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The Economist's Duty

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04/07/2017Ludwig von Mises

[This series of four articles is a condensation of chapters in Human Action, by Ludwig von Mises, which deal with various forms of government interference with the free market. They were published in the Wall Street Journal, December 12, 13, 14, 15, 1949, and were recently found in a folder of newspaper clippings collected by Murray Rothbard. There is no byline or author name connected to the series.]

The Socialist Society

Its Crucial Question: Can It Operate As a Workable System?

"Economics is a theoretical science and as such abstains from any judgment of value. It is not its task to tell people what ends they should aim at. It is a science of the means to be applied for the attainment of the ends chosen, not, to be sure, a science of the choosing of ends.

"Ultimate decisions, the valuation and the choosing of ends, are beyond the scope of any science. Science never tells a man how he should act; it merely shows how a man must act if he wants to attain definite ends."

This is Ludwig von Mises' approach to economics. For instance, it is not the duty of economics, he thinks, to tell people whether they ought to choose or reject socialism as a way of organizing their economic life. The economist's duty is to determine first whether socialism is a workable system, and if so, what it will do. Arguments about the effect of socialism on men's personal lives, their liberties and happiness, are important — but they are for philosophers, not economists.

Socialism is not a workable economic system. It not only fails to deliver what it promises; it can deliver nothing but chaos.

This is one of the major conclusions in von Mises' comprehensive study of economics and civilization, Human Action, published this fall by the Yale University Press. The Wall Street Journal begins this morning a condensation of the chapters dealing with the economic problems of all the various forms of government interference with the free market. These forms of interference go under many names — communism, the managed economy, the welfare state — but they are all varieties of socialism. And all have one fatal economic flaw.

Only the main conclusions will be presented here. For the reasoning and the elaborate data supporting these conclusions, the reader is referred to the full work, possibly the most important economic treatise of our time.

_______________________________________

 

The socialist creed rests upon three dogmas:

First: Society is an omnipotent and omniscient being, free from human frailty and weakness.

Second: The coming of socialism is inevitable.

Third: As history is a continuous progress from less perfect conditions to more perfect conditions, the coming of socialism is desirable.

For the study of human action and economics, the only problem to be discussed in regard to socialism is this: Can a socialist system operate as a system of the division of labor?

*     *     *     *

All older social reformers wanted to realize the good society be a confiscation of all private property and its subsequent redistribution; each man's share should be equal to that of every other.

These plans became unrealizable when the large-scale enterprises in manufacturing, mining, and transportation appeared. The age-old program of redistribution was superseded by the idea of socialization. The means of production were to be expropriated, but no redistribution was to be resorted to. The state itself was to run all the plants and farms.

This inference became logically inescapable as soon as people began to ascribe to the state not only moral but also intellectual perfection. Then one could not help concluding that the infallible state was in a position to succeed in the conduct of production activities better than erring individuals. It would avoid all those errors that often frustrate the actions of entrepreneurs and capitalists. There would no longer be malinvestment or squandering of scarce factors of production; wealth would multiply. The "anarchy" of production appears wasteful when contrasted with the planning of the omniscient state.

The socialist mode of production then appears to be the only reasonable system, and the market economy seems the incarnation of unreason. In the eyes of the rationalist advocates of socialism, the market economy is simply an incomprehensible aberration of mankind. In the eyes of those influenced by historicism, the market economy is the social order of an inferior stage of human evolution which the inescapable process of progressive perfection will eliminate in order to establish the more adequate system of socialism. Both lines of thought agree that reason itself postulates the transition to socialism.

Karl Marx was not the originator of socialism. Nothing could be added to the description of the socialist system as developed by his predecessors, and Marx did not add anything. What he did was to integrate the socialist creed into this meliorist doctrine. The coming of socialism is inevitable, and this by itself proves that socialism is a higher and more perfect state of human affairs than the preceding state of capitalism. It is vain to discuss the pros and cons; socialism is bound to come "with the inexorability of a law of nature."

The Marxian taboo branded all attempts to examine the economic problems of a socialist commonwealth as "unscientific." Nobody was bold enough to defy this ban. It was tacitly assumed by both the friends and the foes of socialism that socialism is a realizable system of mankind's economic organization. The vast literature concerning socialism dealt with alleged shortcomings of capitalism and with the general cultural implications of socialism. It never dealt with the economics of socialism as such.

*     *     *     *

The essential mark of socialism is that one will alone acts.

