Chapter 8. The Dependence of the Division of Labor on Capitalism IV: Socialism, Economic Chaos, and Totalitarian Dictatorship

CHAPTER 8

THE DEPENDENCE OF THE DIVISION OF LABOR ON

CAPITALISM IV: SOCIALISM, ECONOMIC CHAOS, AND

TOTALITARIAN

PART A

THE CHAOS OF SOCIALISM

1. Socialism

From this point on, our discussion of the consequences of price controls becomes a discussion of the consequences of socialism.

In studying the consequences of socialism, it does not matter whether we study an economy that has arrived at socialism through price and wage controls or one that has arrived at socialism openly, through the explicit nationalization of all industry. Nor does it matter whether socialism has been brought about peacefully, through lawful processes and the observance of democratic procedures, or by means of a violent revolution; it also does not matter whether the professed goal of socialism is universal brotherly love or the supremacy of a particular race or class. Economically, the system is the same in all these cases: The government owns the means of production and it is the government’s responsibility to decide how they are to be used. Consequently, everything I will have to say about socialism will apply to all variants of socialism: to the socialism of the Nazis, to the socialism of the Communists, and to the socialism of the Social Democrats, such as the late Norman Thomas. What I

DICTATORSHIP have to say will apply to any economic system actually based on government ownership of the means of production. Of course, it will not apply to countries such as Great Britain, Israel, and Sweden, which, though governed for extensive periods by political parties espousing the philosophy of socialism, did not implement socialism as to their one or actual more economic of those system. countries Of course, in the future. it may apply Most importantly, it will apply to the economic system of the United States, should price controls once again be imposed and made universal and the government seize control over production and distribution in this country, which is more than possible at some point in the years ahead, given the profoundly inflationary nature of our present monetary system.

2. The Essential Economic Identity Between Socialism and Universal Price Controls

The most important principle to grasp about socialism is that its economic consequences are essentially the same as those which result from universal price controls. If socialism is introduced in response to the chaos created by universal price controls, its effect is to perpetuate that chaos; if it is introduced without the prior existence of universal price controls, its effect is to inaugurate that very chaos. This, of course, is ironic insofar as the government uses the chaos created by price controls as

the grounds for its socialization of the economic system. Nevertheless, socialism and universal price controls are fundamentally the same in their economic nature and therefore produce the same effects. It is for precisely this reason that Soviet Russia has so consistently provided such excellent examples of the consequences that follow from universal price controls: Among these examples have been restrictions on the internal freedom of migration and the compulsory sharing of housing, shortages so severe that they result in mile-long waiting lines and people being ready to swoop down on whatever may happen to be available, and, above all, gross inefficiencies in the production and use of capital goods, which radically reduce the overall ability to produce. 1

The essential economic identity between socialism and universal price controls consists in the fact that both of them destroy private ownership of the means of production and its offshoots the profit motive and the price system.

Price controls destroy private ownership of the means of production in the very fact of destroying the right to bid and ask prices. In a division-of-labor economy, in which buying and selling are indispensable to production and all other economic activity, the right to bid and ask prices is a fundamental, indispensable right of ownership. Without it, all other rights of ownership are meaningless. For example, the right to own a factory is meaningless if the owner is prohibited from charging or paying the prices required to keep his factory in existence. Essentially, price controls are fully as destructive of the rights of ownership as socialism itself. And, of course, when price controls are compounded by shortages, the government’s response to the consequences is to seize total control over the means of production and establish de facto socialism. 2

Furthermore, what makes price controls produce the chaos they do is precisely the fact that they interfere with the property rights of businessmen. Specifically, they prohibit businessmen from using their capitals in the ways that would be most profitable to themselves. If they did not interfere with the right of businessmen to use their capitals in the most profitable way, then they could produce none of their chaotic effects. Try to imagine the government not interfering with the businessman’s property rights and profit motive, and yet the consequences of price controls developing. Think back to the preceding chapter and recall the following elements of chaos that we saw resulting from price controls: shortages and the destruction of vital industries; the impotence of consumers accompanied by hatred between buyer and seller; the impetus to higher costs; chaos in the personal distribution of goods to consumers; chaos in the geographical distribution of goods among various local markets; chaos in the distribution of a factor of production among its various products; chaos in the distribution of capital and labor among the various industries.

Consider. All of these elements of chaos result from just one thing: interference with the businessman’s property rights and profit motive. For example, would businessmen voluntarily sell their goods too cheaply and thus cause shortages? Obviously not. Their property rights must be violated and they must be forced to do so. Would businessmen abandon the production of vital goods if they were free to charge profitable prices for them? Obviously not. Would they drive away customers offering them profitable business? Again, no. Would they run up the costs of production if those costs came out of profits (as they would have to in the absence of price controls and shortages)? Clearly not. Would businessmen saturate some markets at low prices, while starving others offering them high prices? Would they use a factor of production to produce some products to excess at low prices, while producing not enough of other products offering them high prices? Would they overinvest in some industries at low profits or loses, while underinvest-ing in other industries offering high profits? Again, the answer is clearly no to all of these questions. What makes businessmen behave in these ways is that their property rights are violated and they are thus prevented from doing what is profitable to themselves.

The wider principle that emerges is that the entire price system and all of its laws and harmonies depend on one essential fact: the observance of private property rights and thus the freedom of businessmen to act for their own profit. It is private property rights and the profit motive that are the foundation and the motive power that underlie and drive the entire price system. It is they which underlie and actuate all of the benevolent economic laws we observed in our study of the free market, such as the uniformity-of-profit principle, the various principles of price and wage uniformity, the cost-of-production principle, the principle that prices are set high enough to limit demand to the supply, and the principle that factors of production are channelled to their most important employments. All of these laws and all of their benevolent consequences are the result of just one thing: private property rights and the profit motive.

Now socialism destroys all property rights. And with them it destroys the operation of the profit motive and the entire price system.

Socialism produces the same chaotic effects as price controls, because it destroys the same thing as price controls, namely, the one and only source of economic order and harmony in the world: private property rights and the profit motive.

The essential fact to grasp about socialism, which

explains why it is essentially identical to price controls, is that it is simply an act of destruction. Like price controls, it destroys private ownership and the profit motive, and that is essentially all it does. It has nothing to put in their place. Socialism, in other words, is not actually an alternative economic system to private ownership of the means of production. It is merely a negation of the system based on private ownership.

3. The Myth of Socialist Planning—The Anarchy of Socialist Production

Of course, socialism is not usually perceived simply as a negation. The first economist fully to grasp the destructive nature of socialism was von Mises, and he has not had many followers. 3 Much more often, socialism is perceived as a source of economic order and harmony. In fact, the most popular synonym for socialism is “economic planning.” The belief in socialism’s ability to plan is why a government turns to socialism when confronted with the chaos created by price controls. Indeed, the belief in socialism’s ability to plan may be one of the reasons for instituting price controls in the first place—namely, as a deliberate step leading directly to socialism. Certainly, the belief in socialism’s ability to plan has been a major factor in the popularity of socialism. Without it, it would be difficult for socialism to find supporters.

Nevertheless, a socialist government is helpless to bring order out of the chaos created by price controls. And if price controls do not exist when it assumes power, then it proceeds to create the same chaos as price controls by the very fact of socializing the economic system. For the great joke of socialism, of “planning,” as it is called, is that it cannot plan; it destroys planning and substitutes chaos.

In order to understand why socialism cannot plan, we must look again at capitalism. This will enable us to form an idea of what is required for economic planning and, therefore, why socialism is incapable of it.

The reader should recall that under capitalism each individual engages in economic planning.

I must stress this fact and I am going to give a very extensive list of examples of it, because it is very important and because socialist propaganda has created exactly the opposite impression in the minds of most people. It has created the impression that what individuals do under capitalism is run about like chickens without heads in an “anarchy of production,” and that rational action—planned action—is a prerogative of government. The truth is that each individual under capitalism is engaged in economic planning almost continuously. Unfortunately, as pointed out in Chapter 5, most of us are in the position of M.

Jourdan—the character in the Molière play—who spoke prose without ever knowing it. 4 We are all engaged in economic planning under capitalism, practically every day, but hardly any of us realize it—least of all, today’s intellectuals. Let us see in just what ways we practice economic planning.

An individual is engaged in economic planning when he plans how much of his wealth and income to save and invest and how much of it to consume; when he plans where to invest it and in what ways to consume it. He is engaged in economic planning, for example, when he plans to put his money in a bank or in the stock market, and in which specific shares in the stock market; when he plans to buy more clothes or a new stereo; even when he plans to drive to work or take the train, instead.

Every businessman under capitalism is engaged in economic planning when he plans to expand or contract the production of any item; when he plans to introduce a new product or discontinue an old product; when he plans to change his methods of production or retain his existing methods; when he plans to build a new factory or not to replace an existing one; when he plans to change the location of his business or let it remain where it is; when he plans to buy new machinery or not; to add to his inventories or not; to hire additional workers or let some of his present workers go.

Every wage earner under capitalism is engaged in economic planning when he plans to seek new employment or to retain his present employment; when he plans to improve his skills or rest content with the ones he has; when he plans to do his job in one particular area of the country, or in one particular industry, rather than in another.

In short, every one of us under capitalism is engaged in economic planning every time he plans any aspect of his personal finances or business affairs. We are engaged in economic planning every time we think about a course of action that would benefit us in our capacity as a buyer or seller.

It is simply amazing that all of this planning could be overlooked, and that the socialists have been able to proceed as though capitalism lacked planning. Capitalism has planning—the planning of each and every person who participates in the economic system.

Let us observe another, equally important fact, briefly described in Chapter 5: Namely, that the planning of capitalism—which, as I say, takes place on the part of everyone—is based on prices. 5

Prices have a twofold function in the planning of capitalism. First, they enable the individual planner of capitalism to perform economic calculations. That is, they enable him to compute the money cost and/or money revenue of various modes of conduct. If the planner is a

businessman, he weighs a money cost against a money revenue. If he is a consumer, he weighs a money cost against a personal satisfaction. If he is a wage earner, he weighs a money revenue against his personal efforts. These economic calculations provide a standard of action for the planner under capitalism. They tell businessmen to produce the products and use the methods of production that are anticipated to be the most profitable. They tell consumers to consume in the ways that, other things being equal, occasion the lowest cost. And they tell wage earners to work at the jobs that, other things being equal, pay the highest wages. Thus, prices are an indispensable guide both to the planning of production and to the living of one’s personal life under capitalism.

The second, corollary function of prices is that they coordinate the plans of each individual under capitalism with the plans of all other individuals. That is, prices serve to make each individual adjust his own plans to the relevant plans of all other individuals in the economic system. In this way, capitalism and the price system bring about a harmoniously integrated planning of the entire economic system. Our whole discussion of the free market’s price system demonstrated this process of coordination and mutual adjustment. It is only necessary to say the following, by way of summary of that discussion: Namely, that concern with money revenue makes one adjust to the plans of the prospective buyers of one’s goods or services and to the plans of all competing—and even potentially competing—sellers of those goods or services. And that concern with money costs makes one adjust to the plans of all other buyers seeking either the things one buys, the factors of production from which they are made, or alternative products of those factors of production—and to the plans of sellers in their capacity as individuals having definite personal values and preferences. The desire to earn a money revenue leads one to produce things that the buyers want and that are not being produced excessively by other sellers. The desire to limit costs leads one to economize on things to the degree that other buyers value them, or value the factors of production on which they depend, or the alternative products of those factors of production; and also to economize to the degree that the goods or services in question can be provided only at some special inconvenience to the sellers engaged in producing them.

Now socialism, in destroying the price system, destroys the possibility of economic calculation and the coordination of the activities of separate, independent planners. It therefore makes rational economic planning impossible and creates chaos.

As an illustration of the consequences, consider the problems confronting a socialist government in trying to plan the production of a simple item, such as shoes. Shoes can be produced in varying quantities, in various styles or combinations of styles, and by various methods or combinations of methods, such as by machine or by hand, including the choice between using various proportions of machine or hand production in different parts of the overall process. They can be produced from different materials or combinations of materials, such as leather, rubber, and canvas, and in different geographical locations, again, in both instances, in varying proportions. Under capitalism, all of these choices are determined on the basis of economic calculations. Thus, shoe production as a whole tends to be carried to the point where further production would make the shoe industry relatively unprofitable in comparison with other industries; the styles are those which the consumers are willing to make profitable; the methods of production, the materials used, the geographic locations are all the lowest cost except insofar as they provide special advantages for which the consumers are willing to bear the extra cost.

Under socialism, the lack of economic calculation makes it impossible to make any of these choices on a rational basis. The extent of attempted shoe production is determined arbitrarily—most likely on the basis of some official’s judgment about how many pairs of shoes are “necessary” per thousand inhabitants, or some such criterion. Style is determined arbitrarily—according to what suits the tastes of those in charge. The methods, materials, and locations planned must be selected arbitrarily. And then—for reasons that will soon become clearer—the actual carrying out of production, as opposed to what is called for in the plans, may very well have to be undertaken on the accidental basis of the means of production that happen to be available.

Now it must be stressed that the decisions about all of these choices—quantity, styles, methods, and so on—are important not only from the standpoint of the consumers of shoes, but, no less, from the standpoint of the production of all other goods. It must be borne in mind that shoe production, or the production of any good whatever, requires factors of production which are thereby made unavailable for other purposes. Shoe production requires labor that could be employed elsewhere. It requires leather or other material that either might be employed elsewhere or which is produced by labor that could certainly be employed elsewhere. In the same way, the tools or machines required, or the labor and the materials used to make them, have alternative employments. Moreover, each of the different choices respecting shoe production makes a different combination of factors of production unavailable for alternative employments. For example, shoes produced by hand reduce the number of handicraft workers available for other purposes. Those produced by machine reduce the number of machine makers and the

amount of fuel available for other purposes. Shoes produced in Minsk leave less labor available for other purposes in Minsk than if they were produced in Pinsk, and so on.

