1922.
Classical Liberalism is all but dead. The great champions of individual liberty and freedom, such as Herbert Spencer and William Graham Sumner, have died and passed into the annals of history. No one, however, had come behind them to pick up their intellectual banners. Socialism had been on the rise for some time, but with the coming and passing of the Great War, countries found themselves embracing socialist methods of production to keep up the war effort. To the intellectual class, who were near unanimous in their support for socialist policies, this served as a vindication that their ideas could work in practice. By this point in time, there were few who dared to raise any substantive challenge against the superiority of socialism and centralized control of the economy.
It was then that “Socialism” by Ludwig von Mises entered the scene. In stark contrast to other books written on socialism at this time, which would either endorse it or at the most quibble about its practicality, Mises launched a full intellectual salvo against all aspects and facets of the socialist program. In such a time where there was so little dissent against the socialist ideal, it was a shocking and revolutionary publication.
While its publication was not enough in and of itself to topple socialism as the reigning ideology of the day, it was enough to start some semblance of an ideological movement against it. Converts to liberalism as a result of its publishing include such figures as F.A. Hayek. While not ultimately successful in their struggle against socialism, without the work of Mises, there would scarcely have been a struggle at all.
Mises raises numerous arguments against socialism throughout the book. However, for our purposes of summary, we will distill these down to four main points:
- The Calculation Argument
- The Incentive Argument
- The Sociological Argument
- The Destructionist Argument
The Calculation Argument
The Calculation Argument was Mises’ premier argument against socialism. However, to understand its importance and gravitas, we must first understand Mises’s view on the importance of prices within the market economy. For Mises, prices are important metrics of allocation. They allocate goods to those who demand the most, but more importantly, they direct entrepreneurs where consumers desire to see resources allocated to. Entrepreneurs desire above all else to earn profit. To do so, they must efficiently allocate resources in such a way that the revenue they derive from consumers is higher than the prices they pay out for the usage of their factors of production. If consumers do not value the goods or services provided by the entrepreneur more than the costs of production, then those resources will be reallocated to other goods and services that consumers value more highly. The process of allocating resources is called by Mises “economic calculation”. As the mechanism by which economic calculation can take place, prices have a central role in the functioning of the market economy. In Mises’ own words, “In an exchange economy, the objective exchange value of commodities becomes the unit of calculation.”
However, what if we are in such a situation where prices did not exist? Socialism is a clear example of such a situation. Under a socialist system of economic organization, all factors of production are owned and operated by the state. As a necessary consequence, there is no exchange in such a system. If there is no exchange, then there can be no prices. But if there are no prices, then there is no mechanism by which the preferences and wishes of the consumers can be reflected in the production of goods and services. Therefore, economic calculation under socialism is impossible. Mises states:
“Without calculation, economic activity is impossible. Since under Socialism economic calculation is impossible, under Socialism there can be no economic activity in our sense of the word. In small and insignificant things rational action might still persist. But, for the most part, it would no longer be possible to speak of rational production. In the absence of criteria of rationality, production could not be consciously economical.”
Without any system of economic calculation, the “economic planners” of the socialist economy are completely blind in all decisions pertaining to production of goods and services. If they are faced with a choice between increasing the amount of bread produced or the amount of milk produced, they have no way to rationally make a decision. Under a market economy, the profitability of the potentially increases in production would dictate which option is the correct choice. This is a clear and objective standard by which entrepreneurs can make production decisions. In a socialist economy, no such standard can possibly exist.
Mises illustrates to us what such a socialist system would look like in practice:
“Let us try to imagine the position of a socialist community. There will be hundreds and thousands of establishments in which work is going on. A minority of these will produce goods ready for use. The majority will produce capital goods and semi-manufactures. All these establishments will be closely connected. Each commodity will pass through a whole series of such establishments before it is ready for consumption. Yet in the incessant press of all these processes the economic administration will have no real sense of direction. It will have no means of ascertaining whether a given piece of work is really necessary, whether labor and material are not being wasted in completing it.”
