Crooked Timber’s neo-Austrians

Ludwig von Mises

I had a very strong sense of déjà vu reading the posts and the comments during the Red Plenty seminar at Crooked Timber, a liberal group blog resting comfortably on Keynesian/Fabian principles as if they were overstuffed cushions. They brought me back to objections I heard to a planned economy on the original Marxism list and on PEN-L in the early to mid-90s, when market socialism and its kissing cousin analytical Marxism were all the rage.

Striking a repentant pose, Ken MacLeod, science fiction novelist and erstwhile fan of Frank Furedi’s brand of socialism, commented:

In the 1970s I thought that central planning combined with democratic control along the lines argued for by (e.g.) Ernest Mandel was possible and desirable. Towards the end of the decade I stumbled upon the economic calculation argument, as briefly stated by David Ramsay Steele in a readable pamphlet. I didn’t understand it fully but I kept worrying at the problem it posed. In the 1980s I read Geoffrey Hodgson’s The Democratic Economy, and Nove’s The Economics of Feasible Socialism, which made some socialist sense of the same argument. More recently I’ve been interested in the more radical market socialism proposed by David Schweickart.

While it is hard to figure out where he is coming from politically, seminar participant Cosma Shalizi, a statistics professor at Carnegie-Mellon, says more or less the same thing:

We are pushed back, inevitably, to the planners having to make choices which express preferences or (in a different sense of the word) values. Or, said another way, there are values or preferences — what Nove called “planners’ preferences” — implicit in any choice of objective function. This raises both a cognitive or computational problem, and at least two different political problems.

The cognitive or computational problem is that of simply coming up with relative preferences or weights over all the goods in the economy, indexed by space and time. (Remember we need such indexing to handle transport and sequencing.) Any one human planner would simply have to make up most of these, or generate them according to some arbitrary rule. To do otherwise is simply beyond the bounds of humanity. A group of planners might do better, but it would still be an immense amount of work, with knotty problems of how to divide the labor of assigning values, and a large measure of arbitrariness.

Despite the sympathies that the seminar participants have for a nice polite liberalism, the intellectual roots of what Shalizi calls a “cognitive or computational problem” can be found in the writings of Ludwig von Mises, a luminary of the Austrian school of economics that begat Ayn Rand, Milton Friedman, Alan Greenspan and a host of others considered anathema in these circles and whose ideas about deregulation and free markets have led to immense suffering in Greece, Spain, and most of the third world.

In the pamphlet by David Ramsay Steele referred to by Ken MacLeod, von Mises is singled out as having figured something out that eluded socialists:

Of the trio which unleashed the economic calculation argument, Weber, Brutzkus and Mises, the outstanding figure was undoubtedly Mises. His statement was published first, it was soon incorporated into a comprehensive critique of socialism in all its aspects, Die Gemeinwirtschaft (Socialism: An Economic and Sociological Analysis), it quickly reached a wide audience of socialists and was so stinging and provocative that it could not be ignored.

Steele recapitulates the arguments found in the 1920 “Economic Calculation in the Socialist Commonwealth” that can be downloaded from the Ludwig von Mises institute website. This is a classic work for rightwing economics professors everywhere, the people that Michael Perelman labeled a “mafia” in a Nation Magazine article by Christopher Hayes on the degraded economics profession.

Antoaneta Dimitrova, another liberal professor who took part in the Red Plenty seminar, had this advice for the Greek victims of neoliberal-inspired economic collapse:

It may be anathema to Greece to let go of some national sovereignty as Eastern Europeans did when negotiating with the EU and submitting themselves to the guidance of the European Commission and sometimes also the IMF in their reform efforts. But, undemocratic and asymmetric as this external guidance has been, procedurally speaking, it has, on balance, proved good for democracy and governance in Eastern Europe.

Well, what does it matter if IMF reforms are undemocratic so long as if everything works out at the end of the day–to use a cable TV news show cliché? After all, the ends justify the means, don’t they? You gotta break some eggs to make an omelet, after all.

