Observations on the Russian Reform Movement; L. von Mises

in the West penetrates to Russia, its masters are upset by the fear of a procapitalist reaction in their own house. This fear impels them on the one hand to foment sedition Dr. Mises is Visiting Professor of Economics at New York University and part-time ad viser, consultant, and staff member of the Foundation for Economic Education. all over the "capitalist sector" of the earth, and on the other hand to ventilate projects aiming at some minor reforms in their own methods of management. Nobody is today more firmly convinced of the incomparable su periority of the capitalistic meth ods of production than the "pro duction tsars" of the countries behind the Iron Curtain. The pres ent-day strength of communism is entirely due to the mentality of the pseudo-intellectuals in the Western nations who still enjoy the products of free enterprise. Capitalism a Social System of Consumers' Supremacy The market economy-capitalism - is a social system of consumers' supremacy. There is in its frame only one method of earning a liv23 24 THE FREEMAN May ing and of acquiring property, namely, one must try to serve one's fellow men, the consumers, in the best possible way. A daily and hourly repeated plebiscite deter mines again and again every indi vidual's earnings and place in so ciety. By their buying and absten tion from buying the consumers allocate ownership of all the mate rial factors of production to those who have succeeded in satisfying the most urgent of their not yet satisfied wants in the best possible and cheapest way. Ownership of the material factors of production can be acquired and can be pre served only by serving the con sumers better than other people do. It is a revocable public man date as it were.

The supremacy of the consumers is no less complete with regard to labor, the human factor of pro duction. Wage rates are deter mined by the price the consumer, in buying the product, is prepared to refund to the employer for the worker's contribution to the proc ess of its production. Thus the consumers' valuation fixes the height of every worker's remuner ation.! And let us not forget: the immense majority of the con sumers are themselves earners of 1 This is to what the jargon of the Hollywood industry refers in using the term "box office account." But it is no less valid for all other fields of business. salaries and wages and, in this capacity, instrumental in the deter mination of their own compensa tion. The unique efficiency of the cap italistic system is due to the in centive it gives to everybody to exert his forces to the utmost in serving his fellow citizens. Not a vague altruism, but rightly un derstood selfishness impels a man to put forth all his strength in the service of his fellowmen. The sys tem of economic calculation in terms of money, the commonly used medium of exchange, makes it possible to compute precisely all projects in advance and the result of every action performed in retrospect; and, what is no less important, to ascribe to every f.ac tor the size of its contribution to the outcome.

Planning for People Control The characteristic feature of so cialism is precisely the fact that it substitutes for this market sys tem of consumers' supremacy a dictatorial system, the "plan." In the planned economy the individ uals are not driven by the desire to improve their own conditions but either by dutifulness or by the fear of punishment. It is im possible for the individual workers to improve their own material sit uation by working better and harder. If they intensify their 1966 THE RUSSIAN REFORM MOVEMENT 25 own exertion, they alone are bur dened by the implied •. sacrifices, but only an infinitesimal fra'ction of the product of their additional exertion will benefit themselves. On the other hand, they can enjoy in full the pleasures of carelessness and laziness in the performance of the tasks assigned to them while the resulting impairment of the total national product curtails their own share· only infini tes imally.

The economists always have pointed to this inherent deficiency of socialism. Today all people in the socialist countries know that this criticism was fully· justified. All their proJects for an improve ment of the quality and an in crease in the quantity of economic goods and services turn around this problem. They all aim - un fortunately, in vain - at discover ing a scheme that could. make the individual members of a socialist system self-interested in the effect of their own contribution to the collective's effort. That the socialists acknowledge this fact and are anxious to find 'a solution amounts in itself to a spectacular refutation of two of the most zealously advanced argu ments in favor of socialism. On the one hand, the socialists as serted. that in the market economy the wage earners are not inter ested in improving the output of their own work. They expected that socialism would bring about an unprecedented improvement of the individual worker's contribu tions because everybody will be inci ted by the knowledge that he does not labor for an exploiter but works for his own best interest.

On the other hand, the socialists vilified profit-seeking as the most pernicious and "socially" inj urious institution and indulged in rev eries about the blessings of what they called a substitution of "pro duction for use" for "production for profit." No less significant an admission of the viciousness of the socialist ideology is provided by the sys tem of allowing small plots of land to be exploited for the ac count of the individual rural work ers - falsely labeled for "private profit." This capitalistic loophole alone prevented famines in the country that includes a good deal of the world's most fertile arable soil. The urgency of the Soviet productivity problem is due to the fact that in the processing indus tries no analogous expedient is at hand. No fundamental Change The much discussed reform proj ects of Professor Liberman and other Russian authors do not refer to the essential characteristics of the Soviet system of central plan26 THE FREEMAN May ning of all activities commonly called economic. Neither do they deal in any way with the problem of economic calculation. (For present-day Russian planners this problem does not yet have primary importance; as long as they are operating within a world of the price system, they are in a posi tion to rely upon the prices deter mined on the markets of the West.) What the reformers want to at tain is improvement in the conduct of factories and workshops turn ing out consumers' goods by the adoption of new methods for the remuneration of directors, super visors, or foremen. The salaries of such people should henceforth be meted out in such a way that they should have a pecuniary interest in producing articles that are con sidered as satisfactory by the con sumers.

