Suppose you saw someone holding a bottle that had a label with the word “cyanide” and he was about to drink from it. You tell him to be careful, that that is poison, and he could die a painful death. He says, no that’s not true, cyanide is a delightful drink, that he has heard that it cures many common ailments, and, in fact, makes you feel better than you ever have.
You reply that you once took a chemistry class and found out that the chemical compound in cyanide is one that burns the inside of anyone who swallows it and can cause severe discomfort before killing him. Besides, there are many cases of people taking cyanide and its effects have all verified the theory of how cyanide can work on the human body — a lot of people have died from it.
The other person insists that those are just the false accusations made by persons who don’t want to end human suffering or don’t want to make people feel better than they have ever felt. As for some people having, supposedly, died after taking cyanide, how can you be sure that that was the cause of the unfortunate circumstances, or that the facts about those cases are even true? Warnings about cyanide are spread by those against human happiness and who have something to gain from the poor conditions of others.
Once more, a false hope in socialism
Sound ridiculous? Not really, if we simply replace the word “cyanide” with the word “socialism.” Public opinion polls have suggested a majority of people in the United States, especially in younger age groups, have a positive view of socialism, with a noticeable number saying that they think America would be better off under a socialist system than a capitalist one.
What appeals to them are the promises made that socialism —usually accompanied by a modifier that makes it “democratic” socialism — will reduce poverty, increase social and economic equality, and will be more representative of the “real” needs and hopes of “the people” than the self-interested profit motives of a private-enterprise system. Moreover, “capitalism” fosters sexual discrimination and oppresses “people of color.”
As for the asserted examples of socialism-in-practice in places such as the old Soviet Union, the frequent response is that that was not real socialism; it was a distorted socialism that failed to be properly implemented and was abused by the accident that the wrong people rose to power, and they imposed a dictatorship that had nothing to do with the real spirit of the socialist ideal.
That is where we are today in the United States and many other places around the world. Forget about the bad twisted socialism of the Soviet Union; “this time” it will be a kinder and gentler socialism that can and will get it right. How will that be ensured? Well, “our” intentions are good intentions, and we will use government planning, regulation and redistribution to achieve the “right” ends. Besides, it will be “democratic.”
The challenge of socialism 100 years ago
This year marks one hundred years since the publication in 1920 of a now-famous article by the Austrian economist Ludwig von Mises, entitled “Economic Calculation in the Socialist Commonwealth.” The First World War had been over for about two years. In Russia, a socialist coup d’état had occurred in November 1917, a year before the end of the conflict. In 1920, a three-year civil war was coming to an end, with the victory of the Bolsheviks — the revolutionary Marxists — under the leadership of N. Lenin.
These Russian communists were dedicated to the nationalization of industry, collectivization of agriculture, the imposition of government central planning, and, as a result, the abolition of the capitalist institutions of individual freedom and decision-making, private property, free enterprise, competitive markets, and the profit-and-loss system of production guided by prices formed through the interaction of supply and demand.
In central Europe, defeated Germany was in political and economic chaos, and suffering from rising prices that would soon degenerate into a hyperinflation by 1923. In German Bavaria, in 1919, there was a short-lived Marxist revolution, and in nearby Hungary, a Marxist government had come to power but was overthrown after several months.
Everywhere, it seemed at that time, was the desire by a growing number of people for the triumph of a new, bright and beautiful socialist future. The Marxist-Leninists in Russia said it had to come through violent revolution followed by a “dictatorship of the proletariat” to destroy the old capitalist order and to prevent any counterrevolutionaries from restoring it.
In Western Europe, socialists said that neither violence nor dictatorship was necessary. The bright and beautiful collectivist future could all come through the peaceful means of the democratic ballot box, with no loss of freedom, other than the unnecessary and socially harmful “economic freedom” of private enterprise. It would be a far more just and fair society when the economy was centrally planned for “the good of all,” without any capitalist exploitation.
The critics of socialism, back then, also were pooh-poohed as apologists for the “evil and oppressive” small group of capitalists; they were against greater economic equality and more “social justice” for the majority of those in society. They simply “hated the people,” and personally gained by making excuses for the selfishness of the profit motive.
Critics of socialism have understood the dangers.
Thus were those enthralled by the socialist promise able to ignore the many criticisms of what a future socialist society would lead to. The anti-socialist warned: If government was the only employer, because it was the monopoly central planner of all production, the individual would be a slave of those in the government planning and employment agencies who would determine his fate. Get on their wrong side for any number of reasons and your life could be made miserable, since there would be no “exits” for alternative employment, because there would be only the State.
