Advances in Austrian Economics

Money, money prices, and the socialist calculation debate

Steven Horwitz
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 MONEY, MONEY PRICES, AND THE
SOCIALIST CALCULATION DEBATE

Steven Horwitz
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In a recent paper, Cottrell and Cockshott (1993) attempt to revitalize the case
for socialist-style economic planning by constructing a method for calculating
production choices by use of a measure of labor time. They argue that their
scheme avoids the standard criticisms of economic planning, especially those
oftbe Austrians (e.g., Mises 1920; Hayek 1940; Lavoie 1985), by using modern
advances in artificial intelligence to perform the complex calculations necessary
for the efficient ex ante allocation of resources. As with the earlier claims of
Marx and Oscar Lange, Cottrell and Cockshott deserve a response by
planning's critics. Also, as before, the labor-based scheme they propose
continues to miss the essence of the Austrian response. Rather than being either
"mysticism" or "scientifically unjustifiable," as CottreU and Cockshott (1993,
p. 90, nlS) assert, I wish to argue that Austrian subjectivism is a coherent way
to understand both how market economies work and why attempts to replace
them with ex ante planning are doomed to failure)
To explore Cottrell and Cockshott's argument, I wish to revisit the socialist
calculation debate by examining the role that money played (or did not play)
in the arguments on both sides. After documenting the very brief attention

Advances in Austrian Economics, Volume 3, pages 59-77.

Copyright o 1996 by JAI Press Inc.
All rights of reproduction in any form reserved.
ISBN: 0-7623-0055-8

59
 60 STEVENHORWITZ

paid to money in that debate, the paper outlines a subjectivist view of money
as a social institution which facilitates trans-personal communication. That
view of money both deepens the Austrian criticisms of Marx and Lange and
can be used to discuss the weaknesses in Cottrell and Cockshott's defense of
planning.

I. MISES, MONEY, AND ECONOMIC CALCULATION

In 1920 Ludwig von Mises formulated one of the first economic critiques of
the socialist policy prescription of comprehensive economic planning. The
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result of Mises's contribution was a debate that lasted through the 1930s over
whether socialist planners could use resources as rationally as could dispersed
owners of private property in the market. 2 Of interest to us here is the role
that money played in this debate. Certainly Marx saw how fundamental money
was to the decentralized nature of capitalistic commodity production, but how
well did his critics see it?
The main thrust of Mises's (1920) article was that social ownership of the
means of production prevented any planning agency from being able to allocate
resources rationally, that is, satisfy consumer wants using the least valuable
resources possible. He argued that economic calculation requires that the
means of production (capital goods) have money prices that can be used to
compare supply and demand or profit and loss. For capital goods to have
money prices, they must be exchanged in a market and for market exchange
to exist, there must be private property in those capital goods. Economic
calculation and private property in the means of production are inseparable:
"Where there is no free market, there is no pricing mechanism; without a pricing
mechanism, there is no economic calculation" (Mises 1920, p. 111).
Mises's elaboration of this point centered around the use of money prices.
He was quite clear in claiming that prices are able to be "aids to the mind"
because they result from monetary exchange. In his discussion of the socialist
state, Mises (1920, p. 92) argued that the absence of a market for the means
of production would drastically limit the use of money:

[Tlbesignificanceof Moneyin a societywherethe meansof productionare State-controlled

will be...ineomparably narrower, since the material available for exchange will be
narrower, inasmuch as it will be confinedto consumption-goods.Moreover,just because
no production-goodwill ever become the object of exchange, it will be impossible to
determine its monetaryvalue.... Calculation in terms of money will be here impossible.

After dispatching (too quickly, according to Cottrell and Cockshott) arguments

that such calculations could be made on the basis of some kind of labor unit,
Mises (1920) expanded on money's role in the valuation process:
 Money, Money Prices, and the Socialist Calculation Debate 61

Monetarycalculationhas its limits. Moneyis no yardstickof value, nor yet of price. Value
is not indeedmeasuredinmoney,nor is price.Theymerelyconsistin money(p. 98, emphasis
in original).

Money prices are the form in which value is expressed.

Put slightly differently, money prices give us guideposts to "orientate
[ourselves] properly among the bewildering mass of intermediate products and
potentialities of production" (1920, p. 103). Mises (1920) summarized his
argument:

Moreover, the mind of one man alone---beit never so cunning, is too weak to grasp the
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importance of any single one among the countlesslymany goods of a higher order. No
single man can ever master all of the possibilitiesof production, innumerableas they are,
as to be in a position to make straightaway evidentjudgments of value without the aid
of some system of computation. The distribution among a number of individuals of
administrative control over economicgoods...entails a kind of intellectual division of
labour, which would not be possible without some systemof calculating production and
without economy(p. 102,emphasis added).

