The Economics of Socialism, Part 1

by | Oct 26, 2021

In the cloud-cuckoo lands of socialist fancy, roast pigeons will fly into the mouths of the comrades,with no realistic explanation of how this miracle is to take place.

Excerpted from “Economic Calculation in the Socialist Commonwealth” (1920) by Ludwig von Mises.

There are many socialists who have never come to grips in any way with the problems of economics, and who have made no attempt at all to form for themselves any clear conception of the conditions which determine the character of human society. There are others, who have probed deeply into the economic history of the past and present, and striven, on this basis, to construct a theory of economics of the “bourgeois” society. They have criticized freely enough the economic structure of “free” society, but have consistently neglected to apply to the economics of the disputed socialist state the same caustic acumen, which they have revealed elsewhere, not always with success. Economics, as such, figures all too sparsely in the glamorous pictures painted by the Utopians.

They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place. Where they do in fact commence to be more explicit in the domain of economics, they soon find themselves at a loss–one remembers, for instance, Proudhon’s fantastic dreams of an “exchange bank”–so that it is not difficult to point out their logical fallacies. When Marxism solemnly forbids its adherents to concern themselves with economic problems beyond the expropriation of the expropriators, it adopts no new principle, since the Utopians throughout their descriptions have also neglected all economic considerations, and concentrated attention solely upon painting lurid pictures of existing conditions and glowing pictures of that golden age which is the natural consequence of the New Dispensation.

Whether one regards the coming of socialism as an unavoidable result of human evolution, or considers the socialization of the means of production as the greatest blessing or the worst disaster that can befall mankind, one must at least concede, that investigation into the conditions of society organized upon a socialist basis is of value as something more than “a good mental exercise, and a means of promoting political clearness and consistency of thought.” [1]

In an age in which we are approaching nearer and nearer to socialism, and even, in a certain sense, are dominated by it, research into the problems of the socialist state acquires added significance for the explanation of what is going on around us. Previous analyses of the exchange economy no longer suffice for a proper understanding of social phenomena in Germany and its eastern neighbors today.

Our task in this connection is to embrace within a fairly wide range the elements of socialistic society. Attempts to achieve clarity on this subject need no further justification.

[1] Karl Kautsky, The Social Revolution and On the Morrow of the Social Revolution (London: Twentieth Century Press, 1907), Part II, p.1.


1. The Distribution of Consumption Goods in the Socialist Commonwealth

Under socialism all the means of production are the property of the community. It is the community alone which can dispose of them and which determines their use in production. It goes without saying that the community will only be in a position to employ its powers of disposal through the setting up of a special body for the purpose. The structure of this body and the question of how it will articulate and represent the communal will is for us of subsidiary importance. One may assume that this last will depend upon the choice of personnel, and in cases where the power is not vested in a dictatorship, upon the majority vote of the members of the corporation.

The owner of production goods, who has manufactured consumption goods and thus becomes their owner, now has the choice of either consuming them himself or of having them consumed by others. But where the community becomes the owner of consumption goods, which it has acquired in production, such a choice will no longer obtain. It cannot itself consume; it has perforce to allow others to do so. Who is to do the consuming and what is to be consumed by each is the crux of the problem of socialist distribution.

It is characteristic of socialism that the distribution of consumption goods must be independent of the question of production and of its economic conditions. It is irreconcilable with the nature of the communal ownership of production goods that it should rely even for a part of its distribution upon the economic imputation of the yield to the particular factors of production. It is logically absurd to speak of the worker’s enjoying the “full yield” of his work, and then to subject to a separate distribution the shares of the material factors of production. For, as we shall show, it lies in the very nature of socialist production that the shares of the particular factors of production in the national dividend cannot be ascertained, and that it is impossible in fact to gauge the relationship between expenditure and income.

What basis will be chosen for the distribution of consumption goods among the individual comrades is for us a consideration of more or less secondary importance. Whether they will be apportioned according to individual needs, so that he gets most who needs most, or whether the superior man is to receive more than the inferior, or whether a strictly equal distribution is envisaged as the ideal, or whether service to the State is to be the criterion, is immaterial to the fact that, in any event, the portions will be meted out by the State.

Let us assume the simple proposition that distribution will be determined upon the principle that the State treats all its members alike; it is not difficult to conceive of a number of peculiarities such as age, sex, health, occupation, etc., according to which what each receives will be graded. Each comrade receives a bundle of coupons, redeemable within a certain period against a definite quantity of certain specified goods. And so he can eat several times a day, find permanent lodgings, occasional amusements and a new suit every now and again. Whether such provision for these needs is ample or not, will depend on the productivity of social labor.

Moreover, it is not necessary that every man should consume the whole of his portion. He may let some of it perish without consuming it; he may give it away in presents; he many even in so far as the nature of the goods permit, hoard it for future use. He can, however, also exchange some of them. The beer tippler will gladly dispose of non-alcoholic drinks allotted to him, if he can get more beer in exchange, whilst the teetotaler will be ready to give up his portion of drink if he can get other goods for it. The art lover will be willing to dispose of his cinema tickets in order the more often to hear good music; the Philistine will be quite prepared to give up the tickets which admit him to art exhibitions in return for opportunities for pleasure he more readily understands. They will all welcome exchanges. But the material of these exchanges will always be consumption goods. Production goods in a socialist commonwealth are exclusively communal; they are an inalienable property of the community, and thus res extra commercium.

