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Comparative Economic Systems

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33 Comparative economic sYstems
David L. Prychitko - ,.:'-i

Austrian economists are rather well known for their defense of capitai:'r
and criticism of planning and intervention. Comparative economic systen'i -
the comparative analysis of a society's fundamental organizational princi:
:'
_ has emerged as a popular, and powerful, field of study within contempo:,:.
Austrian economics. Here, many of the Austrian school's key theore':.-
concepts regarding prices and knowledge, profit and loss accounting.
.:,:
rivalrous competition have been rigorously applied to examine the nature -:':
logic of capitalism, socialism and interventionism. While the Austrians h.' :
developed a theory of comparative economic systems over the past se\ 3r.:1
decadei, only recently, since the collapse of 'really existing socialism'in :-':
fbrmer soviet Union and Eastern Europe, has their analysis - particularl\ : l
the problems of rational planning under socialism - become accepted :,
mainstream economists.

Roots of comparative systems analysis

The field of comparative economic systems is neither an Austrian inventii:
nor unique to the school. Economists of all stripes have studied the thec:-'
and practice of capitalist and socialist systems. Its roots travel back
to r:
nineteenth century. If, as contemporary economists commonly believe, Ad-
Smith's An Inquiry into the Nature and causes of the wealth of Nari'-'"
off'ers the flrst attempt to study the economics of free market capitali':-
(which Smith dubbed the 'system of natural liberty'), then Karl Marx ar-i--
ably provides the flrst major 'comparative' analysis: most notably, Man '
Das kapital established both a critical (if not hostile and damning) analr.-'
of capitalism and also an implicit, general vision of socialist economic ::
ganization.
Marx's inquiry suggests that society may be founded upon three systerr''-
cally distinct organizational principles: tradition, market or plan. These c":-
egoiical distinctions have, with some important exceptions to be discusse:
later, been generally accepted by contemporary comparative systems econ':*
mists from both the neoclassical school (Grossman, 1963, for example) ar
:
the Austrian school (Lavoie, 1985, for example). A tradition-based sociel'
such as primitive communal groups or hunter-gatherer tribes, tends
to 'r':
organized along the following institutions: common ownership of
(very sir: -
plJ; *eons of production; production for direct use; barter; little, if an.
224
 ComParative economic sYStems 225

:iYision of labor (at best, along gender lines without regard to rationality or
:iflciency); a consistent aversion to risk-taking behavior. Alternatively, a
::arket-based society (capitalism) affords a very different organizational logic'
-\ccording to Marx, in fact, the market is the antithesis of traditional
soci-
:tr'.) De facto private ownership of (technologically advanced) means of
:roduction replaces common ownership; commodity production and exchange
l.iipes out production for direct use and face-to-face bartering; both a highly
:echnical und u hi"ru..hical division of labor is created in the workplace, and
r spontaneous, undesigned social division oflabor emerges with the develop-
rent of labor markets and specialized industrial production. The market
:\stem requires a panoply of entrepreneurial risk taking, in the form of
jiscovering new avenues of investment, alertness to economic error, and
echnological and organizational innovation. Money - a universal medium of
:rchange - provides the basis for appraising the relative scarcities of con-
. ,-". jood, and the means of production (capital) in the
form of competiti ve
rices and profit-loss accounting.
For Mari, the market system is ultimately 'anarchic', based upon an 'anar-
,ny of production" in both a descriptive and pejorative sense. Marx argued
..at the market system is an undesigned, uncontrollable series of commodity
sake of personal gain and profit (here essentially agreeing
=rchanges for the
.,. ittr Smith's descriptive 'invisible hand' phrase). Consequently,
for Marx,
:re market would be plagued with ever-increasing bouts of recessions and
:epression, economic chaos and, ultimately, utter collapse (a pejorative sense
,i ,anarchy of production' which has no counterpart in Smith's 'invisible
just as sure as market has abolished
-rnd,). Hence Marx predicted that,
.:adition in the battle over organizational principles, so too, would the plan
:rtinguish the market and usher in a final type of economic system: social-
.m. (nmploying the dialectic, Marx tried to demonstrate that socialism rep-
:esented the inevitable synthesis between primitive communal society - tra-
:irionand industrial capitalism - market.)
-
Socialism is a system based upon de facto public or social ownership of
he means of production, the abolition of a hierarchical division of labor in
.re enterprise and a consciously organized social division of labor' Under
:Ltcialism, money, competitive pricing and profit-loss accounting would be
::stroyed. The 'anarchy of production' would be replaced outright with a
.:ientifically settled, comprehensive economic plan. Tradition, market and
:lan thus emerge, with Marx, as three conceptual systems with unique or-
-:rnizational togics.
This is not to say that people within a market-based
.r stem, for example, fail to be influenced by certain customs and traditions,
rr fail to create and pursue plans. Rather (and this is the point of capitalizing
:ach system) , the underlying economic principle upon which the plans and
:urposes of people are coordinated within the market - a competitive and
226 The Elgar companion to Austrian economics

