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