It is this notion of an "intellectual division of labor" that forms the core of

the later criticisms of central planning. The planners have to explain how they
will know, in the absence of money prices, whether, for example, a bridge
should be built of steel, iron or wood. Mises (1981, p. 123) argues that without
private property in those means of production there can be no money prices,
"Economic calculation can only take place by means of money prices
established in the market for production goods in a society resting on private
property in the means of production." Without these money prices, rational
economic calculation is indeed impossible. 3
To further clarify the importance that Mises attached to money's role in
economic calculation, it is worth noting that the argument Mises developed
in the 1920 paper is anticipated by some brief comments sprinkled
throughout his 1912 book The Theory of Money and Credit. 4 That book
has long been recognized for its contributions to monetary theory, business
cycle theory, and Austrian economics in general. However, it can also be
read as a work on money's role as a social institution, not unlike Georg
Simmel's (1978) The Philosophy o f Money, which Mises cites favorably in
several places. In addition, the book can also be seen as a response to the
Marxism that was the predominant intellectual framework of early twentieth
century Vienna.
On these latter two readings, it is not surprising that Mises would open the
book (1980, p. 41) with a discussion of examples where money would not be
needed, including the case where "the means of production are socialized." He
goes on to say that money "presupposes" private property in capital goods
and an economy where production is "anarchistic." The linkage between private
 62 STEVEN HORWITZ

property and money prices is in Mises's mind as early as 1912. In a later

discussion on the value of money, Mises (1980, p. 62) argues that:

The whole structure of the calculations of the entrepreneur and the consumer rests on the
process of valuing commodities in money. Money has thus become an aid that the human
mind is no longer able to dispense with in making economic calculations.

Once again, Mises draws a clear relationship between the ability to perform
economic calculations and the use of money and money prices. The phrase
"aid that the human mind" is almost identical to Mises's use of "aids to the
mind"(1920, p. 102) in the calculation article. Mises's use of the phrase "money
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prices" throughout the calculation debate is more than just another way of
saying "market prices," it reflects his theoretical argument that the price
system's ability to aid in economic calculation derives from the use of money
in the process of price formation. 5
Mises's accusation of the irrationality of socialism struck at the heart of
Marxian arguments for the superiority of planning. The core of these
arguments was that planning was more scientific, and hence more rational,
than letting economic outcomes emerge as unintended consequences of
anarchical production. Rudolf Hilferding 0981, pp. 366-367) argued in this
vein that with conscious control of the economy, society will "subordinate the
economy to itself as it has been able to subordinate nature ever since it
discovered the laws of motion of the natural world. '~ Planning, by being more
rational, would also be more productive. Not only did Mises go after the
content of Marx's argument, he also went after its spirit--its claim to the mantle
of science.
In 1935 Mises's essay was published in English along with several others
on the topic, including two by Hayek, the latter of which attempted to address
the various ongoing attempts to use general equilibrium techniques to tackle
the feasibility of planning. In Oskar Lange's (1936) response to Hayek, he
developed another equilibrium approach to the problem. What Lange did was
replace the auctioneer of Walrasian general equilibrium theory with a Central
Planning Board. From Lange's (1936, pp. 82-83) perspective, studying "the
determination of equilibrium prices in a socialist economy has shown that the
process of price determination is quite analogous to that in a competitive
market. The Central Planning Board performs the function of the market."
Lange's explanation for why the Austrian arguments miss the mark was that,
from the start, Mises confused two different uses of the word price. Borrowing
from Wicksteed, Lange (1936, pp. 59-60) noted that price

may mean either price in the ordinary sense, i.e., the exchange ratio of two commodities
on a market, or it may have the generalized meaning of 'terms on which alternatives are
offered'.... It is only prices in the generalized sense which are indispensable to solving the
 Money, Money Prices, and the Socialist Calculation Debate 63

problem of the allocation of resources. The economic problem is a problem of choice

between alternatives.

Mises was only concerned with real money prices, which indeed would not
be available with socialized means of production. However, the planning board
can still have access to prices in the sense of terms on which alternatives are
offered by solving for equilibrium prices using a trial and error process.
The shift in focus to equilibrium models, what Lavoie (1985, p. 78) calls
the "diversion of the debate into statics," left behind discussion of the role of
actual money prices in assisting in economic calculation. Mises continually
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emphasized money prices and did so because that was what the Marxian
argument for planning was all about. Marx argued that actual money prices
were a result of commodity production and it was the process of price formation
that symbolized the alienation and exploitation that socialism would transcend.
In addition, Mises's own theoretical framework implied that the calculation
issue only made sense when talking in terms of real money prices generated
in a money-using economy. The subsequent drift away from these issues was
to be the pattern for the remainder of the debate. Aside from Mises's original
article and his discussion in Socialism, no one was again to stress money's role
in calculation and the arguments for or against planning.
As modem Hayekians recognize, the flaw in the Lange-type proposals was
that they sought to use equilibrium theory to describe a world of pervasive
disequilibrium, and that economic systems are better described using process
analysis and evolutionary thinking. The task now is to apply modem Austrian
insights to the issues raised in the calculation debate. One of those insights
is the role of money as a social institution that enables the market to convey
knowledge. After exploring money's role in making possible the epistemolog-
ical advantages of the market, we turn to explore its implications for Marx's,
Lange's, and Cottrell and Cockshott's arguments for planning.

