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Economics

Austrians On the Socialist Front, Part Three

By
Kristoffer Hansen
|
March 4, 2020
From Carl Menger to the present, the Austrian School has taken up a sustained critique of socialism as it has developed over the decades. Ludwig von Mises was perhaps the greatest of the all the Austrians.
Economics

Austrians On the Socialist Front, Part Three

By

Kristoffer Hansen

|
March 4, 2020

From Carl Menger to the present, the Austrian School has taken up a sustained critique of socialism as it has developed over the decades. Ludwig von Mises was perhaps the greatest of the all the Austrians.

Much has been written on the differences between Mises and Hayek, on the issue of socialism as well as other points of theory. It should be noted from the outset that Mises was truly the pioneer of the calculation argument (as well as numerous other issues), which even as far back as1920 contained all the essentials to make it the first and final word on the topic of socialism’s impossibility. Yet this does not mean there is nothing to learn from Hayek and later Austrian engagement with socialism.

Hayek’s argument against socialism is well-known, even if too often blurred together with Mises’s distinct and original version. 15 In its essence, argued Hayek, the socialist system must fail because it does not, and cannot, have the knowledge necessary to plan production. Hayek admits, at least for the sake of argument, that we can conceive of a system of equations that describe the relations of the economy. However, if the socialist planner is to make use of this system, he needs to gather a huge array of knowledge of both the consumers’ preferences and the technical possibilities of the factors of production, that he then needs to reduce to numerical expression somehow and plot into the correct place in his system. Yet not only is this a superhuman effort to begin with, it will also have to be repeated every instant, if only to check that nothing has changed, and it is not at all clear that the planner will be able to decide what information is necessary to make his planning work to begin with. Nothing is thus gained by centralizing and making explicit a process that the market solves every day—if not perfectly, at least with a degree of efficiency impossible in a centrally-planned economy.

Of more interest is Hayek’s view of the tendency of interventions to result in socialism. His best-known expression of this may be The Road to Serfdom, but he argued eloquently for it elsewhere as well. Expediency and practicality in politics are bound to lead to reduced freedom and increased coercion, as

when we decide each issue solely on what appear to be its individual merits, we always over-estimate the advantages of central direction. Our choice will regularly appear to be one between a certain known and tangible gain and the mere probability of the prevention of some unknown beneficial action by unknown persons ... There are probably few restrictions on freedom which could not be justified on the grounds that we do not know the particular loss they will cause.

In an age obsessed with the “scientific method” in all areas of social thought, it is popular to judge each individual case on its merits without any regard for prior theory or general principles. Social and economic problems are reduced to technical issues to which general principles are irrelevant. This Hayek traces to the disillusionment of former socialists: since they have been forced by the inner contradictions of their ideology to discard it, they mistakenly assume all ideologies are rubbish. One must, according to this way of thinking, proceed experimentally on a case-by-case basis in order to be rational, but they delude themselves: there is no practicable stopping point once you begin interfering with the spontaneous market order and, eventually, you have to choose between competing systems.

Hayek here restates Mises’s description of the evolution of German-pattern socialism in a way that also reinforces the Mengerian point on organically developed social structures. Not only will “expedient” piecemeal interventions necessitate further interventions while disrupting social structures, it will also reinforce interventionist ideologies, as the underlying presumption in favor of pragmatic government action is not challenged.

Rothbard and Hoppe

Later Austrians have extended the discussions of socialism in different directions. Murray Rothbard based a portion of his monopoly theory on Mises’s argument against socialism, arguing that monopoly firms would run into the same problems as socialist economies. Rothbard saw that Mises’s analysis applies to any situation where a market for capital goods has disappeared in an advanced industrial economy. Complete vertical integration (when one company is the only supplier and demander of a specific higherorder good) is impossible on the free market, as it will become increasingly difficult to allocate resources efficiently once the market for the specific capital goods has disappeared, and profitable operation of the firm in question will therefore eventually become impossible. And thus, the neoclassical concern for, and attempt to use government to address, market-based monopolies, is completely unfounded.

