===== PAGE 1 ===== Reply to Leland B. Yeager on “Mises and Hayek on Calculation and Knowledge” Joseph T. Salerno edge,” Leland Yeager argues against the view recently pro- pounded by Murray Rothbard, Jeffrey Herbener, and myself that calculation and knowledge constitute separate and distinct problems of economic organization and that Ludwig von Mises attributed the impossibility of socialism exclusively to its inability to solve the former problem. In rebuttal, Yeager alleges that calculation, as this term is used by Salerno, Rothbard, and Herbener (henceforward, SRH) refers narrowly to a trivial arithmetic operation and that it is, therefore, preposterous and a violation of a putative principle of hermeneutics, i.e., “a heuristic principle of textual interpretation,” to identify, as SRH do, calculation in this sense as the crux of Mises’s critique of socialist central planning. Yeager seeks to buttress his hermeneutical case by arguing that if the knowledge problem is solved, i.e., if the central planners are miraculously endowed with knowledge of all previously discovered production functions currently used or potentially useful, in addition to exhaustive and minutely detailed information regarding the quantities, qualities, and locations of existing resources and the global set of consumer value scales (comprehensively defined to include leisure and time preferences as well as preferences for the various types of labor), then all that remains to be done to effect a rational or “Pareto optimal” allocation of resources is to address a relatively tractable problem in linear programming that can be I n this article on “Mises and Hayek on Calculation and Knowl- *Joseph T. Salerno is associate professor of economics at the Lubin School of Business at Pace University. Page references to Professor Yeager’s article refer to pages in this volume. I would like to thank two anonymous referees for many thoughtful suggestions on stylistic and substantive matters that contributed significantly to improving this article. The Review of Austrian Economics Vol.7, No. 2 (1994): 111-125 ISSN 0889-3047 111 ===== PAGE 2 ===== 112 The Review of Austrian Economics Vol. 7, No. 2 solved using a supercomputer. Yeager thus claims to be logically confirmed in his conclusion that, in dismissing the knowledge prob- lem from consideration, SRH are construing the calculation problem in a limited and trifling sense that “trivializes and caricatures” Mises’s critique of socialism. There is not much to say about Yeager’s main allegation, except that it is wholly beside the point, because it rests on a gross misin- terpretation of the meaning explicitly attached to the term “calcula- tion problem” by SRH. It is true that as SRH use the term “economic calculation” it encompasses and culminates in arithmetic computa- tions undertaken to identify the most valuable employments of scarce resources in an economy characterized by specialization and division of labor, e.g., the profit calculations of entrepreneurs operating in a market economy. However, it does not follow that, for SRH, the calculation problem as Mises conceived it refers narrowly to the mathematical techniques employed for manipulating the given quan- titative data; it refers, instead, to the origination and meaningfulness of the data themselves. It is, in short, a problem of “appraisement” [ and not of “arithmetic.” As SRH have repeatedly emphasized, the Misesian demonstra- tion of the logical impossibility of socialism is not predicated on the central planners’ incapacity to perform tasks that can conceivably be carried out by individual human minds (e.g., discovery of factual and technical knowledge, mathematical computations, managerial moni- toring, and prevention of labor shirking, etc.). Rather, it is concerned with the lack of a genuinely competitive and social market process in i which each and every kind of scarce resource receives an objective and quantitative price appraisement in terms of a common denomi- nator reflecting its relative importance in serving (anticipated) con- sumer preferences. This social appraisement process of the market transforms the substantially qualitative knowledge about economic \)} conditions acquired individually and independently by competing \ entrepreneurs, including their estimates of the incommensurable subjective valuations of individual consumers for the whole array of l'final goods, into an integrated system of objective exchange ratios for the myriads of original and intermediate factors of production. It is the delements of this coordinated structure of monetary price appraise- ments for resources in conjunction with appraised future prices of consumer goods which serve as the data in the entrepreneurial profit computations that must underlie a rational allocation of resources. That appraisement and not arithmetic constitutes the essence of the calculation problem is clearly indicated in numerous pas- sages from the works of Salerno and Rothbard cited by Yeager. ===== PAGE 3 ===== Salerno: Reply to Leland B. Yeager 113 Unfortunately, Yeager ignores these key passages. For example,in one of my articles (Salerno 1990a, pp. 54-56) quoted by Yeager, I identify the crucial bearing of