Economic Calculation in the Socialist Commonwealth

Summary

Economic Calculation in the Socialist Commonwealth is a long article by the Austrian economist Ludwig von Mises, published in German in 1920 in the Archiv für Sozialwissenschaft und Sozialpolitik. It argues that a fully socialist economy, in which the state owns all the means of production, cannot calculate rationally, and it began one of the most important controversies in twentieth-century economics. Mises begins with the distribution of consumer goods, which a socialist state could manage by rationing or by issuing vouchers. The harder problem concerns production. A modern economy uses countless combinations of labor, raw materials, machines and time to make each product, and every decision about which method to use requires comparing costs. In a market economy, he argues, prices formed by exchange of the means of production give a common unit, money, in which these costs can be compared. Entrepreneurs can then calculate profit and loss and see whether a project uses resources wisely. In a socialist commonwealth there is no exchange of factories, mines or railways, because the state owns them all; consequently there are no market prices for them. Mises considers proposed substitutes, such as calculating in hours of labor or in physical quantities, and argues that none of them allows the planners to compare the many alternatives open to them. Without prices for the means of production, socialism cannot know whether it is using resources well or wasting them. He also argues that managers in a socialist system lack the responsibility and initiative that come from risking their own property, and that schemes for socialist markets would amount either to pretense or to a return to private ownership. The article provoked the socialist calculation debate. Socialist economists, among them Oskar Lange and Abba Lerner, replied in the 1930s that planners could reach correct prices by trial and error. F. A. Hayek, who had been converted from Fabian sympathies partly by Mises's related book Socialism, extended the argument by stressing that the knowledge needed for planning is dispersed and cannot be gathered at the center. The collapse of Soviet-type economies at the end of the 1980s renewed attention to the article, and it remains a key text of the Austrian school. An English translation by S. Adler appeared in 1935 in Collectivist Economic Planning, edited by Hayek.

Plot or Argument

• Distribution of consumption goods

  Mises grants that a socialist state could distribute consumer goods by allotment and might even allow citizens to swap them, but notes that such exchanges would not extend to the means of production.

• The nature of economic calculation

  In a market economy, money prices for all goods, including factories, labor and materials, let entrepreneurs compare the cost of alternative ways of producing and reach rational decisions.

• Calculation under socialism

  Because the state owns all the means of production, they are never exchanged and have no prices; Mises argues that neither labor-time nor physical units can replace prices for comparing alternatives.

• Responsibility, initiative and recent proposals

  Mises argues that managers of state enterprises lack the incentive and responsibility of owners, criticizes proposals for guild socialism and 'artificial' markets, and concludes that socialism is impracticable as an economic system.

Characters

• Ludwig von Mises, author

  Viennese economist arguing that socialism cannot calculate rationally.

• Otto Neurath, opponent

  Austrian philosopher and economist who proposed planning in physical units, one of the views Mises criticizes.

• Oskar Lange, later respondent

  Polish economist who in the 1930s proposed 'market socialism' as an answer to Mises.

• F. A. Hayek, editor and successor

  Mises's student who published the English translation and extended the argument about dispersed knowledge.

Lessons

• What prices do

  Mises argues that prices are not just costs to pay but information that makes calculation possible. Students can consider how a business or household would decide without them.

  • Why does Mises think labor hours cannot replace prices?
  • How do you use prices to make decisions in everyday life?

• Ownership and responsibility

  Mises connects private ownership with the responsibility to bear losses. The argument invites discussion of incentives in any organization.

  • Why does Mises think state managers would lack initiative?
  • Are there institutions today that face this problem?

• A debate that lasted a century

  The article began an argument that drew in many economists and was revisited after the Soviet collapse. Students can trace how ideas are tested against events.

  • How did Lange answer Mises?
  • Does the fall of the Soviet economy settle the debate?

Context

Mises wrote in the turmoil after the First World War, when socialist governments and soviet republics had briefly appeared in Hungary and Bavaria, and Austrian and German socialists were debating full socialization of industry. Writers such as Otto Neurath proposed planning without money.

Composition

The article appeared as 'Die Wirtschaftsrechnung im sozialistischen Gemeinwesen' in volume 47 of the Archiv für Sozialwissenschaft und Sozialpolitik (1920). Mises developed its argument in his book Die Gemeinwirtschaft (1922), translated as Socialism. S. Adler's English translation appeared in Collectivist Economic Planning, edited by F. A. Hayek (Routledge, 1935).

