Marx, Mises, and Socialism; D. Osterfeld

According to socialist theory, at the proper time, the proletariat will seize control of the means of Mr. Osterfeldof Cincinnati, Ohio, is a graduate student majoring in political theory. production. "With the seIzIng of the means of production," writes Engels, "production of commodi ties is done away with .... An archy in social production is re placed by systematic definite or ganization .... Socialized produc tion upon a predetermined plan becomes henceforth possible."2 Thus, according to Marx and Engels, the production of commod ities for exchange on the market would be replaced by a socialist system of planning and distribu tion where buying and selling would be terminated. For them, the essence of capitalism was pro duction for the market, i.e., "com modity production" ; that of so cialism was a planned system of production and distribution. Marx and Engels scoffed at the idea that their position was 605 606 THE FREEMAN October utopian. On the contrary, they characterized their wri tings as "scientific" and felt that there was strong empirical evidence for their belief in the ultimate tran sition from capitalistic market production to socialistic planned prod uction. They reasoned as fol lows: In the Middle Ages peasants and handicraftsmen worked in dependently and then exchanged their products. There were no large factories. The tools of pro duction were small and individu ally owned.

However, as capitalism devel oped, machines were invented that permitted the emergence of large factories. While production for society as a whole remained "an archic," that within the factories became organized. Further, it was evident that large, well-organized factories were more productive than individual small producers. This, they felt, demonstrated the practical superiority of socialism. All that was now required was to remove the increasingly social, i.e., organized, nature of produc tion within the factory from the hands of the capitalists and then simply generalize the organiza tion of production within the fac tory to the whole society. This would be accomplished by the pro letarian revolution. It was as sumed that socialism would end all economic problems. Mises and Economic Calculation The practicali ty of socialism went largely unchallenged until 1920 when Ludwig von Mises ar gued not simply its undesirability but its actual impossibility. Cap talism, he asserted, "is the only conceivable form of social econ omy." The "attempt to reform the world socialistically," he con cluded, "might destroy civiliza tion. It would never set up a successful socialist community."3 Mises pointed out that there was a fu.ndamental difference be tween factory organization within a market framework and the con scious organization of the entire economic system. 4 A factory is organized by referring its internal operations to "external" markets.

The large factory, to cite just one example, produces many half finished goods that are then used for the production of the final prod uct. The only way one can determine whether it is econom ically sound to produce the half finished goods within the factory or to buy them from other plants is to compare the cost that would be incurred in their production with the "external" market price. 5 But if the entire society were to be, as Lenin recommended, or ganized like the postal system, there would be no external mark ets to which to refer one's inter nal operations. Thus it would be 1974 MARX, MISES AND SOCIALISM 607 impossible to generalize the prin ciple of factory organization to the entire society; for with the entire society so organized, the very basis of its organization, the market, would be eliminated. Profit (a net reduction in felt uneasiness) and loss (a net in crease in felt uneasiness) are not arbitrary. They inhere in all ac tions of all individuals. Every society must therefore have some method for calculating profit and loss or end up destroying itself.

The elimination of the-market, Mises pointed out, would only serve to abolish the only known method of calculating profit and loss but it could never do away with profit and loss themselves. Unable to calculate, a socialist society could not proceed ration ally. Thus, a "planned" economy, felt Mises, must inevitably pro duce chaos. Having demonstrated the neces sity of calculation for all societies, Mises argued that there were two prerequisites for rational calcula tion: the market and money. 6 The Role of the Market While a factory is characterized by its singleness of purpose and is therefore faced only with the more or less technical problem of applying means to ends, society is characterized by its multiplicity of purposes and is faced with the economic problem of allocating scarce resources such that the production of less intensely de sired goods does not prevent the production of more intensely needed goods. Under capitalism this problem is solved daily through the market and without anyone's conscious eff'ort. Since people only buy what is useful for them, there can be no distinction between production for profit and production for use. Prices' are the outcome of the interplay of peo ples' decisions to buy and not to buy. Profits result from success fully supplying consumers with what they most intensely desire at the time of their valuations; losses from the failure to do so.

In the quest for profit, labor and capital perpetually flow to areas where they can reap the most lucrative return on invest ment and away from areas that manifest loss. In this way the market also determines prices for the factors of production in the same way that it forms them for consumers' goods. "The entrepre neurs," says Mises, "eager to earn profits, appear as bidders at an auction, as it were, in which the owners of the factors of prod uc tion put up for sale land, capital goods and labor."7 Since what the entrepreneur can bid is limited by his expected return from the sale of his product, the-factors of 608 THE FREEMAN October production are thereby channeled into the production of the most intensely desired goods. It can be further seen that the price of any object is not determined by adding up the "costs" of the factors of production but that the prices for the factors of produc tion are, in fact, derived from the prices of the final consumer goods.