entrepreneurial competition in resource mar- kets on the problem of economic calculation: In this competitive process, each and every type of productive service is objectively appraised in monetary terms according to its ultimate contribution to the production of consumer goods. There thus comes into being the market’s monetary price structure, a genuinely “social” phenomenon in which every unit of exchangeable goods and services is assigned a socially significant cardinal number and which has its roots in the minds of every single member of society yet must forever transcend the contribution of the individual human mind. Since the social price structure is continually being destroyed and recreated at every moment of time by the competitive appraise- ment process operating in the face of ceaseless change of the economic data, there is always available to entrepreneurs the means of esti- mating the costs and revenues and calculating the profitability of any thinkable process of production. Once private property in the nonhuman means of production is abolished, however, as it is under socialism, the appraisement proc- ess must grind to a halt. . . . In the absence of competitive bidding for productive resources by entrepreneurs, there is no possibility of assigning economic meaning to the amalgam of potential physical productivities embodied in each of the myriad of natural resources and capital goods in the hands of the socialist central planners. . .. A society without monetary calculation, that is, a socialist soci- ety, is therefore quite literally a society without an economy. —— Later in the same work (Salerno 1990a, pp. 62-63), I portray the Misesian case against market socialism in similar terms: From the Misesian point of view . . . the shortcomings of the prices of market socialism do not stem from the fact that such prices are supposed to be treated as “parametric” by the managers. . . . The problem is precisely that such prices are not genuinely parametric from the point of view of all members of the social body. The prices . which emerge on the free market are meaningful for economic calcu- lation because and to the extent that they are determined by a social rappraisement process, which, though it is the inevitable outcome of the mental operations of all consumers and producers, yet enters as an unalterable fact in the buying and selling plans of every individual actor. It is obvious from the foregoing passages that I conceive appraise- ment as neither knowledge nor arithmetic, but as something new ===== PAGE 4 ===== 114 The Review of Austrian Economics Vol. 7, No. 2 | under the sun, introduced into the world only when the institutional / prerequisites of a market economy are fulfilled. The social process o } appraising thus transcends the purely individual operations of know ing and computing at the same time that it complements them inl creating the indispensable conditions for rational choosing by entre- preneurs and resource owners cooperating in the division of labor. In fact, in another work cited by Yeager, I specifically refer to Mises’s istinction between “cardinal numbers and their arithmetic proper- ies [which] are ‘eternal and immutable categories of the human mind’ ” and “economic calculation [which] is ‘only a category inherent in acting under special conditions’” (Salerno 1990b, p. 45). In explicating what I take to be Mises’s view, then, I clearly do not contend that the advent of socialism suddenly and mysteriously renders men unable to perform arithmetic operations. Rather, it is 1 and always has been my contention that socialism abolishes the quantitative appraisement of means without which man’s computa- tional skills and his knowledge of particular facts and general tech- V2 nical rules would be completely useless in guiding production within _the framework of the social division of labor. As I conclude in the latter “article “It is because socialism lacks the means to calculate, therefore, that Mises emphatically denies that men ‘are free to adopt socialism without abandoning economy in the means of production’. . . . In fact ises conceived the social advantage of the price system to be that it Ymade practicable human society itself by providing the cardinal numbers for computing the costs and benefits of purposive action undertaken within the social division of labor” (Salerno 1990b, p. 48). > I also indicate that Mises’s concept of “the intellectual division of labor” refers to the necessity of the existence of independent intellects and wills—of capitalist-entrepreneurs, laborers, landowners, and consumers—for the quantitative appraisement of the means of social action (Salerno 1990b, pp. 41-42). In contrast, Yeager construes Mises’s concept as an embryonic version of Hayek’s “division of knowledge.” Thus, Yeager (p. 97) draws the wrong conclusion from his important insight that “intellectual labor involves knowledge, and division of labor means leaving at least some knowledge, and action on it, decentralized.” A price system is not required because useful knowledge is dispersed, as Yeager infers from this insight; rather, knowledge must be decentralized (among competing entrepreneurial { forecasters and appraisers) in