Who's work is Hayek referring to?

Economics Economics Questions
1

I’ve just read Hayek’s “The Use of Knowledge in Society”; which I’d like to say is one of the best economic essays I’ve read, while making me all the more aware of where I see his differences with Mises are on economic calculation. In any case, here’s my enquiry:

Hayek begins the essay stating as follows:

“What is the problem we wish to solve when we try to construct a rational economic order? On certain familiar assumptions the answer is simple enough. If we possess all the relevant information, if we can start out from a given system of preferences, and if we command complete knowledge of available means, the problem which remains is purely one of logic. That is, the answer to the question of what is the best use of the available means is implicit in our assumptions. The conditions which the solution of this optimum problem must satisfy have been fully worked out and can be stated best in mathematical form: put at their briefest, they are that the marginal rates of substitution between any two commodities or factors must be the same in all their different uses.”

Later on, in a footnote, critcizing Schumpeter for stating that the valuation of producer goods is ipso facto found from the valuation of consumer goods he states the following:

"Professor Schumpeter is, l believe, also the original author of the myth that Pareto and Barone have "solved-- the problem of socialist calculation. What they, and many others dld was merely to state the conditions which a rational allocation of resources would have to satisfy and to point out that these were essentially the same as the conditions of equilibrium of a competitive market. This is something altogether different from showing how the allocation of resources satisfying these conditions can be found in practice. Pareto himself (from whom Barone has taken practically everything he has to say), far from claiming to have solved the practical problem, in fact explicitly denies that it can be solved without the help of the market. See his Manuel d’economie pure (2d ed., 1927), pp. 233-34. The relevant passage is quoted in an English translation at the beginning of my article on “Socialist Calculation: The Competitive ‘Solution,’ " in Economica, VIII, No. 26 (new ser., 1940), 125; reprinted below as chapter viii.”

What I’d like to know, is if the mathematical treatments he cites in the second footnote are the same ones he is referring to in the initial paragraph of his essay that have solved the allocation problem once all objective information regarding production possibilities and means end relations have been acquired; “whereby the marginal rates of substitution between any two commodities or factors must be the same in all their different uses”? I have a suspiscion this implicitly refers to the work of Hicks in Value and Capital, but am not sure, so this is why I am asking.

2

Any ideas?

3

In attempting to find out if there was an English language translation of Schumpeter’s first book which according to Hayek has an excellent and Mengerian account of Methodological individualism I came across this paper http://www.econstor.eu/dspace/bitstream/10419/36462/1/571434975.pdf it is comparing and contrasting Mises and Schumpeter’s views and it might be of some help maybe.

4

In particular, these passages would probably be of interest

"

Even though Schumpeter was not directly involved in the ‘socialist calculation debate’

triggered by Mises’ verdict, the view that he voiced on this issue in Capitalism, Socialism and

Democracy came to play a significant role in the general perception of the outcome of that

debate. Already in two earlier publications Schumpeter had addressed the issue of the

workability of a socialist economy, first, in a paper on “Socialist Possibilities of Today”

published in 1921 in the same journal in which Mises’ articles on ‘Socialist economic

calculation’ appeared and, second, in chapter IV, “Die Wirtschaftsrechnung im sozialistischen

Gemeinwesen,” of his book Das Wesen des Geldes (Schumpeter 1970: 88-107), a book that

had been written during Schumpeter’s time in Bonn between 1925 and 1932 but was first

published only in 1970. In these contributions Schumpeter had argued, contra Mises, that a

socialist economic system can function,22 resting his argument in essence on the same kind of

assumptions that were to play a central role in his later, more detailed exposition in

Capitalism, Socialism and Democracy, namely the assumption that the central planning

authority in a socialist system commands all the knowledge needed to direct resources into

their most productive uses, the very knowledge of which Mises had argued that it cannot be

had in the absence of markets for factors of production (Chaloupek 2003: 250).

In Capitalism, Socialism and Democracy chapters XV and XVI are devoted to the

issue of the workability and the ‘economic logic’ of socialism. The very first sentences of

chapter XV (Schumpeter 1950: 165) are: “Can socialism work? Of course it can.” At the

beginning of chapter XVI the question is asked “whether or not there is anything wrong with

the pure logic of a socialist economy” (ibid.: 172), and the reader is told that, contrary to

Ludwig von Mises’ denial, “the answer is in the affirmative. There is nothing wrong with the

pure logic of socialism” (ibid.). In support of this firm verdict Schumpeter asserts that in the

kind of socialist system that he envisages “it is possible to derive, from its data and from the

rules of rational behavior, uniquely determined decisions as to what and how to produce”

(ibid.) because these data and rules “yield equations … sufficient in number to determine

uniquely the unknowns of the problem” (Schumpeter ibid.). The economist who, so

Schumpeter reasons, had provided the proof for this assertion was Enrico Barone to whose

arguments he refers readers “who want a rigorous demonstration” (ibid: 173).23 Even though

he acknowledges that his case for the rationality of socialist planning supposes “a stationary

process of economic life in which everything is correctly foreseen and repeats itself and in

which nothing happens to upset the plan” (ibid.: 178), he hastens to add that “no great

difficulties arise if we go beyond the precincts of the theory of the stationary process and

admit the phenomena incident to industrial change” (ibid.). Furthermore, having, as he claims,

successfully cleared “the first hurdle – logical definiteness and consistency of socialist

planning – “ (ibid.: 184f.) Schumpeter feels ready to “negotiate the next one” as well, namely

the question of its “practical impossibility” on which, according to him, “it seems, most antisocialist

economists are at present inclined to retire after having accepted defeat on the purely

logical issue” (ibid.: 185). As he asserts, his “solution to the theoretical problem” of socialist

calculation “not only establishes a logical possibility but in doing so also shows the steps by

which this possibility can be realized in practice” (ibid.).

5

Thanks for the link, the paper appears rather interesting. My intention was not so much an analysis of Schumpeter’s comments however, as opposed to finding out exactly what mathematical treatment Hayek was referring to in the first paragraph.

6

I am pretty sure he is referring to Hicks, yeah. At any rate, the mathematics he has in mind would be a simple Walrassian general equilibrium problem (of which Hicks was a pioneer).