Lesson 6 of 7
Reading the debate again
Decades later, historians argued both sides had answered different questions, and that the argument sharpened a theory of the market nobody had stated.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- The rereading separates three questions that had been treated as one: scarcity, the use of information, and the discovery of things nobody yet knows.
- On this account Lange's prices are parameters that managers take as given, while the Austrian claim is that prices are made by people acting on knowledge they alone hold.
- The rereading comes from inside the tradition it defends. That does not make it wrong, and it is the reason to read the critics as well.
For forty years the debate was a closed chapter. From the 1970s it was reopened by historians of economic thought, and the reopening produced a claim stronger than "our side was right": that the question itself had been misunderstood on both sides.
Three things a price system might be doing
- 1ScarcityPrices register that means are limited relative to ends
- 2InformationPrices carry what is known, so a decision can use knowledge held elsewhere
- 3DiscoveryRivalry turns up knowledge nobody had, including knowledge of one's own error
The claim, stated plainly
Kirzner's 1987 article argues that the calculation debate was the catalyst that forced the Austrians to articulate what they had always half meant. The Mises of 1920 and the Mises of 1949 are making the same argument, on his reading, but the later statements say out loud what the earlier one assumed: that a market is a process in which entrepreneurs discover things, and not only an arrangement that registers what is already known.
If that is what a market is, then Lange's board fails for a reason that has nothing to do with arithmetic. A manager instructed to treat a posted price as a fixed parameter is doing the opposite of what an entrepreneur does. The entrepreneur is the person who moves the price, because he has noticed something nobody else has, and is willing to be wrong about it with his own resources.
Kirzner also names the cost of this reading being right: the socialist economists were working inside a framework in which the point could not be stated, so they did not so much reject it as fail to see it.
What is honest to say about the source
The rereading is due to writers inside the Austrian tradition, and Kirzner says so. He credits the standard book-length account to Lavoie and describes his own article as a defence of a further claim about how the tradition learned from the exchange.
That is worth stating flatly. A reinterpretation that finds an old argument to have been won by the interpreter's own school, once properly understood, is exactly the sort of claim a reader should hold at arm's length. The reason to take it seriously anyway is that the thing it points at is checkable: whether prices are parameters or the output of rivalry is a question about how markets work, and the rest of this track is partly about who can show what.
What it does not rescue
The rereading does not restore the 1920 impossibility claim in its strong form. Nothing in it shows that a planning board could not allocate resources tolerably in a stable, simple economy, and Mises's own paper allows that a static economy could be run on the inherited pattern.
What it argues is narrower: that whatever the board does, it is not doing what a competitive market does, because the thing a market does most is generate information that did not exist before anyone acted. Whether that difference is large enough to matter, and how you would measure it, is a question the debate never resolved.
Check yourself
What does the later rereading say the debate confused?
- Prices with quantities
- A market as a state that registers known conditions with a market as a process that discovers unknown ones
- Consumer goods with capital goods
Show the answer
Answer: B.
Kirzner's 1987 article argues the equilibrium element and the discovery element sat together in one blurred picture, and the calculation debate pulled them apart.What is the objection to Lange's parametric treatment of prices, on this reading?
- That the prices would be too high
- That a manager who treats prices as given data is doing the opposite of what an entrepreneur does
- That the board would be slow to publish them
Show the answer
Answer: B.
Lange's own phrase is that prices are parameters to which each participant adjusts. The rereading's claim is that somebody has to move them, on their own account and at their own risk.Why should a reader be careful with this rereading?
- Because it was published in a minor journal
- Because it comes from writers inside the tradition it finds to have been right, which is a reason to read the critics too
- Because its authors did not read the original texts
Show the answer
Answer: B.
Kirzner attributes the standard account to a fellow Austrian and argues a further claim of his own. The lesson says so rather than presenting it as a neutral history.Sources
- Kirzner, 'The Economic Calculation Debate: Lessons for Austrians', Review of Austrian Economics, volume two, 1987: the thesis that the debate forced the articulation of the market as a competitive and entrepreneurial discovery process, the three levels of understanding of the price system, the treatment of Lange's parametric function of prices, and the attribution of the standard book-length history to Lavoie.
- Hayek, Individualism and Economic Order, 1948, chapter nine, for the contemporary version of the same objection to prices treated as given parameters.
- Mises, 'Economic Calculation in the Socialist Commonwealth', 1920, in the 1935 English translation, section two, for the concession that a static economy might be run on an inherited pattern.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- Lavoie's book-length history is named here because Kirzner names it. This lesson does not report its contents, which were not consulted for this course.
- The component example is invented. It illustrates what a discovery claim means and reports no market.