order for a system of prices to come | into being which meaningfully indicates the relative scarcities of useful resources. Or, to put it more starkly, 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 ===== PAGE 5 ===== Salerno: Reply to Leland B. Yeager 115 under division of labor would, consequently, prove impossible. Thus, a world exactly like our own but ruled by a perfectly beneficent and “empathic” overlord, who, in Star Trekian fashion, could, fully and instantaneously, mentally assimilate his subjects’ subjective valu- ations and knowledge, would be unable to develop a sophisticated structure of capital and production for lack of a means of appraise- ~. ment. Rothbard, also, in his articles referred to by Yeager, is pellucidly clear that the calculation problem identified by Mises goes far beyond a piddling arithmetic problem. As well, it involves far more than the difficulty of acquiring qualitative information about previously pre- vailing market conditions. As Rothbard (1991, p. 66) writes: The problem is not knowledge . . . but calculability. [TThe knowledge conveyed by present—or immediate “past” —prices is consumer valu- ations, technologies, supplies, etc. of the immediate or recent past. But what acting man is interested in, in committing resources into ; production and sale, is future prices, and the present committing of resources is accomplished by the entrepreneur, whose function is to appraise—to anticipate—future prices, and to allocate resources accordingly. It is precisely this central and vital role of the appraising ‘entrepreneur, driven by the quest for profits and the avoidance of ‘losses, that cannot be fulfilled by the socialist planning board, for ‘lack of a market in the means of production. Without such a market, there are no genuine money prices and therefore no means for the entrepreneur to calculate and appraise in cardinal monetary terms. In a second article quoted from by Yeager, Rothbard (1992, p. 20) nicely epitomizes the SRH interpretation of economic calculation: “the prices provided by the market, especially the prices of means of production, are a social process, available to all participants, by which the entrepreneur is able to appraise and estimate future costs and prices. In the market economy, qualitative knowledge can be transmuted, by the free price system, into rational economic calcula- tion of quantitative prices and costs, thus enabling entrepreneurial ion on the market.” Given the weighty textual evidence I have adduced above to counter his claim that SRH construe the calculation problem as one of arithmetic, Yeager appears to be transgressing against his own hermeneutical principle of refraining from attributing preposterous and incoherent positions to one’s opponents without having fully and sympathetically engaged their arguments. Nevertheless, I do not believe that it would be fair or accurate to ascribe Yeager’s palpable ===== PAGE 6 ===== 116 The Review of Austrian Economics Vol. 7, No. 2 misreading of SRH’s position to unrestrained eagerness to seize a spolemical advantage or to shoddy scholarship. Rather, I believe that the source of Yeager’s erroneous characterization of our position lies in his static view of the function of prices and economic calculation. b This view is revealed in the logical argument he advances to deny any | but the most trivial distinction between knowledge and calculation, an argument intended to bolster his textually unsupported claim that | SEH equate calculation and arithmetic. In the section on “Economic Calculation,” which precedes and introduces his own rendering of “What Mises Meant,” Yeager (pp. 92-95) delineates his view of the functions performed by prices. Proceeding in a Hayekian vein, Yeager characterizes market prices as a substitute for the perfect knowledge that is assumed by neoclas- sical theorists to be possessed by all market participants. However, as I have argued elsewhere (Salerno 1993, pp. 126-29), for prices to ‘perform such a knowledge-disseminating function, it is necessary for the economy to already subsist in a quasi-static state or what I have ‘dubbed “proximal equilibrium” (PE), wherein genuine uncertainty | and the need for entrepreneurial appraisement are absent and cur- ‘rent prices are an approximately correct guide to future prices. Indeed, this is the view taken by Hayek (1978, p. 82) himself, who fos that “the function of prices is precisely to communicate, as rapidly as possible, signals of changes of which the individual cannot know but to which his plans must be adjusted. This system works [mass on the whole current prices are fairly reliable indications of what future prices will probably be.” Elsewhere, Hayek (1940, pp. 27-28) argues that “real conditions . . . do to some extent so approxi- mate [towards a state of equilibrium], and . . . the functioning of the existing economic system will depend on the degree to which it approaches such a condition.” Yeager does not shrink from the PE implications of the Hayekian description of the function of prices. Indeed, he embraces them holeheartedly, arguing that economic calculation employing knowl- edge-laden prices functions “ideally” to maintain the economic sys- tem in