How could the civil liberties of freedom of speech or the press be secure in the socialist society to come, when the government would be the single owner and producer of the means to express your ideas, including disagreements with what was being done by those in power? Place the resources with which newspapers and books are produced in the monopoly hands of government, and only what the government wants to be said and published may reach the wider audience of the other members of society.
It is disturbing how frequently then and now there were and are so many people who shrug such concerns aside, either because they naively think those in power would be “fair and balanced” in making available the platforms for exercising those civil liberties; or, as is far more explicit today, because they have a disdain for the civil liberties of any who hold views not in agreement with the collectivist fashions of the moment.
In the decades before the First World War, while socialists frequently described the “evils” of capitalism and the wonderful world collectivism would usher in, hardly any attempt was made to discuss and explain how, exactly, a centrally planned economy would work, in the everyday mundane sense of making and delivering the goods that people need and want. Some of the anti-socialist critics raised this question in ways that were often very cogent, while those who dreamed the dream barely seemed even to notice that there might be a problem.
Ludwig von Mises on why socialist planning cannot work
That changed with Ludwig von Mises’s article in 1920. Mises chose not to challenge the good intentions of those who wished to radically change society. Nor did he point to the dangers to liberty or the possibilities for political tyranny by those rising to the top in a socialist society. He did not want to muddy the waters by either impugning socialist good will or the dangers to a free society. Even more, he did not question whether people would be willing to be as industrious under a collective system of work and reward compared with human incentives under a system of personal interest and reward.
He focused, instead, on the less romantic but no less profoundly important question of how the socialist central planners would actually know how to direct the physical and human means of production so as to produce the goods and services the members of the society actually would want, and just as cost-efficiently and productively as under a market system with its pursuit of individual profit and loss.
Mises’s basic answer was that the socialist economy could not do so, because it will have abolished all the institutional requirements for a successful process of economic calculation. The socialist planner could undertake a detailed inventory of all the physical characteristics of the land, resources, raw materials, capital equipment (tools, machinery) under its planning jurisdiction. Added to that might be a census of all those who could be available in the socialist labor force, along with their education, skills, and experience.
But that would not solve the problem of rational economic calculation, the reason being that it is not enough to know the quantities and characteristics of all the physical means of production. Many if not most of those means of production have the potential to be used in different ways to manufacture different types of finished consumer goods, in different combinations with complementary factors of production.
The crucial issue is: In what employments, with which other factors of production, to produce what specific good shall they be directed to ensure that each of them is employed for their most highly valued use to make the goods that were most in demand by the consumers of the society, which, of course, means all of us?
Markets and prices enable economic calculation.
Mises used the example of deciding to construct a railroad connecting two cities when there is a mountain separating them. Shall the rail line be built over the mountain, around it, or through it by means of a tunnel? Which one would be least costly to construct, in terms of the alternative uses of the resources and time that might go into building the railroad? If it was decided that a tunnel would be the best or least costly, with what reinforcing material should the lining of the tunnel be constructed — with, say, concrete or platinum?
Of course, the central planner could make this decision on the basis of any number of arbitrary benchmarks. But that is not the same way such a decision would be made in functioning, competitive market economies. The key to rational decision under capitalism is the existence of a market-generated price system.
Prices are the agreed-to terms at which persons consent to trade, to buy and sell useful inputs and desired consumer goods. Bob and Bill higgle and haggle until they, perhaps, reach agreement that the two pairs of shoes that one of them specializes in producing shall trade for one suit of clothes that the other manufactures.
At the same time, both Bob and Bill have to acquire the respective resources and raw materials and capital equipment (machines, tools) and human hired help with which each produces the goods that are the means by which they purchase from others all the things they desire that those others supply in an interdependent system of division of labor. So Bob and Bill must enter the market in which those means of production are supplied and sold to purchase the ones they need for their respective producing.
Bob and Bill each have to make their best-informed judgments about what it is their particular customers would be interested in buying (what types, styles, and sizes of shoes and suits, respectively, for instance); and the price that buyers would be willing to pay to purchase a certain number of the goods Bob and Bill offer.
Prices permit rational market decision-making.
The prices for their finished consumer goods, based on their past experiences and anticipations of the future, serve to determine the maximum that they can pay to acquire the needed means of production available on the market and still break even or earn a profit. Their next decisions concern which usable combination of those means of production — more labor and less capital equipment, or more labor-saving machinery with fewer hired workers, including which types of such capital equipment — will minimize their costs of production, given what they think consumers want and the prices they will pay for the finished goods.
