Part 3 of 8

2. The Nature of Economic Calculation
Every man who, in the course of economic life, takes a choice between the
satisfaction of one need as against another,  eo ipso makes a judgment of value.
Such judgments of value at once include only the very satisfaction of the need
itself; and from this they reflect back upon the goods of a lower, and then further
upon goods of a higher order.
2
 As a rule, the man who knows his own mind is in
a position to value goods of a lower order. Under simple conditions it is also
possible for him without much ado to form some judgment of the significance to
him of goods of a higher order. But  where the state of affairs is more involved
and their interconnections not so easily discernible, subtler means must be
employed to accomplish a correct
3
 valuation of the means of production. It would
not be difficult for a farmer in economic isolation to come by a distinction
between the expansion of pasture-farming and the development of activity in the
hunting field. In such a case the processes of production involved are relatively
short and the expense and income entailed can be easily gauged. But it is quite a
different matter when the choice lies between the utilization of a water-course for
the manufacture of electricity or the extension of a coal mine or the drawing up
of plans for the better employment of the energies latent in raw coal. Here the
roundabout processes of production are many and each is very lengthy; here the
conditions necessary for the success of the enterprises which are to be initiated
are diverse, so that one cannot apply merely vague valuations, but requires rather
more exact estimates and some judgment of the economic issues actually
involved.
Valuation can only take place in terms of units, yet it is impossible that there
should ever be a unit of subjective use value for goods. Marginal utility does not
posit any unit of value, since it is obvious that the value of two units of a given
stock is necessarily greater than, but less than double, the value of a single unit.
                                               
2
[By “lower order” Mises refers to those goods made for final consumption, and by “higher order”
those used in production.]
3
Using that term, of course, in the sense only of the valuating subject, and not in an objective and
universally applicable sense.9 Economic Calculation in the Socialist Commonwealth
Judgments of value do not measure; they merely establish grades and scales.
4
Even Robinson Crusoe, when he has to make a decision where no ready
judgment of value appears and where he has to construct one upon the basis of a
more or less exact estimate, cannot operate solely with subjective use value, but
must take into consideration the intersubstitutability of goods on the basis of
which he can then form his estimates. In such circumstances it will be impossible
for him to refer all things back to one unit. Rather will he, so far as he can, refer
all the elements which have to be taken into account in forming his estimate to
those economic goods which can be apprehended by an obvious judgment of
value--that is to say, to goods of a lower order and to pain-cost. That this is only
possible in very simple conditions is obvious. In the case of more complicated
and more lengthy processes of production it will, plainly, not answer.
In an exchange economy the objective exchange value of commodities enters
as the unit of economic calculation. This entails a threefold advantage. In the first
place, it renders it possible to base the calculation upon the valuations of all
participants in trade. The subjective use value of each is not immediately
comparable as a purely individual phenomenon with the subjective use value of
other men. It only becomes so in exchange value, which arises out of the
interplay of the subjective valuations of all who take part in exchange. But in that
case calculation by exchange value furnishes a control over the appropriate
employment of goods. Anyone who wishes to make calculations in regard to a
complicated process of production will immediately notice whether he has
worked more economically than others or not; if he finds, from reference to the
exchange relations obtaining in the market, that he will not be able to produce
profitably, this shows  that others understand how to make a better use of the
goods of higher order in question. Lastly, calculation by exchange value makes it
possible to refer values back to a unit. For this purpose, since goods are mutually
substitutable in accordance with the exchange relations obtaining in the market,
any possible good  can be chosen. In a monetary economy it is money that is so
chosen.
Monetary calculation has its limits. Money is no yardstick of value, nor yet of
price. Value is not indeed measured in money, nor is price. They merely consist
in money. Money as an economic good is not of stable value as has been naïvely,
but wrongly, assumed in using it as a “standard of deferred payments.” The
exchange-relationship which obtains between money and goods is  subjected to
constant, if (as a rule) not too violent, fluctuations originating not only from the
side of other economic goods, but also from the side of money. However, these
                                               
