PeterJ , Boettke Tbe Auistrian Contribetion to Political Ecomoimy Ecoeomic Galciuilsitioiii : Ifno other objection could be raised to the socialist plans than that socialism will lower the standard ofliving ofall or at least part of the immense majority , it would be impossible for praxeology to pronounce finaljudgement . Men would have to decide the issue between capitalism and socialism on the ground of judgements of valué and of judgements of relevance .... However , the true state of affairs is entirely dijferent . Man is not in a position to choose between the two systems . Human cooperation under the system of the social división of labor is possible only in the market economy . Socialism is not a realizable system of society's economic organization because it lacks any method of economic calculation . — Ludwig von Mises ( 1949 , p . 679 ). This is the decisive objection that economics raises against the possibility of a socialist society . It mustforgo the intellectual división of labor that consists in the cooperation of all entrepreneurs , landowners , and workers as producers and consumers in the formation of market prices . But without it , rationality , i . e ., the possibility of economic calculation , is unthinkable . This , of course , does not mean that all the best technical knowledge is anywhere concentrated in a single head , but that people with all kinds of knowledge will be available and that among those competing in a particular Job , speaking broadly , those that make the most appropriate use of the technical knowledge will succeed . In a centrally planned society this selection ofthe most appropriate among the known technical methods will only be possible if all this knowledge can be used in the calculations of the central authority . This means in practice that this knowledge will have to be concentrated in the heads of one or at best a very few people who actually formúlate the equations to be worked out . It is hardly necessary to emphasize that this is an absurd idea even in so far as that knowledge is concemed which can properly be said to " exist " at any moment in time . But much of the knowledge that is actually utilized is by no means " in existence " in this ready-made form . Most of it consists in a technique of thought which enables the individual engineer to find new solutions rapidly as soon as he is conjronted with new constellations ofcircumstances . — F . A . Hayek ( 1935b , pp . 210-11 ). Ludwig von Mises ( 1927 , p . 75 ). The usual theoretical abstractions used in the explanation of equilibrium in a competitive system include the assumption that a certain range of technical knowledge is " given . Peter J . Boettke teaches in the Department of Economics , New York University ( U . S . A .), and is the author of numerous books and articles on Austrian economics , comparative economic systems , and the history of economic thought . Laissez-Faire 30

I . Introduction . The basic thesis of this paper is that the issue of economic calculation , in both its positive and negative manifestations , is the contribution of 20th century Austrian economics to the discipline of political economy . Of course , there are other contributions worthy of mention , especially in the área of methodology . But , it is this issue of economic calculation which provides the foundation for the main contributions of the school in monetary theory , capital theory , business cycle theory , the entrepreneurial theory of the market process , and the examination of interventionism . In other words , all the unique contributions of the Austrian school of economics to substantive economics can be traced back to the central importance of economic calculation for human cooperation . The scholar most responsible for highlighting the central importance of economic calculation was Ludwig von Mises . However , contrary to some recent arguments that have been put forth . Mises was joined in the research efFort to elabórate on the implications of this insight by F . A . Hayek .* In other words , Mises's calculational argument was in many ways the source of Hayek's knowledge argimient . Demonstrating that there is no conflict between these arguments is the purpose of this paper . No doubt that subtle and profound diñerences exist between Mises and Hayek , especially in the área of the philosophical justifícation of the sciences of man . But , while I admit that valuable research can be conducted difFerentiating between the research program of Mises and Hayek , it is my contention that the differences are narrow compared to the gulf that separates their shared research program from that of the rest of 20th century economic thought . Moreover , this is how their contemporaries saw the matter , and even more important , how they both saw it . ^ The difference in their presentation , I will contend , is a function of the intended audience for which they wrote . In making this argument , I will flow in and out of an examination of the history of economic analysis , and the intellectual history of economic thought . After presenting the basic analytical issue that economic calculation addresses , I will then attempt to put the progression of the argument within the intellectual context of the socialist calculation debate , and then conclude with a short discussion of how these analytical issues represent the unique Mises / Hayek contribution to modem political economy which must now be advanced to improve our conceptualizations of the market , and to raise critical points in a renewed debate over the possibility of socialism . Since most of the literature on the dehomogenization of Mises and Hayek focuses on Mises's statements in Human Áction , I will also concéntrate on Mises's statement from bis mature writings , though reference will be made to the consistency of his position from his earlier statements to the later writings . However , with regard to Hayek I will draw from his writings across the history of the socialist calculation debate , though not much from his later writings , such as The Fatal Conceit . To anticipate the argument , Mises's audience was largely divorced from the academic economics profession , whereas Hayek's argument was always presented within the context of directly responding to an audience of professional academic economists who raised particularly objections to Mises's challenge . Mises wrote to a wider audience and for the ages , Hayek wrote Laissez-Faire 31

