What pays under capitalism is satisfying the common man, the customer.  The more people you satisfy, the better for you.

LUDWIG VON MISES

Economic Calculation
In The Socialist Commonwealth
(Full text)
 

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Excerpts from  
Economic Calculation
in Socialist Commonwealth

 

Without calculation, economic activity is impossible.
Since under socialism economic calculation is impossible,
under socialism there can be no economic activity
in our sense of the word.

In small and insignificant things rational action might still persist.
But, for the most part, it would no longer be possible to speak
of rational production. In the absence of criteria of rationality,
production could not be consciously economical.

 

For some time possibly the accumulated tradition of thousands of years of economic freedom would preserve the art of economic administration from complete disintegration. Men would preserve the old processes not because they were rational, but because they were sanctified by tradition. In the meantime, however, changing conditions would make them irrational. They would become uneconomical as the result not changes brought about by the general decline of economic thought. It is true that production would no longer be "anarchical." The command of a supreme authority would govern the business of supply. Instead of the economy of "anarchical" production the senseless order of an irrational machine would be supreme. The wheels would go round, but to no effect.

 

Let us try to imagine the position of a socialist community. There will be hundreds and thousands of establishments in which work is going on. A minority of these will produce goods ready for use. The majority will produce capital goods and semi-manufactures. All these establishments will be closely connected. Each commodity produced will pass through a whole series of such establishments before it is ready for consumption. Yet in the incessant press of all these processes the economic administration will have no real sense of direction. It will have no means of ascertaining whether a given piece of work is really necessary, whether labor and material are not being wasted in completing it. How would it discover which of two processes was the more satisfactory? At best, it could compare the quantity of ultimate products. But only rarely could it compare the expenditure incurred in their production. It would know exactly, or it would imagine it knew, what it wanted to produce. It ought, therefore, to set about obtaining the desired results with the smallest possible expenditure. But to do this it would have to be able to make calculations. And such calculations must be calculations of value. They could not be merely "technical"; they could not be calculations of the objective use-value of goods and services. This is so obvious that it needs no further demonstration.

 

Under a system based upon private ownership of the means of production, the scale of values is the outcome of the actions of every independent member of society. Everyone plays a two-fold part in its establishment, first as a consumer, second as a producer. As consumer, he establishes the valuation of goods ready for consumption. As producer, he guides production-goods into those uses in which they yield the highest product. In this way, all goods of higher orders also are graded in the way appropriate to them under the existing conditions of production and the demands of society. The interplay of these two processes ensures that the economic principle is observed in both consumption and production. And, in this way, arises the exactly graded system of prices which enables everyone to frame his demand on economic lines.

 

Under socialism, all this must necessarily be lacking. The economic administration may indeed know exactly what commodities are needed most urgently. But this is only half the problem. The other half, the valuation of the means of production, it cannot solve. It can ascertain the value of the totality of such instruments. That is obviously equal to the value of the satisfactions they afford. If it calculates the loss that would be incurred by withdrawing them, it can also ascertain the value of single instruments of production. But it cannot assimilate them to a common price denominator, as can be done under a system of economic freedom and money prices.
It is not necessary that socialism should dispense altogether with money. It is possible to conceive arrangements permitting the use of money for the exchange of consumer goods. But since the prices of the various factors of production (including labor) could not be expressed in money, money could play no part in economic calculations.

 

Suppose, for instance, that the socialist commonwealth was contemplating a new railway line. Would a new railway line be a good thing? If so, which of many possible routes should it cover? Under a system of private ownership we could use money calculations to decide these questions. The new line would cheapen the transportation of certain articles, and, on this basis, we could estimate whether the reduction in transport charges would be great enough to counterweigh the expenditure which the building and running of the line would involve. Such a calculation could be made only in money. We could not do it by comparing various classes of expenditure and savings in kind. If it is out of the question to reduce to a common unit the quantities of various kinds of skilled and unskilled labor, iron, coal, building materials of different kinds, machinery, and the other things which the building and upkeep of railways necessitate, then it is impossible to make them the subject of economic calculation. We can make systematic economic plans only when all the commodities which we have to take into account can be assimilated to money. True, money calculations are incomplete. True, they have profound deficiencies. But we have nothing better to put in their place. And, under sound monetary conditions, they suffice for practical purposes. If we abandon them, economic calculation becomes absolutely impossible.

 

This is not to say that the socialist community would be entirely at a loss. It would decide for or against the proposed undertaking and issue an edict. But, at best, such a decision would be based on vague valuations. It could not be based on exact calculations of value.