It is a serious blunder to em ploy, in dealing with this issue, any ref erence to the concept of "profit" or to declare that the sug gested method of payment would mean something like "profit-shar ing." There is within a socialist system no room for the establish ment and computation of a magni tude that could be called profit or loss. The task of production is to uti lize the available human and ma terial factors of production for the best possible satisfaction of future wants, concerning which there cannot be any certain knowledge today. The Entrepreneu~ial Function Technology indicates for what purposes the various factors of production could be employed; it thus shows goals that could be at tained provided this is considered as desirable. To choose from this bewildering multitude of possible ways of production those which most likely are fit to satisfy the most urgent of the future wants of the consumers is in the, market economy the specific task of the entrepreneur. If all entrepreneurs were right in their appreciation of the future state of the market, the prices of the various comple mentary factors of production would already have attained the height corresponding to this fu ture state. As, under these condi tions, no entrepreneurs would have acquired some or all of the complementary factors of produc tion at prices lower or higher than those which later events proved to be the correct ones, no profits or losses could emerge.

One profits by having expended less than one -later - receives from the buyers of the product, and one loses if one can sell only at prices that do not cover the costs expended in production.

1966 THE RUSSIAN REFORM MOVEMENT 27 What determines profit or loss is choosing the goal to be set for the entrepreneurial activities and choosing the methods for its at tainment. Thus, it is investment that re sults either in profit or in loss. In a socialist system, since only "society" invests, only society can profit or suffer losses. But in a socialist system the material fac tors of production are res extra commercium. That means: they can neither be bought nor sold and thus no prices for them are de termined. Therefore, it is impos,.. sible to find out whether a definite production activity resulted in profit or loss. The Process of Se/edion The eminence of capitalism con sists· precisely in the fact that it tends to put the direction of pro duction into the hands of those entrepreneurs who have best suc ceeded in providing for the de mands of the consumers. In the planned economy such a built-in process of selection is lacking.

There, it does not matter whether the planning authorities have erred or not. The consumers have to take what the authorities offer them. Errors committed by the planning authority do not become known because there is no method to discover them. In the market economy the emergence of profit demonstrates that in the eyes of the consumers one entrepreneur served them bet ter than others did. Profit and loss are thus the effect of comparing and gauging different suppliers' performance. In the socialist sys tem there is nothing a.vailable to make possible a comparison of the commodities fabricated and the services rendered by the "plan" and its executors with something originating from another side. The behavior of the people for whom the plan and its executors are sup posed to provide does not .indicate whether a better method of pro viding for their needs would have been feasible. If, in dealing with socialism, one speaks of profits, one merely creates confusion.

There are no profits outside the "profit and loss system." If the authorities promise to the director of a shoe factory .a bonus to be determined as a per centage of sales, they do not give him a share in "profits." Still less can this be called a return to the profit system. Profits can only be calculated if one deducts total costs from total receipts. Any such operation is unfeasible under the conditions of the case. The whole factory, fully equipped, was handed over by the authorities to the care of the director and with it all the material needed plus the order to produce, with the help of 28 THE FREEMAN May workers assigned to the outfit, a definite quantity of footwear for delivery to definite shops. There is no method available to find out the costs incurred by all the opera tions preceding the first interfer ence of the director. The bonus granted to him cannot have any relation to the numerical· differ ence between such total costs and the proceeds from the sale of the final product.

A Significant DiffereltCe In fact, the problem of reform as passionately discussed in the communist countries today does not deal with th.e profitability of the variQusplants and productive processes. It turns virtually around a different problem: Is it possible within a socialist system to remunerate a worker, and espe cially the supreme foreman of a plant, according to the value the consumers, the people, attach to his contributiop to the accomplish ment of the product or the serv ice? In the capitalistic or market economy the employer is bound to pay a hired. worker the price the consumers are prepared to. refund to him in buying the product. If he were to pay more, he would suf fer losses,. would forfeit his. funds, and would· be eliminated from the ranks of the entrepreneurs. If he tried to pay less,. the competition of other employers would make it impossible for him to find helpers.

Under socialism no such connec tion between the amounts ex pended in the production of a com modity and its appreciation by the consumers prevails. There cannot therefore, in general, be any ques tion of remunerating workers ac cording to their "productivity" as appreciated by the consumers. Only in exceptional cases is it pos sible to separate the contribution of one worker in such a way from those of all other contributors that its separate valuation by the con sumers and therefore its remun eration according to this valuation become feasible. For instance: all seats in the opera house can be sold at the regular price of m. But if a tenor of world fame sings the main part, the house is sold out even if the price of admission is raised to m +n. It is obvious that such cases are extremely rare and must not be referred to in dealing with the problem of wage rate de termination under socialism.