The Discrepancy (Disequilibrium) Between Ex Ante and Ex Post Price Information Motivates Economic Actions

It must be noted that Salerno has made a significant contribution to the development of a modern Austrian theory of the market process, despite my contrasting position with him on the dehomogenization of Mises and Hayek. That contribution is to refocus attention again on the issue of entrepreneurial appraisement and the forward-looking role of monetary calculation. But in Salerno’s presentation, the forward-looking role is, ironically, overemphasized. In Mises’ theory, monetary calculation is an indispensable aid to the human mind precisely because it is essential for both prospective and retrospective calculations. The price system, as an entire system, provides ex ante information which economic actors employ in deciding the future course of action; ex post information which informs economic actors of the appropriateness or inappropriateness of their past course of action; and the very discrepancy (i.e. disequilibrium) between the ex ante and ex post motivate economic actions (e.g. entrepreneurs) to discover better ways to arrange scarce means to satisfy ends. On the threefold advantage of the private property market price system see Mises (1922, p. 99).

—Peter J. Boettke, Calculation and Coordination: Essays on Socialism and Transitional Political Economy, Foundations of the Market Economy (London: Routledge, Taylor and Francis, 2001), 290n6.

Mises Has Four Basic Warnings against Socialism; All Are Derivative of an Argument for Private Property

As Mises pointed out in his original essay on the subject, there were socialists who never thought of the problems of economic organization, and there were those who examined in some depth the problems in economic history, but as regards a critical examination of the economic organization of socialism there were hardly any thoughtful excursions. Economics did not seem to figure prominently in the pictures painted of the future socialist world. “They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place” (Mises 1920, p. 88). The investigation into the properties of a society organized along socialist lines seemed to be called for. So Mises’ essay can be seen as an attempt to raise this challenge to socialist writers — to examine how the socialist commonwealth would in fact organize its economic affairs. As such, his argument was intended for a wide audience, and not a narrow subset of specialists within economics. Such a narrow subset did not yet exist to which one could aim an argument, but wide acceptance of the moral superiority and historical inevitability of socialism did exist.

In Mises’ writings there are four basic warnings against socialism — the most decisive, of course, was the problem of the impossibility of rational economic calculation. Nevertheless, it is essential to recognize that Mises does present four arguments which include:

1. private property and incentives;
2. monetary prices and the economizing role they play;
3. profit and loss accounting; and
4. political environment.

In a fundamental sense, all of these arguments are derivative of an argument for private property. Without private property, there can be no advanced economic process.

To the economically illiterate, Mises had to explain how private property engenders incentives which motivate individuals to husband resources efficiently. To the more informed, but still economically uninformed, he had to explain how the exchange ratios established in a market allow individuals to compare alternatives by summarizing in a common denominator the subjective assessment of trade-offs that individuals make in the exchange and production process. To the trained economist, Mises had to explain how the static conditions of equilibrium only solved the problem of economic calculation by hypothesis, and that the real problem was one of calculation within the dynamic world of change, in which the lure of pure profit and the penalty of loss would serve a vital error detection and correction role in the economic process. And, finally, to scholars, activists, and political leaders, Mises warned that the suppression of private property leads to political control over individual decisions and thus the eventual suppression of political liberties to the concerns of the collective. All four arguments are criticisms of socialist proposals. On the other hand, the private-property market economy is able to solve each of the three economic issues, and constitutional democracy does seek to guarantee individual rights, and protect against the tyranny of majority. Where socialism fails, in other words, liberalism succeeds.

—Peter J. Boettke, Calculation and Coordination: Essays on Socialism and Transitional Political Economy, Foundations of the Market Economy (London: Routledge, Taylor and Francis, 2001), 33-34.