Two Concepts of Coordination in Austrian Macroeconomics
Comparing and contrasting the poetic and mundane approaches to the economic problem
First time here? I'm dabchick—unequal parts economist, philosopher, and mathematician, with an incurable habit of connecting dots and a Quixotic fantasy of being a renaissance man. After years of vanishing into online rabbit holes, I've developed a lust for thought and a preference for first-principles reasoning. Each week, I challenge myself to write, hoping that someone, somewhere, may marginally improve their world model. It may even be me. That’s what the comment section is for!
The Mises-Hayek Argument
The economic problem of society is thus not merely a problem of how to allocate “given” resources — if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.
- Hayek, ‘The Use of Knowledge in Society’.
In his seminal essay, Hayek gives us a glimpse into the nature of “the economic problem”. In his thought, the emphasis on the emergent order of the free enterprise system stems from his struggle to understand the fundamental quest to answer the question: how and why does it all work? How does Paris get fed?
The concept of coordination can be traced back to Adam Smith’s descriptions of the concatenation of activities involved in producing woolen coats or the famous pin factory. Coordination operates both within firms and between firms. At its core, the term addresses the non-trivial problem of explaining how multiple agents with heterogeneous preferences, endowments, and knowledge manage to cooperate for mutual benefit and find relative success in their endeavours.
Within the Austrian tradition, two distinct approaches to coordination have emerged. The Hayekian branch emphasizes the dispersed, tacit nature of knowledge and how market processes enable coordination without centralized direction. Far from merely draping standard neoclassical theory in poetic language, Hayek's contribution lies in recognizing that the fundamental economic problem is not optimal resource allocation given perfect information, but rather how to enable social cooperation given that knowledge is fragmented and largely inarticulate.
Hayek's notion of “plan coordination”, which substitutes the consistency of plans for the constancy of data in Walrasian general equilibrium, illustrates a crucial difference from the Misesian approach. While the Hayekian framework retains some elements of equilibrium thinking as an analytical benchmark, the Misesians emphasize the actual process of coordination without subjecting it to a transcendent standard outside of ordinary economic life. For Mises and his followers, entrepreneurial appraisal and economic calculation drive coordination without reference to an impossible "God's-eye view" that real market economies supposedly fail to achieve.
Another theme similar to questions of equilibration relates to the problem of price coordination as opposed to plan coordination. As Salerno argues, market developments should be seen in the spirit of W. H. Hutt’s analysis, which emphasizes price coordination (Salerno, 2010, p. 182). In contrast, plan coordination is a concept mainly developed in the Walrasian tradition, where the data themselves equilibrate the market.
Price coordination, however, emphasizes the entrepreneur’s role, in that this view does not see prices as intermediate steps toward an equilibrium fully reducible to other variables (such as utility, scarcity, etc.). This approach to prices inherently leads to Lange’s perspective, in which prices are pure parameters equalizing and balancing out other, more relevant and fundamental elements (Lange, 1956, p. 89). However, contrary to this view, prices are themselves fundamentals, and are not reducible to anything less than human creativity and entrepreneurship.
The phrase “prices are themselves fundamentals” captures, I believe, the core of the Hayek–Mises split—one that has shaped Austrian thought for over a century. Hayek, despite his market-oriented rhetoric, belongs more to the verbal-Walrasian lineage than to Mises’ causal-realist tradition, treating ‘price signals’ as cues that help agents fumble toward general equilibrium. In ‘The Equations of Mathematical Economics and the Problem of Economic Calculation in the Socialist Commonwealth’, Mises writes
The state of equilibrium which our equations describe is a purely imaginary state of equilibrium. It is merely a hypothetical, though indispensable, tool of analysis which has no counterpart in reality. Thus it is not only a future state which differs from the state of the moment that has just passed and with which we are acquainted: It is merely an imaginary theoretical construction which will never become reality. Hayek (1935, p. 211) has also pointed out that the possibility of using the equations describing the state of equilibrium for purposes of economic calculation presupposes a knowledge of the future scales of preferences of consumers. But here he has in mind only a complication of the practical task of applying the equations, and not a fundamental and insuperable obstacle to their use for any such process of calculation.
(emphasis mine)
Now that general equilibrium theorizing has fallen out of favour in economic theory, it appears to some economists that there are no gains to be made from reviewing the Austrian literature and its contributions. Au contraire, the weak formulation of the Efficient Markets Hypothesis ought to lead a consistent Austrian to reject their position!
I would go so far as to say that if the verbal-Walrasian tradition were all Austrians had to offer, they should fold and merge with the mainstream. If the Austrian school’s sole achievement is to dress up Arrow–Debreu in prettier prose, then what’s the point? Economics is supposed to be a dismal science, not a decorative one.
I accept the conditionals; I reject the conditions. Austrian theories of coordination—both Misesian and Hayekian—are fundamentally distinct from Walrasian tâtonnement. In Austrian thought, the economy is not a well-posed problem to be solved; it is a process to be understood. The so-called deep parameters do not assert themselves automatically—they must be discovered, interpreted, and acted upon by situated agents.
“A process cannot be understood by stopping it. Understanding must move with the flow of the process, must join it and flow with it.”
(The First Law of Mentat)
Even so, reducing the market-price system to an information-transmission mechanism sells it short. The constellation of present prices (technically, prices of the immediate past) serves as a tool for market participants to anticipate what the future might look like, but it technically does not convey information. What it does is enable agents to form structured expectations about possible futures, thereby allowing coordination in the absence of explicit communication.
Thus, the price system must be understood on its own terms—as a form of life. On this point, the Misesians are exactly right: the market is not merely a transmitter, but something genuinely new under the sun. This, I believe, is where the uniquely Austrian contributions begin to shine. Let the proof be in the following pudding.
