Economic Calculation Under Socialism: The Austrian Contribution

Economic theories of socialism during the 1930's were based on Walrasian general equilibrium models in which the central planning board was to function as the auctioneer. Socialists assumed that “market socialism” would achieve all the efficiencies characteristic of perfect competition while avoiding the serious market failures of real capitalist economies. The Austrians, Ludwig von Mises and Friedrich Hayek, argued that even market socialism would fail to ‘achieve the efficiency of real market capitalism because Walrasian models used to construct the economic theory of socialism left out important features of real markets that generate efficient outcomes. Specifically, the entrepreneurial nature of the adjustment process, the importance of decentralized information and the role of incentives under vaying institutional settings.