II. MONEY, KNOWLEDGE,

A N D SOCIAL COMMUNICATION

One fruitful way of understanding the importance of money as a social

institution (and its role with respect to economic calculation) is to see that
money's role in the market is analogous to language's role in other human
interaction. In the same way that language enables us to transcend our
individuality and our physical senses by opening up a means of social
communication, so does money enable us to communicate our subjective
preferences in the market. In addition to being analogous to language, money
also extends our range of communication beyond language by enabling us to
make our inarticulate (and thus linguistically inaccessible) knowledge socially
 64 STEVEN HORWITZ

usable. The power of the analogy between money and language derives from
both being spontaneously evolved means of exchange. The medium of
exchange function of money is well-known to economists and the items being
exchanged are goods and services. For language, it is mental phenomena that
are "exchanged" by being constituted in a language that is accessible to other
thinkers.
The spontaneous origin of money is best described in Carl Menger's (1892)
seminal work. He argued that monetary exchange begins when barterers realize
that they can more easily execute exchanges if they hold stocks of relatively
saleable goods. Traders begin to exchange the fruits of their labor for more
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saleable goods which could in turn be traded for what the traders ultimately
desire. As this process of indirect exchange expands, traders begin to converge
on an increasingly smaller number of goods as media of exchange as they
gradually discover (via market successes and failures) the degree of salability
of the various media. Eventually one good emerges as the dominant, or
generally accepted, medium of exchange.
The advantage of a single medium of exchange is that it serves as a socially
accessible reckoning point for appraising value. Beyond the mere simplification
of prices from the multiple trading prices of barter to a single money price
for each good, the development of money enables producers to calculate past
costs and revenues and project possible future ones using double-entry
bookkeeping and the other tools of economic calculation. As individuals make
buying and selling decisions in the market, their subjective knowledge and
preferences are embedded into prices via the exchange of money for goods.
In addition, as the use of money more completely permeates economic
interaction, it becomes normal for actors to begin to conceive of their economic
actions in terms of monetarily constituted prices. Just as when one has mastered
a language, one begins to think in that language, so does economic action
become constituted in money] In fully developed monetary economies,
virtually all actions and exchanges are made through the medium of money.
In the end we have no better way to communicate the tacit forms of knowledge
that underlie the preferences and hunches of consumers and producers.
• In response to this line of argument, Geoff Hodgson (1992, p. 406) claims
that the analogy between the evolution of money and the evolution of language
does not hold because the incentives to deviate from monetary "norms" are
greater (e.g., seignorage from debasement) than those for linguistic norms,
creating path-dependent inefficiencies. Thus language requires little if any
hierarchical regulation, although money may. It should be noted that the
validity of this argument depends on Hodgson's prior claim that unregulated
private exchanges carry a significant likelihood of not generating a usable
generally accepted medium of exchange due to a lack of safeguards against
the incursion of debased media of exchange. If such non-state safeguards do
exist, then they would reinforce the social norm of the usable moneys, much
 Money, Money Prices, and the 5ocialist Calculation Debate 65

as the "safeguard" of the desire to be intelligible reinforces linguistic usage.

Hodgson also assumes that markets are to be understood as "atomistic,"
presumably in the sense of perfect competition, and therefore excluding what
he calls "strong encompassing institutions" (1992, p. 405). However, markets
need not be understood this way, and are perfectly compatible with such
institutions as long as they have emerged from the market process itself. As
to whether the state or market (potentially including strong encompassing
institutions such as a group of large banks) is more likely to prevent debasement
and monetary chaos, I would suggest that historically the state has been far
more guilty of this offense than private traders, vindicating the Menger/
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Austrian story. 8 In addition, a state monopoly over the monetary unit gives
its potential del~asement a pervasiveness unmatchable by any single private
producer or trader.
If the analogy between money and language is a valid one, it should be clear
that viewing monetary exchange as a social communication process is an
extension of the Hayekian view of prices as knowledge conveyors and
competition as a discovery procedure (Hayek 1945, 1978).9 Those views, of
course, were first articulated during and just after the socialist calculation
debate. A closer focus on money enables us to more clearly understand the
role of prices as knowledge conveyors. First, prices can be analogized to words.
If the array of actual money prices in the market is a constellation of meaning
that emerges from the communicative process of monetary exchange, then
individual prices can be understood to be like words that are both results and
formers of that process. What the philosopher Hans-Georg Gadamer (1985,
p. 388) says of language can easily be applied to prices:

[T]he universal concept that is meant by the meaning of the word is enriched by the
particular viewof an object,so that what emergesis a new, more specific,word formation
whichdoes morejusticeto the particularfeaturesof the object.Just as speechimpliesthe
use of pre-establishedwordswhichhavetheir universalmeanings,thereis at the sametime
a constantprocessof conceptformationby meansof whichthe lifeof a languagedevelops.

In much the same way that all speech acts require a background of established
meaning, so do actions in the market require a background of existing prices.
In addition, just as any given act of speech will add to the meaning of a word
by "enriching [it with] the particular view of an object," so do acts of exchange
"enrich" the meaning of money prices by adding the knowledge of the
exchangers. The meaning of prices, like the meaning of words, are the
unplanned outcomes of knowledge-embedding acts of exchange. Although
specific individuals and firms do "intend" existing money prices day-to-day,
the meaning of those prices is an unintended result of a complex, multisided,
interpretive process among various other buyers and sellers in the market.
What matters for economic calculation is precisely the meaning of existing
 66 STEVEN HORWITZ

prices and how well they reflect the judgments of the various market
participants.
Viewing money as a language also supports the Austrian ease against
planning. As many philosophers have argued, there is no way that we can
escape the fact that our thoughts and speech are constituted in language. To
some, that is a tragedy because the power embodied in language conceals some
objective reality from our sight. Those who wish to abolish money prices and
the market are making a similar complaint in trying to discover some economic
reality lying behind the money forms of the market. What Gadamer (1967)
says of those who look for critiques of language from the "outside" is applicable
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to the search for Archimedean points to assess value:

[Tlhere is no societal reality, with all its concrete forces, that does not bring itself to
representation in a consciousness that is linguistically articulated. Reality does not happen
'behind the back' of language; it happens rather behind the backs of those who live in the
subjective opinion that they have understood 'the world' (or can no longer understand it);
that is, reality happens precisely within language (p. 35, emphasis in original).

