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Knowledge vs. Calculation

Tags Calculation and KnowledgePhilosophy and MethodologyPolitical Theory

On occasion I'll see someone try to smooth over the Mises-Hayek "dehomogenization" debate which argued whether and to what extent Mises's and Hayek's approaches to the impossibility of socialism differed. One side--what I'll call the Rothbardian or praxeological-Misesian view--sees Mises's insight as having to do with the use of money prices to serve as a cardinal unit for purposes of economic calculation. This approach is championed by Rothbard, Hoppe, Herbener, Salerno, Huelsmann, and others, and arguably Mises. This view also sees Hayek's contribution as different, and as possibly confused or flawed: that prices help to spread otherwise localized information through the economy, thus enabling efficient use of resources. The Hayekians tend to emphasize the knowledge or informational aspects of money, but also maintain that this is just "the other side of the coin" of Mises's insights.

See, e.g., Yeager, in Mises and Hayek on Calculation and Knowledge, "question[ing] the supposed distinction between calculation and knowledge problems." See also: Pete Boettke, Hayek and Market Socialism: Science, Ideology, and Public Policy (Don Lavoie [in Rivalry and Central Planning, 1985] argued that one must read Mises and Hayek's arguments as two sides of the same coin, and I follow him in this regard and will not dehomogenize their different contributions to the analysis of socialism"); also his Economic Calculation: The Austrian Contribution to Political Economy ("the essential argument that Mises and Hayek rose against socialist proposals--the problem of economic calculation--and their understanding of how the private property system affords monetary calculation are complementary contributions to economic theory").

Also see Steve Horwitz, Monetary Calculation and the Unintended Extended Order: The Misesian Microfoundations of the Hayekian Great Society ("An Austrian economics for the 21st century is going to have to rediscover those Misesian insights and more fully integrate them with Hayek's work on knowledge and coordination. ... a "praxeological" social scientist has both a Hayekian and a Misesian task: The Hayekian task is to recognize and describe the nature of the unplanned order that is to be explained, while the Misesian task is to describe the process by which intentional human action is guided such that it can produce that Hayekian order. ... The "de-homogenizers" have ... correctly identified microfoundations [including] the importance of monetary calculation and Mises's concept of "appraisement," but ... they ignore what seems to be the obvious relationship between those microfoundations and Hayek's vision of the social order. That is, they ignore that the outcome of the use of economic calculation by individual entrepreneurial actors and by firms and households is precisely the "use of knowledge in society" that characterizes the Hayekian spontaneous market order.").Also: Bob Murphy in a recent post wondered: "I don't understand why Salerno (and Kinsella and perhaps others too on their side of this) think it so crucial to hammer home the point that market prices don't convey knowledge." Murphy and I had some back-and-forth on this in the comments to this post, as well.



On occasion I have corralled and summarized some of the resources but do this often enough that I thought it might be useful to put some of the links and references in one place. It is my view that the (primarily Rothbardian/praxeological) sources below, at the very least, make it difficult to argue that the two approaches are "two sides of the same coin". Below is a brief discussion and summary of and some links to some of these arguments.



A summary of some of these views is found in my essay Knowledge, Calculation, Conflict, and Law. See. e.g. p. 53 and n. 8, discussing Hülsmann's discussion of Hayek's tin example:


8 In other words, the prices generated on the market are past prices, which are always the outcome of action, not its cause. Hülsmann (p. 26) explains that "all information that this action was based upon had to be acquired beforehand. The price itself could not have communicated the knowledge that brought it [the price] about." With regard to the tin example, "tin does not become scarcer and then this fact can come to be known to someone and lead to adaptations. Rather it is the other way around. The very fact that demand increases means that someone already knows of a more value-productive employment of tin" (p. 28).

Note that even Hayek says that mere users of tin do not know "anything at all about the original cause of these changes." So prices might rise for a number of reasons: 1. because some people correctly assess that supply is reduced and therefore bid prices up; 2. because some people mistakenly believe supply is reduced and therefore bid prices up; 3. because some people correctly assess that demand will increase; 4. because some people mistakenly forecast that demand will increase. Etc. So if price goes up does it give you any information? All you know is it went up for some reason. You don't know why. The people who bid it up know why they bid it up, based on their own assessment and knowledge--which is of necessity information they have that they did not get from prices; it is their knowledge and opinions that they use to form the price, not the other way around.


In fact it's important to realize, in my view, that it is not a bad thing that information is "dispersed." In fact, as Salerno points out (pp. 114-15), "dispersed knowledge is not a bane but a boon to the human race; without it, there would be no scope for the intellectual division of labor, and social cooperation under division of labor would consequently, prove impossible."

Prices are important because they serve as an "accessory of appraisement." "Current" (immediate past) prices tell only what the current price structure is, and thus serve as a basis for forecasting what the future array of prices will be, given the current starting point. For this reason, Hülsmann argues (p. 47) that present prices "can have no communicative function because they are only the, if indispensable, starting point for our understanding of the future."





For some other interesting views on this:

  • Rothbard (p. 66): "the entire Hayekian emphasis on 'knowledge' is misplaced and misconceived"
  • Hülsmann (p. 39): discussing "the irrelevance of knowledge problems"
  • Salerno (p. 44): "[t]he price system is not--and praxeologically cannot be--a mechanism for economizing and communicating the knowledge relevant to production plans. The realized prices of history are an accessory of appraisement"
  • Hoppe (p. 146): "Hayek's contribution to the socialism debate must be thrown out as false, confusing, and irrelevant."
  • Kinsella: "The encoding metaphor seems to be a pseudoscientific and scientistic attempt to give this kind of economic theorizing a patina of scientific respectability by borrowing engineering terminology. It is scientistic because, in vainly trying to borrow natural science terminology, there is an assumption that only the "hard" or natural sciences have true validity. It is akin to using such inapt phrases as the "momentum" of the leading team in a basketball game, the "energy" of crystals and astral forms, or, even worse, "revving the engine" of the economy. Both economics and ethics can be sciences, but not in the same way as the causal, natural sciences."



Stephan Kinsella