It is immaterial whose will it is. The director may be an anointed king or a dictator, ruling by virtue of his charisma, he may be a Fuehrer or a board of Fuehrers appointed by the vote of the people. The main thing is that the employment of all factors of production is directed by one agency only. One will alone chooses, decides, directs, acts, gives orders. All the rest simply obey orders and instructions. Organization and a planned order are substituted for the "anarchy" of production and for various people's initiative.

In terming the director society (as the Marxians do), state (with a capital S), government, or authority, people tend to forget that the director is always a human being, not an abstract notion or a mythical collective entity. We may admit that the director or the board of directors are people of superior ability, wise and full of good intentions. But it would be nothing short of idiocy to assume that they are omniscient and infallible.

In an analysis of the problems of socialism, we are not concerned with the moral and ethical character of the director. Neither do we discuss his value judgments.  What we are dealing with is merely the question of whether any mortal man, equipped with the logical structure of the human mind, can be equal to the tasks incumbent upon a director of a socialist society.

We assume that the director has at his disposal all the technological knowledge of his age. Moreover, he has a complete inventory of all the material factors of production available and a roster enumerating all manpower employable. The crowd of experts and specialists which he assembles provides him with perfect information and answer correctly all questions he may ask them.

But now he must act. He must choose among an infinite variety of projects in such a way that no want which he himself considers more urgent remains unsatisfied because the factors of production required for its satisfaction are employed for the satisfaction of wants which he considers less urgent.

*     *     *     *

It is important to realize that this problem has nothing at all to do with the valuation of the ultimate ends. It refers only to the means by the employment of which the ultimate ends chosen are to be attained.

We assume that the director has made up his mind with regard to the valuation of ultimate ends. We do not question his decision. Neither do we raise the question of whether the people — the wards — approve or disapprove of their director's decisions. We may assume, for the sake of argument, that a mysterious power makes everyone agree with one another and with the director in the valuation of ultimate ends.

Our problem — the crucial and only problem of socialism — is a purely economic problem, and as such refers merely to means and not to ultimate ends.

[The second article will deal with the specific problems of the social planner.]

 

The Socialist Planner

His Plight Is That He Can't Plan At All

[The private planner in the capitalist society measures his costs and returns­ — and chooses between alternatives — on the basis of prices set by the free market. Socialist economies substitute govern­ment action for the free market; the things called "prices" are controlled by the government, move up or down ac­cording to the desire of the moment.

How does the socialist planner plan? Can he do so on the basis of these government-controlled prices? If not, is there some other workable method of making judgments other than dependence on prices? Or need the government plan­ner make economic calculations at all? May he not just plan to do what "ought" to be done and disregard the cost?

Let us say the socialist director has decided what he wants to do. He begins to plan how to do it. ...]

*     *     *     *

The director wants to build a house.

Now there are many methods that can be resorted to. Each of them offers, from the point of view of the director advantages and disadvantages with regard to the utilization of the future building, and results in a building's serviceableness. Each of them requires other expenditures of building materials and labor and absorbs other periods of production. Which method should the director choose?

Without meaningful prices, he cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them. The plans of his architects enumerate a vast multiplicity of various material items in kind; they refer to the physical and chemical qualities of various materials and the physical productivity of various machines, tools, and procedures. But all their statements remain unrelated to each other. There is no means of establishing any connection between them.

Imagine the plight of the director when faced with a project. What he needs to know is whether or not the execution of the project will increase well-being, that is, add something to wealth available without impairing the satisfaction of wants which he considers more urgent. But none of the reports he receives gives him any clue to the solution of this problem.

We may for the sake of argument disregard the dilemmas involved in the choice of goods to be produced. We may assume [in the socialist economy] this problem is settled. But there is the embarrassing multitude of producers' goods and the infinite variety of procedures that can be resorted to for manufacturing define consumer goods.

The most advantageous location of each industry and the optimum size of each plant and of each piece of equipment must be determined. One must determine what kind of mechanical power should be employed in each of them, and which of the various formulas for the production of this energy should be applied. Each case offers special conditions and requires an individual solution. The director does not deal with coal as such, but with thousands of pits already in operation and with the possibility for digging new pits, with various methods of mining in each of them, with the different qualities of the coal in various deposits, and with the various methods of utilizing the coat for production of heat, power, and a great-number of derivatives.

Eliminate economic calculation and you have no means of making a rational choice between the various alternatives.