Mises states in conclusion:
“All economic change, therefore, would involve operations the value of which could neither be predicted beforehand not ascertained after they had taken place. Everything would be a leap in the dark. Socialism is the renunciation of rational economy.”
The market economy has no difficulty discovering what goods and services should be produced. Profit signals expressed through prices relay this information very clearly to the entrepreneur. In contrast, the socialist economy has no way of discovering this information. By its very structure and function, cannot efficiently allocate resources to the preferences of the consumer. Because of this simple fact, in Mises’ view the market economy stands as the clear superior form of economic organization compared to the socialist economy.
The Incentive Argument
In a pure market economy, the wages of a particular worker will be equal to his marginal productivity. In simpler terms, the worker’s wage is equal to the value he provides to the firm. If this productivity rises, his wage will subsequently rise along with it. If it falls, his wage will fall as well. Then concern of an entrepreneur when deliberating on hiring a new employee is whether or not the productivity of the worker is worth the wage he will pay him. Under a system of socialism, however, the situation is quite different. The determination of the productivity of worker in terms of money is not possible because there is no exchange and no economic calculation in a socialist economy. As such, a determination of wages on the basis of productivity, as is done in the market economy, cannot be replicated in the socialist economy.
However, if wages are not tied directly to productivity, what incentive is there for the worker to be productive? If a worker is paid the same if he is diligent and hard-working or if he is lazy and disinterested, what incentive does he have to be a diligent and hard-working? Mises states:
“Under Socialism the usual connection between work performed and its remuneration cannot exist. All attempts to ascertain what the work of the individual has produced and thereby to determine the wage rate, must fail because of the impossibility of calculating the productive contributions of the different factors of production. The socialist community could probably make distribution dependent upon certain external aspects of the work performed. But any such differentiation would be arbitrary.”
Because of the lack of economic calculation, wage rates in a socialist economy could never be rationally determined. Therefore, there necessarily exists no direct link between the work performed and the wages received. Therefore, wages would have to be paid out according to pre-determined group wages. Everyone that works in a particular coal mine that works in the same position makes the same wage. One can quickly see the problem with such a system. If I am guaranteed to make a certain wage regardless of individual productivity, why would I expend extra labor to ensure that I am productive? Mises points out the inevitable conclusion of such policies:
“Now it is evident that the minimum performance calculated for the worker of average quality, skill, and strength will be achieved only by a part — say one half — of the workers. The others will do less. How can the authorities ascertain whether a performance below the minimum is due to laziness or incapacity? Either the unfettered decision of the administration must be allowed free play, or certain general criteria must be established. Doubtless, as a result, the amount of work performed would be continually reduced.”
If the connection between result and remuneration is severed, then the conclusion is unavoidable: less work will be performed. Multiply this effect in every industry across the entire economy, and the disastrous effects of such a policy can be clearly observed. If the total amount of work performed in the economy is reduced, certeris parabis, then the total amount of production in the economy will be reduced. As a result, standards of living will decrease and poverty will increase. Everyone is worse off in the end.
Mises comments on the way the proponents of socialism often respond to this argument, stating:
“Socialist writers generally pass over these ticklish questions in silence or with a few inconsequential remarks. They only being forward a few sententious phrases and nothing else. The new man of Socialism will be free from base self-seeking; he will be morally infinitely above the man of the frightful age of private property and from a profound knowledge of the coherency of things and from a noble perception of duty he will devote all his powers to the general welfare.”
When faced with the reality that productivity under a socialist economy will necessarily be lower than a market economy, the socialist is prone to retreating to an intellectual refuge of idealism. They claim that the nature of man will be radically altered when capitalism is overthrown and socialism takes its place. Thus, in the new world created by the socialist system, concerns about wages and incentives are nonsense, as man will have evolved beyond any thought of such things. Whether or not it is a plausible view that the very nature of man itself will be changed under a regime of socialism, I will leave to the reader.
