Leftists for Hayek

What happens when a socialist applies the insights of Austrian economics?

Steven Horwitz from the July 2007 issue

Socialism After Hayek, by Theodore A. Burczak, Ann Arbor: University of Michigan Press, 172 pages, $19.95

In 1995 the economist Peter Boettke published a paper titled “Why Are There No Austrian Socialists?” He intended to prod the devotees of Ludwig von Mises (1881–1973) and F.A. Hayek (1899–1992), the two best-known exponents of the pro-market “Austrian” approach to economics, into articulating their arguments in ways that did not reduce them to ideological shoe pounding. But he also wanted to demonstrate to leftists that the Austrians’ arguments were not mere dogma, that they were a series of analytical and empirical propositions about how the world worked that happened to lead to the conclusion that, if a healthy and wealthy economy is one of our goals, free markets are the best way to reach it.

The question in Boettke’s title was a rhetorical one; he wasn’t actually proposing a Misesian socialism. But in the intervening decade, Austrian economics in general and Hayek’s work in particular have experienced a newfound, if sometimes grudging, respect. Several scholarly biographies of Hayek have appeared. The Society for the Development of Austrian Economics now runs the best-attended panels at the annual Southern Economic Association meetings, and “Hayek Studies” is a growth industry across the social sciences and even in neuroscience. Now, with the publication of Theodore Burczak’s Socialism After Hayek, a scholar on the left has confronted Hayek’s critique of socialism in a sympathetic and sustained way. Burczak, who teaches economics at Denison University, has produced a slim but very deep volume that contains the most fundamental challenge to Hayek’s defenses of the market since his debates with the Polish socialist Oscar Lange in the 1930s. The book should reopen some conversations that have been closed for too long.

Lange and his allies argued that the complexity of modern society and the triumphs of modern science meant that the unplanned “anarchy” of capitalist production had to be replaced or supplemented by scientific management. Hayek argued that the very complexity of a capital-using economy is what would doom attempts to manage it. Burczak’s market-socialist hybrid recognizes the power of Hayek’s critique of central planning and markets’ ability to coordinate the decentralized activities of individual people. Rather than substituting planning for markets, Burczak wants to supplement the market: He would stake all adult citizens with a rather large hunk of tax-funded wealth, and he would mandate worker ownership and management of firms. These changes, he argues, will enhance the chances that people will live “choiceworthy” lives—that they’ll have the means and opportunities to make substantive decisions about the directions of their lives, as opposed to, say, choosing between starvation or working for minimum wage.

Hayek’s critique of planning first came to the fore during what is known as the socialist calculation debate. Ludwig von Mises opened that conversation with a 1920 article on economic calculation and his 1922 book Socialism, both of which argued that no state could allocate resources rationally in the absence of private ownership of the means of production—or, more colloquially, that socialism in the classic sense was “impossible.” Only private ownership, Mises argued, leads to a market that can produce meaningful prices, which are necessary to help people decide which of the many alternative uses of capital are most productive. For Mises and those who built on his arguments, the shortages and waste that plague real-word socialist economies are not incidental errors that could be corrected with better management; they are problems endemic to socialist institutions.

Lange replied in a 1936 paper, “On the Economic Theory of Socialism.” Neoclassical economic theory, he argued, demonstrated that a system combining public ownership of capital with choice in consumer goods and occupations could produce a general equilibrium. The concept of “general equilibrium” was relatively new at the time but later became central to modern microeconomics; it is best understood as that state of affairs in which prices for both consumer goods and inputs enable all market participants to maximize utility or profit, and in which all resources are allocated with perfect efficiency. This combination of markets in consumer goods with public ownership of capital was dubbed “market socialism,” and Lange’s claim that Mises was wrong to declare socialism impossible carried the day for about 50 years. Much as Burczak pays tribute to Hayek in developing his modern version of market socialism, Lange quipped that future socialist planners should erect a statue of

Mises to thank him for asking the questions they had now begun to answer.
In a series of papers during the next decade, Hayek responded to Lange and to others making similar arguments. To do so, he attacked the idea of general equilibrium itself. When economists constructed their models of how markets would reach general equilibrium, they would assume, for the sake of the model, that everyone would have equal access to information about the economy. Lange, Hayek argued, was assuming that a socialist planning board would have all this knowledge at its disposal. But in a dynamic world where the information relevant to consumers and producers is dispersed and constantly changing, that isn’t a reasonable assumption. The proper comparison stacks the ability of actual competitive markets against that of actual planners acting without a market, without assuming either has the knowledge assumed by economic models. Which system is better able to discover and convey the information that advanced production requires? (It is notable that the very same critical questions Hayek asked apply with near-equal force to many of the models mainstream economists use to defend both markets and particular forms of intervention. That’s another reason Burczak is attracted to Hayek: They share a deep skepticism about the modernist, mechanistic assumptions that dominate the field.)

