Lesson 7 of 7
What the debate settled
It settled that the formal conditions apply to any economy and left the practical question open. What happened after 1989 is evidence, not a test.
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
- Settled: the formal conditions of efficient allocation are not the property of one set of institutions. Every serious participant agreed by 1940.
- Not settled: whether a non-market procedure can find and keep finding those values in a changing world, which is an empirical question nobody has isolated.
- The collapse of planned economies after 1989 is evidence about particular regimes. It is not a controlled comparison, and both camps claimed it.
Courses about old arguments usually end by awarding a winner. This one does not, because the participants disagreed about what the argument was, and because the strongest piece of evidence anyone cites was not produced by an experiment.
The ledger, honestly kept
Established
- The efficiency conditions can be stated for any economy.
- Calculation in physical units fails for goods of a higher order.
- Labour time is not a workable unit of account.
- A board can in principle adjust posted prices by trial and error.
Open
- Whether a board's search keeps up with changing conditions.
- Whether posted prices for classes of goods carry enough detail.
- How goods made to individual order would be priced.
- What incentive a manager has to risk being wrong.
Anyone who reports the left column as a victory for either side has changed the question.
Why 1989 is not the experiment
The strong claim after 1989 was that events had decided the matter. Two things are wrong with using it that way, and neither depends on sympathy for planning.
The first is that the economies that collapsed were not the system Lange described. His scheme has consumer goods sold at market prices, free choice of occupation, and managers instructed to equate marginal cost with a published price. The Soviet system was a command economy run on physical targets. Mises's own 1920 paper says as much about Russia at the time: what he saw there was the destruction of an existing order, and he explicitly set aside the question of whether that was inherent in socialism or a consequence of the war against it.
The second is that there was no control. Two systems ran in different countries, with different histories, resources, institutions and wars. Any one of those differences is large enough to explain a gap in living standards, and there is no way to hold them constant.
What the evidence after 1989 does support
Something, though not everything. The record is consistent with the practical objections: planning authorities did have chronic difficulty with detail, quality, timing and the goods nobody could specify in advance, which are the four things Hayek's 1940 essay predicted would be hard.
That is a pattern matching a prediction, which is worth more than nothing and less than a test. It cannot separate the calculation argument from a dozen other explanations that were also true of those regimes, and honest writers on both sides say so.
How the participants left it
Lange's judgement was that the danger was bureaucratisation rather than calculation, and he wrote that in the essay that answered Mises. Hayek's judgement was that the question had never been about logic. Kirzner, writing in 1987, says plainly that it would be a mistake to believe the debate has ended.
That is an unusual place for a course to stop, and it is the honest one. The value of the episode is not a scoreboard. It is that a question about institutions, pressed hard for twenty years by serious people, produced a theory of what prices do that both sides can now use, and that the theory is still being argued about by people with access to the same texts you now have.
Check yourself
Which of these was agreed by both sides by 1940?
- That a planning board can adjust prices fast enough
- That the formal conditions of efficient allocation can be stated for any economy
- That labour time is a workable unit of account
Show the answer
Answer: B.
Hayek says explicitly that this was never denied by anyone except some socialists, and that the practical question was the one Mises had raised.Why is 1989 evidence rather than a test?
- Because the data were unreliable
- Because the systems that collapsed were not the proposal under debate, and nothing was held constant between the cases
- Because the debate had already ended
Show the answer
Answer: B.
Lange's scheme keeps consumer markets, free occupational choice and marginal-cost pricing. The command economies did not, and no controlled comparison existed.What did Lange himself say the real danger of his scheme was?
- The impossibility of allocating resources
- The bureaucratisation of economic life
- That consumers would choose badly
Show the answer
Answer: B.
He writes that this, rather than the allocation problem, is the real danger, and adds that he does not see how it is avoided under the alternative either.Sources
- Hayek, 'Socialist Calculation III: The Competitive Solution', Economica, 1940, reprinted in Individualism and Economic Order, 1948, chapter nine, sections one and three to five: what was conceded, and the four practical objections.
- Lange, 'On the Economic Theory of Socialism', 1936 and 1937, reprinted in Lange and Taylor, On the Economic Theory of Socialism, edited by Lippincott, 1938, part three and its closing section, where he names bureaucratisation rather than calculation as the real danger.
- Mises, 'Economic Calculation in the Socialist Commonwealth', 1920, English translation 1935, section five, where he describes conditions in Russia at the time and sets aside the question of what caused them.
- Kirzner, 'The Economic Calculation Debate: Lessons for Austrians', Review of Austrian Economics, volume two, 1987, closing section, for the statement that the debate has not ended.
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.
- No position is taken here on planning, ownership or policy of any kind. The lesson is about what an argument did and did not establish.
- The literature on what the post-1989 record shows is large and was not surveyed for this course. The claim made here is only that a natural experiment with no control is not a test.