The Significance of Mises's Socialism

By Peter J. Boettke, writing for FEE. Excerpts:

"But, Mises insists,

It is important, first, to determine whether this argument — let us call it the “heart [or emotional] argument” — is incongruent with the original argument which we may call the “head [or intellectual] argument” still being promoted by socialist and interventionists. The latter socialist argument endeavors to justify its programs with the assertion that capitalism reduces the full development of productive capabilities; production is less than the potential. Socialist production methods are expected to increase output immeasurably, and thereby create the conditions necessary for plentiful provision for everybody.

Mises concludes this discussion by stressing again the role that reason plays in human affairs:

To judge the heart argument, it is of course important to inquire into the extent of the reduction in economic well-being brought about by adopting a socialist production system.… [Socialists argue that] Economics is … unable to settle the dispute.

But,

I dealt with this problem in a way that discredits the use of the heart argument.… I have never denied that emotional arguments explain the popularity of anti-capitalist policies. But unsuitable proposals and measures cannot be made suitable by such psychic nonsense.

Mises’s analysis of systems of social cooperation is based on a strict scientific approach of means-ends analysis. While he may have severely disagreed with the ends sought by collectivists, Mises did not focus his efforts as an economist in that direction. He was deeply committed to the ideal of value-free economic science. In that vision of scientific analysis, the economist’s task is to concentrate their critical analysis of the effectiveness of chosen means to the attainment of given ends.

Arguing from the Head to Appeal to the Heart

With regard to socialist proposals, this meant that the examination was about whether collective ownership of the means of production (the means chosen) would be effective at realizing the ends sought (the rationalization of production and the ensuing burst of productive capacity that would enable the social harmony promised). As I just pointed out, Mises did not engage the “heart argument” directly, but instead sought to address the “head argument” to temper the appeal of the “heart.”
All the dream-aspirations in the world cannot curtail the fundamental problem with socialist organization that Mises had scientifically dissected. Hazlitt pinpointed this in his review:

The greatest difficulty to the realization of socialism in Mises’s view, in short, is intellectual. It is not a mere matter of goodwill, or of willingness to cooperate energetically without personal reward. “Even angels, if they were endowed only with human reason, could not form a socialistic community.”

Socialism must forego the intellectual division of labor that economic calculation enables under a private-property market economy. As Mises puts it in Liberalism,

This is the decisive objection that economics raises against the possibility of a socialist society. It must forego the intellectual division of labor that consists in the cooperation of all entrepreneurs, landowners, and workers as producers and consumers in the formation of market prices. But without it, rationality, i.e., the possibility of economic calculation, is unthinkable.

Capitalism, in other words, is able to solve the problem of economic calculation and achieve the complex coordination of exchange and production activity.

The argument Mises provides is straightforward. Without private ownership in the means of production, there will not be a market in the means of production. Without a market for the means of production, there will not be monetary prices established on the market (which reflect the exchange ratios, or relative trade-offs people are willing to make). And, without monetary prices, reflecting the relative scarcities of different goods and services, there will be no way for economic decision-makers to engage in rational economic calculation.

Rational economic calculation is impossible in a world without private property rights and the monetary prices that emerge within the competitive market process. By definition, socialism eliminates the basis of the market economy, i.e., private property in the means of production; the system must find some other mechanism to serve the role that economic calculation plays in the market process. Without the ability to engage in rational economic calculation, economic decision-makers will be stumbling and bumbling in the dark. As Mises puts it, without economic calculation, “all production by lengthy and roundabout processes would be so many steps in the dark.”
 
The reason why this objection is so decisive is because it requires the reader to consider explicitly how much they take for granted, given that they live within a market economy where so much of the necessary foundation for social cooperation under the division of labor is simply part of the background of our mundane economic existence. But besides exploding popular fallacies, one of the other main tasks of the economist is to unlock the mystery of the mundane to students and citizens.

The Role of Economic Calculation

John Maynard Keynes famously argued in The General Theory of Employment, Interest and Money that within the capitalist economy, economic decision-makers were ensnared in the “dark forces of time and ignorance.” According to Keynes, the speculative nature of our future economic endeavors is prone to significant coordination problems when savings and investments are decoupled, and economic instability can result in mass unemployment.

Unlike the socialist critique of capitalism that is the subject of Mises’s Socialism, Keynes’s critique of the macroeconomic instability of capitalism is a variant of the interventionist critique that Mises deals with in works such as Human Action. But putting aside their critical and significant difference, Mises does not actually deny the situation that Keynes identified.

Economic decision-makers in a capitalist economy must always act with respect to production in an uncertain world, and within the complexities of a modern monetary economy. Realizing the great benefits from social cooperation under the division of labor depends on the ability of the social system to coordinate the dispersed activities of thousands, perhaps millions, of individuals. But this is precisely why Mises put so much emphasis on economic calculation.
 
The private property market economy generates prices that guide decisions, and profit-and-loss accounting provide the necessary feedback to the shuffling and reshuffling of resources and time among alternative opportunities. Monetary calculation is never perfect in guiding us through the sea of economic change, but it does enable us to navigate those sometimes-turbulent waters. It provides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgments of value which directly apply only to consumption goods — or at best to production goods of the lowest order — to all goods of higher orders.

In short, the ability to engage in economic calculation allows us to pierce through that dark fog of time and ignorance, and organize economic activity in as rational a manner as is humanly possible. Absent that ability to rationally calculate, rational economic organization is not possible.
Economic calculation is what enables decision-makers within the market as a whole to sort through the numerous array of technologically feasible projects and select only those projects that are economical. As Mises puts it,

But the real business of economic administration, the adaptation of means to ends only begins when such a decision is taken [i.e., choosing between alternatives, including alternative methods of production]. And only economics calculation makes this adaptation possible. Without such assistance, in the bewildering chaos of alternative materials and processes, the human mind would be at a complete loss. Whenever we had to decide between different processes or different centres of production, we would be entirely at sea.

The economic problem is not one of ascertaining the technological possibilities and efficiency of certain machinery of production. Instead, the economic problem is one of coordinating the plans of individuals within the economy through time, and to do so in such a way that the production plans of some mesh with the consumption demands of others, and the mutual gains from exchange tend toward exhaustion.

“Without calculation,” Mises writes,

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, is would no longer be possible to speak of rational production. In the absence of criteria of rationality, production could not be consciously economical."

"Mises is in some fundamental sense asking a very basic question: “Look comrades, these plans for a rationally planned economy that ushers in a new world order are beautiful and all that, but can you explain to me precisely how the chickens will end up on the workers’ dinner tables so they will be fed?”

"In other words, how is this economic system going to work at a very basic level to deliver the goods and services in a reasonably efficient manner? The “rationalization” of production cannot possibly be a project rife with endemic waste caused by confusion. But that is precisely what Mises is challenging the socialist idea with. The consequences of their chosen means (collective ownership in the means of production) mean that they will be unable to realize their stated end (rationalization of production and the harmony of social relations) precisely because the means are incoherent with regard to the ends sought."

"The problem with socialism is neither managerial motivation nor incentivizing labor, however difficult those problems may be. The problem is one that will confront even the well-meaning and self-motivated: absent the context of the competitive market economy, the knowledge necessary to engage in the required economic calculations will be absent. In critiquing those who believe they have found a substitute for the competitive market process, Mises inadvertently sows the seeds for a mature understanding of the entrepreneurial market process. In short, one of the key characteristic contributions of the modern Austrian school of economics to 20th-century economic science takes shape in the debate over socialist calculation."