In these papers, Hayek first articulated a theme that would become central to the rest of his life’s work: that economic coordination and economic growth are really a problem of what he called the division of knowledge. Market prices make the often private knowledge spread among billions of individuals socially accessible to others. As Hayek put it in 1968, economic competition is a “discovery procedure.” Markets enable us to discover and make socially usable knowledge that would, under any other system, be inaccessible; they thus make it easier to coordinate the plans of individuals, households, and firms.

What consumers value often depends more on context than on the physical qualities of the good: An SUV might be highly valued by a suburban resident, while a Manhattanite, even one with more wealth, might value the vehicle less, especially when thinking about having to park it. For automobile makers to know how many of such vehicles to produce and how to price them, they need to know far more than the cost of the physical components; they need to have access to individuals’ subjective evaluations. In addition, we sometimes cannot even articulate our reasons for valuing what we value, and we need to go beyond language in making that tacit knowledge socially available. It is our decisions to buy, and not to buy, that through ever-changing prices enable us to make our contextual and often tacit knowledge accessible to others.

It was not until the 1980s and ’90s, when the failures of nominally socialist regimes around the world were too obvious to overlook and when the revival of interest in Austrian economics further refined these arguments, that Hayek and Mises were more widely acknowledged to have been correct—even, famously, by the socialist economist Robert Heilbroner, who wrote in 1990 that “Mises was right.” In the years since then, the debate has largely quieted. Hayekians have taken comfort in their belief that either nothing remained to be said or no one on the left understood Hayek well enough to fashion a real response.

Burczak’s book demonstrates that this sense of security was a false one. Taking seriously what he terms Hayek’s “postmodern economics,” Burczak combines the Austrian’s critique of centralized economic planning with the “capabilities” work of the Nobel Prize–winning economist Amartya Sen and the philosopher Martha Nussbaum, and with the literature on employee ownership and self-management by a number of economists on the left. The result is an alternative vision of socialism that he believes can withstand Hayek’s arguments.

To get there, Burczak offers a fascinating reading of Hayek that lines up nicely with the work of many younger Austrian economists, including myself, the aforementioned Peter Boettke, and others associated with the late Don Lavoie and George Mason University. Burczak emphasizes that Hayek’s economics is distinctly different from the mainstream of the discipline in that it takes seriously the fact that human beings are, to some degree, socially constructed. That is, we are born into and shaped by institutions we did not design, especially language, but also markets, money, moral rules, the common law, and countless different social norms and practices.

Combined with Hayek’s conception of knowledge as fragmentary, uncertain, and often tacit, this understanding produces a postmodern view of the market that is, in Burczak’s words, “a type of dialogical process that creates an evolving set of intersubjective agreements and disagreements about efficient methods to produce ever-changing desirable goods.” Rather than seeing markets as mechanisms achieving perfectly efficient equilibria (a modernist metaphor if ever there was one) in which everyone gets what he wants and no more trades need be made, Burczak, channeling Hayek, argues that markets—and all forms of knowledge—are at any moment imperfect and transient in the face of a variety of subjective interpretations. Yet over time, he and Hayek claim, markets systematically filter in more accurate knowledge about the preferences of other individuals and the scarcity of resources, and in so doing they filter out error. Just as scientific processes gradually enhance our knowledge even if at any given moment they cannot claim to possess Truth, markets continually enhance value by moving goods and services to more highly desired uses but at no point can be said to have created Value, in the final, finished sense that equilibrium-bound socialists like Lange thought possible.

Writing from the left, Burczak agrees that Hayek was right in the debate with Lange. Knowledge is more than objective, technical information about, say, the components of an automobile. It is composed of the judgments and wisdom that emerge through human communication and interaction. The institutions that facilitate that communication, such as markets, are necessary to human flourishing.

Having accepted the Hayekian argument that the market is necessary, Burczak begins his critique of Hayek by asking whether his legal theory, and his defense of the market, are as “neutral” as Hayek believed.

In particular, Burczak challenges Hayek’s vision of social rules emerging through an unplanned but orderly process of judge-made common law, thus providing a neutral, socially beneficial legal framework for the market. For Burczak, the evolution of the common law is inevitably influenced by the subjective knowledge and values of jurists. Burczak also suggests that markets, specifically credit markets, fail to create conditions under which all actors can equally take advantage of the opportunities they uniquely perceive. If true, the latter point would undermine Hayek’s contention that markets “improve the life chances of anyone chosen at random.” The result of both of these problems, Burczak argues, is that free markets will produce inequities in wealth and opportunity that undermine the claim that markets work to the benefit of all.