Table of Contents
PART II THE ECONOMICS OF A SOCIALIST COMMUNITY
SECTION I The Economics of an Isolated Socialist Community
1 The Nature of the Dynamic Forces
Socialism Under Dynamic Conditions
The idea of a stationary state is an aid to theoretical speculation. In the world
of reality there is no stationary state, for the conditions under which economic
activity takes place are subject to perpetual alterations which it is beyond human
capacity to limit.
The influences which maintain this perpetual change in the economic system can be
grouped into six great classes. First and foremost come changes in external Nature.
Under this heading must be classified not only all those changes in climate and
other specifically natural conditions which take place independent of human actions,
but also changes arising from operations carried out within these conditions, such
as exhaustion of the soil, or consumption of standing timber or mineral deposits.
Secondly come changes in the quantity and quality of the population, then changes
in the quantity and quality of capital goods, then changes in the technique of production,
then changes in the organization of labour, and finally changes in demand.
Of all these causes of change the first is the most fundamentally important. For
the sake of argument let us assume that a socialist community might be able so to
regulate the growth of population and demand for commodities as to avert danger
to the economic equilibrium from these factors. Were that so, there are other causes
of change that could be avoided. But the socialist community would never be able
to influence the natural conditions of economic activity. Nature does not adapt
itself to man. Man must adapt himself to Nature. Even the socialist community will
have to reckon with changes in external nature; it will have to take account of
the consequences of elemental disturbances. It will have to take account of the
fact that the natural powers and resources at its disposal are not inexhaustible.
Disturbances from without will intrude on its peaceful running. No more than Capitalism
will it be able to remain stationary.
2 Changes in Population
For the naive socialist there is quite enough in the world to make everybody happy
and contented. The dearth of goods is only the result of a perverse social order
which, on the one hand limits the extension of productive powers, and on the other,
by unequal distribution, lets too much go to the rich and thus too little to the
The Malthusian Law of Population and the Law of Diminishing Returns put an end to
these illusions. Ceteris Paribus the increase of population beyond a certain point
is not accompanied by a proportional increase of wealth: if this point is passed,
production per head diminishes. The question whether at any given time production
has reached this point is a question of fact which must not be confused with the
question of general principle.
In the light of this knowledge, socialists have adopted various attitudes. Some
have simply rejected it. During the whole of the nineteenth century scarcely any
author was so vigorously attacked as Malthus. The writings of Marx, Engels, Dühring,
and many others, bristle with abuse of "parson" Malthus. But they do not refute
him. Today, discussion of the Law of Population may be regarded as closed. The Law
of Diminishing Returns is not contested nowadays; it is therefore not necessary
to deal with those authors who either deny the doctrine or ignore it.
Other socialists imagine that it is possible to undermine such considerations by
pointing to the unprecedented increase in productivity which will take place once
the means of production are socialized. It is not necessary at this point to discuss
whether in fact such an increase would take place; for even granted that it would,
this would not alter the fact that at any given time there is a definite optimal
size of population beyond which any increase in numbers must diminish production
per head. If it is desired to deny the effectiveness of the Laws of Population and
Diminishing Returns under Socialism, then it must be proved that every child born
into the world beyond the existing optimum will at the same time bring with it so
great an increase of productivity that production per head will not be diminished
by its coming.
A third group of writers content themselves with the reflection that with the spread
of civilization and rational living, with the increase of wealth and the desire
for a higher standard of life, the growth of population is slackening. But this
is to overlook the fact that the birth-rate does not fall because the standard of
life is higher but only because of "moral restraint," and that the incentive to
the individual to refrain from procreation disappears the moment it is possible
to have a family without economic sacrifice because the children are maintained
by society. This is fundamentally the same error that entrapped Godwin when he thought
that there was "a principle in human society" which kept the population permanently
within the limits set by the means of subsistence. Malthus exhibited the nature
of this mysterious "principle."
Without coercive regulation of the growth of population, a socialist community is
inconceivable. A socialist community must be in a position to prevent the size of
the population from mounting above or falling below certain definite limits. It
must attempt to maintain the population always at that optimal number which allows
the maximum production per head. Equally with any other order of society it must
regard both under- and over-population as an evil. And since in it those motives,
which in a society based on private ownership of the means of production harmonize
the number of births with the limitations of the means of subsistence, would not
exist, it will be obliged to regulate the matter itself. How it will accomplish
this need not be here discussed. Nor is it relevant to our purpose to inquire whether
its measures will serve eugenic or ethnological ideas. But it is certain that even
if a socialist community may bring "free love," it can in no way bring free birth.
