On almost every page of The Socialist Calculation Debate and the Relevance of Economic Knowledge, I found myself thinking, “I can’t believe a monograph like this still needs to be written in the year 2025,” but here we are. 

A self-described “democratic socialist” has just been elected mayor of arguably the world’s most important city. The Trump administration is buying ownership stakes in large corporations, which leaves me wondering what Republicans who ran against socialism believe “socialism” is. But maybe I shouldn’t be surprised: the right has long embraced border socialism. Why not take increasing control over the material and intellectual means of production?

Peter J. Boettke, Rosolino A. Candela, and Tegan L. Truitt explain in a welcome and important contribution to the Cambridge “Elements” series, launched by Cambridge University Press to disseminate focused scholarly works that are a little too long to be journal articles and a little too short to be books (I reviewed Austrian Perspectives on Entrepreneurship, Strategy, and Organization for AIER in 2021). 

The authors emphasize a point that Austrian economists have reiterated for decades, but that does not seem to have made its way into the mainstream literature. The “calculation problem” is not a computational problem. It’s an epistemic problem. It isn’t that it was too hard to gather the necessary data and do the required calculations in 1920 (when Ludwig von Mises published “Economic Calculation in the Socialist Commonwealth”) or 1945 (when F.A. Hayek wrote “The Use of Knowledge in Society”) or 1985 (when Don Lavoie published Rivalry and Central Planning: The socialist calculation debate reconsidered). Nor was it difficult in December 2022, when generative AI was in its infancy and I introduced a Southern Economic Journal symposium on the 100th anniversary of “Economic Calculation in the Socialist Commonwealth” and the 75th anniversary edition of “The Use of Knowledge in Society” with an article titled “Economic planning must be polycentric, not monocentric.” The problem is that the data don’t exist unless the means of production are bought and sold in free markets – which means that modern technosocialists enamored with generative AI as the technology that will finally solve the calculation problem are missing the point. Oskar Lange called the market a “computing device of the pre-electronic age,” but he is making a category mistake. The market is much more than this.

How do we know? Prices aren’t just what we get when we crunch numbers correctly. They embody the judgments people make in real time in response to real tradeoffs and genuine uncertainty. To borrow a phrase from Deirdre McCloskey, prices are conjective: they represent a social consensus emerging from shared bets on what something is worth given Hayek’s “particular circumstances of time and place.” And yet they confront us as immutable and seemingly objective facts about the social world. Collard greens were $3.99, and ham hocks were $6.06 at Publix earlier this afternoon, representing not an objective fact about the universe but our best guess at a social consensus about all the ways people could use those collard greens and ham hocks a few days before Thanksgiving. With market prices, the people who run Publix can ex ante estimate whether they can buy collard greens and ham hocks and then sell them at a markup sufficient to turn a profit. They can also ex post evaluate their ex ante estimates and learn whether they have wasted resources. 

Importantly, prices are not just “data.” They are conjectures about value that resolve the problem of economic rivalry, which Lavoie defined in Rivalry and Central Planning as “the clash of human purposes.” Those human purposes “clash” because people have fundamentally different ideas about what it means to live well, and they converse about it by “higgling and bargaining” in the marketplace. The process itself generates knowledge that cannot otherwise exist. Economic knowledge cannot be stored in spreadsheets and processed by supercomputers. Entrepreneurial judgment has no algorithmic substitute. Economic knowledge, to borrow from James M. Buchanan’s classic essay, is defined in the process of its emergence.

Their analysis, though brief, is historically rich, as they describe how liberal politics and classical and neoclassical economics emerged side by side. Thinkers from Smith through Mill (and beyond) understood that markets are embedded in a social, cultural, and legal milieu of property, contract, and consent that makes voluntary exchange – and meaningful economic knowledge – possible. It is rooted in the most fundamental of liberal rights: the right to say “no, thank you.”

The Socialist Calculation Debate and the Relevance of Economic Knowledge gives added depth to the history of economic thought over the last century by exploring how the themes in the calculation debate appear in Ronald Coase’s work on transaction costs originating in his classic article “The Nature of the Firm,” the UCLA property rights school, and public choice. Drawing on the economists Ennio Piano and Louis Rouanet, they explain that the choice between managerial hierarchies and spot markets is a kind of economic calculation that entrepreneurs and managers cannot do without private property and the possibility of exchange.

So why does socialism still attract enthusiastic adherents, especially among educated elites one might think would know better? As Boettke et al. argue, socialism survives in part because these educated elites have not actually grappled with Mises’s economic calculation argument and mistakenly believe that it is a computational problem. However, knowledge does not just exist “out there” waiting to be found and analyzed. It emerges in exchange itself.

It also survives because people have redefined it — not as “common ownership and control of the means of production,” but as “a set of egalitarian, redistributive normative commitments.” For the true believer, socialism’s desirability isn’t a hypothesis we can test with theoretical or empirical inquiry. It’s an axiom that produces a series of “if only” statements that commit what the philosopher, Adam Smith scholar, and The End of Socialism author James R. Otteson calls the “nice if” fallacy. If only people were better. It would be nice if everyone had better, cheaper health care. If only they weren’t so rich. And so on. Boettke, Candela, and Truitt remind us that these hopes and ifs, no matter how nice, keep running aground on the fact that central planning creates Planned Chaos.

