Lesson 5 of 7
The verdict at the time
By 1940 most economists took the socialist side to have answered Mises. The reasons were real, and they say as much about the model in everyone's head.
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 reading that took hold was that the impossibility claim had been answered in principle, and that what remained was a practical question of administration.
- Lange himself framed it that way in print: the critics, on his account, had retreated to a second line of defence.
- The model the profession worked with made that reading natural. If a market is a state in which conditions hold, then anything that reaches the state is equivalent.
This lesson reports a verdict rather than endorsing one. It matters because the next lesson disputes it, and a dispute about a verdict is not worth much until the verdict is stated fairly.
What each side thought had been shown by 1940
The socialist economists
- The formal conditions of efficiency apply to any economy.
- A board can reach them by trial and error.
- Critics stopped saying impossible and started saying impractical.
- Therefore the original objection has been met.
Mises and Hayek
- Nobody ever denied the formal conditions.
- The question was how the values are found without a market.
- A search that is too slow and too coarse finds different values.
- Therefore the original objection has not been met.
The two sides were answering different questions, and neither said so.
The evidence for the verdict
The clearest contemporary statement comes from Lange himself. In part one of his essay he argues that Hayek and Robbins had given up the essential point of Mises's position and retreated to a second line of defence: granting that the problem is soluble in principle and doubting only whether a socialist community can solve it by trial and error in practice.
Hayek's 1940 reply does not deny the shift in what was being argued about. He denies that it was a retreat, and says the critics were dealing in a new way with new schemes that had been constructed to meet the original criticism. He adds that the concession being claimed was never a concession, because no critic had said the formal principles fail.
Read those two together and the pattern of the next forty years is already visible. One side saw an argument won on the main point. The other saw an argument that had moved because the proposal had moved.
Why the profession read it that way
Kirzner's 1987 account of the debate gives a reason that does not require anyone to be careless. In the early twentieth century, economists of every school shared a loose picture of the market that mixed two things: an appreciation of dynamic processes, and an appreciation of the degree of balance a market achieves. The two were not separated, and the tools were being built for the second.
If a market is essentially a state in which certain conditions hold, then any institution that reaches the same state is doing the same job, and Lange's board is a market by other means. On that reading the socialist economists were answering the question as they understood it, and answering it competently.
Hayek's own explanation, in the 1940 essay, is that the proposals had been born out of preoccupation with the theory of stationary equilibrium, where data are constant and the search has time to finish.
What this lesson is not saying
It is not saying the profession was right, and it is not saying the profession was wrong. It is saying that the verdict was reached on grounds that can be stated, and that those grounds were about which model of a market was in everyone's head.
That is worth holding onto, because the same move happens in the cycle literature later. When two camps disagree about a conclusion, it is often because one of them has quietly changed what counts as the question.
Check yourself
How did Lange characterise the position of Hayek and Robbins?
- As a refusal to engage with his proposal
- As having given up the essential point and retreated to a second line of defence
- As agreeing with him in full
Show the answer
Answer: B.
That phrasing is in part one of his essay, and it is the clearest contemporary statement of how the debate was being scored.What did Hayek say about the claimed concession?
- That he had indeed abandoned the original argument
- That the formal principles had never been in dispute, so conceding them conceded nothing
- That Lange had misquoted him
Show the answer
Answer: B.
The opening section of the 1940 essay makes this point and says the critics were addressing new schemes built to meet the first criticism.What does Kirzner's account say made the verdict natural?
- Political sympathy among economists
- A shared picture of the market that did not separate an equilibrium state from a discovery process
- The absence of mathematical tools
Show the answer
Answer: B.
His 1987 article argues the two elements coexisted in everyone's understanding and were only pulled apart later, partly because of this debate.Sources
- 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 one: the claim that Hayek and Robbins had retreated to a second line of defence.
- Hayek, 'Socialist Calculation III: The Competitive Solution', Economica, 1940, reprinted in Individualism and Economic Order, 1948, chapter nine, section one: the reply that the formal principles were never denied, and that preoccupation with stationary equilibrium produced the proposals.
- Kirzner, 'The Economic Calculation Debate: Lessons for Austrians', Review of Austrian Economics, volume two, 1987: the argument that a single blurred picture of the market, common to Austrians and neoclassicals alike, was only later resolved into an equilibrium component and a discovery component.
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 survey of economists' opinion in 1940 exists to cite. The verdict is reported from what the participants wrote about each other and from later accounts by historians of the debate, and both are named.
- Kirzner writes from inside the tradition being defended. His account of why the debate was read as it was is an argument, not a neutral record.