Reprinted from the Future of Freedom Foundation
At a banquet dinner held in New York City on March 7, 1956, honoring the famous Austrian economist Ludwig von Mises, another equally renowned member of the Austrian school of economics, Friedrich A. Hayek, delivered a talk highlighting the important contributions of his long-time mentor and close friend, going back to when they first met in the Vienna of the early 1920s.
Hayek pointed out the significance of Mises’s 1912 book, The Theory of Money and Credit, with its development of what became known as the “Austrian” theory of money and the business cycle. But Hayek wanted to emphasize to those attending the dinner the real importance of another of Mises’s books, one that appeared ten years later in 1922. This was Die Gemeinwirtschaft, or in its English-language title, Socialism: An Economic and Sociological Analysis. This work, Hayek said, made “the most profound impression on my generation … for our generation it must remain the most memorable and decisive production of Professor Mises’s career.” Hayek continued:
It was a work on political economy in the tradition of the great moral philosophers, a Montesquieu or Adam Smith, containing both acute knowledge and profound wisdom…. To none of us young men who read the book when it appeared was the world ever the same. If [Wilhelm] Röpke stood here, or [Lionel] Robbins, or [Bertil] Ohlin (to mention only those exactly the same age as myself), they would tell you the same story. Not that we at once swallowed it. For it was too strong a medicine and too bitter a pill…. And though we might try to resist, even strive hard to get the disquieting considerations out of our system, we did not succeed. The logic of the argument was inexorable.
It was not easy. Professor Mises’s teaching seemed directed against all we had been brought up to believe. It was a time when all the fashionable arguments seemed pointed to socialism and when nearly all “good men” among the intellectuals were socialists…. For all the young idealists of the time, it meant dashing of all their hopes.
Mises’s challenge of central planning
It is now 100 years since the first (German-language) edition of Mises’s Socialism appeared in print in 1922. It is a century in which socialism-in-practice has been experienced in a wide variety of countries around the world. But when the volume was published in 1922, the First World War had been over for only less than four years. The Bolshevik revolutionaries in Russia under Vladimir Lenin had only recently triumphed over their anti-communist opponents in a bloody civil war that ended the year before. It was still several years away, in 1929, when Lenin’s successor, Joseph Stalin, would end all remaining private enterprise in Soviet Russia and introduce comprehensive five-year socialist central planning.
Therefore, when Mises’s Socialism first appeared, its relevancy could hardly be questioned, but it still seemed “academic,” that is, still a theoretical critique of whether or not a socialist economic system could be an effective and superior alternative to the “capitalist order,” whose days seemed inevitably numbered. Socialism, as Hayek remarked, was the fashionable “wave of the future” for many of the opinion-influencing intellectuals around the world.
Even so, when it first appeared, it almost immediately caused a firestorm of controversy in the German-speaking world. Here was a book that challenged virtually all the premises, presumptions, and prophecies about the beautiful and better world that was awaiting mankind with the coming of the socialist utopia. An end to production for private profit would lead to material prosperity for all. The elimination of “wage slavery” and worker exploitation at the hands of capitalist employers would mean the arrival of “economic equality” and “social justice.” Wars for the benefit of capitalist arms manufacturers would be a thing of the past, and international peace will have, finally and permanently, arrived. All human relationships would be transformed into altruistic associations of “other-orientedness” with the demise self-interest and possessive greed and selfishness caused by private ownership. Finally, mankind will have entered a heaven-on-earth.
The heart of Mises’s argument was that a socialist centrally planned economy was institutionally unable to effectively and “rationally” function in any way equal or superior to a competitive market economy. Hence, the socialist promise of material standards of life far better than under capitalism was “impossible.”
Private property, competition, and prices
This part of his critique of socialism had been published two years earlier, in 1920, as an article in a German-language scholarly journal under the title, “Economic Calculation in the Socialist Commonwealth.” Mises asked a simple but profound question. Once a socialist regime has come to power, successfully nationalized all of the means of production, and established a system of central planning, how would the central planners know what to do?