competitive long-run equilibrium characterized by a Pareto- optimal allocation of resources. Yeager’s argument is encapsulated in ~ the following four statements extracted from his section on “Economic Calculation” (Yeager, pp. 92-95): , “Ideally, in a competitive economy, the price of each product measures i not only how consumers appraise it at the margin but also what the ~ total is of the prices of the additional resources necessary to supply an additional unit of it [i.e., Pi=MC;].” ===== PAGE 7 ===== Salerno: Reply to Leland B. Yeager 117 “Each consumer ideally leaves no opportunity unexploited to in- crease his expected total satisfaction by diverting any dollar from one purchase to another [i.e., MU1/P1=MU2/P2= . . . =MUy/Pn, implying perfect arbitrage of individual commodity prices and the overall purchasing power of money].” ; “Ideally, [consumers’] bidding sees to it that no unit of a resource goes to satisfy a less intense effective demand to the denial of a more intense one [i.e., P¥j=MVP;].” “Ideally, the result of successful economic calculation . . . is a state of affairs in which no further rearrangement of patterns of production and resource use could achieve an increase of value to consumers from any particular good at the mere cost of a lésser sacrifice of value from some other good [i.e., P;=AC;l. (A fuller discussion would intro- duce the concept of Pareto optimality at this point.)”! Yeager’s repetition of the term “ideally” in this context, which I / have emphasized, is apparently intended to connote that the outcome of the “real” economic process only approximates the “ideal” of Pareto optimality.? Yeager goes on to impute this static conception of the function of economic calculation to Mises, despite his récognition that “Mises did like to emphasize that changes of all sorts are continu- / ally occurring and that the prices to be taken into consideration are not merely ‘current’ prices (which are the data of very recent economic history) but also future prices, as they best can be under- stood by entrepreneurial conjecture” (Yeager, p: 96). After this The meaning of the symbols ini my interpolations in this citation are as follows: / P = price of product MC = marginal cost MU = marginal utility pF = price of factor of production MVP = marginal value product AC = average cost i = ith product wherei = 1, ..., n and n = total number of products j=jth factor where j=1,..., mand m = total number of factors 2For a fuller treatment of the function of the price system, Yeager refers the reader to a disciission in another one of his works, There, Yeager (1966; Pp. 13-30) cites the “usual static neoclassical reasons involving externalities and monopoly for the failure of the market to achieve the ideal allocation of resources, but he tends to downplay their ractical sighificance. However, he does not even hint at the dynamic considerations that prevent actual, moment-to-moment market prices from ever coming close to 1 fulfilling their PE role as “signals of opportunity cost,” which are supposed to accurately guide market participants to a Pareto-optimal pattern of resource use. pe a ===== PAGE 8 ===== 118 The Review of Austrian Economics Vol. 7, No. 2 grudging admission, however, Yeager (p. 97) proceeds to relegate such dynamic considerations, in the fashion of classical economics, | to the status of “frictions” or “disturbing causes” that “immensely i complicate” but do not alter the main task of economic calculation, which is to point the way to the ideal resource allocation of the static state. - ~— We can now explain why Yeager refuses to distinguish between calculation and knowledge and why he misses the significance of the ) distinction drawn by SRH. With the economy always in PE and . current prices therefore conveying to producers virtually complete : knowledge about relevant economic conditions in the present and the 4! future, the only function that remains for entrepreneurs is to roboti- | / | cally compute revenue and cost functions and allocate resources so as | to equate MR and MC. Since the acquisition and use of knowledge is> .thus presented as the essence of economic calculation, should the [central planners somehow or other get hold of the same knowled in the absence of a price system, the entrepreneurial computation 1 problem could be easily solved by the methods of linear programming, ) \which would yield the identical (Pareto-optimal) allocation of re- sources. This is the implication of Hayek’s statement that the price (System “brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process” (Hayek 1972, p. 86). ~~ For Yeager, Hayek, and equilibrium theorists of all stripes, then, an appraisement process is not necessary because, in the words of 1 general equilibrium (GE) theorist J. R. Hicks (quoted in Walsh and Gram 1980, pp. 241, 179), the price mechanism is something that is inherent. It did not have to be . . . brought in from outside. . . . It has been made apparent [by linear programming theorists], not only that a price system is inher- ent in the problem of maximizing production from given resources but also that something like a price system is inherent in any problem of maximizing production against restraints. The