Additionally, Rothbard extended and reformulated the Austrian critique of central planning during the fall of the Soviet Union and the end of socialism in Europe. He was the first to highlight, for instance, the Misesian insight emphasized above that no central planner ever succeeded in introducing pure socialism. The socialist countries were always only islands of “calculational chaos” in a world capitalist market.

Rothbard also pioneered an Austrian approach to the desocialization of socialized economies. Given that the socialist economy must be privatized, he worked toward the development of a path forward. Pieces of the answer is evident: legalize the black market, do not increase taxation, abolish the government’s ability to create new money. Yet all government-controlled factories, lands, and so on, also need to be returned to private ownership. While there are several ways this could be done, Rothbard’s answer took into account both the ethics, as well as the economics, of the matter.

In the first place, there were a great number of activities done by the Soviet Union and other socialist governments that could not be considered beneficial. For instance, we do not need to concern ourselves with privatizing the Gulag and the KGB—as Rothbard exclaimed, “God forbid that we should ever have an efficient supply of concentration-camp or secret police ‘services!’” These “services” are clearly incompatible with the natural rights of the citizens, so they should simply be terminated.

The productive assets, on the other hand, should be turned over to private persons in accordance with three principles:

1. where possible, they should be returned to the original owner from whom they were expropriated or his heir;

2. where no original owner can be found, the assets and plants should be turned over to the particular workers and peasants who have worked or are working on them and who thus de facto homestead them, since they must be considered to be in an unowned state. The nomenklatura, the managerial elite of the socialist state, should (mostly) be excluded from this process, as their productive contributions were limited;

3. the rights of all property owners should be complete and secure. This implies the complete freedom to make exchanges and transfer properties, so there can be no government involvement in such transfers.

Rothbard is well aware that this plan is not without its problems. It is, for instance, impossible to determine the size the new private firms must be to replace the old socialist economy. It is also impossible to say definitely whether the managers of specific plants should be counted as part of the elite or the productive workers. However, these problems, while very real, will be transitory, as an unhampered market will quickly re-allocate assets to their most productive uses and entrepreneurs will rearrange the structure of firms to correspond to economic realities.

Just as Rothbard went beyond Mises and applied the calculation argument to other questions beyond the narrow one of socialist economies, so Hans-Hermann Hoppe extended Mises’s discussion of socialism beyond its original application. 17 Whereas Mises defined socialism in the classical sense, as the socialization of the means of production—or the abolition of their private ownership—Hoppe sees any infringement of the rights of private property as, in fact, a partial socialization. Pure socialism thus becomes one extreme end on a scale that goes from pure capitalism, with complete respect for private property, to the total abolition of property.

This is certainly a redefinition from Mises’s original object of critique, but it does allow Hoppe to treat different social systems within his theoretical framework, and to show that the same general effectslower production and social well-being—follows from the same general cause: the limitation and abolition of property rights. While it is still important to understand and apply Mises’s analysis of interventionism as something distinct from socialism itself, Hoppe’s reformulation shows how social systems differ in their economic and cultural outcomes, depending on the specific trend and nature of the socialization within a given society.

The types of socialism Hoppe describes should be understood as ideal types. We should not expect to encounter any real society that falls exactly within one or another of the types Hoppe describes. His description of “social democratic” socialism, however, is very close to the reality of many Western countries and therefore has the most direct relevance to the system experienced by those around us. He describes social democracy as a system where the means of production are privately owned, but the product is partially expropriated. This lessens the incentives to contribute productively and makes it more costly to look after yourself outside state programs, as private incomes fall while government subsidies to, for example, healthcare, increases. It also means that less of social life will be integrated on the market, as there is less to be gained individually by contributing to the division of labor. The general level of welfare will consequently be reduced.

