The literature on postcapitalism has now become almost unmanageable, broadly divided between the commons debate and the debate on socialist planning (central planning and/or market socialist models). We will outline here once again the debate between the socialist Oskar Lange and the Austrian neoliberal school of Hayek and Mises in the 1930s, which is, however, of a different nature than what one would expect about a “planning vs. market” debate today. Here, Lange’s intervention is not so much based on the classical value theory of labor, but is heavily influenced by the early market socialists. The market socialists around Lange distinguished themselves not only in defending precisely the neoclassical theory of value against the (classical) labor value version, but also in raising, at least implicitly, the issue of finance. We come back to this.
The market socialists, however, first questioned the status that the category of utility occupies in the neoclassical paradigm. If, as is widely assumed, the neoclassical law of valuation is independent of the institutional framework of the economy, then the regulation of the supply and demand of goods and savings throughout the economy can also be organized by a central planning agency, at least in principle. Here, the respective optimization conditions then work without reference to prices, i.e. central planning can replace the Walrasian auction procedure in the markets. This is the path Lange takes in the socialist calculation debate, pointing to a formal similarity between socialism and capitalism while assuming an ontological primacy of neoclassical value theory over capitalism and socialism. Neoclassical value theory can thus become a theoretical weapon for socialists by supporting the configuration of the socialist regime.
The thesis Lange advanced against neoclassical orthodoxy in the mid-1930s, then, was that socialism could well mimic the efficiency of market capitalism if the central planning body was precisely able to supplant the Walrasian process of steering the economy through state planning. The version of socialism offered by Lange was an economy with competitive markets for labor and consumer goods, but not for capital.
Thus, according to Lange, the Walrasian trial-and-error process can be carried out more efficiently by the central planning bureau than by a market process with private ownership; the planning bureau can even replicate the role of finance under capitalism without giving up the optimization conditions associated with the commercial capitalist market. For Lange, there is not the slightest reason why a trial-and-error process similar to that in a competitive market could not work in a socialist economy to determine the accounting prices of capital goods and the productive resources in public ownership. This is because the central planning agency has a much more comprehensive knowledge of what is going on in the entire economic system than a private entrepreneur can ever have, and consequently may be able to arrive at the correct equilibrium prices through a much shorter series of successive trials than a competitive market actually does. In an economy without a capital market, consumers are free to maximize their utility in real markets for consumer goods.
At the same time, capitalists or managers of public firms cannot be guided by a standard maximization rule because there is no market price for capital (as an index of profitability). They have no basis for estimating the different profitability prospects between alternative uses of a given amount of investment. According to Lange, the maximization condition of profit can be replaced by two equivalent conditions: First, maximization leads to optimal output when marginal cost equals the price of the product. In addition, marginal utility must not exceed or fall below marginal cost for output to reach the optimal level. This rule can be satisfied without any calculation of profitability. On the other hand, the central planning office must also instruct managers to choose a combination of factors that minimizes average production costs. In plain English, this means that there are no profits above or below the normal level that would induce producers to raise or lower the level of output (or induce the inflow or outflow of capital from that particular industry: the market is in equilibrium). The above argument has an important implication: Lange’s socialist economics can perfectly replicate the equilibrium position of neoclassical theory without reference to the prices of capital and without a market for investment and saving. Capital markets and finance are superfluous. ,
In Lange’s socialism, there is an equivalent process of utility maximization of consumers, while the maximization condition can be satisfied by the two complementary rules imposed on managers mentioned above. The central planning office will announce shadow prices to managers and they will apply the maximization condition to production accordingly. They will request resources to expand production based on these prices. If the result is suboptimal, the central planning office will take this into account in the new price announcement.
For Lange, the function of prices is a parametric one: although prices are a result of the behavior of all individuals in the market, each individual considers current market prices as given data to which they must adjust. This parametric function of prices does not change under socialism, only the forms of the “equations” (and thus their “solution”) change. The only difference is that the role of Walras’s auctioneer is taken over by the planning office, presumably in a more efficient way than under capitalism.
The equilibrium values of these parameters are still determined by the “objective equilibrium conditions,” which is done through a series of successive trials. In the end, Lange’s defense of socialism is weak. His conclusion is that the economy outlined in his model can become as efficient as capitalism. Since finance has played no role in the neoclassical universe, its operation can be replicated by the central planning board, leading to the same result.
However, there could be an alternative reading of Lange’s argument: Since the capital market is insignificant for the organization of capitalism and the establishment of commercial equilibrium, socialism as a regime of public ownership of the means of production can become a real economic alternative. Indeed, the real contribution of the market socialist approach was not a defense of socialism but a critique of mainstream thinking that was unable to grasp the importance of capital markets and finance. This challenge triggered a reaction from Austrian economists around Hayek and Mises. It is this latent aspect of the debate that has gone unnoticed in the literature.
Hayek’s involvement in the socialist calculation debate during the 1930s gave him the opportunity to redefine his position regarding the nature of capitalism. In doing so, Hayek distanced himself from the established neoclassical orthodoxy of the era (the so-called model of perfect competition) while remaining a strong proponent of the market system.