The right to existence of every person born can be said to exist only when undesirable
births can be prevented. In the socialist community as in any other, there will
be those for whom "at the great banquet of Nature no place has been laid" and to
whom the order must be given to withdraw themselves as soon as may be. No indignation
that these words of Malthus may arouse can alter this fact.
3 Changes in Demand
It follows from the principles which the socialist community must necessarily observe
in the distribution of consumption goods, that alterations of demand cannot be allowed
free play. If economic calculation and therewith even an approximate ascertainment
of the costs of production were possible, then within the limits of the total consumption-units
assigned to him, each individual citizen could be allowed to demand what he liked;
each would choose what was agreeable to him. It would indeed be possible that as
a result of malicious intent on the part of the directors of production certain
commodities might be priced higher than they need be. Either they might be made
to bear too high a proportion of overhead costs, or they might be made dearer by
uneconomic methods of production; and the citizens who suffered would have no defence,
except political agitation, against the government. So long as they remained in
the minority they themselves would not be able either to rectify the accounts or
to improve the methods of production. But at any rate the fact that at least the
greater number of the factors concerned could be measured and that, as a result
of this, the whole question could be relatively clearly put, would be some support
for their point of view.
Since, under Socialism, no such calculations are possible, all such questions of
demand must necessarily be left to the government. The citizens as a whole will
have the same influence on them as on other acts of government. The individual will
exercise this influence only in so far as he contributes to the general will. The
minority will have to bow to the will of the majority. The system of proportional
representation, which by its very nature is suitable only for elections and can
never be used for decisions with regard to particular acts, will not protect them.
The general will, i.e. the will of those who happen to be in power, will take over
those functions which in a free economic system are discharged by demand. Not individuals
but the government would decide which needs are the most urgent and must therefore
be satisfied first.
For this reason demand will be much more uniform, much less changeable than under
Capitalism. The forces which under Capitalism are continually bringing about alterations
in demand will be lacking under Socialism. How will innovations, ideas deviating
from those traditionally accepted, obtain recognition? How will innovators succeed
in getting inert masses out of the rut? Will the majority be willing to forsake
the well beloved customs of their forefathers for something better, which is yet
unknown to them? Under Capitalism where each individual within the limits of his
means can decide what he is to consume, it is sufficient for one individual, or
a few, to be brought to recognize that the new methods satisfy their needs better
than the old. Others will gradually follow their example. This progressive adoption
of new modes of satisfaction is especially facilitated by the fact that incomes
are not equal. The rich adopt novelties and become accustomed to their use. This
sets a fashion which others imitate. Once the richer classes have adopted a certain
way of living, producers have an incentive to improve the methods of manufacture
so that soon it is possible for the poorer classes to follow suit. Thus luxury furthers
progress. Innovation "is the whim of an élite before it becomes a need of the public.
The luxury of today is the necessity of tomorrow." Luxury is the roadmaker of
progress: it develops latent needs and makes people discontented. In so far as they
think consistently, moralists who condemn luxury must recommend the comparatively
desireless existence of the wild life roaming in the woods as the ultimate ideal
of civilized life.
4 Changes in the Amount of Capital
The capital goods employed in production are sooner or later used up. This is true,
not only of those goods which constitute circulating capital, but also of those
which constitute fixed capital. Those, too, sooner or later are consumed in production.
In order that capital may be maintained in the same proportions, or that it may
be increased, constant effort is necessary on the part of those who supervise production.