The Sociological Argument
Mises maintains that man is a profoundly and necessarily social being. We cannot imagine him in his modern form outside of the confines of civilized society. The social institutions that we exist inside of have shaped us permanently, as well as beneficially. Mises states:
“Society is the product of thought and will. It does not exist outside thought and will. Its being lies within man, not in the outer world. It is projected from within outwards.
Society is co-operation; it is community in action. To say that Society is an organism, means that society is division of labor. To do justice to this idea we must take into account the aims which men set themselves and the means by which these are to be attained. Ut includes every inter-relations of thinking and willing man. Modern man is a social being, not only as one whose material needs could not be supplied in isolation, but also as one who has achieved a development of reason and of the perceptive faculty that would have been impossible except within society. Man is inconceivable as a isolated being, for humanity exists only as a social phenomenon and mankind transcended the stage of animality only so far as co-operation evolved the social relationships between the individuals. Evolution from the human animal to the human being was made possible by and achieved by means of social co-operation and by the alone.”
For Mises, the crucial element of man’s existence and cooperation in society is the phenomenon of the division of labor. He writes:
“Old and young, men and women co-operate by making appropriate use of their various abilities. Here also is the germ of the geographic division of labor.; man goes to hunt and woman to the spring to fetch water. Had the strength and abilities of all individuals and the external conditions of production been everywhere equal to the idea of division of labor could never have arisen. Man would never of himself have hit upon the idea of making the struggle for existence easier by co-operation in the division of labor. No social life could have arisen among men of equal natural capacity in a world which was geographically uniform.”
“Once labor has been divided, the division itself exercises a differentiating influence. The fact that labor is divided makes possible further cultivation of individual talent and thus co-operation becomes more and more productive. Through co-operation men are able to achieve what would have been beyond them as individuals and even the work which individuals are capable of doing alone is made more productive.”
Division of labor results from the fact that individuals are granted by nature with different gifts. These could be in the innate abilities that they possess, or in the geographical area they inhabit. Because of these differences, individuals are placed in a position where they must trade to be able to get access to all the goods and services they desire. However, this division of labor has a secondary effect: it makes individuals much more productive. Specialization and productive cooperation allow increases the marginal product of labor of all in society to previously unattainable heights. Even so, this division of labor that constitutes society is not imposed upon us by any authority. It is a spontaneous and voluntary structure, sustained by those who live within it. Conscious of this important aspect of social life, Mises goes on to write:
“Organism and organization are as different from each other as life is from a machine, as a flower which is natural from one which is artificial. In the natural plant each cell lives for itself while functioning reciprocally with the others. What we call living is just this self-existence and self-maintenance. In the artificial plant the separate parts of members of the whole only as far as the will of he who unities them, has been effective…Human organization is no different. Like society it is a result of will. But in this case the will no more produces a living rose. The organization is holds together only so long as the creating will is effective.”
“To seek to organize society is just as crazy as it would be to tear a living plant to bits in order to make a new one out of the dead parts. An organization of mankind can only be conceived after the living social organism is killed. The collectivist movement are therefore doomed to failure. It may be possible to create an organization embracing all mankind. But this would always be merely an organization, side by side with which social life would continue. It could be altered and destroyed by the forces of social life and it certainly would be destroyed from the moment it tried to rebel against these forces. To make Collectivism a fact one must first kill all social life, then build up a collectivist state.”
“Organizations are possible only as long as they are not directed against the organic or do it any injury. All attempts to coerce the living will of human beings into the service of something they do want must fail. An organization cannot flourish unless it is founded on the will of these organized and serves their purposes.”
Mises draws the sharp distinction between “organism” and “organization”. An organism is a spontaneously existing structure that persists because it satisfies the purposes of those involved. An organization is a structure that exists because the structure is enforced by a singular will imposed from above. Mises views society as fundamentally being an organism, while collectivist ideologies, such as Socialism, are systems of organization. For any system of organization to be constructed, the organism must be rearranged to the organizer’s liking. However, to do this to an organism will kill the organism. One cannot take apart a flower, rearrange its parts, put it back together and expect it to grow. The flower, attacked and torn by the organizer, is now dead. Mises posits that the same fate will befall society when a collectivist ideology is imposed upon it. Society, the living organism, will be ripped and reassembled by the collectivists. However, the end result is mangled corpse where a thriving structure once lived.
