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Even Socialists Know that Economic Planning Requires Market Prices

Tags SocialismCalculation and KnowledgePhilosophy and Methodology


In a recent editorial at Jacobin magazine, it is argued that a “planned economy can actually work.” They start with something I have written about at least a dozen times recently: the definition of socialism. Let me not mince words: our ability to argue against the rising left’s socialism is going to depend on what exactly is being argued. If they endorse traditional Marxist socialism, which has as its definition, “public ownership of the means of production,” then we get to use, of course, Mises’s socialist calculation argument.

But so often, this is not at all what is meant when they use the word. Mostly, this is because public ownership of the means of production, whether they admit it with his name or not, was already intellectually leveled by Mises. During the run up to the Soviet Union’s dominance, the intellectuals considered public ownership of productive factors to be the systematic structure of an economy that could avoid the “anarchy of production.” It was Mises more than anyone who swept the legs out from under this conception of socialism.

But besides Mises’s theoretical, a priori observations, the Soviet Union did, in fact, disintegrate for what were obviously economic reasons. It is only now that the rising socialist class can look back at this experience and blame “corruption” and other peripherals. In any case, socialism today has various other meanings and to the extent that socialists are tight-lipped about state ownership of the factors of production, to that extent we need to be aware that they are trying to avoid the mistakes pointed out by the socialist calculation argument. Hence, the DSA, Jacobin, and so many others define socialism differently now.

And as they define it differently, we need to adapt our arguments to their actual proposals. For instance, if Bernie Sanders is going to call himself a democratic socialist, and yet argues for a plethora of state interventions, but not social ownership of the means of production, then we ought not use Mises’s calculation argument.  Instead, we ought to use Mises's arguments against interventionism; which, in my opinion, is actually easier anyway.

"Democratic Socialism" as Neo-Syndicalism

But less often understood is a sort of “neo-syndicalism” that characterizes their case for socialism. I discuss this in writing here, and in a podcast here. Because I’m relatively alone in referencing syndicalism as a better way to understand modern “socialism,” I want to lean on other more qualified people. As I noted last week, Shawn Ritenour teased at this connection in his talk with Jeff Deist. To verify I interpreted him right, I asked him about this when I was at the Austrian Economics Research Conference in March. He confirmed: modern socialism in the AOC-type strain, is better thought of as syndicalism. Thus, in opposing it, we ought to be more careful about the arguments we use in opposing this great threat to a free market economy.

Hayek's Problem with Planning

Now, why is all this relevant to the Jacobin piece? Because in that piece, they used Hayek as an example of someone who did not appreciate the “planning” that could be done at a firm level. They seek to argue that Hayek was wrong to make decentralized knowledge the pinpoint problem of planning. Hayek’s argument, to quote Hans-Hermann Hoppe, was as follows:

For Hayek, the ultimate flaw of socialism is the fact that knowledge, in particular “the knowledge of the particular circumstances of time and place,” exists only in a widely dispersed form as the personal possession of various individuals; hence, it is practically impossible to assemble and process all the actually existing knowledge within the mind of a single socialist central planner.

It is this argument against the practicality of planning in light of dispersed knowledge that both characterized Hayek’s case against socialism, and was challenged in the Jacobin article. But what is interesting to me, is that Hans Hoppe (and Joe Salerno and Jeff Herbener and others who participated in the effort to “dehomoginze” Mises and Hayek) blasted Hayek for essentially leaving the door open to socialists who could still argue for planning, albeit in a different form.

In other words, Hoppe warned that Hayek’s weak arguments couldn’t stop the tide of socialism, or at least efforts to undermine a private property order. And, lo and behold, the neo-socialist left has come to argue that planning can, indeed, work. Let me now elaborate on the Hayek connection using Hans Hoppe.

The reason I have been so dogmatic about the definition of socialism is because it was this original definition that Mises’ calculation argument was meant to destroy. And to lose sight of that is to render Mises less than prescient in his case against socialism. Because if socialism can mean a variety of other things, then it becomes easy to defend socialism by moving the goal posts, which is exactly what has been done in the revamped socialist movements around the world.

Mises Didn't Rely on the Knowledge-Problem Argument

Rather than arguing that socialism suffered from a knowledge problem, Mises argued that because socialism means the public or government ownership of all factors of production, it does not exchange these factors with itself. A single-ownership economy does not have a need to exchange factors with itself. But without exchange, there can be no prices; that is, there is no objective means for the decision makers in a socialist economy to allocate in a way that is beneficial for consumers. For under a capitalist free market, the prices that arise inform the entrepreneur as to which allocations of scarce resources are productive, and which aren’t. He can calculate anticipated revenues minus costs and determine whether a given activity is profitable. Thus, not having any of this, socialism’s problem is sourced in its lack of private property ownership.

