Economics Discussion Paper 2012-6 REVISITING THE SOCIALIST CALCULATION DEBATE: THE ROLE OF MARKETS AND FINANCE IN HAYEK’S RESPONSE TO LANGE’S CHALLENGE

In the early twentieth century, a range of writers produced visions of a socialist economy whose distinguishing characteristic was an allocation of resources using a ‘technical’ perspective. In the 1930s, Oskar Lange took up the challenge of Ludwig von Mises’ claim of the ‘impossibility’ of constructing a socialist economy on such an engineering basis. He readily acceded to the need for efficiency calculations to be made in value terms rather than using purely natural or engineering criteria, but claimed that these values could emerge without a market for capital goods, and without private ownership of capital. Friedrich Hayek replied stressing the dynamic aspects of competition in the context of the capital market; the latter is to be seen as a discovery procedure wherein production possibilities must not be taken for granted. Thus, socialist calculation is impossible because of the absence of those markets for capital and risk that evaluate the success or failure of different investment decisions under capitalism. Appraising this debate, we emerge with two findings. First, Lange's contribution was based on a one-sided, static conception of the capitalist economy, and therefore of the construction of a socialist alternative. Second, the Austrian approach only surreptitiously concedes the key role of finance in its defence of the dynamic properties of capitalism. And yet it is the very gyrations and instability emerging from the financial sector in capitalism that was one of the central factors motivating the search for an alternative engineering method of allocation in the first place. The latter point invites us to reconsider the place of finance in various schools of economics in mainstream thinking.