Every now and then I get requests to respond to specific criticisms of our work. I usually just make a brief response in an email when asked a question about what a critic has said. But like buses, you wait 20 years then three come at once. In the last week three people from three countries have asked me to respond to a 1996 article by Horwitz Money, money prices, and the socialist calculation debate.

Here is a brief response. It is brief both because his own criticisms of us are short, and because we have replied at length in the past to the same or very similar points.

Horwitz accuses us of only focusing on von Mises critique of socialist calculation. He acknowledges that we have demonstrated that computationally the problem of socialist calculation is tractable, but that we have ignored the arguments of Hayek. Hayek, Horwitz wrote, made a distinct critique of socialism, not that millions of equations were too complex to solve, but that on epistemological grounds socialist calculation was impossible.

Horwitz is correct that the Hayek critique of socialism is not identical to that of Mises, but by the time Horwitz article was published in 1996 we had already produced a report dealing with Hayek’s arguments. As a technical report this had perhaps limited circulation but a journal article covering the same ground has also been published. Our response to Hayek was extended ten years later in more detail .

Horwitz’s article touches only on one of all the points we raise against Hayek, that of so called ’tacit knowledge’. Hayek argued that a function of market incentives was to draw out from economic actors what he called tacit knowledge. By this he means knowledge that they did not know that they even had until the right monetary incentives drew it out from them.

We are very skeptical of this notion. Observe that the existence of tacit knowledge is so defined as to be unmeasurable and undetectable. Once any knowledge is writen down or communicated, then it no longer meets the criterion of being tacit. So how do we know that this tacit knowledge exists in the first place?

The hypothesis that explicit knowledge has tacit knowledge as its precondition is untestable by definition. Tacit knowledge like the existence of the soul, is an unfalsifiable proposition. The sorts of examples that Hayek gave – the particular and specialised knowledge that a shipping clerk has – are singularly unconvincing. As we wrote in 1994: Further, even the sort of ‘particular’ knowledge which Hayek thought too localized to be susceptible to centralization is now routinely centralized. Take his example of the information possessed by shippers. In the 1970s American Airlines achieved the position of the world’s largest airline, to a great extent on the strength of their development of the SABRE system of computerized booking of flights (Gibbs, 1994). Since then we have come to take it for granted that our local travel agent will be able to tap into a computer network to determine where and when there are flights available from just about any A to any B across the world. Hayek’s appeal to localized knowledge in this sort of context may have been appropriate at the time of writing, but it is now clearly outdated.

Horwitz argues that production functions are not knowable because they are continuously in the process of being created by entrepreneurial activity. This he says, precludes planning in the absense of monetary economy.

The first point I should make here is that Marxist economists do not think that there is such a thing as a production function. It is a concept of bourgeois economics. We did say that the Austrian school is distinguished from other bourgeois economics schools by thinking that the production function is constantly mutable and subject to change. But Marxists reject the whole notion of a production function . Instead socialist planning theory analyses production in terms of sets of techniques .

These are two very different concepts.

The production function in neoclassical theory typically takes the form

P = LαKβ

where P is production, L is labour used, K is capital used. Clearly this is a non linear function, and a highly abstract one in that K and L are just sums of money. K is not broken down in to any concrete list of goods used. This abstraction was the focus of the Cambridge capital theory debates of the 1960s where Sraffian economists showed that even if one assumes perfect competition and uniform profit rates, you can not define the value of capital independently of both the concrete lists of components used in each technique or the distribution of national income between the working and capitalist classes.

The model used by Sraffa to critique the neoclassical model was a matrix specifying how much of each input is used by each production process. Sraffa uses only one production technique per process. This is itself a simplified version of what the mathematical planning theory of Kantorovich used, since Kantorovich allows multiple possible production techniques to make each product.

Now how does this collection of technique fit in with what Horwitz says?

How about his claim that the knowledge of how to produce things is only created or elicited by entrepreneurial activity?

Well he is certainly right in that the knowledge of the techniques needed to make things is itself the result of activity. But it is not the activity of the mythical entrepreneur. It is, in advanced industrial society, the collective effort of design teams and bureaus. And the process of knowledge production is very objective. It can not function without extensive documentation. As we wrote in 2007:

One component of a cybernetic control system has to be distributed. Clearly it is the Airbus factories that have the information about what parts are used to make an A340, the car plants have the information about what parts are used to make a Mondeo. This information approximates to what Hayek and the Austrian school of economics call contextual or tacit knowledge – but it is of course no longer human knowledge. Literally nobody knows what parts go into an A340. The information, too vast for a human to handle, is stored in a relational database. At an earlier stage of industrial development it would have been dealt with by a complex system of paper records. Again the knowledge would have been objective – residing in objects rather than in human brains. The very possibility of large scale, co-ordinated industrial activity rests upon the existence of such objectivised information. The information to construct the parts explosion is generated by a computerised design process within the collaborating factories of Airbus Industrie. In a cybernetically controlled socialist economy, the parts explosion data for the A340, along with the parts explosion data for other products would have to be computationally combined to arrive at a balanced production plan.

I suspect that the Austrian school writers have never actually worked in a modern design bureau. They certainly have a rather abstract idea about how the knowledge our industrial society depends on is actually produced.

When Horwitz says that without money prices experts would have no way of determining what was technically feasible but economically irrational, he is falling back from Hayek to Mises. This argument that only money provides a way of aggregating different inputs in order to chose the cheapest technique was the core of Mises argument. But at least Mises recognised that if one had access to labour values, these would serve just as well. Horwitz forgets this concession by Mises. He also seems unaware of Kantorovich’s Objective Valuation, arising out of linear programs, so this particular argument by Horwitz was already long obsolete in 1996.