That’s something that old von Mises himself understood when he became an economic adviser to Engelbert Dollfuss, the fascist dictator in Austria. Here’s the self-described liberal economist in his 1927 “Liberalism: A Socio-Economic Exposition“:

It cannot be denied that Fascism and similar movements aiming at the establishment of dictatorships are full of the best intentions and that their intervention has, for the moment, saved European civilization. The merit that Fascism has thereby won for itself will live on eternally in history.

The deeds of the Fascists and of other parties corresponding to them were emotional reflex actions evoked by indignation at the deeds of the Bolsheviks and Communists. As soon as the first flush of anger had passed, their policy took a more moderate course and will probably become even more so with the passage of time.

That sort of rings a bell, doesn’t it? When the Chicago boys, the ideological heirs of Ludwig von Mises, went down to Chile, they might have felt a momentary twinge of embarrassment about all the people being tortured, but in the long run it was for the good for the Chilean people to be saved from central planning. As Henry Kissinger once put it, “I don’t see why we need to stand by and watch a country go communist due to the irresponsibility of its people. The issues are much too important for the Chilean voters to be left to decide for themselves.”

Many years ago I—like my friend Doug Henwood—was a libertarian and took all the bullshit I read in National Review seriously. Well, half-seriously anyhow. Back in 1960, when JFK was a candidate, I decided to join the Young Americans for Freedom with my rich cousin Louis (who had material incentives to believe in this nonsense) in order to spite my high school classmates. As someone who was very “unpopular” back then, I decided to find other reasons for people to hate me besides being un-athletic and short. I embraced conservatism for the same reason that Charles Bukowski told his classmates in a Los Angeles high school before WWII that he liked Hitler—just to rile them up.

To refresh my memory of what the Austrian school was about, I read (very possibly reread) “Economic Calculation in the Socialist Commonwealth” by von Mises. Most of it consists of warnings about attempting to organize an economy other than on the basis of “economic calculation”, in other words money.

One may anticipate the nature of the future socialist society. There will be hundreds and thousands of factories in operation. Very few of these will be producing wares ready for use; in the majority of cases what will be manufactured will be unfinished goods and production goods. All these concerns will be interrelated. Every good will go through a whole series of stages before it is ready for use. In the ceaseless toil and moil of this process, however, the administration will be without any means of testing their bearings. It will never be able to determine whether a given good has not been kept for a superfluous length of time in the necessary processes of production, or whether work and material have not been wasted in its completion.

Von Mises was a member in good standing of the Austrian school of economics whose founder Carl Menger came up with the idea of marginal utility. The basic idea goes something like this. A consumer good like a hot dog might bring maximum enjoyment on the first eating, but subsequent dishes might provide a diminishing return—unless of course you compete professionally like Takeru Kobayashi who ate 69 Nathan’s hot dogs in ten minutes on July 4, 2011, setting a new Guinness world’s record. When I read about marginal utility, I can’t help but think of the stump speech that Peter Camejo used to give in the early 70s. Under socialism, there would be so much abundance that food would be virtually free. So if somebody walked out of a grocery store with a bunch of apple pies, the reaction would be to call mental health professionals rather than the cops.

Philip Wicksteed, a British preacher and disciple of the Austrians, tried to explain the theory this way:

We may now go on to the next great step in advance in our analysis of the scale of preferences or relative estimates. We have noted incidentally more than once that the question may arise not only, for example, whether to buy any new potatoes at all, but also how many to buy. Suppose the usual consumption of potatoes in a family is about 4 lbs. a day (2 stone a week), and sound old potatoes are about ½d. the lb. If new potatoes are 2d. the housewife may determine to buy 2 lbs. that week, for a treat, reckoning that they will go once round on Sunday, the second dish to be of old potatoes as usual, or if that takes too much trouble the second dish to be dispensed with. If they are 1½d. a lb. she may buy 4 lbs. and have all new potatoes on Sunday, or one dish on Sunday and one on some other day in the week; or she may buy enough for the birthday dinner of one of the children. But when new potatoes come down to a penny she will buy no more old potatoes at all.

