capitalism

Socialist Calculation Debate 477
Maurice Dobb, Oskar Lange, and Abba Lerner. Among the
statements reaffirming the validity of Mises’ thesis and criticizing
the various attempted refutations of it were those of
Lionel Robbins, Friedrich Hayek, and Mises himself. The
literature up until shortly before the outbreak of World War
II was extensively surveyed in a 1938 Norwegian-language
book by Trygve J. B. Hoff (published in English translation
in 1949). With the benefit of hindsight, it is clear that the
most influential among the defenses of socialist efficiency
was that advanced by the Polish economist Oskar Lange in
two articles published in the United Kingdom in 1936 and
1937. Lange’s position is generally bracketed with that of
Abba P. Lerner, who published an attack on Mises at about
the same time. It was apparently the Lange–Lerner line of
argumentation that convinced post–World War II economists
that the Mises’s thesis had been definitively refuted.
Lange credited Mises with having clearly formulated
the economic problem facing socialism, an important contribution
in itself. But his understanding of Mises’s critique
of socialism was such as to convince him that Mises was
quite wrong in declaring economic calculation to be impossible
under socialism. Lange understood Mises as claiming
that the achievements of a market economy cannot be
duplicated under attempted central planning. But Lange
quite incorrectly interpreted Mises as seeing the achievements
of a market economy as consisting strictly in attaining
an approximation to the pattern of resource allocation
that would emerge in a perfectly competitive market economy
in Walrasian general equilibrium. A perfectly competitive
market economy is one in which many industries each
consisting of a large number of relatively small firms find
themselves confronting an “equilibrium” market price for
their product; these firms are unable to change this price
and must therefore treat it as a given. Such an equilibrium
price enables each firm to successfully produce and sell the
amount it wishes to sell at the equilibrium price. Thus,
although these firms have no control over the price at which
their good or service sells, they do have complete control
over the amount they produce and put forward for sale. The
array of such equilibrium prices across the entire market
economy constitutes the set of market prices making up
“Walrasian general equilibrium.”
Lange understood Mises to argue that, because no
money market prices for resource services could exist
under socialism, it followed that a “general equilibrium”
(for which resource prices would be an important ingredient)
in a socialist economy is a logical impossibility. Lange
then proceeded to show that, although market prices for
resources would indeed not exist under socialism, the more
general sense of prices (referring to the “terms on which
alternatives are available”) does, of course, still hold for a
centrally planned economy. So the logical possibility of a
socialist system being in a state of general equilibrium certainly
does exist. Moreover, Lange proceeded to devise a
system of trial and error through which an actual socialist
economy might, in fact, seek to approach a pattern of (nonmarket)
prices that would constitute the state of general
equilibrium, and thus be consistent with the same pattern of
efficient resource allocation generally associated with
Walrasian equilibrium under capitalism.
As we have noted, Lange’s critique of Mises was,
during the mid-20th century, uncritically accepted in the
mainstream literature. The economic calculation debate
appeared to have ended with the successful refutation of the
Mises–Hayek position. It is true that not all economists
believed Mises to have been refuted. In 1969, James
Buchanan offered an interpretation that rendered the
Lange–Lerner critique harmless. But this interpretation did
not challenge the mainstream perception (from which
Lange had proceeded) that Mises had shared the Walrasian
understanding of what a market economy consists in. It was
the late 20th-century resurgence of Austrian economics that
finally revealed the error in Lange’s interpretation of Mises
(and thus the error in his practical proposals for socialist
central planning). Only then was the social calculation
debate resumed in earnest.
In 1985, Don Lavoie published his Rivalry and Central
Planning. This book carefully reexamined the entire socialist
calculation debate, sharply disagreeing with the mainstream
account of this debate (and particularly with its
conclusion that the Lange–Lerner position constituted a
definitive refutation of Mises’s critique of the possibility of
socialist planning). The mainstream literature (including
Lange and Lerner) had not grasped the Austrian understanding
of how the dynamic rivalry of competing entrepreneurs
(totally absent in perfectly competitive equilibrium) drives
the beneficial coordinating market process of capitalism.
From the perspective of the Austrian competitive market
process, the logical possibility of an array of nonmarket but
equilibrium prices, under socialism, is almost completely
irrelevant to the central issue. The central issue is how,
under socialism, resource values can be revealed for the
planners to engage in economic calculation. Under capitalism
it is the rivalrous, entrepreneurial activity of market
participants that generates such values (in the form of [nonequilibrium]
market prices). Such rivalrous entrepreneurial
activity is, by definition in a socialist system, ruled out in a
centrally planned economy. The consequent impossibility
of centralized economic calculation means that central
planners necessarily lack the knowledge needed for the
efficient allocation of resources.
There occurred a gradual erosion of the earlier mainstream
unanimity in regard to the possibility of socialist
calculation in the economic literature of the closing decades
of the 20th century. With the award of the Nobel Prize in
economics to Hayek in 1974, interest renewed in the earlier
Austrian critique regarding rational calculation under
socialism. Economists had, by the end of the century, again