Wednesday, February 12, 2014

Cassel: Praised Entrepreneurship and Critiqued Socialism but Ignored by Austrians?

A few excerpts from Fundamental Thoughts in Economics will suffice to make this point. Cassel was highly skeptical of political power and believed that economic analysis was necessary to check the efforts to expand government's scope when that expansion was unwarranted and the goals of the expansion were unrealistic.
The observance of this rule [to minimize assumptions in modeling] enables us to determine the degree to which economic conditions are independent of social order. In fact, this is the only way by which science can effectively oppose popular overvaluation of political power. But such a study of social economy is also of great importance for science itself, in as much as it is an aid for penetrating deeper into the true nature of important economic phenomena. It is sometimes useful to form an idea of how certain feature of our actual economic life would present themselves in a hypothetical, purely socialistic society, with the whole production centralized in the hands of a single authority, and what modifications the phenomena would thereby undergo. Such an investigation shows that the dogmatic socialists' belief in the radically transforming effect of their social order on the essential economic phenomena is quite groundless, and in fact represents a superstitious overvaluation of political power." (25-26)
He even consider calculation under a socialist system in The Theory of Social Economy. His definition of socialism is somewhat vague, but he does consider the limits of economic planning,

In our economic system, the work of directing production in conformity with the requirements of consumers falls principally upon the entrepreneurs. This task is by no means so simple as Socialists imagine when they say that all that is necessary is to compile statistics of wants in advance and then officially to regulate production on the basis of these statistics. Regulating consumption in this manner would be equivalent, in a large degree, to suppressing the freedom of choice. of consumption that is characteristic of the exchange economy. But the consumers wish most decidedly to retain this freedom of choice to the last moment.  
The difficulty of the problem lies precisely in the fact that the constantly varying demands of consumers, which cannot be determined in advance with any degree of certainty, must be satisfied, despite incessant changes in the methods and conditions of production. This work is actually done - naturally not perfectly - by a number of independent entrepreneurs, each of whom, on the whole, looks merely to his own interest.  
This solution of the problem is possible because, whenever a want that can be paid for is left unsatisfied, or is not completely satisfied, or satisfied only at an abnormally high price - every time, that is, the problem of the 'economic direction of social production' is not satisfactorily solved - an entrepreneur is encouraged by the prospect of earning a special profit to make a better provision for the want in question, and the productive process is thus steadily improved. The entrepreneur intervenes, not only where something is to be done for the immediate satisfaction of consumers' wants, but everywhere where the productive process, somewhere among the thousands of its component processes, exhibits a gap which leaves room for his enterprise. In this way, all these partial processes are united into a single productive process, embracing the entire satisfaction of wants in the exchange economy. (171)
Notice that, even though Cassel was a general equilibrium theorist who loved the specificity provided by math, he was very clear that economics is about humans acting. He even emphasizes the entrepreneur, yet does not receive a citation, as far as I have looked, in Israel Kirzner’s Market Theory and the Price System. A search through the index of Human Action reveals that Cassel is mentioned once: only indirectly via a citation. The more I the study economists that practiced prior to the Keynesian era, the more I believe that the Austrian school has harmed itself by not fully employing the ideas of these potential intellectual allies. If anyone knows of a story as pertaining to this apparent separation, I would love to learn more.

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