In the 1930s the problem of how one could organize a socialist economy became a major concern among economists. Partly because of the affinity many intellectuals felt for the “Soviet experiment,” and partly because of the perceived shortcomings of “unfettered capitalism” that were increasingly the subject of academic investigation, working out the economics of socialism presented an exciting challenge to economic theorists. However, the theoretical inquiry eventually represented far more than an exercise in the application of economic principles to an alternative institutional arrangement. It evolved into a debate between two contrasting visions of how an economic system functioned in the first place and hence became a means for deepening theoretical understanding of private-property regimes as well as of communist regimes. And more important for our story, the debate that developed over the economics of socialism eventually demonstrated the wide gap that existed between the Mengerian vision and the neoclassical vision of economic reality.

The topic of the economics of socialism was not new to Austrian economists in the 1930s; it had occupied the attention of prominent Austrians from the beginning. Indeed, Menger himself had been a liberal in the nineteenth-century sense, and one of his aims in developing his value theory was to refute decisively the labor theory of value and its radical implications for private property and wage labor ([1871] 1981:168). Bohm-Bawerk carried on Menger's project by criticizing Marx in The Positive Theory of Capital ([1888] 1959).