It is, therefore, clearly not enough, as most socialists appear to believe, for a socialist government—having inherited or stolen the technology of shoe production— to simply decide how many shoes to produce, determine on a style, quality, method, and locations for production, and then give the orders to produce them. In planning the production of shoes, or any other individual item, a socialist government is logically obliged to consider its effect on the production of all other items in the economic system. It is logically obliged to try to plan the production of shoes, or any other good, in a way that least impairs the production of other goods. In drafting its plans for shoe production, a socialist government is obliged to consider the extent of shoe production in relation to the production of all other goods using the same factors of production. It is obliged to consider such questions as whether shoe production might be expanded with factors of production drawn from the production of some other good, and whether the production of that other good might be maintained by drawing factors of production from a third good, and so on.

For example, it must consider whether it would be advisable to use more labor in Minsk for shoes and less for making clothing, say, and perhaps to expand clothing production in Pinsk, at the expense of some third good. It must consider all of the industries using any of the factors of production used in the shoe industry. It must consider what depends on the output of those industries and what alternative factors of production are available to those industries. Indeed, it must go even further. It must consider all of the industries using the alternative factors of production. It must consider what depends on their products, and what further alternative factors of production may be available to them. And so on. And at each step, it must consider the possibility of expanding the overall supply of the factor of production in question, and, if so, by what means, where, and at the expense of what.

To make these problems real, let us continue with the example of shoes. In order to plan shoe production rationally, it would be necessary for a socialist government to consider all of the alternative employments of each of the factors of production used to produce shoes. Let us start just with leather. A socialist government would have to consider the alternative employments of leather, such as upholstering furniture and providing belting for machinery. It would have to consider the consequences of having more or less furniture and machinery versus more or less shoes. It would have to consider alternatives to the use of leather in upholstering furniture and making belting for machinery—for example, various fabrics, and plastic and steel. It would have to consider the alternative uses for the various fabrics and for the plastic and steel, or for the factors of production used to produce them. It would have to consider what depended on those alternative uses, and what substitutes were available for them. It would have to consider whether the total supply of leather, its substitutes, or the substitutes for its substitutes, should be expanded, and, if so, by what means, where, and at the expense of what. Then, of course, the socialist government would be obliged to repeat the same procedure for all of the other factors of production employed to produce shoes, or which potentially could be employed to produce shoes.

All of this raises the insuperable difficulty of socialist planning: Namely, under socialism, it is necessary to plan the production of the entire economic system as an indivisible whole. That would be the only rational procedure.

But the planning of the economic system as an indivisible whole is simply impossible.

It would require a superhuman intellect to be able to grasp the physical connections among all the various industries and to be able to trace the consequences of alterations in any one industry on all the others. What would be required for the rational planning of a socialist economy would be the existence of an omniscient deity willing to descend from heaven and assume the management of the socialist economy.

This deity would have to be able to hold in mind at one time a precise inventory of the quantities and qualities of all the different factors of production in the entire economic system, together with their exact geographical locations and a full knowledge of the various technological possibilities open to them. That is to say, it would have to be able to hold in mind at one time all of the millions of separate farms, factories, mines, warehouses, and so forth, down to the last repair shop, together with a knowledge of the quantity and quality of all the machines, tools, materials, and partly-finished goods that they contained, and exactly what they were potentially capable of accomplishing and when.

It would then have to be able to project forward in time all of the different new combinations of factors of production that might be produced out of the existing factors, together with where and precisely when they would come into existence and the technological possibilities that would then be open to them. It would have to be able to make this projection for an extended period of time— say, a generation or more—in order to avoid the possibly wasteful production of machines and buildings lasting that long.

And then, out of all the virtually infinite number of different possible permutations and combinations of what might be produced, it would have to pick one that on some undefined and undefinable basis it considered “best,” and then order it to be undertaken. That would be its economic plan. That is what would be required even to begin to duplicate what capitalism accomplishes through the price system.

For observe. Under capitalism, different individuals in combination—that is, when their knowledge is added together—do know the precise quantities, qualities, locations, and technological possibilities open to all the various factors of production in the economic system. And everybody’s production is based on the sum of all of this knowledge, because the knowledge is reflected in the prices of all the various factors of production and products. For example, the price of wheat at any given time reflects the knowledge of each owner of wheat concerning the amount, quality, and location of the wheat he owns; it also reflects the knowledge of each user of wheat about the technological possibilities open to wheat. All of this knowledge enters into the supply and demand and hence the price of wheat. It is the same with every other good: its price reflects the sum of existing knowledge about the amount of it available, the technological possibilities open to it in production, and every other relevant consideration. And the future supply, locations, and production possibilities of factors of production are taken into account in the anticipation of their future prices.

The deity needed for the planning of socialism would require intellectual powers even surpassing those I have described. For under socialism any unanticipated event, such as a train wreck, an early snowstorm, a warehouse fire, an unexpectedly bad harvest—even unanticipated favorable events, such as the opposite of all of these—is a calamity, for it requires the replanning of the entire economic system. For example, if a tank train carrying a shipment of oil is destroyed, how is the socialist economy to decide where to take out the loss? It would have to look at all of the different uses for oil, all the possible remote consequences of its withdrawal from this or that area of production, and it would have to look at all of the alternative employments of factors of production that might be used to replace the lost oil, and all the permutations and combinations entailed in that, and then decide. By the same token, if, as a result of good fortune, a socialist economy had fewer wrecks of tank trains than anticipated, it would have to replan the entire economic system to find the right use for the extra supply of oil.

Capitalism, on the other hand, as we have seen throughout, responds easily and smoothly to unforeseen changes in economic conditions. Such changes simply bring about a change in the structure of prices and thus generate the most efficient response on the part of all concerned. Thus, the wreck of a tank train—to continue with that example—acts to raise the price of oil a little. The rise in price diminishes the consumption of oil in its marginal employments and simultaneously encourages its production—and, of course, at the least possible expense to other productive activities. The reason capitalism responds so smoothly and efficiently is that every individual in the economic system is involved in planning the response. Each individual acts on the basis of his knowledge of his own personal or business context, and the actions of all the individuals are harmoniously integrated through the price system. 6

The essential problem of socialism is that it requires economic planning to take place without benefit of a division of intellectual labor. It requires that one man (the Supreme Director), or each of several men (the Supreme Board of Directors), hold in his head and utilize the knowledge that can be held and utilized only by millions of separate individuals freely cooperating with one another on the basis of private ownership of the means of production and its offshoots the profit motive and the price system. The essential economic flaw of socialism is that in destroying these basic institutions of capitalism, it destroys the foundations of the intellectual division of labor that is indispensable to rational economic planning.

As I say, therefore, the planning of the economic system as an indivisible whole—by single individuals— let alone its continuous replanning in response to every unforeseen change, is simply impossible. The ruler of socialism, after all, is simply not an omniscient deity.

As a result, although it is called “central planning,” socialism can never have anything even approaching a rationally integrated plan for the entire economic system. In reality, the actual planning of socialist countries is undertaken by separate government ministries, each responsible for different industries or regions. Even the individual factories undertake part of the planning process. The plans of these separate ministries and individual factories are only superficially integrated into an economy-wide plan. In this sense, the actual planning of socialism must be called “decentralized planning.” There is no alternative to decentralized planning, because it is simply impossible for any one individual to try to plan everything. Decentralized planning exists as soon as two or more people assume separate responsibilities in the planning process.

However, the decentralized planning of socialism necessarily causes chaos. Because without a price system— without the foundation and mainspring of the price system, i.e., private ownership of the means of production and the profit motive—the individual planners must operate at cross purposes. First of all, there is nothing to stop their

various discoordinated plans from presupposing the availability of the same factors of production. In such conditions, the execution of any plan necessarily absorbs factors of production whose absence then makes the execution of other plans impossible. For example, if the shoe industry is planned by one ministry, the clothing industry by a second ministry, the steel industry by a third ministry, and so on, there is nothing to prevent all of these industries from drafting mutually contradictory plans. There is nothing to prevent them from basing their plans on the availability of the same labor, or the same material, fuel, transport facilities, or whatever. In such a case, to whatever extent one industry succeeds in obtaining the factors of production necessary to execute its plan, it simultaneously wrecks the plans of other industries.

Observe what is involved here. Because planning under socialism is necessarily both decentralized and lacks coordination, the production of each of the various goods can be expanded more or less randomly at the expense of destroying the production of other, more important goods. This is exactly the same chaos that prevails under universal price controls and universal shortages.

Furthermore, to whatever extent individual industries or factories are given discretion in the plans, the products that are produced can very well be unsuited to the needs of other industries that depend on them, and in that way wreck the plans of these other industries. For example, the plan for agriculture can be wrecked by the poor quality of tractors that break down too often or aren’t suited for the terrain. Under socialism, suppliers do not have any incentive of profit and loss in meeting the requirements of their customers. Nor are they subject to any form of competition. Each branch of industry under socialism is a protected legal monopoly that is totally disinterested in the requirements of its customers. This, too, is exactly the same situation we observed in the case of price controls and shortages. And it applies, as I say, not only at the consumer level, but at the producer level as well.

Under socialism, each industry, as well as each consumer, is at the mercy of disinterested monopoly suppliers. To understand what this is like, first recall our discussion of the problems at service stations and in the relations between tenants and landlords resulting from price controls on gasoline and from rent controls. 7 Now observe that similar or even worse problems exist around us in the present-day United States in practically every case in which the government is the supplier. For example, think of the services provided by municipal bus lines and subway systems, the public schools, the motor vehicle bureau, and the Post Office. All of these operations are notorious in the utter indifference and contempt they display toward customers and in the low quality and lack of dependability of their services. These characteristics are the result of the fact that these operations are government owned and therefore operate without the incentives of profit and loss; in addition, they are generally immune from the threat of competition. Because of the lack of profit and loss incentives, it doesn’t matter to them whether they gain customers or lose customers—whether they perform fast and efficient service or slow and inadequate service.

Now imagine the steel industry being owned by the government and run in the same way, and the customers of the steel industry having to contend with its performance. The industries needing steel would not be able to make their plans with very great confidence. 8 Moreover, since they too would be owned by the government, they would not particularly care about not receiving the quality and service or even the kind of products they were supposed to. The effects on their customers, in turn, and on the plans of their customers, would be compounded.

For example, an industry waiting for a new factory, say, called for by its plan, would have to contend with the indifference and bad service of a construction industry suffering from the indifference and bad service of the steel industry. And so it would go, with the plans of each industry wrecked by the lack of incentives and poor performance of every other industry further back in the chain of supply. It is for these very reasons, which are tantamount to the conditions of chronic shortages, that suppliers in the Soviet Union were so unreliable that, as previously pointed out, each factory there strove as far as possible to be self-sufficient and thus independent of suppliers. 9

To think of socialism as a “planned economy” is absurd. It is, in fact, an “anarchy of production”—a true anarchy of production.

The Soviet Quota System

The fact that socialism is an anarchy of production could not be better illustrated than by the famous Soviet “quota system.” Socialist planning in Soviet Russia assigned to each farm and factory a specified physical production goal, called its “quota”—for example, so many bushels of wheat or so many pounds of nails. And each farm or factory was encouraged to exceed its quota.

Now this situation is identical to the one we discussed under a system of universal price controls and universal shortages, for it means that there is a ready and waiting employment for more factors of production in every branch of production, with the result that any branch is capable of expanding at the expense of any other, more important branch. This, of course, is a system of pure chaos. The Soviet quota system, moreover, illustrated the

anarchy of socialist production in another major respect as well. The central planning authority did not even attempt to issue really precise production quotas because of the enormous additional detail that would have been required. For example, at times it did not even attempt to specify the number of each particular size nail or screw and so forth that was to be produced. It simply ordered the production of so many pounds or mere units of nails or screws or whatever, overall. As a result, depending on whether the orders were in terms of weight or mere number of units, the factories concerned were led to try to concentrate on items that were giant sized and enormously heavy, or pin sized and very large in number. For these were the ways most easily to meet and exceed the quotas. The disastrous results for subsequent production can be imagined.

The quota system and its stress on meeting and exceeding quotas is an inevitable consequence of the fact that socialism cannot rationally plan. It results from the fact that a socialist government wants to expand production, but is unable to trace the connections among the different industries. It is unable to determine—and is not even aware that it is necessary to determine—the effects of producing more of any one item on the ability to produce other items. A socialist government sees the particular product it wants to produce in each case, but, because it lacks a price system, it has no concept of the cost of producing that product or, therefore, of what other products it must forgo in the process. As a result, it simply gives orders to produce as much as possible of everything.

Socialism is simply unable to determine costs and is not concerned with costs. It should be realized how much more profound this lack of concern with costs is in a socialist economy than in the case of isolated socialized enterprises operating in an economy that is based on private ownership of the means of production. Today, for example, the Post Office is not overly concerned with costs, because there is no one in the Post Office who stands to make a profit by reducing costs or suffer a loss by allowing them to run up. In the context of a socialist economy, the problems of the Post Office, or any other enterprise, would be far more profound. In that case, it could not even know what its costs were, because of the absence of a price system. As a result, the Post Office, and every other enterprise under socialism, would be operated totally in the dark, with an unknown impact on the rest of the economic system. 10

Shortages of Labor and Consumers’ Goods

Under Socialism

Because this will be an important matter for consideration in Part B of this chapter, it should be realized that socialism’s inability to determine costs and consequent lack of concern with costs produces exactly the same kind of labor shortage as exists under universal price controls. A labor shortage exists under socialism both because of a socialist government’s desire to produce more of everything and because of its inefficiency in how it produces anything in particular. The latter circumstance increases the amount of labor required to produce each good. In addition, of course, shortages of consumers’ goods contribute to the labor shortage. The extent of the labor shortage is such that factory managers routinely hoard labor, that is, keep it on the payroll, in idleness, merely to have it available as and when the need for it may arise. 11

A few words must be said specifically about the reasons for the existence of shortages of consumers’ goods under socialism, especially since it is often claimed by socialists who have some familiarity with economics that such shortages could be avoided by a socialist society. Shortages of consumers’ goods exist under socialism even without inflation. They exist as a result of the following factors. First, the chaos in the production and geographical distribution of the various goods: at any time, goods can cease being produced, or cease being sent to particular localities. This can occur because particular plans are fulfilled that snatch away the necessary factors of production or perhaps the very consumers’ goods themselves from other plans. Second, when this happens, the managers of the local stores and warehouses of the socialist society have no incentive and no authority to raise prices. Nor do they have the incentive or authority to try to anticipate such events and build up stockpiles—that would be speculation. In the same way, they have no incentive or authority to bring in supplies from other areas (or send supplies to other areas)—that would be another form of activity possible only under capitalism, namely, arbitrage. In addition, all of the moral and political pressures of a socialist society work against prices being raised.