At the same time, society will be ever more politicized: there are no clear boundaries for legitimate state action, so special interest groups will agitate for special protection in one way or another. Ideological groups will also call for ever more state involvement in society, and since there are no clear limits on the proper sphere of the state in social democratic ideology, the mainstream will find it hard to counter the more extreme socialists. Given that there are often strong material interests allied to extreme ideologues, these will be successful in expanding the state over time. In our time, we can clearly see this in the agitation for universal basic income under some form: there is a strong material incentive for many people to support this, and it is the ideological conclusion of social democracy, as it will result in removing the last bit of shame and cultural stigma associated with living at the taxpayers’ expense.

More generally, we can see Hoppe’s work on socialism as expanding Mises’s idea of German-pattern socialism. Interventionism leads to more interventionism and eventually total state control, but the way this occurs depends on the specific circumstances and contexts of a given society. Mises was perhaps narrowly focused on the historical experience of the world wars, where price controls and related interventions were primary. German-pattern socialism can arise in other ways too, and Hoppe has honed in on fleshing out various examples.

Conclusion:

After more than a century of criticism from the leading Austrian economists, it is curious, to say the least, that anyone could still take the socialist doctrines seriously. Part of the reason for this may be ignorance of the Austrian critiques. Even today, the idea is still common among the general commentariat that socialism sounds good “in theory,” but unfortunately, given human nature, it cannot work in practice. Such an attitude might explain why a socialist is still seen as

an idealist, rather than an ill-informed barbarian. It was possible to see socialism as an ideal one hundred years ago, before Mises converted a generation of economists away from this mistaken idea in the 1920s. The Austrian economists, indeed, have done more than any other school of economic thought to destroy the core of socialism and demonstrate conclusively that there is nothing good or noble to be expected from a socialist revolution. And just as important, they have not only refuted the errors of socialism, they have contributed positively to our understanding of socio-economic knowledge. From them, we have gained important insights into the market process and we have received a refined understanding of the crucial role of property as a necessary precondition for any social order to emerge above the merely primitive.

Socialism in the original sense is, for all intents and purposes, dead and buried. Only fringe groups advocate it now, and there are few socialist countries left that come close to the extremes of twentieth-century socialist regimes. However, this does not mean that the socialist debates are only of historical interest. Three points of enduring significance stand out.

Firstly, to paraphrase Mises’s statement from Liberalism: private property is the crucial element of a free society. This is not simply because respect for property rights allows for economic calculation, but because it allows for the harmonious development of society. The socialists contrasted production for profit under capitalism with production for satisfaction of needs under socialism. We now can say with absolute certainty that this dichotomy is nonsense: private profit and social welfare, the individual good and the common good, align perfectly in a market society.

Secondly, while socialism is for the moment defeated, we do not live in an age of victorious classical liberalism. The ruling ideologies are rather a congeries of neo-mercantilism and social democracy—interventionism in various forms. These doctrines should be met and combated on their own terms, but we must not forget that every success for the advancement of interventionism means a partial destruction of the free society and an advance toward the socialist state, whether the interventionists realize it or not.

Thirdly, ideology remains a fundamental determinant of the course of human history. Socialism may have been beaten down, but mankind has no guarantee that it will remain in disrepute. As economic difficulties and social strife are bound to result from state interventionism, and as Western intellectuals frame our system as a “capitalist” one, capitalism will be blamed for the continued failures of statist interventions. And thus, people will likely consider the market to blame for whatever evil befalls them. The only way to ensure that the discredited ideas of socialism do not receive a new lease on life is to combat them with correct ideas and correct explanations of interventionism’s malaise. Fortunately, our rightful weapons have already been forged for us by the likes of Menger, Böhm-Bawerk, Mises, and Hayek—all we have to do is use them.

About the author

Kristoffer Hansen is currently working on his PhD dissertation on monetary interventionism and agriculture at the University of Angers in France. He has thrice been a Summer Fellow at the Ludwig von Mises Institute.

from the editor's blog