Review of Austrian Economics

Rejoinder: Salerno on Calculation, Knowledge, and Appraisement

Leland B. Yeager

Contrary to Joseph Salerno’s “Reply” (1994), my article (1994) did not try to specify what Professors Salerno, Rothbard, and Herbener mean by “calculation.” I did not say that they “equate calculation and arithmetic” (Salerno 1994, p. 116). Instead, I implicitly raised the question of what they might mean. I did so by pursuing my avowed main purpose, namely, to challenge their attempted dichotomy between the “calculation” and “knowledge” problems of socialism. I further challenged their suggestion that Ludwig von Mises was concerned only with the non-knowledge aspects of the calculation problem.

Salerno now focuses attention on “appraisement.” In the capitalist market process but not under socialism, every scarce resource receives an appraisement “reflecting its relative importance in serving (anticipated) consumer preferences” (p. 112). The market process “transforms the substantially qualitative knowledge about economic conditions acquired . . . by competing entrepreneurs,” including their estimates of consumers’ subjective valuations, into “an integrated system of objective exchange ratios for the myriads of original and intermediate factors of production” (ibid.). The process operates “in the face of ceaseless change of the economic data” (p. 113). “[D]ispersed knowledge is not a bane but a boon to the human race; without it, there would be no scope for the intellectual division of labor, and social cooperation under division of labor would, consequently, prove impossible” (pp. 114–15). In the capitalist process, as Rothbard says in a passage that Salerno quotes (p. 115), “the entrepreneur is able to appraise and estimate future costs and prices. In the market economy, qualitative knowledge can be transmuted, by the free price system, into rational economic calculation of quantitative prices and costs.”

Correctly interpreting Mises, Salerno writes “that the market creates a social appraisement process . . . which depends crucially on an intellectual division of labor featuring the qualitative understanding of competing entrepreneurs; and . . . that this process is indispensable for converting the multidimensional knowledge of the economic data, regardless of who possesses this knowledge or where it is located, into a unitary structure of meaningful resource and product prices” (p. 120). Salerno goes on to emphasize “entrepreneurial forecasting” and “dynamic appraisement” (p. 122).

All this emphasis on knowledge—yes, knowledge—is amply warranted. A further point that Salerno makes at least implicitly is worth underlining: much relevant knowledge is of a kind that simply could not be quantified or articulated except through the market process. Often an entrepreneur makes business decisions partly on his intuition or feel for technology, the attitudes and tastes of consumers and workers, sources of financing, and conditions in markets for inputs and for consumer goods and services—all in the future as well as the present. The entrepreneur receives information for judgments about such matters by reading specialized and popular publications, watching television and movies, experiencing various services and products personally, chatting with innumerable people, and strolling through town or the shopping mall. Much of what he thereby observes—or senses—he could not express in explicit words or numbers. A socialist system would let much such entrepreneurial knowledge go to waste even if it somehow emerged in the first place. The market system of profit and loss tends, as Mises said, to expand or shrink the roles of particular entrepreneurs according as they are relatively good or relatively poor in acquiring and using even these subtle and conjectural kinds of knowledge.

I forgo correcting several of Salerno’s conjectures about my own position, mind-set, and standards of scholarship because his conjectures are peripheral to the issue at hand. My central point is that Mises was indeed concerned with the capitalist market process of mobilizing, articulating, and quantifying knowledge that socialism simply could not duplicate or replace. On any reasonable interpretation of exactly what calculation means in debates over socialist calculation, it is closely bound up with the development and use of knowledge. One ill-serves Mises’s reputation and ill-serves wide understanding of momentous issues by insisting on some conception or other of calculation from which all knowledge aspects have been severed.

References

Salerno, Joseph T. 1994. “Reply to Leland B. Yeager on ‘Mises and Hayek on Calculation and Knowledge’.” Review of Austrian Economics 7, no. 2: 111–25.

Yeager, Leland B. 1994. “Mises and Hayek on Calculation and Knowledge.” Review of Austrian Economics 7, no. 2: 93–109.

Leland B. Yeager is professor emeritus of economics at Auburn University.

The Review of Austrian Economics Vol. 9, No. 1 (1996): 137–39

ISSN: 0889–3047