A basic moral postulate of socialism is that goods should be free to whoever needs them, or, if not free, then at least as inexpensive as possible. The political pressures of socialism are likewise overwhelmingly against price increases (a fact that in the Poland of the 1970s and 1980s was repeatedly confirmed by rioting and even by changes in the top officials on occasions when price increases were imposed). The reasons for such political pressures are exactly the same as those which make rent control so popular in New York City, namely, whoever succeeds in buying at the low price sees his benefit and applauds the government officials responsible; on the other hand, those who are victimized by the shortage the too-low price creates rarely see any connection between the

too-low price and their inability to obtain the goods they want; they view the low price as being in their interest, too, and hope to be able to buy at that price.

All of these circumstances create shortages of consumers’ goods under socialism, which, of course, are worsened by the desire to hoard that necessarily accompanies them. On top of all this, the socialist government can issue additional money to the consumers and typically does so, which, of course, further intensifies the shortages by expanding aggregate demand in the face of a given level of prices.

4. Further Economic Flaws of Socialism: Monopoly, Stagnation, Exploitation, Progressive Impoverishment

The most fundamental fact about socialism is that government ownership of the means of production constitutes an attempt to make intelligence and initiative in production a monopoly of the state.

Production depends on the possession of means of production. If the means of production are monopolized by the state, because it arbitrarily claims to own them all, then no one is free to produce on his own initiative and to regard his own intelligence and judgment as the ultimate authority for his action. In a socialist economy, no one can produce without the permission, indeed, without the orders, of the state.

This attempted monopoly of intelligence and initiative is the cause of socialism’s anarchy of production. Socialism simply prohibits all of the independent planning of millions of free, self-interested individuals that is required to run an economic system in a rational and ordered way.

There are additional, corollary consequences of socialism’s monopoly character that must be stressed, namely, the necessary technological backwardness of socialism and the utter powerlessness of the plain citizen under socialism.

To understand these points, compare the conditions of socialism with those of capitalism. Under capitalism, whoever sees a profitable opportunity for action is free to act on his own initiative. He is powerfully motivated to do so by the prospect of the profit he can make. At the same time, he is restrained from rash action by the risk of losing his own money. In addition, his action constitutes a challenge to the established ways of doing things. For if what he is doing is in fact an improvement over present products or methods of production, then those producing the present products or practicing the present methods must copy his or be driven out of business. And, as we have seen, competition is powerfully promoted by the fact that if an innovator lacks capital of his own, he can turn to any one of hundreds or even thousands of independent sources of financing by offering to share his profits with potential backers. Thus, under capitalism, every new idea has an enormous number of possible chances for being implemented. 12

Because of its freedom of initiative, its incentives to use that initiative, and its freedom of competition, the products and methods of production of capitalism tend to be literally the very best that anyone in the entire society can think of, and to improve further as soon as anyone can think of any still better idea. We saw all this, of course, back in Chapter 6. 13

Under socialism, on the other hand, individual initiative is paralyzed by the fear of punishment. Prison replaces profit for the man who would seek to implement an idea on his own initiative, for it is against the law under socialism to act outside the government’s “plan.” If an individual does manage to think of some improvement under socialism, he must submit it to the government. If he does so, he will at most have only a handful of chances for approval of his idea. In addition, whatever officials he turns to in the government will have no economic incentives to adopt his idea, whatever its possible merit. They will be inclined to reject it, in order to spare themselves the difficulties and uncertainties that are always entailed in implementing an innovation— such as the need to find new suppliers of raw materials, obtain new workers, or discharge or relocate present workers. The officials will not want to run the risk of the innovation being judged a failure and thus arousing the displeasure of those in a position to do them harm. At the same time, if the innovation were somehow to succeed, by whatever arbitrary standard success is judged under socialism, the effect on the officials would likely be merely the difficulties of establishing the new arrangements and then having their assigned production quotas increased. These are the conditions that prevailed in the former Soviet Union. 14 Under such circumstances, very few new ideas are thought of, fewer still are implemented, and virtually none at all are of benefit to the plain citizen.

The complete and utter powerlessness of the plain citizen under socialism can hardly be exaggerated. Under socialism, the plain citizen is no longer the customer, “who is always right,” but the serf, who must take his rations and like it. For no official of a socialist government stands to make a profit by supplying him better or suffer a loss by supplying him worse. These officials both lack the incentive of profit and loss and need not fear any competition from the initiative of outsiders. Thus, the plain citizen is economically powerless against them.

It is not even necessary to speak of the absence of any improvements for the plain citizen. Even if it had the ability, socialism has no reason to supply the plain citizen even with such goods as already exist and to which he

may have grown accustomed in the preceding era of capitalism. Indeed, it has no reason to supply him with anything more than is necessary to prevent an uprising. Consider a simple example. Assume there is a neighborhood somewhere that needs a grocery store. Under capitalism, this need represents a profitable opportunity for someone. Whoever sees it and has no better opportunity available simply opens a grocery and proceeds to make money, at the same time satisfying the neighborhood’s need.

Under socialism, on the other hand, the residents of the neighborhood can obtain a grocery only by petitioning the economic planning board for one. Even if the residents actually went so far, which is itself highly doubtful, the officials of the board would have no compelling reason—no personal material incentive—to comply with their request. They would certainly be far less likely to do so than officials in the United States who presently accede to requests for traffic lights at dangerous intersections, which is often only after repeated deaths have occurred. It is for these very reasons, incidentally, that even Moscow, the leading city of socialism, is grossly lacking in retail and service establishments; residents living in outlying suburbs must often travel all the way to the center of the city to obtain even such things as food supplies. 15

To take a second example: if ten million citizens of a socialist state are without shoes and must go barefoot, this does not and cannot mean any more to the officials of the socialist state than it means to the officials of New York City that everyday hundreds of thousands of New Yorkers are subjected to inhuman, cattle-like conditions in the city’s municipalized subway system. No government official is motivated seriously to work to do anything about such conditions, because he has no profit/loss incentive to improve them. He will not grow richer by improving them. He will not grow poorer by leaving them alone.

The closest a government official could come to having an incentive to make an improvement anywhere is if he were running for election and the outcome of the election depended on that improvement. Then, until the clamor died down, he might attempt to do something to make that particular improvement—at the expense, of course, of sacrificing other areas, where fewer complaints would be generated. Such an occasional, narrow political incentive, however, is as nothing compared with capitalism’s freedom of individual initiative motivated by the incentives of profit and loss. This immensely powerful combination of freedom and incentive under capitalism is continually applied to improving all aspects of economic life, the overwhelming majority of which can never even be the subject of an election. For example, that specific neighborhood’s getting a grocery store cannot be the focus of a mayoral election, much less a national election. It would simply be lost in the shuffle of far too many other matters. The same is usually true even of such larger matters as ten million people going barefoot or hundreds of thousands being treated like cattle. These are likely merely to have the status of particular dissatisfactions among innumerable other dissatisfactions and thus require no special urgency of response on the part of government officials.

Furthermore, under socialism, for reasons to be explained in Part B of this chapter, there are no free elections, and thus even the occasional democratic political incentive does not arise. Under socialism, the closest a government official comes to having an incentive to improve conditions is when the populace is on the point of revolt and it is more expedient to make some show of improvement rather than crush the protest with force.

In contrast to the politicians, democratic or totalitarian, the people who really do work to improve the economic conditions of the general public, who—literally—stay up nights thinking of ways to provide them with such things as grocery stores, more and better shoes and means of transportation, and everything else they may possibly want, are capitalists, who are continually motivated by the prospect of making or losing a fortune and who can act on their own initiative. Capitalists know not only that they will profit from improving conditions but also that if they fail to make improvements, others can make them and that the resulting competition will cause those who have not made the improvements to lose the wealth they now own.

The simple fact is that under socialism, the consumers must accept whatever the government decides to give them, however meager and inadequate that may be. For the rest, they are helpless, and whatever pleas they might make fall on deaf, indifferent, and often hostile ears.

The paralysis of initiative and incentives under socialism knows no limit—it extends to death itself. For example, if one asks how it is that Russia under socialism could periodically be threatened by famine despite the fact that it possessed the world’s richest farm land, in the Ukraine, and was a major wheat exporter even under the Czars, the answer is that the individual Russians were prevented—by physical force—from taking the actions necessary to save their lives. Russian peasants, however ignorant they may have been, were not so ignorant that they did not know that to eat they must grow food; nor did they lack the knowledge to grow sufficient food. They could have grown not only enough to feed themselves, but the urban population of the country as well, and far more. The urban population could have produced things of value to the peasants, and they could mutually

have exchanged and both have lived far removed from the threat of starvation.

The reason they did not is quite simple: The Soviet government arbitrarily declared the whole of the Soviet Union to be its property, and refused to allow the peasants to farm for their own profit or the urban population to produce for its own profit. It threatened, quite literally, to kill anyone who tried to do so. Thus, a Russian peasant may have looked at virgin forest land that he could have cleared and made his farm, and which would have fed himself and ten others. He may have looked, but he would not have lifted a finger, because he would have been killed for trying. People starve to death under socialism because the actions they would have to take to prevent starvation would bring them a more immediate death from the government. It is that simple.

It follows from the powerlessness of the plain citizens that the government of a socialist country is not and has no reason to be interested in anyone’s values but those of its rulers. This principle applies both to technological developments and to the whole of production. The only kind of technological developments that a socialist government is interested in are those which are of value to its rulers: above all, improvements in weapons production and in the kinds of things that add to the rulers’ prestige, such as “sputniks”—or pyramids. Of course, even these, or their base, it must steal from capitalist countries, because it is impossible significantly to develop military technology, or any other aspects of technology of special interest to the state, while repressing civilian technology. For example, the tank and the military airplane could not have been developed in the absence of the automobile. Radar and rocketry could not have been developed in the absence of radio. But the automobile and radio would never have been introduced under socialism. They could not because the motive that inspires the introduction of such goods is pleasure and profit—the personal, selfish pleasure of the consumers and the private profit of the producers—not collectivistic duty and altruistic sacrifice. 16

The only kind of production a socialist government is interested in is the production of weapons, spectacles, and monuments, which enhance the power and prestige of the rulers—and of just enough consumers’ goods to prevent mass starvation or, perhaps, a revolt, either of which would weaken its power. Ironically, in Das Kapital, Karl Marx refers to capitalists as “blood-sucking,” “vampire-like” “exploiters.” It is clear, however, that it is not capitalists, but the rulers of socialism who are the genuine “blood-sucking,” “vampire-like” “exploiters” of labor. Minimum physical subsistence is the most they will ever voluntarily give to the masses, for they have absolutely no reason to give more. Over seventy years of communism in the Soviet Union served to confirm this principle. But in the long run they cannot even provide this much. For, as should be apparent, as a result of its “anarchy of production,” socialism “cannot even maintain its slaves in their slavery”: the workers of socialism “sink deeper and deeper into poverty”—to borrow some other of Marx’s choice clichés and apply them truthfully for once.

If anyone doubts that the standard of living under socialism tends to sink below the level of minimum physical subsistence, let him consider where the citizens of the former Soviet Union would be right now without American wheat. Let him consider how many of them would die from the famine that would then result. Let him consider how many of them would already have died from the numerous famines that have been averted only because of the existence of an outside capitalist world to turn to for grain supplies. The citizens of the former Soviet Union averted famines and countless other disasters only because an outside capitalist world existed to provide them with all sorts of supplies to make good the errors of their chaotic economy. Their system was able to drag itself out for over seventy years only by means of the direct or indirect aid of the United States and other Western governments, which was responsible even for most of their ability to export and thus to pay for some of their imports. 17

As previously stated, without the aid of capitalist countries, socialism must revert to feudalism, for it could not feed an extensive urban population. Such urban population as it might begin with would be destroyed by famines or flee to the countryside to avoid such destruction. These results must ultimately occur even if socialism were to begin with the present economy of the United States, the inheritance of more than two centuries of capitalism. For the chaos of socialism would so reduce production as to make it impossible to replace the existing stock of capital goods. Then, as a result of fewer capital goods, production would drop again, and the supply of capital goods would thus decline still further. Socialism would find itself caught in the vicious circle I described in the last chapter, of less production causing fewer capital goods causing less production. 18 The day would come when, no matter how high the level at which it began, it could not feed the population. Socialism is an utterly destructive and self-destructive economic system.

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The overwhelming inefficiencies of socialism shed light on what otherwise might be a puzzling phenomenon, namely, the inability of the former Soviet Union, despite its alleged concentration on the production of capital goods for most of its history, significantly to increase its per capita production of consumers’ goods,

or, indeed, to accumulate any very great amount of additional capital goods. If the apologists for the Soviet Union were to be believed, the reason for its miserably low production of consumers’ goods was its concentration on the production of capital goods—on the “building up of heavy industry.” Now it would be possible, perhaps, to explain the lack of consumers’ goods for a few years on the grounds that the means for producing them have been devoted to the production of capital goods, instead. If, however, capital goods have in fact been accumulated, the effect is to make possible an increase in the production both of capital goods and consumers’ goods, because the possession of more capital goods raises the overall ability of an economic system to produce.

If, with a greater overall ability to produce, an economic system still does not produce more consumers’ goods, the explanation cannot be that it is continuing to devote some given high proportion of its efforts to the production of capital goods. If the production of capital goods is to be the explanation at all, it must be that the economic system devotes a larger and larger proportion of its growing ability to produce to the production of capital goods. In the case of Soviet Russia, which had had little or no increase in the average standard of living since 1913 (indeed, as we have seen, would have suffered from famines in the absence of an outside capitalist world to turn to), this would imply that by the 1970s or 1980s, something on the order of ninety-nine and forty-four one-hundredths percent of its output must have been in the form of capital goods, and be increasing further every year— that by then Soviet Russia must have been purer in its devotion to the production of capital goods than Ivory is in soap; that it must have been one enormous factory from Leningrad to Vladivostok.

