To take a break from debating the nuances of banking theory with fellow Austrians — although, do not fret, we will soon return to the topic of fractional reserve banking — I want to bring attention to a recent post, by blogger Lord Keynes (LK), on Austrians and economic calculation in a society in which goods are predominately in private hands. LK points out that the original socialist calculation debate revolved around the inability to coordinate resources in a society without a pricing process; that is, where the means of production are in the “common” hands, or publicly commanded. He then wonders how Austrians (amateur or otherwise) can accuse him of not understanding economic calculation (since he does not argue in favor of a socialist economy), and concludes that these Austrians must be referring to the theory of intertemporal discoordination.

While the theory of intertemporal discoordination is one facet of the theory of economic coordination (or, more accurately, a theory of what occurs when prices are distorted and there is serious and prolonged discoordination), it is a minor one (although, one of the best elucidated to-date). How Austrian business cycle theory fits into the framework of coordination can be best picked up from a reading of lecture two and lecture three of Friedrich Hayek’s Prices and Production, which explains the intertemporal coordination of producers’ goods in conditions of equilibrium. The real substance of coordination theory in the Austrian exposition of the business cycle is not in the explanation of how resources are misallocated, but rather in how resources are allocated without interference or distortion.

The same idea applies to the interpretation of the socialist calculation debate. Mises’ criticism of the socialist economy revolves around the idea that central, or government, rationing of resources (without a pricing process) is bound to fail, and that a capitalist system in which the means of production are individually owned and where these individuals can apply means and ends in accordance with their scale of values, guided by money prices, will more efficiently allocate resources. Coordination theory is not in the criticism of the socialist economy, rather in the elucidation of the pricing process. Mises was using his understanding of economic calculation to criticize a society without it. A complete integration of the theory of the pricing process did not come about in economics until 1940, with the publication of Mises’ Nationalökonomie.

Thus, the real value of coordination theory is not in being able to show how socialism is an economically destructive method of resource distribution, but in understanding how resources are efficiently allocated in a market economy. That is, how exactly individuals use the pricing process to allocate between means and ends, based on individual and subjective ranking of preferences. Why do some Austrians critique non-Austrian economists for “not understanding” economic coordination, even if the targets of the criticism are not socialists? Because coordination theory provides the basis for a criticism of any type of allocation of resources that is not by merit of individual valuation in a market economy, constrained by profit and loss (the mechanism by which bad decisions allow for the redistribution of goods to better decision-makers). This point is what I attempted to bring up and prove in my piece “Government Spending is Bad Economics.”

Blogger LK did, in fact, provide a few comments in response to my piece on economic calculation and government spending, but he missed entirely the substance. Instead of understanding the argument, he attacked my position on idle resources on the basis that I rather see an individual unemployed than put to use — his criticism was, essentially, an appeal to emotion. (Also, for what it is worth, my argument in that piece is not an ethical one, nor am I [in general] someone who agrees with Rothbardian ethics.) He does not consider the fact that the input of labor is necessarily is necessarily tied to the input of producers’ goods, and that an efficient input of both requires the economization of means and ends by the individual. More fundamentally, he does not recognize the fact that the government has certain qualities (outlined in my article) that put it outside of the sphere of the private market (and, if you believe the government provides necessary things, for good reason). In short, he does not address the meat and bones of my argument, which has every thing to do with economic calculation (he even argues that my conclusion that the government is disequilibrating is unsupported, even though the support is found in the substance of the article he is responding to).

I will reiterate what economic calculation is, or the theory of economic coordination: it is the means by which individuals allocate the means of production, by individual valuation guided by the pricing process and constrained by profit and loss. In other words, coordination theory essentially looks at how the economy operates; how millions of individuals, each with different and oftentimes contradictory objectives, bring about market harmony. Not emphasized by the focus on coordination are the crucial forces of discoordination (or, disequilibrating forces, if you prefer); these are, nonetheless, another aspect of economic calculation, or coordination theory.

Do only socialist economics lack economic coordination? This is the claim that LK essentially makes when he balks at Austrians who accuse him of not understanding “economic calculation.”

If economic calculation describes the private allocation of economic goods, then government spending must necessarily be outside the scope of economic calculation (or coordination). That this is true is by the public nature of government. Government disrupts economic calculation. It does this through the distribution of wealth (a non-market method of distribution of wealth), through outright public spending, or by skewing individuals’ value rankings (by, for example, subsidizing products). That government is not within the scope of coordination theory does not really say anything with regards to whether it is good or not.

Before we can judge the merits of government spending we need to answer the following questions:

Do we know how the private economy works? Do we know where the private economy (market process) fails? If the market process fails at a given point, is the government an adequate solution?

The stage of the debate is still at question one, since an Austrian will accuse others of not knowing how the private economy (market process) works (much like Hayek accused Keynes of not knowing). For instance, an Austrian will tell a Keynesian that the market does not fail at intertemporal allocation, whereas a Keynesian (at least one loyal to Keynes’ business cycle theory) will tell you that it does. Others might tell you that the market fails where there is imperfect information or imperfect competition, with varying degree of specificity. The varying degrees of specificity come in depending on how much each economist understands that the market is a process. The details of specificity are up for debate, which is still within the realm of the first question.

Economists like LK need to understand, though, where exactly Austrians stand on the debate with regards to question 1. So far, he has shown that he does not. When Austrians refer to “economic calculation,” they are referring to a very broad set of economic theory which describes the forces of coordination and discoordination which characterize the market process. It is theory which describes the working of a market economy, or an economy in which the means of production are privately owned.

The same is true the other way around. I feel as if few Austrians truly understand where Keynes, for instance, stood on economic coordination. Most Austrians or quasi-Austrians interpret Keynes in the same vein as “vulgar Keynesianism.” This is not so. Keynes, and many economists before and after him who were/are not Austrians, held a particular economic perspective that is actually much more complicated than Austrians perceive. That is why when most Austrians give a caricature of Keynesian economics they end up undermining their own arguments. Everyone has jumped to answer questions 2 and 3, when the debate on 1 was never finished.

Even considering the fact that all sides need to shape up a bit, I hope that non-Austrians will walk away from this post with a better understanding of what “economic calculation” is (at least, under an Austrian lens). Economic calculation is more than just business cycle theory; it is a term that encompasses all of catallactic theory (that is, theory of exchange). It deals with the market economy and the allocation of the means of production. To an Austrian, economic calculation is the meat and bones of economic theory, in that it forms the structure around which all other catallactic theory revolves around. There is still much to disagree with — I am sure that many will disagree with this post itself —, but the first step to solving a disagreement is understanding where your opponent is coming from.