But, again, what makes it possible for them to make such evaluations and judgments is the fact that there are market-generated prices for the purchase, rent, and hire of those means of production, owing to the ability for them to be owned and bought and sold on competitive markets.
The production decisions producers make in the social system of division of labor not only enable them to search for the resource combinations and uses that will maximize their own personal profits (if their judgments about market conditions turn out to be correct); it also means that no resources, workers, or capital tend to be employed in the competing lines of production where they are valued less highly.
Through the eyes of the employing and production-directing market entrepreneurs, consumer valuations about what they would like to buy, and in what qualities and quantities at particular prices, are transmitted back to the markets for those factors of production, so each is, in turn, evaluated and priced. Those prices reflect where the factors of production are most highly valued. Entrepreneurs are able thereby to produce what the consumers most urgently want as expressed in what they pay for the goods those resources can assist in supplying.
Costs reflect alternative consumer demands for goods.
Market costs for purchasing, renting, or hiring factors of production are exchange-based estimates of their importance and value in alternative employments for making other goods. Costs in the marketplace are competitively generated surrogates for the value of other desired things for which they
might be used. Factors-of-production prices are estimates of the value of the factors in other corners of the market. Each entrepreneur must judge whether his use of those factors is of greater value to the consumers to whom he caters than the use to which his supply-side rivals, who are also bidding for them, will put them in their own lines of productive activity.
Let us go back to Mises’s example of building a railway between two cities and a decision whether to go around, over, or through the mountain. A private railway enterpriser would estimate the possible rail traffic for cargo and passengers that might be his, if he builds the line and the revenues he might then earn. He has to project what the financial and other outlays would be to construct the railway between the two cities. As part of that decision he must evaluate which construction method between the two locations will be least costly. That also requires an estimate of which reinforcing material to use for lining a tunnel through the mountain will minimize his expenses of operation, since platinum is more durable than concrete and requires less maintenance, but is more expensive to purchase.
All of those estimates and calculations are impossible without a functioning market economy in which competition has generated the prices for both alternative finished consumer goods and the factors of production out of which they might be manufactured. For those prices to emerge there must be individual freedom of choice and action, a right of freedom of exchange and voluntary association, and private property not only in consumer goods but in those factors of production, as well.
Otherwise, how can users of consumer goods and purchasers of production goods express their actual valuations and appraisal on the basis of which trades are mutually agreed to? Those valuations are expressed and captured in the prices at which trades are consummated.
Abolishing markets and prices leads to planned chaos.
Mises’s central criticism of socialist central planning as an economic system that was being offered as a viable substitute for free-market capitalism is that in abolishing private property in the means of production and thereby eliminating free exchange and the formation of market prices, a socialist economy would have done away with the institutional prerequisites for rational economic decision-making.
Without private property in the means of production, Mises reasoned, there is nothing to (legally) buy and sell. Without being able to buy and sell the factors of production, there are no incentives to make bids and offers for their purchase and use. Without such bids and offers, there are no agreed-to and consummated exchanges. Without such actual market transactions there are no real market prices for the inputs without which outputs cannot be produced.
Without such prices, how would the central planner realistically know what consumers want, and know the least-cost methods of producing them to get the most out of the means available to fulfill people’s desired ends? Mises’s answer was that socialist planners could not — and certainly they could not come close to matching the way a competitive market economy solves this social problem of bettering the conditions of humanity.
It is for this reason that Mises later titled one of his shorter works, Planned Chaos (1947). That is and has been the result that imposing and implementing any form of fairly comprehensive socialist central planning must create.
Recall that that was an argument that Mises originally made one hundred years ago in 1920. Think of all the economic disasters that socialist systems have produced over this last century when imposed in any country anywhere in the world. And now fast-forward to today in 2020. “Progressives” and “democratic” socialists in America say that their form of socialism will be different. Their Green New Deal to centrally plan away global warming, to ensure the “social justice” of redistribution, and guaranteed government jobs for full employment, will have none of the defects of those false socialisms of the last century.
But their bottle of socialism has the same cyanide in it as those others that hundreds of millions have suffered from around the globe. We need to not fall for the quack medicines peddled by the ideological hucksters trying to pass it off as the elixir of life that will cure all our ills. That is why it is necessary and essential to recognize and emphasize Ludwig von Mises’s critique of socialism now in our own time as much as when he first penned it.
This post was written by: Richard M. Ebeling
Dr. Richard M. Ebeling is the BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel. He was formerly professor of Economics at Northwood University, president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).