imputation of prices (or “scarcities”) to the factors of production is nothing else but a measurement of the intensities of the restraints; such intensities are always implicit—the special property of a competitive [price] . system is that it brings them out and makes them visible. . . . If we take the famous definition, given so many years ago by Lord Rob- bins—‘the relationship between ends and scarce means that have “lalternative uses—economics, in that sense, is well covered by linear \ , theory. ===== PAGE 9 ===== Salerno: Reply to Leland B. Yeager 119 _ This reasoning, of course, also underlies the position taken by neoclassically-trained market socialists such as Oskar Lange. In a posthumously published reflection on his contribution to the socialist calculation debate, Lange (1974, p. 137) wrote: The market process with its cumbersome tatonnements appears old- fashioned. Indeed, it may be considered as a computing device of the pre-electronic era. The market mechanism and trial and error procedure proposed in my [original] essay really played the role of a computing device for solving a system of simultaneous equations. The solution was found by a process of iteration which was assumed to be convergent. . . . The same process can be implemented by an electronic analogue machine which simulates the iteration process implied in the taton- nements of the market mechanism. Such an electronic analogue (servo-mechanism) simulates the working of the market. This state- ment, however, may be reversed: the market simulates the electronic / analogue computer. In other words, the market may be considered as / a computer sui generis which serves to solve a system of simultaneous equations. ~~ Thus market-oriented PC theorists, such as Hayek and Yeager, and neoclassical/socialist GE theorists are brothers under the skin. The former, who according to Yeager include Mises, ultimately do not ~ gainsay the claim of the latter that the price system is “in” the data | and that the market performs essentially the same function as an equation-solving computer. All of Hayek’s subtle argumentation i b; Hayek 1972¢) amounts only to the denial that all the relevant da could ever be assembled in one place and, to use Yeager’s term “assimilated” by one mind preparatory to being fed into the com puter.’ Thus is Yeager (p. 99) led to conclude, in agreement with Hick | his classic triad of articles on knowledge (Hayek 1972a; Hayek 1 In his article on “Economics and Knowledge,” Hayek (1972a, pp. 41-42 n. 6) sought, among other objectives, to “dynamize” the concept of equilibrium and give it empirical applicability by dissolving the link between equilibrium conceived as a [coinciding of subjective expectations held by diverse individuals and the concept of the “stationary state” based on the constancy of the underlying objective data. It is now enerally known that Hayek’s article was intended in part as a critique of Mises, whose praxeological approach to economic theory included a (strictly subsidiary) role for the mental construct of a stationary state or “evenly rotating economy.” This is of great doctrinal significance in light of the fact that Hicks’s attempted dynamic recasting of GE theory in Value and Capital, which, Hicks (1968, p. vi) has revealed, was largely based on ideas “conceived at the London School of Economics during the years 1930-35,” was prompted by precisely the same considerations. In fact, Hicks (1968, p. 117) specifically criticized “the method of the Austrians” for its “concentration on the case of a Stationary State.” Moreover both Hicks (1968, pp. 119-21) and Hayek (1972a, ===== PAGE 10 ===== 120 The Review of Austrian Economics Vol. 7, No. 2 7 and Lange, that “if all relevant knowledge could be gathered and assimilated and all other preparations made and if the vast compre- hensive calculation could be performed, then the immense list of ~ results spewed from the computer would not only prescribe all input and output quantities in detail but also indicate shadow prices of all inputs and outputs.” It is because of his PE mindset, then, that Yeager is unable to perceive what is to SRH the very pith of Mise§’s calculation argument: first, that the market creates a social appraisement process which is I not implicit in the informational parameters of the equation system _ land which depends crucially on an intellectual division of labor J / featuring the qualitative understanding of competing entrepreneurs; and, second, that this process is indispensable for converting the multidimensional knowledge of the economic data, regardless of re | possesses this knowledge or where it is located, into a unitary struc- “ture of meaningful resource and product prices. That Yeager’s attempt to portray Mises as a PE theorist i is unten- able and that SRH’s view of Mises as a dynamic appraisemént theorist is indeed the correct one is compellingly evinced by Mises’s definitive response in Human Action to thé proposed mathematical solution to socialist calculation. Here Mises (1966, pp. 710-15) makes it crystal clear that the static prices mathematically imputed from perfect knowledge of the economic data would not lead to a dynzmi- cally efficient allocation of