Only in this way can prices for all the factors of production be formed and the relative efficiency of the nearly infinite number of possible methods and combina tions of production be ascertained. Only by means of the market can w~ determine what to produce, in what quantities and qualities, and by what methods. The Role of Money A second element is also re quired before we can successfully calculate: money. Since consump tion goods provide us with im mediate benefits we can value them directly, without monetary calcu lation. However, the means of production are valued only indi rectly. And as production grows more complex it becomes simply impossible to ascertain, intuiti tively, their contribution to our well-being. Thus money, an auxili ary method of calculation, is re quired. Money reduces everything to a common unit, thereby per mitting exact calculations. Only then can we determine the ap propriate methods of production, Le., whether in a given circum stance to use, say, more steel, and less manpower, or vice versa.

Without the ability, afforded us by money, to calculate and com pare relative costs there would be no rational way to choose between the plethora of possible alterna tives. But even if some form of "money" were, used in a socialist society it could never perform this essential function, for the utility of money implies the abil ity of the individual to act on his valuations. As Mises says, "the higgling of the market establishes substitution relations between commodities." This obviously pre supposes the existence of private property throughout the economy. Thus, the existence of money a.nd the market imply each other,and together, they enable us to calcu late. And only economic calcula tion "provides a guide amid the bewildering throng of economic possibilities. It enables us to ex tend judgments of value which apply directly only to consumption goods . . . to all goods of higher orders. Without it, all production by lengthy and roundabout proc esses would be so many steps in the dark."s But precisely because socialism endeavors to eliminate exchange, 1974 MARX, MISES AND SOCIALISM 609 money, and private 'ownership of the means of production, economic calculation is impossible under socialism. Hence a socialist society would be unable to determine what is profitable and what is not. The resulting inefficiencies and distor tions, Mises felt, would lead to capital decumulation, in turn re sulting in progressive impoverish ment. "The paradox of 'plan ning,'" concluded Mises, "is that it cannot plan."9 JlWar Communism"

No sooner had Mises wri tten than his theory received dramatic confirmation. The Bolsheviks seized power in Russia in 1917 and attempted to implement so cialist principles. Exchange was outla\ved, money was purposely in flated out of existence, over 37,000 enterprises were nationalized, and private holdings in agriculture were declared illegal. The results were disastrous. The iron ore and cast iron industries fell by 1920 to only 1.9 and 2.4 percent of their 1914 volume of production. Oil production fell to 41 percent and coal to 27 percent. The 1920 av erage productivity was ten to twenty percent of the 1914 total and the production of fully manu factured goods was .12.9 percent of 1913. In agriculture, produc tion was halved and, despite the distribution of 700,000 tons of food from the United States, peo ple perished by the millions. 10 The economic debacle now known as "War Communism" came to its end only with the advent of the "New Economic Policy" in the early 1920's, which reinstated a semblance of a market economy.

By 1928 production was back to the 1914 levels. Since that time the "socialist" countries have learned to direct production (1) by means of restricted domestic markets, and (2) by coopting the methods determined by the for eign Western markets. Oskar Lange An attempt was made by the Marxist, Oskar Lange, in 1937 to demonstrate the viability of so cialism. Lange allegedly "refuted" Mises by advocating what has come to be known as "market so cialism" (although he never used that term). While the state would own the means of production, prices, according to Lange, would be determined by competition, and production would be extended to the point where marginal cost equaled price. There would be a Central Planning Board but the correct prices for the factors of production would be ostensibly found by a method of trial and error. Correct prices were consid ered to be the actual market prices. There would be wage in610 THE FREEMAN October equality, rent and interest. How ever the state would appropriate the rent and interest and use them for social purposes. ll The most interesting thing about Lange's "refutation" is that he defines socialism in terms of property, instead of market, rela tions. He is forced to maintain commodity production, exchange, interest, rent and wage inequality.

