The political revolutions of 1989–91 in Central and Eastern Europe and the former Soviet Union have created a new historical conjuncture in which the very future of the socialist project has been called into question.footnote1 Socialists of all varieties have been affected by a profound loss of confidence and lowering of sights, including those who had long rejected even the term ‘actually existing socialism’ as an acceptable description of the Soviet and East European experience. The underlying reason for this loss of confidence is that the historical conjuncture coincides with a deep-seated crisis of socialist theory, above all of the theory of a socialist economy.

The classical Marxist model of a socialist economy may be characterized in terms of a dichotomy between capitalism and socialism in the two dimensions of ownership and coordinating mechanism. Under socialism, capitalist private ownership of the means of production is replaced by social ownership; theoperation of market forces is replaced by socialist economic planning. Social ownership enables exploitation to be abolished; socialist economic planning enables the anarchy of production to be replaced by conscious social control of the economy. The two dimensions are connected in that market forces operate through the interaction of numerous separate decisions over the use of discrete parcels of society’s productive resources, which are therefore de facto privately owned whatever the de jure position, whereas economic planning involves a single set of coordinated decisions over the use of society’s productive resources as a whole, which necessarily precludes private ownership and fragmented decision making.footnote2

This classical Marxist model, interpreted as the centralized planning of all production decisions, has been discredited by the Soviet experience. At the same time, the revival in the 1980s of the socialist economic calculation debate that had first taken place in the 1920s and 1930s provided theoretical support for the proposition that central planning, indeed any society-wide economic planning, is necessarily inefficient and strictly speaking impossible. Any socialist economic model today must take account of the Soviet experience and, even more importantly, address the theoretical issues that have been identified in the revived calculation debate.footnote3 These theoretical issues in relation to the efficiency and/or possibility of socialism are part of the more general theoretical climate, associated with the rise of the neo-liberal Right, which challenges the desirability of any form of collective action and celebrates the superiority of ‘spontaneous order’ over conscious social action.footnote4

The debate on the possibility of rational economic calculation in a socialist economic system, defined as a system in which the means of production are publicly owned, was effectively initiated by Barone in 1908, gathered momentum in the German literature during the 1920s, continued in the English literature during the 1930s, and then died out in the 1940s, after the summing-up article by Bergson in 1948.footnote5 The two principal sides in the debate were economists from the Austrian school, who denied the possibility of rational calculation under socialism, and socialist economists arguing within the neoclassical paradigm, who defended such a possibility. Underlying the debate were not only different views on the desirability of capitalism and socialism, but also different epistemological and methodological approaches. These differences of approach were, however, largely implicit at the time and it has been argued that the distinctive Austrian position only crystallized as a result of the debate itself and subsequent reflection on it.footnote6 In the neoclassical paradigm, knowledge is conceptualized as being objective, with production possibilities, costs and revenues constituting knowable objective constraints given which economic agents make maximizing decisions. In the Austrian school, by contrast, knowledge is conceptualized as being subjective. Instead of being taken as given for the purpose of decision making, subjective—or ‘tacit’—knowledge must be discovered through action, through competitive entrepreneurial activity in the market. The emphasis on the centrality of the ‘discovery’ process is the hallmark of the modern Austrian school and the basis of its reworking of the debate on the possibility of rational calculation under socialism which gathered pace during the 1980s. It is the foundation of the modern Austrians’ claim that the impossibility of a rational socialist economic system has been established not just historically but, more significantly, also theoretically.

In the debate, the role of the market in making rational economic calculation possible has been discussed under three headings—calculation, motivation and discovery. In 1920 Mises argued that economic calculation is only possible in a free-market system, based on private property, which establishes the exchange value of all goods and services and thus provides economic agents with the necessary information, in the form of prices, for them to decide how to act.footnote7 It then emerged that Barone had already refuted Mises’s argument by demonstrating that a socialist economy could achieve the same level of efficiency as its capitalist counterpart by solving the set of simultaneous equations, based on production and utility functions, that describes the interdependent behaviour of the economic actors in the system.footnote8 Hayek’s 1935 contribution in response to this has historically been interpreted as arguing that, although Barone’s analytic solution is conceivable in theory, it is impossible in practice, given both the amount of information that would have to be collected centrally and the scale of the computation required to solve the simultaneous equations.footnote9 Lange responded to Hayek’s argument by producing his seminal model of market socialism, drawing on earlier decentralized models.footnote10