Society and the division of labor are engaged in voluntarily because they are beneficial for all those involved. They live and persist because of the necessary improvements it offers to all. Collectivism cannot take this organism as it exists, however. It must try to recreate it anew. This must be done through force and coercion. The utilization of such means necessitates that the voluntary organism that once existed will be no more. Mises argues that the fallacy of the collectivist view is such, that its impositions try to create but can only destroy. A true society can only be voluntary in nature. Violence does not build or improve society, but only results in its total morality.
The Destructionist Argument
How does society improve? How do things ever get any better? Answers to such questions have occupied economic thought for centuries. Indeed, there are entire fields of economics, Development Economics, that are dedicated to studying this subject. One method of improving one’s standard of living is to simply work longer and harder. Instead of working 8 hours a day, you work 10. While this may provide a higher standard of living, it also requires more effort. Thus, one’s actual standard of living has not markedly increased at all. One produces more, but has less time for leisure. What is necessary to actual increase living standards is for productivity to increase while labor remains constant. This is accomplished through the accumulation of capital.
Capital is all of the machines and tools used to help produce goods and services. Anything from hammers to keyboards to dump trucks are all forms of capital. The key benefit of capital goods is that they make labor much more productive than it would otherwise be. Digging a hole using nothing but one’s hands is much less productive than doing so with a shovel. The same task can be accomplished in a much shorter timespan simply because a capital good was utilized. Thus, for standards of living to increase, it is crucial that more and more capital goods are accumulated and incorporated into the economy.
It is through the market economy that this process takes place. It is not just enough to accumulate capital, but also to accumulate where it can be put to the most highly desired uses. Through the methods of economic calculation, entrepreneurs can rationally determine where new investments and capital goods should be allocated as to best serve the consumers. Thus, true capital accumulation is a market oriented and market organized process.
Socialism as a form of economic organization is completely anathema to the market, and thus, the capital accumulation process. Not only will capital not continue to be accumulated, but under socialism capital will be destroyed. Mises writes:
“In fact Socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build; it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production have created. Since a socialist order of society cannot exist, unless it be a fragment of Socialism within an economic order resting otherwise on private property, each step leading towards Socialism must exhaust itself in the destruction of what already exists.
Such a policy of destructionism means the consumption of capital.”
“In the problem of the capital consumption of a destructionist society we find one of the key problems of the socialist economic policy. The danger of capital consumption would be particularly great in the socialists community; the demagogue would achieve success most easily by increasing consumption per head at the cost of the formation of additional capital and to the detriment of existing capital.”
There are many means that the socialists use that result in destructionism. Mises lists these as labor legislation, social insurance, trade unions, unemployment insurance, socialization, taxation, and inflation. What all of these have in common is their direct interference in private property and free exchange, leading them inevitably to the destruction of the market, and subsequently, of capital.
Labor legislation always comes from a place of economic ignorance. To try and “protect” the worker from the “exploitation” of the capitalist fundamentally misunderstands the relationship between the two. As Mises states:
“This attitude of destructionism emerges more clearly from the theory than from the execution of labor protection, for the danger to industrial development implied in the regulations has to a certain extent limited attempts to carry theory into practice. That the theory of the exploitation of wage earners has spread and been rapidly accepted is due above all to destructionism., which has not hesitated to use a technique for describing the industrial working condition which can only be described as emotional.”
These kinds of programs are always aimed at reducing the amount of labor expended by the worker. In so far as this is the case, the outcome is perfectly predictable. If total labor is decreased, then the aggregate amount of production in the economy must concomitantly decrease as well. As we have already shown above, this decreases living standards of all. Furthermore, when the total amount of labor is decreased, the amount of capital that can be accumulated decreases as well. Growth must necessarily be slowed, if not halted altogether.
