Socialism is traditionally considered a political‐economic system that aspires to replace the institutions of a market capitalist economy with social ownership of the means of production, comprehensive economic planning, and an egalitarian distribution of wealth. Nineteenth‐century debates over socialism focused on the issue of whether a socialist system should be instituted through reforms or revolution. A second controversy centered on whether the political mechanism that effected these changes should be decentralized or centralized. The Marxist position favored revolution and centralization and became dominant in certain parts of Europe and Asia by the 20th century, whereas most of the world adopted a nonrevolutionary brand of socialism. The Austrian School criticism of socialism from the 1920s to the 1940s, combined with the experiences of socialist regimes during the course of the 20th century, encouraged a whole series of offshoots from the traditional vision as conceived by socialism’s early proponents. These offshoots took the form of market socialism, participatory socialism, libertarian socialism, anarcho‐communism, and vague modifications on welfare statism.
To the extent that socialism aspires toward social ownership and comprehensive planning, it faces a fatal epistemological flaw, articulated most clearly by Mises in 1920. By destroying private ownership of the means of production, and therefore eliminating the markets for those means of production, the socialist economy abolishes the prices of capital goods, which are the measures of their relative scarcity. But by doing so, the knowledge about relative values and alternative economic uses of scarce capital goods also is unwittingly destroyed. Without this information, as Mises keenly observed, the central planning board would have no basis on which to engage in rational economic calculation. Even if the planners strove to serve the public interest, they would be left in the dark over how to best serve those interests. Although they might be awash in technical data and information regarding current availability of resources, planners would have no criteria to calculate the benefits and opportunity costs of alternative plans of action. They would find it impossible, in practice, to devise a coordinated set of production, consumption, and distribution plans that would match the levels of wealth and complexity generated by market economies.
Mises’s conclusions led to the great socialist calculation debate of the 1930s and 1940s, between Austrian School economists and proponents of market socialism, discussed in great detail by Steele and Lavoie. Market socialism, exemplified by the 1936 work of Oskar Lange, conceded to the Austrians that markets are necessary—advanced economies cannot coordinate millions of independent plans without the information signals generated by market prices—which encouraged Lange and his followers to devise abstract economic models that combined social ownership of the means of production with what amounted to capitalist‐like markets for consumer goods. Informed alone by these consumer goods prices, Lange believed, central economic planners would possess the kind of knowledge necessary to calculate the values of all the scarce resources and capital goods needed to produce consumer goods and services. He, and market socialists in general, failed to understand, however, that the prices of consumer goods are like the tip of a huge iceberg. Possessing these data provides almost no relevant information regarding what is unseen below the surface. The problem of economic calculation focuses on coordinating the rest of the capital structure that lies below the surface, the structure that supports the production of consumer goods and services. Trapped in an overly formal and empirically empty model of markets and equilibrium prices, market socialists failed to understand the brunt of the Austrian case against socialism; effective coordination requires not merely markets for consumer goods, but markets for all the means used to produce consumer goods. However, markets for the means of production can only come about with private property rights to capital goods, something that socialism had consistently fought to destroy since it treads too close to capitalism.
Not only had market socialists failed to appreciate the Austrian argument, but the bulk of the economics profession, while not praising market socialism, felt that Lange provided at least a theoretically satisfying answer to Mises’s critique, and that the socialist calculation debate had finally been settled in socialism’s favor. Only after the collapse of existing socialist regimes in the late 1980s and early 1990s has the economics profession begun to appreciate the conclusions arrived at by Austrian economists more than half a century earlier. Private ownership and markets for the means of production are a necessary element of advanced society.
Despite the stunning collapse of the socialist regimes in the East, new and quite divergent visions of socialism—alternatives to both central planning of the Soviet variety and market socialism of the Langean variety—have gained rapid currency among the radical left. Michael Albert and Robin Hahnel, for example, have championed a decentralized, council‐based model of socialism. Although their notion of participatory socialism purports to have solved all the problems and contradictions of centrally planned and market‐based socialism, Albert and Hahnel ignore the calculation problem and fail to answer the charge raised by Mises in 1920.