4
Franz Cuhel, Zur Lehre von den Bedürfnissen (Innsbruck: Wagner’ssche UniversitätBuchhandlung, 1907), pp.198 f.
fluctuations disturb value calculations only in the slightest degree, since usually,
in view of the ceaseless alternations in other economic data--these calculations
will refer only to comparatively short periods of time--periods in which “good”
money, at least normally, undergoes comparatively trivial fluctuations in regard
to its exchange relations. The inadequacy of the monetary calculation of value
does not have its mainspring in the fact that value is then calculated in terms of a
universal medium of exchange, namely money, but rather in the fact that in this
system it is exchange value and not subjective use value on which the calculation
is based. It can never obtain as a measure for the calculation of those value
determining elements which stand outside the domain of exchange transactions.
If, for example, a man were to calculate the profitability of erecting a
waterworks, he would not be able to include in his calculation the beauty of the
waterfall which the scheme might impair, except that he may pay attention to the
diminution of tourist traffic or similar changes, which may be valued in terms of
money. Yet these considerations might well prove one of the factors in deciding
whether or not the building is to go up at all.
It is customary to term such elements “extra-economic.” This perhaps is
appropriate; we are not concerned with disputes over terminology; yet the
considerations themselves can scarcely be termed irrational. In any place where
men regard as significant the beauty of a neighborhood or of a building, the
health, happiness and contentment of mankind, the honor of individuals or
nations, they are just as much motive forces of rational conduct as are economic
factors in the proper sense of the word, even where they are not substitutable
against each other on the market and therefore do not enter into exchange
relationships.
That monetary calculation cannot embrace these factors lies in its very nature;
but for the purposes of our everyday economic life this does not detract from the
significance of monetary calculation. For all those ideal goods are goods of a
lower order, and can hence be embraced straightway within the ambit of our
judgment of values. There is therefore no difficulty in taking them into account,
even though they must remain outside the sphere of monetary value. That they do
not admit of such computation renders their consideration in the affairs of life
easier and not harder. Once we see clearly how highly we value beauty, health,
honor and pride, surely nothing can prevent us from paying a corresponding
regard to them. It may seem painful to any sensitive spirit to have to balance
spiritual goods against material. But that is not the fault of monetary calculation;
it lies in the very nature of things themselves. Even where judgments of value
can be established directly without computation in value  or in money, the
necessity of choosing between material and spiritual satisfaction cannot be
evaded. Robinson Crusoe and the socialist state have an equal obligation to make
the choice.
Anyone with a genuine sense of moral values experiences no hardship in
deciding between honor and livelihood. He knows his plain duty. If a man cannot
make honor his bread, yet can he renounce his bread for honor’s sake. Only they
who prefer to be relieved of the agony of this decision, because they cannot bring
themselves to renounce material comfort for the sake of spiritual advantage, see
in the choice a profanation of true values.
Monetary calculation only has meaning within the sphere of economic
organization. It is a system whereby the rules of economics may be applied in the
disposition of economic goods. Economic goods only have part in this system in
proportion to the extent to which they may be exchanged for money. Any
extension of the sphere of monetary calculation causes misunderstanding. It
cannot be regarded as constituting a kind of yardstick for the valuation of goods,
and cannot be so treated in historical investigations into the development of
social relationships; it cannot be used as a criterion of national wealth and
income, nor as a means of gauging the value of goods which stand outside the
sphere of exchange, as who should seek to estimate the extent of human losses
through emigrations or wars in terms of money?
5
 This is mere sciolistic
tomfoolery, however much it may be indulged in by otherwise perspicacious
economists.
Nevertheless within these limits, which in economic life it never oversteps,
monetary calculation fulfils all the requirements of economic calculation. It
affords us a guide through the oppressive plenitude of economic potentialities. It
enables us to extend to all goods of a higher order the judgment of value, which
is bound up with and clearly evident in, the case of goods ready for consumption,
or at best of production goods of the lowest order. It renders their value capable
of computation and thereby gives us the primary basis for all economic
operations with goods of a higher order. Without it, all production involving
processes stretching well back in time and all the longer roundabout processes of
capitalistic production would be gropings in the dark.
There are two conditions governing the possibility of calculating value in
terms of money. Firstly, not only must goods of a lower, but also those of a
higher order, come within the ambit of exchange, if they are to be included. If
they do not do so, exchange relationships would not arise. True enough, the
                                               
5
Cf. Friedrich von Wieser, Über den Ursprung und die Hauptgesetze des wirtschaftlichen Eertes
(Vienna: A. Hölder, 1884), pp. 185 f.Nature of Economic Calculation 12
considerations which must obtain in the case of Robinson Crusoe prepared,
within the range of his own hearth, to exchange, by production, labor and flour
for bread, are indistinguishable from those which obtain when he is prepared to
exchange bread for clothes in the open market, and, therefore, it is to some extent
true to say that every economic action, including Robinson Crusoe’s own
production, can be termed  exchange.
6
 Moreover, the mind of one man alone--be
it ever 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. The distribution among a number of individuals of administrative
control over economic goods in a community of men who take part in the labor
of producing them, and who are economically interested in them, entails a kind
of intellectual division of labor, which would not be possible without some
system of calculating production and without economy.
The second condition is that there exists in fact a universally employed
medium of exchange--namely, money --which plays the same part as a medium
in the exchange of production goods also. If this were not the case, it would not
be possible to reduce all exchange-relationships to a common denominator.
Only under simple conditions can economics dispense with monetary
calculation. Within the narrow confines of household economy, for instance,
where the father can supervise the entire economic management, it is possible to
determine the significance of changes in the processes of production, without
such aids to the mind, and yet with more or less of accuracy. In such a case the
process develops under a relatively limited use of capital. Few of the capitalistic
roundabout processes of production are here introduced: what is manufactured is,
as a rule, consumption goods or at least such goods of a higher order as stand
very near to consumption-goods. The division of labor is in its rudimentary
stages: one and the same laborer controls the labor of what is in effect, a
complete process of production of goods ready for consumption, from beginning
to end. All this is different, however, in developed communal production. The
experiences of a remote and bygone period of simple production do not provide
any sort of argument for establishing the possibility of an economic system
without monetary calculation.
In the narrow confines of a closed household economy, it is possible
throughout to review the process of production from beginning to end, and to
                                               
