Category Archives: Mises

Ludwig von Mises: Economic Calculation in the Socialist Commonwealth

image

Despite its track record of failure, oppression and misery, socialism has enjoyed a seemingly endless parade of apologists and defenders.  As improbable as it seems, the argument for state socialism was hotly debated in the 20th century. This inexplicable allure is surpassed only by the seemingly deathless appeal it holds to this day.  While there are many academics who are eager to put a new coat of paint on socialism’s rotten edifice, it seems that too few pay attention to the individuals who challenged socialism and were proven correct. This is likely due to the fact that this is exactly what academic elites and apparatchiks want. Regardless, everyone should read what is widely regarded as the definitive demolition of the argument for the socialist state, Ludwig Von Mises’ 1920 essay, Economic Calculation in the Socialist Commonwealth. It is important not only because it identified the failures that of the socialist state with devastating accuracy, but because it is a purely economic critique of socialist economics.

Mises’ argument is built on three central theses:

  1.  A socialist state with a monopoly on production goods is effectively destroying the natural market price system and rendering rational economic calculation impossible
  2. A socialist state which prioritizes labor based valuations on consumer and production goods is ignoring individual subjective preferences
  3. The socialist state destroys personal responsibility and initiative by removing the incentive to economize

Mises draws an important distinction around production goods and consumer goods at the outset.  He observes that consumer goods, the final result of production which a consumer can use to fulfill a desired end, are valued in monetary terms.  Consumers can subsequently engage in trade using monetary exchanges amongst themselves in order to fulfill their subjective preferences.  The entrepreneur, on the other hand, is not afforded the same opportunity.  In order to prioritize production goods and engage in the act of economizing, the entrepreneur needs to perform economic calculation through a free floating price system which emerges through exchange in a system of private property.  Because the socialist state monopolizes production goods and dispenses them through an arbitrary and bureaucratic allocation process that’s devoid of rational pricing, the entrepreneur is hamstrung. An efficient division of labor cannot even take place.  No single human mind or collection of human minds can replace the social nature of the price system in a competitive free market.

Because Marxism, the philosophical font of virtually all socialist economics, posits that an exploitative relationship exists between the entrepreneur and the laborer, socialists attribute an inherently predatory quality to exchange relations in the production process. The entrepreneur is somehow extorting and expropriating from each laborer and depriving him of the surplus value that results in the final exchange of consumer goods. Socialists have wrongly assigned virtue to the state monopoly on production goods, and subsequently, end up destroying the uniquely human capacity for rational calculation. Once socialists have gained control of the apparatus of the State, there is no underlying set of principles by which the socialist state can proceed that is even remotely comparable to the price system of the free market.

When Marxism solemnly forbids its adherents to concern themselves with economic problems beyond the expropriation of the expropriators, it adopts no new principle, since the Utopians throughout their descriptions have also neglected all economic considerations, and concentrated attention solely upon painting lurid pictures of existing conditions and glowing pictures of that golden age which is the natural consequence of the New Dispensation.

Marxism also posits a juvenile theory of alienation inherent in capitalism, but attribute the malady to the wrong source. Socialists bemoan the allegedly dehumanizing qualities of free market exchange while conveniently ignoring the fact that state intervention exists everywhere. Modern neoclassical macroeconomics reinforce and perpetuate an unchallenged activist role for the state in economic affairs as well as the reduction of economic life to increasingly abstract mathematical models.  As Dr. Joseph Salerno astutely argues in the essay’s postscript, it is exactly the reverse.

Abolish all, or even 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.

Dr. Salerno goes further to argue that despite Mises argument against full scale state socialism, the argument retains its relevance to contemporary state interventions in healthcare and energy production.  Whether they be tax breaks, subsidies or loan guarantees, the myriad interventions and subventions in the managed market economy create numerous distortions. Perverse production incentives, misallocation of resources, and institutionalized mediocrity are but a few of the deformations which result from keeping entrepreneurs insulated from the forces of supply and demand.

Mises predicted the failure of socialism with devastating accuracy years before the collapse of the Soviet Union. While China’s version of market socialism is undoubtedly an improvement over Mao’s regime, their economic and monetary policies have lead to massive instability and mismanagement of resources which lend further credence to Mises core argument.

Almost a full century has passed since the initial publication of this essay.  Despite socialism’s continued failures here and abroad, the champions of socialism continue to flog the rhetoric of a discredited ideology while remaining seemingly oblivious to the intellectual and moral void at the core of their pursuit.  The leading lights of socialist thought have not offered any meaningful rebuttal to this problem since perhaps Oskar Lange, but as Mises already correctly argued, mathematical models cannot replicate human action.

Socialism offers nothing but a license for the unlimited expansion of state power packaged as a litany of grievances dressed up in a pretense of intellectual profundity and moral rectitude.  The promise of “equality” is never achieved, but socialists peddle these pathetic fantasies with the same chicanery and mendacity as a televangelist. Mises offered a theoretical framework and a set of economic principles that were grounded in sound scientific reasoning and a respect for individual liberty.  His arguments deserve a proper reckoning.

image

Advertisements