Care must be taken that the capital goods used up in the process of production are
replaced; and, beyond that, that new capital is created. Capital does not reproduce
In a completely stationary economic system, this operation demands no particular
foresight. Where everything remains unchanged, it is not very difficult to ascertain
what becomes used up, and what must therefore be put aside to replace it. Under
changing conditions, it is quite otherwise. Here the direction of production and
the different processes involved are continually changing. Here it is not enough
to replace the used-up plant and the semi-manufactured products consumed in similar
qualities and quantities: others—better or at least better corresponding to the
new conditions of demand—have to take their place; or the replacement of capital
goods used in one branch of production has to be restricted in order that another
branch of production may be extended or commenced. In order to carry out such complicated
operations, it is necessary to calculate. Without economic calculations capital
calculations are impossible. Thus in the face of one of the most fundamental problems
of economic activity, the socialist community—which has no means of economic calculation—must
be quite helpless. With the best will in the world it will be quite unable to carry
out the operations necessary to bring production and consumption into such a balance,
that value of capital is at least maintained and only what is obtained over and
above this is consumed.
But apart from this, in itself quite unsurmountable difficulty, the carrying out
of a rational economic policy in a socialist community would encounter other difficulties.
To maintain and accumulate capital involves costs. It involves sacrificing present
satisfactions in order that greater satisfactions may be obtained in the future.
Under Capitalism the sacrifice that has to be made by the possessors of the means
of production, and those who, by limiting consumption, are on the way to being possessors
of the means of production. The advantage which they thereby procure for the future
does indeed not entirely accrue to them. They are obliged to share it with those
whose incomes are derived from work, since other things being equal, the accumulation
of capital increases the marginal productivity of labour and therewith wages. But
the fact that, in the main, the gain of not living beyond their means (i.e. not
consuming capital) and saving (i.e. increasing capital) does pay them is a sufficient
stimulus to incite them to maintain and extend it. And this stimulus is the stronger
the more completely their immediate needs are satisfied. For the less urgent are
those present needs, which are not satisfied when provision is made for the future,
the easier it is to make the sacrifice. Under Capitalism the maintenance and accumulation
of capital is one of the functions of the unequal distribution of property and income.
Under Socialism the maintenance and accumulation of capital are tasks for the organized
community—the State. The utility of a rational policy is the same here as under
Capitalism. The advantages will be the same for all members of the community: the
costs will be the same also. Decisions upon matters of capital policy will be made
by the community—immediately by the economic administration, ultimately by all the
citizens. They will have to decide whether more production goods or more consumption
goods shall be produced—whether methods of production which are shorter but which
yield a smaller product or whether methods of production which are longer but which
yield a greater product shall be employed. It is impossible to say how these majority
decisions will work out. It would be senseless to conjecture. The conditions under
which decisions will have to be made are different from what they are under Capitalism.
Under Capitalism the decision whether saving shall take place is the concern of
the thrifty and the well-to-do. Under Socialism it is the concern of everybody,
without distinction-therefore also of the idler and the spendthrift. Moreover, it
must be remembered that here the incentive which provides a higher standard of life
in return for saving will not be present. The door would therefore be open to demagogues.
The opposition will always be ready to prove that more could be assigned to immediate
satisfactions, and the government will not be disinclined to maintain itself longer
in power by lavish spending. Après nous le déluge (After us, the deluge) is an old
maxim of government.
Experience of the capital policy of public bodies does not inspire much hope of
the thriftiness of future socialist governments. In general, new capital is created
only when the necessary sums have been raised by loans—that is from the savings
of private citizens. It is very seldom that capital is accumulated out of taxes
or special public income. On the other hand, numerous examples can be adduced of
cases in which the means of production owned by public bodies have depreciated in
value, because in order that present costs may be relieved as much as possible,
insufficient care has been taken for the maintenance of capital.
It is true that the governments of the socialist or half-socialist communities existing
today are anxious to restrict consumption for the sake of an expenditure which is
generally considered as investment and formation of new capital. Both the Soviet
Government in Russia and the Nazi Government in Germany are spending great sums
for the construction of works of a military character and for the construction of
industrial plants whose purpose it is to make the country independent of foreign
imports. A part of the capital wanted for this purpose has been provided by foreign
loans; but the greater part has been provided by a restriction both of home consumption
and of investment of such a type which could serve for the production of consumption
goods wanted by the people. Whether we may consider this policy as a policy of saving
and forming new capital, or not, depends on the way in which we judge a policy whose
aim it is to increase a country's military equipment and to make its economic system
independent of foreign imports. The fact alone that consumption is restricted for
the sake of constructing big plants of different kinds is not evidence that new
capital is created. These plants will have to prove in the future whether they will
contribute to the better supply of commodities wanted for the improvement of the
economic situation of the country.