6
Cf. Mises, Theorie des Geldes und der Umlaufsmittel (Munich and Leipzig: Duncker & Humblot,
1912), p. 16, with the references there given. [See the English translation by H.E. Batson, The
Theory of Money and Credit (Indianapolis: Liberty Classics, 1980), p. 52.]
judge all the time  whether one or another mode of procedure yields more
consumable goods. This, however, is no longer possible in the incomparably
more involved circumstances of our own social economy. It will be evident, even
in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is
not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500
of oil. There is no need for any system of calculation to establish this fact: the
deciding element is the will of the economic subjects involved. But once this
decision has been taken, the real task of rational economic direction only
commences, i.e. economically, to place the means at the service of the end. That
can only be done with some kind of economic calculation. The human mind
cannot orientate itself properly among the bewildering mass of intermediate
products and potentialities of production without such aid. It would simply stand
perplexed before the problems of management and location.
7
It is an illusion to imagine that in a socialist state calculation  in natura can
take the place of monetary calculation. Calculation  in natura, in an economy
without exchange, can embrace consumption goods only; it completely fails
when it comes to dealing with goods of a higher order. And as soon as one gives
up the conception of a freely established monetary price for goods of a higher
order, rational production becomes completely impossible. 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.
It is easy to overlook this fact, considering that the extent to which socialism
is in evidence among us constitutes only a socialistic oasis in a society with
monetary exchange, which is still a free society to a certain degree. In one sense
we may agree with the socialists’ assertion which is otherwise entirely untenable
and advanced only as a demagogic point, to the effect that the nationalization and
municipalization of enterprise is not really socialism, since these concerns in
their business organizations are so much dependent upon the environing
economic system with its free commerce that they cannot be said to partake
today 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 or foreign, can be noticed, and because those
private industries which produce the materials for these improvements give the
impulse for the ir introduction. In these concerns the advantages of reorganization
can be established, because they operate within the sphere of a society based
upon private ownership of the means of production and upon the system of
monetary exchange, being thus capable of computation and account. This state of
                                             
