Seminar Topic - What Has Economic Science Learned From Socialism?

This is a recurring theme for me, but one which I maintain is very key. I ran into a note I had written up last spring on this topic, and then a post at The Austrian Economists seemed a good place to promote the idea. However, it didn't catch any traction there. I will post in here, so it is not entirely forgotten.

The socialist calculation debate brought to light many fundamental economic issues, and problems of the classical and neo-classical modeling. While classical economists believed strongly in markets, their models could not explain exactly why socialism would not work. But, while the calculation problem provided a lot of insight and generated a lot of profound and interesting investigations, it did not resolve the issue. In fact, Lange's concept of market socialism for some time was considered a refutation of the arguments against socialism. A new set of economic theory rose from the ashes of that debate, focused on beneficial government interventions.

Comparative political economists continued to ask which system worked best, and market failure theorists worked out how government could solve the problems of the market. But then the "other" system fell, and upon cracking open revealed a rotting interior. In fact, the critics appeared to be correct after all. All of the problems they pointed out turned out to be true.

Now what? How has this revelation begun to change the face of economic theory? Is some of the faith in the ability of government to solve market failure on the way out? Do we now consider government failure as often as market failure? Do we now focus on the institutions that make markets possible- what of the old institutions of socialism, can we learn from why they failed? Can we still learn from the calculation debate, by considering why the socialists were wrong and what was wrong with their models and by looking again at the arguments of the opponents of socialism?

If the old models could not prove the problems of socialism, do we now have new models which can? Many of the core problems with the old models concerned their static nature and dependence upon equilibrium. Are we finally moving away from those kind of models, to a more dynamic approach? Should we look to the Austrians, the most adamant critics of socialism, for a better starting point and methodology? How has the science benefited so far, and what more can we learn?

The idea is that economists of all stripes should come together and review the old debates and the models that underlie them, between those who favored socialism and those who were critical, determine what failed in those models that so many fewer economists today would argue for socialism in those same terms, and explore whether we have rid ourselves of those assumptions in the models we use today. Some great work was done right around the collapse which touched on these issues - for example Stiglitz who I posted about a few days ago. But, I am not sure that something like this seminar has occurred, and even if it has perhaps we need more of them.

For example, have we rid ourselves entirely of misuses of equilibrium theory? Static models similar to the perfect competition model? Probably as important as the flaws in the static models are the flaws in aggregation - from Keynes to Solow to DGE models, some of the most highly respected theory and modeling has used fantastic aggregation that would seem ridiculous to a child, and which cannot adequately address institutional structures or behavioral responses to them. Are we still too dependent on aggregation without microfoundations?

Assuming for the moment we have indeed learned our lessons and rid ourselves of these fallacies, it would still be very useful to go over this bit of history, cleanse ourselves of our past and explore the way that these lessons have been incorporated into our current models. It seems to me that any science which believed a falsehood for a long period needs this kind of cleansing, needs to face its own past and take some time to explicitly re-think its models.

Really grasping the mistakes of the past is the best way to ensure they are not repeated. Understanding the way in which the flaws in past models fooled past economists into thinking that socialism could triumph will prevent those today who want to simplify from making the same errors in simplification in new forms. We may think we know the obvious: institutions, institutions, institutions. But what of static models - when can they be used safely? What of aggregation, still used so much in dynamic modeling today, when can it backfire badly? What other lessons can we extract from this long period of darkness in economic science?