How would they know which goods and services to produce in terms of the actual wants of the members of this new socialist society? How would the central planners decide how to do the producing in terms of technologies chosen and the relative types and amounts of scarce resources (land, labor, and capital) to employ in one line of production rather than some other? What would be the economic benchmarks or bases by which the central planners would know they had produced the right goods, in the right amounts, with the most cost-efficient use of the means of production under their control to ensure that the best outcomes prevailed with the least economic waste?
In a functioning, free-market economy, all such questions are answered and solved through the competition of supply and demand and the resulting price system. In the marketplace, consumers are able to inform and convey information to producers what it is they want, and how intensively, by expressing their demand for things through the prices they are willing to pay for final goods and services they are interested in buying. Producers inform consumers what they would be willing to produce and at what prices they might be able to bring quantities of goods and services to market.
At the same time, private enterprisers and entrepreneurs interested in undertaking the production of various goods must compete with each other for employment and use of the scarce means of production that could be potentially employed in different ways making different goods. Their rival bids for purchasing or hiring those means of production, in turn, generate the prices for the factors of production: wages for labor, rent for the use of land, prices to purchase capital (machines, tools, equipment), and interest to borrow other people’s savings for investment projects of many different types and for different lengths of time.
Thus, out of these competitive bids and offers and rivalries on both the demand and supply sides of the market, there emerges the structure of relative prices for outputs and inputs. Those private enterprisers and entrepreneurs can now compare the possible price at which a finished good, if manufactured, might sell for at some point in the future after a production process had been undertaken, with the prices that would have to be paid to employ the needed land, labor, capital, and resources during the production process.
A rational and reasonable decision then could be made as to whether any particular good in question could be produced with a certain combination of the needed inputs and result in a profit (monetary revenues greater than monetary costs) or a loss (monetary revenues less than monetary costs). The profit-oriented self-interest of private enterprisers and entrepreneurs would always tend to make sure that the goods being produced, with particular combinations of resources, were those for which consumer demand justified the costs to bring them to market.
Abolishing the institutions for economic rationality
The impracticability of a socialist system of central planning was that it did away with the institutional prerequisites that are essential for economic rationality: private property in the means of production, a competitive market process for the emergence of a functioning price system, and a stable medium of exchange — money — on the basis of which those inputs and outputs could be compared to determine profit or loss.
But, Mises argued, under socialism, the means of production cannot be (legally) bought and sold, since they are under the monopoly ownership and control of the socialist government. With nothing to legally buy and sell, there are no competitive bids and offers for the means of production. With no bids and offers, there is no marketplace leading to agreed-upon terms of trade. With no agreed-upon terms of trade, there are no market-generated prices. And without market-based prices for both consumer goods and the means of production, there is no successful and rational way to determine profit and loss within the economic system.
As a result, Mises argued, rather than an economic horn-of-plenty in terms of all the goods people really want, in the quantities actually desired, and produced in a way that uses the means of production in the most cost-rational way, what results is a system of, as Mises called it much later on, “planned chaos.” Here went all the socialist hopes and dreams of an alternative social order that would produce more and better goods than in a competitive market economy.
Mises’s 1920 critique on the unworkability of a socialist economic order became the centerpiece of his 1922 volume on Socialism. For decades to follow, indeed, until the collapse of the Soviet Union in 1991, socialists and others denied or ignored Mises’s arguments. Or they attempted to propose forms of what became known as “market socialism,” under which government managers of state-owned enterprises would be assigned to act “as if” they were capitalists using prices imposed by the central planning agency to decide what to produce and in what particular ways.
Socialism versus classical liberalism
But Socialism is more than just an economic critique of the unworkability of socialist central planning, however profound and timeless this core part of the book was and remains. What Ludwig von Mises offered was an entire critical analysis of the very idea of a socialist system, from the widest philosophical, social, historical, and ideological perspectives. When Hayek referred to the breath of the book being more in the tradition of eighteenth-century Enlightenment figures like Montesquieu or Adam Smith, he was not exaggerating.