The principle of exchange can thus operate freely in a socialist state within the narrow limits permitted. It need not always develop in the form of direct exchanges. The same grounds which have always existed for the building-up of indirect exchange will continue in a socialist state, to place advantages in the way of those who indulge in it. It follows that the socialist state will thus also afford room for the use of a universal medium of exchange–that is, of money. Its role will be fundamentally the same in a socialist as in a competitive society; in both it serves as the universal medium of exchange. Yet the significance of money in a society where the means of production are State controlled will be different from that which attaches to it in one where they are privately owned. It will be, in fact, incomparably narrower, since the material available for exchange will be narrower, inasmuch as it will be confined to consumption goods. Moreover, just because no production good will ever become the object of exchange, it will be impossible to determine its monetary value. Money could never fill in a socialist state the role it fills in a competitive society in determining the value of production goods. Calculation in terms of money will here be impossible.

The relationships which result from this system of exchange between comrades cannot be disregarded by those responsible for the administration and distribution of products. They must take these relationships as their basis, when they seek to distribute goods per head in accordance with their exchange value. If, for instance 1 cigar becomes equal to 5 cigarettes, it will be impossible for the administration to fix the arbitrary value of 1 cigar = 3 cigarettes as a basis for the equal distribution of cigars and cigarettes respectively. If the tobacco coupons are not to be redeemed uniformly for each individual, partly against cigars, partly against cigarettes, and if some receive only cigars and others only cigarettes, either because that is their wish or because the coupon office cannot do anything else at the moment, the market conditions of exchange would then have to be observed. Otherwise everybody getting cigarettes would suffer as against those getting cigars. For the man who gets one cigar can exchange it for five cigarettes, and he is only marked down with three cigarettes.

Variations in exchange relations in the dealings between comrades will therefore entail corresponding variations in the administrations’ estimates of the representative character of the different consumption-goods. Every such variation shows that a gap has appeared between the particular needs of comrades and their satisfactions because in fact, some one commodity is more strongly desired than another.

The administration will indeed take pains to bear this point in mind also as regards production. Articles in greater demand will have to be produced in greater quantities while production of those which are less demanded will have to suffer a curtailment. Such control may be possible, but one thing it will not be free to do; it must not leave it to the individual comrade to ask the value of his tobacco ticket either in cigars or cigarettes at will. If the comrade were to have the right of choice, then it might well be that the demand for cigars and cigarettes would exceed the supply, or vice versa, that cigars or cigarettes pile up in the distributing offices because no one will take them.

If one adopts the standpoint of the labor theory of value, the problem freely admits of a simple solution. The comrade is then marked up for every hour’s work put in, and this entitles him to receive the product of one hour’s labor, less the amount deducted for meeting such obligations of the community as a whole as maintenance of the unfit, education, etc.

Taking the amount deducted for covering communal expenses as one half of the labor product, each worker who had worked a full hour would be entitled only to obtain such amount of the product as really answered to half an hour’s work. Accordingly, anybody who is in a position to offer twice the labor time taken in manufacturing an article, could take it from the market and transfer to his own use or consumption . For the clarification of our problem it will be better to assume that the State does not in fact deduct anything from the workers towards meeting its obligations, but instead imposes an income tax on its working members. In that way every hour of work put in would carry with it the right of taking for oneself such amount of goods as entailed an hour’s work.

Yet such a manner of regulating distribution would be unworkable, since labor is not a uniform and homogeneous quantity. Between various types of labor there is necessarily a qualitative difference, which leads to a different valuation according to the difference in the conditions of demand for and supply of their products. For instance, the supply of pictures cannot be increased ceteris paribus, without damage to the quality of the product. Yet one cannot allow the laborer who had put in an hour of the most simple type of labor to be entitled to the product of an hour’s higher type of labor. Hence, it becomes utterly impossible in any socialist community to posit a connection between the significance to the community of any type of labor and the apportionment of the yield of the communal process of production. The remuneration of labor cannot but proceed upon an arbitrary basis; it cannot be based upon the economic valuation of the yield as in a competitive state of society, where the means of production are in private hands, since–as we have seen–any such valuation is impossible in a socialist community. Economic realities impose clear limits to the community’s power of fixing the remuneration of labor on an arbitrary basis: in no circumstances can the sum expended on wages exceed the income for any length of time.

Within these limits it can do as it will. It can rule forthwith that all labor is to be reckoned of equal worth, so that every hour of work, whatever its quality, entails the same reward; it can equally well make a distinction in regard to the quality of work done. Yet in both cases it must reserve the power to control the particular distribution of the labor product. It will never be able to arrange that he who has put in an hour’s labor shall also have the right to consume the product of an hour’s labor, even leaving aside the question of differences in the quality of the labor and the products, and assuming moreover that it would be possible to gauge the amount of labor represented by any given article. For, over and above the actual labor, the production of all economic goods entails also the cost of materials. An article in which more raw material is used can never be reckoned of equal value with one in which less is used.

Excerpt is from “Economic Calculation in the Socialist Commonwealth” (1920) by Ludwig von Mises.


Ludwig Von Mises (1881-1973) was the 20th century's foremost economist. He was the author of Human Action, Socialism, and a dozen other works.

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

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