Yet, curiously, with all this implied devotion to the production of capital goods, the Soviet Union could not generate sufficient capital of its own to build an automobile or truck factory or natural gas pipeline. Again and again, it had to turn to the United States, to Japan, and to Western Europe—even to Italy, which was the source of its most important automobile factory.

The truth is, a socialist country can never accumulate much capital, even under the most favorable circumstances of outside aid, because its inefficiencies are so great. The greatest efforts it devotes to the production of capital goods are always in danger of being more than offset by the low productivity of those efforts, to the point that it cannot even replace the capital goods it consumes in production, and thus must decumulate capital. The former Soviet Union, and every socialist country, was in the position of a farmer who is so inefficient that for every bushel of seed he uses up in production, he can barely produce a bushel of crop. With such inefficiency, no matter how great the concentration on the production of capital goods, very little indeed can remain after allowing for the minimum subsistence of the producers as well as the replacement of the capital goods consumed in production.

Capital accumulation under socialism is possible only at the cost of human life, on the scale imposed by Stalin. Stalin ordered the production of capital goods at the expense of the production of the food and clothing and other necessities required to sustain the lives of the producers. To build hydroelectric stations, steel mills, and armaments factories, he consumed the lives of tens of millions of human beings. These are facts which Gorbachev should have kept in mind when he simultaneously condemned Stalin for being a tyrant and credited him for the development of the Soviet economy. Under socialism, economic development is possible only under the kind of tyranny and mass murder practiced by Stalin. It is the exchange of human lives for piles of steel and concrete, which in turn, as the source of weapons for military aggression to further extend the power of socialism’s rulers, are useful only for further destruction. When the mass murder lets up, the result is “the years of stagnation” for which Gorbachev denounced the Brezhnev era.

Of course, when left entirely to its own inefficiencies, without an outside capitalist world to turn to, socialism cannot maintain either the capital it inherits from capitalism or what it has accumulated through mass murder. Its inefficiencies are then so great, its production so limited in comparison with the capital goods being used up, wearing out, or deteriorating with age, that with or without mass murder it decumulates capital and retrogresses—to the economic conditions of feudalism and the Dark Ages.

In such circumstances, the economic self-destructiveness of socialism would not be reduced even if a socialist society abandoned its quest for war-making power and thus did not maintain a largescale military establishment. Its economic self-destructiveness rests on the fundamental chaos and inefficiencies of the system. Socialism can accomplish nothing, including the maintenance of a significant military establishment, without the support of an outside, capitalist world, which continuously provides it with vital supplies. In the absence of the maintenance of a military establishment, its chaos and inefficiencies would render it no less dependent on an outside, capitalist world. Thus, in the absence of the necessary support from the capitalist world, socialism must collapse with or without the maintenance of a military establishment.

5. Socialism’s Last Gasp: The Attempt to Establish a Socialist Price System and Why It Is Impossible

Von Mises’s demonstration of the chaotic consequences of socialism’s lack of a price system has not gone entirely unnoticed. While practically all socialists continue to denounce the “wages system” and to extol what they call “production for use” above the hated “production for profit,” a handful of academic socialists who are conversant with economics have recognized the devastating power of von Mises’s criticisms.

According to these socialists, it was a minor oversight of all other socialists to have failed to understand the operations of the price system and to have sought to destroy it, and thus to destroy all of civilization along with it, for over a century. Fortunately, however, before socialism could destroy civilization, the material productive forces have come to the rescue and made von Mises see the problem, and his criticisms have now led this handful of academic socialists to recognize what must be done to avert disaster. I do not exaggerate. Oskar Lange, formerly of the University of California and the University of Chicago and later deputy premier of Communist Poland, wrote:

Socialists have certainly good reason to be grateful to

Professor Mises, the great advocatus diaboli of their cause.

For it was his powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting to guide the allocation of resources in a socialist economy. Even more, it was chiefly due to

Professor Mises’s challenge that many socialists became

aware of the very existence of such a problem. . . . a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry of Socialization or of the

Central Planning Board of the socialist state. . . . a socialist teacher might invite his students in a class on dialectical materialism to go and look at the statue, in order to exemplify the Hegelian List der Vernunft [cunning of ‘reason’]

which made even the stanchest of bourgeois economists unwittingly serve the proletarian cause. 19

The alleged solution to the economic problems of socialism offered by Lange and the others (whom we must view as a kind of self-styled vanguard of the vanguard of the proletariat, trying to teach the vanguard not to act as a barbarian horde) is known as “liberal socialism” or, sometimes, “market socialism.” It consists in the construction of a mythical economic system that is analogous to the centaur of Greek mythology, the beast that was supposed to be half man, half horse. That system is capitalism’s price system appended to the body of socialism. Socialism is to have freemarket prices for all goods and services. It is to have wages, interest, and profits. The hated “wages system,” that Marx spent his life attacking, is to be retained. Production is to be “production for profit,” not, as all socialists have always said previously, “production for use.” In this way, socialism is allegedly to be able to have all the advantages of capitalism, plus more; for it will simultaneously pocket all of the profits that under capitalism would go to the capitalists. Profits will serve as a “parameter,” that is, as a guide to what to do—though, of course, no one will actually profit from doing what he is supposed to do.

This doctrine, incidentally, was presented for consideration in Soviet Russia under Khrushchev. It was known as “Libermanism,” after a Russian professor of that name. The proposed role of profits was described with great fanfare at the time, in practically the very words I have used. “Libermanism” has not been heard from since, and with good reason, as we shall see.

Now the way socialism is to achieve a price system is by dividing the socialist economy up into separate sections or firms. Each will be assigned a balance at the government’s central bank. The government will set prices for all goods and services. At least on paper, these firms will then buy from and sell to each other; they will also sell to consumers and pay wages. They will pay interest on capital to the government’s central bank and even to other enterprises, and they will record profits and losses.

There is really nothing astonishing in any of this. It is similar to socialism on the German or Nazi pattern, in that seemingly separate, independent enterprises will exist. Lange, Liberman, and the others simply want to convert Russian-style socialism into something more closely resembling German-style socialism.

They go further. They claim that many or most of the controls of German-style socialism can be abolished. They claim that a price system can be developed within the context of their German-style socialism, that would make it unnecessary for the government to engage in specific allocations of physical factors of production. They claim, in effect, that all the government need do is allocate capital in money terms to different enterprises or individuals, tell them to invest and produce in the lowest-cost, most profitable way, and then everything will take place as under capitalism except that the government will rake in the profits. There allegedly need be no problem of shortages as a result of the government’s prices being set too low, or unsalable surpluses as a result of its prices being set too high; for as soon as such shortages or surpluses appear, it is claimed, the government can raise or lower the prices concerned and thus achieve a balance between supply and demand.

Now the absurdity of what Lange, Liberman, and the others propose can be grasped most simply by starting with the existence of capitalism and then imagining two alternative things to occur: (1) the government imposes

price and wage controls, (2) the government obtains the power to expropriate any firm’s or individual’s capital and turn it over to any other firm or individual at its discretion. After we look at the consequences of each of these measures separately, we can consider their operation in conjunction; and that will describe what to expect from any attempt at a “price system” under socialism.

According to Lange, Liberman, et al., a socialist government could have a price system and make it work by varying prices in response to changing conditions of supply, demand, and cost. In the case of price controls imposed on an existing capitalist system, the individual capitalists have a powerful personal incentive to try to push the government to change its controls every time there is a change in supply, demand, or cost. It is absurd to believe, however, that the government could be made to change its controls in the same way that the capitalists would have changed their prices in a free market.

To make this as concrete as possible, what Lange, Liberman, and the others are implying—though apparently without being aware of it—is that the government could control the price of oil and gasoline and apartment rents and so forth, and would then vary its controls every day in just the same way as a free market would have varied its prices. Now if this were really so, we must ask why the U.S. government did not listen to the oil companies and raise the controlled price of oil and gasoline during the oil shortages of 1973 and 1979, or why the New York City rent-control authorities have never listened to the landlords and raised the controlled rents in the face of the shortage of rent-controlled housing? We must ask why price controls are imposed in the first place, for what purpose could they serve if they were really to duplicate the prices charged in a free market?

The fact is that government price-control officials do not and cannot control prices in the way a free market would have set them. For the basis of the free market’s prices is the self-interests of the different individuals concerned, acting in an environment of freedom of competition. A gas station owner, an oil company, a landlord, and so on, sets his price on the basis of what is most profitable for him, given the same endeavor of all others in setting their prices and in choosing whether or not to pay his. Self-interest, operating under the freedom of competition, is the driving force of price determination under capitalism. Government control of prices thwarts this driving force.

While price controls thwart this driving force, the socialization of the economic system destroys it utterly, and more besides.

There is one, indispensable control that socialism must have, even under the most relaxed imaginable variant of the German-style socialism envisioned by

Lange, Liberman, et al.; and that is the right to withdraw capital at any time from any enterprise and make it available to any other enterprise. This minimum control on the allocation of capital is inescapably implied in the very nature of government ownership: if the government is to be the owner, the enterprises and those in charge of them can have no right to regard the capital at their disposal as theirs for one moment longer than the government wishes it.

To grasp the significance of this fact, let us forget about price controls for the moment. Let us return to an existing capitalist system, and assume that all the government does is obtain the power to expropriate the capital of any firm or individual and turn it over to any other firm or individual at its discretion. This is the equivalent to what it must be able to do, as a minimum, under the most “liberal” variant of socalled market socialism. Thus, for example, one year, it uses this power to halve or totally eliminate the capital of the General Motors Corporation and build up the capital of other enterprises. The next year, it gives the real estate of Manhattan Island to a different group of owners. In the following year, it dispossesses the farmers of New Jersey and turns their farms over to others. The government can do this in the same way that a private business today can close down some branches and open others, or fire existing managers and replace them with new ones—for the property is the government’s, not that of the private firms or individuals any longer.

Now this measure would totally destroy all the incentives of ownership.

Nevertheless, it is to people in such a position that “market socialism” in its logically consistent form wants to entrust the supreme management of the socialist economic system. “Market socialism” wants the socialist government to place capital in the hands of firms and individuals who will have absolutely no incentives of ownership, and then to give them discretion as to its investment. It wants the government to delegate its responsibility for investment to them, by giving them capital and then telling them to go and make believe they are capitalists. As I have said, it expects that then everything will work as under capitalism except that the state will be able to claim all of the profits.

If this system were actually implemented, those to whom the socialist state entrusted the use of its capital at any time would be in the position of owners of capital at the pleasure of the state. Their powers of discretion in investment would be genuine powers of ownership, but they would last no longer than the state desired. They would be in the position of people facing the constant threat of expropriation. They would, in effect, be prop—

SOCIALISM, ECONOMIC CHAOS, AND TOTALITARIAN DICTATORSHIP 281 erty owners, but they would be less secure in their possession of property than were the owners of fields along the coast of Europe in the era of the Viking raids. It is obvious that the self-interest of people in such a position is very different from that of capitalists under capitalism. Not being secure owners of property, they are not in a position to think of enhancing its value on a long-range basis. Their horizon extends no further than the immediate moment. If they are given significant discretion in its use, their self-interest lies with personally consuming as much of the capital entrusted to them as possible, or converting it to some concealable form, such as gold or jewels. If the socialist state effectively thwarts this motive, it succeeds merely in securing the services of people who are disinterested in the most literal sense of the term.

To grasp the nature of this disinterest, simply think again of our example of the General Motors Corporation, the owners of Manhattan real estate, the New Jersey farmers, and so on. Under “market socialism,” all of them have the threat of impending expropriation hanging over their heads. Their self-interest is to consume or conceal as much of their property as possible. We may assume that to prevent this, the government issues orders severely punishing such acts, and that it thereby actually succeeds in stopping them. Now what? Now, the “market socialists” believe, these property owners will be willing to simply go to work for the state with the same zeal with which they would have worked for themselves, and will continue in loyal service until the day the state expropriates them and turns their property over to a new set of owners. Then this new set will do the same thing.

It should be clear that what all of the abstruse talk of the “market socialists” about the “parametric” function of profits in a socialist society boils down to is this: It is profitable to a man to clear and cultivate a field, to develop a business, to construct a factory, which is why under capitalism he does it. Under socialism he will allegedly still do it, not because it is profitable to him, but because it is “parametrically” profitable—that is, profitable to his expropriators. If traditional socialism requires that an omniscient deity assume command of the socialist economy to make it work, “market socialism” requires the descent of Jesus of Nazareth, Francis of Assisi, and all the other saints of altruism, who will, in the meantime, assume the garb of hard-nosed, calculating businessmen. “Market socialism” is the same old line of “from each according to his ability, to each according to his need,” but dressed up in the ludicrous guise of the businessman’s quest for profit.

I have not mentioned the opportunities for corruption that a system of “market socialism” would create, nor, having now mentioned them, will I dwell on them. It is clear, however, that under such a system vast personal fortunes could rotate, as it were, among succeeding sets of government favorites who were awarded the right to invest the capital of the economic system.

It is really a nonessential under “market socialism” whether the government explicitly controls prices or not. It could delegate this responsibility to the individual enterprises if it wished. If it did, it might achieve an economic system at the level of, say, Turkey under the arbitrary, despotic rule of the sultans, when no one could be secure in the possession of any property—when no one dared to improve his house or fields, let alone build a factory, for fear of having them seized by the government.

If the government does control prices, as Lange and the others actually suggest, it is absurd to believe that the enterprises to whom it entrusts capital will be zealously besieging the price-control office with requests to raise or lower them so as to balance demand and supply; or, of course, that the price-control office would have any more reason to listen to their requests than when price controls are imposed on an existing capitalist system.

It is obvious that socialism cannot rationally entrust its management to people who either have no incentive at all or an incentive to grab what they can while the opportunity exists. And, in fact, none of the socalled market socialists is actually consistent enough to go very far in his proposals. Without ever explicitly mentioning it, and certainly without ever stressing the fact, they all take for granted that the state will give precise orders to each enterprise concerning what industry or industries it is to operate in, what products it is to produce, how many factories it is to have, and where, and what kind and how many machines it is to have. The discretion they are actually willing to allow is in the relatively minor and very narrow area of how best to use the existing quantity and quality of plant and equipment assigned, for the purposes assigned.

