Comparative Economic Systems

33 Comparative economic

sYstems

David L. Prychitko

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Austrian economists are rather well known for their defense of capitai:'r and criticism of planning and intervention. Comparative economic systen'i :' the comparative analysis of a society's fundamental organizational princi: _ has emerged as a popular, and powerful, field of study within contempo:,:. Austrian economics. Here, many of the Austrian school's key theore':..:,: concepts regarding prices and knowledge, profit and loss accounting.

rivalrous competition have been rigorously applied to examine the nature -:': logic of capitalism, socialism and interventionism. While the Austrians h.' : developed a theory of comparative economic systems over the past se\ 3r.:1 decadei, only recently, since the collapse of 'really existing socialism'in :-': fbrmer soviet Union and Eastern Europe, has their analysis - particularl\ : l the problems of rational planning under socialism - become accepted :, mainstream economists.

Roots of comparative systems analysis The field of comparative economic systems is neither an Austrian inventii: nor unique to the school. Economists of all stripes have studied the thec:-' to r: and practice of capitalist and socialist systems. Its roots travel back Adbelieve, commonly nineteenth century. If, as contemporary economists Smith's An Inquiry into the Nature and causes of the wealth of Nari'-'" off'ers the flrst attempt to study the economics of free market capitali':(which Smith dubbed the 'system of natural liberty'), then Karl Marx ar-i-ably provides the flrst major 'comparative' analysis: most notably, Man ' Das kapital established both a critical (if not hostile and damning) analr.-' of capitalism and also an implicit, general vision of socialist economic :: ganization.

Marx's inquiry suggests that society may be founded upon three systerr''cally distinct organizational principles: tradition, market or plan. These c":egoiical distinctions have, with some important exceptions to be discusse: later, been generally accepted by contemporary comparative systems econ':* : mists from both the neoclassical school (Grossman, 1963, for example) ar sociel' the Austrian school (Lavoie, 1985, for example). A tradition-based to 'r': such as primitive communal groups or hunter-gatherer tribes, tends (very sir: organized along the following institutions: common ownership of if an. little, plJ; *eons of production; production for direct use; barter; 224

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ComParative economic sYStems 225

:iYision of labor (at best, along gender lines without regard to rationality or :iflciency); a consistent aversion to risk-taking behavior. Alternatively, a ::arket-based society (capitalism) affords a very different organizational logic' soci-\ccording to Marx, in fact, the market is the antithesis of traditional of means advanced) :tr'.) De facto private ownership of (technologically :roduction replaces common ownership; commodity production and exchange l.iipes out production for direct use and face-to-face bartering; both a highly :echnical und u hi"ru..hical division of labor is created in the workplace, and r spontaneous, undesigned social division oflabor emerges with the developrent of labor markets and specialized industrial production. The market :\stem requires a panoply of entrepreneurial risk taking, in the form of jiscovering new avenues of investment, alertness to economic error, and

echnological and organizational innovation. Money - a universal medium of :rchange - provides the basis for appraising the relative scarcities of conform of competiti ve . ,-". jood, and the means of production (capital) in the rices and profit-loss accounting. For Mari, the market system is ultimately 'anarchic', based upon an 'anar,ny of production" in both a descriptive and pejorative sense. Marx argued ..at the market system is an undesigned, uncontrollable series of commodity sake of personal gain and profit (here essentially agreeing =rchanges for the

for Marx, .,. ittr Smith's descriptive 'invisible hand' phrase). Consequently, :re market would be plagued with ever-increasing bouts of recessions and

:epression, economic chaos and, ultimately, utter collapse (a pejorative sense ,i ,anarchy of production' which has no counterpart in Smith's 'invisible

just as sure as market has abolished -rnd,). Hence Marx predicted that, principles, so too, would the plan organizational over battle the .:adition in type of economic system: socialfinal a in usher and market :rtinguish the

.m. (nmploying the dialectic, Marx tried to demonstrate that socialism rep:esented the inevitable synthesis between primitive communal society - traand industrial capitalism - market.) Socialism is a system based upon de facto public or social ownership of he means of production, the abolition of a hierarchical division of labor in

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.re enterprise and a consciously organized social division of labor' Under

:Ltcialism, money, competitive pricing and profit-loss accounting would be ::stroyed. The 'anarchy of production' would be replaced outright with a .:ientifically settled, comprehensive economic plan. Tradition, market and :lan thus emerge, with Marx, as three conceptual systems with unique or-

This is not to say that people within a market-based -:rnizational togics. .r stem, for example, fail to be influenced by certain customs and traditions, rr fail to create and pursue plans. Rather (and this is the point of capitalizing :ach system) , the underlying economic principle upon which the plans and :urposes of people are coordinated within the market - a competitive and

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spontaneous profit-loss system - is conceptually distinct from a societl organized by a scientific, comprehensive plan or by a pre-modern, cooperative pattern offace-to-face bartering, essential to a tradition system.

