Knight and the Austrians on Capital, and the Problem of Socialism

One of the great debates of the twentieth century was over the theory and practice of socialist economics.¹ While the end of the Cold War has focused intellectual attention on the actual practice of communist states, the theoretical arguments about the possibility of a genuine socialism (as opposed to the corrupt versions practiced in the former communist bloc countries) still have intellectual cache. The fact is that for the better part of the twentieth century, intellectual thought was dominated by those who believed—with little evidence, or perhaps in spite of the available evidence—that socialism was clearly morally superior and most likely could be fashioned in such a way as to be economically superior to capitalism. While that sentiment has fewer adherents now than it did ten years ago, among intellectuals the number who still subscribe to that view is probably still relatively large. Among economists, the number is probably smaller, but still not zero.

One might understand how twentieth-century intellectuals in general could be favorably disposed toward socialism's ethical claims. Given what we now know about the myriad problems of central planning, the real puzzle is why economists ever believed that socialism as an economic system could fulfill all the promises made on its behalf. One answer is that even among economists in the early part of the twentieth century, the intellectual dominance of socialist thought displaced the presumptions of nineteenth-century liberalism. Belief in the efficacy of free trade and the desirability of minimal government involvement in the economy gave way to a presumption in favor of economic planning and Keynesian demand-management policy throughout the developed and undeveloped world. Arguments concerning the inherent contradictions of capitalism and the necessity of the visible hand of government action replaced arguments for the invisible hand of the free market.

There were a minority of economists who resisted the professional move toward central planning and government activism. Some were simply appalled by the prospect of socialism on political grounds, while others sought to provide a new set of arguments for economic liberalism. In the first half of the twentieth century when the intellectual battle was being fought within the economics profession, economists who were the most pessimistic about the possibility of a benign and productive socialist regime included Ludwig von Mises, Friedrich Hayek, Lionel Robbins, and Frank Knight. Like many of their colleagues, all of these men shared a vision of socialism as a system potentially fraught with economic inefficiencies and rife with opportunities for political despotism. What makes their opposition to socialism interesting is that they argued their cases on very different grounds. Despite their shared antipathy to socialism as a political and economic system, there were important disagreements among them about the analytical conclusions to be drawn from an investigation of the economics of socialism. In particular, Frank Knight differed radically from Mises and Hayek on the economics of socialism.² Where Mises and later Hayek devoted much of their careers to trying to show the theoretical impossibility of efficient central planning, Knight was of the opinion that economics could provide no theoretical critique of socialism at all. Any problems that might be encountered in a socialist economy would all be of a political nature.

The puzzle we will investigate is why economists like Frank Knight on the one hand, and Ludwig von Mises and Friedrich Hayek on the other, all of whom were on the same side of the political fence with respect to the desirability of socialism, could be at such loggerheads in their analytic evaluation of the economics of socialism.³

Not only did Knight and the Austrians share a broad political vision; they also shared some common ground on economic matters as well. Mises and Knight possessed similar methodological and analytical views on apriority and subjectivism. Mises considered Knight's Risk, Uncertainty...