Frédéric Bastiat

‎"When under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices. Now, is it the most unfortunate who gains from this struggle? Certainly not, but rather the most influential and calculating." - Frédéric Bastiat

The Purpose of Money and Good of Freedom

A while ago I had an interesting conversation with a friend of mine. He was having troubles with wrapping his mind around this whole free trade and capitalism thing. He invited me to lunch so that we could discuss it and wanted to find out my opinion on some of his thoughts and ideas. I told him I would be happy to go with him and discuss what was on his mind.

He started out by saying that he thinks the ideal life of Utopia is attainable and it is through proper education in schools and training in the home.

I said that it was not attainable. Where are you going to find a  school that can keep and hold all of its students and lead them to an honest graduation?

H: it wouldn’t be that hard. We just have to make a system that is fun and easy to learn in. If we can do that every kid would stay in school and learn proper techniques for helping the society in life.

M: it would be difficult. Take for example Detroit, which is possibly one of the most government controlled and socialized cities in the country. They have a high school graduation rate of less than 30%. They tried doing exactly what you are saying and it has failed miserably.

H: we just haven’t found the right system to work in yet. It wouldn’t be hard if we forced everyone to go and stay in school.

M: but as soon as you force someone to do something that they don’t like to do (and how many children like going to school?) there will be a pushback. Children especially do not understand the importance of a good education. And in my opinion a good education is one that teaches individuality and not conformity to social norms.

H: true, I also agree with that and I think people should be individuals and not robots. But we can accomplish this by letting people do what they want for a living. They still have their freedom of choice about what jobs they do or where they live. It would just be that there wouldn’t be any money or any financial restraints. If they wanted a second house down in San Diego they could have one. It would just be shared by others when they are not there.

M: but if everyone shares and it belongs to everyone then who gets to decide when each person can go there and how long they can stay? In your system how will society decide how much travel and leisure time people can have?

H: it would be somebody’s job to record and process all of this stuff. They would just call ahead and put their name down and reserve it. Then when they showed up, if no one else was there, it would be theirs for the week or weekend. If everyone just put in their time and helped everyone else out it could work.

M: but then it wouldn’t be their house and they wouldn’t be able to go whenever they wanted. They would be limited in their travel time and would not be as free as they would be in a free society.

H: but they would! Can’t you see they won’t always go to San Diego. Maybe one time they will want to go to Lake Powell or New York or Florida. If they were able to go anywhere there wouldn’t ever be any conflicts because everyone else would be somewhere else.

M: I think there are too many people that would always want to be on vacation and go everywhere for you to build enough resorts or beach houses to accommodate them all. But, I think we are getting off topic here about your utopian ideas. Who is going to pay to construct all of these houses? Where are you going to get the materials? If everyone pitches in and does their part how are you going to decide who does this job and who gets that job?

H: everyone decides where they go. It is the exact same as the ideas you have about a free society. Carpenters would still be carpenters and lawyers would still be lawyers. Everyone can decide for themselves what profession they want to pursue and where they want to live.

M: that is where your ideas hit another roadblock. And this is a huge one. Who would rather be a stone mason than a movie critic if everyone gets paid the same and benefits the same from all their work?

H: I know plenty of people who would rather be a physical laborer than an actor or a writer. Some people excel at some things much better than others do. Everyone would find their own little niche in society and help out where they could.

M: you know people who would rather do physical labor than writing because of the pay difference between the two. Nobody would choose coal mining or snow removal over cooking competition judge. It will not work because there are too many difficult things that people refuse to do if they are going to be on an equal playing field as a person with a simple, fun and enjoyable job. Nobody will take the risk of losing their own life to support someone they have never met while that person gives them no physical, spiritual, moral or mental support in return. A coal miner is not going to do it unless there is an obvious reward waiting for him.

H: but there is an obvious reward! That is the opportunity to live in a peaceful loving society filled with people who care and love for each other. If everyone helped out with what they have or can do this world would be a much better place.

M: that’s what Lenin said also.

H: who is that?

M: the communist dictator of Russia. The guy who murdered millions in order to build the socialist utopia you’re talking about.

H: and it worked! Under communism in Russia people had better lives they lived in better conditions than they do now and they had more food to eat than they do now. Everything about modern day “free” Russia and communist Russia says that communism was better.

M: ignoring the fact that you don’t care that millions of innocent people died in Russia I can say that everything you just said is false. They may have lived better but that was based on a system that couldn’t support itself. If it was so much better why did it end? Why don’t they go back to it today?

H: they are trying to!

M: not the people who lived through it. The reason they lived better was because they lived off of other peoples money. They had a wildly unsustainable system. When they used all of their own money they stole it from their satellite states and used all of their money. When they ran out of money they got outside financial help, when that money was gone people and countries saw that there was absolutely no way that they were going to pay it back they stopped giving them money. Then what happened? In 1989 they went bankrupt. They could no longer support their life on the system they had and they went under. Just like every other country that has ever tried to practice socialism.

H: just like modern day Greece and Italy then I guess?

M: Exactly.

H: but if we train our children and society correctly we can achieve that success where everyone helps and everyone prospers. It is all in the education and training of our children. It wont happen in our lifetime but it will happen sooner or later and everyone will live in a better world.

M: I agree. But I think that we have to teach them the opposite of what you are saying. I think we have to teach them work ethic and entrepreneurship. Not socialism. If everyone fends for themselves it will benefit everyone in the long run.

H: How can you say something like that? How can you teach you kids to be so selfish as to only care about themselves and not others?

M: first of all that is not how things work. When one person sets out to make a fortune for himself he can only do it by making others wealthier too. Unless he robs a bank or steals money from others he will almost always benefit others.

H: if you work for yourself and try to get money for yourself  it does not benefit others. You can take advantage of people and rob them blind with their consent and it will be right in front of their eyes and they will never know it. It is a cruel and evil system that lets a man rob from others to benefit themselves!

M: I agree with only that last statement. Which is why I wholeheartedly disagree with what you are saying about socialism.

H: how can you say that? How can you say that when you set out to help yourself you can only do that if you benefit others? That is a complete lie. I agree it will work every now and then but it will not work most of the time. It is a selfish idea and I can’t understand it.

M: well let me give you an example. Lets say that there is a man who knows how to make bricks. He makes them for everyone to use but asks a little money in return to feed his family. So he is a entrepreneur and he helps society by making his bricks and they help him by giving him money. One day a couple comes to him and says that they want to build a house to raise their family. They will need 5,000 bricks to build the house they want; but neither have the skills nor the time to do it themselves. He says he can accomplish the job, but it will take him several weeks to make that many bricks, so in exchange for his service in making the bricks he asks for some money from them to feed his own family in the meantime. They agree.

Several weeks go by and the couple comes to claim their bricks and pay the man for his labor. The man delivers the bricks and the couple build their house. Both parties go away happy and satisfied at the results of the transaction. Is that fair? Did both parties benefit? Did the man rob from the couple?

H: that is fair and the man did not rob from the couple. But why do we have to involve money in the equation? Why can’t they just both agree to do it for free in exchange for a happy and friendly society? If money were not in the process both parties would still benefit from the transaction. Both the couple and the brick maker would have been better off.

M: how would the brick maker been better off? He just spent several weeks making bricks for the couple and they gave nothing in return.

H: well that depends on what they did for society. No matter what they did it would somehow come back and benefit the brick maker somehow. Or, if they were not directly benefiting him it would still benefit society as a whole because they would provide service to someone else who could provide a service to him. In the end it would all work out. We don’t need money in society to run effectively.

M: but we do. How else are we going to know if someone has helped out as much as another?

H: what do you mean?

M: the vast majority of times that people have money it is because they did gave some good or service to another member of society.

H: so what is the role of money in your opinion?

                It is important to note that my friend was not being contentious at any point in the conversation. The whole time he was asking sincere questions and even though he did agree with me on many of the points  I made he was still acting as the provocateur in order to find a deeper or more understandable answer. He was very respectful of my ideas and I was of his as well.

M: money tells society that another member of society has helped out. Because, you do not receive any money unless you perform some service or provide a certain good so someone else. There are some dishonest cases in which money is transferred from one hand to the other, and it is sad that this is reality. But, the huge, overwhelming majority of times that money is exchanged it is done so on a voluntary basis.

H: like going to the store and buying things?

M: exactly! Or having someone make you bricks for your house.

