Excerpted from “Economic Calculation in the Socialist Commonwealth” (1920) by Ludwig von Mises.
3. Economic Calculation in the Socialist Commonwealth
Are we really dealing with the necessary consequences of common ownership of the means of production? Is there no way in which some kind of economic calculation might be tied up with a socialist system?
In every great enterprise, each particular business or branch of business is to some extent independent in its accounting. It reckons the labor and material against each other, and it is always possible for each individual group to strike a particular balance and to approach the economic results of its activities from an accounting point of view. We can thus ascertain with what success each particular section has labored, and accordingly draw conclusions about the reorganization, curtailment, abandonment, or expansion of existing groups and about the institution of new ones. Admittedly, some mistakes are inevitable in such a calculation. They arise partly from the difficulties consequent upon an allocation of general expenses. Yet other mistakes arise from the necessity of calculating with what are not from many points of view rigorously ascertainable data, e.g. when in the ascertainment of the profitability of a certain method of procedure we compute the amortization of the machines used on the assumption of a given duration for their usefulness. Still, all such mistakes can be confined within certain narrow limits, so that they do not disturb the net result of the calculation. What remains of uncertainty comes into the calculation of the uncertainty of future conditions, which is an inevitable concomitant of the dynamic nature of economic life.
It seems tempting to try to construct by analogy a separate estimation of the particular production groups in the socialist state also. But it is quite impossible. For each separate calculation of the particular branches of one and the same enterprise depends exclusively on the fact that is precisely in market dealings that market prices to be taken as the bases of calculation are formed for all kinds of goods and labor employed. Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.
We might conceive of a situation, in which exchange between particular branches of business is permitted, so as to obtain the mechanism of exchange relations (prices) and thus create a basis for economic calculation even in the socialist commonwealth. Within the framework of a uniform economy knowing not private ownership of the means of production, individual labor groups are constituted independent and authoritative disposers, which have indeed to behave in accordance with the directions of the supreme economic council, but which nevertheless assign each other material goods and services only against a payment, which would have to be made in the general medium of exchange. It is roughly in this way that we conceive of the organization of the socialist running of business when we nowadays talk of complete socialization and the like. But we have still not come to the crucial point. Exchange relations between production goods can only be established on the basis of private ownership of the means of production. When the “coal syndicate ” provides the “iron syndicate ” with coal, no price can be formed, except when both syndicates are the owners of the means of production employed in their business. This would not be socialization but workers’ capitalism and syndicalism.
The matter is indeed very simple for those socialist theorists who rely on the labor theory of value.
As soon as society takes possession of the means of production and applies them to production in their directly socialised form, each individual’s labour, however different its specific utility may be, becomes a priori and directly social labour. The amount of social labour invested in a product need not then be established indirectly; daily experience immediately tells us how much is necessary on an average. Society can simply calculate how many hours of labour are invested in a steam engine, a quarter of last harvest’s wheat, and a 100 yards of linen of given quality … To be sure, society will also have to know how much labour is needed to produce any consumption-good. It will have to arrange its production plan according to its means of production, to which labour especially belongs. The utility yielded by the various consumption-goods, weighted against each other and against the amount of labour required to produce them, will ultimately determine the plan. People will make everything simple without the mediation of the notorious “value.” 
Here it is not our task once more to advance critical objections against the labor theory of value. In this connection they can only interest us in so far as they are relevant to an assessment of the applicability of labor in the value computations of a socialist community.
On a first impression calculation in terms of labor also takes into consideration the natural non-human conditions of production. The law of diminishing returns is already allowed for in the concept of socially necessary average labor time to the extent that its operation is due to the variety of the natural conditions of production. If the demand for a commodity increases and worse natural resources must be exploited, then the average socially necessary labor time required for the production of a unit increases too. If more favorable natural resources are discovered, the amount of socially necessary labor diminishes.  The consideration of the natural condition of production suffices only in so far as it is reflected in the amount of labor socially necessary. But it is in this respect that valuation in terms of labor fails. It leaves the employment of material factors of production out of account. Let the amount of socially necessary labor time required for the production of each of the commodities P and Q be 10 hours. Further, in addition to labor the production of both P and Q requires the raw material a, a unit of which is produced by an hour’s socially necessary labor; 2 units of a and 8 hours’ labor are used in the production of P, and one unit of a and 9 hours’ labor in the production of Q. In terms of labor P and Q are equivalent, but in value terms P is more valuable than Q. The former is false, and only the latter corresponds to the nature and purpose of calculation. True, this surplus, by which according to value calculation P is more valuable than Q, this material sub-stratum “is given by nature without any addition from man.”  Still, the fact that it is only present in such quantities that it becomes an object of economizing, must be taken into account in some form or other in value calculation.
