Socialist  Controversy


3. Ludwig von Mises On Economic Calculation.

Oldrich Kyn and Drago Fiser


At the very beginning the disputed question was whether the socialist economy that was supposed to be a non-market economy, can or cannot be rational and efficient. It is, however, necessary to point out, that the concept of socialism as a non-market economy was sometimes interpreted as meaning no market whatsoever but sometimes as meaning just no market for intermediate and capital goods, but existence of markets for consumer goods and labor.

It is important to keep this in mind, because the two variants require quite different degree of centralization, and the opposing sides may have been referring to different variants of the socialist economy. On the other hand, the completely decentralized versions of socialism as for example the earlier mentioned anarcho-syndicalism or guild socialism were mostly not considered. The first truly important critique of the socialist economy was given in the well-known paper of Ludwig von Mises “Economic Calculation in a Socialist Commonwealth” (1920 see the von Mises page).  In this paper Mises asserts that economic calculation and therefore also rational allocation of scarce resources is under socialism impossible. The logical steps in his argument are as follows. Socialism means public property and therefore both private property and market disappear. But without private property and market economic calculation is impossible.  Where there is no economic calculation scarce resources cannot be optimally allocated and therefore waste and inefficiency cannot be avoided in the socialist economy.


“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.” 

This argumentation utilizes the point already mentioned by Pierson, namely that costs and results of production can be compared only if both inputs and output are expressed in common units of measurement. Money and prices are needed for that.  Clearly it would be impossible to decide for example which one of the two technologies should be used in production if value of output could not be compared to the cost of production.

The concept of “economic calculation” is explained by Mises according to the Austrian theory.  Consumers valuate various combinations of consumer goods using their own subjective preferences. Markets aggregate the individual preferences into the social preference scale.  Subjective preferences of individuals are not mutually comparable, but the subjective valuation results in the choice of quantities of consumer goods that can be summed up. In such a way market transforms the subjective value of individual consumers into objective value. Further, to produce certain set of consumer goods specific quantities of various intermediate goods are needed and to produce these quantities still additional intermediate goods are needed. In each of the following rounds the derived demand for intermediate goods increases. So starting from the value of consumer goods, market process imputes value to the first round of intermediate goods, and then imputes value to the second, third etc. rounds. This process of imputation of value continues after finally value is imputed to the primary factors of production.


The monetary units, von Mises wrote, do not make the absolutely perfect valuation scales, but nevertheless they allow comparison of different variants and selection of the one that seems to be the most efficient. Without the transformation of diverse physical units into a single monetary unit it would be impossible to select the variant of production that would be best for the society. Physical units would be sufficient if the production decisions were so simple, that only quantity of a single consumer good was involved, without any dependence on the production of others. But the economic decisions are not so simple. It is always needed to compare various combinations of the production of more than one product and those combinations are constrained by scarcities of economic resources. And decisions are even more complex if we take into account that the same product can be produced using different technologies, requiring different quantities of individual inputs. It is very wrong to think that the production decisions in socialism can by made efficiently by using physical units only.


Clearly the market of producer goods is even more essential than the market of consumer goods. Prices must be freely generated in the market and that is impossible without private property. Prices set centrally by government would not do, because they would hardly represent consumer preferences and therefore, would lead to the wrong decisions. 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. ….

There would be no means of determining what was rational, and hence it is obvious that production could never be directed by economic considerations. ….. 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.”

Apart of the main argument against socialism—the impossibility of economic calculation-- discussed above Ludwig von Mises added several other comments. Mises argued that the abolition of the private ownership would lead to the loss of incentives and personal responsibility of those, who would manage the production. Socialist enterprises would lack the inherent tendency to improve the production process and to adjust output according to the changes in demand. He also pointed to the error of many socialist authors, who mistakenly believed that socialism would overcome conflicts of interest between individual social groups.

Max Weber and Boris Brutzkus apparently reached similar conclusions independently of von Mises.  Brutzkus’ views were based on experiences  from the War Communism.





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