A socialist price system: answering the Austrians

According to economists of the Austrian school, even with everyone’s best efforts, a system based on social ownership of the means of production could not effectively deploy a decentralized price system. The case is made primarily by Mises and Hayek in the 1920s and 1930s with a further contribution by Lavoie in the 1980s. Their argument can be broken down into two elements. Firstly, only the competitive market process can give prices the coordinative meaning necessary for economic calculation. Secondly, we cannot do without capitalists. To begin with, there has to be people with “skin in the game”; and, furthermore, those running socialist firms would not be in a position to replace the capitalists in the entrepreneurial role that the latter perform in an ever-changing economy. An examination of the key writings on these questions by these three economists reveals that their case rests on very shaky ground. The case is weakened further when one looks at the ways in which a socialist price system could be an improvement on what capitalism offers. The article also discusses the Lange and Dickinson ‘neoclassical’ models and shows them to be irrelevant diversions.