H: but I’m still uncertain of one thing. Why can’t you take money out of the equation and have society work? Why do we have to rely on some arbitrary paper to determine our livelihood?

M: because if you don’t have money how are you going to determine if someone has entered their fair share of services into society? It would become a free-rider state. If people could get all the wanted without showing proof of giving it would collapse very quickly. Just like the USSR did. People would live better for a short time but then they would collapse from lack of goods and services.

H: give me an example of why money has to be used? Why cant we use some other form of verification such as a voucher or certificate saying you helped out?

M: because then you are just giving money a new name and appearance while leaving the substance essentially the same.

H: Ok, that makes sense. But do you have an example for me to understand this?

M: sure. Take the brick maker again. If he wasn’t using money to calculate how well he was doing he could very well make a much inferior product. He would not be able to tell which process of brick making he was using is the most efficient. He wouldn’t be able to tell if his inventory sits a long time for nothing (thus wasting the time of the miners who dig the minerals and not benefiting society in the least). How would he be able to tell if he was using the best materials? Is he wasting too much lime in the process or using more than his share? If you think about answers to all of these it is not so simple as you might think. There has to be something there to tell him if what he is doing is correct or not, beneficial or not, wasteful or not, worthwhile or not. And that is what role money plays not only in his brick making shop but also in the overall economy.

If it costs more to make the bricks than it does to buy them he will never know. And because money was not there to tell him if this were the case or not he may very well become a burden to society by not producing in the most efficient manner. But neither society nor the brick maker will ever know. And when this happens in such a simple company how much easier it is in a complex company such as oil drilling or food manufacturing? And when these larger companies begin to be a burden on society it is only a matter of time before everyone in society is in poverty and in the direct opposite circumstance that you have envisioned for them.

H: let me think about that and maybe I can come up with some ways to work around these problems. It would only take a matter of time before you came up with a way of measuring the success and failures of a system like that.

M: well you have a huge head start. Go read all of the economic writings of Eastern Europe and the USSR from the 1900’s and you will see that they got almost nowhere in their quest to do what you are thinking about. Something that you will find as you read their philosophies is that they all wanted to go back to a free market and let people make money and choices and failures and all the economic criteria of a free society.

H: I’ll start reading it and see if I can find a way. This is important to me, I think this world deserves better than it has right now.

M: I agree with you. People deserve better than they have right now. If we let socialism and governments get out of the way we could find that Utopia that you are seeking. It will be a better place. Where everyone pitches in and everyone gets rewarded according to their abilities and achievements.

Part 8 of 8

Postscript: Why a Socialist Economy is “Impossible”