spontaneous profit-loss system - is conceptually distinct from a societl .,,ithin, a competitive marke: ::-,:,
organized by a scientific, comprehensive plan or by a pre-modern, coopera- . :titively established pnce. - :-
tive pattern offace-to-face bartering, essential to a tradition system. ^:aise the relative scarcitie: : : .:
.:.erefore the primary ecor..\:-., i
Austrian contributions to comparative systems analysis -rmic planning - will be rm:.:,.-:
Tradition-based economies have been interpreted by most economists, in- ::onomic planning is dispers;:
"::
cluding Austrians, as having only historical-anthropological relevance (for : effectively collected anC -,:.:
understanding the emergence of civilization, for example), while offering llevek would later emphasize _ !-:
little or nothing to the grand debate over economic organization under mo- :irticular to time and place ),1:::
dernity. The traditional economy, in other words, has generally been rel- -r,,'oie, 1986) have argued ri.: ':.:
egated to a conceptual organizational scheme with little contemporary em- -.:rket pricing and profit lo.s .:;. -
pirical relevance. Economists who have worked within the field of compara- .:e. and have thereby devel::.:: :
tive systems have, for the most part, directed their attention to the question oi , : to defend their claim thar ::... r-:
whether a plan-based system (which we shall subsequently refer to as social- -:st advanced computer s\ s:.:!
ism) can achieve the same, if not a higher, level of economic rationality or \lises maintained thar. 3r -i:' :
efficiency as a market-based system (which shall now be referred to as )20, p. 109; also see NIise' - :l-
simply capitalism). rn may not pose a problem r: :. :
On this question, the conclusions drawn by Austrian economists have been - :ny theory that depends u:- :_
notoriously consistent. Shortly following Eugen Bcihm-Bawerk's (1896) re- -: end of scarcity, or full an: ,--::
lentless critique of the Marxian labor theory of value, the chief Austriar. :- rnomists maintain that cal;':..-* :
insight in comparative systems theory - that socialism will fail to calculare ..:ch must lead to the dou n:.,. _: .

rationally the relative scarcities of goods and resources, and must therefore -.-: \\'ere not, of course, free::,::. ::
fail in practice - first surfaced in Friedrich von Wieser's Theorie der -::9e would attempt to ans,,,.:: \
gesellschaftlichen Wirtschaft (1914). Wieser had claimed that plans in : - -Jel of 'market socialism L-._r.
-
capitalist system can be coordinated . . e been more aware of the _.-:.: =
..orv Lange's lead (Schumle::: .

far more effectively by thousands and millions of eyes, exerting as many wills -.:ate had resulted.)
they will be balanced, one against the other, far more accurately than if all thes: The collapse of the Sor,iet L-:-: -
actions, like some complex mechanism, had to be guided and directed by som;
superior control. A central prompter of this sort could never be informed c: -:Jest that there is empirical :.- .;:
'.' :rdled some outside inre:=,: --
countless possibilities, to be met with in every case, as regards the utmost utilirr
to be derived from given circumstances, or the best steps to be taken for futui; .:ems analysis (see Kornat. -:':
advancement and progress. (pp. 396-7) :::raps ironically, suggest rhe: :.1- r
--: critically re-evaluated as ',:. i :.:
But the locus classicrzs of the Austrian criticism of socialism appears i:. --: -\ustrians have claimed rri: ).,:
Mises's 1920 essay, 'Die Wirtschaftsrechnung im sozialistischer. - ::.,-eptual possibility, void oi e:::
Gemeinwesen' (translated as 'Economic Calculation in the Socialist Corn- "--,'pted the original Marxirn >.:':-
monwealth'). "- , : demonstrated that, for a,, :..:
The core of Mises's argument can be stated concisely: (1) socialism as- : .:-based system falls far shc:: _-:
pires to replace private ownership of the means of production with socir : .:. After all, traditional ecc:.:,,
ownership, and seeks to destroy spontaneous (anarchic) market exchange ::- -..e a successfully funcrion::- i ,

favor of central economic planning; (2) therefore, the means of productio.-, : :\. a real-world impossi: ..:.
(that is, higher order capital goods) will not be produced for, and exchange: -: Jrative SyStemS Iiteratur. . . : :'
 Comparative economic systems 227

