Edited and written by David Gordon, senior fellow of the Mises Institute and author of four books and thousands of essays.

Can Equations Save Socialism?

Spring 1998

Edited by Bruce Caldwell
University of Chicago Press, 1997,x + 270 pgs.

Socialism and War gathers together F.A. Hayek's most important papers on the socialist calculation debate. Although Hayek played a key role in this debate, his criticism of socialism was by no means confined to it. In the section "Planning, Freedom, and the Politics of Socialism," Professor Caldwell presents several articles and pamphlets that allow us to see how The Road to Serfdom took shape in Hayek's mind.

You will no doubt have noticed that the book is entitled Socialism and War; but by far the greater part of the volume covers the former topic, although some interesting papers on war finance repay careful study.

A great deal of discussion among Austrian economists in recent years about the calculation argument has centered on a question of interpretation, on which I propose to concentrate: To what extent did Mises and Hayek differ in their understanding of the argument? Reading the papers in Part I of this volume brings to the fore a basic fact. Hayek believed that Mises had won the argument as he had originally presented it. Socialists conversant with economic thought, Hayek maintained, fully recognized this point.

Thus, Hayek states: "although the discussion on this point dragged on for several years . . . it became more and more clear that in so far as a strictly centrally directed planned system of the type originally proposed by most socialists was concerned, his central thesis could not be refuted . . . he meant that socialism made rational calculation impossible" (p. 76).

But this at once raises a problem. If everyone who mattered agreed with Mises, what was the further debate about? A new type of socialist responded to Mises by attempting to storm the citadel of neoclassical economics. The equations of general equilibrium, socialists like Oskar Lange argued, could be turned to the advantage of socialism. How might this task be achieved? In two ways: some proposed that by the use of computers, these equations could be solved by a central planning board. Others sought to mimic the market by schemes of "market socialism."

Hayek endeavored to meet both these lines of reply to Mises; and it is here, I suggest, that the issue of "calculation" or "knowledge" arises. Did Hayek use a different version of the argument from Mises, in which the "knowledge problem" replaces Mises's emphasis on calculation? Or was Mises himself a proponent of a knowledge argument?

Mises's original argument, it seems clear, had as its principal target socialists who saw no need at all for a price system. Without even the simulacrum of a price system, obviously no calculation can take place. To raise the issue of whether the real function of prices is to transmit information is not here to the point. At this stage of the debate, socialists lacked the sophistication required for this to be a relevant concern.

Hayek's "knowledge" argument arises only when socialists concede that a rational economic order requires a price system. Here, Hayek's response is that absent a free-market economy, the data required to determine prices cannot be gathered.  Thus, reference to the equations of Walrasian equilibrium misses the mark. Of what value are these equations if one lacks the information to solve them?

Hayek states what he deems the central issue as regards the mathematical solution in this way: "But to argue that a determination of prices by such a mathematical procedure being logically conceivable in any way invalidates the contention that it is not a possible solution only proves that the real nature of the problem has not been perceived. . . . What is practically relevant here is not the formal structure of this system, but the nature and amount of concrete information required if a numerical solution is to be attempted and the magnitude of the task which this numerical solution must involve in any modern community" (p. 93-94).

In like fashion, Hayek endeavored to show that the competitive solution advanced, in different forms, by Lange and H.D. Dickinson, rested on unrealistically high estimates of the ability of the planners to gather data.

In support of his critical view of socialism, Hayek paid close attention to the weaknesses of the Soviet economy; here he relied heavily on the work of the Russian economist, Boris Brutzkus. Readers will enjoy Hayek's devastating review of Sidney and Beatrice Webb's Soviet Communism: A New Civilization. Although Hayek writes suaviter in modo, he really succeeds in putting the knife into the fatuous pair of authors. As a long time student of negative reviews, I am struck with admiration for Hayek's technique.

I have concentrated on only one strand in this important collection, owing to the centrality of the calculation argument in recent years. In sum, Hayek intended his knowledge argument only as a supplement to Mises's calculation argument. Mises's argument was aimed at socialists who deny the need for a price system: thus the mathematical and competitive "solutions" leave his argument untouched.

Mises, by the way, thought the equations of equilibrium completely irrelevant to the calculation debate. "It was a serious mistake to believe that the state of equilibrium could be computed by means of mathematical operations on the basis of the knowledge of conditions in a non-equilibrium state. It was no less erroneous to believe that such a knowledge of the conditions under a hypothetical state of equilibrium could be of any use for acting man in his search for the best possible solution of the problems with which he is faced in his daily choices and activities" (Mises, Human Action, 1966, pp. 714-15). Since equilibrium equations are irrelevant, Mises found "no need to stress" the practical problems involved in trying to solve them.

Professor Bruce Caldwell has on the whole ably edited and introduced this volume. I am surprised, though, at his roseate picture of Walter Rathenau. His social planning scheme was far more radical than a mere emphasis on economies under socialism from producing more standardized goods (p. 10). He held murky mystical beliefs about the need to merge people into one unified body, as well. Further, Rathenau was hardly "a hero to the German-speaking world" (p. 10). His willingness to accept the Versailles settlement and his bitter criticism of his one-time friend Kaiser Wilhelm made him unpopular in conservative circles.

Finally, the quotation from Holderlin that the editor could not trace (p. 175) is from one of his best known works, Hyperion.


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