If we read the above quotation just a few years ago [before 1968], when all the 'bourgeois' economics was considered totally unscientific, we would be surprised how the Marxist Oskar Lange respects the bourgeois economist von Mises. Mises really is a bourgeois economist and there is no question that his writings represent an apology of capitalism. In spite of that his piece "Economic Calculation in a Socialist Commonwealth" (Die Wirtschaftrechnung in sozialistischen Gemeinwesen, Archiv fur Sozialwissenschaft, 1920) had enormous importance for the economic theory of socialism, both in the twenties and today. It is a paradox of historical proportions that we are beginning to acknowledge the importance of economic calculation for socialist economy only half a century after the publication of the Mises study and 30 years after Lange's "On the Economic Theory of Socialism" (Review of Economic Studies, 1936-1937) in which Lange responded to von Mises's critique of socialism. Let us go over the main ideas of von Mises that are still imperative and that will demonstrate the importance of economic calculation.
Economic theory of Ludwig von Mises is a direct continuation of the theory of Austrian school, which means that it is based on the theory of marginal utility. He is a typical representative of liberal economics and an adversary of all types of centralism including socialism. He explains the reason for his interest in socialist economy in the introduction as follows: "Whether one regards the coming of socialism as an unavoidable result of human evolution, or considers the socialization of the means of production as the greatest blessing or the worst disaster that can befall mankind, one must at least concede, that investigation into the conditions of society organized upon a socialist basis is of value as something more than 'a good mental exercise'. In an age in which we are approaching nearer and nearer to socialism, and even, in a certain sense, are dominated by it, research into the problems of the socialist state acquires added significance for the explanation of what is going on around us".
The basic aim of von Mises was to prove that the socialist economy cannot function efficiently, because abolition of markets prevents rational economic decision-making. The gist of his argumentation can be summarized in the following way: socialism means nationalization and with the elimination of private property market mechanism disappears. But without markets economic calculation is impossible and that prevents optimal utilization of economic resources. The elimination of markets will cause the waste of scarce resources and that will be the main source of inefficiency in the socialist economy.
Von Mises's view of socialism was historically constrained. Both the proponents and adversaries of socialism assumed at that time that money and all other features of market mechanism would disappear immediately after socialist revolution. War communism - the economic system of the only existing socialist nation (Soviet Russia) at that time, was moneyless. It is, therefore, not surprising that von Mises identified socialism with the non-market economy where consumer goods are centrally distributed in kind to citizens and producer goods are centrally allocated also in kind to socialist enterprises. He admits possibility of limited exchange of goods under socialism. "But the material of these exchanges will always be consumption goods. Production goods in a socialist commonwealth are exclusively communal; they are an inalienable property of the community, and thus res extra commercium."
There may exist money under socialism, but they have completely different role than money in a society based on private ownership. "Moreover, just because no production good will ever become the object of exchange, it will be impossible to determine its monetary value. Money could never fill in a socialist state the role it fills in a competitive society in determining the value of production goods. Calculation in terms of money will here be impossible."
Von Mises explains the nature of economic calculation using the theory of marginal utility. According to this theory there are two sources of economic value: utility and scarcity of limited factors of production. Everybody repeatedly decides how to satisfy his needs. That person makes value judgments and ranks the goods according to the degree of utility for him. The market then converts these individual preference scales into the objective rates of exchange. The subjective valuation by people imposes human criteria onto the economic process and creates the value scales for the economy. The market interactions help to apply those scales first to the valuation of consumer goods and then the market imputes value to the goods of higher order, (that is to producer goods more and more distant from the consumer goods in the chain of input - output relations) and finally to the primary economic resources.
Prices that emerge from the process of imputation of value, have the property of quantification of the degree of scarcity in relation to human needs. Prices of all goods, whether final, intermediate or primary, reflect preference scales of all people and scarcity of all resources. Economic calculation using such prices affects the decisions of all individual entrepreneurs so that the scarce resources are used in accord with consumer preferences. Any product that appears at these prices unprofitable is inefficient for the society and its production leads to the waste of limited resources.
According to Mises, imputation of value is possible only if prices are formed freely in the market. That is why he insists that free market is a necessary precondition for such an allocation of scarce resources that will best reflect social preferences. In other words only in the free market economy is it possible to transform limited resources into goods that are most useful to the consumer.
Mises does not maintain that the market valuation process is an ideal and most accurate tool for finding the most efficient utilization of scarce resources, but it is a necessary precondition of economic calculation. Without converting all the diverse products into comparable units of measurement no calculation of efficiency would be possible.
Only in most simple cases, as for example within households, it is possible to make right decisions using just measurements in physical units. But this is impossible in the economy with a complex division of labor.