by Joseph T. Salerno
Mises’s Thesis
In “Economic Calculation in a Socialist Commonwealth,” Ludwig von Mises
demonstrates, once and forever, that, under socialist central planning, there are
no means of economic calculation and that, therefore, socialist economy itself is
“impossible” (“unmöglich”)--not just inefficient or less innovative or conducted
without benefit of decentralized knowledge, but really and truly and literally
impossible.
At the same time, he establishes that the necessary and sufficient conditions of
the existence and evolution of human society is liberty, property, and sound
money: the liberty of each individual to produce and exchange according to
independently formed value judgments and price appraisements; unrestricted
private ownership of all types and orders of producers’ goods as well as of
consumers’ good; and the existence of a universal medium of exchange whose
value is not subject to large or unforeseeable variations.
Abolish all or ever one of these institutions and human society disintegrates
amid a congeries of isolated household economies and predatory tribes. But not
only does abolition of private ownership of the means of production by a world
embracing socialist state render human social existence impossible: Mises’s
analysis also implies that socialism destroys the praxeological significance of
time and nullifies humanity’s uniquely teleological contribution to the universe.
Because Mises’s critique of socialism has been the subject of significant
misinterpretation by his followers as well as his opponents, his argument, as it is
presented in this article, should be restated.
 (1) Mises’s pathbreaking and central insight is that monetary  calculation is
the indispensable mental tool for choosing the optimum among the vast array of
intricately-related production plans that are available for employing the factors of
production within the framework of the social division of labor. Without recourse
to calculating and comparing the benefits and costs of production using the
structure of monetary prices determined at each moment on the market, the
human mind is only capable of surveying, evaluating, and directing production
processes whose scope is drastically restricted to the compass of the primitive
household economy.
The practically unlimited number of alternative plans for allocating the factors
of production and the overwhelming complexities of their interrelationships stem
from two related  facts about our world. First, our world is endowed with a wide
variety of relatively “nonspecific” resources, which to a greater or lesser degree
are substitutable for one another over a broad range of production processes.
Second, since human action itself implies the ineradicable scarcity of time as
well as of resources, there always exists an almost inexhaustible opportunity to
accumulate capital and lengthen the economy’s structure of production, thus
multiplying beyond number the technical possibilitie s for combining the factors
of production.
Given, therefore, the infinitude of the relationships of complementarity and
substitutability simultaneously subsisting among the various types of productive
resources, a single human mind--even if it were miraculously endowed with
complete and accurate knowledge of the quantities and qualities of the available
factors of production, of the latest techniques for combining and transforming
these factors into consumer goods, and of the set of all individuals’ value
rankings of consumer goods--would be utterly incapable of determining the
optimal pattern of resource allocation or even if a particular plan was ludicrously
and destructively uneconomic. Not only would this perfectly knowledgeable
person be unable to devise a rational solution of the problem, he or she would be
unable to even achieve a full intellectual “survey” of the problem in all its
complexity.
Thus, as Mises [p.17] says, “...the mind of one man alone--be it never so
cunning, is too weak to grasp the importance of any single one among the
countlessly many goods of a higher order. No single man can ever master all the
possibilities of production, innumerable as they are, as to be in a position to make
straightway evident judgments of value without the  aid of some system of
computation.”Postscript: Why a Socialist Economy is “Impossible” 36
(2) What is needed, then, to produce the cardinal numbers necessary for
computing the costs and benefits of production processes is what Mises [p. 19]
calls the “intellectual division of labor” which emerges when private property
owners are at liberty to exchange goods and services against money according to
their individual value judgments and price appraisements. Thus in a market
society every individual mind is accorded a dual role in determining the
quantities of monetary calculation. In their consumer roles, all people make
monetary bids for the existing stocks of final goods according to their subjective
valuations, leading to the emergence of objective monetary exchange ratios
which relate the values of all consumer goods to one another.
In light of the system of consumer goods’ prices thus determined, and of the
existing knowledge of the technical conditions of production, entrepreneurs
seeking to maximize monetary profit bid against one another to acquire the
services of the productive factors currently available and owned by these same
consumers (including those in entrepreneurial roles). In this competitive process,
each and every type of productive service is objectively appraised in monetary
terms according to its ultimate contribution to the production of consumer goods.
There thus comes into being the market’s monetary price structure, a genuinely
“social” phenomenon in which every unit of exchangeable goods and services is
assigned a socially significant cardinal number and which has its roots in the
minds of every single member of society yet must forever transcend the
contribution of the individual human mind.
(3) Since the social price structure is continually being destroyed and
recreated at every moment  of time by the competitive appraisement process
operating in the face of ceaseless change of the economic data, there is always
available to entrepreneurs the means of estimating the costs and revenues and
calculating the profitability of any thinkable process of production.
Once private property in the nonhuman means of production is abolished,
however, as it is under socialism, the appraisement process must grind to a halt,
leaving only the increasingly irrelevant memory of the market’s final price
structure. In the absence of competitive bidding for productive resources by
entrepreneurs, there is no possibility of assigning economic meaning to the
amalgam of potential physical productivities embodied in each of the myriad of
natural resources and capital goods now in the hands of the socialist central
planners.
Even if planners observed the money prices which continued to be generated
on an unhampered market for consumer goods, or substituted their own unitary
scale of values for those of their subject consumers, there would still be no
possibility for the central planners to ever know or guess the “opportunity cost”
of any social production process. Where actors, in principle, are not in a position
to compare the estimated costs and benefits of their decisions, economizing
activities, by definition, are ruled out.
A society without monetary calculation, that is, a socialist society, is therefore
quite literally a society without an economy. Thus, contrary to what has become
the conventional interpretation by friend and foe alike, Mises (pp. 21and 26) was
not indulging in rhetorical hyperbole but drily stating a demonstrable conclusion
of economic science when he declared in this article: “Without economic
calculation there can be no economy. Hence in a socialist state wherein the
pursuit of economic calculation is impossible, there can be--in our sense of the
term--no economy whatsoever ... Socialism is the abolition of rational economy.”
(4) Socialism will have particularly devastating effects on the economy’s
capital structure. Without a unitary expression for time preferences in monetary
terms, central planners will never know whether the investment of current
resources in the higher stages of production, which yield physically
heterogeneous and noncommensurable outputs, will generate an overall
production structure whose parts fit together or whose intended length is adjusted
to the amount of capital available. Thus higher-order technical processes will be
undertaken whose outputs cannot be used in further production processes because
the needed complementary producer goods are not available.
In the Soviet Union, for example, in the midst of a dire undersupply of food
products, new and unused tractors stand rusting in fields of unharvested grain,
because there does not exist sufficient fuel to power them, labor to operate them,
or structures to house them. One of the most important consequences of the fact
that centrally planned economies exist within a world market economy is that the
planners can observe and crudely copy capitalist economies in deciding which
technical processes can coexist in a reasonably coherent capital structure. Had the
entire world, rather than isolated nations, existed under central planning for the
last half century, the global  capital structure would long since have crumbled
irretrievably to dust and humanity been catapulted back to autarkic primitivism.
(5) Thus, from the first, Mises emphasized the point, which was conveniently
ignored by hostile and disingenuous critics: that the existence of the Soviet Union
and other centrally-controlled economies is no refutation of his thesis regarding
the impossibility of socialist economy. Their gross inefficiency notwithstanding,
these economies in fact do eke out a precarious existence as parasites on the
social appraisement process and integrated capital structure produced by the
surrounding world market. As Mises (p. 20) points out, neither these economies
nor nationalized enterprises within capitalist economies are genuinely socialistic,
because both entities
are so much dependent upon the environing economic system with its
free commerce that they cannot be said to partake ...of the really essential
nature of a socialist economy.... In state and municipal undertakings
technical improvements are introduced because their effect in similar
private enterprises, domestic and foreign, can be noticed, and because
those private industries which produce the materials for these
improvements give the impulse for their introduction. In these concerns
the advantages of reorganization can be established, because they operate
within the sphere of a society based upon the private ownership of the
means of production and upon the system of monetary exchange, being
thus capable of computation and account.
(6) But Mises does not stop with the demonstration that socialism must
eradicate economizing activity within the social nexus; he also traces out its
implications for the development of the human mind. With the dissolution of
social production that  inevitably ensures upon the imposition of a worldembracing socialist state, humanity is reduced in short order to dependence upon
economic activities carried on in relative isolation. The primitive production
processes suitable to autarkic economies do not require economic calculation
using cardinal numbers nor do such simple processes offer much scope for purely
technical calculation. No longer dependent upon arithmetic operations to sustain
itself, the human mind begins to lose its characteristic ability to calculate.
Mises’s analysis of the effects of socialism also has another momentous
implication. With the impossibility of building up and maintaining a capital
structure in the absence of monetary calculation, human economy under
socialism comes to consist of super-short and repetitive household processes
utilizing minimal capital and with little scope for adjustment to new wants. The
result is that time itself--in the praxeological sense of a distinction between
present and future--ceases to play a role in human affairs. Men and women, in
their capitalless, hand-to-mouth existence, begin to passively experience time as
the brute beasts do--not actively as a tool of planning and action but passively as
mere duration. Humanity as a teleological force in the universe is therefore
necessarily a creation of the inextricably related phenomena of calculation and
capital. In a meaningful sense, then, socialism not only exterminates economy
and society but the human intellect and spirit as well.
(1) It is of utmost importance to recognize that, in his original article as well
as all later writings on the subject, Mises unswervingly identified the unique and
insoluble problem of socialism as the impossibility of calculation--not, as in the
case of F.A. Hayek, as an absence of an efficient mechanism for conveying
knowledge to the planners. This difference between Mises and Hayek is reflected
in their respective conceptions of the social function of competition as well as in
their responses  to the claims of the later market and mathematical socialists.
Actually, Mises anticipated and refuted both groups in his original article.
Nonetheless, Mises’s position on these issues is today generally ignored or
conflated with Hayek’s.
(2) For Mises, the starting point for entrepreneurial planning of production in
a market economy is the experience of the present (actually immediately past)
price structure of the market as well as of the underlying economic data.
Knowledge of past market prices by the  entrepreneur does not substitute for
qualitative information about the economy, as Hayek seems to argue, but is
necessarily complementary to it. The reason, for Mises, is that it is price
structures as they emerge at future moments of time that are relevant to
unavoidably time-consuming and therefore future-oriented production plans. But
entrepreneurs can never know future prices directly; they are only able to
appraise  them in light of their “experience” of past prices and of their
“understanding” of what transformations will take place in the present
configuration of the qualitative economic data. Whether or not one prefers to
characterize entrepreneurial forecasting and appraisement as a procedure for
“discovery” of knowledge, as Hayek does, what is important is that for Mises it is
the indispensable starting point of the competitive process and not its social
culminant.
In other words, the forecasting and appraisement of future price structures in
which discovery of new knowledge may be said to play a role is a precompetitive
and  nonsocial operation, that is, it precedes and conditions competitive
entrepreneurial bidding for existing factors of production and is carried on
wholly within the compass of individual minds. The social function of
competition, on the other hand, is the objective price appraisement of the higherorder goods, the sine qua non of entrepreneurial calculation of the profitability of
alternative production plans. Competition therefore acquires the characteristic of
a quintessentially social process, not because its operation presupposes
knowledge discovery, which is inescapably an individual function, but because,
in the absence of competitively determined money prices for the factors of
production, possession of literally all the knowledge in the world would not
enable an individual to allocate productive resources economically within the
social division of labor.
(3) Mises thus assumes in all his writings on the subject that the planners have
full knowledge of consumer valuations of final goods as well as of the various
means available for producing these goods under known technological
conditions. For example, Mises [pp. 23] writes, “The administration may know
exactly what goods are most urgently needed.... It may also be able to calculate
the value of any means of production by calculating the consequence of its
withdrawal in relation to the satisfaction of needs.” Despite this knowledge, the
socialist administrators would be unable to arrive at a useful social appraisement
of the means of production in cardinal terms. This can only occur where there
exists private ownership and exchange of productive resources, which generate
catallactic competition among independent producers resulting in the imputation