Of similar influence is the work of Murray Bookchin, who is the anarcho‐communists’ answer to Mises’s anarcho‐capitalist student, Murray Rothbard. Arguably the most important left‐wing anarchist since Kropotkin, Bookchin’s anarcho‐communist visions of libertarian municipalism and social ecology have enjoyed remarkable growth among a younger generation of anarchists, radical environmentalists, and socialists, evidenced, among others, by the work of David Goodway’s Anarchist Research Group. Not only is the work of Bookchin and his disciples totally ignorant of the socialist calculation debate, but Bookchin, like Marx, dogmatically denies that economics has any valid claims regarding the organization of society.
Most people who still embrace socialism, however, have turned to the modern welfare state almost by default. Some people, such as Joseph Stiglitz and Hilary Wainwright, have given serious consideration to the criticisms of socialism raised by Mises, Hayek, and the younger generation of Austrian School economists. They have capitulated to the necessity of private property and markets in the means of production, but call for a greater role of the welfare‐regulatory state in correcting what they consider inherent failures in the incentive structures and the knowledge‐disseminating properties of a free‐market system.
The collapse of socialism in eastern Europe has surely reinvigorated much theoretical speculation over alternative models to traditional socialism. More concretely, it also has raised the problem of economic transition toward a market economy. Although libertarians and classical liberals have a general understanding of the institutions of a free society, they have engaged in a lengthy debate over the specific kinds of reforms needed and the speed at which these reforms should be introduced in the postcommunist countries.
Some people, such as Boettke, have argued for a shock therapy approach that calls for a rapid dismantling of the state bureaucracy and regulations and a swift conversion of state property into private property. This approach should be accompanied by a credible move to a legal constitutional framework that encourages the development and enforcement of private property rights and free trade among the means of production. The metaphor of a dope addict has been used to illustrate the transition problems under socialism: Cold turkey is the most effective route to a heroin addict’s recovery, as painful as it is, rather than a gradual withdrawal over time. So, too, it is maintained, the dependents of the crumbling socialist societies should be brought into a market capitalist system as rapidly as possible. Gradual reform provides too many incentives to bring the state back in.
Gradualists such as Svetozar Pejovich respond that, although we in the West might know what the “right” institutions that comprise a free society are, we do not know exactly what the citizens of the eastern European nations want. They appear fiercely loyal to destructive nationalist sentiments and often regard institutions introduced by state fiat as illegitimate. Therefore, it may take a great deal of time before radical institutional change works to bridge the gap between a new political‐economic order and its legitimacy.
Socialism, in its traditional dimensions, is an abject failure. The collapse of socialism does not necessarily imply that free‐market capitalism will win by default. Markets, profit and loss, entrepreneurship, and competition are indeed necessary features of advanced societies. But these institutions require trust and legitimacy to function. Furthermore, market institutions are quite capable of supporting a parasitic welfare‐regulatory state. However, the utter collapse of socialism as an economic system accounts for the fact that the bulk of socialist thought in our postcommunist era has finally acknowledged the necessity of basic market institutions.
Albert, Michael, and Robin Hahnel. The Political Economy of Participatory Economics. Princeton, NJ: Princeton University Press, 1991.
Boettke, Peter J. Calculation and Coordination: Essays on Socialism and Transitional Political Economy. New York: Routledge, 2001.
Bookchin, Murray. Post‐Scarcity Anarchism. 2nd ed. Montreal: Black Rose Books, 1986.
Goodway, David, ed. For Anarchism: History, Theory, and Practice. New York: Routledge, 1989.
Lange, Oskar. “On the Economic Theory of Socialism.” On the Economic Theory of Socialism. Benjamin Lippincott, ed. New York: McGraw‐Hill, 1964.
Lavoie, Don. Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered. New York: Cambridge University Press, 1985.
Pejovich, Svetozar. “Institutions, Nationalism, and the Transition Process in Eastern Europe.” The Economic Foundations of Property Rights: Selected Readings. Pejovich, ed. Cheltenham, UK: Edward Elgar, 1997.
Prychitko, David L. “Marxism and Decentralized Socialism.” Critical Review 2 no. 4 (Fall 1988): 127–148.
Steele, David Ramsay. From Marx to Mises: Post‐Capitalist Society and the Challenge of Socialist Calculation. LaSalle, IL: Open Court, 1992.
Stiglitz, Joseph. Whither Socialism? Cambridge, MA: MIT Press, 1994.
Wainwright, Hilary. Arguments for a New Left: Answering the Free Market Right. Cambridge, MA: Blackwell, 1994.