Austrian contributions to comparative systems analysis Tradition-based economies have been interpreted by most economists, including Austrians, as having only historical-anthropological relevance (for understanding the emergence of civilization, for example), while offering little or nothing to the grand debate over economic organization under modernity. The traditional economy, in other words, has generally been relegated to a conceptual organizational scheme with little contemporary empirical relevance. Economists who have worked within the field of comparative systems have, for the most part, directed their attention to the question oi whether a plan-based system (which we shall subsequently refer to as socialism) can achieve the same, if not a higher, level of economic rationality or efficiency as a market-based system (which shall now be referred to as simply capitalism). On this question, the conclusions drawn by Austrian economists have been notoriously consistent. Shortly following Eugen Bcihm-Bawerk's (1896) relentless critique of the Marxian labor theory of value, the chief Austriar. insight in comparative systems theory - that socialism will fail to calculare rationally the relative scarcities of goods and resources, and must therefore fail in practice - first surfaced in Friedrich von Wieser's Theorie der

gesellschaftlichen Wirtschaft (1914). Wieser had claimed that plans

in :

capitalist system can be coordinated far more effectively by thousands and millions of eyes, exerting as many wills they will be balanced, one against the other, far more accurately than if all thes: actions, like some complex mechanism, had to be guided and directed by som; superior control. A central prompter of this sort could never be informed c: countless possibilities, to be met with in every case, as regards the utmost utilirr to be derived from given circumstances, or the best steps to be taken for futui; advancement and progress. (pp. 396-7)

But the locus classicrzs of the Austrian criticism of socialism appears i:. Mises's 1920 essay, 'Die Wirtschaftsrechnung im sozialistischer. Gemeinwesen' (translated as 'Economic Calculation in the Socialist Cornmonwealth'). The core of Mises's argument can be stated concisely: (1) socialism aspires to replace private ownership of the means of production with socir ownership, and seeks to destroy spontaneous (anarchic) market exchange ::favor of central economic planning; (2) therefore, the means of productio.-, (that is, higher order capital goods) will not be produced for, and exchange:

ithin, a competitive marke: ::-,:, :titively established pnce. - :^:aise the relative scarcitie: : : .: .:.erefore the primary ecor..\:-., i -rmic planning - will be rm:.:,.-: ::onomic planning is dispers;: ":: : effectively collected anC -,:.: .,,

.

llevek would later emphasize _ !-:

:irticular to time and place ),1::: -r,,'oie, 1986) have argued ri.: ':.: -.:rket pricing and profit lo.s .:;. .:e. and have thereby devel::.:: : , : to defend their claim thar ::... r-:

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\lises maintained thar. 3r -i:' : )20, p. 109; also see NIise' - :lrn may not pose a problem r: :. : - :ny theory that depends u:- :_ -: end of scarcity, or full an: ,--::

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. . e been more aware of the _.-:.: ..orv Lange's lead (Schumle:::

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The collapse of the Sor,iet L-:-: -:Jest that there is empirical :.- .;: '.' :rdled some outside inre:=,: -.:ems analysis (see Kornat. -:': :::raps ironically, suggest rhe: :.1- r --: critically re-evaluated as ',:. i :.: --: -\ustrians have claimed rri: ).,: - ::.,-eptual possibility, void oi e:::

"--,'pted the original Marxirn >.:':"- , : demonstrated that, for a,, :..: : .:-based system falls far shc:: _-:

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.:. After all, traditional ecc:.:,, -..e a successfully funcrion::- i ,

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Comparative economic systems 227 .,,ithin, a competitive market process; (3) without this market process, com_ - those that normally allow individuals to ap:raise the relative scarcities of the means of production will be erased; (4) :herefore the primary economic goal of a socialist system rational eco:omic planning - will be impossible. The knowledge required for successful :;onomic planning is dispersed among individuals within society, and cannot :e effectively collected and used without competitive market pricing. As Hayek would later emphasize (1945), the relevant information is contextual, :articular to time and place. More recently, younger Austrians (especially T avoie, 1986) have argued that the type of knowledge supplied by rivalrous rarket pricing and profit loss accounting is predominantly 'tacit' or inarticu-rte, and have thereby developed a phenomenological-hermeneutical analy.is to defend their claim that this knowledge cannot be collected by even the nost advanced computer systems. Mises maintained that, at best, socialism 'is only conceptually possible' 1920,p.109; also see Mises, 1927,pp.i0-75). Rational economic calcula_ :ron may not pose a problem in the pure theory of a static socialist society (or -n any theory that depends upon such extreme assumptions as, for instance, :re end of scarcity, or full and complete information). Nevertheless, Austrian ::onomists maintain that calculation is an eminently practical problem, one .', hich must lead to the downfall of real-world socialist planning. (The Austri:ns were not, of course, free from criticism or misunderstanding. Soon oskar ' ange would attempt to answer Mises's claim by erecting a neoclassical rodel of 'market socialism' (Lange, 1936). Joseph Schumpeter, who should :ave been more aware of the intricacies of the Austrian position, would later :ollow Lange's lead (Schumpeter, 1942). The confused socialist calculation