But this brings “market socialism” back to all of the problems of socialist “planning” that it claims to have solved. For in this case, the state must still decide the relative size of the various industries, the quantity and composition of their output, their basic methods of production, and their physical location. And, as we have seen, it has no rational way of deciding these things, for it must attempt to plan the totality of the economic system as an indivisible whole while being simply incapable of comprehending the specific details of the economic system and their myriad interrelationships.

The limited discretion the “market socialists” want to

allow would only introduce further disruption into the already anarchic conditions of socialist production. For it would allow enterprises on their own initiative to snatch away materials, supplies, and labor from other enterprises in ways that could not be controlled by the government planners, and which would thus disrupt even such limited, partial planning as they are able to accomplish on behalf of projects of special priority. Imagine, for example, the government of Soviet Russia trying to build a tank factory, only to find that it could not do so because some of its own enterprises had snapped up all the supplies of some vital material or part. It is for this very reason, I am sure, that “market socialism”—even of the very timid variety actually recommended by Lange and the others— was never tried in any socialist country, is unlikely ever to be tried, and, if tried, would soon be abandoned.

The only solution for the problems of socialism is, as von Mises saw over seventy years ago, the restoration of capitalism.

---

Indeed, the debate over market socialism is now closed and the correctness of von Mises’s position definitively established. It is established by the recognition on the part of socialist regimes all across the world that it is necessary to establish private ownership of the means of production. It is established by the overwhelming fact that all across the world the cry is raised “no more socialism” and efforts are underway in almost every socialist country to establish capitalism.

In echo of these momentous developments, it is gratifying to read the words of a lifelong socialist and admirer of the Soviet Union, Robert Heilbroner, who now says, “Fifty years ago, it was felt that Lange had decisively won the argument for socialist planning. . . . It turns out, of course, that Mises was right. . . . From what we know now [which von Mises knew in 1922] about how anarchic the planning process was, the wonder is not that the Soviet economy has given out but that it went on as long as it did.“ 20 Heilbroner also declares: “At a recent meeting near Washington, Soviet economists from the prestigious Academy of Sciences disputed the ‘pessimistic’ conclusions of the C.I.A. that the Soviet G.N.P. was today only between one-half and one-third as high as that of the United States, and that Soviet citizens enjoyed the equivalent of Portuguese or Greek living standards. The Soviet experts maintained that a truer measure put the Soviet G.N.P. at one-seventh of the American—a figure that yields a per-capita standard of living in the Soviet Union which is approximately that of China.” 21

PART B

THE TYRANNY OF SOCIALISM

1. The Tyranny of Socialism

The chaos of socialism is equalled only by the tyranny of socialism. In abolishing economic freedom, socialism abolishes political freedom. In abolishing property rights, it abolishes civil rights. In a word, socialism means the establishment of a totalitarian dictatorship.

It must be stressed again that when I refer to socialism, I am referring to all variants of socialism—the socialism of the allegedly respectable socialists, such as the Social Democrats, as well as the socialism of the Nazis and Communists. I stress this fact because a widespread misconception prevails that somehow the “good” socialists could achieve socialism by peaceful means and thereafter preserve political freedoms and civil liberties. That is not so, and it has never been so. And no one should make the mistake of thinking that countries like Great Britain, Israel, and Sweden have been or are exceptions. As we have seen, these countries have not in fact been socialist countries, but “mixed economies.” 22

In every instance in which socialism has actually been enacted, as, for example, in Nazi Germany, Soviet Russia, Communist China, Communist Cuba, and all the other Communist-bloc countries, its totalitarianism has been manifest. It is only necessary to show why the violent, bloody means that have been employed to achieve socialism, and the perpetual reign of terror that follows thereafter, are no accident, but are caused by the very nature of socialism; why, in other words, socialism is a thoroughly evil end, necessitating evil means for its achievement, and necessarily producing the most evil consequences.

2. The Necessity of Evil Means to Achieve Socialism

Let us begin by considering the means employed to achieve socialism. We observe two phenomena that are not unrelated. First, wherever socialism has actually been enacted, as in the Communist-bloc countries and Nazi Germany, violent and bloody means have been used to achieve it and/or maintain it. And, second, where socialist parties have come to power but abstained from wholesale violence and bloodshed, as in Great Britain, Israel, and Sweden, they have not enacted socialism, but retained a socalled mixed economy, which they did not radically or fundamentally alter. Let us consider the reasons for these facts.

Even if a socialist government were democratically elected, its first act in office in implementing socialism

SOCIALISM, ECONOMIC CHAOS, AND TOTALITARIAN DICTATORSHIP 283 would have to be an act of enormous violence, namely, the forcible expropriation of the means of production. The democratic election of a socialist government would not change the fact that the seizure of property against the will of its owners is an act of force. A forcible expropriation of property based on a democratic vote is about as peaceful as a lynching based on a democratic vote. It is a cardinal violation of individual rights. The only way that socialism could truly come into existence by peaceful means would be if property owners voluntarily donated their property to the socialist state. But consider. If socialism had to wait for property owners to voluntarily donate their property to the state, it would almost certainly have to wait forever. If socialism is ever to exist, therefore, it can only come about by means of force—force applied on a massive scale, against all private property.

Further, in the case of the socialization of the entire economic system, as opposed to that of an isolated industry, no form of compensation to the property owners is possible. In the case of an isolated nationalization, the government can largely compensate the former owners by taxing the rest of the property owners to some extent. If the government seizes all property, however, and simply abolishes private ownership, then there is just no possibility of compensation. The government simply steals everyone’s property lock, stock, and barrel. In these circumstances, property owners will almost certainly resist and try to defend their rights by force if necessary, as they properly should.

This explains why it takes the Communists to achieve socialism, and why the Social Democrats always fail to achieve socialism. The Communists, in effect, know that they are out to steal all of men’s property from them and that if they expect to succeed, they had better come armed and prepared to kill the property owners, who will attempt to defend their rights. The Social Democrats, on the other hand, are held back by fear from taking the steps that would be necessary to achieve socialism.

In sum, the essential facts are these. Socialism must commence with an enormous act of theft. Those who seriously want to steal must be prepared to kill those whom they plan to rob. In effect, the Social Democrats are mere con men and pickpockets, who engage in empty talk about pulling the “big job”—socialism— someday, and who flee before the first sign of resistance by their intended victims. The Communists, on the other hand, are serious about pulling the “big job.” They are armed robbers prepared to commit murder. This is why the Communists are able to implement socialism. Of the two, only the Communists are willing to employ the bloody means that are necessary to implement socialism.

3. The Necessity of Terror Under Socialism

If socialism is not to be achieved by open force, the only other way it can be achieved is behind people’s backs—i.e., by fraud—which is the method of price and wage controls. This was the route chosen by the Nazis.

But however socialism may be achieved, whether by open force or by fraud, its maintenance requires a reign of terror. It requires an environment in which people cannot trust even their friends, an environment in which they are afraid to express any ideas of their own, or even to ask questions. It requires precisely the kind of environment that existed in Nazi Germany and is characteristic of every Communist country.

In order to begin to understand this point, let us consider merely the requirements of enforcing price and wage controls in an economy that is falling under the rule of de facto socialism. Let us imagine our own economy suffering from universal price controls and universal shortages and observe what would be required just to enforce the price-control regulations and prevent the development of a black market so large as to make the price controls largely meaningless.

Imagine, therefore, that we have a fully price-controlled economy, and that enough time has gone by to create shortages of practically everything. Imagine that we have gasoline shortages, meat shortages, power shortages, shoe shortages—shortages of all goods. In these conditions, every seller would have a powerful self-interest in charging higher prices than the law allowed, and every buyer would have a powerful self-interest in offering to pay such higher prices as a means of outbidding others, in order to obtain a larger supply for himself. How could the government stop the buyers and sellers from pursuing their mutual self-interests and transacting business above its ceiling prices?

Obviously, there would have to be penalties imposed for selling above the ceiling prices. But what kind of penalties? If a seller stood to make the equivalent of an extra twenty or thirty thousand dollars a year, say, by defying the price-control regulations, an occasional small fine would certainly not be a sufficient deterrent. And probably even the smallest neighborhood shops would stand to take in far more than that amount of extra income by defying the regulations. If the government were serious about its price controls, therefore, it would be necessary for it to impose severe penalties—penalties comparable to those for a major felony.

But the mere existence of such penalties would not be enough. The government would also have to make it actually dangerous to conduct blackmarket transactions. It would have to make people fear that in conducting such a transaction they might somehow be discovered by the

police, and actually end up in jail. In order to create such fear, the government would have to develop an army of spies and secret informers. For example, the government would have to make a storekeeper and his customer fearful that if they engaged in a blackmarket transaction, some other customer in the store would report them. Because of the privacy and secrecy in which many blackmarket transactions could be conducted, the government would have to make anyone contemplating a blackmarket transaction fearful that the other party might turn out to be a police agent trying to entrap him. The government would have to make people fearful of their long-time associates, even of their friends and relatives, lest even they turn out to be informers.

And, finally, in order to obtain convictions, the government would have to place the decision about innocence or guilt in the case of blackmarket transactions in the hands of an administrative tribunal. It could not rely on jury trials, because it would be unlikely that many juries could be found willing to bring in guilty verdicts in cases in which a man might have to go to jail for several years for the crime of selling a few pounds of meat or a pair of shoes above the ceiling price.

In sum, therefore, the requirements merely of enforcing price-control regulations would be the adoption of essential features of a totalitarian state, namely, the establishment of the category of “economic crimes,” in which the peaceful pursuit of material self-interest is treated as a criminal offense, and the establishment of a totalitarian police apparatus replete with spies and informers and the power of arbitrary arrest and imprisonment. Clearly, the enforcement of price controls requires a government similar to that of Hitler’s Germany or Stalin’s Russia. If the government is unwilling to go to such lengths, then, to that extent, its price controls prove unenforceable and simply break down. The black market then assumes major proportions.

Now observe that in a socialized economy, a black market also exists. Only in this case, its existence entails the commission of further crimes. Under de facto socialism, the production and sale of goods in the black market entails the defiance of the government’s regulations concerning production and distribution, as well as the defiance of its price controls. For example, the goods themselves that are sold in the black market are intended by the government to be distributed in accordance with its plan, and not in the black market. The factors of production used to produce those goods are likewise intended by the government to be used in accordance with its plan, and not for the purpose of supplying the black market. Under a system of de jure socialism, such as existed in Soviet Russia, all blackmarket activity necessarily entails the misappropriation of state property. From the point of view of the legal code of a socialist state, most blackmarket activity must be regarded as theft of state property. For example, the factory workers or managers in Soviet Russia who turned out products that they sold in the black market were considered as stealing the raw materials supplied by the state.

Observe further. In a socialist state, the government’s economic plan is part of the supreme law of the land. We have already seen in Part A of this chapter how chaotic the socalled planning process of socialism is. Its further disruption by workers and managers siphoning off materials and supplies to produce for the black market, is something which a socialist state is logically entitled to regard as an act of sabotage. And that is how the legal code of a socialist state does regard it. Consistent with this fact, blackmarket activity in a socialist country often carries the death penalty. In Nazi Germany, people were beheaded for it. In Soviet Russia, they were shot for it.

Even apart from possible indulgence in blackmarket activity, every socialist official who has responsibility for production necessarily leads a dangerous life. On the one hand, any use of factors of production in a way different than that specified by the state’s economic plan lays such an official open to a charge of sabotage. On the other hand, it is generally impossible for the state’s economic plan to be very precise, as we have seen; and so some discretion must be used. Since a socialist economic system functions in a state of continuous chaos and chronic crisis, it is very easy for any given official to be singled out and blamed for some disaster caused by socialism’s anarchy of production. It becomes an essential talent under socialism for an official to be able to know how to cover himself and always to have scapegoats of his own at hand. From the top to the bottom, an incredible game of buck passing, favor trading, and mutual blackmail takes place. Ever-shifting alliances and factions are formed for mutual protection. And, periodically, victims are sacrificed: usually, subordinate officials here and there; sometimes, entire factions in giant purges.

The fundamental fact driving socialism to a reign of terror is the incredible dilemma in which the socialist state places itself in relation to the masses of its citizens. 23 On the one hand, the socialist state assumes full responsibility for the individual’s economic wellbeing. It openly avows this responsibility—this is the whole source of socialism’s popular appeal. On the other hand, in all of the ways I have shown, the socialist state makes an unbelievable botch of the job. It makes the individual’s life a nightmare. Every day of his life, the citizen of a socialist state must spend time in endless waiting lines. For him, the problems Americans experienced in the gasoline shortages of the 1970s are normal; only he does not experience them in relation to gasoline—for he does

not own a car and has no hope of ever owning one—but in relation to simple items of clothing, to vegetables, even to bread. Even worse, as we will see, he is frequently forced to work at a job not of his choice and which he therefore must certainly hate. And he lives in a condition of unbelievable overcrowding, with hardly ever a chance for privacy. To put it mildly, such a man must seethe with resentment and hostility.

Now against whom would it be more logical for the citizens of a socialist state to direct their resentment and hostility than against that very socialist state itself? The same socialist state which has proclaimed its responsibility for their life, has promised them a life of bliss, and which in fact is responsible for giving them a life of hell. Indeed, the leaders of a socialist state live in a further dilemma, in that they daily encourage the people to believe that socialism is a perfect system whose bad results can only be the work of evil men. If that were true, who in reason could those evil men be but the rulers themselves, who have not only made life a hell, but have perverted an allegedly perfect system to do it?

It follows that the rulers of a socialist state must live in terror of the people. By the logic of their actions and their teachings, the boiling, seething resentment of the people should well up and swallow them in an orgy of bloody vengeance. The rulers sense this, even if they do not admit it openly; and thus their major concern is always to keep the lid on the citizenry.

Consequently, it is true but very inadequate merely to say such things as that socialism lacks freedom of the press and freedom of speech. Of course, it lacks these freedoms. If the government owns all the newspapers and publishing houses, if it decides for what purposes newsprint and paper are to be made available, then obviously nothing can be printed which the government does not want printed. If it owns all the meeting halls, no public speech or lecture can be delivered which the government does not want delivered. But socialism goes far beyond the mere lack of freedom of press and speech. It totally annihilates these freedoms. It turns the press and every public forum into a vehicle of hysterical propaganda in its own behalf, and it engages in the relentless persecution of everyone who dares to deviate by so much as an inch from its official party line.