Social insurance is defined by Mises as the attempts by the state to provide every citizen with all of the housing, medical care, and food. To be clear, Mises does not believe that these acts themselves are bad. Providing for the poor and those less fortunate is a cornerstone of any moral society. However, the calculus of the situation changes drastically when this charity is carried out by the state. Whenever these acts of charity are transformed into state-guaranteed handouts, there will always be a strong tendency for people to continually take advantage of such benefits, even if they are not truly in need of them. Mises refers to aid provided to the sick when he states:
“Social insurance has thus made the neurosis of the insured a dangerous public disease. Should the institution be extended the disease will spread. No reform can be of any assistance. We cannot weaken or destroy the will to health without producing illness.”
Such social insurance programs amount to a redistribution of resources from the laborers to the non-laborers. Those that produce will have their income to subsidize others. If we combine this fact with the tendency for individuals to continually increase their exploitation of such programs, we are left with the conclusion that social insurance programs continually incentivize individuals to stop working and instead receive resources from the workers that remain. One can see how this process is necessarily unsustainable. If there are continually fewer and fewer workers all the while the pressure put on them to provide for the non-workers is increasing, eventually this redistributionist edifice will collapse under its own weight. Standards of living and capital accumulation will collapse right beside of it.
The effect of trade unions upon the economy is in effect similar to that of labor legislation. They both aim the same goal of increasing the wages of the worker while reducing the amount of labor he expends. However, the trade union has a proverbial card up its sleeve that it can use to leverage its demands: the strike. The workers leave the factories and stand outside them protesting their conditions and wages to the capitalists, demanding change and reform. As Mises points out, however, these strikes are not voluntary affairs freely carried out by all the workers. On the contrary, Mises writes:
“The weapon of the trade union is the strike. It must be borne in mind that every strike is an act of coercion, a form of extortion, a measure of violence directed against all who might act in opposition to the strikers’ intentions. For the purpose of the strike would be defeated if the entrepreneur were able to employ others to do the work of the strikers, or if only a section of the workers joined the strike.”
When the rights of trade unions to legally use such coercion against any dissenting workers is recognized in law, the destructive actions of the trade unions are enabled uniformly across entire industries. Mises details the consequences of such measures:
“The policy of the strike, violence, and sabotage can claim no merit whatever for any improvement in the workers position. It has helped to shake to the foundations the skillfully constructed edifice of the capitalist economy, in which the lot of everyone down to the poorest worker has been continually rising.”
The policies of the trade unions serve to destroy the harmony and unity of the market economy. By positioning the workers in a way where they ostensibly have to fight against the capitalists, the peace and order of the market is replaced by violence and discord.
Mises states:
“For this surely is clear: that should there ever be a thorough discussion upon the right of the workers in vital industries to strike, the whole theory of trade-unionism and compulsory strikes would soon collapse and such strike-breaking associations as the “Technische Nothilfe” would receive the applause which to-day goes to the strikers. It is possible that in the ensuing conflict society would be destroyed. On the other hand, it is certain that a society which aims at preserving trade unionism on its present lines is in a fair towards destroying itself.”
Unemployment insurance are those programs from the government which attempt to put unemployed individuals back into productive lines of work. The proponents of such programs often claim that the market cannot rid itself of all unemployment, and therefore, the state must step in to put these individuals to work. However, such a view of unemployment is at odds with sound economic theory. Mises posits that all unemployment in markets is ultimately voluntary, as for any employment, one can always accept a lower wage in return for an employment opportunity. Therefore, the market is fully able to absolve itself of any unemployment, given enough time and the absence of change. However, because we do not live in a world of equilibrium, some kind of unemployment will always exist.
Thus, unemployment programs are not at all necessary to fix to flaws of the market, but rather, harmful interventions into it. For if such programs are instituted in the economy, the inevitable result, as with social insurance, a continual transfer of income from the productive to the unproductive. This tendency will continuously accelerate until the system itself collapses.
