1.1 Economic calculation in the socialist commonwealth – Ludwig von Mises
We have already noted that the economic calculation debate started with Ludwig von Mises (1920). Arguably, this debate can even be identified with the so-called Mises-Hayek critique of central planning (Meadowcroft 2003). While there are suggestions of profound differences between Mises and Hayek, these differences are small when compared to the rest of economic thought in the twentieth century (Boettke 1998). Our intention here is to first present the arguments of Ludwig von Mises and then analyse the positions of Friedrich von Hayek, the 1974 Nobel Laureate in Economics. We will then have a complete overview of the original and complete Mises-Hayek critique.
Mises (1920) mainly wrote his critique during a time when socialist parties were gaining power in Russia, Hungary, Austria and other countries, and different types of socialist systems were evolving. The prevailing ideology was Marxism, as the Bolsheviks had taken over and were consolidating their power in Russia. Mises (1920, p. 38) concluded that Marxist writers preferred to focus on the immediate future and the ‘path to Socialism and not Socialism itself’ – ‘they are not even conscious of the larger problem of economic calculation in a socialist society’.
So Mises was writing with highly, or even totally centralised economies in view. The final step to a socialist nationalisation programme, according to the Austrian Marxist Otto Bauer, is the socialisation of banks and their amalgamation into a single central bank, of which the administrative board would be the ‘supreme economic authority, the chief administrative organ of the whole society’ (Mises 1920, p. 39). Part of Mises’ critique (1920) is that in the case of a single centralised bank, the monetary system as it was known would disappear, and there would be problems with credit.
Although central banking and monetary policy are not key concerns in the context of healthcare, they have broader economic implications for our analysis. First, without an effective monetary policy inflation rises, which has consequences for every aspect of economic life, including healthcare. Second, the availability of credit and the financing function has effects on how much money can be allocated to the healthcare system. Third, an effective monetary policy is critical in health-care to finance entrepreneurship and innovation in order to find new cures for illnesses or improve existing ones.
Every person makes some value judgment in order to choose between the satisfaction of one need against another (Mises 1920). This value judgement is basically utilitarian because the person intends to satisfy their individual needs. A rational individual would be able to appropriately value goods of lower or higher utility order. ‘But where the state of affairs is more involved and their interconnections not so easily discernible, subtler means must be employed to accomplish a correct valuation of the means of production’ (Mises 1920, p. 8).
According to Mises, in order to attain a correct valuation and optimise production, an exchange economy is necessary. It is then possible to make a calculation that entails the valuation of all participants in the trade. An exchange economy is also an inclusive mechanism that respects and accounts for all participants’ preferences. No one can be excluded, and therefore it can be viewed as a democratic process in which every individual participates in a process to determine the price. Access is not fundamentally limited in the exchange process. Every individual can participate. Even absence from the exchange can be regarded as non-active participation, since it affects demand for healthcare services, and thus monetary values (prices).
Participants can value the goods according to their preferences and at the same time calculate how much of their own labour is required in order to attain or produce them.
Anyone who wishes to make calculations in regard to a complicated process of production will immediately notice whether he has worked more economically than others or not; if he finds from reference to the exchange relations obtaining in the market, that he will not be able to produce profitably.
(Mises 1920, p. 10)
Another advantage is that individuals can easily refer to monetary – in this case, values – and connect them to utility. Since goods are substitutes for each other in accordance with the exchange relations, the participant can use the monetary value as a guide to choosing which goods to obtain. This is the basic line of Mises’ argument regarding the benefits of the market exchange. The process of production is even more complicated regarding a plant or a large energy project because ‘vague valuations’ cannot be applied.
In his early work, Mises is more concerned with the economic mechanism, although in later works he focusses more on the importance of choice (e.g. Human Action 1940). As stated in the introduction above, the perspective here is classic and preference utilitarianism. An important conclusion from the brief analysis of Mises’ critique is that everyone can choose freely. In socialism, by contrast, it is the central committee or other types of centralised authority which make decisions. These decisions most likely do not represent individual needs and preferences. At this point, it is useful to mention that choice depends on the degree of centralisation and administration. We can say that Mises was prophetic about what would happen in Russia. In 1921, the State Planning Committee, known as Gosplan, was established, and the main line of Mises’ arguments stems from this very centralisation of decision-making. Eventually communism in Russia collapsed.
In the former U.S.S.R., which is probably the example closest to socialism as theorised by Mises, decision-making was highly centralised and centrally controlled through the Soviet Health Ministry in Moscow. It ‘controls health care facilities, medical education training, personnel, and financial resources throughout the Soviet Union’. (Rowland and Telyukov 1991, p. 76). Medical personnel were appointed by the Ministry and...