The reason for these facts is the socialist rulers’ terror of the people. To protect themselves, they must order the propaganda ministry and the secret police to work ’round the clock. The one, to constantly divert the people’s attention from the responsibility of socialism, and of the rulers of socialism, for the people’s misery. The other, to spirit away and silence anyone who might even remotely suggest the responsibility of socialism or its rulers—to spirit away anyone who begins to show signs of thinking for himself. It is because of the rulers’ terror, and their desperate need to find scapegoats for the failures of socialism, that the press of a socialist country is always full of stories about foreign plots and sabotage, and about corruption and mismanagement on the part of subordinate officials, and why, periodically, it is necessary to unmask largescale domestic plots and to sacrifice major officials and entire factions in giant purges.

It is because of their terror, and their desperate need to crush every breath even of potential opposition, that the rulers of socialism do not dare to allow even purely cultural activities that are not under the control of the state. For if people so much as assemble for an art show or poetry reading that is not controlled by the state, the rulers must fear the dissemination of dangerous ideas. Any unauthorized ideas are dangerous ideas, because they can lead people to begin thinking for themselves and thus to begin thinking about the nature of socialism and its rulers. The rulers must fear the spontaneous assembly of a handful of people in a room, and use the secret police and its apparatus of spies, informers, and terror either to stop such meetings or to make sure that their content is entirely innocuous from the point of view of the state.

Socialism cannot be ruled for very long except by terror. As soon as the terror is relaxed, resentment and hostility logically begin to well up against the rulers. The stage is thus set for a revolution or civil war. In fact, in the absence of terror, or, more correctly, a sufficient degree of terror, socialism would be characterized by an endless series of revolutions and civil wars, as each new group of rulers proved as incapable of making socialism function successfully as its predecessors before it.

The inescapable inference to be drawn from this discussion is that the terror actually experienced in the socialist countries has not been simply the work of evil men, such as Stalin, but springs from the nature of the socialist system, and at least in those socialist countries which are not committed to the abandonment of socialism, is still going on at this very moment. (As of the fall of 1994, this is certainly the case in China, Cuba, North Korea, Laos, Cambodia, and Vietnam. Despite claims of commitment to the abandonment of socialism, it may very well still be the case both in portions of the former Soviet Union and in some of the former East European satellites.) Stalin could come to the fore because his unusual willingness and cunning in the use of terror were the specific characteristics most required by a ruler of socialism. He rose to the top by a process of socialist natural selection: the selection of the worst. 24 His heirs resorted to the same techniques. As wellknown examples, consider the invasions of Hungary and Czechoslovakia, the use of drugs to destroy the sanity of dissidents, and, above all, the vast network of forced labor camps in

the Soviet Union. And, of course, even in the last years of socialism, there was no way of knowing what was not reported to the outside world, which almost certainly was a good deal worse than what was reported. Indeed, most of the territory of the Soviet Union was inaccessible to foreigners, and contacts with Soviet citizens were severely limited by the Soviet government. 25 The Soviet government pursued this policy of secrecy only because it had a great deal to hide. The policy of secrecy has now apparently been abandoned by the successor regime, and it is to be hoped that the full truth of the atrocities committed in the Soviet Union under socialism will emerge in the years to come.

Under the Soviet regime, the Russian people experienced all the hostility and resentment I have described, but they were so fearful and behaved so contemptibly that they channelled it against each other rather than against socialism and its rulers. Hedrick Smith wrote: “. . . Soviet society in general is peopled by mini-dictators inflicting inconvenience and misery on the rest of their fellow citizens, often, it seems, as a way of getting back at the system for the hardship and frustration they themselves have suffered.” 26 He quotes a Russian scientist: “‘Put a Russian in charge of a little plot of ground or a doorway somewhere, and he will use his meager authority over that spot to make life hard on others.’” Smith notes that he has heard Russians describe this phenomenon as “a mass settling of scores on a personal level.” 27

This is the psychological and moral climate of a socialist society—a society blinded by terror and reduced virtually to the punishment of all by all. It is terror and universal hatred that socialism and its rulers require lest they be blasted from power. 28

If Stalin’s heirs did not find it necessary to be fully as brutal as Stalin himself, it was only because they were able to coast on the environment of fear and the habit of unquestioning obedience that he created. But in the prolonged absence of fresh demonstrations of terror on the scale applied by Stalin, and as the result of the relaxation inspired by Gorbachev, more and more resentments surfaced and came to be focused on the government. Thus, the stage was set for the collapse of socialism.

It was to be expected that to avoid such collapse, the Soviet government would return to its traditional policy of all-out repression. Fortunately, the attempt to do this failed—in the aborted coup of August 1991. However, similar, more successful attempts by the remnants of the Communist apparatus cannot be ruled out and may well take place in the future.

The only alternative both to renewed repression and to an unending series of civil wars and revolutions, as successive socialist governments attempt the impossible and are driven out in a storm of hatred, is to abandon socialism in favor of capitalism. Whether or not Russia and the other portions of the former Soviet Union will find the will to make such a historic change, or even be allowed to make it by a citizenry that is intellectually still committed to socialism, remains to be seen. Thus far, the economic reforms enacted constitute but the faintest beginning of such a change.

In Eastern Europe, where the end of fear of Soviet invasion led to the quick loss of the satellites, the prospects for establishing capitalism appear to be better. This is especially true in what was formerly East Germany, where the unified German government is in a position to provide genuine guarantees of property rights. Hopefully, at least Hungary, Czechoslovakia, and Poland, and the Baltic states of Lithuania, Latvia, and Estonia, which were so recently part of the Soviet Union, will also be able to succeed in establishing capitalism. The nature of the requirements for establishing capitalism in a formerly socialist country will be explained at the end of this chapter.

4. The Necessity of Forced Labor Under Socialism

Socialism necessitates a system of forced labor— slavery. Forced labor is implied in the very idea of socialist planning. If the state is to plan the production of all commodities, it must also plan the skills that the workers will possess who are to produce those commodities, and where those workers are to live and work. It is incompatible with socialist planning for private individuals to have the freedom to acquire the skills they want and to live where they want. Such freedom would alone make socialist planning impossible.

Of course, socialism cannot plan in any case. Nevertheless, forced labor remains an essential feature of socialism. As shown in Part A of this chapter, the economic conditions of socialism are the same as those which prevail under universal price controls and universal shortages. Accordingly, socialism is characterized by a labor shortage, in which there is a ready and waiting employment for more labor in the production of virtually every good. The labor shortage under socialism results from the fact that a socialist government wants to expand production, but is unable to trace the connections among the different industries; it is unable to determine the effects of producing more of any one item on the ability to produce other items.

As a result, as we have seen, it establishes a quota system, as in Soviet Russia, in which it tries to encourage the maximum possible production of each item. This creates a need for additional labor and all other factors of production in every industry and factory. The labor shortage is compounded by all of the inefficiencies of

socialism, which cause a larger amount of labor to be required to produce each unit of a good. Finally, the shortages of consumers’ goods under socialism act to reduce the supply of labor by destroying the incentive to work and earn money, leading people to stop working. 29

In the face of such conditions, if the government is unwilling to abandon socialism (or price controls, however the case may be), its only alternative is to freeze people into their jobs, order them into those jobs and those geographical areas where it considers their work vital, and extract work from them by the threat of physical force. The government must freeze people into their jobs to stop them from quitting in response to the shortage of consumers’ goods. It must order them into specific jobs in specific areas for the same reasons it finds it necessary when a shortage exists to allocate crude oil or any other factor of production to the production of specific products in specific places, namely, to avoid the chaos of products it considers vital not being produced because other products it considers less important are produced instead. It must extract work by the threat of force because, with the money that jobs offer no longer a value to the workers, it lacks adequate positive incentives to offer them.

This, of course, is a system of slavery.

Forced Labor in the Soviet Union

It is necessary to consider the extent to which forced labor existed in the Soviet Union.

First and foremost, over the life of the Communist regime untold millions of people suffered and died in concentration camps—the infamous Gulag system. In the Stalin years, the camps may have held as many as 20 to 30 million slave laborers. 30 Even as late as the Gorbachev era, the camps contained hundreds of thousands if not a million or more slave laborers. Second, forced labor existed insofar as all people living on collective farms—as much as 40 percent or more of the Soviet population—were prohibited from moving away from those farms without the permission of the collective farm managements. In addition, at harvest time, all available urban workers could be forced into the countryside to help bring in the harvest. (Observe, incidentally, that the collective farming system was so inefficient that 40 percent of the population was insufficient to bring in the harvest. In the United States, by way of comparison, less than 4 percent of the population is more than sufficient for agriculture.) Third, every graduate of a university or technical school in the Soviet Union was compulsorily assigned to a job for a period of two to three years following graduation. Fourth, every remaining worker in the Soviet Union was compelled to have a labor book that detailed all of his previous employment, including comments by the government officials who were his former employers, reasons for changing jobs, and so on. This book had to be presented to each new government employer. Employment could not be obtained without it. The new government employer then kept the book so long as the worker was employed at that particular job. Theoretically, since Khrushchev, the government employer was supposed to return the labor book at the worker’s request. Nevertheless, this system certainly discouraged the worker’s leaving any given job against the government employer’s wishes, and was, in fact, a forcible deterrent to changing jobs. In addition, it was illegal in the Soviet Union to be unemployed. 31

If the severity of forced labor in Soviet Russia under Stalin’s successors was not as great as it was under Stalin, the explanation was largely a more flourishing black market. In the latter part of the Brezhnev era, for example, the black market was estimated to account for about 20 percent of the Soviet Union’s economy. 32 In addition, for many years following Stalin it was legal for the members of collective farms to farm small plots of up to an acre on their own account and to sell the produce in the cities for whatever prices it could bring. These small plots accounted for less than 3 percent of the cultivated land in the Soviet Union and produced about 30 percent of its agricultural output. 33 This agricultural output and the black market made it worthwhile for people to work and earn money; within limits they provided people with something to spend the money on.

Notice, however, how the mitigation of forced labor and, indeed, the very survival of the socialist system, depended on the extent to which socialist principles were violated. Strictly, according to socialist principles, there should have been no black market and no quasi-private farming plots. But it was only by permitting them that the system could survive. For the rest, the fact that forced labor was not as severe as it was under Stalin was the result of a willingness on the part of Stalin’s successors to tolerate enormous rates of labor absenteeism and a general breakdown of what the regime called “labor discipline.” 34 (To illustrate how pervasive these problems were, Hedrick Smith described a popular comedy routine in Russia, in which three workers sneaked away from their jobs to get haircuts. They received miserable service because their barbers had sneaked off too. The barbers, in turn, could not obtain the things they wanted, because the dentist, repairman, and grocer they were seeking were the very customers left sitting in their chairs. 35 )

The Imposition of Forced Labor in the United States

It must be stressed that a system of forced labor could be imposed even in the United States. This could happen

either as a result of the open socialization of the economic system, or, as is much more likely, as part of a program of de facto socialization carried out in response to the chaos created by price controls. None of our traditions, none of our past record of freedom, would be enough to stop it.

It should be realized that such slavery was actually instituted during World War II in countries with very similar traditions as the United States. It was imposed in Great Britain, Australia, and even Canada. During World War II, workers in those countries could not quit or change their jobs without government permission, and they could be ordered to work wherever the government required them. Similar legislation was proposed to the Congress of the United States by President Roosevelt in his State of the Union Message of January 1944. 36 Fortunately, the legislation did not pass. But had the United States been at war longer and the effects of the labor shortage become more severe, as a result of the continued operation of inflation and price controls, it is very likely that such legislation would have been enacted even here. For the only alternative, given the continuation of price controls, would have been chaos in the allocation of labor and the massive stoppage of work.

Thus, if we someday adopt socialism in this country, no matter what its form, we must expect the same consequences as existed in the Soviet Union.

5. Socialism as a System of Aristocratic Privilege and a Court Society

Once the government assumes the power to determine the individual’s job, it obtains the power to decide whether he must spend his life working in a coal mine in a remote village somewhere, or in the comparative comfort of one of its offices in the capital. It obtains the power to decide whether he will pass his life as an obscure nobody living in poverty, or enjoy a flourishing career, celebrated in his field, and living in comparative opulence. 37 This, of course, goes along with the government’s power over the distribution of consumers’ goods—a power which every socialist government naturally possesses. In accordance with its powers of distribution, a socialist government decides what kind of house or apartment the individual is to occupy, what kind of clothing he is to wear, what kind of food he is to eat, whether or not he is to own an automobile, and so on.

In Soviet Russia, for example, the government assigned different grades of housing based on rank in the government or Communist Party. On the same basis, it decided who could and who could not buy an automobile. It even maintained special stores that were closed to the general public and which exclusively served high government and party officials and their favorites in the arts and sciences. These stores carried many kinds of Western imports, from clothing to tape recorders, and the limited supplies of whatever worthwhile goods as were produced in the Soviet Union itself. While such things as meat were unavailable throughout most of the Soviet Union for months on end, the privileged customers of these stores were supplied with caviar. 38

The existence of a system of naked aristocratic privilege is not a contradiction of the principles of socialism, but their natural outgrowth. It follows directly from socialism’s fundamental moral and political premise, which is that the individual does not exist as an end in himself, but as a means to the ends of “Society.” Since Society is not an independent entity with a will and voice of its own, the alleged ends of Society are necessarily ends determined by the rulers of the socialist state. This means that under socialism the individual is actually nothing more than a means to the ends of the rulers. It is difficult to imagine a system that could be more aristocratic and servile in nature.