for a particular time and place and to a narrow specialist audience . ^ In inteqjreting their respective contributions , it is vital to see how Mises 's insights can be applied to resolve the particular debates which he sought to transcend , and how Hayek's insights into particular debates can transcend that context and provide lasting contributions to our puré understanding of maricet processes and social cooperation . And , when looked at in this manner , for all practical purposes the Mises / Hayek contribution becomes a unified ( and unique ) perspective on economic processes . II . Economic Calculatíon . Put simply , economic calculation refers to the decisión making ability to allocate scarce capital resources among competing uses . " Economic calculation ," Mises wrote , " is either an estimate of the expected outcome of fiíture action or the establishment of the outcome of past action . But the latter does not serve merely histórica ! and didactic aims . Its practical meaning is to show how much one is free to consume without impairing the fiíture capacity to produce " ( 1949 , pp . 210-11 ). Acting man must mentally process the altematives placed before him , and to do so he must have some " aid to the human mind " for comparing inputs and output . Mises's great contribution to economic science was to estabhsh that this decisión making ability is dependent on the institutional context of private property .* Mises's point , while not denying the importance of incentives in executúig business plans , was that the necessary informational inputs into that decisión process are made available to decisión makers only through the market process . The argument went as follows : 1 Without private property in the means of production , there will be no market for the means of production ; 2 . Without a market for a means of production , there will be no monetary prices established for the means of production ; 3 . Without monetary prices , reflecting the relative scarcity of capital goods , economic decisión makers will be unable to rationally calcúlate the altemative use of capital goods . In short , without private property in the means of production , rational economic calculation is not possible . Under an institutional regime which attempts to abolish private ownership in the means of production , advanced industrial production is reduced to so many steps in the dark as decisión makers are denied the necessary compass . As Mises put it in Socíalism , economic calculation " provides a guide amid the bewildering throng of economic possibilities . It enables us to extend judgements of valué which apply directly only to consumption goods — or at best to production goods of the lowest order — to all goods of higher orders . Without it , all production by lengthy and roundabout processes would be so many steps in the dark .... And then we have a socialist community which must cross the whole ocean of possible and imaginable economic permutations without the compass of economic calculation " ( 1922 , pp . 101 , 105 ). In the world in which we live , economic decisión makers are confronted with an array of technologically feasible production projects . What economic calculation provides is a means to select from among these projects to assure that resources are employed in an economic manner .* Waste , as a result , will be mini- Laissez-Faire 32

mized as decisión errors are continually detected and corrected by the aid of profít and loss accounting . Only through this process of error detection and correction within the market can it be said that entrepreneurial hunches are tied to the imderlying reality of consumer tastes , resource endowment , and technological possibihties . Every entrepreneurial act is a wishfiíl conjecture about a fiíture which is different from today , but wishing so , cannot make it so by itself ** Entrepreneurial wishes yield profits only when technological possibilities are arranged in a manner which best satisfíes consumer preferences in the most economical fashion . Consumer preferences change , and the stock of teclmological knowledge changes , and the entrepreneur ( perhaps a new one ) is trying to bring their new wishfiíl conjectures into life to realize profits . If their conjecture is wrong , or poorly executed , then the ensuing losses will redirect their efforts . " Every single step of entrepreneurial activities ," Mises wrote , " is subject to scrutiny by monetary calculation . The premeditation of planned action becomes commercial precalculation of expected costs and expected proceeds . The retrospective establishment of the outcome of past action becomes accounting profits and losses " ( 1949 , p . 229 ). The ability to render monetary calculations is conditioned by social institutions — namely private property in the means of production . Mises 's question to critics of the " anarchy " of capitalist production was what altemative to rational calculation on the basis of monetary prices do you propose ? '' If a satisfectory non-market answer is not put forth , then Mises's challenge remains unmet . And , if instead some form of " market socialism " is proposed , then it must be recognized that this is " nothing short of a fiíll acknowledgment of the correctness and irrefiítability of the economists' analysis and devastating critique of socialists' plans " ( Mises 1949 , p . 706 ). Mises's argument was directed at a broad community of intellectuals , activists , and scientists . The intention was to demónstrate how economic science decisively challenges the claims made on behalf of the socialist project . The intellectual spirit of the age was one which accepted the superiority — both ethically and economically — of socialism . 'To prove that economic calculation would be impossible in the socialist community ," Mises stated , " is to prove also that Socialism is impracticable . Everything brought forward in favour of Sociahsm during the last hundred years , in thousands of writings and speeches , all the blood which has been spilt by the supporters of Socialism , cannot make sociaüsm workable " ( 1922 , p . 117 ). This was a conclusión that was most inconvenient to those who aspired to créate a better worid along " progressive " lines in the early 20th century . As Mises pointed out in his original essay on the subject , there were sociaüsts who never thought of the problems of economic organizaron , and there were those who examined in some depth problems in economic history , but as for a critical examination of the economic organization of socialism there were hardly any thoughtfiíl excursions . Economics did not seem to figure prominently in the pictures painted of the fiíture socialist worid . " They invariably explain how , in the cloud-cuckoo lands of their fancy , roast pigeons will in some way fly into the mouths of the comrades , but they omit to show how this miracle is to take place " ( Mises 1920 , p . 88 ). The investigation into the properties of a society organized along Laissez-Faire 33