of meaningful money prices to the resources.
(4) Anticipating the future arguments of market socialists, Mises reasons that
any attempt to implement monetary calculation by forcing or inducing managers
of socialist enterprises to act as profit-maximizing (or even more absurdly, pric eand-marginal-cost-equalizing) entrepreneurs founders on the fact that these
managers do not have an ownership interest in the capital and output of their
enterprises. Consequently, the bids they make against one another in seeking to
acquire investment  funds and purchase productive resources must result in
interest rates and prices that are wholly and inescapably arbitrary and useless as
tools of economic calculation.
The meaninglessness of these so-called “parametric prices” of market
socialism, and the ir failure to replicate the price structure of the market, derives
from the circumstance that they are wholly conditioned by the system of rewards
and penalties and other arrangements instituted by the monopoly owners of the
factors of production (the planners) to guide the behavior of their managers. But
this system of managerial incentives is itself a construct of the individual human
mind, which would first have to solve for itself the problem of valuing the factors
of production before it could even hope to devise the proper (but now
superfluous) incentive structure.
(5) Hayek and his followers are skeptical regarding how quickly and
effectively dispersed knowledge of the changing economic circumstances can be
incorporated into the socialist price system. But for Mises’s analysis, this is quite
beside the point. Regardless of how well-informed the socialist managers are,
their bids in the “market” for factors of production, to which the central planners
are supposed to adjust the price parameters of the  system, emerge from an
arbitrary set of directives from the planners themselves and not from competition
among private property owners. The prices could be no more useless for the task
of economic calculation, if the planners eschewed the elaborate and wasteful
charade of orchestrating a pseudo-market and simply picked them out of a hat.
(6) From the Misesian point of view, moreover, the shortcomings of the prices
of market socialism do not stem from the fact that such prices are supposed to be
treated as  “parametric” by the managers, as has been curiously argued recently
by some of Mises’s followers. The problem is precisely that such prices are  not
genuinely parametric from the point of view of all members of the social body.
The prices which emerge on the free market are meaningful for economic
calculation because and to the extent that they are determined by a social
appraisement process, which, though it is the inevitable outcome of the mental
operations of all consumers and producers, yet enters as an  unalterable external
factor in the buying and selling plans of every individual actor.
(7) In the 1930s, Hayek and the British Misesian Lionel (later Lord) Robbins
made a fateful and wholly unwarranted concession to those who contended that
the methods of mathematical economics could be successfully bent to yield a
solution for the socialist calculation problem. In response to the argument that
prices of the factors of production would emerge from the solution of a set of
simultaneous equations which incorporated the given data of the economic
system, Hayek and Robbins argued that in  “theory” this was true but in
“practice,” highly problematic.
The reason for its impracticality, according to Hayek and Robbins, is that, in
the real-world economy, consumer  wants, available resources, and technology
are subject to continual and unforeseeable change. Therefore, by the time the
planners had assembled the vast amount of information needed to formulate the
massive equation system and succeeded in solving it (manually or mechanically,
since there were no high-speed computers in the 1930s), the system of prices
which emerged would be completely inapplicable to the current economy, whose
underlying data had changed rapidly and unpredictably in the meantime.
Unfortunately, the Hayek-Robbins response was construed by most
economists to mean that the theoretical debate over socialist calculation had
come to an end with the concession from the Misesian side that socialism could
calculate after all, though perhaps a day late in practice. Moreover, some modern
Austrian economists, in a belated effort to reclaim the theoretical high ground,
reconstructed the case against socialism along lines suggested by Hayek’s later
articles on knowledge and competition, which, for all their subtle and compelling
argumentation, are disturbingly quasi-Walrasian, seemingly disregarding the
lapse of time between present and future prices. The result has been an
unacknowledged but momentous retreat from the original and unrefuted Misesian
critique emphasizing the absolute impossibility of economic calculation without
market prices to a categorically different Hayekian position criticizing the
relative inefficiency of non-market mechanisms for discovery, communication,
and use of knowledge in the allocation of productive resources.
(8) In sharp contrast to the Hayek-Robbins rejoinder and the reconstructed
Austrian position, Mises’s neglected refutation of the mathematical socialists,
which is outlined in his original article (pp. 25-26) and elaborated upon in
Human Action, does not deviate in the slightest from the fundamental and crucial
calculation perspective. Thus Mises assumes that the economic data underlying
an existing market economy are suddenly and forever frozen and revealed to
newly appointed central planners.
With brilliant insight, Mises demonstrates that, even with Hayekian
knowledge problems thus banished from consideration, the planners would still
be unable to calculate the optimal or any pattern of deployment for the factors of
production. The reason is that the existing capital structure and acquired skills
and locations of the labor force are initially maladjusted to the newly prevailing
equilibrium configuration of the data. The planners therefore would be forced to
decide how to allocate the flow of productive services among the myriads of
potential technical production processes and labor retraining and relocation
projects so as to secure the optimal path of adjustment to equilibrium for the
existing stocks of capital goods, labor skills, and housing. The bewildering
complexity of this allocation decision rests on the fact that the planners will be
confronted with altered conditions at every moment of time during this
disequilibrium transition process, since the quantities and qualities of the
available productive services themselves are in constant flux due to the
circumstance that they originate in the very stocks of physical assets and labor
skills that are being progressively transformed.
(9) Complicating this problem beyond conception is the added fact that the
leveling of incomes under the new socialist regime and the inevitable fluctuation
of current incomes attending the transformation of the production structure would
effect a continual revolution in the structure of  consumer demands during the
transition period. Mises [p. 26] is surely not overstating his case when he
concludes that “... the transition to socialism must ... change all economic data in
such a way that a connecting link with the final state of affairs in the previously
existent competitive economy becomes impossible. But then we have the
spectacle of a socialist economic order floundering in the ocean of possible and
conceivable economic combinations without the compass of economic
calculation.”
Even if mathematics, therefore, yields a consistent set of prices for the given
data of equilibrium, this solution is inapplicable to the calculation problems of
the dynamic approach to equilibrium. In this situation, use of such prices to
allocate resources does not allow the economy to achieve equilibrium, at any
rate, before the capital structure and the entire system of social production is
demolished.
Thus Mises’s original thesis stands on its own against all counterarguments
and without any need for qualification or emendation: without private ownership
of the means of production, and catallactic competition for them, there cannot
exist economic calculation and rational allocation of resources under conditions
of the social division of labor. In short, socia list economy and society are
impossible.
Beyond Socialism
(1) But though Mises’s thesis may remain valid, is it sill relevant in a world in
which socialist planned economies have collapsed like a house of cards? The
answer is a resounding “yes,” for Mises’s argument [p. 20] implies that “Every
step that takes us away from private ownership of the means of production and
from the use of money also takes us away from rational economics.”
The never-ending growth of the bloated, rapacious, unjust, and unlove ly
American and other Western-style welfare states involves an ongoing series of
such steps. Looking at it from another angle, the blessedly defunct planned
economies of Eastern Europe, as noted above, were far from being genuinely
socialist economies in the Misesian sense, because of their ability to trade in and
observe the capital complementarities and prices of the world market. They were,
and the Soviet Union, China, and others still are, gigantic monopoloid entities
that suppress internal markets for  capital goods yet maintain subjective and
objective relationships with the world market order which enables them to
crudely calculate their actions.
As the parasitic welfare state expands its power of monetary inflation and of
regulating and intervening  into its host “mixed” economy, we can expect
productive activities to become more chaotic and guided less and less by
socially-determined market prices. In fact, long before a state of complete
socialization is achieved, economy and society will begin to disintegrate amid
failure of markets to clear, increasing barter, less efficient sizes and forms of
business organizations, misallocation, and technical inefficiency of productive
resources and disastrous declines of gross capital investment, labor productivity,
and living standards. The dangers currently threatening to plunge sectors of the
U.S. economy into calculational chaos can be illustrated with a few examples.
(2) Let us consider inflation. One of the most important factors operating to
restrain governments of the United States and other mixed economies from
reinstituting the inflationary monetary policies which brought us the double -digit
rates of price increase of the 1970s is the coexistence of closely integrated global
capital markets and independent national fiat currencies issued by central banks
jealous of their prerogatives. Any nation that attempts a highly inflationary
monetary policy courts the prospect of a rapidly depreciating exchange rate for
its currency, a “flight” of investors from its domestic capital market, and a
stratospheric climb in interest rates. In the current jargon, monetary authorities,
even of large nations such as the United States, have “lost control of domestic
interest rates.”
Now, there is a much ballyhooed movement  afoot to effect greater
international “coordination” of monetary and fiscal policies or even to introduce
a supranational central bank empowered to issue its own fiat currency. At
bottom, such proposals seek to loosen the restraints on monetary inflation at the
domestic level and allow politicians and bureaucrats and their allowed special
interests to surreptitiously extract an expanding flow of lucre or “welfare” from
the productive sectors of their economies.
More importantly from our point of view, these international monetary
arrangements greatly increase the threat of hyperinflation and the consequent
disintegration of the world market economy. Moreover, even if it were reined in
before hiving off into hyper-inflationary currency collapse, a bout of galloping
inflation in an economy with a highly developed and complex capital structure
would drastically falsify monetary calculation and cause capital consumption and
a drastic plunge in living standards.
(3) Another area in which we face the prospect of calculational chaos is health
care. By wildly subsidizing and stimulating the demand for health care services
of selected special interest groups beginning in the mid-1960s, the United States
government precipitated a never ending and catastrophic upward-spiral of health
care costs.
In addition, the irrational and labyrinthine structure of regulations and
prohibitions imposed by government on the industry has massively distorted
resource allocation, restricted supply, and further driven up the costs of medical
care. The tragic but predictable result of such intervention is that many of the
unsubsidized members of society have been effectively priced out of the market
for health care. The simple and humane solution to this tragedy is to quickly
terminate these antisocial subsidies and dismantle the destructive regulatory
structure, permitting the competitive price appraisement and resource allocation
process to operate unimpeded.
But, of course, the internal dynamic of the welfare state is never to retrench
and risk disaffection of its pampered and powerful constituencies, for example,
the American Medical Association, the American Association for Retired
Persons, the entrenched bureaucracies of nonprofit hospitals, and so on. And so
we face the prospect of “national health care insurance” which is a euphemism
for the thoroughgoing socialization of the health care sector, with its resultant
shortages, further suppression of competitive incentives, and deterioration of
quality. But this is simply another example of the mad logic of the welfare state:
since the government produces nothing that is valuable in terms of social
appraisement, it can only supply welfare to some by siphoning off the resources
and destroying the economic arrangements that support the welfare of others. In
attempting to repair the politically unpopular destruction of its earlier policies, it
is driven to further isolated acts of destruction until it arrives, with cruel and
ultimate irony, at the policy for the systematic destruction of society and human
welfare, that is, socialism.
(4) Finally, we have environmental policies, which are becoming
progressively broader in scope and more draconian in enforcement. To the extent
that such policies go beyond the protection of individual rights and property--and
they are now far, far beyond this point--they become antisocial and destructive of
capital and living standards. In fact, in many if not in most cases, it is the
obliteration of economic productivity per se which is intended and which
constitutes the in-kind welfare subsidy to the well-heeled and well-organized
minority of upper-middle class environmentalists.
This is true, for example, of environmental regulations that prohibit
development activities for the vast majority of Alaskan land and along much of
the California coastline as well as of recent calls for suppressing development of
Amazon rain forest and coercively maintaining the entire continent of Antarctica
forever wild. Needless to say, thoroughgoing and centralized land use
regulations, which some fanatical environmentalists are calling for, is tantamount
to the abolition of private property in national resources and business structures.
The connection between environmentalism and socialism is even stronger when
we realize that what socialism brings about unintentionally--the abolition of
humanity as a teleological force shaping nature to its purposes--is precisely the
aim of the radical environmentalist program.
The significance of Mises’s 1920 article extends far beyond its devastating
demonstration of the impossibility of socialist economy and society. It provides
the rationale for the price system, purely free markets, the security of private
property against all encroachments, and sound money. Its thesis will continue to
be relevant as long as economists and policy-makers want to understand why
even minor government economic interventions consistently fail to achieve
socially beneficial results. “Economic Calculation in the Socialist
Commonwealth” surely ranks among  the most important economic articles
written this century.
Joseph T. Salerno
Associate Professor of Economics
Lubin Graduate School of Business
Pace University
April 1990