We can no more plan an economy in natura or on the basis of labor times

than we can communicate without the use of languageJ ° To flesh out this
argument in more detail, we turn to three different proposals for planning and
assess them from the perspective outlined previously.

III. MONEY PRICES AND THE CRITIQUE OF PLANNING

Marxian economic planning, Lange's general equilibrium market socialism,

and Cottrell and Cockshott's labor time proposal are all looking for some kind
of Archimedean point from which to assess value without recourse to monetary
calculation. However, as was pointed out, money, like language, does not
permit such a point. Economic behavior must be constituted in money, just
as our thought processes must be constituted in language. 11 The
communication of economic knowledge (i.e., knowing what projects are
rational from an economic standpoint) requires a medium of communication
beyond natural language, and that is what money and money prices provide.

A. Marx~2

Marx (1971, p. 71) also recognized the potential analogy of money and
language, but dismissed it:

It is no less false to compare money with language. It is not the case that ideas are transmuted
in language in such a way that their particular nature disappears and their social character
 Money, Money Prices, and the Socialist Calculation Debate 67

exists alongside them in language, as price exists alongside goods. Ideas do not exist apart
from language.

Marx correctly understood the relationship between language and ideas but
did not see value and money in the same way. He rightly argued that ideas
do not exist extra-linguistically, but he missed the fact that economic value
does not exist extra-monetarily. Marx wanted to argue that the commodity
mode of production masks the true value of economic goods by endowing them
with an ultimately false monetary exchange value. In a society not based on
monetary exchange, we would know the real value (based on socially necessary
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labor time) of human creations. This "real" value lies behind the veil of
monetary exchange in the marketplace.
Marx's argument that value can be known outside of money seems
predicated on the feasibility of the socialist future, that is, he could imagine
a viable economic system organized around those nonmonetary values. What
eliminated the possibility of Marx's Arehimedean point was the triumph of
subjectivism over the labor theory of value. By holding the labor theory of
value, Marx could believe there was a point of view outside of money prices
by which to assess value. Once we admit, however, that economic value, as
a form of meaning, is a product of the human mind, then it is futile to look
for a measure of value outside of human action in the market. Marx wanted
an objective theory of value: the amount of labor power socially necessary for
production. But value is represented by (or in Mises's words "consists in") the
amount of money that people choose to part with to obtain the subjectively
appraised expected utility of what they purchase. If we are to have rational
economic calculation, we cannot dispense with money.
Mises's original critique can be expanded by a subjectivist view of money.
Marx did not recognize the knowledge problem faced by planners because he
believed that the knowledge they would need would be the socially necessary
labor time for useful goods. As the Austrian critique of planning makes clear,
however, it is the subjective knowledge of market participants that determines
value and that knowledge cannot be objectively accessed, as labor time might
be. Such knowledge can only be made socially available through the language
of money and money prices. Money is the means by which the knowledge
needed for economic calculation is socially utilized, because that knowledge
(including relative labor costs) becomes embedded in the price system through
concrete acts of monetary exchange. There is no way outside of monetary
exchange to come to know value, and as a result, there is no way for a central
planner to accurately determine the economic rationality of various production
processes.
Money is necessary for the dialogic process that forms capital and capital
values, and that helps determine which means of production should be applied
to which consumer goods. The constant flux of the capital structure is the result
 68 STEVEN HORWITZ

of knowledge-communicating monetary exchanges in the market process. The

advantage of markets over planning is that they incorporate the contextual
knowledge of more people, enabling markets to generate results that satisfy
more people. As in other dialogic processes, meaning/value cannot be defined
before the process itself, rather it emerges as a social resultant of the pushes
and pulls of persuasion and interpretation and other communication processes.
The value of capital goods, and their appropriateness in various processes of
production, can only be constituted through the competitive process of
monetary exchange. 13 This requires private property in the means of
production and an open market for their exchange against a generally accepted
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medium of exchange, in contrast to virtually all proposals for planning,

especially Marx's.

