A Review on the Economic Calculation Debate

I. Introduction

Friedrich August von Hayek is well known as a rigor criticizer of market socialism. His contribution to the socialist calculation debates was difficult, to interpret for modern information theorists and mechanism design theorists. In this regard, many theorists have misunderstood Hayek´s contribution to the socialist calculation debate until today. Therefore, the question still arises: Did modern theorists really misunderstand Hayek´s insight?

The answer to this question can be found by understanding Professor Caldwell’s arguments in his paper just mentioned above and various studies referring to the discourse of the calculation debates.

In the paper Hayek and Socialism, Professor Caldwell analyzes Hayek´s participation in the socialist calculation debate from the 1930s and 1940s. Furthermore, he reviews the new debate on market socialism. The particularity was that he considers the intellectual environment in which Hayek’s thought was evolved. Hayek was involved in a variety of discussions with advocates for the market socialism such as Lange and Lerner. One of his essential contributions to the calculation debates was published in Collectivist Economic Planning and includes a series of essays like Individualism and Economic Order, Economic and Knowledge, The Use of Knowledge in Society and The Meaning of Competition. In general, they contain Hayek´s explanation for the failure of the market socialism and further throw light on difficulties caused by state interventionism that still exist today.

In recent debates about the calculation problems the economics of information introduce themselves by Bardhan, Roemer (1995), J. Stiglitz (1994) and others who claim that the main reason for the break-up of the communistic regime due to information asymmetries and related incentive compatibility. In contrast, Hayek did not contribute significantly to economics of information, though he never tried to change science of economics. His main aim was to improve social conditions of the society in his day.

The sections (II) will demonstrate that Hayek´s insight related to socialist calculation debates was understood by the majority of information theorists as it applies the progress in this field nowadays, which Hayek sought to show. Section (III) will examine Professor Caldwell´s argumentation. The final section will conclude the implications drawn from the answers to the question of the essay.

II. A question of interpretation?

Hayek´s work on the “dispersion of knowledge” is widely known and had played an important role in developing Hayek´s ideas and implications on the calculation debate. He claims in his article Economic and Knowledge (1937) that the central planners are facing the knowledge problem with respect to plan production and price goods. He examines that information cannot be easily collected or conveyed, because it is dispersed and possessed by individuals. Moreover, individuals do not recognize sometimes the value of the knowledge that they own. They possess localized knowledge in other words “knowledge of the particular circumstances of time and place”. (Hayek 1945, p. 80) At the same time, there is tacit knowledge that is difficult to convey to central planners or other individuals. Furthermore, individuals may have no incentives to share the knowledge. As a result, Hayek´s emphasizes the point to utilize the dispersed knowledge in the market by acquiring data through price signals. In this context, Professor Caldwell examines that modern information theorists did not have a profound understanding about tacit and localized knowledge, however, they were able to understand the domain that prices convey information and that knowledge is dispersed. For instance, Sanford Grossman, a modern information theorist has acknowledged that market prices convey information. He continued working on this idea from Hayek together with Joseph Stiglitz, by analyzing situations in which individuals infer information from market prices. In addition, Hayek´s idea was incorporated into the modern mainstream economics after a while.¹ In particular, Leonid Huriwicz, a pioneer of the “mechanism design” theory has credited and later advanced Hayek´s insight given in the paper “The Use of Knowledge in Society” (1945). This indicates that some information theorists and methodology theorists indeed understood Hayek. Even though, they did not grasp a deeper understanding of Hayek´s insights. We must consider that otherwise his two key papers mentioned above would be left out in the science of economics. Subsequently, Hayek was not totally misunderstood. This might be also a reason why today modern theorists are more familiar with the “dispersion of knowledge” arguments of Hayek.

Second, Professor Caldwell claims that the methodology design theorists and mainstream economists misunderstood Hayek because they misinterpret his book The Road of Serfdom (1945) as a prediction instead of a warning. He supports his claim by determining that methodology theorist tried to investigate an existence of historical patterns or trends. Whereas, Hayek does not acknowledge a consistence of repeating stages in the human history, Professor Caldwell stated. Likewise, when Hayek wrote the book he had in mind Great Britain, as in fact, no historical events took place over in this country. Taking this into consideration it might be the case, that methodology theorists misread Hayek´s warning rather than misunderstood him. Because of that, they indeed understand his main conclusion of the book that planning must necessarily and inevitably lead to authoritarianism. Clearly, we can reject and weight Professor Caldwell’s argument as weak in this respect and conclude, that no real misconception exist at this point. Accordingly, methodology design theorists did not misunderstood Hayek, in this respect.

Third, we should draw to the fact that Hayek similar to the modern information theorists understood that the theoretical tools were insufficient for understanding the limitations of socialism, as Professor Caldwell argued. That means, in this case no misconstrue did exist between Hayek and modern information theorists. The only difference was that Hayek identified the impractical treatment of knowledge as a main cause. For Hayek, the neoclassical theory was useless and not really helpful. He did not agree on perfect competition, the idea of “given” knowledge and homo oeconomicus. He characterized the market as a dynamic market process where rivalry among participants ensures that knowledge is generated and discovered not as mainstream economist believe in the idea of “search”. Although, modern theorists had different interpretations on the causes of the limitation of socialism they did evidently share with Hayek the same view about the theoretical restrictiveness. As result, once again Hayek

[...]

¹ Steven Horwitz, Microfoundation and Macroecnomics - An Austrian Perspective, 2000, p. 31