" In the narrow confines of a closed household economy, it is possible throughout to review the process of production from beginning to end, and to judge all the time whether one or another mode of procedure yields more consumable goods. This, however, is no longer possible in the incomparably more involved circumstances of our own social economy. It will be evident, even in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e. economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location."
"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. "
It was already said above, that according to the views of von Mises abolition of private property implies abolition of market, at least of the market for means of production. And as it was shown von Mises considers the existence of the market for means of production even more important than the existence of the market for consumer goods.
He writes therefore:" Every step that leads away from private ownership of the means of production and the use of money also takes us away from rational economics. "
" 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.
Economic calculation is related also to the problem of initiative and responsibility. "The problem of responsibility and initiative in socialist enterprises is closely connected with that of economic calculation. It is now universally agreed that the exclusion of free initiative and individual responsibility, on which the successes of private enterprise depend, constitutes the most serious menace to socialist economic organization."
How can Marxist economists answer the von Mises's criticism of the working of the socialist economy? Of course the easiest way would be to reject all criticism and denounce von Mises as an anti-communist and apologist of capitalism. This is the way the "critique of bourgeois economics" has been done by some in past and to a certain extent even today.
But we learned from the experience that the problem of economic calculation and rational utilization of scarce resources, is so serious that it cannot be disposed of by strong words. Many socialist and even some Marxists (Oskar Lange in the first place), accepted already before the War the importance of von Mises's arguments about economic calculation and came to the conclusion that it is necessary to give up old views about the organization of the socialist economy and design such a "model of functioning" that will not have the shortcomings criticized by von Mises.
Alternative models of socialist economy were not only accepted by our economists but they are becoming a reality. Today , therefore we can say that von Mises was wrong when he argued generally against socialism. His criticism was in fact just a criticism of one of several ways a socialist economy can be organized, namely of the centralistic model as we call it today.
Some may argue that Mises criticism is not valid even if applied to the centralistic model, because certain features of the market remained even there. Means of production do still have their prices and economic calculation comparing revenue and costs in monetary units also exists.
But such an argument is unjustified. In the centralistic model the economic calculation as defined by Mises really does not exist. First, the comparison of revenue and cost would have to be the only or at least the basic criterion for decisions about production and choice of production techniques; Second prices used in calculation must not be arbitrary, they must reflect the scarcity of resources relative to consumer preferences. Neither of these conditions is satisfied. The quantity to be produced and the techniques to be used are prescribed by the obligatory plan and the purpose of cost calculations is primarily to check how well is the enterprise following planned indicators. The prices of the means of production are mostly arbitrary and they cannot be corrected by the market, because the market in this area was replaced by the system of central rationing (the so called Material and Technical Supplies system). Prices are used just for accounting purposes; the disputes about the so called "rational price formula" showed that they completely lost their function as parameters for optimal decisions. When prices are distorted it is still possible to calculate costs and revenue in monetary units, however the economic decisions that would use such prices would be distorted as well and optimal solution would be impossible to find.
This way of reasoning is now well understood by Czechoslovak economists, as can be demonstrated by the blueprint of the new economic system. Does it mean that they fully understand von Mises arguments with all their consequences? I think not. The rehabilitation of market is usually explained by insufficient level of technological development, that still requires market mechanism. The attempts to restrict the market forces and replace them by central commands are implicitly considered to be just premature steps, which have to be reversed and wait until social and technical evolution reaches sufficiently high level. But can the technological progress invalidate the arguments of Mises? His reasoning is based on three points: 1) scarcity of factors of production, 2) acceptance of consumers utility maximization, 3) complexity of interrelations in the process of production.
If the factors of production are limited and the structure of the production process is too complex then it is impossible to find an optimal use of resources, that is the use that would respect consumers' preferences and maximize their well-being, without market mechanism. If this conclusion is right--and it seems that it is--then the technological progress could lead to the removal of market mechanism only if the resources would not be limited any more, or if it would not be necessary to respect the consumers' preferences. In the latter case consumers would have no choice, they would have to consume whatever would be rationed to them so that it would not matter whether limited resources are wasted or not. Finally the market mechanism would not be needed if technological progress would lead to such a simplification of interrelations within production process that it would be possible to make (possibly with the use of supercomputers) the optimal central plan directly in physical units.
Both the removal of limitation of productive resources and the enormous simplification of the process of production needed for central planning in physical units are implausible at least for foreseable future. Whatever will happen after that is just a matter of faith.
The last remaining possibility is that sometimes in future people will value the material consumption so little that society would be able to afford inefficient economy and waste of scarce resources.
I believe that there is no simple answer for these serious questions. The article of von Mises--with the following discussion that was for limitation of space not mentioned here--remain still a real challenge to Marxian economics. But only if it is worth to think about the future evolution of economic organization of society.