The second defect in calculation in terms of labor is the ignoring of the different qualities of labor. To Marx all human labor is economically of the same kind, as it is always “the productive expenditure of human brain, brawn, nerve and hand.” 
Skilled labour counts only as intensified, or rather multiplied, simple labour, so that a smaller quantity of skilled labour is equal to a larger quantity of simple labour. Experience shows that skilled labour can always be reduced in this way to the terms of simple labour. No matter that a commodity be the product of the most highly skilled labour, its value can be equated with that of the product of simple labour, so that it represents merely a definite amount of simple labour.
Böhm-Bawerk is not far wrong when he calls this argument “a theoretical juggle of almost stupefying naivete.”  To judge Marx’s view we need not ask if it is possible to discover a single uniform physiological measure of all human labor, whether it be physical or “mental.” For it is certain that there exist among men varying degrees of capacity and dexterity, which cause the products and services of labor to have varying qualities. What must be conclusive in deciding the question whether reckoning in terms of labor is applicable or not, is whether it is or is not possible to bring different kinds of labor under a common denominator without the mediation of the economic subject’s valuation of their products. The proof Marx attempts to give is not successful. Experience indeed shows that goods are consumed under exchange relations without regard of the fact of their being produced by simple or complex labor. But this would only be a proof that given amounts of simple labor are directly made equal to given amounts of complex labor, if it were shown that labor is their source of exchange value. This not only is not demonstrated, but is what Marx is trying to demonstrate by means of these very arguments.
No more is it a proof of this homogeneity that rates of substitution between simple and complex labor are manifested in the wage rate in an exchange economy–a fact to which Marx does not allude in this context. This equalizing process is a result of market transactions and not its antecedent. Calculation in terms of labor would have to set up an arbitrary proportion for the substitution of complex by simple labor, which excludes its employment for purposes of economic administration.
It was long supposed that the labor theory of value was indispensable to socialism, so that the demand for the nationalization of the means of production should have an ethical basis. Today we know this for the error it is. Although the majority of socialist supporters have thus employed this misconception, and although Marx, however much he fundamentally took another point of view, was not altogether free from it, it is clear that the political call for the introduction of socialized production neither requires nor can obtain the support of the labor theory of value on the one hand, and that on the other those people holding different views on the nature and origin of economic value can be socialist according to their sentiments. Yet the labor theory of value is inherently necessary for the supporters of socialist production in a sense other than that usually intended. In the main socialist production might only appear rationally realizable, if it provided an objectively recognizable unit of value, which would permit of economic calculation in an economy where neither money nor exchange were present. And only labor can conceivably be considered as such.
 Friedrich Engels, Herrn Eugen D?hrings Umw?lzung des Wissenschaft, 7th ed., pp. 335 f.
 Karl Marx, Capital, translated by Eden and Cedar Paul (London: Allen & Unwin, 1928), p. 9.
 Karl Marx, Capital, translated by Eden and Cedar Paul (London: Allen & Unwin, 1928), p. 12.
 Karl Marx, Capital, translated by Eden and Cedar Paul (London: Allen & Unwin, 1928), p. 13 et seq.
 Cf. Eugen von Böhm-Bawerk, Capital and Interest, translated by William Smart (London and New York: Macmillan, 1890), p. 384.
Excerpted from “Economic Calculation in the Socialist Commonwealth” (1920) by Ludwig von Mises.
- Economic Calculation in the Socialist Commonwealth (Part 6)
- Economic Calculation in the Socialist Commonwealth (Part 5)
- Economic Calculation in the Socialist Commonwealth (Part 4)
- Economic Calculation in the Socialist Commonwealth (Part 3)
- Economic Calculation in the Socialist Commonwealth (Part 2)
- Economic Calculation in the Socialist Commonwealth (Part 1)