What all this has to do with the rejection of socialism might not be obvious at first blush. Somebody trying to decide whether to buy potatoes or not would not, for example, explain the famine in the Ukraine of the early 30s, would it?

Von Mises took the marginal utility theory and applied it to money. Thorsten Polleit, an economist working for a precious metals firm, has a piece on the von Mises website titled What Can the Law of Diminishing Marginal Utility Teach Us?  that concludes with this profound lesson:

Violations of individual property rights (for instance through government taxation, regulations, etc.) will make property owners value present goods increasingly more highly than future goods — a conclusion which follows from the law of diminishing marginal utility.

Violations of individual property rights thus raise peoples’ time preference, increasing consumption at the expense of savings and investment, thereby reducing (or even reverting) the pace of capital accumulation. An interventionist-socialist societal order will therefore necessarily lead to impoverishment relative to a free market societal order, in which there are no systematic violations of individuals’ property rights.

The one thing you will note throughout the Austrian school literature, as well as its offspring from Chicago to business schools everywhere, is its emphasis on the individual. As Margaret Thatcher, one of their most fervent supporters put it in a 1987 interview: “And, you know, there is no such thing as society. There are individual men and women, and there are families.”

If you want to shift the focus away from social classes, this comes in very handy. Instead of trying to explain why millions of people don’t have the money to buy food and need to rely on food stamps, you create artificial scenarios where an abstract human being is contending with abstract baskets of goods. This is fundamentally how bourgeois economics is taught. In good times, it might pass muster but during a depression it prompts a Charles Ferguson to make an Academy award winning documentary that exposes people like Columbia’s Glenn Hubbard for the con artist that he is.

In doing some research on this article, I was happy to see that Nikolai Bukharin, my favorite Bolshevik next to Leon Trotsky, wrote a book that took the Austrians on. Titled “Economic Theory of the Leisure Class”  and written in the same year as von Mises’s dreadful “Economic Calculation in the Socialist Commonwealth”, it puts the focus on social classes rather than the individual.

Bukharin described the Austrian school in sociological terms as expressing the class outlook of the rentier, a representative of the dominant financial bourgeoisie that “is not capable of looking forward.” Bukharin describes their philosophy as “Enjoy the moment,” a characterization that would still apply to the hedge fund operators of today with their $30 million dollar penthouses and fleets of Ferraris.

The industrial bourgeoisie was consumed with the need to produce but this parasitical class was much more focused on consumption, hence the preoccupation of the marginal utility theorists with their potatoes, etc. Bukharin elaborates:

This crass individualism is likewise neatly paralleled in the “subjectivist-psychological” method of the new tendency. To be sure, the theorists of the bourgeoisie had assumed an individualistic attitude even in earlier periods; they always enjoy making references to Robinson Crusoe. Even the representatives of the “labour value theories” based their position on individualistic references: their labour value was not, as one might perhaps expect, the social objective law of prices, but the subjective evaluation of the “economic subject” (the economic man) who evaluates the commodity variously, depending on whether the expenditure of labour has been connected with greater or less inconveniences (for example, Adam Smith).

The brunt of Bukharin’s critique is directed against Eugen Böhm-Bawerk, whose rejection of Marx’s value theory was also based on marginal utility theory. Just as Crooked Timber became a hotbed of von Mises’s calculation thesis around the novel “Red Plenty”, so it became the sounding board of attacks on value theory based implicitly on Böhm-Bawerk. In a series of articles laying siege to Karl Marx, communism, and revolution, one of the blog owners—an Australian economist named John Quiggin who has more awards than Heineken beer–came close to being sued for plagiarism by the Böhm-Bawerk estate:

For those engaged in attempts to achieve a better, more equal and more sustainable society, Marx’s theory of value has little to offer. What can it tell us, for example, about the relative merits of trying to promote equality through higher minimum wages, through more progressive taxation or through expansion of public ownership? But, in the Communist Manifesto and elsewhere Marx had a lot to say about capital and capitalism that was, and remains, both interesting and insightful.

