July 11, 2023
Anna Faria and J.R. Subrick ask in a recent edition of the Southern Economic Journal: After the New Comparative Economics, who needs Mises?
They take Andrei Shleifer, by some counts the most cited living economist, as representative of the New Comparative Economics.
Their answer, in a nutshell, to my titular question is: Anyone who seeks a full-orbed grasp of why socialism fails.
The abstract:
“The demise of socialism in Eastern Europe and the transition to a market economy in China and India marked the end of traditional comparative economics as a field. The debate between capitalism and socialism was settled. The economic calculation argument of Ludwig von Mises seemed no longer relevant. In its place, the new comparative economics (NCE) arose. The NCE focuses on the institutional differences that affect the protection of contract and property rights. The research program of Andrei Shleifer has provided numerous insights into how markets operate. This paper examines the Shleifer-inspired program in comparative economics in light of the economic calculation argument Mises made. Although the recent developments in comparative economics have extended and complemented the contributions of Mises, it has not displaced them. An account of the economic calculation problem is still missing in the new comparative economics.”
In other words, the problem with socialism is more than incentives:
“Does Shleifer's focus on incentives supersede the calculation argument of Mises? No, it does not, since they approached the problems of socialism from two different but not incompatible perspectives. In fact, Mises and Shleifer were studying different problems. Mises addressed the theoretical problems of socialism as they existed in the first half of the 20th century, when socialist production processes had not yet had time to fully develop (and ultimately fail). Without private property rights, how does one allocate resources in a dynamic economy to sustain an extensive division of labor? Mises addressed this question. Assuming away the nuanced variations in institutional arrangements and public choice issues of the type Shleifer later highlighted, Mises and Hayek logically concluded the impossibility of socialist production and allocation in a dynamic economy. In contrast, Shleifer sought to explain the empirical observations of persistent shortages in socialist economies of the late twentieth century.”
For more on those pervasive, Soviet shortages, see Shleifer and Vishny or Levy. As they put it:
“The single most pervasive phenomenon in socialist countries is a shortage of goods. Consumer goods ranging from necessities, such as food, to luxuries, such as cars and gold, as well as many intermediate inputs, are typically in short supply.”
Why? In Shleifer and Vishny’s account:
“We argue that an important reason for pervasive shortages is self-interested behavior by the ministry bureaucrats who set the planned prices and output. These bureaucrats intentionally plan shortages in order to invite bribes from rationed consumers. If markets cleared, firms in an industry could earn profits, but most of these profits would accrue to the state treasury, not to the managers or the ministries. The key feature of socialism is that the decision makers who determine the prices and output of firms do not, to a first approximation, keep any of these profits. In contrast, when there is a shortage of a good, potential customers try to obtain it by offering bribes and favors to the bureaucrats in the ministry (and to the managers of firms). These bribes tend to be much larger than the share of official profits that the bureaucrats and managers are allowed to keep. And because the bribes are not official transactions, none of them goes to the treasury. As a result, the industry is better off creating a shortage of the goods and collecting bribes than making official profits it cannot keep. To collect bribes, socialist industries will always try to produce a level of output entailing a shortage at official prices.”
The way I’ve put it before is that the “new comparative economics,” or even more broadly—the “new institutional economics”—is describing behavior in environments that aren’t subject to economic calculation in money prices. For more on the connection between the NCE/NIE and Austrian econ, specifically how calculation fits in, see here, here, here, or here.
Check out the Faria and Subrick paper—it’s also a great overview for Law and Econ students.