B. Lange

In addition to strengthening Mises's critique of central planning, viewing

money as a language can also help reveal the flaws in the Lange-type market
socialist schemes. The key to Lange's criticism of Mises was the Wicksteedian
notion of prices as "terms on which alternatives are offered." Like Marx, Lange
was in search of an Archimedean point from which the Central Planning Board
could adjudicate value. Rather than the labor theory of value, the bedrock
of classical economics, Lange opts for general equilibrium theory, the bedrock
of neoclassical economics. Like Marx's, Lange's planning board tries to go
outside of subjectivism and monetarily-constituted market prices to assess
value.
The problem with Lange's "terms" is that while they do indicate tradeoffs
available, they lack a context through which those tradeoffs can be
meaningfully interpreted. The Central Planning Board can declare the price
of a good to be anything it wants, but that act does not endow the price with
the social meaning necessary for it to serve its purpose as a communicator of
knowledge. One could define a new word, say "gorkle," as "a dark shade of
red," but unless others have some context or some set of words or meanings
through which "gorkle" can be understood, the word is meaningless. Words
require a linguistic history and context in order to be rendered intelligible.
Consider what it means to enclose a word in quotation marks. By doing
so, we are holding the meaning of the quoted word in doubt. However, we
cannot do that for every word (or even some large number of words) in a
sentence. If we do, there is no context for understanding any of the quoted
words. If only one such word is quoted then we can form interpretations of
its meaning through the context provided by the rest of the sentence. The more
words we quote, the harder it is to attach meaning to the highlighted words.
Although Lange does allow the Central Planning Board to start with
historical prices, the prices the board will set over time are still like words in
 Money, Money Prices, and the Socialist Calculation Debate 69

quotation marks. Because Lange wanted all prices, or at least the prices of
all-important capital goods, to be constructed outside of a process of monetary
exchange, they are far less meaningful to entrepreneurs and consumers than
are market-generated money prices. There is no economic equivalent of "the
rest of the sentence" to provide a context of meaning. Lange (1936, p. 80) was
correct to recognize the need for an "objective price structure," but he claimed
that retaining "the parametric function of prices" would provide one; that is,
if the producers treated prices as given, then those prices would be sufficient
for calculation. If the CPB should happen to stumble across the general
equilibrium price vector, then it perhaps could do what Lange thinks it can.
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The problem is in getting there. By forcing producers to treat prices as

parameters, much of the contribution that producers can make to the price
formation process is eliminated. Although information about excess supplies
is important, producers have far more knowledge to contribute to the pricing
process, much of it tacit, that cannot be captured by statistical reports on
inventories and sales. If the CPB does not hit the general equilibrium price
vector from the start, it will have a very difficult time ever getting there precisely
because meaningful price formation processes require the active participation
of persons on both sides of the market. This dialogic process is cut short by
mandating parametric prices.
The formation of prices through concrete choices is a dialogic process that
creates, discovers, and reflects knowledge. To deny actors a role in this
economic dialogue by assuming that prices have to be taken as parameters
prevents the market from endowing prices with meaning, and removes the
context necessary for others to interpret individual prices and projects. Lange's
insistence on parametric prices is what makes his scheme "general equilibrium"
market socialism. The criticisms that Austrians, such as Kirzner (1973), have
made of general eqnilibrium's inability to explain price movements can be
modified to apply to Lange. Price formation requires a context of meaning
that can only emerge from some kind of dialogic process. For Kirzner, the
alertness of entrepreneurs to discrepancies in the price structure, deriving from
knowledge differentials, drives the movement of prices. The formation of prices
is a continual interplay between entrepreneurs and consumers taking existing
prices as momentary givens and the changing of those prices due to the resulting
acts of entrepreneurship and purchase.
Money prices are continually being reinterpreted through acts of
entrepreneurship by all of those who make use of them. This is how prices
change and provide meaning to market actors. The problem with the Lange-
type proposals is that although the Central Planning Board is adjusting prices
in what they believe (assuming all else remains equal) is generally the right
direction, the knowledge they possess is only a fraction of what they would
need to know to get the price right. The Austrian critique can be seen as arguing
that actual monetary exchanges will generate more of the needed knowledge
 70 STEVENHORWITZ

(although not the perfect amount) and thus hasten the processes of adjustment
in disequilibrium. 14 More knowledge will be generated in the market because
monetary exchange can register the subjective evaluations of a wider group
of people, and do so more accurately, than the planning board. Kirzner's theory
of entrepreneurship can be interpreted as a dialogic (in the sense of involving
the full participation of actors on both sides of the market) conception of price
formation that can be compared to the monological and therefore meaningless
parametric prices of general equilibrium market socialism. Parametric pricing
prevents the entrepreneurial activity necessary for the dialogic development
of a context of meaning out of which the intelligibility of any particular price
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can be determined. ~5 Attempting to impose a Lange-type market socialist

scheme would seriously restrict the speed and accuracy of disequilibrium price
adjustments and would dramatically hinder the efficacy of market production.
Some confusion here may be due to the idea of treating prices as "data."
In one sense this is accurate, as entrepreneurs use them as "inputs" into their
determination of the use of capital and their expected profits or losses.
However, they are not objective, unambiguous pieces of information. Prices
are more like signs or symbols that result from human interpretive processes
and, themselves, require further interpretation to be meaningful. Even the most
objective of data is not really "data" until someone decides that it is useful
for something.
Lange-type schemes fail because they cannot provide the context of meaning
required for the effective use of prices for economic calculation. The semiotic
function of prices can only arise out of specific acts of monetary exchange by
economic actors. Prices conceived only as the "terms on which alternatives are
offered" are most likely going to be irrelevant for rational economic calculation
because they lack this context of interpretation. Only monetary exchange can
provide the intersubjective context necessary to give prices meaning and allow
rational economic calculation to take place.