7  Friedrich von Gottl-Ottlilienfeld, Wirtschaft und technik (Grundriss der Sozialökonomik, Section
II; Tübingen: J.C.B. Mohr, 1914), p. 216.Nature of Economic Calculation 14
affairs, however, could not obtain in the case of socialist concerns operating in a
purely socialistic environment.
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. In trivial and secondary matters
rational conduct might still be possible, but in general it would be impossible to
speak of rational production any more. There would be no means of determining
what was rational, and hence it is obvious that production could never be directed
by economic considerations. What this means is clear enough, apart from its
effects on the supply of commodities. Rational conduct would be divorced from
the very ground which is its proper domain. Would there, in fact, be any such
thing as rational conduct at all, or, indeed, such a thing as rationality and logic in
thought itself? Historically, human rationality is a development of economic life.
Could it then obtain when divorced therefrom?
For a time the remembrance of the experiences gained in a competitive
economy, which has obtained for some thousands of years, may provide a check
to the complete collapse of the art of economy. The older methods of procedure
might be retained not because of their rationality but because they appear to be
hallowed by tradition. Actually, they would meanwhile have become irrational,
as no longer comporting with the new conditions. Eventually, through the general
reconstruction of economic thought, they will experience alterations which will
render them in fact uneconomic. The supply of goods will no longer proceed
anarchically of its own accord; that is true. All transactions which serve the
purpose of meeting requirements will be subject to the control of a supreme
authority. Yet in place of the economy of the “anarchic” method of production,
recourse will be had to the senseless output of an absurd apparatus. The wheels
will turn, but will run to no effect.
One may anticipate the nature of the future socialist society. There will be
hundreds and thousands of factories in operation. Very few of these will be
producing wares ready for use; in the majority of cases what will be
manufactured will be unfinished goods and production goods. All these concerns
will be interrelated. Every good will go through a whole series of stages before it
is ready for use. In the ceaseless toil and moil of this process, however, the
administration will be without  any means of testing their bearings. It will never
be able to determine whether a given good has not been kept for a superfluous
length of time in the necessary processes of production, or whether work and
material have not been wasted in its completion. How will it be able to decide
whether this or that method of production is the more profitable? At best it will
only be able to compare the quality and quantity of the consumable end product
produced, but will in the rarest cases be in a position to compare the expenses
entailed in production. It will know, or think it knows, the ends to be achieved by
economic organization, and will have to regulate its activities accordingly, i.e. it
will have to attain those ends with the least expense. It will have to make its
computations with a view to finding the cheapest way. This computation will
naturally have to be a value computation. It is eminently clear, and requires no
further proof, that it cannot be of a technical character, and that it cannot be
based upon the objective use value of goods and services.
Now, in the economic system of private ownership of the means of
production, the system of computation by value is necessarily employed by each
independent member of society. Everybody participates in its emergence in a
double way: on the one hand as a consumer and on the other as a producer. As a
consumer he establishes a scale of valuation for goods ready for use in
consumption. As a producer he puts goods of a higher order into such use as
produces the greatest return. In this way all goods of a higher order receive a
position in the scale of valuations in accordance with the immediate state of
social conditions of production and of social needs. Through the interplay of
these two processes of valuation, means will be afforded for governing both
consumption and production by the economic principle throughout. Every graded
system of pricing proceeds from the fact that men always and ever harmonized
their own requirements with their estimation of economic facts.
All this is necessarily absent from a socialist state. The administration may
know exactly what goods are most urgently needed. But in so doing, it has only
found what is, in fact, but one of the two necessary prerequisites for economic
calculation. In  the nature of the case it must, however, dispense with the other--
the valuation of the means of production. It may establish the value attained by
the totality of the means of production; this is obviously identical with that of all
the needs thereby satisfied. 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. Yet it cannot reduce this value to the uniform
expression of a money price, as can a competitive economy, wherein all prices
can be referred back to a common expression in terms of money. In a socialist
commonwealth which, whilst it need not of necessity dispense with money
altogether, yet finds it impossible to use money as an expression of the price of
the factors of production (including labor), money can play no role in economic
calculation.
8
                                               
8
This fact is also recognized by Otto Neurath (Durch die Kriegswirtschaft zur Naturalwirtschaft
[Munich: G.D.W. Callwey, 1919], pp. 216 f.). He advances the view that every complete
adminisrtative economy is, in the final analysis, a natural economy. “Socialization,” he says, “is
Picture the building of a new railroad. Should it be built at all, and if so,
which out of a number of conceivable roads should be built? In a competitive and
monetary economy, this question would be answered by monetary calculation.
The new road will render less expensive the transport of some goods, and it may
be possible to calculate whether this reduction of expense transcends that
involved in the building and upkeep of the next line. That can only be calculated
in money. It is not possible to attain the desired end merely by counterbalancing
the various physical expenses and physical savings. Where one cannot express
hours of labor, iron, coal, all kinds of building material, machines and other
things necessary for the construction and upkeep of the railroad in a common unit
it is not possible to make calculations at all. The drawing up of bills on an
economic basis is only possible where all the goods concerned can be referred
back to money. Admittedly, monetary calculation has its inconveniences and
serious defects, but we have certainly nothing better to put in its place, and for
the practical purposes of life monetary calculation as it exists under a sound
monetary system always suffices. Were we to dispense with it, any economic
system of calculation would become absolutely impossible.
The socialist society would know how to look after itself. It would issue an
edict and decide for or against the projected building. Yet this decision would
depend at best upon vague estimates; it would never be based upon the
foundation of an exact calculation of value.
The static state can dispense with economic calculation.  For here the same
events in economic life are ever recurring; and if we assume that the first
disposition of the static socialist economy follows on the basis of the final state
of the competitive economy, we might at all events conceive of a socialist
production system which is rationally controlled from an economic point of view.
But this is only conceptually possible. For the moment, we leave aside the fact
that a static state is impossible in real life, as our economic data are forever
changing, so that the static nature of economic activity is only a theoretical
assumption corresponding to no real state of affairs, however necessary it may be
for our thinking and for the perfection of our knowledge of economics. Even so,
we must assume that the transition to socialism must, as a consequence of the
levelling out of the differences in income and the resultant readjustments in
consumption, and therefore production, change all economic data in such a way
that a connecting link with the final state of affairs in the previously existing
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.
                                                                                                                     
thus the pursuit of natural economy.” Neurath merely overlooks the insuperable difficulties that
would have to develop with economic calculation in the socialist commonwealth.
socialist economic order floundering in the ocean of possible and conceivable
economic combinations without the compass of economic calculation.
Thus in the socialist commonwealth every economic change becomes an
undertaking whose success can be neither appraised in advance nor later
retrospectively determined. There is only groping in the dark. Socialism is the
abolition of rational economy.