We have assumed that the director has already made up his mind with regard to the construction of a definite plant or building. However, in order to make such a decision he already needs economic calculation. If a hydroelectric power station is to be built, one must know whether or not this is the most economical way to produce the energy needed. How can he know if he cannot calculate costs and output?

*     *     *     *

For more than a hundred years the substitution of socialist planning for private en­terprise has been the main political issue. Thousands and thousands of books have been published for and against the plans. Wars have been fought and rivers of blood have been shed for the cause of socialism. Yet, in all these years the essential question has not been the raised.

From the writings of the mathematical economists the imaginary construction of a socialist commonwealth emerges as realizable system of cooperation under the division of labor, as a full-fledged alternative to the economic system based on private control of the means of production.

The director of the socialist community [it is alleged] will be in a position to allocate the various factors of production in a rational way, i.e., on the ground of calculation. Men can have both socialist cooperation under the division of labor and rational employment of the factors of production. They are free to adopt socialism without abandoning economy in the choice of means. Socialism does not enjoin the renunciation of rationality in the employment of the factors of production. It is a variety of rational social action.

An apparent verification of these errors was seen in the experience of the socialist governments of Soviet Russia and Nazi Germany. People did not realize that these were not isolated socialist systems. They were operating in an environment in which the price system still worked. They could resort to economic calculation on the ground of prices established abroad. Without the aid of these prices their actions would have been aimless and planless.

Only because they were able to refer to these foreign prices were they able to calculate to keep books, and to prepare their much talked about plans.

*     *     *     *

We may admit that in its initial period a socialist regime could to some extent rely upon the experience of the preceding age of capitalism. But what is to be done later, as conditions change more and more? Of what use could the prices of 1900 be for the director of 1949? And what use can the director in 1980 derive from the knowledge of the prices of 1949?

The paradox of "planning" is that it cannot plan because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.

[The third article will discuss attempted methods of making calculations other than by the price mechanism.]

 

Socialism's Unique Problem

It Can Find No Way to Make Its Economic Calculations

The socialist tracts deal with everything except the essential and unique problem of socialism — viz., economic calculation.

It is only in the last years that socialist writers have no longer been able to avoid paying attention to this primordial matter. They have begun to suspect that the Marxian technique of smearing "bourgeois" economics is not an entirely sufficient method for the realization of the socialist utopia. They have embarked upon schemes for socialist economic calculation.

It would hardly be necessary to deal with these schemes were it not for the fact that such examination offers a good oppor­tunity to bring into relief fundamental fea­tures of both the market society and of the imaginary construction of a [socialist] non­-market society.

The various schemes proposed can be classified:

Calculation in kind is to be substituted for calculation in terms of money. This method is worthless. One cannot add or subtract numbers of different kinds (hetero­geneous quantities).

The "labor-hour" is recommended as the unit of calculation. This suggestion does not take into account the original material factors of production and it ignores - the different qualities of work accomplished in the various labor-hours worked by the same and by different people.

The unit is to be a "quantity" of utility. However, acting man does not measure utility. He arranges in scales of gradation. Market prices in the free economy are not expressive of equivalence but of a diverg­ence in the valuation of the two exchanging parties.

Or:

Calculation is to be made possible by the establishment of an artificial quasi-market.

Calculation is to be made with the aid of the differential equations of mathematics.

Calculation is to be made superfluous by resorting to the method of trial and error.

Trial and Error. The entrepreneurs do not have advance assurance about whether their plans are the most appropriate solution for the allocation of factors of production, to the various branches of industry. It is only later experience that shows them whether they are right or wrong; they apply trial and error. Why, say some socialists, should not the socialist director resort to the same method?

The method of trial and error is applicable in all cases in which the correct solution is recognizable as such by unmistakable marks not dependent on the method of trial and error itself. If a man mislays his wallet, he may hunt it in various places. If he finds it, he recognizes it as his property. There is no doubt about the success of trial and error.

Things are quite different if the only mark of the correct solution is that is has been reached by the application of a method considered appropriate. Here the method of trial and error is not a substitute for the arithmetical process. It would be quite futile if the arithmetical process did not provide a yardstick for discriminating what is incorrect from what is correct.

If one wants to call entrepreneurial action an application of the method of trial and error, one must not forget that the correct solution is easily recognizable as such. It is the emergence of a surplus of proceeds over costs. Profit tells that consumers approve; loss that they disapprove.

