Peter J. Boettke, a 1992-1993 National Fellow at the Hoover Institution, Stanford University, teaches economics at New York University. Dr. Boettke would like to thank Dr. Robert Hessen for his thoughtful criticisms of an earlier draft of this essay.
In 1989 we collectively sat and watched the .defining ideology of the twentieth century die an inglorious death. Our newspapers and magazines were full of stories. The nightly network news reported almost daily on some radical change or another.
From May to June we watched as the crowds swelled in Tiananmen Square demanding democratic change. Americans’ hearts filled with pride as the students chose the words of Patrick Henry, “Give me liberty, or give me death,” to represent their aspirations. Our proud hearts turned anxious as the tanks rolled in to crush the democratic movement.
Political liberalization movements had been crushed before by Communist governments, notably Hungary in 1956 and Czechoslovakia in 1968. But never before had the act of oppression been simultaneously broadcast throughout the world. Any remaining legitimacy of Communism died as the lone unarmed protester faced off the tanks in Tiananmen. Democratic revolutions swept across Eastern and Central Europe in the last half of 1989. Solidarity in Poland and the Civic Forum in Czechoslovakia rose to power and replaced Communist governments. The Berlin Wall fell and Germany would be reunited. And in December, the tyrant Ceausescu was executed in Romania.
The economic, political, and moral implications of 1989 have not yet been fully understood. It is true that most intellectuals would admit that the revolutions of 1989 represented a move toward market economics and political democracy—the twin forces in classic European liberalism. Political democracy, though, can take several forms—parliamentary or presidential, proportional representation or two-party system, and so forth. The simple act of voting does not guarantee a liberal order. Many of the difficulties in the post-1989 era of reform, in fact, arise precisely in the area of finding the political infrastructure for the effective operation of democracy.
The shape and scope of politics possesses profound implications for the operation of the market. Not all market economies are equal. It seems that most observers are willing to admit that a market economy is better than a centrally planned one, but the reasons why and to what extent the market must be insulated from politics remain mysteries to most. This is unfortunate. For while economics is not everything there is in the world, it nevertheless constitutes a major component of our existence. Whether we are free men or slaves, whether we are rich or poor, whether we can develop as a people or stagnate, these are fundamentally economic questions.
The pure understanding of the nature and significance of economic forces and the implications for the social order are essential to learning how our world works. Ludwig von Mises was one of the most prolific and important contributors to our understanding of economic life. Mises’ original contributions to economic science included monetary theory, capital theory, methodology, and market structure theory. But what truly distinguished Mises was his contribution to the study of comparative economic systems. His identification of the crucial flaw in socialist proposals was the most important economic discovery of the twentieth century.
Mises argued that rational economic calculation required that participants rely on the shorthand of market signals to make decisions concerning the alternative use of scarce resources. The exchange ratios established on the market, for example, provided important signals to economic actors so that they could make investment decisions that would coordinate their plans with those of others in the marketplace and lead to an efficient allocation of resources. Socialism, however, promised to eliminate the structural basis of the market economy—private property in the means of production. Without private property in the means of production, Mises argued, there could be no market for the means of production. Without a market for the means of production, there could be no relative money prices for the means of production. Without money prices reflecting the relative scarcities of capital goods, rational calculation of alternative uses of scarce resources could not be accomplished. Socialism, Mises pointed out, was logically flawed and could not achieve the humanitarian ends claimed with the socialist means employed. Economic chaos and political oppression would be the unintended results of trying to implement socialism.
Mises’ argument concerning the problem of economic calculation under socialism has gone through a strange history. When introduced in his 1920 article and later developed further in his 1922 book, Socialism, this argument became the subject of debate and discussion among economists and social theorists throughout the world. Socialist thinkers, in particular, sought answers to the problems Mises raised. Even Nikolai Bukharin, the architect of Soviet Russia’s policies of “War Communism” and the “New Economic Policy” in the 1920s referred to Mises as the “most learned critic of Communism.”
In the late 1930s, however, the Polish socialist-economist Oskar Lange was perceived by many professional economists and intellectuals to have developed a successful answer to Mises. Socialism could indeed replicate the efficiency claims of capitalism in theory. Moreover, given the real world problems of monopoly and the instability of business cycles, socialism could outperform capitalism in practice.
Mises’ argument was supposedly demonstrated to lack the force it was once thought to have possessed. Instead, Mises’ Omnipotent Government and F.A. Hayek’s The Road to Serfdom were interpreted as retreats by their authors from their earlier argument concerning rational economic calculation to a political argument about totalitarianism.
From that time until the early 1980s, it became the received wisdom in academic and intellectual circles that Mises had been refuted by Lange. Socialist planners could indeed engage in rational economic calculation. And, with the appropriate democratic political institutions, the totalitarian argument could be subverted as well. Mises died in 1973, and everyone, except a handful of followers, expected his theories to die with him. Instead of dying, Mises’ influence has steadily grown in the last 20 years.
Several articles and books appeared in the 1980s which challenged the standard interpretation on a theoretical level, most notably Don Lavoie’s Rivalry and Central Planning (1985). Lavoie’s comprehensive treatment of the socialist calculation debate established that Lange had not dealt with the challenge Mises had originally put forth. Lange’s version of neoclassical socialism was guilty of both a poor reading of the aspirations of Marxian socialism, and a poor understanding of the dynamic properties of a market economy. Events also seemed in Mises’ favor. In the late 1970s China had chosen to pursue market liberalization to revive the stagnating Communist economy. Hungary encouraged market incentives within its state-run economy throughout the 1970s and 1980s. In Poland, the Solidarity labor union movement rose to challenge the legitimacy of the “workers’ state” by pointing out that the Communist government did not benefit the proletariat. Even the Soviet Union announced economic liberalization plans under the leadership of Mikhail Gorbachev. When the revolutions of 1989 occurred and Communism collapsed throughout Eastern and Central Europe, even those who had earlier dismissed Mises’ argument, like Robert Heilbroner, had to admit that “Mises was right.”