The existence of a system of aristocratic privilege does not contradict the slogan “from each according to his ability, to each according to his need.” 39 The rulers of socialism can and do assert that they and their favorites have “special needs.” Moreover, that slogan was intended by Marx to be achieved only under “socialism in its higher phase”—that is, after generations of socialism had changed human nature. If one thinks seriously about the meaning of the phrase “a change in human nature,” one must realize that it is a contradiction and therefore impossible. A change in human nature is as absurd an idea as a change in the nature of water or lead. Men will be able to practice the principle “from each according to his ability, to each according to his need,” when water is able to flow uphill and lead to float. Meanwhile, while it is waiting for human nature to “change,” a socialist state is free to adopt any system of distribution it pleases. Moreover, it cannot, as a matter of practice, adopt a system of economic equality, because, as previously explained, such a system is tantamount to the destruction of causality in production—it renders the individual incapable of accomplishing results perceptibly affecting his or his loved ones’ wellbeing and thus would have the consequence of immediately bringing production to an end. 40

What positively generates the system of aristocratic privilege under socialism is the fact that the only values that actually count in a socialist society are the values of its rulers. It should be recalled from Part A of this chapter that the absence of competition and profit-and-loss incentives in supplying the consumers makes the plain citizens economically impotent under socialism. Produc—

tion thus takes place exclusively in accordance with the values of the rulers. What the rulers value is what contributes to their military strength, their prestige, and their amusement. The goods required by the masses for survival enter into the rulers’ valuations only to the extent that the rulers need subjects and do not wish to lose too many of them.

The nature of the rulers’ values determines the nature of the incentives and inequalities of a socialist society. It is not true that a socialist society exists entirely without incentives. That would be true only if it tried to practice consistently the absurd ideal “from each according to his ability, to each according to his need.” In actual fact, a socialist society does have some incentives. But the incentives are geared entirely to the achievement of the values of the rulers. There are no incentives to the achievement of the values of the plain citizens.

The kind of incentives and inequalities that prevail under socialism are similar to those which prevail in an army. In an army there are incentives for privates to make corporal and for everyone to advance to a higher grade. But all the incentives in an army are geared to achieving the objectives of the supreme commander. The objectives of the supreme commander are the ultimate ends, definitely not the improvement of the life of the privates. Indeed, neither in an army nor under socialism is the improvement of anyone’s actual life the goal. The goal is always some impersonal achievement, whether victory in the battle with the neighboring country or victory in the battle of the new dam or truck factory, which is just how the socialists in Soviet Russia described their construction projects. 41 The closest socialism ever comes to making the improvement of life its goal is its alleged concern with the improvement of the life of unborn future generations. But no sooner does the generation of the grandchildren arrive, than socialism’s concern switches to the grandchildren of the grandchildren. 42

Socialism is essentially a militaristic-aristocratic type society. It rests on a base of starving serfs, comprising the great majority of the population, who live at or below the level of minimum physical subsistence and whose only function in life is to toil for the values of the rulers. Workers with special skills of value to the rulers may be somewhat better off, if that is what is necessary to make them deliver their skills and if it is practicable to offer them such incentives. But they too are essentially just serfs—they too work under force, and what they receive is subsistence or sub-subsistence, plus a small bonus for their skill. Above the serfs come various grades of officials and favorites, who help the rulers to exploit the serfs or who provide the rulers with weapons of war, the means of gaining greater prestige, or simply amusement. In this category are all the production managers, all the lower and middle party and police officials, the propagandists, the intellectuals, the scientists, the artists, the athletes. These are the tools, the henchmen, the flunkies, and the simple court favorites of the socialist society. Finally, at the very top, come the supreme rulers themselves—the men who have outmaneuvered and outgunned all of their rivals. These are the Neanderthals whose powerlust and gluttony socialism elevates to the ultimate end of human existence.

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A few further words need to be said in reference to the middle strata of a socialist society, especially its intellectuals. As a result of a socialist state’s twin powers over the individual’s work and consumption, everyone’s life comes to depend unconditionally on the good graces of every government official with power or influence. In such circumstances, not only are people stopped by terror from criticizing anything the government or any government official does, but a competition breaks out in the positive praise and adulation of the government and its officials. As illustration of the lengths to which such self-abasing flattery can be carried, it should be remembered that educated Germans proclaimed that Hitler spoke with God, the “Führer of the Universe”; and that educated Russians praised Stalin as “the leader genius,” the sight of whom made them want “to howl from happiness and exaltation.” 43

The same sort of thing continued to go on in Soviet Russia almost to the very end, though, since the time of Khrushchev it was more subdued. In Soviet Russia, no one was able to rise in his field without the backing of influential friends in the Party. Major advancement, including the highly coveted privilege of travelling abroad and thus being able to buy foreign goods simply unavailable in Soviet Russia, required serving as an informer for the KGB—the secret police. In the Soviet Union, men betrayed friends and relatives for the meanest material gains: to be able to buy such things as a Western refrigerator, Western furniture, even a Western toilet. 44

Ironically, the American sympathizers of the Soviet Union, who continue to work for the establishment of a similar regime here, frequently write books and plays denouncing corporate executives under capitalism for allegedly selling their souls for material advantage. The socialist society that these authors and playwrights yearn for is a society in which the only way that intellectuals can advance is by means of displaying the most abject servility to Neanderthals, who, in the absence of a capitalist world outside, could offer them no more than a few extra scraps of food wrung from some poor serf. It is pitiable, but that is evidently the path that many of today’s intellectuals find most secure and the reward they find commensurate with their abilities, since a socialist

society is what they are striving to bring about.

Such intellectuals should not be thought of, however, as motivated by a desire to sell their souls merely for a crust of bread or a toilet. They describe themselves as nonmaterialists, and what they seek is primarily a nonmaterial reward. The nature of that nonmaterial reward makes a crust of bread or a toilet appear far too generous as a measure of their worth. For, as we have seen in the discussion of environmentalism, what they are motivated by is simply the nihilistic desire to destroy human achievement. Their nonmaterial reward is to be the impoverishment and suffering of all. 45

6. From Forced Labor to Mass Murder Under Socialism

There is a further consequence of forced labor under socialism that must be considered, namely, its potential for developing into mass murder. To understand how this can happen, we must contrast forced labor under socialism with forced labor under different conditions.

Slavery existed in ancient Greece and Rome and in the Southern United States before the Civil War, and was, of course, a moral abomination. Nevertheless, abominable as slavery was, there was an important factor in these cases which restrained the slave owners and the overseers in their treatment of the slaves. That was the fact that the slaves were private property. A private slave owner was restrained in his treatment of his slaves by his own material self-interest. If he injured or killed his slave, he destroyed his own property. Of course, out of ignorance or irrationality, this sometimes happened; but it was the exception rather than the rule. Private slave owners were motivated to treat their slaves with at least the same consideration they gave to their livestock, and to see to it that their overseers acted with the same consideration.

But under socialism, the slaves are “public property”—the property of the state. Those who have charge of the slaves, therefore, have no personal economic interest in their lives or wellbeing. Since they are not owners of the slaves, they will not derive any personal material benefit if the slaves are alive to work in the future, nor suffer any personal material loss if the slaves are not alive to work in the future. In such conditions, slave labor results in mass murder. The officials in charge of the slaves are given orders to complete certain projects as of a certain time. Quite possibly, they are threatened with being reduced to the status of slaves themselves, if they fail. In these circumstances, the slaves are treated as valueless natural resources. Brutal punishments are inflicted on them for trifling reasons, and they are worked to the point of exhaustion and death. The slaves of socialism are slaves, but they are no one’s property and therefore no one’s loss.

In this way, slave labor under socialism results in mass murder. In just this way, tens of millions of people have been murdered.

Of course, the economics of slavery under socialism is not a sufficient explanation of mass murder. Those who participate in the system must be utterly depraved. But observe how socialism creates the conditions in which depravity flourishes—the conditions in which depravity can express itself, is freed of the restraints of better motives, and is positively nurtured and encouraged. For it is socialism that delivers men into slavery. It is socialism that removes the restraint of self-interest from those in charge of the use of any form of property. And it is socialism that creates an environment of hatred and sadism. In such conditions, the most depraved and vicious element of the population finds a place for its depravity and viciousness and steps forward to run the labor camps and the whole socialist society.

7. From Socialism to Capitalism: How to Privatize Communist Countries

The worldwide discrediting of socialism and the desire to replace it with capitalism raises the vital question of precisely how to establish private ownership of the means of production in the socialist countries. The purpose of this section is to explain not only how state property can initially be placed in private hands, but, even more importantly, what is required for private ownership of the means of production to be made genuine and effective.

The advantages of private ownership of the means of production are so overwhelming that it is actually of secondary importance precisely who the initial private owners are and how their ownership is established. Whatever the specific method or methods of establishing private ownership of the means of production, the institution will function to the benefit of everyone—owners of the means of production and nonowners of the means of production alike. 46 It will do so, however, only to the degree that the individual private owners possess full and secure rights of ownership.

The security of property rights means that the owners must be secure both against the possibility of any form of new confiscation by the state and against successful challenge to their ownership by other private individuals claiming to be the rightful owners. To understand the necessity of the security of property rights, the reader should imagine how his behavior would be affected if he were contemplating buying a home that he could not be certain would be his for very long. He would not be

prepared to pay very much for it, and, after he bought it, he would not be prepared to put very much into it. Indeed, his incentive would probably be to let the house run down and even to sell off such things as the appliances for the sake of obtaining cash or other assets that would be more securely his. Without the security of property rights, the situation of all would-be owners of factories, farms, mines, and stores in the present-day socialist countries must be exactly the same. Such owners would be in essentially the same position as the state employees described earlier who were supposed to act as capitalists under “market socialism.” 47 The absolute security of the owners’ property rights is essential if people are to be willing to pay proper prices for the various properties and then to stay on and improve them rather than milk them for whatever they can.

An essential aspect of the rights of ownership is the right freely to buy and sell property. This aspect of property rights is especially important in the transition from socialism to capitalism. The combinations of assets of the various enterprises of socialism and thus the combinations of assets of the enterprises that will initially exist under capitalism will almost certainly need radical change. It will be essential for the market to have the freedom literally to redefine all enterprises by changing the combinations of their assets. This means, there must be the freedom both to break up existing enterprises by selling off their assets in the manner of “corporate raiders” and to combine their assets through such devices as mergers and acquisitions.

As I say, these freedoms are essential. For a major foundation of the efficiency of capitalism—ironically, increasingly overlooked in the supposedly capitalist United States—is the ability to create business firms that possess the right combinations of assets. This ability is essential if firms are to be able to produce the right products by the most efficient methods. It must be present at all times, if the economic system is to be able to adjust to changing conditions. It is acutely necessary in the context of putting right the combinations of assets that a socialist government is likely to have thought appropriate for the various enterprises. It would be essential not only for such things as combining manufacturers with the right parts makers, and retail outlets with the appropriate warehouse facilities, but also for changing the uses made of all kinds of existing factories and land sites.

Nothing less than a radical overhaul of the entire apparatus of production inherited from socialism will be necessary if the economic system is to become efficient. Many factories will have to be closed and such of their assets as are still useable, devoted to production in different locations. Most other factories will have to undergo major changes in what they produce and the methods by which they produce. The output of innumerable factories will have to go to different users. The use that is made of innumerable land sites will have to change. All of this requires the freedom to buy and sell and to breakup and combine the assets of firms.

Along the same lines, the market would need the absolute freedom to hire and fire the managers of enterprises. This freedom too is necessary at all times and acutely necessary in the conditions of a transition from socialism to capitalism. Any managers inherited from socialism are likely to need replacement. Many of the initial managers under capitalism will also need replacement. To be effective, the transition from socialism to capitalism will need to be followed by a fall into obscurity of numerous former top managers and rise from obscurity of numerous new managers. Nothing must be allowed to impede the business takeovers and buyouts that are an essential part of this process.

In addition, of course, there must be the absolute freedom to hire and fire ordinary workers. Socialism is characterized by a massive misallocation of labor, just as it is characterized by massive misallocation of capital. This too must be put right if production is to become efficient.

A vital aspect of the transition from socialism to capitalism, that is implicit in all that has just been said and is clearly called for by the nature of capitalism, is the freedom of every enterprise to enter into the industry of every other enterprise, and, of course, the freedom of everybody to form new enterprises. In other words, the full freedom of competition must exist.

In the light of these requirements, the specific methods of establishing private ownership of the means of production can now be considered.

The simplest and most obvious method is that wherever former owners of property or their descendants are still alive, the properties should be returned to those from whom they were stolen, or to their descendants.

In Eastern Europe, this method is somewhat complicated by the fact that many of the private property owners who were dispossessed by the Communists were themselves beneficiaries of expropriations carried out not long before by the Nazis. Here the solution clearly is to return the properties to the earlier owners dispossessed by the Nazis, or to the descendants of those owners.

To the difficulty of settling claims as between two or more private claimants is added the fact that the method of returning property to former owners becomes less and less adequate, the longer is the period of time during which socialism has existed and the more ruthless were the means employed to establish socialism in the first place. This is because it becomes correspondingly more difficult to locate specific individuals with valid claims

292 CAPITALISM to ownership. (In many cases, everyone with a valid claim may simply have been murdered.) The major part of the problem, however, is the fact that as time has passed, numerous new plants and machines have been constructed, which no one can now claim on the basis of property rights existing before the establishment of socialism. These observations are particularly applicable to the former Soviet Union, where socialism existed for over seventy years and where over twenty million people were murdered by the Communist regime. The mass murders committed by the Nazis may pose a similar problem to the location of heirs.

In view of these facts, I propose three methods of privatization. First, as far as possible, property should be returned to those from whom it was stolen, or to their descendants. Second, in the case of agricultural land where it is not possible to locate former owners or their descendants, the land should be made the individual private property of those who now work it. That is, all the collective farms and state farms should be broken up into separate, individual private farms. Formulas could be devised allowing for differences in the amount of land individuals received based on differences in the time they had been compelled to work the land. Those who had suffered such forced labor for a longer period, would receive more of the land than those who had suffered it for a shorter period. Individuals who would otherwise receive parcels of land too small to farm might simply receive cash.

Third, in the case of all other property—factories, mines, shops, and so forth—the appropriate principle would be to place the assets on the open market for competitive bidding. Foreigners should be actively encouraged to participate in this bidding and, indeed, the bidding should be carried on in Western currencies and in gold. Foreigners should have the same full rights of ownership as citizens: they should be allowed to buy and sell property of all kinds, to form companies, and to remit dividend and interest payments to their own countries to whatever extent they wish.