C. Cottrell and Cockshott

There are several arguments made by Cottrell and Cockshott that can be
explored from the perspective of the communicative function of monetary
exchange. CottreU and Cockshott try to go beyond the earlier defenses of
planning by first going back and trying to resuscitate the notion of calculating
production in terms of labor time and second, by linking such a calculation
process to recent advances in computational technology that might make such
complex calculations possible. Specifically, they link their ideas to D.O. Hebb's
theory of neural nets which provides the analytical underpinnings for the
feasibility of their computation argument.
Before turning to the narrower issue of calculation they raise, it is important
to note an irony in their use of Hebb's work on neural nets. Although the main
 Money, Money Prices, and the Socialist Calculation Debate 71

target of their argument is Mises's original calculation article, Cottrell and

Cockshott claim to discuss arguments made "from the Austrian point of view."
With that in mind, there is surprisingly little from Hayek or Lavoie directly
on the epistemological issues that both emphasized. This absence is explicable
when we note that, as we shall explore subsequently, Cottrell and Cockshott
treat as a computational issue what is really an epistemological one. 1~ The
relevance of this to Hebb's work is that the central argument of Hayek's major
contribution to theoretical psychology, The Sensory Order (1952), which also
underlies his epistemological perspective on markets and planning, is parallel
to Hebb's work. ~7 As Hayek notes in the preface (1952, p. viii), speaking of
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Hebb's Organization of Behavior:

[it]appearedwhenthe finalversionof the presentbookwas practicallyfinished. That work

contains a theory of sensation which in many respectsis similar to the one expounded
here.... [Tlhetwo books,I hope,are complementaryrather than coveringthe sameground.

The theme of Hayek's work on the mind was that the very complexity of the
mind prevented human beings from completely understanding its workings.
The best we could do, analogously to the social world, is understand the general
principles by which it operated. These limits also implied that "the capacity
of any explaining agent must be limited to objects with a structure possessing
a degree of complexity lower than its own" (1952, p. 185).
The relevance of this argument for the calculation debate should be clear.
If we are unable to exhaustively explain our own minds, "this would imply
an inherent limitation of our possible explicit knowledge" (Hayek 1967, p. 60).
To the extent that proposals like Cottrell and Cockshott's rely on our ability
to communicate explicit knowledge to a planning board, they are likely to fail
due to the limits of the explicitly communicable. Although Cottrell and
Cockshott see the work of Hebb and others as providing the calculational
power to solve for labor values, that same line of inquiry also reveals the
complexity of the human mind and the limits to our ability to provide the
objective data that such calculations would require.
The confusion of the computational and epistemological arguments becomes
clear where Cottrell and Cockshott (1993, p. 90) try to counter what they
perceive to be Mises's and Hayek's view that planners will not have the "full
and up-to-date information on production possibilities which they need." They
dismiss this argument by claiming that modern communication and data
facilities render this obsolete. They next tackle Lavoie's argument that the issue,
in their interpretation of Lavoie, is one of data"creation" not "collection." They
dismiss Lavoie by arguing that a socialist planning board could set aside some
resources for an "innovation budget" which would be used for experimentation
in new processes and products. They point out that such activities are an
"important social function" of capitalists, but see no reason (aside from a
 72 STEVEN HORWITZ

supposed "mystification of the entrepreneur" by Austrians) that a planning

board could not duplicate those functions.
The first problem here is that they miss Lavoie's point completely. The issue
of data creation (or discovery, as in Hayek [1978] and Kirzner [1989]), is about
how to draw out of market participants the bits of tacit knowledge that they
unknowingly possess. As Lavoie argues, the data required by the planners may
not even exist, and only the discovery process of competition can draw it out.
This is not a mystification of the entrepreneur. The argument is not that
entrepreneurs are somehow endowed with superhuman powers of reason or
insight, but that they act within a set o f institutions, namely markets with money
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prices, that provide them with information about what to do and how to do
it. 18 In addition, that same set of institutions provides incentives (in the form
of monetary profit) for doing the job well. Even further, the entrepreneurial
errors that do occur in markets (which are recognized by all Austrians) can
be taken advantage of by other entrepreneurs through the knowledge spread
by money prices.
Cottrell and Cockshott see Austrians as denying that "production function
information is...given once and for all" (1993, p. 90, fn. 15). That is true, but
it does not go far enough. The point is not just that production functions
change, but that production functions are not objectively knowable. ~9
Entrepreneurs are continually discovering and rediscovering the relationship
between inputs and outputs as they operate in a competitive market process.
Entrepreneurial activity continually creates and recreates production
"functions." The reason for the quote marks is that the whole notion of a
"function" presumes some stable relationship between inputs and outputs. It
is the objectivity and stability of that relationship that the Austrian critique
calls into question, which is precisely why planners cannot access that
information. Entrepreneurs have the advantage of the language of money prices
to at least provide them with ex ante and ex post information about the
economic efficiency of their perceived production options. Government funded
"innovation specialists" would lack this learning process with which to know
whether their innovations were economically efficient.
Cottrell and Cockshott's proposal to leave this innovation process to "a
combination of expert opinion and democratic methods" and relying on the
competition for reputation among experts also ignores the essence of the
Austrian critique. The problem is not a technical one of coming up with new
ideas (what are some ways of building a bridge?), but an economic problem
of sorting out those ideas by having some sense of their economic efficiency
(e.g., should we build a bridge, and if so, which among the technically feasible
methods costs the least?). Experts and voters can pick a project and pick a
method, but without genuine money prices (and the incentives they bring with
them) they have no way of knowing if they are using the least valuable resources
in doing so. In the absence of money prices, how would planners know not
 Money, Money Prices, and the Socialist Calculation Debate 73

