Where is Austro Libertarian?

Economics

Austrians On the Socialist Front, Part Two

By
Kristoffer Hansen
|
January 7, 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 Two

By

Kristoffer Hansen

|
January 7, 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.

Mises Enters the Fray

The general atmosphere produced at the conclusion of Part One was one of critical engagement with the growing movement of Marxist socialism and a basic acceptance of a growing role for the state on the part of most intellectuals, It was here that Ludwig von Mises arrived on the scene in the aftermath of World War I. Fresh from the battlefields of Galicia and his wartime duties, in a brief span of time, Mises provided immeasurable service to his native Austria—and to all of mankind. The first he did by convincing the new socialist rulers of Vienna to abandon wholesale nationalization of the means of production during the winter from 1918 to 1919.

Mises wrote in his Memoirs:

Bolshevism would lead Vienna to starvation and terror within a few days. Plundering hordes would take to the streets and a second blood bath would destroy what was left of Viennese culture. After discussing these problems with the Bauers [Otto Bauer was the leader of Austrian Social Democratic Party] over the course of many evenings, I was finally able to persuade them of my view. Bauer’s resulting moderation was a determining factor in Mises’s influence on the Bauers in this matter, as well as his work on stopping Austrian inflation in 1922, saved Austria from revolution and Bolshevism, but he proved powerless to stop the destructive policies of interventionism and capital consumption that paved the way for the Nazi takeover in 1938. Whereas his successes were limited in practical politics, Mises would soon prove very influential in the intellectual endeavors that took much of his attention in the 1920s and, indeed, for the rest of his life, as he embarked on dismantling the socialist doctrines root and branch.

This work began in earnest with his 1919 book Nation, State, and Economy, where Mises criticized the policy of central planning of the economy during the war and showed how the trend of intervention had long been in a socialistic direction:

It is not hard to recognize that the measures of war socialism amounted to putting the economy on a socialistic basis. The right of ownership remained formally unimpaired. By the letter of the law the owner still continued to be the owner of the means of production. Yet the power of disposal over the enterprise was taken away from him.... The goal of production was prescribed to him, the raw materials were delivered to him at definite prices, the workers were assigned to him and had to be paid by him at rates on whose determination he had no direct influence. The product, furthermore, was taken from him at a definite price, if he was not actually carrying out all the production as a mere manager.... War socialism was by no means complete socialism, but it was full and true socialization without exception if one had kept on the path that had been taken.
War socialism was only the continuation at an accelerated tempo of the state-socialist policy that had already been introduced long before the war. From the beginning the intention prevailed in all socialist groups of dropping none of the measures adopted during the war after the war but rather of advancing on the way toward the completion of socialism.

State action guided by interventionist ideas lead gradually to socialism, in Mises’s view. As the unintended consequences of the first intervention become apparent, the need for further intervention arises, if the policy of interventionism is not to be abandoned. Abandoning the policy would be admitting ideological defeat, and so the intervention in the economy continues, until only the appearance of private property remains, while in reality the government exercises full control over the economy. Such intervention may begin with price controls on a few essential commodities, but since all prices are connected, the effects spread and the control cannot stop at the initial intervention. Other goods must be made subject to price controls too. And since price controls inevitably leads to shortages or surpluses at the fixed prices, rationing and production quotas become necessary too. And so, in a step by step fashion, the whole economy is brought under government direction.

Mises referred to this socialism resulting from economic intervention the “German pattern,” because he first ascribed it to the economic policy of the central powers in World War I. This is the inherent endpoint of all interventionist regimes: once you’ve started down the road of government direction of the economy, you’re compelled forward to the next intervention by the mounting economic problems, unless you abandon the ideology of interventionism altogether. Germany had advanced furthest along this road during the Great War, but Mises saw exactly the same development in Great Britain during World War II, going so far as to call Britain a socialist commonwealth by the end of the war in his famous 1950 essay “Middle-of-the-Road Policy Leads to Socialism.” In Great Britain, as in Germany, socialism was the result not of conscious revolutionary action, but of the piecemeal interventionism much favored by the ruling “étatist” (Mises’s word for statist) ideologies.

It may be difficult at first to identify the difference between his conception of German-pattern socialism and the hampered market economy (interventionism), but Mises is emphatic that there is a difference: the hampered market economy, despite all the interventions, is still a market economy, where private property still means something and most prices are still formed in markets, although the resulting prices may be much altered by government intervention. In the introduction to his 1940 essay “Interventionism: An Economic Analysis,” he pinpoints the distinction between interventionism and socialism of the German pattern by explaining that the former

desires that production and consumption should develop along lines different from those prescribed by the unhindered market, and it wants to achieve this aim by injecting into the workings of the market, orders, commands, and prohibitions, for whose enforcement the power and constraint apparatus stand ready. But these are isolated interventions; they do not combine into a completely integrated system which regulates all prices, wages, and interest rates, and which thus places the direction of production and consumption in the hands of the authority.

The struggle against interventionism, the illusory ‘third way’ between capitalism and socialism, was an abiding concern for Mises throughout his life. Yet, important as his contributions to our understanding of interventionism are, it is arguable that his major achievement was his direct refutation of the very possibility of a socialist economy. Already in Nation, State, and Economy, he had laid out the problem that the socialists had to answer:

The liberal doctrine starts with the fact that the economic order resting on private ownership of the means of production removes the opposition between private and social interest because each individual’s pursuit of his rightly understood self- interest assures the highest attainable degree of general welfare. Socialism wants to establish a social order in which the self-interest of the individual, selfishness, is excluded, a society in which everyone has to serve the common good directly. It would now be the task of the socialists to show in what manner this goal could be reached. Up to now, however, no socialist has ever made even the mere attempt to show how this gap between special interest and general welfare could be bridged over.