.,,ithin, a competitive market process; (3) without this market process, com_
:etitively established prices - those that normally allow individuals to ap-
:raise the relative scarcities of the means of production will be erased; (4)
-
:herefore the primary economic goal of a socialist system rational eco-
-
:omic planning - will be impossible. The knowledge required for successful
:;onomic planning is dispersed among individuals within society, and cannot
:e effectively collected and used without competitive market pricing. As
Hayek would later emphasize (1945), the relevant information is contextual,
:articular to time and place. More recently, younger Austrians (especially
T
avoie, 1986) have argued that the type of knowledge supplied by rivalrous
rarket pricing and profit loss accounting is predominantly 'tacit' or inarticu-
-rte, and have thereby developed a phenomenological-hermeneutical analy-
.is to defend their claim that this knowledge cannot be collected by even the
nost advanced computer systems.
Mises maintained that, at best, socialism 'is only conceptually possible'
1920,p.109; also see Mises, 1927,pp.i0-75). Rational economic calcula_
:ron may not pose a problem in the pure theory of a static socialist society (or
-n any theory that depends upon such extreme assumptions as, for instance,
:re end of scarcity, or full and complete information). Nevertheless, Austrian
::onomists maintain that calculation is an eminently practical problem, one
.', hich must lead to the downfall
of real-world socialist planning. (The Austri-
:ns were not, of course, free from criticism or misunderstanding. Soon oskar
' ange would attempt to answer Mises's
claim by erecting a neoclassical
rodel of 'market socialism' (Lange, 1936). Joseph Schumpeter, who should
:ave been more aware of the intricacies of the Austrian position, would later
:ollow Lange's lead (Schumpeter, 1942). The confused socialist calculation
:ebate had resulted.)
The collapse of the Soviet union and the Eastern Bloc after 19g9 seems to
.uggest that there is empirical power to the Austrian analysis, and has already
-ekindled some outside interest in the school's approach to comparative
:\ stems analysis (see Kornai, 1990, for example). But this collapse may also,
:erhaps ironically, suggest that the Austrian analysis will need to be clarified
.nd critically re-evaluated as we move into the next century. why is this so?
rhe Austrians have claimed that socialism, as a plan-based system, is only a
-'onceptual possibility, void of empirical viability. Hence, although they have
.ccepted the original Marxian systems schema of tradition-market-plan, they
rave demonstrated that, for all practical purposes, the empirical status of a
:lan-based system falls far short of that found even among traditional sys-
::ms. After all, traditional economies have existed at one time or another,
,i hile a successfully functioning socialist system is, according
to Austrian
:reory, a real-world impossibility. Here, the Austrian contribution to the
--omparative systems literature is nothing short of radical, and arguably repre-
 228 The Elgar companion to Austrian economics

sents a tremendous intellectual feat, one which distinguishes Austrian econo-

- ,;to private proPs::. : *:
mists from Marxists and neoclassical comparative systems economists. .::Ine WOfk.
Moreover, the Austrians have consistently criticized the notion of a poten- But Austri.rn. It..: -'
':-'nSth ol their,
tial .Third Way'- as proposed by models of market socialism, indicatire
'

planning, redistributive welfare states, corporatism and the like. The Austri- - jr,)pe as
'prool , : - "
. -,'nornic rel'ornr- l:
-'
ans have remained firm that market and plan are conceptually distinct eco- =
nomic systems, undergirded by different organizational logics. A notion of a .t. uill
be bet':: l'..--,.
'third' system (barring tradition), which purports to 'combine' market and ;rtionism in th: : '- --' : '
plan, is grounded on a logical confusion, and either collapses into a system oi - :riusion.
central economic planning (as argued in Hayek, 1944, and Prychitko, 199 1

or remains a market-based system with mere state intervention (Mises, 1929: i.e also:
Littlechild, l9l9 ; Lav oie, 1985). .: cr 69: The 'urr-... . .