The debate over the socialist calculus is important in Hayek’s work in that it revealed an aspect of his argument that remained largely hidden in his later contributions: the crucial role of finance. Initially, Hayek continued his argument in the spirit of Mises. Nevertheless, the context of the discussion changed: No longer the labor theory of value, but the neoclassical theory of value is the fulcrum of the debate. Hayek understands very well that market socialists fall back on the fallacies of the dominant neoclassical paradigm. In fact, it is the latter that is the real target of his critique. He grasps the fact that a defense of an unstable capitalist system cannot be formulated on the basis of the standard neoclassical model of perfect competition and static equilibrium. The market system is not perfect, but it is the only path to meaningful economic organization.
The central point in Hayek’s argument is based on a particular empirical conception of knowledge: In the absence of capitalist competition, knowledge cannot be aggregated and cannot be produced Therefore, any negation of competition leads to worse results in terms of efficiency. The problem associated with the notion of information or knowledge has two aspects. No economic regime, not even a socialist one, ever reaches a static equilibrium. The character of any economic configuration is not static but dynamic. Indeed, it is characterized by genuine disequilibrium: All action must be based on the anticipation of future events, and the expectations of different entrepreneurs will naturally differ. The decision to whom to entrust a given amount of resources will have to be made on the basis of individual promises of future returns. Or rather, it will have to be made on the basis of the proposition that a certain rate of return can be expected with some degree of probability. There will, of course, be no objective test of the level of risk. But then, who is to decide whether it is worth taking the risk?
The central authority will have no basis for decision other than the past performance of the entrepreneur. But how will it decide whether the risks he has taken in the past were justified? And will his attitude toward risky ventures be the same as if he were risking his own fortune? According to Hayek, unlike in the imaginary neoclassical universe, in real life decisions are made on the basis of expected, unknown future income. We can assign “certain degrees of probability” to the latter, but ultimately there is no “objective” measure of risk. This presents a much more difficult economic problem than is commonly thought.
It is one thing to deal with the difficulty the central planning office has in gathering the immense amount of information needed to accomplish the task of effective planning. However, there is also another problem of even greater importance that is obviously more fundamental. The dispersed technical knowledge that the central planning office is supposed to collect does not even exist in the first instance.
The competitive process in the marketplace, on the other hand, not only disseminates existing dispersed knowledge (the dissemination or communication of knowledge), but more importantly, it also contributes to its production (the learning or discovery process). Thus, competition not only helps communication, but primarily generates much of the knowledge that is subsequently disseminated.
Future investment decisions in any type of economy are based on expectations about future circumstances. Such expectations include a certain expected rate of return, combined with some degree of confidence (probability) in its achievement. No ecological action with respect to the future can be taken unless there is an estimate of risk. This estimate cannot be objectively known. It is therefore open to change and revision. Nevertheless, market information is the only meaningful evidence available to the entrepreneur or any other person to decide on future economic events and to undertake investment projects. Thus, the entrepreneur’s subjective investment and risk decisions are made in light of existing capital and risk prices, which, despite their shortcomings, are the best available information on which to base decisions.
Market prices are thus disequilibrium prices in the sense that they are signals or communicators far from optimal operators. This conclusion also holds for the prices of capital and for risk. Rather than informing economic agents of the “right” path, they provide incentives and disincentives that motivate them to explore and discover for themselves the true profitable alternatives. Prices in competitive markets not only disseminate information already discovered and given; they motivate the discovery process itself. In their absence, this type of motivation will cease to exist. Thus, even if someone succeeds in collecting and pooling all the available information at a given time, it will be worthless because the negation of competition significantly impoverishes the real content of that information .
Markets not only disseminate (imperfect) information, but they (primarily) motivate economic agents to behave in certain economic ways. The importance of prices in addressing Hayek’s knowledge problem lies not in the accuracy of the information that equilibrium prices convey about the actions of others who are similarly informed, but it lies in the ability of disequilibrium prices to provide pure profit opportunities that can attract the attention of alert, profit-seeking entrepreneurs. Economic agents live in a world of disequilibrium and uncertainty. Thus, for Hayek, the market system is the only tool that assists them in their calculations about the unscripted future. Efficient economic calculation is inconceivable without disequilibrium prices of capital and risk. This point was overlooked by market socialists when they adopted the conception of perfect competition In the absence of competitive markets, the capitalist spirit of action ceases to exist. From this perspective, any government interference in the market is a serious threat to it.
The crucial point in this debate may well be that Hayek implicitly raised the issue of finance and capital markets, which cannot exist without risk production and control and without the moment of uncertainty. Moreover, one can assume that this historical debate has little use for discussions of post-capitalist economies or even communism. Regarding the latter, there is still recourse to a communist calculation of working time, which is supposed to be possible today without central planning due to information services, network planning technology and computer capacity. Stefan Heidenreich and other authors like Jens Schröter have presented further models for a non-monetary economy. This should be discussed further.
translated by deepl.