Markets in the Name of Socialism

The Left-Wing Origins of Neoliberalism

Johanna Bockman

• Publisher: Stanford University Press
• Year: 2011
• ISBN:
  9780804778961
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The worldwide spread of neoliberalism has transformed economies, polities, and societies everywhere. In conventional accounts, American and Western European economists, such as Milton Friedman and Friedrich von Hayek, sold neoliberalism by popularizing their free-market ideas and radical criticisms of the state. Rather than focusing on the agency of a few prominent, conservative economists, Markets in the Name of Socialism reveals a dialogue among many economists on both sides of the Iron Curtain about democracy, socialism, and markets. These discussions led to the transformations of 1989 and, unintentionally, the rise of neoliberalism.

This book takes a truly transnational look at economists' professional outlook over 100 years across the capitalist West and the socialist East. Clearly translating complicated economic ideas and neoliberal theories, it presents a significant reinterpretation of Cold War history, the fall of communism, and the rise of today's dominant economic ideology.

1

Neoclassical Economics and Socialism

From the Beginnings to 1953

Like most teachers of economic theory, I have found it quite worth while to spend some time studying any particular problem in hand from the standpoint of a socialist state.

Fred M. Taylor, Presidential Address to the 1928 annual meeting of the American Economic Association (1929: 1)

THE SCHOLARLY AND POPULAR LITERATURE has generally assumed that neoclassical economics lends ideological support to capitalism and seeks to discredit socialism. On the surface, neoclassical economics—the mainstream economics practiced in the United States and around the world, founded on the view that markets, free from outside intervention, are the most efficient way to allocate resources—certainly appears procapitalist and antisocialist. In fact, however, models of socialism, as well as of markets, lie at the core of neoclassical economics.

This chapter charts the development of neoclassical economics from its nineteenth-century origins in Western Europe, through its use in the Soviet Union, and up to the changes it underwent in the Cold War 1950s. Histories of economic thought do not usually recognize the role of socialism and socialists in neoclassical economics but rather relegate socialist economic thought to separate chapters or sections (for example, Ekelund and Hébert 1990; Niehans 1994). One exception to this treatment is the so-called socialist calculation debate. According to the standard narrative, in the early 1920s Austrian economist Ludwig von Mises published a devastating critique of socialism, arguing that an economy without money, markets, or prices would not allow rational economic calculation and therefore that socialism was impossible (for example, Ekelund and Hébert 1990: 575–577). In 1936, in this account, Oskar Lange responded to Mises with a neoclassical model of socialism, in which planners set prices and subsequently allow markets to adjust these prices. To Lange, this system allowed rational economic calculation and suggested the possibility of socialism. In response to Lange, Friedrich von Hayek then altered Mises’s argument: A socialist economy would be inefficient, not impossible.¹ Over the decades, different authors have claimed victory for each side (for example, Bergson 1948: 447; Lavoie 1985).

The fact that Lange first responded sixteen years after Mises made his initial salvo raises some questions about the nature of this “debate.” Time, and potentially significant historical events, play almost no role in the conventional narrative about the debate. The standard narrative presents free market advocates challenging those who support central planning, a dichotomy that blends together the Soviet Union, socialism, central planning, Keynesianism, and almost any form of government intervention in the economy into an amorphous object opposed to the equally amorphous object of the free market capitalism somehow allied with (non-Marxist) economists.² Right-wing activists have to this day used the “socialist calculation debate” to make broad ideological claims about socialism, capitalism, and the discipline of economics itself. Economists on both sides of the debate—including members of the Austrian School at the time and later the Chicago School—used neoclassical economics based, as we shall see, on socialist models. To better understand neoclassical economics, I have intentionally removed the “socialist calculation debate” and Keynesianism from their usual place at the center of the history of economics, a center that blinds most scholars to the fundamental importance of socialism to neoclassical economics as practiced from Chicago to Moscow, from Cambridge, Massachusetts, to Belgrade.³

This chapter documents how a variety of socialisms became intertwined at the center of neoclassical economics. At first, the founders of neoclassical economics in the 1870s built their science on the assumption that pure competitive markets provided optimal results in production, exchange, and consumption. By the 1890s, neoclassical economists had developed the idea that the pure competitive market model and the centrally planned socialist model were mathematically equivalent. Both of these models lie at the center of neoclassical economics. Therefore, analyzing a centrally planned socialist economy provided new insights into neoclassical economics and markets and vice versa. The words of the American Economic Association president, Fred M. Taylor, quoted at the beginning of this chapter reflect this neoclassical methodological discovery. Using socialism as an analytical tool to develop neoclassical economics, did not necessarily mean that economists considered themselves socialists. In fact, many rejected or were quite critical of socialism.