At the same time, the volume is a statement and defense of the classical-liberal worldview of individual freedom, the free society, the competitive market order, and the ideal of a global community of men based on human dignity and liberty, voluntary association, and world peace and prosperity. At every turn, as Mises explains the nature and dangers from the establishment of a socialist system, it is juxtaposed with the alternative vision and virtues of free-market liberalism for a truly tranquil and harmonious world.
To begin with, political and economic liberalism reflected humanity’s escape from its long historical existence under conquest, slavery, politically imposed status, and numerous forms of tyranny and despotism. Under emergent liberalism, human relationships, slowly but surely, were transformed into those of contract under which individual association was based on voluntary consent and mutual benefit.
The human being changed from an “object” to be used and abused in the service of others, under the use or threat of political force, into a distinct human being possessing individual rights, deserving respect and dignity from others. The master-and-servant relationship became one of citizens in a free society possessing equality of rights under an impartial rule of law.
Mises emphasized this change in the human condition by highlighting how liberalism had changed the status of women in society. For ages, women were the property of fathers and husbands, expected to obey, and controlled in all they were allowed to do. But with the growing economic liberty of free-market capitalism, women increasingly were recognized as independent human beings possessing the same equal rights as men and free to direct their own lives as they chose in the arena of private property rights, inheritance, contract, and nearly all aspects of decision-making.
Socialist central planning and political tyranny
Any form of socialism entailed a reversal or narrowing of these classical-liberal triumphs in human life. Government nationalizing of private property and the imposing of central planning meant that the individual was now at the mercy and dictates of those planning the socialist society. The government would assign work, determine how and where people lived, and distribute the centrally planned output based on a political determination of what members of the socialist society deserved and “needed.” Mises summarized all this:
The Socialist Community is a great authoritarian association in which orders are issued and obeyed. This is what is implied by the words “planned economy” and the abolition of the [free market] anarchy of production…. It follows that men become the mere pawns of official action….
Socialist society is a society of officials. The way of living prevailing in it, and the mode of thinking of its members are determined by this fact…. Socialism knows no freedom in occupation. Everyone has to do what he is told and go to where he is sent…. Officialdom is extended to the sphere of the spirit. Those who do not please the holders of power are not allowed to paint or to sculpt or to conduct an orchestra. Their works are not printed or performed….
The nationalization of intellectual life, which must be attempted under Socialism, must make all intellectual progress impossible…. No censor, no emperor, no pope, has ever possessed the power to suppress intellectual freedom which would be possessed in a socialist community.
Has there been any instance of a system of socialism-in-practice with comprehensive central planning over the last 100 years that has not borne out Ludwig von Mises’s explanation and warnings of what was likely to happen when “capitalism” is overthrown and the control over the economic affairs of any society is transferred to those who then hold in their hands the destiny of all those under their power?
Have not socialist societies all been giant prisons of tyranny, torture, terror, and mass murder against all those identified and marked as “enemies” or “opponents” or “wreckers” of the Central Plan? Socialism-in-practice has left a global graveyard of well over 100 million victims — innocent, unarmed men, women, and children — on the road to Utopia.
Classical liberalism and world trade
In addition, Mises explained that economic liberalism has helped to foster a worldwide community of peace and prosperity. Over the last 200 years, as political barriers and prohibitions were lowered or abolished, boundary lines between countries became less and less important. Market interactions increasingly became private affairs between consumers and producers, demanders and suppliers bound together in an international web of economic interdependency arising from specialization and division of labor. In place of bombs and bullets dividing and destroying human beings, a bountifulness of peaceful and productive freedom of trade connected more and more members of the human race.