But what exactly was Mises right about? To answer that question there simply is no better book than David Ramsay Steele’s From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (Open Court Publishers, 440 pages, $17.95 paperback). Perhaps there is no substitute for the original, but books that deal with the debates between thinkers put arguments in a perspective which the original works cannot possibly accomplish.
Steele provides a deep appreciation and understanding of the challenge that Mises’ economic argument presents for socialist theory. Not only is From Marx to Mises an excellent examination of Mises’ thought, but Steele also provides a primer on Marx’s thought, including some of the most modern developments, such as analytic Marxism. From Marx to Mises moves well beyond a technical book in economic and political theory, and possesses a legitimate claim as a major contribution to “Grand Theory” in the social sciences.
Many people despise the teachings of economics because it puts parameters on their utopias. Economic theory demonstrates the practical limits of demands for social control over production and exchange. The challenge that economic calculation presents to socialist thinkers is that they are required to develop a method other than the price system which can serve the same function that calculation within the price system does. Economic calculation, despite its imperfections, affords market participants with a method by which to choose from all the technologically feasible projects those projects which are economical. In this way, scarce capital resources are allocated effectively, and the production plans of some are coordinated with the consumption demands of others through the price system. As Steele demonstrates, no workable solution to Mises’ challenge has yet been formulated by socialist thinkers: neither labor unit calculation, nor administrative command, nor market socialism nor workers’ self-management. Mises’ challenge remains unmet: The socialist revolution has been defeated by mundane economics. Even the cover design of From Marx to Mises conveys this point with its portrayal of an abacus superimposed over a picture of revolutionary crowds this picture, in itself, is worth the price of the book for those who come to understand its point.
But is Steele’s book still important after 19897 Unfortunately, many academics, intellectuals, and politicians have come to believe that with the end of the Cold War Communism is dead and therefore the economic arguments against Communism and socialism are irrelevant. Nothing could be further from the truth.
First, many still do not understand the reason for the failure of the socialist model. Socialism, it is often asserted, failed because mankind was unable to live up to its worthy ideals. But, this gets the argument exactly backwards. Mankind did not fail to live up to socialism; socialism failed to live up to the moral and practical demands of mankind. Steele provides a great service by clarifying this point by separating the motivational question of economic incentives from the informational question of economic calculation (especially chapters 9 and 10). The problem was not simply a matter of good intentions. Even if leaders and workers possess nothing but the best of intentions, the question remains as to how would they know what the best way to proceed should be? The monetary price system and the process of economic calculation provides the prerequisite incentives and information to market participants so they can formulate effective responses to these questions. Not only does the competitive economy mobilize existing information efffi- ciently, it generates the discovery of new information that otherwise would have remained hidden. Socialism simply does not possess similar institutions and thus is structurally hampered.
Second, since the argument concerning the inherent weaknesses of socialism is little understood, modern attempts at developing a “feasible socialism” continue to flourish and influence the direction of policy throughout the world. At a strictly theoretical level, for example, Pranab Bardhan and John Roemer published an article in the Journal of Economic Perspectives (Summer 1992) proposing a resurrected model of market socialism. Bardhan and Roemer argue that what failed in 1989 was a social system characterized by (1) public ownership, (2) non- democratic politics, and (3) command administration of resource allocation. The model they propose would eliminate (2) and (3), but (1) remains intact.
There are many others besides Bardhan and Roemer. Alec Nove’s The Economics of Feasible Socialism has been reissued. Moreover, Joseph Stiglitz has a forthcoming book through MIT Press entitled Whither Socialism? Stiglitz argues that the major question in the wake of 1989 is whether modern economics can serve the socialist moral ideals of the nineteenth century. Stiglitz answers in the affirmative. Stiglitz’s recasting of the argument provides a new challenge to economists working in the Misesian tradition, and Steele’s book provides many insights that should be incorporated into an effective response to proposals for a revised theory of the socialist economy.
Third, the former Communist governments are still involved in very difficult transitions from authoritarian political economies to social systems more amenable to economic and political freedom. Western advice during the transition has so far been neither consistent nor very good. Mises’ argument concerning economic calculation, however, entails much more than a criticism of socialism. It also entails a statement of why market economies achieve whatever degree of success that they do. But Mises’ argument remains little understood even as a criticism of socialism, let alone as a positive prescription for the transition.
What this lack of appreciation of the duality of the calculation argument demonstrates is that the positive propositions generated by Mises have not yet been fully accepted by the economics profession and the intellectual community at large, and, as a consequence, they are not influential on the political stage. Steele presents Mises’ ideas to the economics profession and intellectual community in such a careful and thoughtful manner that it is sure to invite investigation, criticism, and attempted refutation by skeptics in an open dialogue among concerned readers. A small note of caution, however, is in order. Steele does make a few errors in interpretation to my mind with regard to (1) the philosophical weaknesses of Misesian apriorism, (2) Hayek’s critique of scientism and the engineering mentality, and (3) the importance of Leon Walras’ contributions to economic science. On all three counts I would side with orthodox Austrianism and against the arguments presented by Steele. Despite these quibbles, Steele’s book represents a major contribution to the literature and should find a place on the bookshelf of all who care about a free society. Neither dogmatic in presentation, nor lacking in strong conviction concerning the strength of reason and evidence in the service of ideals, David Ramsay Steele’s From Marx to Mises provides a strong antidote to the sickness that afflicts modern discussions over the politics and history of our times.