:etitively established prices

:ebate had resulted.) The collapse of the Soviet union and the Eastern Bloc after 19g9 seems to .uggest that there is empirical power to the Austrian analysis, and has already

-ekindled some outside interest in the school's approach to comparative :\ stems analysis (see Kornai, 1990, for example). But this collapse may also, :erhaps ironically, suggest that the Austrian analysis will need to be clarified .nd critically re-evaluated as we move into the next century. why is this so? rhe Austrians have claimed that socialism, as a plan-based system, is only a -'onceptual possibility, void of empirical viability. Hence, although they have .ccepted the original Marxian systems schema of tradition-market-plan, they rave demonstrated that, for all practical purposes, the empirical status of a :lan-based system falls far short of that found even among traditional sys::ms. After all, traditional economies have existed at one time or another, ,i hile a successfully functioning socialist system is, according to Austrian :reory, a real-world impossibility. Here, the Austrian contribution to the --omparative systems literature is nothing short of radical, and arguably repre-

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,;to private proPs::. : *:

sents a tremendous intellectual feat, one which distinguishes Austrian econo-

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mists from Marxists and neoclassical comparative systems economists. Moreover, the Austrians have consistently criticized the notion of a potential .Third Way'- as proposed by models of market socialism, indicatire planning, redistributive welfare states, corporatism and the like. The Austrians have remained firm that market and plan are conceptually distinct economic systems, undergirded by different organizational logics. A notion of a 'third' system (barring tradition), which purports to 'combine' market and plan, is grounded on a logical confusion, and either collapses into a system oi central economic planning (as argued in Hayek, 1944, and Prychitko, 199 or remains a market-based system with mere state intervention (Mises, 1929: Littlechild, l9l9 ; Lav oie, 1985). Yet, if their analysis is correct, Austrians must ask themselves exactly what did collapse in the late 1980s and early 1990s. To be consistent, Austrian economists cannot claim sociali,sm finally collapsed, otherwise they face the embarrassing task of explaining how socialism - an economic system which they purport to be empirically impossible - lasted several decades, or indeed. how it lasted at all. Here lay a potential weakness of applied Austrian systems theory, for Austrian economists, unfortunately, are traditionally prone to commit this intellectual mistake. Michael Polanyi's (1957, p. 36) criticism ot Mises and Hayek is the most glaring:

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Of all the intellectual triumphs of the Communist regime - and they are vast - ;: seems to me the greatest is to have made these eminent and influential writer. [Mises and Hayek] so completely lose their heads. Could anything please th;: regime better than to hear itself proclaimed by its leading opponents as an omnipotent, omniscient, omnipresent socialist planner? That is precisely the picture oiitself which the regime was so desperately struggling to keep up. Such accusations supply the Soviet government with an incontestable 'testimony' of havin.achieved the impossible aspirations of socialism, when in fact it has simply set ul a system of state capitalism - a goal which leaves the regime next door to where :: started.

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ibliography

. ic. Peter J. (l'. /,rlA, Bo.ton h. '.s. PcterJ. (loo: Hir : .:trn. Crcgorr ' I c' :

.: rhe CLose of

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L October. . -.. F.A. r1911t.7i:, - .. ' , :r. F.A. (1945). Tr: - : '- . Septen.rber. .:. Jrnos 1 lggu . 7' i - r . --. Osker tlo-1o. : (ed.). :,:, Or ::incott . .. Don 11985 . \. ---.ishing Co.