5 The Element of Change in the Socialist Economy
It should be already sufficiently clear from what has been said, that under Socialism,
as under any other system, there could be no perfectly stationary state. Not only
incessant changes in the natural conditions of production would make this impossible;
quite apart from these, incessant dynamic forces would be at work, in changes in
the size of the population, in the demand for commodities, and in the quantity of
capital goods. One cannot conceive these factors eliminated from the economic system.
It is thus unnecessary to inquire whether these changes would also involve changes
in the organization of labour and the technical processes of production. For, once
the economic system ceases to be in perfect equilibrium it is a matter of indifference
whether actual innovations are thought of and put into practice. Once everything
is in a state of flux, everything which happens is an innovation. Even when the
old is repeated, it is an innovation because, under new conditions, it will have
different effects. It is an innovation in its consequences.
But this is not in the least to say that the socialist system will be a progressive
system. Economic change and economic progress are by no means one and the same thing.
That an economic system is not stationary is no proof that it is progressing. Economic
change is necessitated by the fact of changes in the conditions under which economic
activity takes place. When conditions change the economic system must change also.
Economic progress, however, consists only in change which takes place in a quite
definite direction, towards the goal of all economic activity, e.g. the greatest
possible wealth. (This conception of progress is quite free from implications of
subjective judgment.) When more, or the same number of people are better provided
for, then the economic system is progressive. That the difficulties of measuring
value make it impossible to measure progress exactly, and that it is by no means
certain that it makes men "happier," are matters which do not concern us here.
Progress can take place in many ways. Organization can be improved. The technique
of production can be made more efficient, the quantity of capital can be increased.
In short, many paths lead to this goal. Would socialist society be able to follow
We may assume that it would entrust the most suitable people to direct production.
But, however, talented they were, how would they be able to act rationally if they
were unable to reckon, to make calculations? On this difficulty alone Socialism
must surely founder.
In any economic system which is in process of change all economic activity is based
upon an uncertain future. It is therefore bound up with risk. It is essentially
The great majority of people, not knowing how to speculate successfully, and socialist
writers of all shades of opinion, speak very ill of speculation. The literateur
and the bureaucrat, both alien to an atmosphere of business activity, are filled
with envy and rage when they think of fortunate speculators and successful entrepreneurs.
To their resentment we owe the efforts of many writers on economics to discover
subtle distinctions between speculation on the one hand and "legitimate trade,"
"value creating production," etc., on the other. In reality all economic activity
outside the stationary state is speculation. Between the work of the humble artisan
who promises to deliver a pair of shoes within a week at a fixed price, and the
sinking of a coal mine based upon conjectures with regard to the disposal of its
products years hence, there is only a difference of degree. Even those who invest
in gilt-edged fixed-interest-beating securities speculate—quite apart from the risk
of the debtor's inability to pay. They buy money for future delivery—just as speculators
in cotton buy cotton for future delivery. Economic activity is necessarily speculative
because it is based upon an uncertain future. Speculation is the link that binds
isolated economic action to the economic activity of society as a whole.
It is customary to attribute the notoriously low productivity of government undertakings
to the fact that the persons employed are not sufficiently interested in the success
of their labours. If once it were possible to lift each citizen to such a plane
that he could realize the connection between his own efforts and the social income,
part of which belongs to him, if once his character could be so strengthened that
he would remain steadfast in the face of all temptations to idle, then government
undertakings would not be less productive than those of the private entrepreneur.
The problem of socialization appears thus to be a problem of ethics. To make Socialism
possible it is only necessary to raise men sufficiently above the state of ignorance
and immorality to which they have been degraded during the terrible epoch of Capitalism.
Until this plane has been reached bonuses and so on must be employed to make men
It has already been shown that, under Socialism, the lack of an adequate stimulus
to the individual to overcome the disutility of labour must have the effect of lowering
productivity. This difficulty would arise even in a stationary state. Under dynamic
conditions there arises another, the difficulty of speculation.
