is, I believe, due to his understandable reluctance to see a work distributed which, in part, expounded views in which he no longer believed. His reluctance to keep his brilliant first book in print, much less having it translated, can probably be explained by his awareness that his own distinct opinions emerged only in his second book on the Theorie der wirtschaftlichen Entwicklung, which came out four years after the first. Though the author may later no longer have been prepared to defend the ideas of his first work, they are certainly essential enough to the understanding of the development of economic theory. Indeed Schumpeter made a contribution to the tradition of the Austrian school which is sufficiently original to be made available to a wider public.

—F. A. Hayek, “Joseph Schumpeter (1883-1950),” in The Collected Works of F. A. Hayek, vol. 4, The Fortunes of Liberalism: Essays on Austrian Economics and the Ideal of Freedom, ed. Peter G. Klein (Chicago: University of Chicago Press, 1992), Kobo e-book.