. .. Don (lq8b'. T:. ', '. ' r.cJge'. C.r't1. .. ' "Don(19R6--' I .-:iJ.StcphcnC . -: ,i

To claim today that the collapse of the Soviet economy represents a collaps; of socialism (and a final vindication of the Austrian position) may simph prolong the above misunderstanding. Fortunately, some younger Austrians (such as Boettke, 1990, 1993 an; Lavoie, 19S6-7) and others sympathetic to the Austrian position (Robens. 1971, for example) have interpreted so-called socialist economies as marke: systems with a tremendous degree of state intervention. In this manner, socalled socialist economies differ in kind from a comprehensively plannec system because they crucially depend upon world market prices and a stupendous underground economy for scarce resources

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., Ludu,ig von ( l 9l - ,.-ttth|l.r.ren.rc ]1r1:'-; ' !' .- : . in F.A. Hrr-r

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' l/ Sr'r'lrt/i'"i - ' Lldtig ron r l 'ih;rnsr.Cilr: Sh.- : t- -;. . -"Ju ig r on , lLl . .1r \ork \crr ". .= \li.huclrlo)-. -: ,,r. DaYid L. (19:. '.: "" : . : n. Conn.:Cric' .t . \lerico

Press.

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Comparative economic sYstems 229

rcto private property relations in spite of a de jure socialist constitutional ramework.

But Austrians might now harbor a greater tendency to undermine the of their own analysis by interpreting the latest events in Eastern :urope as 'proof' of socialism's failure. Perhaps as the excitement over these :rrength

:--onomic reforms begins to wane, and new problems emerge, Austrian econo::lsts will be better prepared to interpret more carefully the history of inter.entionism in the twentieth century, while avoiding unnecessary scholarly - onfusion. See also: i:rpter 69: The socialist calculation debate; Chapter 77: The 'new' institutional economics'; rapter 64: The collapse of communism and post-communist reform; Chapter 74: Marxisms market processes

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Bibliography rrcrrke, Peter J. (1990), The Political Economy ol Soviet Socialism: The Formative

Years,

8

1928. Boston: Kluwer Academic. : -.ettke, Peter J. ( 1993), Wh1- Perestroika Failed, New York: Routledge. Karl Marx i,rhm-Bawerk, Eugen (1896), Zum Abschluss des Marxschen Systems, translated ,ind the Close oJ His System (1898); New York: Augustus Kelley' 1949. l:ossman, Gregory (1963), 'Notes for aTheory of the Command Economy', So,-iet Studies,15, III

x

2). October.

j:vek, F.A. (1944),The

Road to Setdom, Chicago: University ofChicago Press. :rr1ek, F.A. (19a5), 'The Use of Knowledge in Society', American Economic Reulew, XXXV,

i,

-l). September. ,rnai, Janos (1990), The Road to a Free Economy, New York: W.W. Norton.

in Benjamin -,nge, Oskar (1936), 'On the Economic Theory of Socialism', reprinted

E.

Lippincott (ed.), On the Eutnomic Theory oJ Sociall.rm, New York: McGraw-Hill' 1964. --r oie, Don (1985), National Economic Planning: What is Le.t'i?, Cambridge, Mass.: Ballinger Publishing Co.

as a Procedure for Discovery and conveyance of Inarticulate Knowledge', Comparative Economic Studies, 28, (1), spring

.r oie, Don ( 1986), 'The Market

-roie,Don(1986 7),'PoliticalandEconomiclllusionsofSocialism',CriticalReview'1.(l)' '.\

inter.

Insri-::tlechild, Stephen C. (1919), The Fallacy of'the Mixed Economy, San Francisco: Cato iute.

' i:ses, Ludwig von (1920), 'Die Wirlschaftsrechnung im sozialistischen Gemeinwesen', An:hiv .tir soz.ialwissenschafien,4T, translated as 'Economic Calculation in the Socialist Common..realth,, in F.A. Hayek (ed.), Collectivist Ecorutmit Planning: Critical Studies on the Po.r.sil,tlities ol Sot:iall.rm, (1935); Clifton, NJ: Augustus M. Kelley, 1975. ..1:.es, Ludwig von (1927), Liberalismus, translated as Liberalism: A socio-Econornic Exposi:rol, Kansas City: Sheed Andrews & McMeel, 1962. Ludwig von (1929), Kritik des lnterventionisma.s, translated as A Critique o.f lntenen"1:.es. ;rorrl.wt, New York: Arlington House, 1977. ::lenyi, Michael (1957), 'The Foolishness ofHistory', Encounter,9, (5), November. -:r chitko, Davirl L. (1991), Marxism and Workers' Sell-Management: The Essential Tension,

:

\\'estport, Conn.: Creenwood Press. r'ierts, Paul Craig (1971), Alienation and the Soviet Economy, Albuquerque: University of \erv Mexico Press.

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A. (1942), Capitalism, socialism, and Democracy, New York: Harper Row, 1976. Wieser, Friedrich von (1914), Theorie der gesellschaftlichen Wirtschaft, translated as So, Economics (1927); New York: Augustus Kelley, 1967. Schumpeter, Joseph

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