In his article “Economic Calculation in the Socialist Commonwealth,” published the next year, Mises showed that it was indeed impossible to direct production in a socialist society in a rational manner that would yield the socially desired outcome. Mises repeated the argument in his 1922 volume Socialism and in his magnum opus, Human Action, in 1949. There are, as Mises sees it, two preconditions for rational calculation and allocation of resources in any advanced society: both consumer goods and producer goods (the means or factors of production) must be subject to exchange; and there must be a common medium of exchange (money) used in the trade of both types of goods, which can function as the common denominator in economic calculation.

As Mises presents the problem, free trade in consumer goods is not a problem, since all socialists readily admit to private property in these. Nor is the existence of money contrary to the socialist order, as money can develop in the trade of consumer goods. The problem arises because under socialism, there is no private ownership of the means of production, and hence no exchange of these. When the factors of production cannot be exchanged, there are no money prices for them, and without money prices it becomes impossible to assign a monetary value to them.

That money prices are necessary for calculation follows from the nature of value:

Valuation can only take place in terms of units, yet it is impossible that there should ever be a unit of subjective use value for goods ... Judgments of value do not measure; they merely establish grades and scales. Even Robinson Crusoe, when he has to make a decision where no ready judgment of value appears and where he has to construct one upon the basis of a more or less exact estimate, cannot operate solely with subjective use value ... Rather will he, so far as he can, refer all the elements which have to be taken into account in forming his estimate to those economic goods which can be apprehended by an obvious judgment of value—that is to say, to goods of a lower order and to pain-cost. That this is only possible in very simple conditions is obvious. In the case of more complicated and more lengthy processes of production it will, plainly, not answer.

It may be straightforward for Crusoe to estimate the value of the fishing rod from the value he assigns to the fish he expects to catch with it. But we need not advance very far beyond a primitive economy to see that direct judgments of value are inadequate. What if the alternatives open to Crusoe are a fishing boat or a fish pond? Even these relatively simple undertakings are too complex for direct comparison, as the alternative uses for the factors of production involved in producing these are too numerous to be subjected to direct comparison. It is perhaps in Human Action that Mises makes the point most clearly:

The [socialist] director wants to build a house. Now, there are many methods that can be resorted to ... Which method should the director choose? He cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them. He cannot attach either to the waiting time (period of production) or to the duration of serviceableness a definite numerical expression. In short, he cannot, in comparing costs to be expended and gains to be earned, resort to any arithmetical operation. The plans ... enumerate a vast multiplicity of various items in kind; they refer to the physical and chemical qualities of various materials and to the physical productivity of various machines, tools, and procedures. But all their statements remain unrelated to each other. There is no means of establishing any connection between them.

With trade in factors of production and money prices for all of them, it becomes possible to reduce all the inputs to a common denominator, and the different possible courses of action can be compared. This is why the existence of large-scale, even multinational enterprises is no argument for the possibility of socialism. Companies such as Walmart for instance, exist in a market setting: there are markets for all the factors of production they need, and they can draw up budgets for their different departments and for the company as a whole based on real money prices.

One should not think that Mises considers money as somehow a measure of value, or that everything is—or should be—reducible to a money price. Prices consist in money, and only goods that are subject to exchange will be priced. It is therefore not a flaw of monetary calculation that it cannot express values such as friendship, honor, or the beauty of a building or neighborhood. These ideals are, in Menger’s terminology, goods of lower order and can therefore be taken account of by a straightforward judgment of value—either I partake of these non-economic goods and live according to my ideals, or I must realize that I place a higher value on material goods than on my ideals:

Anyone with a genuine sense of moral values experiences no hardship in deciding between honor and livelihood. He knows his plain duty. If a man cannot make honor his bread, yet can he renounce his bread for honor’s sake. Only they who prefer to be relieved of the agony of this decision, because they cannot bring themselves to renounce material comfort for the sake of spiritual advantage, see in the choice a profanation of true values. 

Economic calculation is thus simply a tool, not an end in itself, but it is an indispensable tool for the development of advanced capitalist economies.

Some may raise an empirical objection against Mises’s arguments. It may be that socialism does not work in theory, but is it not a matter of practical historical experience that socialist countries existed for an extended duration of time? Soviet Russia, Mao’s China, Nazi Germany, and so on—are they not all refutations of Mises’s conclusion? Mises’s answer was no and, remarkably, he had in 1920 anticipated this objection and denied its relevance, on the grounds that, when the socialist system is limited and can refer to market prices outside itself, then a certain rationality in production is possible.

This is true both in the case of a socialized sector of the domestic economy (the case Mises considered in 1920) and in that of a socialist country in the world economy. In both cases, the socialist planners will be able to refer to the market prices formed in the capitalist system and use these in their planning. A possibly apocryphal story from Soviet Russia illustrates that the Soviets were aware of this. Nikita Khruschev exclaimed at one point, referring to the decadent capitalist West: “we will bury you!” and Russian economists were wont to repeat the exclamation in conversations with Western counterparts, with the addition that they would let Hong Kong be, in order to follow along on the stock exchange.

Ironically, then, the retort to those who claim socialism works is that it only worked in the past because it wasn’t real socialism!

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