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Markets in the Name of Socialism

Stanford University Press

Contents

Preface................................................................................................................................viiList of Interviewees...................................................................................................................xiAcknowledgments........................................................................................................................xvIntroduction: Economists and Socialism.................................................................................................11 Neoclassical Economics and Socialism: From the Beginnings to 1953....................................................................172 A New Transnational Discussion among Economists in the 1950s.........................................................................503 Neoclassical Economics and Yugoslav Socialism........................................................................................764 Goulash Communism and Neoclassical Economics in Hungary..............................................................................1055 The International Left, the International Right, and the Study of Socialism in Italy.................................................1336 Market Socialism or Capitalism? The Transnational Critique of Neoclassical Economics and the Transitions of 1989.....................1577 Post-1989: How Transnational Socialism Became Neoliberalism without Ceasing to Exist.................................................189Conclusions............................................................................................................................215Notes..................................................................................................................................225Bibliography...........................................................................................................................269Index..................................................................................................................................309

Chapter One

Like most teachers of economic theory, I have found it quite worth while to spend some time studying any particular problem in hand from the standpoint of a socialist state.

Fred M. Taylor, Presidential Address to the 1928 annual meeting of the American Economic Association (1929: 1)

THE SCHOLARLY AND POPULAR LITERATURE has generally assumed that neoclassical economics lends ideological support to capitalism and seeks to discredit socialism. On the surface, neoclassical economics—the mainstream economics practiced in the United States and around the world, founded on the view that markets, free from outside intervention, are the most efficient way to allocate resources—certainly appears procapitalist and antisocialist. In fact, however, models of socialism, as well as of markets, lie at the core of neoclassical economics.

This chapter charts the development of neoclassical economics from its nineteenth-century origins in Western Europe, through its use in the Soviet Union, and up to the changes it underwent in the Cold War 1950s. Histories of economic thought do not usually recognize the role of socialism and socialists in neoclassical economics but rather relegate socialist economic thought to separate chapters or sections (for example, Ekelund and Hébert 1990; Niehans 1994). One exception to this treatment is the so-called socialist calculation debate. According to the standard narrative, in the early 1920s Austrian economist Ludwig von Mises published a devastating critique of socialism, arguing that an economy without money, markets, or prices would not allow rational economic calculation and therefore that socialism was impossible (for example, Ekelund and Hébert 1990: 575—577). In 1936, in this account, Oskar Lange responded to Mises with a neoclassical model of socialism, in which planners set prices and subsequently allow markets to adjust these prices. To Lange, this system allowed rational economic calculation and suggested the possibility of socialism. In response to Lange, Friedrich von Hayek then altered Mises's argument: A socialist economy would be inefficient, not impossible. Over the decades, different authors have claimed victory for each side (for example, Bergson 1948: 447; Lavoie 1985).

The fact that Lange first responded sixteen years after Mises made his initial salvo raises some questions about the nature of this "debate." Time, and potentially significant historical events, play almost no role in the conventional narrative about the debate. The standard narrative presents free market advocates challenging those who support central planning, a dichotomy that blends together the Soviet Union, socialism, central planning, Keynesianism, and almost any form of government intervention in the economy into an amorphous object opposed to the equally amorphous object of the free market capitalism somehow allied with (non-Marxist) economists. Right-wing activists have to this day used the "socialist calculation debate" to make broad ideological claims about socialism, capitalism, and the discipline of economics itself. Economists on both sides of the debate—including members of the Austrian School at the time and later the Chicago School—used neoclassical economics based, as we shall see, on socialist models. To better understand neoclassical economics, I have intentionally removed the "socialist calculation debate" and Keynesianism from their usual place at the center of the history of economics, a center that blinds most scholars to the fundamental importance of socialism to neoclassical economics as practiced from Chicago to Moscow, from Cambridge, Massachusetts, to Belgrade.

This chapter documents how a variety of socialisms became intertwined at the center of neoclassical economics. At first, the founders of neoclassical economics in the 1870s built their science on the assumption that pure competitive markets provided optimal results in production, exchange, and consumption. By the 1890s, neoclassical economists had developed the idea that the pure competitive market model and the centrally planned socialist model were mathematically equivalent. Both of these models lie at the center of neoclassical economics. Therefore, analyzing a centrally planned socialist economy provided new insights into neoclassical economics and markets and vice versa. The words of the American Economic Association president, Fred M. Taylor, quoted at the beginning of this chapter reflect this neoclassical methodological discovery. Using socialism as an analytical tool to develop neoclassical economics, however, did not necessarily mean that economists considered themselves socialists. In fact, many rejected or were quite critical of socialism.

While it might seem that economics in the socialist East and economics in the capitalist West were quite different, economists in the East and West both developed neoclassical economics within discussions of socialism. The formal, mathematical identity between competitive markets and centrally planned socialism suggested that actually existing socialism in the new Soviet Union would be relevant to neoclassical...