Austrian Welfare Economics
Traditional New Welfare Economics is a mathematical exercise in static allocative optimisation. Under certain assumptions about preferences and market structures, perfectly competitive general equilibrium models yield Pareto-optimal allocations. Fallaciously, each deviation from these modeling assumptions becomes a theoretical justification for state intervention.
The Mises-Rothbard approach inverts this paradigm entirely. Economic efficiency stems from adherence to private property norms and the resulting pattern of voluntary exchange, not from measuring deviations from hypothetical "optimal allocations." Preferences and valuations aren't transcendent objects imperfectly manifesting in general equilibrium, but rather the transcendental conditions of human action itself. That I value a good above its market price is revealed exclusively through my purchase of it or my refusal to sell one in my possession at that price. Valuation has no objective existence outside demonstrated human action.
The disequilibrium process through which market coordination emerges is not merely a footnote—it constitutes the essence of economic phenomena. A science of economics that neglects spontaneous, speculative, entrepreneurial discovery is fundamentally incomplete, like staging Hamlet without the Prince.
In Mises’ negative argument against socialism, there lies a latent positive appraisal of the market-price system, later formalised by Rothbard. Indeed, they are two aspects of the same coin—to see why socialism fails, one must first understand why (and how) capitalism succeeds.
With money as a common denominator, the ordinal and incomparable valuations of consumers are synthesized into cardinal comparisons of value—namely, market prices. This synthesis is made possible by the institutions of private property and exchange (of money for goods), which are necessary conditions for such evaluations to take place at all. As Jeffrey Herbener summarises,
The price for the existing stock of each consumer good reflects, but is not and cannot be equal to, the subjective value of its marginal unit, i.e., the unit with the least subjective value. The price for each factor is imputed to it by entrepreneurial demands to rent the factor, according to the objective value of the amount of the consumer good the factor produces at the margin, i.e., its marginal value product. This price will also reflect the subjective opportunity cost factor owners place on the marginal unit of the factor, including renting the factor into other production processes.
Implicit here is the constraint that exchanges must be truly voluntary, i.e. not made under coercion or duress. This principle of genuine ‘demonstrated preference’ is central to Rothbard's framework. Thus, the first theorem of welfare economics, when reinterpreted, does not describe the utopian world of perfectly competitive general equilibrium, but rather the actual economy of production and exchange. Any deviations from this are due to violent interventions into the market, not the “failure” of the market itself.
What distinguishes the Austrian perspective is its emphasis on process over outcome. The end-state concept of Pareto-optimality is discarded in favor of the more pragmatic notion of Pareto-superiority. Every exchange on the market, by this measure, represents a Pareto-superior shift in the state of affairs, benefiting the parties involved (ex-ante) without infringing upon the rights of others.
The mundane moral of the “double thank-you” is rendered scale-invariant.
In the market, we are genuinely thanking each other for having made us each better off.
- Steven Horwitz.
Mises, Anti-Mises, Synthesis
Whether through human action or human design, however, there has been a convergence in the Misesian and Hayekian perspectives. Jesús Huerta de Soto was perhaps the first to integrate the schism, and Michael Munger’s reformulation of the argument in The Socialist Generation Debate synthesizes Mises’s theoretical impossibility argument with Hayek’s pragmatic difficulty argument perfectly.
Note: If the problem is “calculation,” then Acemoglu’s question is perfectly fair. Socialism is not impossible, it is just limited by the ability of society to replicate the function of the price system, gathering dispersed data and performing and updating calculations very rapidly. But that means that the function of markets is essentially mechanical, and there is nothing in principle that would prevent economic experts from solving this problem, with sufficient computing power.
But… wait, stop, don’t! The problem is not calculation of given data, but the generation of the data that would be required, but does not yet exist.
The process by which meaningful market prices are generated in a society based on ownership and exchange cannot be replicated by the socialist commonwealth. The problem is not the calculation of given data, but the generation of the data that would be required, but does not yet exist. The absence of price signals might wreak Hayekian havoc upon the planner’s best-laid plans, but without the price system, the structure of production cannot be organized out of Misesian mayhem.
Thanks for reading! I read all the comments, so share your thoughts and/or share the essay!
I am new to Austrian economics and I would love to know more about this so I would love if you could publish a article about basics
I think you slightly understate the core of the Hayekian Research paradigm here and are too quick to separate the Mises and Hayek positions. Each fall back on each other. I have no qualms with the Misesian position, but it’s been pretty characteristic for a while how understated the epistemic question is. The price system serves to disseminate asymmetric information, but more than that it is feedback and learning. It serves to signal tacit information, both inarticulate as the existing ‘stock’ and unknowable as a future ‘flow.’
Rational economic calculation is impossible due to this inability of the planner to acquire both instantaneously full information about objective detached facts, and knowledge that is subject dependent. We cannot make the ‘best use of alternative resources’ as there is no basis for assessing opportunity costs. These are fundamentally institutional, and knowledge questions. Exchanges serves to facilitate resources to actors themselves. Prices are not the fundamental, that comes down to people and exchange as James Buchanan has previously emphasised. The essence of coordination is—in my view—far more explicitly made in the work of Hayek than any other Austrian who came before it. This is made fairly obvious to me from the inspiration it took toward spontaneous order, in extending entrepreneurship to theory of institutions and the backdrop we need to produce growth. Prices fail if they produce wrong signals or incentives, and they fail if the costs of transacting is too high. The result of this is a vital transition into institutional theory, that allows investigation of knowledge more broadly in the social sciences and systems which go against the constructivist vision. They are systems of human action — and yet not systems of human design.