We may assume that in the socialist commonwealth there is a market for consumers' goods and that money prices for consumers' goods are determined on the market. But the characteristic market of the socialist system is that the producers' goods are controlled by one agency; they are neither bought nor sold and there are no "prices" for them. Thus there cannot be any question of comparing input and output by the methods of arithmetic.

We do not assert that the capitalist mode of economic calculation guarantees the absolutely best solution of the alloca­tion of factors of production. Perfect solu­tions are out of reach of mortal men.

What the operation of a market not sabotaged by the interference of compulsion and coercion can bring about is merely the best solution accessible to the human mind. As soon as any man discovers a discrepancy between the real state of produc­tion and a realizable better state, the profit motive pushes him toward the utmost effort to realize his plans. The sale of his products will show whether he was right or wrong. This is the only important respect in which one can call the market economy a system of trial and error.

The problem of socialist economic calculation is precisely this: that in the ab­sence of market prices for the factors of production, a computation of profit or loss is not feasible.

*     *     *     *

The Quasi-market. It is nothing short of a full acknowledgment of the irrefutability of the economists' analysis of the socialists' plans that the Intellectual leaders of socialism are now busy designing schemes for a socialist system in which the market and market prices for the factors of production are to be preserved. They are now eager to justify socialism by pointing out that it is possible to preserve these institutions even under socialism.

What these neo-socialists suggest is para­doxical. They want to abolish private control of the means of the production, market prices and competition. But they want to organize the socialist utopia in such a way that people could act as if these things were present. Nothing will change except the ownership of the capital invested. Society will be substituted for the shareholders; the people will henceforth pocket the dividends. That is all.

The cardinal fallacy in this and all kindred proposals is that they consider the structure of industrial production and the allocation of capital to the various branches as rigid, and do not take into consideration the necessity of altering the structure to adjust to changing conditions.

The entrepreneurs establish corporations, enlarge or reduce their size, dissolve them or merge them; they buy and sell shares and bonds of existing corporations; they grant and recover credits; they perform all those acts the totality of which is the capital and money market. It is these transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of consumers. These transactions constitute the market. If one eliminates them, one does not preserve any part of the market.

Our problem does not refer to the managerial activities; it concerns the allocation of capital. The question is: In which branches should production be increased or restricted, in which branches should the ob­jective of production be altered, what new branches inaugurated? Those who confuse entrepreneurship and management close their eyes to the economic problem.

Those suggesting a quasi-market have never wanted to preserve the free stock and commodity exchanges, the trading in futures and the bankers and money lenders. But one cannot play speculation and investment. Investors expose their own des­tiny; this makes them responsible to the consumers, the ultimate bosses. If one relieves investors of this responsibility, one deprives them of their very character.

All the hazards of this insecurity fall only upon society, the exclusive owner of all resources. If the director were without hes­itation to allocate the funds available to those who bid most, he would simply put a premium upon audacity, carelessness and unreasonable optimism. He must reserve to himself the decision on how society's funds should be utilized. But then we are back again where we started.

*     *     *     *

Differential equations: In devising imaginary construction of an evenly rotating economy we assume that all the factors of production [will then be] employed in such a way that each of them renders the mostly highly valued services it can possibly render. No further change in the employment of any of these factors could im­prove the state of want-satisfaction. This situation — in which no further changes in the disposition of the factors of production are to be resorted to — is described [by the mathematical economists] by systems of differential equations.

But for utilization of the equations describing the [desired] state of equilibrium, a knowledge of the gradation of the values of consumers' goods in this state of equilibrium is required. This gradation is one of the elements of these equations assumed as known. Yet the director knows only his present valuations. He believes that, with regard to his present valuations, the allocation of the factors of production is unsatisfactory and wants to change it. But he knows nothing about how he himself will value on the day the equilibrium will be reached.

It was a serious mistake to believe that the state of equilibrium could be computed by mathematical operations on the basis of the knowledge of conditions in a non-equilibrium state. There is therefore no need to stress the point that the fabulous number of equations which one would have to solve each day anew for a practical utilization of the method would make the whole idea absurd.

*     *     *     *

The employment of the means of production can be continued either by private owners or by the social apparatus of coercion and compulsion.

In the first case there is a market, there are market prices for all factors of production, and economic calculation is possible. In the second case all these things are absent. We do not deal with the acts of the omnipresent and omniscient Deity, but with the actions of men endowed with a human mind only. Such a mind cannot plan without economic calculation.