In an economic system based upon private ownership of the means of production, the
speculator is interested in the result of his speculation in the highest possible
degree. If it succeeds, then, in the first instance, it is his gain. If it fails,
then, he is the first to feel the loss. The speculator works for the community,
but he himself feels the success or failure of his action proportionately more than
the community. As profit or loss, they appear much greater in proportion to his
means than to the total resources of society. The more successfully he speculates
the more means of production are at his disposal, the greater becomes his influence
on the business of society. The less successfully he speculates the smaller becomes
his property, the less becomes his influence in business. If he loses everything
by speculation he disappears from the ranks of those who are called to the direction
of economic affairs.
Under Socialism it is quite different. Here the leader of industry is interested
in profit and loss only in so far as he participates in them as a citizen—one among
millions. On his actions depends the fate of all. He can lead the nation to riches.
He can just as well lead it to poverty and want. His genius can bring prosperity
to the race. His incapacity, or his indifference, can bring it to destruction and
decay. In his hands lie happiness and misery as in the hands of a god. And he must
indeed be god-like to accomplish what he has to do. His vision must include everything
which is of significance to the community. His judgment must be unfailing; he must
be able rightly to weigh the conditions of distant parts and future centuries.
That Socialism would be immediately practicable if an omnipotent and omniscient
Deity were personally to descend to take in hand the government of human affairs,
is incontestable. But so long as this event cannot definitely be counted upon, it
is not to be expected that men will be ready freely to grant such a position to
any one out of their midst. One of the fundamental facts of all social life, which
all reformers must take into account, is that men have their own thoughts and their
own wills. It is not to be supposed that they would suddenly, of their own free
will, make themselves for all time the passive tools of anyone out of their midst—even
though he were the wisest and best of them all.
But so long as the possibility of a single individual permanently planning the direction
of affairs is excluded, it is necessary to fall back upon the majority decisions
of committees, general assemblies and, in the last resort, the whole enfranchised
population. But therewith arises the danger on which all collectivist undertakings
inevitably come to grief—the crippling of initiative and the sense of responsibility.
Innovations are not introduced because the majority of the members of the governing
body cannot be induced to consent to them.
Things would not be made any better by the fact that the impossibility of leaving
all decisions to a single man, or a single committee, would lead to the creation
of innumerable sub-committees by which decisions would be taken. All such sub-committees
would only be delegates of the one supreme authority which, as an economic system
working according to a unitary plan, is implied by the very nature of Socialism.
They would necessarily be bound by the instructions of the supreme authority and
this, in itself, would breed irresponsibility.
We all know the appearance of the apparatus of socialist administration: a countless
multitude of office holders, each zealously bent on preserving his position and
preventing anybody from intruding on his sphere of activity—yet at the same time
anxiously endeavouring to throw all responsibility of action on to somebody else.
For all its officiousness, such a bureaucracy offers a classic example of human
indolence. Nothing stirs when no external stimulus is present. In the nationalized
concerns, existing within a society based for the most part on private ownership
of the means of production, all stimulus to improvements in process comes from those
entrepreneurs who as contractors for semi-manufactured articles and machines hope
to make a profit by them. The heads of the concern itself seldom, if ever, make
innovations. They content themselves with imitating what goes on in similar privately-owned
undertakings. But where all concerns are socialized there will be hardly any talk
of reforms and improvements.
7 Joint Stock Companies and the Socialist Economy
One of the current fallacies of socialism is that joint stock companies are a preliminary
stage of the socialist undertaking. The heads of joint stock companies—it is argued—are
not owners of the means of production, and yet the undertakings flourish under their
direction. If, in place of the shareholders, society should assume the function
of ownership, things would not be altered. The directors would not work worse for
society than they would for the shareholders.
This notion, that in the joint stock company the entrepreneur-function is solely
the shareholder's and that all the organs of the company are active only as the
shareholders' employees, pervades also legal theory, and it has been attempted to
make it the basis of Company Law. It is responsible for the fact that the business
idea, which underlies the creation of the joint stock company, has been falsified,
and that up to today people have been unable to find for the joint stock company
a legal form which would enable it to work without friction, and that the company
system everywhere suffers from grave abuses.
In fact there have never and nowhere been prosperous joint stock companies corresponding
to the ideal etatistic jurists have created. Success has always been attained only
by those companies whose directors have predominant personal interest in the prosperity
of the company. The vital force and the effectiveness of the joint stock company
lie in a partnership between the company's real managers—who generally have power
to dispose over part, if not the majority, of the share-capital—and the other shareholders.