Part 7 of 8

Conclusion

It must follow from what we have been able to establish in our previous
arguments that the protagonists of a socialist system of production claim
preference for it on the ground of greater rationality as against an economy so
constituted as to depend on private ownership of the means of production. We
have no need to consider this opinion within the framework of the present essay,
in so far as it falls back on the assertion that rational economic activity
necessarily cannot be perfect, because certain forces are operative which hinder
its pursuance. In this connection we may only pay attention to the economic and
technical reason for this opinion. There hovers before the holders of this tenet a
muddled conception of technical rationality, which stands in antithesis to
economic rationality, on which also they are not very clear. They are wont to
overlook the fact that “all technical rationality of production is identical with a
low level of specific expenditure in the processes of production.”
31
 They overlook the fact that technical calculation is not enough to realize the “degree of
general and teleological expediency”
32
 of an event; that it can only grade
individual events according to their significance; but that it can never guide us in
those judgments which are demanded by the economic complex as a whole . Only
because of the fact that technical considerations can be based on profitability can
we overcome the difficulty arising from the complexity of the relations between
the mighty system of present-day production on the one hand and demand and
the efficiency of enterprises and economic units on the other; and can we gain the
complete picture of the situation in its totality, which rational economic activity
requires.
33
These theories are dominated by a confused conception of the primacy of
objective use  value. In fact, so far as economic administration is concerned,
                                               
31
Friedrich von Gottl-Ottlilienfeld,  Wirtschaft und technik (Grundriss der Sozialökonomik,
Section II; Tübingen: J.C.B. Mohr, 1914), p. 220.
32
Friedrich von Gottl-Ottlilienfeld,  Wirtschaft und technik (Grundriss der Sozialökonomik,
Section II; Tübingen: J.C.B. Mohr, 1914), p. 219.
33
Friedrich von Gottl-Ottlilienfeld, Wirtschaft und technik (Grundriss der Sozialökonomik, Section
II; Tübingen: J.C.B. Mohr, 1914), p. 225.
objective use value can only acquire significance for the economy through the
influence it derives from subjective use value on the formation of the exchange
relations of economic goods. A second confused idea is inexplicably involved--
the observer’s personal judgment of the utility of goods as opposed to the
judgments of the people participating in economic transactions. If anyone finds it
“irrational” to spend as much as is expended in society on smoking, drinking, and
similar enjoyments, then doubtless he is right from the point of view of his own
personal scale of values. But in so judging, he is ignoring the fact that economy
is a means, and that, without prejudice to the rational considerations influencing
its pattern, the scale of ultimate ends is a matter for conation and not for
cognition.
The knowledge of the fact that rational economic activity is impossible in a
socialist commonwealth cannot, of course, be used as an argument either for or
against socialism. Whoever is prepared himself to enter upon socialism on ethical
grounds on the supposition that the provision of goods of a lower order for
human beings under a system of common ownership of the means of production
is diminished, or whoever is guided by ascetic ideals in his desire for socialism,
will not allow himself to be influenced in his endeavors by what we have said.
Still less will those “culture” socialists be deterred who, like Muckle, expect from
socialism primarily “the  dissolution of the most frightful of all barbarisms--
capitalist rationality.”
34
 But he who expects a rational economic system from
socialism will be forced to re-examine his views.
 
                                               
34
Friedrich Muckle, Das Kulturideal des Sozialismus (Munich and Leipzig: Duncker & Humblot,
1919), p. 213. On the other hand, Muckle demands the “highest degree of rationalisation of
economic life in order to curtail hours of labor, and to permit man to withdraw to an island where
he can listen to the melody of his being.

Part 6 of 8

5. The Most Recent Socialist Doctrines and the Problem of 
Economic Calculation

Since recent events helped socialist parties to obtain power in Russia,
Hungary, Germany and Austria, and have thus made the execution of a socialist
nationalization program a topical issue,
17
 Marxist writers have themselves begun
to deal more closely with the problems of the regulation of the socialist
commonwealth. But even now they still cautiously avoid the crucial question,
leaving it to be tackled by the despised “Utopians.” They themselves prefer to
confine their attention to what is to be done in the immediate future; they are
forever drawing up programs of the path to Socialism and not of Socialism itself.
The only possible conclusion from all these writings is that they are not even
conscious of the larger problem of economic calculation in a socialist society.
To Otto Bauer the nationalization of the banks appears the final and decisive
step in the carrying through of the socialist nationalization program. If all banks
are nationalized and amalgamated into a single central bank, then its
administrative board becomes “the supreme economic authority, the chief
administrative organ of the whole economy. Only by nationalization of the banks
does society obtain the power to regulate its labor according to a plan, and to
distribute its resources rationally among the various branches of production, so as
to adapt them to the nation’s needs.”
18
 Bauer is not discussing the monetary
arrangements which will prevail in the socialist commonwealth after the
completion of the nationalization of the banks. Like other Marxists he is trying to
show how simply and obviously the future socialist order of society will evolve
from the conditions prevailing in a developed capitalist economy.  “It suffices to
transfer to the nation’s representatives the power now exercised by bank
shareholders through the Administrative Boards they elect,”
19
 in order to
socialize the banks and thus to lay the last brick on the edifice of socialism.
Bauer leaves  his readers completely ignorant of the fact that the nature of the
                                               