[The fourth article will discuss forms of government intervention in the market which are short of "all-out" socialism.]

 

Socialism in Disguise

It Creeps Up in Many Tempting Masques

Private ownership of the means of production (market economy) and public ownership of the means of production (socialism) can be neatly distinguished. Each of these two systems of society's economic organization is open to precise and unambiguous description and definition.

The dualism of the market and the government's power of compulsion suggests various [other] ideas. Should it not be a task of government to interfere and to correct the operation of the market? Is it necessary to put up with the alternative of capitalism or socialism? Are there not perhaps other realizable systems of social organization which are neither communism nor pure and unhampered market economy?

Thus people have contrived a variety of third systems. Their authors allege that these systems are non-socialist because they aim to preserve private ownership of the means of production and that they are not capitalistic because they eliminate the "deficiencies" of the market economy.

The task of economics is to analyze. With regard to this interventionism it has only one question to ask: How does it work? We do not raise the question whether such interference is good or bad. We merely ask whether or not it can attain those ends which those advocating and resorting to it are trying to attain.

*     *     *     *

[The following are merely two examples of the many forms of government interference discussed by von Mises.]

Interference with production. We deal here with those measures which are primarily intended to divert production from the ways it would take in an unhampered market economy.

Restriction of production means that the government either forbids or makes more expensive the production, or distribution of definite articles, or the application of definite modes of production, transportation or distribution. The effect of its interference is that people are prevented from using their knowledge, their labor and their material means in the way in which they would earn the highest returns. Such interference makes people poorer.

Wealth is produced by expending a certain quantity of the factors of production. Curtailing this quantity does not increase but decreases the amount of goods produced.

Economics does not contend that restriction is a bad system of production. It asserts that it is not a system of production at all but rather a system of quasi-consumption. The enormous popularity which restriction enjoys in our day is due to the fact that people do not recognize its consequences. It is important to emphasize that what produces wealth and well-being is production and not restriction.

*     *     *     *

Interference with prices. Interference with the structure of the market means that the authority aims at fixing prices or commodities and services and interest rates at a height different from what the unhampered market would have determined. In resorting to such measures the government wants to favor either the buyer — as in the case of maximum prices — or the seller — as in the case of minimum prices.

The characteristic feature of the market price is that it equalizes supply and demand. But if the government fixes prices at a height different from what the market would have fixed if left alone, this equilibrium of demand and supply is disrupted.

Then there are — with maximum prices — potential buyers who cannot buy although they are ready to pay the price fixed by the authority, or even a higher price. Then there are — with minimum prices — potential sellers who cannot sell although they are ready to sell at the price fixed by the authority, or even at a lower price.

There emerges a tendency to shift pro­duction activities from the production of goods affected by the maximum prices into the production of other goods. This outcome is manifestly contrary to the intentions of the government; it considered these com­modities so vital that it singled them out to make it possible even for poor people to be amply supplied with them. But the result of interference is that production drops — or stops altogether.

*     *     *     *

Interventionism [government interfer­ence with the market] cannot lead to a per­manent system of social organization.

All varieties of interference with the market phenomena not only fall to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which — from the point of view of their authors' and advocates' valuations — is less desirable than the previous state of affairs which they were designed to alter.

If one wants to correct their manifest unsuitableness by supplementing the first acts of intervention with more and more acts, one must go farther and farther until the market economy has been destroyed and socialism has been substituted for it.

*     *     *     *

As long as the United States clings to the market economy and does not adopt the system of full government control of business, the socialist economies of western Europe will still be in a position to calculate. Their conduct of business still lacks the characteristic feature of socialist conduct; it is still based on economic calculation. It is therefore very different from what it would become if all the world turned toward socialism.

Optimists hope that at least those nations which have in the past developed the capitalist market economy and its civilization will cling to it. It is vain to speculate about the outcome of the great ideological conflict between the principles of private ownership and public ownership, of individualism and totalitarianism. All that we can know beforehand can be condensed in the following three statements:

1. Nothing suggests the belief that progress toward more satisfactory conditions is inevitable or a relapse into very unsatisfactory conditions impossible.

2. Men must choose between the market economy and socialism. They cannot evade deciding between these alternatives by adopting a "middle-of-the-road" position, whatever name they give it.

3. In abolishing economic calculation the general adoption of socialism would result in complete chaos and the disintegration of social cooperation under the divisions of labor. ...

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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