Economic Theory

The Socialist Calculation Debate – then and now (Part 3)

On 20 September, the IEA’s Head of Political Economy, Dr Kristian Niemietz, gave a talk at King’s Maths School in London on the topic: “The Socialist Calculation Debate – then and now”. The article below is based on his talk.


…continued from Part 2


Up until this point, you might think: isn’t this all just a problem of insufficient data processing power? If so – doesn’t this mean that the Socialist Calculation Debate is now out of date? Sure, planning an economy requires colossal amounts of data. It may not have been possible in the old Eastern Bloc to collect, process and evaluate such a data volume. But would that still be a problem today? Don’t Amazon and Google already have more information about their customers than any socialist planning board ever had?

Hayek did not live to see the internet age, let alone the rise of Artificial Intelligence. Nonetheless, if he were alive today, I suspect that he would not feel compelled to modify his arguments very much. The Socialist Calculation Debate was never primarily about data processing in the technical sense.

Hayek also argued that a lot of economically relevant knowledge is of a tacit nature. Tacit knowledge is knowledge that we possess, but would struggle to articulate. For most people, the grammar of their native language is tacit knowledge. You can all speak perfect English, but if a non-native speaker asked you “Why did you use this tense rather than that one?”, or “Why did you use this word rather than that one?”, most of the time, your answer would be “I don’t know; it just sounds right, and the other one just sounds odd.”

This is, admittedly, a bad example, because you can study the grammar rules of your native language if you want to. In this case, you can convert tacit knowledge into formal knowledge.

But very often, you can’t. Most jobs contain some tacit knowledge that you have acquired over the years, but would struggle to articulate, and thus, pass on to a successor or a colleague. I’ll never forget my disappointment when I read the book On Writing by Stephen King, the horror novel author. I read it because I thought I could learn some tricks from the master. I could not. King is obviously a great writer, but he’s terrible at explaining how he does it. He doesn’t know how he does it. It’s tacit knowledge. He can’t articulate it. But if he can’t do it – who can?

Even consumer preferences are often tacit, and for a mix of reasons, our actual purchasing behaviour often deviates from our stated preferences. Entrepreneurial knowledge often contains a large tacit share too. When asked about their business ideas, successful entrepreneurs will often say that they just had “a hunch”, “a feeling” or “an intuition”.

For that kind of knowledge, it doesn’t help if you get faster computers that can handle more data.

Going a little bit beyond the Socialist Calculation Debate in the narrow sense, Hayek also emphasised the role of trial-and-error processes in economic life. In economics, we learn most things through experimentation rather than grand plans. This is even clearer today than it was in Hayek’s days. For almost every product that we use today, you can find quotes from industry experts from around the time of the launch, confidently predicting that the product would never take off. Online shopping will never be a thing. The internet will never be a thing. TV will never be a thing. The car will never be a thing. The Beatles will never be a thing. Arnold Schwarzenegger will never make it as an actor. Walt Disney will never find an audience for his eccentric idea of a talking duck in a sailor’s suit, and a talking mouse in a bathing suit.

With the benefit of hindsight, it would be tempting to make fun of the people who made those predictions that aged so terribly, but that would miss the point. Those people were not stupid or ignorant. It’s just that that is what economic life is like. We know very little. There is very little that we can consciously plan. We have to try things, see what happens, and learn by doing.

Could a socialist economy also permit that kind of experimentation? I can’t see how. You need a system in which people can test ideas that, to most observers, seem implausible, and far-fetched. That is not how bureaucracies (or, for that matter, democratic committees) work – and nor should they. A system in which people have the freedom to take risks must be a system in which they take responsibility for the consequences. That requires private property.

I’d argue that it is clear from both theory and historical evidence which side has won the Socialist Calculation Debate, and that is the Austrian side – the anti-socialist side. But then, I’m not a neutral observer. I’m firmly on “Team Austria”.

But I’d also say that even if you find yourself on the socialist side, you should nonetheless take the Socialist Calculation Debate seriously, and engage with the Austrian critique. Earlier generations of socialists certainly did. Remember what Oskar Lange said:

“[A] statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or of the Central Planning Board of the socialist state.”

I would like to see some of that spirit from today’s socialists! I would like to see a modern-day socialist try to come up with a considered response to the Mises-Hayek arguments. I’d like to see them try to come up with a version of socialism which avoids those problems of socialist calculation.

Modern-day socialists don’t do that. They just dismiss objections to socialism as “cringe”. They enjoy a huge reputational edge over their opponents, namely, the fact that socialism is considered hip and trendy, and so, they just capitalise on that advantage, rather than bother with practicalities.

Up to a point, it’s working for them. However, at least one socialist agrees with me that people on his side should try a little harder. Sam Gindin, a Canadian Marxist, writes in the popular socialist magazine Jacobin:

“Of the two central tasks the making of socialism demands — convincing a skeptical populace that a society based on public ownership of the means of production, distribution, and communication could in fact work, and acting to end capitalist rule — the overwhelming focus […] has been on the political battle to defeat capitalism. What the society at the end of the rainbow might actually look like has […] tended to receive only rhetorical or cursory attention. But […] the cavalier assertion of socialism’s practicality will no longer do. Winning people over to a complex and protracted struggle to introduce profoundly new ways of producing, living, and relating to each other demands a much deeper engagement with socialism’s actual possibility. […] [I]t’s not enough to focus on getting there. It is now at least as important to convince prospective socialists that there really is a “there” to get to.”

Quite so.


Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).

1 thought on “The Socialist Calculation Debate – then and now (Part 3)”

  1. Posted 20/10/2023 at 00:52 | Permalink

    Excellent history! Socialists seem to have abandoned reason and evidence. Emotion seems to work better for them.

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