17
[The reader will remember that Mises is writing in 1920.]
18
  Cf. Otto Bauer, Der Weg zum Sozialismus (Vienna: Ignaz Brand, 1919), p. 26 f.
19
Cf. Otto Bauer, Der Weg zum Sozialismus (Vienna: Ignaz Brand, 1919), p.
banks is entirely changed in the process of nationalization and amalgamation into
one central bank. Once the banks merge into a single bank, their essence is
wholly transformed; they are then in a position to issue credit without any
limitation.
20
 In this fashion the monetary system as we know it today disappears
of itself. When in addition the single central bank is nationalized in a society,
which is otherwise already completely socialized, market dealings disappear and
all exchange transactions are abolished. At the same time the Bank ceases to be a
bank, its specific functions are extinguished, for there is no longer any place for it
in such a society. It may be that the name “Bank” is retained, that the Supreme
Economic Council of the socialist community is called the Board of Directors of
the Bank, and that they hold their meetings in a building formerly occupied by a
bank. But it is no longer a bank, it fulfils none of those functions which a bank
fulfils in an economic system resting on the private ownership of the means of
production and the use of a general medium of exchange--money. It no longer
distributes any credit, for a socialist society makes credit of necessity impossible.
Bauer himself does not tell us what a bank is, but he begins his chapter on the
nationalization of the banks with the sentence: “All disposable capital flows into
a common pool in the banks.”
21
 As a Marxist must he not raise the question of
what the banks’ activities will be after the abolition of capitalism?
All other writers who have grappled with the problems of the organization of
the socialist commonwealth are guilty of similar confusions. They do not realize
that the bases of economic calculation are removed by the exclusion of exchange
and the pricing mechanism, and that something must be substituted in its place, if
all economy is not to be abolished and a hopeless chaos is not to result. People
believe that socialist institutions might evolve without further ado from those of a
capitalist economy. This is not at all the case. And it becomes all the more
grotesque when we talk of banks, banks management, etc. in a socialist
commonwealth.
Reference to the conditions that have developed in Russia and Hungary under
Soviet rule proves nothing. What we have there is nothing but a picture of the
destruction of an existing order of social production, for which a closed peasant
household economy has been substituted. All branches of production depending
on social division of labor are in a state of entire dissolution. What is happening
under the rule of Lenin and Trotsky is merely destruction and annihilation.
                                               
20
Cf. Mises, Theorie des Geldes und der Umlaufsmittel (Munich and Leipzig: Duncker &
Humblot, 1912), p. 474 ff. [See the English translation by H.E. Batson, The Theory of Money and
Credit (Indianapolis: Liberty Classics, 1980), [Compare p. 411 of the 1980 English edition.]
21
Cf. Otto Bauer, Der Weg zum Sozialismus (Vienna: Ignaz Brand, 1919), p. 24 f.29
Whether, as the liberals
22
 hold, socialism must inevitably draw these
consequences in its train, or whether, as the socialists retort, this is only a result
of the fact that the Soviet Republic is attacked from without, is a question of no
interest to us in this context. All that has to be established is the fact that the
Soviet socialist commonwealth has not even begun to discuss the problem of
economic calculation, nor has it any cause to do so. For where things are still
produced for the market in Soviet Russia in spite of governmental prohibitions,
they are valued in terms of money, for there exists to that extent private
ownership of the means of production, and goods are sold against money. Even
the Government cannot deny the necessity, which it confirms by increasing the
amount of money in circulation, of retaining a monetary system for at least the
transition period.
That the essence of the problem to be faced has not yet come to light in Soviet
Russia, Lenin’s statements in his essay on Die nächsten Aufgaben der
Sowjetmacht best show. In the dictator’s deliberations there ever recurs the
thought that the immediate and most pressing task of Russian communism is “the
organization of bookkeeping and control of those concerns, in which the
capitalists have already been expropriated, and of all other economic concerns.”
23
Even so Lenin is far from realizing that an entirely new problem is here involved
which it is impossible to solve with the conceptual instruments of “bourgeois”
culture. Like a real politician, he does not bother with issues beyond his nose. He
still finds himself surrounded by monetary transactions, and does not notice that
with progressive socialization money also necessarily loses its function as the
medium of exchange in general use, to the extent that private property and with it
exchange disappear. The implication of Lenin’s reflections is that he would like
to re-introduce into Soviet business “bourgeois” bookkeeping carried on on a
monetary basis. Therefore he also desires to restore “bourgeois experts” to a state
of grace.
24
 For the rest Lenin is as little aware as Bauer of the fact that in a
socialist commonwealth the functions of the bank are unthinkable in their
existing sense. He wishes to go farther with the “nationalization of the banks”
                                               
22
 [Mises is using the term “liberal” here in its nineteenth-century European sense, meaning
“classical liberal” or libertarian. On liberalism see Mises’s Liberalism: In the Classical Tradition,
translated by Ralph Raico (Irvington-on-Hudson, N.Y.: Foundation for Economic Education,
1985).]
23
Cf. V.I. Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin: Wilmersdorf, 1919), pp. 12 f.,
22ff. [English translation, The Soviets at Work.--This edition.]
24
  Cf. V.I. Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin: Wilmersdorf, 1919), pp. 15.
[English translation, The Soviets at Work.--This edition.]
and to proceed “to a transformation of the banks into the nodal point of social
bookkeeping under socialism.”
25
Lenin’s ideas on the socialist economic system, to which he is striving to lead
his people, are generally obscure.
“The socialist state,” he says “can only arise as a net of producing and
consuming communes, which conscientiously record their production and
consumption, go about their labour economically, uninterruptedly raise
their labour productivity and thus attain the possibility of lowering the
working day to seven or six hours or even lower.”
26
 “Every factor, every
village appears as a production and consumption commune having the
right and obligation to apply the general Soviet legislation in its own way
(‘in its own way’ not in the sense of its violation but in the sense of the
variety of its forms of realisation), and to solve in its own way the
problems of calculating the production and distribution of products.”
27
“The chief communes must and will serve the most backward ones as
educators, teachers, and stimulating leaders.” The successes of the chief
communes must be broadcast in all their details in order to provide a good
example. The communes “showing good business results” should be immediately
rewarded “by a curtailment of the working day and with an increase in wages,
and by allowing more attention to be paid to cultural and aesthetic goods and
values.”
28
We can infer that Lenin’s ideal is a state of society in which the means of
production are not the property of a few districts, municipalities, or even of the
workers in the concern, but of the whole community. His ideal is socialist and not
syndicalist. This need not be specially stressed for a Marxist such as Lenin. It is
not extraordinary of Lenin the theorist, but of Lenin the statesman, who is the
leader of the syndicalist and small-holding peasant Russian revolution. However,
at the moment we are engaged with the writer Lenin and may consider his ideals
separately, without letting ourselves be disturbed by the picture of sober reality.
                                               
25
Cf. V.I. Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin: Wilmersdorf, 1919), pp. 21 and
26. [English translation, The Soviets at Work.--This edition.] Compare also Bukharin, Das
Programm der Kommunisten (Zürich: no pub., 1918), pp. 27 ff.
26
Cf. V.I. Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin: Wilmersdorf, 1919), pp. 24 f..
[English translation, The Soviets at Work.--This edition.]
27
Cf. V.I. Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin: Wilmersdorf, 1919), pp. 32.
[English translation, The Soviets at Work.--This edition.]
28
Cf. V.I. Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin: Wilmersdorf, 1919), pp. 33.
[English translation, The Soviets at Work.--This edition.]
According to Lenin the theorist, every large agricultural and industrial concern is
a member of the great commonwealth of labor. Those who are active in this
commonwealth have the right of self-government; they exercise a profound
influence on the direction of production and again on the distribution of the
goods they are assigned for consumption. Still labor is the property of the whole
society, and as its product belongs to society also, it therefore disposes of its
distribution. How, we must now ask, is calculation in the economy carried on in a
socialist commonwealth which is so organized? Lenin gives us a most inadequate
answer by referring us back to statistics. We must
bring statistics to the masses, make it popular, so that the active population will
gradually learn by themselves to understand and realize how much and what kind
of work must be done, how much and what kind of recreation should be taken, so
that the comparison of the economy’s industrial results in the case of individual
communes becomes the object of general interest and education.
29
From these scanty allusions it is impossible to infer what Lenin understands
by statistics and whether he is thinking of monetary or in natura computation. In
any case, we must refer back to what we have said about the impossibility of
learning the money prices of production-goods in a socialist commonwealth and
about the difficulties standing in the way of  in natura  valuation.
30
 Statistics
would only be applicable to economic calculation if it could go beyond the  in
natura calculation, whose ill-suitedness for this purpose we have demonstrated. It
is naturally impossible where no exchange relations are formed between goods in
the process of trade.
 
                                               
29
  Cf. V.I. Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin: Wilmersdorf, 1919), pp. 33.
[English translation, The Soviets at Work.--This edition.]
30
Neurath, too , imputes great importance to statistics for the setting up of the socialist economic
plan. Otto Neurath (Durch die Kriegswirtschaft zur Naturalwirtschaft [Munich: G.D.W. Callwey,
1919], pp. 212 et seq.).