Said Mises: “For Liberalism the problem of the frontiers of the state does not arise. If the functions of the state are limited to the protection of life and property against murder and theft, it is no longer of any account to whom this or that land belongs.” People, capital, and goods freely move to where economic opportunity and personal preference finds it most attractive and desirous. As Mises reinforced:
The greater productivity of work under the division of labor is a unifying influence. It leads men to regard each other as comrades in a joint struggle for welfare, rather than as competitors in a struggle for existence. It makes friends out of enemies, peace out of war, society out of individuals.
This was no fantasy. Before the First World War in 1914, a peaceful and prosperous global community was well toward becoming a reality to the extent to which free-trade liberal principles were mostly practiced among the then-leading nations of the world. But this was shattered by the First World War as belligerent nations sealed themselves off from their wartime enemies through renewed protectionism, passports and visas, and centralized planning and systems of wage and price controls — all in the name of “winning the war” by governments across the battle lines. All the nations at war, in other words, introduced “war socialism.” Accompanying this came restrictions on personal freedom, civil liberties, and lost privacy as virtually anything became subject to government surveillance.
Socialism and conflict
In the aftermath of the war’s end in 1918, all the socialist projects ended up being forms of “national socialism,” that is, socialism within individual countries. Mises argued that this not only made citizens of any such socialist state the economic and social captive of their own government, for if systems of fairly comprehensive socialist central planning were to be established in a growing number of countries, it would also mean the end to a peaceful and mutually beneficial international order.
Each centrally planned country would limit imports and exports to what the respective national central planning authorities decided was good and desirable. Foreign investment, now being “affairs of state,” would be dictated and determined by politics rather than by private and peaceful pursuit of profit in the service of global consumer demand. The benefits of international division of labor would be lost. Wars between socialist countries would become a new danger, as one centrally planned society attempted to forcibly obtain needed or desired goods or resources from another centrally planned society that refused to exchange in pursuit of its own domestic planning purposes and targets.
Socialism, therefore, means the demise of the economic and social unity of the world, replaced by national socialist planners potentially sealing off one country from another, with interactions and trade limited to and confined within the determinations of those same planners. The individual becomes a captive of his own nation’s central planners, who determine how and what types of relationships he will be allowed to have with any and all of the other peoples around the world.
Liberty versus socialism
In a book of over 500 pages, Mises also dissects the various religious and secular ethics that had been used to rationalize and justify a collectivist system replacing a society of free individuals respected and secure in their rights, each peacefully pursuing their own personal purposes and ends. He debunks the centuries-old presumption that individuals following their own goals come into conflict with some presumed higher social or national or collective good. He explains that there is no “social good” independent of and separate from the ends and purposes of the respective individual members of a society. The free market harmonizes the peaceful pursuits of each individual with the purposes and activities of all others.
Toward the end of Socialism, Ludwig von Mises called all friends of freedom to the intellectual battlefront:
Everyone carries a part of society on his shoulders; no one is relieved of his share of responsibility by others. And no one can find a safe way out for himself if society is sweeping towards destruction. Therefore everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interests of everyone hang on the result. Whether he chooses or not, every man is drawn into the great historical struggle [between liberalism and socialism], the decisive battle into which our epoch has plunged us.
Mises was not unaware of how difficult is the task to oppose and defeat collectivism and socialism. In the preface that he wrote for the 1932 second edition of Socialism, Mises said that generations may have to pass for classical liberalism’s victory, and it was for future generations that he had written this book:
I know only too well how hopeless it seems to convince impassioned supporters of the Socialist Idea by logical demonstration that their views are preposterous and absurd. I know too well that they do not want to hear, to see, or above all to think, and that they are open to no argument. But new generations grow up with clear eyes and open minds. And they will approach things from a disinterested, unprejudiced standpoint, they will weigh and examine, will think and act with forethought. It is for them that this book is written.
So, 100 years after Ludwig von Mises’s Socialism was first published, it was written with you in mind, today. You are the future generation that Mises hoped for.
This article, The Centenary of Ludwig Von Mises’s Critique of Socialism, was originally published by the American Institute for Economic Research and appears here with permission. Please support their efforts.