to build bridges that are technically feasible but economically irrational? In

addition, what assurance is there that democratic procedures accurately
communicate subjective preferences? Moreover, the knowledge of experts is
precisely what the Austrians claim is insufficientfor economic coordination.
Expert knowledge is normally "scientific,"articulateknowledge, which is only
a fraction of the knowledge being utilized in thc market. 2°
The deeper issuc here is that Cottrcll and Cockshott are stillmissing the
point that the debate was never about the limitations of computation. Perhaps
modern computers could solve the billions of equations necessary to figure
either a gencral equilibrium price vcctor or a labor-timc price cquilibrium.
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Howevcr, doing so assumes that the information necessary to fillout those

equations exists in a form that can be fed into a computcr. This is the point
that Austrians (especially Hayck and Lavoie) have denied. The whole issue
of tacit knowledge, deriving from Hayek's aforementioned theory of mind,
suggests that not all,and in fact only a portion, of the data needed to solve
these equations objectively exists. Rather than claiming, as do Cottrell and
Cockshott, that this is an unscientific radical subjectivism (a claim which
rhetorically short-circuits discussion of the very real and very scientific
epistemological issues), Cottrell and Cockshott should be trying to address how
their scheme would be able to overcome the limits of articulation.
This problem is evident once again in Cottrell and Cockshott's (1993, p. 103)
argument that the necessary data for solving an inverse Leontief matrix could
be gathered through an "economy-wide network of cheap personal computers,"
and other communications technology. Again, this confuses the computational
problem with the epistemological one. Computers will not do the trick if the
relevant data cannot be put into statistics or language. Consistent with the
aggregative, mathematical approach Cottrell and Cockshott are taking, the use
of computers assumes that all the relevant economic knowledge is objective
data. On the contrary, the relevant information may be both contextual, in
that it only has meaning within an actual competitive process, or tacit, in that
it is linguistically inaccessible (Boettke 1993, p. 53). Despite their claim to
understanding Lavoie's argument, Cottrell and Cockshott overlook Lavoie's
(1985, p. 160if) clear distinction between Robbins's "computational" argument,
and Robbins's and Hayek's later points about knowledge and competition.
Without concrete acts of choice, using a generally accepted medium of
exchange, pseudo-market prices based on labor time will be meaningless for
economic calculation. Although CottreU and Cockshott are to be lauded for
going farther than other defenders of socialism in recognizing the complexity
of the task facing planners, they founder on the same ultimate point. That
complexity is not based on the limits of computation technology, but the limits
of the human mind. The argument here is that, although they do so imperfectly,
the money prices of the market serve as a communication process that no other
economic system can match. This point is not mere ideological shoe-pounding,
 74 STEVENHORWITZ

rather it is the conclusion drawn from an understanding of the human mind

and the role of social institutions in facilitating human mental processes such
as economic calculation.2| Unless we are consciously aware of all that we know,
and are able to communicate it linguistically, humanity must rely on trans-
personal institutions such as the market to facilitate economic coordination.
Attempts to override or eliminate the market are predicated on a
philosophically untenable hubris.

IV. CONCLUSION
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Like other defenders of planning before them, Cottrell and Cockshott overlook
the epistemological barriers to planning and the way in which monetary
exchange enables us to largely overcome those same barriers. ReaffLrming
money's role in the process of economic calculation and recognizing monetary
exchange as a social communication process shed new fight on the problems
with past planning proposals, from Marx to Lange to CottreU and Cockshott.
The hope that humans could consciously construct a more "rational" and more
"just" social order goes as far back as at least Plato. The problems that plague
such plans are not ones that will be solved with the growth in human intelligence
and technology that we have seen since. If anything, that very growth is a result
of the exact spontaneous social coordination processes that planners wish to
replace. The impossibility of economic planning is simply part and parcel of
the human condition, both then and now.

ACKNOWLEDGMENT
This paper is a revised version of one presented at the History of Economics Society
meetings, Notre Dame, IN, June 1995. The author thanks Jeffrey Young, David
Prychitko, Karen Vaughn, Bruce CaldweU, an anonymous referee, and participants at
the HES session for comments and suggestions.

