In The Papers: Re-Scoring Hayek vs. Lange

I am a big fan of the Socialist Calculation Debate.  I think it was the Austrian school’s finest hour, and although they ultimately lost in the eyes of most economists, I believe that history has vindicated the arguments that Mises and Hayek brought forth against socialists of all stripes.  Jan Hanousek and Randall K. Filer found an interesting case study for trying to turn the Socialist Calculation Debate into an empirical matter, in a paper they entitled Lange and Hayek Revisited:  Lessons from Czech Voucher Privatization.

Abstract:

A fundamental question in economics since the 1930s has been whether an administrative price system could simulate the results of perfect competition even without a true market for the means of production. The theoretical possibility of such a system has been known since the introduction of market socialism by Oskar Lange. We have used the artificial bidding market involved in the Czech voucher privatization process to test whether a sequential process of trial-and-error can set administrative prices close to equilibrium. It would appear from this natural experiment that Robbins and Hayek were correct in doubting the real-world feasibility of market socialism.

The basic idea is that the Czech government, after the collapse of the Union of Soviet Socialist Republics (as the joke went, the Russians went 0-for-4 in naming that day), introduced an artificial form of money which could be used to purchase shares of privatized companies at an auction (2).   The government used administrative price committees to set the share prices (2).

The government’s goal, ironically enough given what they were just exiting from, was to create a socialist market economy:  a set of government allocations which would mimic the end results of the market process, skipping the whole competition part and leaving out the messy bits.  Unlike a full-scale socialist experiment, this would be pretty constrained, as the endowments (amount of artificial money per person and numbers of shares of government enterprises) were fixed and a small number of stages of bidding set.

The question the authors ask is, was the administrative authority able to establish equilibrium prices?  In other words, could they clear the market without excess supply or demand? (3)  In the case of this auction, the voucher mechanism provided for bidding across several rounds, and the government set up two distinct auction periods (4-5).

To kill the suspense, the pricing authorities were not able to find an equilibrium price vector—they always had excess demand (7-8).  In the early rounds, 50-67% of the demand was unsatisfied, and even by the final rounds, that amount was still 12-17%.  This governmental authority could not, even in a simple example with fixed endowments and resources, come up with a set of share prices which would satisfy consumer demand.  This should make it even more obvious why a socialist market economy as Lange envisioned could never exist:  no small group of actors has enough information to satisfy the needs and desires of an entire population.  In this case, they couldn’t even do it in a constrained scenario for a short period of time.

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