.: cr cr4: The e cll .r'.

Yet, if their analysis is correct, Austrians must ask themselves exactly what - r :narket processes
did collapse in the late 1980s and early 1990s. To be consistent, Austrian
economists cannot claim sociali,sm finally collapsed, otherwise they face the 3 ibliography
embarrassing task of explaining how socialism - an economic system which . ic. Peter J. (l'-
. /,rlA, Bo.ton h.
they purport to be empirically impossible - lasted several decades, or indeed.
.

'.s. PcterJ. (loo: : '

how it lasted at all. Here lay a potential weakness of applied Austrian systems
theory, for Austrian economists, unfortunately, are traditionally prone to com- Hir :
.: rhe CLose of : :'
.:trn. Crcgorr ' I c' :
mit this intellectual mistake. Michael Polanyi's (1957, p. 36) criticism ot L October.
Mises and Hayek is the most glaring: . -.. F.A. r1911t.7i:, - ..
' , :r. F.A. (1945). Tr: - : '-
Of all the intellectual triumphs of the Communist regime - and they are vast - ;: - . Septen.rber.
.:. Jrnos 1 lggu . 7' i
seems to me the greatest is to have made these eminent and influential writer.
. --. Osker tlo-1o. - r
[Mises and Hayek] so completely lose their heads. Could anything please th;: ::incott (ed.). Or :,:, :
regime better than to hear itself proclaimed by its leading opponents as an om- -
. .. Don 11985 . \.
nipotent, omniscient, omnipresent socialist planner? That is precisely the picture ---.ishing Co.
oiitself which the regime was so desperately struggling to keep up. Such accusa- . .. Don (lq8b'. T:. ', '.
tions supply the Soviet government with an incontestable 'testimony' of havin.- ' r.cJge'. C.r't1. ..
achieved the impossible aspirations of socialism, when in fact it has simply set ul ' "Don(19R6--' I
a system of state capitalism - a goal which leaves the regime next door to where ::
started. .-:iJ.StcphcnC . -:
,i
., Ludu,ig von ( l 9l :
To claim today that the collapse of the Soviet economy represents a collaps; - ,.-ttth|l.r.ren.rc ]1r1:'-; ' !' ':..'

of socialism (and a final vindication of the Austrian position) may simph .- : . in F.A. Hrr-r
prolong the above misunderstanding. ' l/ Sr'r'lrt/i'"i - '
Lldtig ron r l 'i-
Fortunately, some younger Austrians (such as Boettke, 1990, 1993 an; h;rnsr.Cilr: Sh.- : t- --
Lavoie, 19S6-7) and others sympathetic to the Austrian position (Robens. . -"Ju ig r on , lLl ;.

". \crr \ork .1r . -

1971, for example) have interpreted so-called socialist economies as marke: \li.huclrlo)-. .=
systems with a tremendous degree of state intervention. In this manner, so- -: ,,r. DaYid L. (19:. '.: ""
. : n. Conn.:Cric' .t :
called socialist economies differ in kind from a comprehensively plannec -

system because they crucially depend upon world market prices and a stu- . \lerico Press.
pendous underground economy for scarce resources - which engenders de

L-.
 Comparative economic sYstems 229

rcto private property relations in spite of a de jure socialist constitutional

ramework.
But Austrians might now harbor a greater tendency to undermine the
:rrengthof their own analysis by interpreting the latest events in Eastern
:urope as 'proof' of socialism's failure. Perhaps as the excitement over these
:--onomic reforms begins to wane, and new problems emerge, Austrian econo-
::lsts will be better prepared to interpret more carefully the history of inter-
.entionism in the twentieth century, while avoiding unnecessary scholarly
- onfusion.

