In May 1988, the Soviet newspaper Pravda ran an article which summarized the condition of the Soviet socialist economy:
“Not one of the 170 essential sectors has fulfilled the objectives of the Plan a single time over the last 20 years … this has brought about a chain reaction of hardship and imbalance which has led to ‘planned anarchy’… the disequilibrium has affected every pore of our economy, and has become legendary.”
The term used in the article — “planned anarchy” — captures the essence of socialism. But it also rings out as a vindication of one of the greatest critics of socialism in the 20th century: the Austrian economist, Ludwig von Mises. Seventy years ago, in 1920, the Soviet experience was only three years old. But already, under the name of “War Communism,” Lenin’s Bolsheviks had nationalized industry, done away with market prices and wages, declared the end of a money economy and introduced planning in the form of a centrally directed command economy.
That same year, 1920, Ludwig von Mises published one of the most important essays in the history of economics: “Economic Calculation in the Socialist Commonwealth.” In less than fifty pages, Mises demonstrated clearly and irrefutably that socialism was doomed to fail. He incorporated his argument into his 1922 treatise, Socialism, An Economic and Sociological Analysis. Here, the economic principles of a socialist system were analyzed in the wider context of the social, political and cultural pathologies of a collectivist order.
It is not an accident that every experiment with socialism has created what Pravda called “planned anarchy,” or as Mises entitled one of his own books in the 1940s, Planned Chaos. Even if we ignore the fact that the rulers of socialist countries have cared very little for the welfare of their own subjects; even if we discount the lack of personal incentives in socialist economies; and even if we disregard the total lack of concern for the consumer under socialism; the basic problem remains the same: the most well-intentioned socialist planner just does not know what to do.
The heart of Mises’ argument against socialism is that central planning by the government destroys the essential tool — competitively formed market prices — by which people in a society make rational economic decisions.
A modem economy with an advanced system of division of labor, sophisticated technologies and a wide variety of capital equipment is just too complex for planners to successfully organize and oversee. There is just too much knowledge (and too many different types of knowledge) dispersed among too many people. The planner is unable to centralize all of the relevant and ever-changing information in a complex society. He is unable to arrange everything in the economy in just the right way in order to “get it right.”
Mises explained that in a market economy free of government intervention, this problem which the socialist planner faces is non-existent. The key, Mises said, is private property and individual freedom. In a system of division of labor, in which all of the transactions require the voluntary consent of buyers and sellers, self-interest is (as Adam Smith argued long ago) harnessed to the common good. No one can acquire what someone else possesses unless he, in turn, offers that person something he is willing to take in trade. Thus, improvement in each individual’s condition requires that he consider the wants and desires of his fellow men.
But in a far-flung, world-encompassing system of division of labor, in which potential trading partners are separated by time and space, how do people discover what they should produce in order to satisfy the consumer demands of others? And how do they produce efficiently, i.e., with the least economic waste?
Mises explained that the institution of private property made all of this possible. Ownership and voluntary exchange create opportunities for gains from trade. Competitive bids and offers for various goods and services generate market prices at which transactions are consummated. And these prices convey useful information to everyone in the market about what products are in demand in the rest of the world.
At the same time, private ownership of the means of production permits the acquisition and hire of resources and labor for the production of goods that consumers may desire to purchase. The competitive bids of entrepreneurs for the purchase of those means of production generate market prices for the necessary resources. These prices enable businessmen to evaluate the relative value and profitability of using means of production in alternative ways. They provide the means to determine which products to produce in the economically least costly manner.
Also, since money serves as the common medium through which A transactions are undertaken, the market value of all goods and services, and all means of production, are reduced to a common denominator for simplified comparison and evaluation — their money prices on the market.
This, Mises said, is what makes possible “economic calculation” in a market economy. Men are free to make their own choices. Market prices that arise out of those choices enable each individual to acquire and share information about what others desire in the market. The market provides the method by which people can make their own free decisions in an economically efficient manner. The entire process redounds to the benefit of society as a whole.
The problem with socialism, Mises insisted, is that it short-circuits the “economic calculation” process. And it does so by abolishing private ownership of the means of production and eliminating peaceful, voluntary exchange. With no legal right of ownership, there is neither ability nor incentive to buy and sell; with nothing to buy and sell, there are no bids and offers for commodities or resources; with no bids and offers, there are no consummated exchanges; with no consummated exchanges, there arise no market prices; and without market prices expressing the relative values of commodities and resources, there exists no rational way of knowing what they are actually worth to people; therefore, businessmen cannot know how they should economically and efficiently be used to satisfy the wants and desires of the consuming public.
The socialist planner, therefore, is left trying to steer the collectivist economy blindfolded. He cannot know what products to produce, the relative quantities to produce, and the most economically appropriate way to produce them with the resources and labor at his central command. This leads to “planned chaos,” as Mises called it, or to the “planned anarchy” to which Pravda referred.
Ludwig von Mises was born on September 29, 1881. This month marks the 109th anniversary of his birth. (He died on October 10, 1973, at the age of 92.) His greatest work, Human Action, A Treatise on Economics, was published on September 10, 1949, forty-one years ago this month. Throughout most of his life, he was one of the most uncompromising defenders of human liberty and the free market economy. And he was the most important critic of socialism in the 20th century.
But during his life, he was vilified and hated by a large part of the intellectual community, including many in the economics profession, around the world. What was his “crime”? In an era in which the reigning ideology has been collectivism of one form or another, in which the State has been worshipped as a god, and in which unswerving obedience to the State is to be given, Ludwig von Mises defended the individual and his freedom against omnipotent governments.
But he did more than that. He also tore to shreds the socialist fantasy that proclaimed that prosperity could come from central planning. He not only argued that prosperity could come only through freedom and free markets. Socialism as a means for improving the condition of man is impossible.
Socialism is dying around the world. Those who have lived under socialism are trying to rediscover the rules and institutions of a market economy. Ludwig von Mises’ life was dedicated to showing why socialism had to die and why there is no substitute for a free economy. His courage and devotion to the principles of freedom shall stand as a model and ideal for all of us to emulate in future ages.
Made available by Future of Freedom Foundation.