Where Hayek and Marx Part Ways

“The most committed liberal would believe that perfection is unattainable, while the socialist would contend that it is not only possible but necessary.”

One of the most consistently repeated criticisms of socialism coming from the economic right has to do with the inability of a centrally planned economy to efficiently allocate resources. They argue that this is due to the difficulty that arises from processing the large amounts of information that go into every economic transaction. While this criticism has some merit, I do not think it can be considered a criticism of socialism writ-large—but rather only of centralized Soviet-style socialism. This is an important issue to address from the Left because—with renewed interest in socialism around the world—much of the criticism coming from conservatives or libertarians invokes some version of this argument. More on this later, but first I want to address what I see as the fundamental insights that this line of critique provides. Perhaps the most famous thinker associated with it is Austrian economist Friedrich Hayek. It is most clearly laid out in his article “The Use of Knowledge in Society,” which describes markets as mechanisms for the exchange of the total knowledge that is necessary to calculate the total production of allocation needed in an economy. This is what is commonly known as the calculation problem. The basic argument is that the knowledge needed for the full calculation of an economic transaction is so specific and sensitive to contextual variables such as time and place that aggregating it would be impossible, so it is best left decentralized and in the hands of the agents best suited to apply it: namely, individuals interacting in the market.

The roots of this line of reasoning can be seen already with the neoclassical economists of the mid-to-late 19th century. At its core, I believe it can be reduced to a disagreement between the labor theory of value (LTV), espoused by Marx, and the subjective theory of value (STV), of which Hayek was a proponent. One interesting aspect of this dichotomy is that—while the former is usually associated with left-wing economics because of Marx and the latter with the Right because of the Austrian School—it is mostly a matter of historical accident. It could have easily been the other way around. LTV is most commonly known as one of the underlying principles of Marx’s theory of exploitation, but the idea did not originate with Marx or Engels, but rather with Adam Smith and David Ricardo, two of the founders of mainstream classical economics. And while Smith, unlike the caricature of him that is often created, certainly had pointed critiques about the fairness of capitalism, he was still a firm believer in a market-based economy, as was Ricardo.

The point of this brief historical detour is simply to show that there is nothing inherently right-wing or left-wing about either theory of value. They are both simply descriptions of the formation and change of a particular economic variable.

On the other hand, STV is most closely linked with the Austrian School of economics. This is a fair association, but it is not the whole story. It was originally developed separately and simultaneously during the second half of the 19th century by three economists: Carl Menger, founder of the Austrian School, William Stanley Jevons, and Léon Walras. All three were separately working on what is now known as General Equilibrium Theory, of which STV is a necessary component. Interestingly, Walras was a self-described socialist (albeit with some qualifications). His brand of socialism is closer to what is now commonly referred to as Georgism, due to American economist Henry George (though Walras first published on the subject in 1861, a few years before George). Walras advocated for a free market economy in which capital, production, and exchange remain in the hands of private actors. However, he also proposed the full socialization of the product of land. This included, not only taxation on land value but even the repurchase of all land by the state so that it could be publicly owned and land rents could become socialized wealth.