resources. The latter can only be achieved by the entrepreneurially appraised prices that are generated by the _ historieal market process. In arriving at this conclusion Mises first considers a situation in which the central planner is endowed with perfect knowledge of the existing economic data. Mises points out, however, that such data would include a stock of intermediate or capital goods, which, in a world of unrelenting change and uncertainty and of consequent entrepreneurial error, is necessarily maladapted to the primary data of wants, technology, and “original” resources, i.e., permanent and/or nonreproducible labor and land. Nonetheless, the existing invento- ries of nonpermanent, reproducible items that constitute this dise- quilibrium capital stock are cast as “parameters” in the system of simultaneous equations. Solving this system would therefore yield a static or Pareto-optimal allocation of resources and a related shadow Jp. 41 n. 6) credit Alfred Marshall with pointing the way to the proper use of the equilibrium technique. Thus Hayekian PE and modern GE theory have common roots. For an illuminating discussion of the seminal influence of Hayek’s work on Hicks’s initial endeavors in GE theory, see E. Roy Weintraub (1991, pp. 30-31). ===== PAGE 11 ===== Salerno: Reply to Leland B. Yeager 121 price system. But this static Solution cannot possibly elucidate the series of steps that must be initiated today to progressively and efficiently transforth the structure of capital goods through a se- yd quence of further disequilibrium states towards its (presently un- known) equilibrium configuration. Indeed, thirty years after Mises elaborated this argument, dissi- dent GE theorists were just beginning to catch a glimpse of its signifi: ance, Thus, as Vivian Walsh and Harvey Gram (1980, pp. 182-83) rankly and perceptively noted at the time: The intended interpretation of neoclassical allocation theory depends fundamentally on the meaning attached to the parameters that énter into its structural relationships. . . . In a model of neoclassical allocation theory it is of no iniportance to distinguish inputs on the basis of the process by which they came into being. . . . Indéed, the only historical fact that has any bearing on the analysis is that a given quantity of resources has come into existence and is now available at a point in time to be used i in ways that may or may not have been anticipated when these resources were produced. . .. Thus the categories land, labor, and “capital” are only descriptive; they have no analytical significance in static allocation models. . [Neoclassical theory does not deny the reproducibility of the means of production. It simply takes no account of this reproducibility in its analysis of prices and quantities. . . . Thus, the flow of services of a diesel engine may enter as a factor input into certain technical processes, but it is immaterial to the, theory's s treatment of production that the engine itself is the result of a previous investment of resources as opposed to a free gift of nature dropping, as it were, from Heaven! *Hicks’s earlier theory of the “Traverse” was an abortive attempt by a GE theorist to come to terms with, or escape from, a similar insight. Wrote Hicks (1972, pp. 183-84): “[I]n the real world changes in techriology : are incessant; there is no time for an economy to get into equilibrium (if it was_able to do so) with respect to January’s technology, before that of February is upon it. It follows that at any actual moment, the existing JS capital cannot be that which is appropriate to the existing technology. . . . Every actual situation differs from an equilibrium situation by reason of the inappropriateness of dts capital stock.” Despite this recognition, however, Hicks apparently found it would ( “be “very inconvenient” to abandon GE theory in order to * ‘analyze the transition from ) growth equilibrium to another” (Collard-1993, 343): Needless to say, Hicks’s theory Fy of the adjustment path, worked dut on the assumption of a “fixprice” policy and a change : in technology that does not influence relative .rices,.is unable to 1 monetary calculation guides entrepreneurs in choosing the most valuable uses (from the point-of-view of their _ curren: [Ule.as.s future market _conditions)_ for the perennially.inappropriate capital stoc ck. For a polite but devastating c critique of Hicks, see Lachmann (1977). one out-of-equilibrium position to_another, so Hicks’s Traverse is a traverse from one AERIS Ey ===== PAGE 12 ===== 122 The Review of Austrian Economics Vol. 7, No. 2 Now, Mises’s calculation argument focuses on a situation charac- ( terized by the absence of competitive appraisement of current re- source prices based on entrepreneurial forecasting of the successive changes in the data that occur during the extended transition to Alshe final equilibrium. In these circumstances, there is absolutely no possibility of determining whether and to what extent current productive services should be devoted to, e.g., maintaining existing railroad diesel engines, initiating a highway expansion project, con- structing a new truck assembly factory, converting military cargo planes to civilian uses, etc. The