Part 5 of 8

4. Responsibility and Initiative in Communal Concerns

The problem of responsibility and initiative in socialist enterprises is closely
connected with that of economic calculation. It is now universally agreed that the
exclusion of free initiative and individual responsibility, on which the successes
of private enterprise depend, constitutes the most serious menace to socialist
economic organization.
14
The majority of socialists silently pass this problem by. Others believe they
can answer it with an allusion to the directors of companies; in spite of the fact
that they are not the owners of the means of production, enterprises under their
control have flourished. If society, instead of company shareholders, becomes the
owner of the means of production, nothing will have altered. The directors would
not work less satisfactorily for society than for shareholders.
We must distinguish between two groups of joint-stock companies and similar
concerns. In the first group, consisting for the large part of smaller companies, a
few individuals unite in a common enterprise in the legal form of a company.
They are often the heirs of the founders of the company, or often previous
competitors who have amalgamated. Here the actual control and management of
business is in the hands of the shareholders themselves or at least of some of the
shareholders, who do business in their own interest; or in that of closely related
shareholders such as wives, minors, etc. The directors in their capacity as
members of the board of management or of the board of control, and sometimes
also in an attenuated legal capacity, themselves exercise the decisive influence in
the conduct of affairs. Nor is this affected by the circumstance that sometimes
part of the share-capital is held by a financial consortium or bank. Here in fact
the company is only differentiated from the public commercial company by its
legal form.
                                               
14
Cf. Vorläufiger Bericht der Sozialisierungskommission über die Fragse der Sozialisierung des
Kohlenbergbaues, concluded 15th February, 1919 (Berlin, 1919), p. 13.
The situation is quite different in the case of large-scale companies, where
only a fraction of the shareholders, i.e. the big shareholders, participate in the
actual control of the enterprise. And these usually have the same interest in the
firm’s prosperity as any property holder. Still, it may well be that they have
interests other than those of the vast majority of small shareholders, who are
excluded from the management even if they own the larger part of the sharecapital. Severe collisions may occur, when the firm’s business is so handled on
behalf of the directors that the shareholders are injured. But be that as it may,  it is
clear that the real holders of power in companies run the business in their own
interest, whether it coincides with that of the shareholders or not. In the long run
it will generally be to the advantage of the solid company administrator, who is
not  merely bent on making a transient profit, to represent the shareholders’
interests only in every case and to avoid manipulations which might damage
them. This holds good in the first instance for banks and financial groups, which
should not trifle at the public’s expense with the credit they enjoy. Thus it is not
merely on the prescriptiveness of ethical motives that the success of companies
depends.
The situation is completely transformed when an undertaking is nationalized.
The motive force disappears with the exclusion of the material interests of private
individuals, and if State and municipal enterprises thrive at all, they owe it to the
taking over of “management” from private enterprise, or to the fact that they are
ever driven to reforms and innovations by the business men from whom they
purchase their instruments of production and raw material.
Since we are in a position to survey decades of State and socialist endeavor, it
is now generally recognized that there is no internal pressure to reform and
improvement of production in socialist undertakings, that they cannot be adjusted
to the changing conditions of demand, and that in a word they are a dead limb in
the economic organism. All attempts to breathe life into them have so far been in
vain. It was supposed that a reform in the system of renumeration might achieve
the desired end. If the managers of these enterprises were interested in the yield,
it was thought they would be in a position comparable to that of the manager of
large-scale companies. This is a fatal error. The managers of large-scale
companies are bound up with the interests of the businesses they administer in an
entirely different way from what could be the case in public concerns. They are
either already owners of a not inconsiderable fraction of the share capital, or hope
to become so in due course. Further, they are in a position to obtain profits by
stock exchange speculation in the company’s shares. They have the prospect of
bequeathing their positions to, or at least securing part of their influence for, their
heirs. The type to which the success of joint-stock companies is to be attributed,
is not that of a complacently prosperous managing director resembling the civil
servant in his outlook and experience; rather it is precisely the manager,
promoter, and man of affairs, who is himself interested as a shareholder, whom it
is the aim of all nationalization and municipalization to exclude.
It is not generally legitimate to appeal in a socialist context to such arguments
in order to ensure the success of an economic order built on socialist foundations.
All socialist systems, including that of Karl Marx, and his orthodox supporters,
proceed from the assumption that in a socialist society a conflict between the
interests of the particular and general could not possibly arise. Everybody will act
in his own interest in giving of his best because he participates in the product of
all economic activity. The obvious objection that the individual is very little
concerned whether he himself is diligent and enthusiastic, and that it is of greater
moment to him that everybody else should be, is either completely ignored or is
insufficiently dealt with by them. They believe they can construct a socialist
commonwealth on the basis of the Categorical Imperative alone. How lightly it is
their wont to proceed in this way is best shown by Kautsky when he says, “If
socialism is a social necessity, then it would be human nature and not socialism
which would have to readjust itself, if ever the two clashed.”
15
 This is nothing but sheer Utopianism.
But even if we for the moment grant that these Utopian expectations can
actually be realized, that each individual in a socialist society will exert himself
with the same zeal as he does today in a society where he is subjected to the
pressure of free competition, there still remains the problem of measuring the
result of economic activity in a socialist commonwealth which does not permit of
any economic calculation. We cannot act economically if we are not in a position
to understand economizing.
A popular slogan affirms that if we think less bureaucratically and more
commercially in communal enterprises, they will work just as well as private
enterprises. The leading positions must be occupied by merchants, and then
income will grow apace. Unfortunately “commercial-mindedness” is not
something external, which can be arbitrarily transferred. A merchant’s qualities
are not the property of a person depending on inborn aptitude, nor are they
acquired by studies in a commercial school or by working in a commercial house,
or even by having been a business man oneself for some period of time. The
entrepreneur’s commercial attitude and activity arises from his position in the
economic process and is lost with its disappearance. When a successful business
man is appointed the manager of a public enterprise, he may still bring with him
                                               
15
Cf. Karl Kautsky, Preface to “Atlanticus”[Gustav Jaeckh], Produktion und Konsum im
Sozialstaat (Stuttgart: J.H.W. Dietz, 1898), p. 14.
certain experiences from his previous occupation, and be able to turn them to
good account in a routine fashion for some time. Still, with his entry into
communal activity he ceases to be a merchant and becomes as much a bureaucrat
as any other placeman in the public employ. It is not a knowledge of
bookkeeping, of business organization, or of the style of commercial
correspondence, or even a dispensation from a commercial high school, which
makes the merchant, but his characteristic position in the production process,
which allows of the identification of the firm’s and his own interests. It is no
solution of the problem when Otto Bauer in his most recently published work
proposes that the directors of the National Central Bank, on whom leadership in
the economic process will be conferred, should be nominated by a Collegium, to
which representatives of the teaching staff of the commercial high schools would
also belong.
16
 Like Plato’s philosophers, the directors so appointed may well be
the wisest and best of their kind, but they cannot be merchants in their posts as
leaders of a socialist society, even if they should have been previously.
It is a general complaint that the administration of public undertakings lacks
initiative. It is believed that this might be remedied by changes in organization.
This also is a grievous mistake. The management of a socialist concern cannot
entirely be placed in the hands of a single individual, because there must always
be the suspicion that he will permit errors inflicting heavy damages on the
community. But if the important conclusions are made dependent on the votes of
committees, or on the consent of the relevant government offices, then
limitations are imposed on the individual’s initiative. Committees are rarely
inclined to introduce bold innovations. The lack of free initiative in public
business rests not on an absence of organization, it is inherent in the nature of the
business itself. One cannot transfer free disposal of the factors of production to
an employee, however high his rank, and this becomes even less possible, the
more strongly he is materially interested in the successful performance of his
duties; for in practice the propertyless manager can only be held morally
responsible for losses incurred. And so ethical losses are juxtaposed with
opportunities for material gain. The property owner on the other hand himself
bears responsibility, as he himself must primarily feel the loss arising from
unwisely conducted business. It is precisely in this that there is a characteristic
difference between liberal and socialist production.
 