Considering the fact that Quiggin’s article was titled “Marxism without revolution: Capital“, it is hard to figure out why he felt the need to characterize Marx as “interesting and insightful”. As Karl Marx might have put it when his Jewish roots were acting up, “Favors like this who needs?”

Invoking the good Nikolai Bukharin, one might feel the need to look at Crooked Timber sociologically. How is that 100 years after the Austrian school was in its heyday, the professors on this high-profile blog are attempting to use the same arguments and for the same purpose: to put the final nail in Marx’s coffin.

There was an Austrian social scientist (a Hungarian citizen of the Austro-Hungarian Empire actually) who was von Mises and Böhm-Bawerk’s contemporary but drew much different conclusions about the capitalist system. His name was Karl Polanyi and his best-known work was “The Great Transformation”, a broadside against markets and those who serve as its apologists.

In June 1989, Monthly Review magazine published an article by Kari Polanyi Levitt, his daughter and only child, and Marguerite Mendell titled “The Origins of Market Fetishism”. It is worth quoting at some length:

In the setting of intellectual Vienna of the 1920s, Mises and Hayek and their associates were the misfits–the remnants of old Vienna’s privileged urban elites whose security had been shattered, whose savings had been decimated by wartime and postwar inflation, and whose taxes were financing the pioneering housing programs of Vienna’s socialist municipal administration. In their parlors and favorite coffee houses the patrician middle classes, now deprived of their prewar privileges, fed their fears of “the dictatorship of the proletariat.” They were particularly terrified by the 1926 Linz Program of the Social Democratic Party which resolved to defend Austria’s democratic constitution–by armed struggle if necessary–against threats by the Christian Socials to crush the working class and its organizations. They made common cause with the rising forces of clerical reaction which eventually led to the suspension of Parliament in 1933 and the violent destruction of the working-class movement in February 1934, leaving the country defenseless against Hitler’s occupation in 1938. The heirs of the Liberal tradition of the 1860s joined forces with clerical fascism in their paranoiac fear of the working classes.

A special target of Hayek’s polemics in the 1920s was the regime of rent control and public housing, which effectively eliminated private high-rental residential construction. (Hayek: 1929) Working-class families were now privileged in access to low-rental, bright, spacious, modern apartments with parks, kindergartens, and other communal facilities. These programs, together with a sweeping educational reform based on Alfred Adler’s theories of psychology, plus the large-scale participation of the working people of Vienna in a remarkable variety of cultural, recreational, and educational activities organized by the Socialists made “Red Vienna” a world-class showpiece of avant-garde urban lifestyle.

The elite of the intellectuals of Vienna were socialist sympathizers. In Vienna alone 350,000 people belonged to Social Democratic organizations, while socialist trade unions comprised 700,000 workers. “Never before or since,” wrote Ernst Fischer, “has a Social Democratic Party been so powerful, so intelligent, or so attractive as was the Austrian party of the mid 1920s.” (Fisher: 143) According to another contemporary, the “piecemeal reforms were to be the first building blocks of a future socialist society.” (Zeisel: 123)

“The ultimate justification of socialism derived from our expectation that it would usher in a new man, a new morality…. The essence of being a socialist is the holding of certain ethical positions about justice and about duties to our fellow man.” (Zeisel 123, 131) As we shall see, it is precisely the fundamental conflict of values which underlies the contending visions of democratic socialism and individualistic libertarianism.

For those who have been keeping track of current events, this does not sound that much different from the planet earth in the last 3 years or so, with its Arab Spring, its Greek protests against austerity both in the streets and in the ballot boxes, as well as the Occupy Movement in the USA which lives on despite its eviction from public spaces.

Our goal, of course, is to build once again a massive socialist movement that will not only give these neo-Austrians the fright of their lives but wipe a decadent system off the face of the earth.