 

A stationary society could, indeed, dispense with these calculations. For there, economic operations merely repeat themselves. So that, if we assume that the socialist system of production were based upon the last state of the system of economic freedom which it superseded, and that no changes were to take place in the future, we could indeed conceive a rational and economic socialism. But only in theory. A stationary economic system can never exist. Things are continually changing, and the stationary state, although necessary as an aid to speculation, is a theoretical assumption to which there is no counterpart in reality. And, quite apart from this, the maintenance of such a connection with the last state of the exchange economy would be out of the question, since the transition to socialism with its equalization of incomes would necessarily transform the whole "set" of consumption and production. And then we have a socialist community which must cross the whole ocean of possible and imaginable economic permutations without the compass of economic calculation.
All economic change, therefore, would involve operations the value of which could neither be predicted beforehand nor ascertained after they had taken place. Everything would be a leap in the dark. Socialism is the renunciation of rational economy.

 

. . . Some of the younger socialists believe that the socialist community could solve the problem of economic calculation by the creation of an artificial market for the means of production. They admit that it was an error on the part of the older socialists to have sought to realize socialism through the suspension of the market and the abolition of pricing for goods of higher orders; they hold that it was an error to have seen in the suppression of the market and of the price system the essence of the socialist ideal. And they contend that if it is not to degenerate into a meaningless chaos in which the whole of our civilization would disappear, the socialist community, equally with the capitalist community, must create a market in which all goods and services may be priced. On the basis of such arrangements, they think, the socialist community will be able to make its calculations as easily as the capitalist entrepreneurs.
Unfortunately, the supporters of such proposals do not see (or perhaps will not see) that it is not possible to divorce the market and its functions in regard to the formulation of prices from the working of a society which is based on private property in the means of production and in which, subject to the rules of such a society, the landlords, capitalists, and entrepreneurs can dispose of their property as they think fit. For the motive force of the whole process which gives rise to market prices for the factors of production is the ceaseless search on the part of the capitalists and the entrepreneurs to maximize their profits by serving the consumers' wishes. Without the striving of the entrepreneurs (including the shareholders) for profit, of the landlords for rent, of the capitalists for interest, and of the laborers for wages, the successful functioning of the whole mechanism is not to be thought of. It is only the prospect of profit which directs production into those channels in which the demands of the consumer are best satisfied at least cost. If the prospect of profit disappears, the mechanism of the market loses its mainspring, for it is only this prospect which sets it in motion and maintains it in operation. The market is thus the focal point of the capitalist order of society; it is the essence of capitalism. Only under capitalism, therefore, is it possible; it cannot be "artificially" imitated under socialism.

 

The advocates of the artificial market, however, are of the opinion that an artificial market can be created by instructing the controllers of the different industrial units to act as if they were entrepreneurs in a capitalist state. They argue that even under capitalism the managers of joint stock companies work not for themselves but for the companies, that is to say, for the shareholders. Under socialism, therefore, it would be possible for them to act in exactly the same way as before, with the same circumspection and devotion to duty. The only difference would be that under socialism the product of the manager's labors would go to the community rather than to the shareholders. In such a way, in contrast to all societies who have written on the subject hitherto, especially the Marxians, they think it would be possible to construct a decentralized, as opposed to a centralized, socialism.
In order to judge properly these proposals, it is necessary in the first place to realize that these controllers of individual units would have to be appointed. Under capitalism the manager of the joint-stock companies are appointed either directly or indirectly by the shareholder. In so far as the shareholders give to the managers the power to produce by means of the company's (i.e., the shareholders') stock they are risking their own property or a part of their own property. The speculation (for it is necessarily speculation) may succeed and bring profit: it may misfire and bring about the loss of the whole or a part of the capital concerned. This committing of one's own capital to a business whose outcome is uncertain and to men whose future ability is still a matter of conjecture, whatever one may know of their past, is the essence of joint stock company enterprise.

 

Now it is a complete fallacy to suppose that the problem of economic calculation in a socialist community relates solely to the matters which fall into the sphere of the daily routine of the managers of joint stock companies. It is clear that such a belief can only arise from exclusive concentration on the idea of a stationary economic system a conception which no doubt is useful for the solution of many theoretical problems but which has no counterpart in fact and which, if exclusively regarded, can even be positively misleading. It is clear that under stationary conditions the problem of economic calculation does not arise. When we think of the stationary society, we think of an economy in which all the factors of production are already used in such a way as, under the given conditions, to provide the maximum of things which are demanded by consumers. That is to say, under stationary conditions there no longer exists a problem for economic calculation to solve. The essential function of economic calculation has by hypothesis already been performed. There is no need for an apparatus of calculation. To use a popular but not altogether satisfactory terminology we can say that the problem of economic calculation is of economic dynamics; it is no problem of economic statics.