Only where these directors have the same interest in the prosperity of the undertaking
as every owner, only where their interests coincide with the shareholder's interests,
is the business carried on in the interests of the joint stock company. Where the
directors have interests other than those of a part, or of the majority, or of all
of the shareholders, business is carried on against the company's interests. For
in all joint stock companies that do not wither in bureaucracy, those who really
are in power always manage business in their own interests, whether this coincides
with the shareholders' interests or not. It is an unavoidable presupposition of
the prosperity of the companies, that those in power shall receive a large part
of the profits of the enterprise and that they shall be primarily affected by the
misfortunes of the enterprise. In all flourishing joint stock companies, such men,
immaterial of what their legal status is, wield the decisive influence. The type
of man to whom joint stock companies owe their success is not the type of general
manager who resembles the public official in his ways of thought, himself often
an ex-public servant whose most important qualification is good connection with
those in political power. It is the manager who is interested himself through his
shares, it is the promoter and the founder—these are responsible for prosperity.
Socialist-etatistic theory of course will not admit this. It endeavours to force
the joint stock company into a legal form in which it must languish. It refuses
to see in those who guide the company anything except officials, for the etatist
wants to think of the whole world as inhabited only by officials. It is allied with
the organized employees and workers in their resentment-ridden fight against high
sums paid to the management, believing that the profits of the business arise of
themselves and are reduced by whatever is paid to the men in charge. Finally, it
turns also against the shareholder. The latest German doctrine does not want, "in
view of the evolution of the concept of fair play," to let the shareholder's self-interest
decide, but rather "the interest and well-being of the enterprise, itself, namely
its own economic, legal and sociological value, independent of transient majorities
of transient shareholders." It wants to create for the administration of the companies
a position of power, which should make them independent of the will of those who
have put up the majority of the share-capital.
That "altruistic motives" or the like are ever decisive in the administration of
successful joint stock companies is a fable. Such attempts to model Company Law
after the illusory ideal of etatistic politicians, have not succeeded in making
the joint stock company a piece of the illusory "functional economy"; they have
however damaged the joint stock company form of enterprise.
Clark, Essentials of Economic Theory
(New York, 1907), pp. 131 ff.
Bebel, Die Frau und der Sozialismus, p. 340.
Bebel quotes therewith the well-known verse of Heine.
Heinrich Soetbeer, Die Stellung der Sozialisten
zur Malthusschen Bevölkerungslehre(Berlin, 1886), pp. 33 ff.; 52 ff.; 85 ff.
Malthus, An Essay on the Principle of Population,
5th ed. (London, 1817), Vol. II, pp. 245 ff.
Tarde, Die Sozialen Gesetze, German translation by
Hammer (Leipzig, 1908), p. 99. Also the numerous examples in Roscher, Ansichten der
Volkswirtschaft vom geschichtlichen Standpunkt, 3rd ed. (Leipzig, 1878), Vol. I,
pp. 112 ff.
On the difficulties a socialist economy must put in
the way of the invention and, even more, of the realization of technical improvements, see
Dietzel, Technischer Fortschritt und Freiheit der Wirtschaft (Bonn and Leipzig, 1922), pp.
See the pertinent criticism of these efforts which
are evidence of good intentions rather than of scientific sharpness of thought, in Michaelis,
Volkswirtschaftliche Schriften (Berlin, 1873), Vol. II, pp. 3 ff., and by Petritsch, Zur
Lehre von der Überwälzung der Steuern mir besonderer Beziehung auf den Börsenverkehr
(Graz, 1903), pp. 28 ff. Of Adolf Wagner, Petritsch says that "although he likes to call
economic life an 'organism' and wants to have it considered as such, and although he always
stresses the interest of the community against that of individuals, yet in concrete economic
problems he does not get beyond the individuals and their more or less moral aims, and
wilfully overlooks the organic connection between these and other economic phenomena. Thus
he ends where, strictly speaking, should be the starting point, not the end, of every
economic investigation" p. 59). The same is true of all writers who have thundered against
See the criticism of these theories and movements
in Passow, Der Strukturwandel der Aktiengesellschaft im Lichte der Wirtschaftsenquete
(Jena, 1930), pp. 1 ff.
Table of Contents