While it might seem that economics in the socialist East and economics in the capitalist West were quite different, economists in the East and West both developed neoclassical economics within discussions of socialism. The formal, mathematical identity between competitive markets and centrally planned socialism suggested that actually existing socialism in the new Soviet Union would be relevant to neoclassical economics and neoclassical economics would be relevant to Soviet socialism. However, as Soviet state socialism became ever more hierarchical and authoritarian, economists with more democratic, egalitarian, and decentralized inclinations created abstract decentralized market socialist models and incorporated them into the core of neoclassical economics. These market socialist models were not some mixed economy like Keynesianism but rather assumed a pure competitive market. At the same time, neoclassical economists began to explore the institutions required for the competitive market. Some socialists suggested that nonhierarchical socialist institutions provided the ideal environment for the neoclassical competitive market. Neoclassical economists in East and West thus developed their professional knowledge in parallel based on a common disciplinary past. This chapter ends in 1953, when Joseph Stalin’s death, the end of the McCarthy trials, and the relaxation of Cold War tensions allowed a revival of a transnational neoclassical dialogue and the realization of neoclassical socialist ideas.

The Emergence of Neoclassical Economics

As discussed in the introduction, it is generally recognized that William Stanley Jevons in England, Carl Menger in Austria, and Léon Walras in Switzerland simultaneously discovered neoclassical economics in the 1870s.⁴ The novelty of neoclassical economics was its rejection of the labor theory of value, used by both classical economists and Marxists, which was replaced by neoclassical subjective or perceived value.

Economists had long written prolifically and often quite negatively about socialism and communism. Most economic handbooks and manuals contained extensive criticisms of socialism (Gide 1904; Pareto 1896; Sidgwick 1887; Taussig 1911). Economists primarily described the First International; the newly published works of Karl Marx, whose first volume of Das Kapital had just been published in 1867; and various communist experiments—including those of Owen, Saint-Simon, Blanc, and Fourier, who were judged as failures. Economists, no matter their politics, deemed these experiments and socialist movements relevant enough to economics to be included in basic manuals.

Socialists often wrote quite negatively about marginalism and about economics more broadly. In contrast to Marx, economists of the classical school generally rejected socialism and advocated laissez faire capitalism, showing that socialist and other forms of economic intervention worked against “natural laws” and thus resulted, unintentionally, in reducing the welfare of society. Economists with laissez faire liberal and antisocialist views were some of the first to embrace neoclassical economics (Mornati 2001: 5). Thus, socialists also viewed neoclassical economists and their tools with great suspicion (Kurz 1995; Lerner 1934b; Michelini 2001: lxviii).⁵ It was commonly believed that economics and socialism were antithetical (Mason 1980).

According to nineteenth-century socialist views, socialism would function without capitalist economic categories—such as money, prices, interest, profits, and rent—and thus would function according to laws other than those described by current economic science. While some socialists recognized the need for money and prices at least during the transition from capitalism to socialism, socialists more commonly believed that the socialist economy would soon administratively mobilize the economy in physical units without the use of prices or money (Brus 1972).

However, because the doctrines of both neoclassical economics and socialism were changing, neoclassical economists gradually developed new ideas about socialism. As British economist Henry Sidgwick wrote of socialist and neoclassical economics:

It is obvious that two systems or modes of thought, so close in their subject-matter—for the aim of both, so far as Political Economy has a practical aim, is to establish the production and distribution of wealth on a right basis—can hardly have lived side by side for a century without exercising an important influence on each other. (1895: 336)⁶

British economist John Stuart Mill symbolized the shift in political economy to include the study of wealth and income distribution: “The laws and conditions of the production of wealth, partake of the character of physical truths. . . . It is not so with the Distribution of Wealth. That is a matter of human institution solely” ([1848] 1917: 199–200). In response to socialist condemnations of social inequalities, many economists began to question their own profession’s traditional support of laissez faire.⁷ At this time, many younger economists turned to neoclassical economics and yet also became politically sympathetic to socialism. This turn to the distribution of wealth and income, which would include issues of property and potential redistribution mechanisms, met with severe criticisms from conservative economists.⁸

While they may have been politically sympathetic to socialism, neoclassical economists could not agree intellectually with Marxism, primarily because of Marx’s commitment to the labor theory of value (Faucci and Perri 1995; Howey 1989; Mason 1980). Neoclassical economists had built their theory and their identity on a critique of classical economics and its labor theory of value (Howey 1989). The first volume of Marx’s Capital appeared in 1867, while the second (1885) and third (1894) volumes appeared only after Marx’s death in 1883. Some neoclassical economists hoped that Marx would have seen the light by the third volume and rejected the labor theory of value.⁹ Therefore, even while they may have been politically sympathetic, many economists remained intellectually at odds with socialism.