                                               
16
Cf. Otto Bauer, Der Weg zum Sozialismus (Vienna: Ignaz Brand, 1919), p. 25.

Part 4 of 8

3. Economic Calculation in the Socialist Commonwealth

Are we really dealing with the necessary consequences of common ownership
of the means of production? Is there no way in which some kind of economic
calculation might be tied up with a socialist system?
In every great enterprise, each particular business or branch of business is to
some extent independent in its accounting. It reckons the labor and material
against each other, and it is always possible for each individual group to strike a
particular balance and to approach the economic results of its activities from an
accounting point of view. We can thus ascertain with what success each
particular section has labored, and accordingly draw conclusions about the
reorganization, curtailment, abandonment, or expansion of existing groups and
about the institution of new ones. Admittedly, some mistakes are inevitable in
such a calculation. They arise partly from the difficulties consequent upon an
allocation of general expenses. Yet other mistakes arise from the necessity of
calculating with what are not from many points of view rigorously ascertainable
data, e.g. when in the ascertainment of the profitability of a certain method of
procedure we compute the amortization of the machines used on the assumption
of a given duration for their usefulness. Still, all such mistakes can be confined
within certain narrow limits, so that they do not disturb the net result of the
calculation. What remains of uncertainty comes into the calculation of the
uncertainty of future conditions, which is an inevitable concomitant of the
dynamic nature of economic life.
It seems tempting to try to construct by analogy a separate estimation of the
particular production groups in the socialist state also. But it is quite impossible.
For each separate calculation of the particular branches of one and the same
enterprise depends exclusively on the fact that is precisely in market dealings that
market prices to be taken as the bases of calculation are formed for all kinds of
goods and labor employed. Where there is no free market, there is no pricing
mechanism; without a pricing mechanism, there is no economic calculation.
We might conceive of a situation, in which exchange between particular
branches of business is permitted, so as to obtain the mechanism of exchange
relations (prices) and thus create a basis for economic calculation even in the
socialist commonwealth. Within the framework of a uniform economy knowing
not private ownership of the  means of production, individual labor groups are
constituted independent and authoritative disposers, which have indeed to behave
in accordance with the directions of the supreme economic council, but which
nevertheless assign each other material goods and services only against a
payment, which would have to be made in the general medium of exchange. It is
roughly in this way that we conceive of the organization of the socialist running
of business when we nowadays talk of complete socialization and the like. But
we have still not come to the crucial point. Exchange relations between
production goods can only be established on the basis of private ownership of the
means of production. When the “coal syndicate” provides the “iron syndicate”
with coal, no pric e can be formed, except when both syndicates are the owners of
the means of production employed in their business. This would not be
socialization but workers’ capitalism and syndicalism.
The matter is indeed very simple for those socialist theorists who  rely on the
labor theory of value.
As soon as society takes possession of the means of production and
applies them to production in their directly socialized form, each
individual’s labour, however different its specific utility may be,
becomes  a priori  and directly social labour. The amount of social
labour invested in a product need not then be established indirectly;
daily experience immediately tells us how much is necessary on an
average. Society can simply calculate how many hours of labour are
invested in a steam engine, a quarter of last harvest’s wheat, and a 100
yards of linen of given quality ... To be sure, society will also have to
know how much labour is needed to produce any consumption-good. It
will have to arrange its production plan according to its means of
production, to which labour especially belongs. The utility yielded by
the various consumption-goods, weighted against each other and
against the amount of labour required to produce them, will ultimately
determine the plan. People will make everything simple without the
mediation of the notorious “value.”
9
Here it is not our task once more to advance critical objections against the
labor theory of value. In this connection they can only interest us in so far as they
                                             
9
Friedrich Engels, Herrn Eugen Dührings Umwälzung des Wissenschaft, 7th ed., pp. 335 f.
[Translated by Emile Burns as Herr Eugen Dühring’s Revolution in Science--Anti-Düring (London:
Lawrence & Wishart, 1943).]
are relevant to an assessment of the applicability of labor in the value
computations of a socialist community.
On a first impression calculation in terms of labor also takes into
consideration the natural non-human conditions of production. The law of
diminishing returns  is already allowed for in the concept of socially necessary
average labor time to the extent that its operation is due to the variety of the
natural conditions of production. If the demand for a commodity increases and
worse natural resources must be exploited, then the average socially necessary
labor time required for the production of a unit increases too. If more favorable
natural resources are discovered, the amount of socially necessary labor
diminishes.
10
 The consideration of the natural condition of production suffices
only in so far as it is reflected in the amount of labor socially necessary. But it is
in this respect that valuation in terms of labor fails. It leaves the employment of
material factors of production out of account. Let the amount of socially
necessary labor time required for the production of each of the commodities P
and Q be 10 hours. Further, in addition to labor the production of both P and Q
requires the raw material a, a unit of which is produced by an hour’s socially
necessary labor; 2 units of a and 8 hours’ labor are used in the production of P,
and one unit of a and 9 hours’ labor in the production of Q. In terms of labor P
and Q are equivalent, but in value terms P is more valuable than Q. The former is
false, and only the  latter corresponds to the nature and purpose of calculation.
True, this surplus, by which according to value calculation P is more valuable
than Q, this material sub-stratum “is given by nature without any addition from
man.”
11
 Still, the fact that it is only present in such quantities that it becomes an
object of economizing, must be taken into account in some form or other in value
calculation.
The second defect in calculation in terms of labor is the ignoring of the
different qualities of labor. To Marx all human labor is economically of the same
kind, as it is always “the productive expenditure of human brain, brawn, nerve
and hand.”
12
Skilled labour counts only as intensified, or rather multiplied, simple
labour, so that a smaller quantity of skilled labour is equal to a larger
quantity of simple labour. Experience shows that skilled labour can
always be reduced in this way to the terms of simple labour. No matter
                                             
10
Karl Marx, Capital, translated by Eden and Cedar Paul (London: Allen & Unwin, 1928), p. 9.
11
Karl Marx, Capital, translated by Eden and Cedar Paul (London: Allen & Unwin, 1928), p. 12.
12
Karl Marx, Capital, translated by Eden and Cedar Paul (London: Allen & Unwin, 1928), p. 13 et
seq.
that a commodity be the product of the most highly skilled labour, its
value can be equated with that of the product of simple labour, so that it
represents merely a definite amount of simple labour.
Böhm-Bawerk is not far wrong when he calls this argument “a theoretical
juggle of almost stupefying naïveté.
13
 To judge Marx’s view we need not ask if it
is possible to discover a single uniform physiological measure of all human
labor, whether it be physical or “mental.” For it is certain that there exist among
men varying degrees of capacity and dexterity, which cause the products and
services of labor to have varying qualities. What must be conclusive in deciding
the question whether reckoning in terms of labor is applicable or not, is whether
it is or is not possible to bring different kinds of labor under a common
denominator without the mediation of the economic subject’s valuation of their
products. The proof Marx attempts to give is not successful. Experience indeed
shows that goods are consumed under exchange relations without regard of the
fact of their being produced by simple or complex labor. But this would only be a
proof that given amounts of simple labor are directly made equal to given
amounts of complex labor, if it were shown that labor is their source of exchange
value. This not only is not demonstrated, but is what Marx is trying to
demonstrate by means of these very arguments.
No more is it a proof of this homogeneity that rates of substitution between
simple and complex labor are manifested in the wage rate in an exchange
economy--a fact to which Marx does not allude in this  context. This equalizing
process is a result of market transactions and not its antecedent. Calculation in
terms of labor would have to set up an arbitrary proportion for the substitution of
complex by simple labor, which excludes its employment for purposes of
economic administration.
It was long supposed that the labor theory of value was indispensable to
socialism, so that the demand for the nationalization of the means of production
should have an ethical basis. Today we know this for the error it is. Although the
majority of socialist supporters have thus employed this misconception, and
although Marx, however much he fundamentally took another point of view, was
not altogether free from it, it is clear that the political call for the introduction of
socialized production neither requires nor can obtain the support of the labor
theory of value on the one hand, and that on the other those people holding
different views on the nature and origin of economic value can be socialist
                                             
13
Cf. Eugen von Böhm-Bawerk, Capital and Interest, translated by William Smart (London and
New York: Macmillan, 1890), p. 384. [See the English translation by George Huncke and Hans F.
Sennholz (South Holland, Ill.: Libertarian Press, 1959) p. 299, where the phrase reads “a bit of
legerdemain in the theorizing line that is astounding in its naiveté.”]Economic Calculation 22
according to their sentiments. Yet the labor theory of value is inherently
necessary for the supporters of socialist production in a sense other than that
usually intended. In the main socialist production might only appear rationally
realizable, if it provided an objectively recognizable unit of value, which would
permit of economic calculation in an economy where neither money nor
exchange were present. And only labor can conceivably be considered as such.