The Jacobin article failed to dehomogenize Mises and Hayek and used the Hayekian narrative to undermine the free market case against planning. And they did so by indicating that, contrary to capitalist theory, firms actually plan all the time! Contrary to Hayek, they argue, dispersed knowledge does not prevent the successful planning from the top down. While the Hayekian would no doubt counter that this is at the firm level, and therefore closer to the individual knowledge-holder than a large socialist system would imply, it should be pointed out that this criticism of Hayek is exactly the flaw Hoppe identified all those years ago. Hoppe:

First, if the centralized use of knowledge is the problem, then it is difficult to explain why there are families, clubs, and firms, or why they do not face the very same problems as socialism. Families and firms also involve central planning. The family head and the owner of the firm also make plans which bind the use other people can make of their private knowledge, yet families and firms are not known to share the problems of socialism. For Mises, this observation poses no difficulty: under socialism private property is absent, whereas individual families and private firms are based on the very institution of private property. But for Hayek the smooth operation of families and firms is puzzling, because his idea of a fully decentralized society is one in which each person makes his own decisions based on his own unique knowledge of the circumstances, unconstrained by any central plan or supraindividual (social) norm (such as the institution of private property).

Second, if the desideratum is merely the decentralized use of knowledge in society, then it is difficult to explain why the problems of socialism are fundamentally different from those encountered by any other form of social organization. Every human organization, composed as it is of distinct individuals, constantly and unavoidably makes use of decentralized knowledge. In socialism, decentralized knowledge is utilized no less than in private firms or households. As in a firm, a central plan exists under socialism; and within the constraints of this plan, the socialist workers and the firm’s employees utilize their own decentralized knowledge of circumstances of time and place to implement and execute the plan. For Mises, all of this is completely beside the point. But within Hayek’s analytical framework, no difference between socialism and a private corporation exists. Hence, there can also be no more wrong with the former than with the latter.

The Importance of Prices

Now, it gets more interesting. For the Jacobin article finds its solution to Hayek’s knowledge problem to be in prices!

Walmart, of course, sells goods on the market. Under capitalism prices are still inputs into the planning process for corporations and states alike.

This is a huge capitulation. After all, the socialists learned that prices cannot actually be avoided, a socialist system wherein there is government ownership of the means of production would not have prices, therefore socialism is a failure. The fact that they are using prices to overcome Hayek’s knowledge problem is a tremendous vindication of Mises, who argued that the failure of socialism was its rejection of private property and therefore prices. Socialism failed and Mises won.

The fact that Jacobin must so weakly move the goalposts so that “planning works” is a testament to the magnificent insights of Ludwig von Mises. The answer is yes, Walmart can plan because there is a capitalist price mechanism. That’s the case for capitalism, not socialism. The capitalists have never opposed “plans.” Instead the capitalist recognizes that the plan must be informed by real-world structures of capital, by time preferences, by consumer demand, by resource constraints– and therefore the capitalist must plan with the price mechanism as his guide. The planners in a capitalist economy are those that privately own the means of production and allocate those means in accordance with where profits indicate economic need.

Hoppe writes:

Without the institution of private property, the information conveyed by prices simply does not exist. Private property is the necessary condition of the knowledge communicated through prices. But then it is correct only to conclude, as Mises does, that it is the absence of the institution of private property which constitutes socialism’s problem. To claim that the problem is a lack of knowledge, as Hayek does, is to confuse cause and effect, or premise and consequence.

Thus, the failure of socialism is not per se its lack of knowledge held in the minds of individuals. As Hoppe noted of Hayek’s knowledge problem, this does not get to the root of it; and he anticipated exactly how the neo-socialists (who have abandoned traditional central planning; the proof of this is in their very embrace of prices) would take advantage of Hayek’s weak argument. Mises’ argument, as held high by the pro-Misesians such as Rothbard, Salerno, and Hoppe, remains the greatest single devastation against socialism and the fact that socialists today do not talk in terms of a price-less single state-ownership of factors structure is a testament to that.

Originally published at Austrolibertarian.

Contact C.Jay Engel

C.Jay Engel is an entrepreneur who owns several businesses and lives with his wife and four children in northern California. He is an avid reader of the Austro-libertarian literature and a dedicated proponent of private property and sound money. He is the creator and editor of AustroLibertarian.com  and its associated new publication Austro Libertarian Magazine.


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