However, for some, socialism and neoclassical economics could go hand in hand. One of the founders of neoclassical economics, Léon Walras, was a great supporter of both socialism and free competition:

I call myself democratic socialist because I see in slavery, servitude and in the proletariat three empirical phases of one and the same question, namely that of property and taxation, or the distribution of social wealth among men in society. ([1896] 1969: 144)¹⁰

While declaring himself a socialist since at least 1861, though a rather idio-syncratic one (Baranzini 2001; Cirillo 1980; Landauer 1959, 1623), Walras also continuously argued for “free competition” because “production in a market ruled by free competition is an operation by which services can be combined and converted into products of such a nature and in such quantities as will give the greatest possible satisfaction of wants,” maximum utility at minimum cost ([1874] 1984: 255). Like other neoclassical economists, he continually criticized Marxist socialism and its labor theory of value. To explain why perfect competition provided maximum social utility, Walras created one of the most important neoclassical tools, his general equilibrium model. The general equilibrium model describes an entire economy with a series of mathematical equations, showing how this economy reaches and functions at equilibrium, the point where supply and demand are optimally balanced. In a freely competitive economy, companies or individuals move toward an equilibrium price that balances supply and demand, a process Walras called tâtonnement or “groping.” Interestingly and importantly for this analysis, Walras imagined an auctioneer mediating this process, announcing prices and changing these prices to balance supply and demand. Ideally, in Walras’s model, large numbers of companies would compete and would be forced to accept equilibrium prices from the market (or the auctioneer) as given and to make profit-oriented production decisions based on lowest possible costs (marginal costs). As a result, these companies would maximize society’s satisfaction and minimize the costs involved.

For Walras, socialism would provide the necessary institutions for free competition and social justice. Socialism, in Walras’s view, entailed state ownership of land and natural resources and the abolition of income taxes.¹¹ As owner of land and natural resources, the state could then lease these resources to many individuals and groups, which would eliminate monopolies and thus enable free competition. The leasing of land and natural resources would also provide enough state revenue to make income taxes unnecessary, allowing a worker to invest his savings and become “an owner or capitalist at the same time that he remains a worker.”¹² The socialist institutions advocated by Walras, which did not include state intervention in economic activities, would thus allow the realization of free competition idealized by neoclassical economics. Mathematical neoclassical economics helped to explain this competitive economy and suggested necessary reforms to realize it (Baranzini 2001: 48). To Walras, perfect competition, socialism, neoclassical economics, and mathematics did not just complement each other but, in fact, made each other possible.¹³ Walras understood the free market as necessary for socialism and socialism as necessary for the free market.

Surprisingly, however, many innovations in the neoclassical economics of socialism came from economists critical of socialism.¹⁴ Neoclassical economists understood their discipline as applicable and necessary to any economic system, including socialism (Landauer 1959: 1619–1635). These critics in particular pointed out that socialists, especially those following Karl Marx, did not discuss the nature of a future socialist economy (Mises [1920] 1938, 87–88).¹⁵ As a result, socialists incorrectly predicted that a socialist economy would be liberated from economic categories—including prices, money, supply and demand, and profit—and economic laws. Neoclassical economists who supported laissez-faire policies and criticized Marxist socialism argued that both capitalist and socialist economies would share the same economic laws and economic rationality and thus that attempts to avoid these laws would lead only to disappointment (Böhm-Bawerk [1889, 1891] 1971; Wieser [1893] 1989). For example, Dutch economist N. G. Pierson wrote, “I hope to show that it is a mistake to believe . . . that the efforts of theoretical economics are unnecessary. This branch of knowledge can never be neglected—not even in the event of socialism being carried into practice” ([1902] 1938: 43). These critics implied that, if one truly understood economic laws, one would not be a socialist. To these critics, neoclassical economics was universally applicable to all economic systems.

At the same time, socialist models helped to develop neoclassical economics. Major innovations in neoclassical economics came from those critical of socialism, who, at the same time, used one particular socialist model, an abstract model of a socialist state, as a methodological tool (Hayek [1935] 1938a: 24; Landauer 1959: 1624; Lavoie 1985: 80; Maksimović 1958: ch. 2). Hayek recognized this: “And up to a certain point from the very beginning the problems of a centrally directed economy found a prominent place in the expositions of modern economics” ([1935] 1938a: 24). To build his theories about value, Austrian School neoclassical economist and critic of socialism Friedrich von Wieser used a “communist state”: “We shall think of the communist state as the perfect state . . . Natural value shall be that which would be recognized by a completely organic and most highly rational co...