Property or Knowledge Problem?

I don’t know the debate literature on the Mises–Hayek re-homogenization and de-homogenization well enough to know where this comment fits in, but this is something I’ve been thinking about for a short while now. There is a defensible way of interpreting Mises’ work on economic calculation in a socialist society as a Hayekian knowledge problem. It came to me when I read Jörg Guido Hülsmann’s Mises: The Last Knight of Liberalism, specifically when he discusses the motives behind Mises’ work. I don’t know whether Mises ever foresaw the knowledge problem, but it seems to me to be a small step from his position on the problem of imputation.

I’m sure the idea had been floating around for some time, but in Principles Carl Menger posits that the values of means of production are derived from the values of the demanded consumer goods they ultimately produce. This is known as price imputation, or derived demand. The problem is that nobody really understood how this process occurred. There were a number of theories developed, including one by Friedrich von Weiser which revolved around his concept of “natural value.” Mises, in a sense, sidestepped the problem by accepting that these values simply aren’t known. This set the stage for the development of his theory of economic calculation: markets develop proxies, known as prices. Prices aren’t a perfect reflection of value, but monetary profit and loss accounting helps the process balance without capsizing.

The main issue of contention, as I understand it, is that Mises emphasized property and Hayek emphasized knowledge. These aren’t incompatible positions. If we look at it from an institutional perspective, Mises was explaining the institutions which provide the rules which determine the process of price determination, and these institutions include private property — without the owners and would-be owners of the means of production bidding their property back-and-forth on markets, prices would not form. But, this was to help fill the gap in the theory of imputation: this knowledge isn’t necessary if society develops proxies to take its place. Hayek, occupied with related work on equilibrium theory and expectations, simply focused on the knowledge aspect of the subject. He was also debating economists who thought they did have the theory to run the economy, and he had to remind them that their models without real world values were useless for planning.

Some people think the two theories to be incompatible. Others think them compatible, but ultimately two different critiques of socialism. I think it’s the same critique of socialism seen from two different angles.

4 thoughts on “Property or Knowledge Problem?

    1. JCatalan

      Actually, not only do I find Hoppe’s article unconvincing, I also have difficulty finding a bit of truth in it. Further, it’s extremely unsophisticated. For example, in his discussion of the firm, Hoppe seems totally unconcerned with auxiliary literature that: (a) shows that firms exist primarily to overcome the costs of using the pricing process, and; (b) firms do suffer from a “knowledge problem” as they grow in size. More importantly, he doesn’t seem to understand Hayek’s argument. Hayek never advocates complete decentralization of the division of labor, nor does he assume that completely decentralized knowledge is a positive end — he assumes decentralized knowledge as a reality society has to deal with. What’s interesting is that Hoppe references some of Hayek’s later work, which in large part deals with the institutions that help coordinate human activity (which is what Mises talks about in his work on property rights, prices, and economic calculation). Finally, Hoppe goes off on a tangent on Hayek’s political philosophy, and even there Hoppe’s rant seems to completely miss the point.

  1. gcallah

    “There is a defensible way of interpreting Mises’ work on economic
    calculation in a socialist society as a Hayekian knowledge problem”

    Of course there is! Kirzner has been pointing this out for years, and I have made the same point. The socialist dictator could simply assign prices to various goods that allowed precise calculation: the problem is those prices would not reflect real knowledge of opportunity costs. Mises did explicitly recognize this: he LOVED the knowledge essays of Hayek. The whole “de-homogenization” effort of Salerno, Hoppe, et al. is solely based on “Hayek was a pinko, so he must have been wrong.”

  2. classical-lib

    There’s no essential difference between Mises and Hayek’s points.

    For Mises, property and money makes possible an ‘intelectual division of labor’ which is essential to the possibility of economic calculation under capitalism. Any resemblance with the hayekian ‘division of knowledge’ is not mere coincidence:

    “No single man can ever master all the possibilities of production, innumerable as they are, as to be in a position to make straightway evident judgments of value without the aid of some system of computation. The distribution among a number of individuals of administrative control over economic goods in a community of men who take part in the labor of producing them, and who are economically interested in them, entails a kind of intellectual division of labor, which would not be possible without some system of calculating production and without economy.” Ludwig von Mises, Economic Calculation in the Socialist Commowealth

    Mises raised this question to be the decisive problem of socialism:

    “This is the decisive objection that economics raises against the possibility of a socialist society. It must forgo the intellectual division of labor that consists in the cooperation of all entrepreneurs, landowners, and workers as producers and consumers in the formation of market prices. But without it, rationality, i.e., the possibility of economic calculation, is unthinkable.” Ludwig von Mises, Liberalism, 2.4

    In Human Action, he says, quoting Hayek:

    “But then we are back again where we started: the director, in his endeavors to direct production activities, is not aided by the division of intellectual labor which under capitalism provides a practicable method for economic calculation.

    The employment of the means of production can be controlled either by private owners or by the social apparatus of coercion and compulsion. In the first case there is a market, there are market prices for all factors of production, and economic calculation is possible. In the second case all these things are absent. It is vain to comfort oneself with the hope that the organs of the collective economy will be “omnipresent” and “omniscient.” We do not deal in praxeology with the acts of the omnipresent and omniscient Deity, but with the actions of men endowed with a human mind only. Such a mind cannot plan without economic calc
    ulation.” Ludwig von Mises, Human Action, Chapter XXVI

    He also praises Hayek for the clearing of the knowledge problem:

    “The fact that knowledge exists dispersed, incomplete and inconsistent, in many individual minds, has been pointed out by Hayek and this is very important. Hayek says that if we are talking about the knowledge of our age, we are making a mistake if we think that this knowledge exists in all minds, or even that all of it exists in the mind of one man. He pointed out, for instance, in the case of the socialistic society that the progress possible is limited by the mind of one man. It is important for the capitalist economy that everybody, who has a better knowledge about some particular problem, can try to profit from this superiority and his attempts contribute to the improvement of the general conditions. In the socialistic economy, knowledge has value only insofar as it is available to the central authority, to the dictators who are making the central plan. Under capitalism, the coordination of the various bits of knowledge is brought about through the market. In a socialistic society it must be effected either in the mind of the dictator or in the minds of the members of the dictator’s committee.” Ludwig von Mises, in: Bettina Bien Greaves, Steneographic notes of Ludwig von Mises New York University Seminar. 20 mar. 1958


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