shadow prices generated by the Lange-Hicks-Yeager linear programming “solution” are therefore incapable of providing the guiding light of economic calculation. And it is this alone which can save human actors from blindly toppling over into the abyss of irrationality and arrant wasteful- ness when choosing among social (i.e., nonautarkic) production processes. Let us even grant further, as Mises (1966, pp. 713-14) does, that the central planner is miraculously inspired with an exact image of the final equilibrium state that is perfectly adjusted to the primary data of the problem. Without recourse to a social appraisement process, the planner would still be unable to calculate a transition [oe that economically utilizes the services of the current capital stock. Of course, dynamic appraisement is even more important in the real world. Here, exogenous changes in the data continually deflect the economy from any temporal progression toward a given equilibrium. Thus, all entrepreneurial actions and innovations are guided by anticipated future prices reflecting, according to Mises (1966, p. 711), “only the first steps of a transformation” of market conditions in the direction of equilibrium. It is instructive to consider the series of rhetorical questions posed by Yeager (p. 96) midway into his article. These are designed to drive home his point that Mises could not possibly have been contending about arithmetic. But once it is finally understood that Mises’s arguments about calculation referred neither to arithmetic / nor to knowledge but to appraisement, it also becomes quite clear that ‘these questions do not merit the answer Yeager seeks to elicit. Representative of Yeager’s queries are: “Was Mises conceding that the planners might conceivably assemble all of this unimaginably de- tailed information [about the economic data]? Was he balking only at the next step, denying that they could use all of it to calculate a pattern of production and resource allocation that would in some sense be optimal?” To these questions I reply with a resounding “Yes, indeed!” Mises did concede, for the sake of argument only, that / i ===== PAGE 13 ===== Salerno: Reply to Leland B. Yeager 123 [1 planners possessed perfect information.’ But he emphatically denied ~~ _4| that this information would be of any use to them in efficiently allocating resources. I conclude with Mises’s own words (which are difficult to explain away without invoking some problematic hermeneutical principle®): “It was a serious mistake to believe that the state of equilibrium could be computed, by means of mathematical operations, on the basis of the knowledge of conditions in a nonequilibrium state. It was no less erroneous to believe that such knowledge of the conditions under a hypothetical state of equilibrium could be of any use for acting man / in his search for the best possible solution of the problems with which he is faced in his daily choices and activities” (Mises 1966, pp. 714-15). So 5It should be emphasized that Mises did recognize a separate and “practical” knowledge problem confronting socialism. But he hastened to make it clear that it was not this problem that rendered a socialist economy a logical impossibility. Thus Mises . (1966, p. 715) concluded his chapter in Human Action on the “The Impossibility of ~-Economic Calculation under Socialism” with the following sentence: “There is therefore no need to stress the point that the fabulous number of equations which one would have to solve each day anew for a practical utilization of the [mathematical] method would make the whole idea absurd even if it really were a reasonable substitute for the market's yd economic calculation” [my emphases]. Mises then refers the reacer in a-footnote-fo 1 ayek’s Knowledge-based critique of the mathematical solution in the volume on / Collectivist Economic Planning (Hayek 1975, pp. 207-14). eager (pp. 100-5) devotes over one-third of the text of his article to supporting his interpretation of Mises’s calculation argument with appeals to similar interpreta- tions advanced by other notable Hayekians on the contemporary scene as well as to his own past intellectual experience in coming to terms with Mises’s writings. But it is Precisely this now conventional explication of Mises’s calculation argument-which rapidly became entrenched among Hayekians after the work of Don Lavoie—that SR take issue with, because they believe'it represents a palpable conflation of Hayek's an | Mises’s thought. Thus, it is difficult to see what these appeals add to Yeager’s case ‘| beyond an argument from authority. For a critique of the unwarranted “homogeniza- va tion” of Mises and Hayek by some contemporary Austrian economists, see Salerno (1993). am —— ===== PAGE 14 ===== 124 The Review of Austrian Economics Vol. 7, No. 2 References Collard, David A. 1993. “High Hiéks, Deep Hicks, and Equilibrium.” History of Political Economy 25 (Summer): 331-50. Hayek, Fi A. 1952. The Pure Théory of Capital. Chicago: University of ~ Chicago Press. == [1937] 1972a. “Ecotiotiics ahd Knowledge.” In Hayek, Individualism __- and Ecoriomic Order. Chicago: Henry Regnery. Pp. 33-56. =. 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