 

The problem of economic calculation is a problem which arises in an economy which is perpetually subject to change, an economy which every day is confronted with new problems which have to be solved. Now in order to solve such problems it is above all necessary that capital should be withdrawn from particular lines of production, from particular undertakings and concerns and should be applied in other lines of production, in other undertakings and concerns. This is not a matter for the for the managers of joint stock companies; it is essentially a matter for the capitalists the capitalists who buy and sell stocks and shares, who make loans and recover them, who make deposits in the bank and draw them out of the banks again, who speculate in all kinds of commodities. It is these operations of speculative capitalists which create those conditions of the money market, the stock exchanges and the wholesale markets which have to be taken for granted by the manager of the joint stock company, who, according to the socialist writers we are considering, is to be conceived as nothing but the reliable and conscientious servant of the company. It is the speculative capitalists who create the data to which he has to adjust his business and which therefore give direction to his trading operations.
It follows, therefore, that it is a fundamental deficiency of all these socialist constructions which invoke the "artificial market" and artificial competition as a way out of the problem of economic calculation, that they rest on the belief that the market for factors of production is affected only by producers buying and selling commodities. It is not possible to eliminate from such markets the influence of the supply of capital from the capitalists and the demand for capital by the entrepreneurs, without destroying the mechanism itself.

 

Faced with this difficulty, the socialist is likely to propose that the socialist state as owner of all capital and all means of production should simply direct capital to those undertakings which promise the highest return. The available capital, he will contend, should go to those undertakings which offer the highest rate of profit. But such a state of affairs would simply mean that those managers who were less cautious and more optimistic would receive capital to enlarge their undertakings while more cautious and more skeptical managers would go away empty-handed. Under capitalism, the capitalist decides to whom he will entrust his own capital. The beliefs of the managers of joint stock companies regarding the future prospects of their undertakings and the hopes of project makers regarding the profitability of their plans are not in any way decisive. The mechanism of the money market and the capital market decides. This, indeed, is its main task: to serve the economic system as a whole, to judge the profitability of alternative openings, and not blindly to follow what the managers of particular concerns, limited by the narrow horizon of their own undertakings, are tempted to propose.
To understand this completely, it is essential to realize that the capitalist does not just invest his capital in those undertakings which offer high interest or high profit; he attempts rather to strike a balance between his desire for profit and his estimate of the risk of loss. He must exercise foresight. If he does not do so, than he suffers losses losses that bring it about that his disposition over the factors of production is transferred to the hands of others who know better how to weigh the risks and the prospects of business speculation.

 

Now if it is to remain socialist, the socialist state cannot leave to other hands that disposition over capital which permits the enlargement of existing undertakings, the contraction of others, and the bringing into being of undertakings that are completely new. And it is scarcely to be assumed that socialists of whatever persuasion would seriously propose that this function should be made over to some group of people who would "simply" have the business of doing what capitalists and speculators do under capitalist conditions, the only difference being that the product of their foresight should not belong to them but to the community. Proposals of this sort may well be made concerning the managers of joint stock companies. They can never be extended to capitalists and speculators, for no socialist would dispute that the function which capitalists and speculators perform under capitalism, namely directing the use of capital goods into that direction in which they best serve the demands of the consumer, is only performed because they are under the incentive to preserve their property and to make profits which increase it or at least allow them to live without diminishing their capital.
It follows, therefore, that the socialist community can do nothing but place the disposition over capital in the hands of the state or to be exact in the hands of the men who, as the governing authority, carry out the business of the state. And that signifies elimination of the market, which, indeed, is the fundamental aim of socialism, for the guidance of economic activity by the market implies organization of production and a distribution of the product according to that disposition of the spending power of individual members of society which makes itself felt on the market; that is to say, it implies precisely that which it is the goal of socialism to eliminate.

 

 If the socialists attempt to belittle the significance of the problem of economic calculation in the socialist community, on the ground that the forces of the market do not lead to ethically justifiable arrangements, they simply show that they do not understand the real nature of the problem. It is not a question of whether there shall be produced cannons or clothes, dwelling houses or churches, luxuries or subsistence. In any social order, even under socialism, it can very easily be decided which kind and what number of consumption goods should be produced. No one has ever denied that. But once this decision has been made, there still remains the problem of ascertaining how the existing means of production can be used most effectively to produce these goods in question. In order to solve this problem, it is necessary that there should be economic calculation. And economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production. That is to say, there must exist money prices of land, raw materials, semi-manufactures; that is to say, there must be money wages and interest rates.

 

Thus the alternative is still either socialism or a market economy.

 

 

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