See also:
i:rpter 69: The socialist calculation debate; Chapter 77: The 'new' institutional economics';
rapter 64: The collapse of communism and post-communist reform; Chapter 74: Marxisms
-:J market processes

Bibliography
rrcrrke, Peter J. (1990), The Political Economy ol Soviet Socialism: The Formative Years,
III 8
1928. Boston: Kluwer Academic.
: -.ettke, Peter J. ( 1993), Wh1- Perestroika Failed, New York: Routledge.
i,rhm-Bawerk, Eugen (1896), Zum Abschluss des Marxschen Systems, translated x
Karl Marx
,ind the Close oJ His System (1898); New York: Augustus Kelley' 1949.
l:ossman, Gregory (1963), 'Notes for aTheory of the Command Economy', So,-iet Studies,15,
2). October.
j:vek, F.A. (1944),The Road to Setdom, Chicago: University ofChicago Press.
:rr1ek, F.A. (19a5), 'The Use of Knowledge in Society', American Economic Reulew, XXXV,
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i, ,rnai, Janos (1990), The Road to a Free Economy, New York: W.W. Norton.
-,nge, Oskar (1936), 'On the Economic Theory of Socialism', reprinted
in Benjamin E.
Lippincott (ed.), On the Eutnomic Theory oJ Sociall.rm, New York: McGraw-Hill' 1964.
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Publishing Co.
as a Procedure for Discovery and conveyance of Inarticulate
.r oie, Don ( 1986), 'The Market
Knowledge', Comparative Economic Studies, 28, (1), spring
-roie,Don(1986 7),'PoliticalandEconomiclllusionsofSocialism',CriticalReview'1.(l)'
'.\ inter.
-::tlechild, Stephen C. (1919), The Fallacy of'the Mixed Economy, San Francisco: Cato
Insri-
iute.
' i:ses, Ludwig von (1920), 'Die Wirlschaftsrechnung im sozialistischen Gemeinwesen', An:hiv
.tir soz.ialwissenschafien,4T, translated as 'Economic Calculation in the Socialist Common-
..realth,, in F.A. Hayek (ed.), Collectivist Ecorutmit Planning: Critical Studies on the Po.r.si-
l,tlities ol Sot:iall.rm, (1935); Clifton, NJ: Augustus M. Kelley, 1975.
..1:.es,
Ludwig von (1927), Liberalismus, translated as Liberalism: A socio-Econornic Exposi-
:rol, Kansas City: Sheed Andrews & McMeel, 1962.
Ludwig von (1929), Kritik des lnterventionisma.s, translated as A Critique o.f lntenen-
"1:.es.
;rorrl.wt, New York: Arlington House, 1977.
::lenyi, Michael (1957), 'The Foolishness ofHistory', Encounter,9, (5), November.
-:r chitko, Davirl L. (1991), Marxism and Workers' Sell-Management: The Essential Tension,
\\'estport, Conn.: Creenwood Press.
: r'ierts, Paul Craig (1971), Alienation and the Soviet Economy, Albuquerque: University of
\erv Mexico Press.
 230 The Elgar companion to Austrian economics

Schumpeter, Joseph A. (1942), Capitalism, socialism, and Democracy, New York: Harper
Row, 1976.
Wieser, Friedrich von (1914), Theorie der gesellschaftlichen Wirtschaft, translated as So, -r4 Financial econorn
Economics (1927); New York: Augustus Kelley, 1967.
Mark Skotrsert

- --: ^\ustrian school oi ei'--:. ---:

--: books about the ragi:,=- ::::
-::rble? Can investors':..: :'
- imize risk and mari;-:: -::-
= .,f
government in tl-.: ,:- -:
: - :.omic theorY can Pr. -: -'
\ re stock prices Predictable ?

- ::: is flo coflSeoSU: lt'-:- '- 1'

;r.tS &ro forecastable. \1,: '

:
:
-
" - inancial gurus are -- --:.
.: ::
-:.: cnd other finan;-:. -'':1'
: - :.amic theories. e Curllll:l-- -
--1
Fatterns and coml. --.::
:-
- i markets. Nlanl ::- - -:
-- rI a living organi'::- -:'- -
. . ::havior over an'] -- ':: r!'
- -..-:matics, computer !--:-::
, ' -,'l) mechanistic \\ J. . ' j
'-- '

'.' .k market isju't : ---:

-.1 :he other end of Ir3 >:'.::
.: -. :hat anyone on \\'..
S :=-

"-:- J3. including Harrr l'1 :r':

".::: and Paul Samuels- . -
r : . .. unPredictable. aI l::::.:
- -.i:eenth-centurr Fr::- - - '
: - :--:,ltion of the sPecui":-: -: :
-- --::lities are 50 Per -j-: ---
j r11 lall. Bachelier . '
.'.

-, : root of time' uh:::' :':'

.'- :lr colliding iP iP.'; I-
.-::o be called'ranca::- n'
"- The random ualk::.:-:;
- -' :tat 'short-term' ci:.:::;

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