Mises Robbins and Hayek on Calculation in a Socialist Economy

As I suggested in the Preface, latter-day Austrians can with some legitimacy claim that the concept of opportunity cost, here attributed to Jevons, Wick-steed, Davenport, Knight, and ultimately developing into a London tradition, was independently developed by later Austrians and notably by Ludwig von Mises. In his monumental, polemic, and much neglected treatise, Human Action,11 Mises advances a theory of opportunity cost that is, indeed, almost equivalent to the full-blown LSE conception to be described later. Mises' explicit treatment of cost in Human Action will also be discussed later. At this point it is noted only that the German treatise that provides the basis for the English-language work was not published until 1940. For the period in question, therefore, Mises' earlier writings must be examined. In this connection, specific reference must be made to his 1920 paper, in which he argued that economic calculation in a socialist society is impossible,12 and to his book which followed in 1922.13

A modern reading of these early contributions by Mises suggests that some of the intuitive force of his argument stemmed from a more sophisticated conception of opportunity cost than he was able to make explicit at that time. Mises' attack on the possibility of socialist calculation is wholly consis

11. Ludwig von Mises, Human Action (New Haven: Yale University Press, 1949).

12. ''Die Wirtschaftsrechnung im sozialistischen Gemeinwesen,'' ArchivfUr Sozialwissenschaften, XLVII (1920), reprinted as ''Economic Calculation in the Socialist Commonwealth,'' in F. A. Hayek (ed.), Collectivist Economic Planning (London: Routledge, 1935).

13. Ludwig von Mises, Die Gemeinwirtschaft (Jena, Germany: Gustav Fischer, 1922). The second German edition appeared in 1932. Mises added an epilogue to this edition at the time of its translation as Socialism (New Haven: Yale University Press, 1951).

tent with the conception of opportunity cost that emerged more fully later, both at LSE and in his own writings. Although he did not center his early argument directly on the cost problem, per se, the general tenor of Mises' discussion is clearly and quite closely related to later developments in cost theory, and his contribution to that theory surely deserves recognition alongside those of Wicksteed and Knight. Quite apart from the importance of Mises' own works is his influence on the work of Lionel Robbins and F. A. Hayek, the transplanted Austrian who became one of the central figures of the LSE tradition.

In addition to writing the 1934 paper previously cited, Robbins also participated in the great debate over the possibility of socialist calculation.14 An assessment of his contribution at this stage must be closely connected with the assessment made of Mises' work. Robbins' argument might well have been based on a more sophisticated notion of opportunity cost than that which is explicitly discussed, but one senses in a modern reading that, along with Mises and Hayek, he could have been much more effective if he had been able to make more articulate the distinction between objectively measurable cost and cost as an element of a decision process.

Hayek's specific contribution to the development of cost theory that is contained in his part of the debate on socialist calculation is a peculiarly mixed bag. In his "Introduction" to the famous collection of essays,15 Hayek foreshadows his later and more explicit methodological emphasis on the necessity of distinguishing between the subjective apparent sense data of the person who chooses in the economic process and the objective data that are available to any external observer. As we shall see, this methodological step is essential to any genuine understanding of cost. It appears, however, that Hayek had not in 1935 incorporated this methodology fully into his own basic theory. In his essay, "The Present State of the Debate,'' included in the collection, he suggests clearly that cost of production becomes difficult to calculate in a socialist setting primarily because of the absence of the conditions of competitive equilibrium where "cost of production had indeed a

14. Lionel Robbins, The Great Depression (New York: Macmillan, 1934), esp. pp. 14354.

15. F. A. Hayek (ed.), Collectivist Economic Planning, op. cit.

very precise meaning.''16 This emphasis, which was also evident in Robbins' work, left the way open for Lerner's effective reply which argued simply for the adoption of a rule for setting prices at marginal opportunity costs, regardless of the state of the world.17

My purpose here is not to evaluate the discussion of socialist calculation, but only to examine that discussion for the contributions it contains to the pure theory of opportunity cost. With the exception of Lerner (whose insight was much more profound, and who was himself a part of the developing LSE tradition), those who argued that socialist calculation is possible accepted an objective definition of cost without any serious critical examination of the issues that such definition might raise.

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