Until very recently, the Federal Reserve had been ratcheting up bank regulations. Economists generally agree that excessive bank regulation dissuades banks from extending credit for some productive projects. In a recent speech, Fed Governor Stephen Miran points to another problem with excessive regulation. In brief, “regulations enacted to shore up financial stability have constrained the Fed’s control over some elements of monetary policy transmission and the size of the balance sheet.” He refers to such a situation as regulatory dominance, since monetary policy takes a back seat to the regulatory framework.

Miran has a point. But the problem is even bigger than he suggests. The entire post-2008 system of monetary control is not just misguided, but likely illegal. Congress has known this for seventeen years, and has not done a thing about it. Without concerted action by legislators, monetary policy will remain activist and the balance sheet bloated.

Bending the Rules

When Congress expanded the Fed’s authority to pay interest on reserves in October 2008, the law was clear. Section 19(b)(12) of the Federal Reserve Act said the interest rate the Fed pays on reserves cannot “exceed the general level of short-term interest rates.” This wasn’t some throwaway line. Congress meant what it said: interest on reserves was supposed to eliminate the implicit tax that had previously existed on reserve balances. It was not supposed to subsidize reserve holding, let alone revolutionize the monetary policy operating framework.

But the Fed had bigger plans. Facing an explosion of emergency lending, officials decided to pay banks more than comparable market rates, such as Treasury yields. This kept banks from lending out their excess reserves, which would have caused inflation.

As George Selgin documented in his book Floored!, the Fed’s creative solution was to reinterpret the statute. Officials decided that “rates on obligations with maturities of no more than one year,” including the primary credit rate, counted as short-term interest rates. The primary credit rate is an administered rate set by the Fed. In other words, the Fed is following the letter of the law (if not the spirit) provided the rate it pays on reserves is less than the rate it charges on loans.

Ignore the fact that obligations with maturities of not more than one year may have greater duration risk (and hence, should generally command a higher interest rate) than an overnight loan, which is effectively what the Fed gets when it pays interest on reserves. The Fed can set its primary credit rate as high as it wants! Again, it is an administered rate, not a market rate. If the primary credit rate determines the upper bound on the interest rate the Fed can pay on reserves and the Fed can set the primary credit rate as high as it wants, then there is no binding constraint on the rate the Fed can pay on reserves. That’s a clear subversion of Congressional intent.

As Milton Friedman remarked, “Nothing is as permanent as a temporary government program.” What started as an emergency measure has lasted nearly two decades. Paying a premium rate of interest on reserves fundamentally changed American monetary policy. Instead of carefully managing scarce reserves through open market operations, the Fed now floods the system with reserves and controls rates by paying banks to keep them idle.

To put it bluntly: to prevent emergency lending from depreciating the dollar, the Fed broke the law by deliberately paying a premium rate on reserves. It ignored Congress’s judgment and substituted its own.

Back to Miran

As Miran explains, excessive regulations boost demand for reserves. Banks worried about heightened scrutiny “can raise demand for bank reserves above and beyond what’s required” in order to assure bank regulators that the bank is safe and sound. Those reserves are necessarily supplied by the Fed. Our central bank currently holds a $6.6 trillion balance sheet and pays roughly $200 billion annually to banks — with megabanks and foreign institutions reaping the lion’s share.

But here’s what Miran gets wrong: regulatory reform treats the symptom, not the disease. Even with lighter regulations, the Fed would still be operating in a floor system, where it pays banks a premium to hold reserves. And that framework may have no legal basis whatsoever.

Congress Shrugs

The floor system isn’t a secret. The Fed operates it openly. Economists regularly debate its merits. Miran just gave a whole speech about its implications. Yet Congress has done nothing. It has neither authorized nor prohibited the Fed’s activities. All the public has gotten is occasional pointed questions at hearings, followed by studied inaction.

Miran himself notes that “several times now, the Senate has debated whether the Fed ought to be stripped of its statutory authority to pay [interest on reserve balances].” Sadly, this is concern without consequence. Congress’s oversight failure borders on dereliction of duty. If Congress thinks the floor system is good policy, write it into law. Remove the “not to exceed” language. Give the Fed explicit authority to use interest on reserves as its main policy tool.

If, on the other hand, Congress thinks the Fed exceeded its authority, do something about it. Restore the statutory limit. Require a return to traditional open market operations. Make clear that emergency measures don’t automatically become permanent powers.

This matters for more than legal niceties. If we’re serious about constitutional government and the rule of law, Congress can’t just shrug when agencies rewrite their mandates. The Fed isn’t special. The complexity of monetary policy doesn’t exempt it from following the law. And seventeen years of “everybody knows” doesn’t make an illegal system legal.

Conclusion

Miran is right to worry about regulatory dominance of the Fed’s balance sheet. But the real problem isn’t regulations forcing banks to demand more reserves — it’s that the entire system enabling those dynamics was never supposed to exist. Regulatory reform is certainly warranted. But it won’t fix the fundamental problem. We need legal fixes to target monetary policy directly.

Congress must explicitly authorize what the Fed has been doing, or require it to stop. Anything less is an abdication of its constitutional responsibility — and a betrayal of the principle that in America, no institution is above the law.