Reception

The article set off the socialist calculation debate of the 1920s and 1930s. Many economists judged at the time that Lange and others had answered it, but later writers, especially after the collapse of the Soviet bloc, gave more weight to Mises and Hayek. The Mises Institute publishes the translation in a pocket edition and online.

Comparisons

• The Road to Serfdom

  Hayek, Mises's student, turns the economic critique of central planning into a political argument about the loss of liberty and the rise of the worst to power.

• The Communist Manifesto

  Marx and Engels call for abolishing private property in the means of production; Mises argues that doing so would remove the prices on which rational production depends.

• The Wealth of Nations

  Smith explains how exchange and the division of labor coordinate production; Mises asks what would happen if exchange of capital goods were abolished.

• The Open Society and Its Enemies

  Popper, a fellow Viennese, criticizes utopian social engineering on grounds of limited knowledge, a philosophical parallel to the calculation argument.

• The General Theory of Employment, Interest and Money

  Keynes accepted private ownership but proposed wide state management of investment and demand, a middle path Mises rejected.

• Economics in One Lesson

  Hazlitt, Mises's friend and his leading popularizer in American journalism, spreads the Austrian view of prices as signals.

• Socialism: An Economic and Sociological Analysis

  Mises's 1922 book develops this article's argument at length in its second part and sets it within a full critique of socialist thought.

• Human Action: A Treatise on Economics

  Mises's 1949 treatise restates the calculation argument as part of a complete theory of human action and the market.

Quotes

For Students

A reading companion for classical Christian high school students. See the student guide.

Reading Guide

Watch for

• The difference between distributing consumer goods and directing production.
• Why Mises insists on money prices for the means of production.
• The substitutes for prices he considers and rejects.
• His argument about responsibility and initiative.

Key terms and names

Means of production

Land, factories, machines, raw materials and other goods used to produce further goods.

Economic calculation

Comparing costs and expected returns in a common unit to choose among alternatives.

Socialist commonwealth

A society in which the community owns all the means of production.

Socialist calculation debate

The controversy, beginning with Mises's article, over whether a planned economy can allocate resources rationally.

Market socialism

Proposals, such as Lange's, for planners to simulate market prices.

Seminar Questions

1. Comprehension What problem does Mises think socialism can solve, and what problem can it not?
2. Comprehension Why are there no prices for the means of production under full socialism?
3. Interpretation Why does Mises reject calculation in labor hours?
4. Interpretation How does Mises connect ownership with responsibility?
5. Big Question Can any central authority gather enough knowledge to direct a whole economy?
6. Big Question Are there things that should not be priced at all?

Faith Connections

• Matthew 25:14-30 (Scripture)

  The parable of the talents praises servants who put resources to productive use and so raises, in a moral register, Mises's question about how resources are best employed.

• Leo XIII, Rerum Novarum (Great Conversation)

  Leo XIII's 1891 encyclical defends private property against socialism on moral grounds, while Mises makes an economic case; comparing them shows two different kinds of argument.

Logic and Rhetoric

Central argument: Rational choice among methods of production requires comparing costs; comparing costs requires money prices for the means of production; such prices require private ownership and exchange; therefore full socialism cannot calculate rationally.

Rhetorical device: reductio ad absurdum. Mises follows the socialist program to its logical end, an economy without prices for capital goods, and argues that the result is planning without any means of telling good decisions from bad.

Debate: Resolved: A centrally planned economy can allocate resources as efficiently as a market economy.

Writing Prompts

Essay: Lay out Mises's argument as a chain of premises and a conclusion. Which premise would a defender of socialism most likely attack?

Comparison with The Road to Serfdom: Compare Mises's economic argument against central planning with Hayek's political argument. How does each support the other?

Creative Prompts

• Classroom

  Give groups a fixed set of resources and three possible products, with no prices. Ask them to decide what to make, then repeat with prices and compare the decisions.

• Essay

  Explain Mises's argument in your own words and evaluate one objection to it, such as Lange's proposal of trial-and-error pricing.

• Dialogue

  Write a dialogue between Mises and a socialist planner in 1920 Vienna about how to decide whether to build a new railway line.

Further Reading

• Socialism: An Economic and Sociological Analysis, Ludwig von Mises

• The Use of Knowledge in Society, F. A. Hayek

  Hayek's 1945 essay on dispersed knowledge and prices.

• On the Economic Theory of Socialism, Oskar Lange

  The best-known socialist reply (1936–37).

• Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered, Don Lavoie