Calculation: Introduction
Economic Calculation in the Socialist Commonwealth
by Ludwig von Mises (1920)
Table of Contents
Introduction to 1990 Edition
by Jacek Kochanowicz (University of Warsaw)
Ludwig von Mises's seminal
refutation of socialist economics, republished here, was written
seventy years ago, but it is a description of the "real socialism" of
today--or rather yesterday. Mises's thesis is that in a socialist
economy rational economic calculation is impossible; its attempts to
allocate resources efficiently in the absence of private ownership of
the means of production must fail. The East Bloc's disastrous
experience with socialism has shown the world that Mises was correct
all along.
In this article, Mises writes
of full-blown socialism, where the state is the sole owner of the means
of production. Although made so long ago, his description reflects very
well the economic realities of the Soviet Union since the late
twenties, and of Central and Eastern Europe since the late forties
until, practically, today.
In the socialist economy that
Mises described, consumption goods are freely demanded and exchanged by
individuals of different tastes. Money can exist, but only within the
limited sphere of the market for consumer goods. In the sphere of
production, however, there is no private ownership of the means of
production. They are not exchanged, and as a consequence, it is
impossible to establish prices that reflect actual conditions. If there
are no prices, there is no method of finding the most effective
combination of the factors of production.
Mises's pathbreaking article
led to a famous debate on socialist calculation. Polish economist Oskar
Lange contested Mises's position and tried to show that socialism can
work by a "trial and error" method. [1] In
the Lange model, the economy has a free market for consumption goods.
The production sphere is organized into enterprises and branches, and
there is a Central Planning Board. The bosses of enterprises are
required to establish production plans in exactly the same way the
private entrepreneurs would do--in a way that minimizes costs and makes
marginal cost equal to price. The Central Planning Board determines the
rate of investment, the volume and structure of public goods, and the
prices of all inputs. The rate of investment is established by equating
the demand and supply of capital goods. The Board raises the prices
when the demand is not satisfied and lowers them when supply is too
large.
Presuming for a moment that
this would work, the question arises: why is this method better than
the real market? For Lange, there were two advantages. First, income
can be more equally distributed. Since there is no capital income,
people are paid according to their input labor. (Some talented people
receive additional income which is a sort of "rent" on their particular
skills.) Second, socialism allows for better planning of long-term
investment. Investment will not be directed by short-term fluctuation
of opinions about future opportunities, and thus it would be less
wasteful and more rational. Similar to John Maynard Keynes and, later,
Paul Samuelson, Lange thought that although the free market may give
proper signals concerning short-term production decisions, it does not
give long-term signals concerning investment.
Lange used neoclassical, not Marxist terminology. Although he was a socialist by conviction, he was
fascinated by the intellectual side of marginalist economics and by the
possibility of showing with this apparatus that Mises was wrong. Lange
thought that, theoretically, the possibility of calculation without an
actual market was shown by the Italian economist Enrico Barone in 1908. [2] Barone
referred to a system of general equilibrium saying that if the sets of
equations could be solved, the partial equilibria of producers and
consumers could be established ex ante.
Barone's point was, however, that such a possibility is practically
impossible, so (similar to Mises) he supported the view that socialism
cannot work efficiently. Lange's aim was to show that both Mises and
Barone were wrong (but Mises to a larger degree) and that theoretically
and practically, calculation was possible.
Lange thought he had finally
solved the problems of socialist calculation that Mises had
demonstrated in his essay "Economic Calculation in the Socialist
Commonwealth." And to this point Lange wrote in his article "On the
Economic Theory of Socialism":
Socialists have certainly good reason to be grateful to Professor Mises, the great advocatus diabol
of their cause. For it was his powerful challenge that forced the
socialists to recognize the importance of an adequate system of
economic
accounting to guide the allocation of resources in a socialist economy.
Even more, it was chiefly due to Professor Mises'
challenge that many socialists became aware of the very existence of
such a problem.... [T]he merit of having caused
the socialists to approach this problem systematically belongs entirely
to Professor Mises.
Thus Lange suggested the following:
Both as an expression of recognition for the great service rendered by him and as a memento of the prime importance of
sound economic accounting, a statue of Professor Mises ought to occupy an honorable place in the great hall of the Ministry
of Socialization or of the Central Planning Board of the socialist state.
Lange's theoretical views, as
well as his conviction of the practical applicability of a "shadow
market" in the socialist economy, were, in turn, questioned by
Friedrich A. Hayek.[3] Hayek
thought that Lange had committed many errors. In Lange's version of
socialism, an army of controllers would be needed to verify the
calculations of the heads of enterprises. But what would motivate the
heads of enterprises and branches? Would they be prevented from
cheating. Moreover, the results of these calculations would have to be
compared with additional, counter-factual calculations in order to see
whether the bosses of enterprises have chosen the best combination of
factors of production possible. All this would call for an enormous
bureaucratic state.
The practical side of socialism
took its own course. A communist economy as we know it was constructed
in the Soviet Union in the late twenties and early thirties and then
transplanted to Central and Eastern Europe after World War II. For a
time it seemed to have worked well, at least from the point of view of
the ruling bureaucracies, who did not hesitate to use totalitarian
measures and mass terror.
There was no place for private
ownership, nor for the market. The only method of coordinating economic
activity was government command and bureaucratic allocation. The result
was a prolonged crisis, marked by a stagnation or decrease of
production, by inflation, ecological disaster (because of wasteful use
of all types of resources--energy, water, forests, etc.), by falling
standards of living, and by widespread public frustration and social
pathology. This crisis, coupled with political developments including
the rise of an organized opposition, brought about the revolutionary
changes we witnessed in 1989.
In Eastern European countries,
and in Poland in particular, there is now a strong desire to
reintroduce private property and the free market.
When it has been accomplished,
perhaps Lange's suggestion should be taken up: a statue of Mises should
be erected in Poland--in tribute to his final intellectual triumph. For
his vision of a free society provides firm intellectual grounding for
the emergence of a free and prosperous Poland.
Jacek Kochanowicz
Professor of Economics
University of Warsaw, Poland
April 1990
1 Oskar Lange, "On the Economic Theory of
Socialism," Review of Economic Studies (1936-37).
2 Enrico Barone, "Ii zninisterio della
produzione nello stato collettivista," Giornale degli Economisti e
Revista di Statistica, vol 37 (1908).
3 Friedrich A. Hayek, "Socialist Calculation:
the Competitive 'Solution'," Economica, ns., vol. vii, no. 26
(1940).