Mr. Osterfeld of Cincinnati, Ohio, is a graduate student majoring in political theory.

Karl Marx and Frederick Engels defined socialism as that stage of economic development when production according to a consciously "settled plan" replaces the production of commodities. "Commodity production" exists when products are produced for sale on the market, i.e., when production is separated from use by an intervening exchange.¹ Since a commodity necessarily presupposes a market, the substitution of a planned economy for commodity production therefore entails the destruction of the market. And this is precisely what is demanded.

According to socialist theory, at the proper time, the proletariat will seize control of the means of production. "With the seizing of the means of production," writes Engels, "production of commodities is done away with… Anarchy in social production is replaced by systematic definite organization… Socialized production upon a predetermined plan becomes henceforth possible."2

Thus, according to Marx and Engels, the production of commodities for exchange on the market would be replaced by a socialist system of planning and distribution where buying and selling would be terminated. For them, the essence of capitalism was production for the market, i.e., "commodity production"; that of socialism was a planned system of production and distribution.

Marx and Engels scoffed at the idea that their position was utopian. On the contrary, they characterized their writings as "scientific" and felt that there was strong empirical evidence for their belief in the ultimate transition from capitalistic market production to socialistic planned production. They reasoned as follows: In the Middle Ages peasants and handicraftsmen worked independently and then exchanged their products. There were no large factories. The tools of production were small and individually owned.

However, as capitalism developed, machines were invented that permitted the emergence of large factories. While production for society as a whole remained "anarchic," 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 production within the factory from the hands of the capitalists and then simply generalize the organization of production within the factory to the whole society. This would be accomplished by the proletarian revolution. It was assumed that socialism would end all economic problems.

Mises and Economic Calculation

The practicality of socialism went largely unchallenged until 1920 when Ludwig von Mises argued not simply its undesirability but its actual impossibility. Captalism, he asserted, "is the only conceivable form of social economy." The "attempt to reform the world socialistically," he concluded, "might destroy civilization. It would never set up a successful socialist community."3

Mises pointed out that there was a fundamental difference between factory organization within a market framework and the conscious 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 product. The only way one can determine whether it is economically 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, organized like the postal system, there would be no external markets to which to refer one’s internal operations. Thus it would be impossible to generalize the principle 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 increase in felt uneasiness) are not arbitrary. They inhere in all actions 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 rationally. Thus, a "planned" economy, felt Mises, must inevitably produce chaos.

Having demonstrated the necessity of calculation for all societies, Mises argued that there were two prerequisites for rational calculation: 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 desired 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 effort. 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 peoples’ decisions to buy and not to buy. Profits result from successfully 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 investment 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 entrepreneurs," says Mises, "eager to earn profits, appear as bidders at an auction, as it were, in which the owners of the factors of production 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 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 production 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 combinations of production be ascertained. Only by means of the market can we determine what to produce, in what quantities and qualities, and by what methods.

The Role of Money

A second element is also required before we can successfully calculate: money. Since consumption goods provide us with immediate benefits we can value them directly, without monetary calculation. However, the means of production are valued only indirectly. And as production grows more complex it becomes simply impossible to ascertain, intuitively, their contribution to our well-being. Thus money, an auxiliary method of calculation, is required. Money reduces everything to a common unit, thereby permitting exact calculations. Only then can we determine the appropriate methods of production, i.e., whether in a given circumstance to use, say, more steel, and less manpower, or vice versa. Without the ability, afforded us by money, to calculate and compare relative costs there would be no rational way to choose between the plethora of possible alternatives.

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 ability of the individual to act on his valuations. As Mises says, "the higgling of the market establishes substitution relations between commodities." This obviously presupposes the existence of private property throughout the economy. Thus, the existence of money and the market imply each other, and together, they enable us to calculate. And only economic calculation "provides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgments of value which apply directly only to consumption goods… to all goods of higher orders. Without it, all production by lengthy and roundabout processes would be so many steps in the dark."8

But precisely because socialism endeavors to eliminate exchange, 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 distortions, Mises felt, would lead to capital decumulation, in turn resulting in progressive impoverishment. "The paradox of ‘planning,’" concluded Mises, "is that it cannot plan."9

"War Communism"

No sooner had Mises written than his theory received dramatic confirmation. The Bolsheviks seized power in Russia in 1917 and attempted to implement socialist principles. Exchange was outlawed, money was purposely inflated 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 average productivity was ten to twenty percent of the 1914 total and the production of fully manufactured goods was 12.9 percent of 1913. In agriculture, production was halved and, despite the distribution of 700,000 tons of food from the United States, people perished by the millions.¹º 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 co-opting the methods determined by the foreign Western markets.

Oskar Lange

An attempt was made by the Marxist, Oskar Lange, in 1937 to demonstrate the viability of socialism. Lange allegedly "refuted" Mises by advocating what has come to be known as "market socialism" (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 considered to be the actual market prices. There would be wage inequality, rent and interest. However the state would appropriate the rent and interest and use them for social purposes.11

The most interesting thing about Lange’s "refutation" is that he defines socialism in terms of property, instead of market, relations. He is forced to maintain commodity production, exchange, interest, rent and wage inequality. Hence, Lange actually builds his "socialist" model on the very market principles it was the goal of socialism to replace,12 thereby actually reinforcing Mises’ assertion that a non-market society is impossible.

Paul Sweezy

Perhaps the pre-eminent American Marxist is Paul Sweezy who, without direct reference to Mises, claims that a non-market economy is possible. Sweezy believes that skilled labor is simply a multiple of unskilled labor whose value is determinable outside of the market 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 materials should be used in the production 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 altogether? 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 whatsoever 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 problems. Technology can only tell us the various ways to produce a thing. It cannot tell us which method we should adopt to produce it or if it should even be produced at all. These are economic problems. One can increase productivity in a given area by building 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 and value are distinct concepts. It is clear that Sweezy fails to understand the nature of the problem raised by Mises.

Conclusion

In 1920 Ludwig von Mises demonstrated the impossibility of socialism. 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 lamentably deficient. Unfortunately, Mises’ attack is simply ignored by most socialists. In Leo Huberman’s presentation of the Marxian economic theory in Monthly Review as well as in Michael Harrington’s recent Socialism, to cite just two examples,15 Mises is never mentioned, nor the possibility 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, California, 1973).

2 Frederick Engels, Socialism: Utopian 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 exchange their products."

3 Ludwig von Mises, Socialism (London, 1969), pp. 220 and 137.

4 Ibid., p. 215.

5 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.

¹º 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 Capitalist Development (New York, 1942), pp. 41-5.

14 Others include H. D. Dickinson, "Price Formation in a Socialist Community" Economic Journal (June, 1933), pp. 237-50; and Jan Drewnowski, "The Economic 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 Economy (July, 1968), pp. 645-50.

15 Leo Huberman, "Value and Surplus Value," Monthly Review (July, 1949), pp. 90-6; and "The Accumulation of Capital," Monthly Review (August, 1949), pp. 123-28; and Michael Harrington, Socialism (New York, 1972).