The Question of Rational Economic Calculation in Market Socialism Diplomarbeit zur Erlangung des akademischen Grades Magister der Sozial- und Wirtschaftswissenschaften im Diplomstudium Wirtschaftswissenschaften Eingereicht von: David Hebesberger Angefertigt am: Institut für Volkswirtschaftslehre BeurteilerIn: O. Univ.-Prof. Mag. Dr. Reinhard Neck (Alpen-Adria-Universität Klagenfurt) Linz, November 2015 The Question of Rational Economic Calculation in Market Socialism David Hebesberger Eidesstattliche Erklärung: Ich erkläre an Eides statt, dass ich die vorliegende Diplomarbeit selbständig und ohne fremde Hilfe verfasst, andere als die angegebenen Quellen und Hilfsmittel nicht benutzt bzw. die wörtlich oder sinngemäß entnommenen Stellen als solche kenntlich gemacht habe. Die vorliegende Diplomarbeit ist mit dem elektronisch übermittelten Textdokument identisch. Linz, 2015 II The Question of Rational Economic Calculation in Market Socialism David Hebesberger Abstract Many of those familiar with the economic calculation debate between the economists of the Austrian school of economics and proponents of socialism understand it to have been won by the socialists due to Oskar Lange’s model of market socialism, also known as the Lange model. Such an interpretation of the debate, however, is rooted in a misinterpretation of Austrian arguments which did thus remain unanswered, leaving the debate unfinished until today. Due to this misinterpretation of Austrian arguments and consequently the debate, this thesis investigates the question of rational economic calculation in Oskar Lange’s model of market socialism from the perspective of the Austrian school of economics. For this purpose, the works of the Austrian economists Ludwig von Mises, Friedrich Hayek, and in a somewhat lower quantity also Lionel Robbins concerning knowledge and the market shall be investigated. Subsequent to the elaboration of Austrian notions concerning knowledge and the market, these ideas will be applied to the Lange model, revealing that rational economic calculation is considered to be entirely impossible in market socialism. This is due to essentially the same reasons that prevent its execution in conventional socialism, which are rooted in the lack of a market for the means of production. Thus, although Lange attempted to construct his model in a manner which would exempt itself from the problems of conventional socialism, it does from the Austrian perspective fail to do so. Indeed, the Lange model was never officially implemented anywhere in the world. In order to still get an impression of how the Lange model would have performed in a real-world setting, it will be examined whether the Hungarian New Economic Mechanism, which is sometimes likened to the Lange model, is indeed comparable. III The Question of Rational Economic Calculation in Market Socialism David Hebesberger Table of Contents 1 Introduction ......................................................................................................................... 1 2 The Lange Model ................................................................................................................ 4 2.1 Lange’s Economic Calculation Problem ..................................................................... 7 2.2 Equilibrium in Capitalism ............................................................................................ 8 2.2.1 Equilibrium ........................................................................................................... 8 2.2.2 Trial and Error .................................................................................................... 10 2.3 Equilibrium in Market Socialism ............................................................................... 10 2.3.1 The Factors of Production .................................................................................. 11 2.3.2 Equilibrium ......................................................................................................... 11 2.3.3 Trial and Error .................................................................................................... 13 2.3.4 The Parametric Function of Prices ..................................................................... 14 2.3.5 The Social Dividend ........................................................................................... 15 3 Views of the Austrian School............................................................................................ 16 3.1 Historical Background ............................................................................................... 16 3.2 The Austrian Economic Calculation Problem ........................................................... 24 3.2.1 General Definition .............................................................................................. 24 3.2.2 Original Formulation .......................................................................................... 26 3.2.3 Monetary Calculation ......................................................................................... 28 3.3 Knowledge and the Market ........................................................................................ 31 3.3.1 Dispersed Knowledge ......................................................................................... 31 3.3.2 The Dynamic Market .......................................................................................... 35 3.4 Knowledge Utilization in Capitalism ........................................................................ 36 3.4.1 The Price System ................................................................................................ 36 3.4.2 The Role of Entrepreneurship............................................................................. 38 3.5 Shortcomings of the Lange Model ............................................................................. 44 3.5.1 The Means of Production ................................................................................... 44 IV The Question of Rational Economic Calculation in Market Socialism David Hebesberger 3.5.2 Insufficient Responsiveness ............................................................................... 47 3.5.3 Minimum Cost .................................................................................................... 50 3.5.4 Insufficient Differentiation ................................................................................. 53 3.6 Entrepreneurs vs. Corporate Managers ...................................................................... 54 3.6.1 Unwarranted Equalization .................................................................................. 54 3.6.2 The Sovereignty of Owners ................................................................................ 56 3.6.3 The Capital Market ............................................................................................. 57 3.7 Reflection on Austrian Theory and the Lange Model ............................................... 59 4 The Hungarian System ...................................................................................................... 64 4.1 General Facts ............................................................................................................. 65 4.2 The Role of the Firm .................................................................................................. 68 4.3 Price Determination ................................................................................................... 70 4.4 Foreign Markets ......................................................................................................... 71 4.5 Economic Performance .............................................................................................. 72 4.5.1 Economic Growth ............................................................................................... 72 4.5.2 Shortages ............................................................................................................ 74 4.5.3 Export Performance ............................................................................................ 75 4.6 New Economic Mechanism vs. Lange Model ........................................................... 76 5 Conclusion ......................................................................................................................... 81 6 Reference List ................................................................................................................... 83 V The Question of Rational Economic Calculation in Market Socialism David Hebesberger 1 Introduction This thesis intends to examine the question of why, based on the views of the Austrian school of economics, rational economic calculation, which is the allocation of the economy’s scarce resources to those uses most desired by consumers, is impossible in the model of market socialism proposed by Oskar Lange in his article “On the Economic Theory of Socialism”. Particular emphasis in answering this question will be placed on Austrian argumentation concerning dispersed knowledge and the market as a dynamic process. Lange published his article in two parts in the years of 1936 and 1937 and it was an important component of the economic calculation debate (Lavoie, 1985). The economic calculation debate was a controversy between the proponents of the Austrian school of economics, Ludwig von Mises, Friedrich Hayek, and Lionel Robbins, and advocates of socialism such as Oskar Lange, Abba