Hence, Lange actually builds his "socialist" model on the very mar ket principles it was the goal of socialism to replace,12 thereby ac tually reinforcing Mises' assertion that a nonmarket society is im possible. Paul Sweezy Perhaps the pre-eminent Ameri can Marxist is Paul Sweezy who, without direct reference to Mises, claims that a nonmarket economy is possible. Sweezy believes that skilled labor is simply a multiple of unskilled labor whose value is determinable outside of the mar ket by, for example, placing two men on the same assembly line and then measuring their values in terms of their outputS. 13 But this does not even touch upon the essential point: the allocation of scarce resources. It only tells us if one man is more productive at the same job than another. It is silent on the questions of how many men should be employed on that particular assembly line? What materi als should be used in the produc tion of a particular good? By what methods should it be produced? In what quantity and quality should it be produced? Should a new plant be opened? If so, where?

Should an old one be expanded, contracted, or discontinued alto gether? Should a new invention be implemented at this time? Next week? Next year? Or not at all? etc., etc. The fact that one man is more productive on an assembly line than another is no help what soever in answering these crucial questions. Thus, Sweezy falls into the very error that Mises warned of a half century ago: the confusion of technological with economic prob lems. Technology can only tell us the various ways to produce a thing. It cannot tell us which method we should adopt to pro duce it or if it should even be pro duced at all. These are economic problems. One can increase pro ductivity in a given area by build ing a technologically modern plant. However, whether the plant was economically desirable or actually impeded the satisfaction of more important desires in other areas by diverting needed resources to the production of the new plant is an altogether separate question.

The latter can be handled only by economic calculation. Technology 1974 MARX, MISES AND SOCIALISM 611 and value are distinct concepts. It is clear that Sweezy fails to under stand the nature of the problem raised by Mises. Conclusion In 1920 Ludwig von Mises dem onstrated the impossibility of so ialism. Since that time there have been periodic attempts to refute Mises and establish socialism's practicality.14 Two of the more famous "refutations" were examined here and found to be lament ably deficient. Unfortunately, Mises' attack is simply ignored by most socialists. In Leo Huber man's presentation of the Marxian economic theory in Monthly Re view as well as in Michael Har rington's recent Socialism, to cite just two exampl~s,15 Mises is never mentioned, nor the possibil ity of socialism ever questioned. Silence, however, cannot change economic law. ~ • FOOTNOTES. 1 See Paul Craig Roberts and Matthew Stephenson, Marx's Theory of Exchange, Alienation and Crisis (Stanford, Cali fornia, 1973) .

2 Frederick Engels, Socialism: Uto pian and Scientific (New York, 1972), pp.72-5; also see Karl Marx, The Critique of the Gotha Programme (Peking, 1972), p. 14: "With the cooperative society based on common ownership of the means of production the producers do not ex change their products." 3 Ludwig von Mises, Socialism (Lon don, 1969), pp. 220 and 137. 4 Ibid., p. 215. I) Ludwig von Mises, Bureaucracy (New Rochelle, 1969), p. 33. 6 Mises, Socialism, pp. 117-18. 7 Ludwig von Mises, Human Action (Chicago, 1966), p. 335. 8 Mises, Socialism, pp. 115-17. 9 Mises, Human Action, p. 600. 10 See, for example, Lancelot Lawton, An Economic History of Soviet Russia (London, 1932); and the same author's The Russian Revolution (London, 1927) ; and Michael Farbman, Bolshevism in Retreat (London, 1923). 11 Oskar Lange, "On the Economic Theory of Socialism," Soviet Economics, ed. Alec Nove and D. M. Nuti (Baltimore, 1972), pp. 92-110.

12 Paul Craig Roberts, "Oskar Lange's Theory of Socialist Planning," Journal of Political Economy (May, 1971), p. 566. Roberts also points out that since the marginal rule is only an illustrative principle it does not provide any guidance for decision-making in the real world. Hence Lange's model isn't sound even on its own terms. 13 Paul Sweezy, The Theory of Capi talist Development (New York, 1942), pp.41-5. 14 Others include H. D. Dickinson, "Price Formation in a Socialist Commun ity" Economic Journal (June, 1933), pp. 237-50; and Jan Drewnowski, "The Eco nomic Theory of Socialism: A Suggestion for Reconsideration" Journal of Political Economy (August, 1961), pp.341-54; for a critique of the latter's position see P. C. Roberts, "Drewnowski's Economic Theory of Socialism," Journal of Political Econ omy (July, 1968), pp. 645-50~ 15 Leo Huberman, "Value and Surplus Value," Monthly Review (July, 1949), pp. 90-6; and "The Accumulation of Cap ital," Monthly Review (August, 1949), pp. 123-28; and Michael Harrington, Socialism (New York, 1972).