As Mises writes:
“It is not Capitalism which is responsible for the evils of permanent unemployment, but the policy which paralyses its working.”
The destructionist effects of policies of socialization should be apparent from the discussion on the calculation argument above. Because of the lack of any form of rational decision making in production lines, the socialist economy will necessarily be less productive than the market economy. Regardless of the good intentions of the planners, their plans can never replace the price mechanism that the market economy relies upon to produce goods according to the wants of the consumer.
Taxation is much maligned in society by all those who have to pay them. It attracts scorn from the rich and poor alike, but it also carries grave economic consequences as all. Taxation in socialist schemes is inevitably heavily falls on all classes of society, but especially upon the wealthy. As popular as a sentiment of taxing the rich may be, it ultimately impoverishes everyone else. Mises writes:
“Nothing is more calculated to make a demagogue popular than a constantly reiterated demand for heavy taxes on the rich. Capital levies and high income taxes on the larger incomes are extraordinarily populated with the masses, who do not have to pay them. The assessors and collectors go about their business with positive enthusiasm; they are intent upon increasing the taxpayer’s liability by the subtleties of legal interpretation.
The destructionist policy of taxation culminates in capital levies. Property is expropriated and then consumed. Capital is transformed into goods for use and then for consumption. The effect of all of this should be plain to see.”
However, taxes upon the rich are not the only kind of harmful tax that can be levied from the government. Even burdensome taxes upon the average businessman can be profoundly damaging. Mises says:
“Innumerable economic projects lie fallow because the load of taxation would make them unprofitable. Thus in many states the high duties on founding, maintaining, amalgamating, and liquidating joint stock companies seriously reject the development of the system”
The last weapon of destructionism is that of inflation. Inflation’s effects are felt by individuals in subtle ways. The price of their groceries increases ever so slightly. Their rents are marginally higher this month than several months previously. Inflation’s specter is felt by all. However, inflation possesses an even more pernicious aspect to it: the erosion of economic calculation. If prices are ever-increasing as a result of inflationary pressures, then the rational calculation undertaken from entrepreneurs becomes that much less effective. A rise in the price of a good could be the result of increased demand, or of inflation. If the entrepreneur invests in this industry, but finds that the increase in price was a result of inflation, then his investment was misplaced. If the entrepreneur abstains from investing, but demand really has increased, then the wants of the consumers will go unfulfilled. Mises comments:
“By destroying the basis of reckoning values — the possibility of calculating with a general denominator of prices which, for short periods at least, does not fluctuate too wildly — inflation shakes the system of economic calculation in terms on money, the most important aid to economic action which thought has evolved.”
The effects and consequences of the socialist weapons of destructionism are clear enough. They destroy the workings of the market economy, and in so doing, prevent the accumulation of capital and rise in living standards. The innumerable benefits gifted to us by the market and its mechanism are severed by the predations of the state. As Mises says in summary, “The destructionist policies of interventionism and Socialism has plunged the world into great misery.”
Conclusion
The success of reason and the success of conversion are two very different phenomena. To be successful in conversion is to convince others that one’s ideas are correct. Using the power of rhetoric and speech to spread your arguments and conceptions to those around you. This type of success, Mises did not accomplish. The ideological march of Socialism continued on after Mises’ publication. Nevertheless, the success of reason Mises did achieve. Through his four arguments against Socialism, he intellectually shreds the entire socialist program, leaving no part of it standing.
Mises was eventually vindicated in his success of reason, although he would not live to see it. The USSR collapsed in 1991, along with the rest of the Eastern Block. Seemingly overnight, the vast edifice of Communism fell into pieces and crumbled. The worldwide revolution envisioned by Lenin utterly failed, and Communism is all but gone from this world.
Even though one can have success of conversion without success of reason, the intellectual life of the human race always bends towards the latter over the former. Mises raised up an intellectual salvo against Socialism that has stood the test of time, outlasting all of his critics. The arc of truth in the universe may be quite long, but it ultimately bends toward sounds ideas and sound arguments.