Active foreign participation in the bidding creates the possibility of the average citizen of the socialist countries deriving an important immediate benefit from privatization. Namely, as the proceeds from the sale of assets came in, each individual citizen could receive his individual share of the proceeds—that is, the proceeds of the government’s sales could be divided up among the citizens. Thus, during the period of liquidation of state assets, the average citizen could receive one or more checks payable in Western currencies. He could use the proceeds to buy essential consumers’ goods that could be imported from the outside world because the means would be present to pay for those imports. This would help to tide him over during the difficult period of transition during which his country’s economic system was being reorganized and he was unemployed or not in a position to earn a significant amount by working. In this way, for the first and only time—in the process of its liquidation—collective ownership of the means of production would turn out to provide some actual benefit to the citizens: in the moment of its being liquidated for Western cash, it would enable them to obtain something of value to their lives.

It should be observed, incidentally, that the benefit to the average citizen would be the greater, the greater was the prospective security of property. Because to the extent that newly acquired property rights were expected to be upheld, the higher would be the prices that foreigners would be prepared to pay for the assets being offered for sale, and thus the greater would be the proceeds accruing to the average citizen of the formerly socialist country. Economic morality would be rewarded. (The ability of foreigners freely to remit dividends and interest payments is an important aspect of this morality and also an important foundation of the foreigners’ willingness to bid up the prices of the assets offered for sale, and thus of the ability of the average citizen of the formerly socialist country immediately to benefit from privatization.)

The next chapter will show why it is of absolutely no consequence that much of the property of the formerly socialist country would be owned by foreigners—why there are no negatives to offset the positives I have just described, but only the further positives resulting from the operation of private ownership of the means of production once it is in place. Furthermore, once the transition to capitalism was accomplished and the average citizen of the formerly socialist country was in a position to begin saving and investing on a significant scale, not only would he begin to accumulate capital within his own country, but the capital market of the entire world would be open to him, and he could invest abroad just as others had invested in his country. This is an aspect of what can be called capitalist internationalism.

In order to secure the best prices for assets being sold off, a corps of professional auctioneers and brokers should be employed, who would receive a commission based on a percentage of the sales proceeds.

The principle of distributing the proceeds from the sale of assets equally among the citizens could be modified to give greater compensation to victims of labor camps and survivors of those who have been murdered by the Communist regime. However, the primary compensation for such crimes should probably be left until after the transition to capitalism has been completed and it is thus possible to provide more substantial compensation.

There are, of course, other possible methods of establishing private property. One would be simply to make

the various existing enterprises the private property of their present managements. Another would be to turn the various enterprises over to their present employees. Obviously, the two methods could be combined, with the present managers receiving a certain percentage of the ownership and the present employees a further percentage. To some extent, these methods are actually in use.

If, following the establishment of private property in these ways, there really was security of property and full rights to buy and sell assets and shares, to hire and fire managers and workers, and to compete in all branches of industry, these methods would ultimately be effective in establishing private ownership of the means of production. As time went on, all the necessary changes could take place, including changes in ownership, which would be effected by the market, and an efficient economic system would emerge. However, the appropriation of enterprises by their Communist-appointed managers will necessarily carry with it the taint of the old regime and all of its injustices, and is likely also to be accompanied by a continued largescale ability to use political pull, based on previously established relationships with government officials. Thus, private ownership of the means of production begun in this way will be tainted by injustice, past and present, and by corresponding inefficiency. This would be a legitimate source of resentment and would constitute a potential threat to the continuation of such ownership.

Turning the ownership of each establishment over to the workers of that establishment would at best arbitrarily favor some workers over others. Those workers who happened to work in highly capital-intensive industries, such as electric-power production or steel making, would obtain ownership of far more capital than workers who happened to work in less capital-intensive industries, such as clothing factories and restaurants. The same point would apply within each industry, insofar as some plants were more modern and efficient than others. It is very pertinent, of course, that as the result of socialism’s protracted gross inefficiencies, the value of many factories and other productive establishments would turn out to be altogether nonexistent.

The problem of workers benefitting or failing to benefit by virtue of the accidental circumstances of where they worked would also exist in agriculture. The workers of collective farms with abundant, rich soil would receive more than the workers of collective farms with relatively meager, poor soil. In agriculture, however, apart from the return of former owners or their descendants, there does not appear to be an alternative to the workers’ coming to own the land. Of course, the workers on the relatively poorer lands could be given the option of sharing in the proceeds of the sale of other assets rather than accept land they had been forced to work.

To the extent that workplaces do become the property of the workers employed in them, it must be stressed that it is vital that the workers of each plant be free both to sell their ownership shares while keeping their jobs and to leave their jobs while keeping their shares. In this case, ownership and employment would eventually become almost entirely separate, as under capitalism. The ability to hold ownership and employment separately is essential for the free movement of capital and labor between industries. In its absence, workers would be reluctant to leave their employment, because they would then lose their capital, and they would be afraid to admit new workers into their firm or industry, because they would then have to correspondingly dilute their ownership. There would be no possibility of transferring capital from one industry to another, since the workers of the industry from which the capital came would simply lose it. Furthermore, the rapid separation of ownership and employment is necessary to overcome a bias that might otherwise exist against improvements in efficiency if workers as owners were in a position to reject improvements that might cost them their jobs. 48

Thus, at its worst, turning ownership over to the workers could mean a state of affairs in which the movement of labor and capital between the various branches of industry was made impossible. In addition, it could mean a situation in which the workers of each industry, by virtue of their possession of a monopoly on employment in their industry, were in a position to practice extortion on the rest of the economic system as the price of providing their services. Obviously, these are conditions which should be avoided at all costs. 49

Provided that the essential requirements of security of property, the separation of employment and ownership, and the unrestricted freedoms to buy and sell, hire and fire, and compete, are observed, what remains is to accomplish the transition to private ownership as quickly as possible. Reasonable but strict time limits must be set for the location of former owners or their heirs, and it must be firmly established that thereafter no new claims will be heard on their account. This is an essential part of establishing the security of property. All of the assets in the hands of the state must likewise be disposed of within a strict time limit, so that no one in the market need labor under any uncertainty about what properties will be available and when and thus what plans he can and cannot make. This is essential to making the economic system as efficient as possible as soon as possible.

In the absence of the establishment of private ownership of the means of production, all other reform is meaningless. For example, decontrolling prices without first establishing private ownership of the means of pro—

294 CAPITALISM duction and its corollary the freedom of competition, simply means giving arbitrary, monopolistic power to lesser government officials in charge of individual industries and enterprises. It is comparable to giving the postmaster general or the local postmaster the right to set postal rates. Without private ownership of the means of production, there can be no market economy or free market. Divorced from private ownership of the means of production, such notions are a contradiction in terms. Nor, of course, can there be lasting or meaningful reform in the political realm. As shown earlier in this chapter, political freedom cannot exist without private ownership of the means of production both in such specific forms as printing presses and lecture halls and in general, throughout the economic system, in order to secure the individual’s livelihood from the power of the state. If the present, avowedly anticommunist regime in Russia does not soon succeed in establishing largescale private ownership of the means of production, it will be certain to begin taking on all of the odious features of the Communist regime it has replaced. Indeed, one authority claims that 150,000 people are in jail even now in Russia for having engaged in black market activity. 50

For the rest, it is essential that public opinion come to be based on an understanding of the importance of private ownership of the means of production and why its existence is in the material self-interest of everyone. Such understanding is essential to the longrun security of property. To further promote such understanding is a leading purpose of the next chapter.

Notes

1. On these points, see above, pp. 249–250, 257, and 260–262 passim.

2. See above, pp. 263–264.

3. See Ludwig von Mises, Socialism (New Haven: Yale University Press, 1951), pp. 111–142, 211–220, 516–521; reprint ed. (Indianapolis: Liberty Classics, 1981); idem, Human Action, 3d ed. rev. (Chicago: Henry Regnery, 1966) pp. 689–715. Von Mises’s leading supporter on this issue is F. A. Hayek, to whom I am also greatly indebted in the following discussion. See his The Road to Serfdom (Chicago: University of Chicago Press, 1944), pp. 48–50; and Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 33– 56, 77–91, 119–208.

4. See above, p. 137.

5. See above, ibid.

6. See above, pp. 172–214 passim, but especially pp. 209–214. 7. See above, pp. 239–240.

8. Cf. Robert Kaiser, Russia (New York: Atheneum, 1976), p. 338.

9. See above, pp. 136–137.

10. This point, of course, was made repeatedly by von Mises. See the references to him above, in n. 3 of this chapter.

11. See Kaiser, Russia, p. 324.

12. See above, pp. 176–178.

13. Ibid.

14. See Kaiser, Russia, pp. 330–335.

15. See Hedrick Smith, The Russians (New York: Quadrangle/New York Times Book Company, 1976), p. 59.

16. By the same token, the ability of the civilian economy to benefit from government-sponsored weapons research, such as that of the U.S. government in World War II or the U.S. space program in the 1960s, presupposes the existence of a capitalist economic system. It is only the existence of capitalism’s profit motive and freedoms of individual initiative and competition that makes it possible to put such research to civilian use. This explains why there were significant civilian benefits in the United States from such research, but not in the Soviet Union, despite the Soviets’ early and substantial lead in space research. Needless to say, moreover, in the absence of the need for weapons research in a capitalist economy, all of the major scientific and engineering talent that is employed in it, would be employed in other lines of research, and with far greater efficiency, because that research would be privately supported. Thus, for example, in the absence of the development of the atomic bomb, while atomic power would probably not have come as soon, other fundamental advances with other major derivatives would probably have come sooner—it is a case of what Bastiat and Hazlitt refer to as the seen versus the unseen. (See Henry Hazlitt, Economics in One Lesson, new ed. [New Rochelle, N. Y.: Arlington House, 1979].) Indeed, with growing government control over research—its seizure of so much of the funds that would otherwise support private research and its politicizing of so much of research—the alternative private research that might have been may simply never be.

17. On this point, see above, pp. 136–137.

18. See above, pp. 258–262. For a detailed explanation of the dependence of capital accumulation on economic efficiency and, more fundamentally, on economic freedom, see below, pp. 634–636.

19. Oskar Lange, On the Economic Theory of Socialism, Benjamin E. Lippincott, ed. (Minneapolis: University of Minnesota Press, 1938), pp. 57–58.

20. Robert Heilbroner, “Reflections After Communism,” New Yorker, Sept. 10, 1990, pp. 92, 94.

21. Ibid., p. 94.

22. See above, pp. 263–264.

23. Cf. Frederic Bastiat, “The State,” in Frederic Bastiat, Selected Essays On Political Economy, trans. Seymour Cain (New York: D. Van Nostrand, 1964), pp. 140–151. Bastiat’s essay was originally written in 1848. Also cf. Hayek, Road to Serfdom, p. 107.

24. Cf. Hayek, Road to Serfdom, pp. 134–152.

25. See Kaiser, Russia, pp. 87, 141–142; Smith, Russians, pp. ix–x, 3–6, 11–22.

26. Smith, Russians, p. 265.

27. Ibid. Along exactly the same lines, in his more recent book, Smith relates the widely told story of the Russian who is asked by God to wish for something that he would like God to do for

him, on the understanding that whatever God does for him, he will do twice as much for his neighbor. After hearing this offer, the Russian asks that God pluck out one of his eyes, so that his neighbor can lose both eyes. See Hedrick Smith, The New Russians (New York: Random House, 1990), p. 204.

28. Smith and Kaiser, incidentally, were both aware of the fundamental insecurity of the Soviet regime. See Smith, Russians, pp. 253–254; Kaiser, Russia, pp. 10–12, 21–23, 172– 174, 451–453, 459, 473.

29. See above, pp. 258–262 and 273–275.

30. See, for example, David J. Dallin and Boris Nicolaevsky, Forced Labor in Soviet Russia (New Haven: Yale University Press, 1947), pp. 84–87.

31. Concerning these various points, see G. Warren Nutter, The Strange World of Ivan Ivanov (New York: World Publishing Co., 1969), pp. 87–89; Kaiser, Russia, pp. 336–337; Smith, Russians, pp. 267, 285; ibid., New Russians, pp. 190–191. 32. See Kaiser, Russia, pp. 111–113, 341–343; Smith, Russians, pp. 82–85, 92–93.

33. See Nutter, Strange World, pp. 99–100; Smith, Russians, pp. 200–201; Kaiser, Russia, pp. 46–47.

34. See Smith, Russians, pp. 222–225; Kaiser, Russia, pp. 339–340.

35. Cf. Smith, Russians, p. 223.

36. See New York Times, January 12, 1944, p. 12.

37. Cf. von Mises, Socialism, pp. 185–191.

38. See Kaiser, Russia, pp. 175–181, 192, 328; Smith, Russians, pp. 7–8, 25–52, 355–360, 464–467.

39. For a critique of this slogan and its underlying moral philosophy, see Ayn Rand, Atlas Shrugged (New York: Random House, 1957), especially pp. 660–672 and 1009–1069; also The Virtue of Selfishness (New York: New American Library, 1964), pp. 1–34. 40. See above, pp. 145–146.

41. See Smith, Russians, pp. 219–221, 230–232, 334, 338–343. For a novel that makes real the feeling of life under socialism, see Ayn Rand, We The Living (New York: Random House, 1959).

42. Cf. Ayn Rand, Capitalism: The Unknown Ideal (New York: New American Library, 1966), p. 21.

43. Ludwig von Mises, Omnipotent Government (1944; reprint ed., New Rochelle, N. Y.: Arlington House, 1969), p. v; idem, Bureaucracy (1944; reprint ed., New Rochelle, N. Y.: Arlington House, 1969), p. 106.

44. See Alexander Solzhenitzyn et al., From Under the Rubble (Boston: Little, Brown and Company, 1974), pp. 246–248; Kaiser, Russia, pp. 360–380; Smith, Russians, pp. 25–52, 109– 110, 464–467.

45. See above, pp. 99–106.

46. The benefit of private ownership of the means of production specifically to nonowners is dealt with below, pp. 296–326 passim.

47. See above, pp. 279–282.

48. Any requirement that ownership of capital and employment be united constitutes syndicalism. See the critique of syndicalism presented by von Mises in Socialism, pp. 270–275. 49. See above, pp. 144–145.

50. Yuri Maltsev, “Putting Rouge on a Corpse,” Washington Times, January 22, 1992.