NOTES
1. The charge of scientific unjustifiability is more than a bit ironic from two authors who
are ultimately defending a version of the labor theory of value.
2. The best overview of the debate is Lavoie (1985). See also Mises (1920, 1981, 1966), Hayek
(1935a, 1935b, 1940), Hoff(1981), Vaughn (1980), Murrell (1983), Boettke (1990, ch. 1), and Steele
(1992).
3. Mises°suse of the word impossible has been the subject of much debate (see Lavoie 1985,
p. 152ff). With the example in the text we might clarify this point. Clearly the Central Planning
Board can build bridges. It can marshal the resources and direct the project. Bridge building is
possible. What is not possible is to know (not just ex ante, but ex post as well), whether the bridge
was built without sacrificing more highly valued resources than necessary. The "impossibility"
 Money, Money Prices, and the Socialist Calculation Debate 75

refers to making economic decisions about the best way to build a bridge, not technological ones.
Money prices are ex ante guides to what will likely be rational and profits and losses are ex
post indicators of how rational one's actions were. The fact that government agencies and planners
actually get things done is not a sufficient response to Mises. One would have to show that they
did so in a more economically efficient way than the market would have.
4. For more on this issue, see Horwitz (1995), which also refers to the page numbers in the
first German edition of 1912. The standard English translations of The Theory of Money and
Credit are from the second German edition of 1924, after the calculation article was published.
However, the relevant remarks do appear in the 1912 German edition.
5. It is also worth noting that Mises continued this exact same line of argument in later works,
including Human Action (1966). The discussion of money and economic calculation in that book
appears not in the section on the problems with socialism, but in an earlier, broader, section on
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economic calculation.
6. See also Engels (1972, p. 68ff), where he discusses the parallel between the human
subordination of nature and the human subordination of social forces that will result under
socialism.
7. Therefore, contrary to Hodgson (1992, p. 407), a Mcngerian account of money's origin
can be consistentwith feedback effectson actors.One need not assume fixedtastesand preferences
throughout the entire evolution of monetary order. As the order cvolvcs it may indced causc
endogenous changes in tastesand preferences.
8. For an account of U.S. monetary history that cmphasizes thc role of tbe state in
manipulating the value of money for politicalpurposes, see Timbcrlake (1993).
9. For more on the communicative function of monetary exchange see Horwitz (1992b).
10. Of course limitedtypes of communication .mightbc possiblewithout language,forexample,
body movements and so forth.In thc same way, nonmonctary production might be possiblewithin
a small and homogeneous enough socialgroup (a Hayekian "organization").However, the analogy
of money and language suggests some fairlyclear limits to the size and complexity of such
endeavors.
II. In response to the comments of a referee,let me clarifythat by "economic behavior" I
mean what Mises (I966, pp. 232-234) referredto as "catallactic"or exchange activityon the market.
Thus the choices among alternativesthat characterizehuman action in general,what Mises would
put under the broader umbrella of"praxeology," need not be "constitutedin money." For example,
m y choice concerning which household chores to tackle on a Saturday morning is "economic"
in thc broad sense of praxeological,but not in the narrower sense of "catallactic,"as itdoes not
directlyinvolve market exchange. If economics is understood as a subset of praxeology, then the
claim that economic behavior must bc constitutedin money is less open to obvious objection.
These Misesian distinctionsare helpfulin demarcating the often fuzzy limitsbetween economics
proper and rational choice theory (or praxeology) more broadly. I thank Richard Ebeling for
somc helpfulelectroniccorrespondence on thisissue.
12. Portionsof the following two subsectionsare revisedversions of a discussionin Horwitz
(1992a, chapter 6).
13. See Buchanan (1982) for a broad statement of the idea that order is defined only in the
process of itsemergence.
14. In Kirzner's(1992) terminology, the induced variables(such as prices)can better track
the underlying variables(such as preferences).
15. See Kirzncr (1985, pp. 126-129) for more on the role of cntrepreneurshipin the context
of the calculationdebate.
16. This distinctionis made in Bocttke (1993, pp. 52-54) where he describes four different
problems of socialism: (I) property rights and incentives,(2) information and computational
complexity, (3) epistcmologicallimits,and (4) politicalorganization.
17. For more on the relationshipbetween Hayck's theory of mind and his socialtheory, see
 76 STEVEN HORWITZ

Butos and Yoppl (1993) and Horwitz (1994).

18. See Mises (1920, p. 120), "The entrepreneur's commercial attitude arises from his position
in the economic process and is lost with its disappearance."
19. We should be careful here to distinguish technologicalproduction functions from economic
ones. Information about how much heat is necessary to melt gold might well be objectively
knowable, but the production decision about which is the most economically efficient way of
generating that heat (not to mention whether melting gold is even a good idea) is precisely what
entrepreneurs are continually trying to discover in a competitive market. The issue is under what
circumstances this discovery process is best able to take place. See Hayek (1940, p. 196): "In the
discussion of this sort of problem.., the question is frequently treated as if the costs curves were
objectively given facts. What is forgotten is that the method which under given conditions is the
cheapest, is a thing which has to be discovered, and to be discovered anew, sometimes almost
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from day to day, by the entrepreneur .... " 20. Cottrell and Cockshott also seem blissfully
unaware of the public choice literature. It seems a stretch to believe that citizens in a democratic
society either could or would wish to be sufficiently informed to pass judgment on production
decisions. This is not an elitist argument; it simply recognizes the existence of rational ignorance.
Even if there were a process by which such information could be spread, it would surely be
dominated by those groups who stand to gain concentrated benefits from the adoption of various
proposals. When unable to make rational economic decision in the absence of market prices,
planners will turn to political rationales to justify their decisions. This was the theme in Hayek
(1944), as explored by Boettke (1995).
21. For a discussion of Austrian economics as a series of nonnormative propositions, see Rizzo
(1992).

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