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The Ludwig von Mises Institute

Advancing Austrian Economics, Liberty, and Peace

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by Ludwig von Mises





Socialism, that is, full government control of all economic activities, is impracticable because a socialist community would lack the indispensable intellectual instrument of economic planning and designing: economic calculation. The very idea of central planning by the state is self-contradictory. A socialist central board of production management will be helpless in the face of the problems to be solved. It will never know whether the projects considered are advantageous or whether their performance would not bring about a waste of the means available. Socialism must result in complete chaos.

The recognition of this truth has for many years been prevented by the taboos of Marxism. One of Marxism’s main contributions to the success of pro-socialist propaganda was to outlaw the study of the economic problems of a socialist commonwealth. Such studies were in the opinion of Karl Marx and his sect the mark of an illusory “utopianism.” “Scientific” socialism, as Marx and Engels called their own brand, must not indulge in such useless investigations. The “scientific” socialists have to satisfy themselves with the insight that socialism is bound to come and that it will transform the earth into a paradise. They must not be so preposterous as to ask how the socialist system will work.

One of the most remarkable facts of the intellectual history of the nineteenth and early twentieth centuries is that this Marxian Verboten was strictly obeyed. The few economists who dared to defy it were disregarded and soon fell into oblivion. Only about twenty-five years ago the spell was broken. The impossibility of economic calculation under socialism was demonstrated in an irrefutable way.

Of course, some stubborn Marxians raised objections. They could not help admitting that the problem of economic calculation was the most serious issue of socialism and that it was a scandal that the socialists in eighty years of fanatical propaganda wasted their time on trifles without divining in what the main problem consisted. But they assured their alarmed partisans that it would be easy to find a satisfactory solution. Indeed, various socialist professors and writers both in Russia and in the Western countries suggested schemes for an economic calculation under socialism. These schemes proved utterly spurious. It was not difficult for the economists to unmask their fallacies and contradictions. The socialists failed completely in their desperate attempts to reject the demonstration that no economic calculation is feasible in any system of socialism.[1]

It is obvious that a socialist management also would aim at supplying the community with as many and as good commodities as can be produced under the existing conditions of the supply of factors of production and of technological knowledge. A socialist government too would be eager to use the available factors of production for producing those goods that, according to its opinion, are most urgently needed, and to forego the production of those goods which it considers less urgently needed. But the unfeasibility of economic calculation will make it impossible to find out which methods for the production of the goods needed are the most economical ones.

The socialist governments of Russia and Germany are operating in a world the greater part of which still clings to a market economy. They thus are in a position to use for their economic calculation the prices established abroad. Only because they can refer to these prices are they able to calculate, to keep books and to make plans. It would be quite different if every nation were to adopt socialism. Then there would be no more prices for factors of production and economic calculation would be impossible.[2]


The same is the case with enterprises owned and operated by the government or the municipalities of a country in which the greater part of economic activity is under the management of free enterprise. For them too economic calculation offers no difficulties.

We do not need to ask whether or not it would be feasible to manage such government, state, and municipal enterprises in the same way as private enterprise. For it is a fact that as a rule the authorities are inclined to deviate from the profit system. They do not want to operate their enterprises from the viewpoint of the attainment of the greatest possible profit. They consider the accomplishment of other tasks more important. They are ready to renounce profit or at least a part of profit or even to take a loss for the achievement of other ends.

Whatever these other goals aimed at may be, the result of such a policy always amounts to subsidizing some people to the burden of others. If a government-owned enterprise operates at a loss or with a part only of the profit which it could attain if it were conducted solely according to the profit motive, the falling off affects the budget and thereby the taxpayers. If, for instance, a city-owned transportation system charges the customers so low a fare that the costs of the operation cannot be covered, the taxpayers are virtually subsidizing those riding the trains.

But we need not, in a book dealing with the problems of bureaucracy, bother about these financial aspects. From our point of view another outcome is to be considered.

As soon as an undertaking is no longer operated under the profit motive, other principles must be adopted for the conduct of its affairs. The city authorities cannot simply instruct the manager: Do not bother about a profit. They must give him more definite and precise orders. What kind of orders could these be?

The champions of nationalized and municipalized enterprise are prone to answer this question in a rather naive manner: The public enterprise’s duty is to render useful services to the community. But the problem is not so simple as this. Every undertaking’s sole task is to render useful services. But what does this term mean? Who is, in the case of public enterprise, to decide whether a service is useful? And much more important: How do we find out whether the services rendered are not too heavily paid for, i.e., whether the factors of production absorbed by their performance are not withdrawn from other lines of utilization in which they could render more valuable services?

With private profit-seeking enterprise this problem is solved by the attitudes of the public. The proof of the usefulness of the services rendered is that a sufficient number of citizens is ready to pay the price asked for them. There cannot be any doubt about the fact that the customers consider the services rendered by the bakeries useful. They are ready to pay the price asked for bread. Under this price the production of bread tends to expand until saturation is reached, that is, until a further expansion would withdraw factors of production from branches of industry for whose products the demand of the consumers is more intense. In taking the profit-motive as a guide, free enterprise adjusts its activities to the desires of the public. The profit-motive pushes every entrepreneur to accomplish those services that the consumers deem the most urgent. The price structure of the market tells them how free they are to invest in every branch of production.

But if a public enterprise is to be operated without regard to profits, the behavior of the public no longer provides a criterion of its usefulness. If the government or the municipal authorities are resolved to go on notwithstanding the fact that the operation costs are not made up by the payments received from the customers, where may a criterion be found of the usefulness of the services rendered? How can we find out whether the deficit is not too big with regard to these services? And how discover whether the deficit could not be reduced without impairing the value of the services?

A private business is doomed if its operation brings losses only and no way can be found to remedy this situation. Its unprofitability is the proof of the fact that the consumers disallow it. There is, with private enterprise, no means of defying this verdict of the public and of keeping on. The manager of a plant involving a loss may explain and excuse the failure. But such apologies are of no avail if they cannot prevent the final abandonment of the unsuccessful project.

It is different with a public enterprise. Here the appearance of a deficit is not considered a proof of failure. The manager is not responsible for it. It is the aim of his boss, the government, to sell at such a low price that a loss becomes unavoidable. But if the government were to limit its interference with the fixing of the sales prices and to leave everything else to the manager, it would give him full power to draw on the treasury’s funds.

It is important to realize that our problem has nothing at all to do with the necessity of preventing the manager from the criminal abuse of his power. We assume that the government or the municipality has appointed an honest and efficient manager and that the moral climate of the country or city and the organization of the undertaking concerned offer a satisfactory protection against any felonious misprision. Our problem is quite different. It stems from the fact that every service can be improved by increasing expenditures. However excellent a hospital, subway system, or water works may be, the manager always knows how he could improve the service provided the funds required are available. In no field of human wants can full satisfaction be reached in such a way that no further improvement is possible. The specialists are intent upon improving the satisfaction of needs only in their special branches of activity. They do not and cannot bother about the check which an expansion of the plant entrusted to them would impose upon other classes of need-satisfaction. It is not the task of the hospital director to renounce some improvement of the municipal hospital lest it impede the improvement of the subway system or vice versa. It is precisely the efficient and honest manager who will try to make the services of his outfit as good as possible. But as he is not restrained by any considerations of financial success, the costs involved would place a heavy burden on the public funds. He would become a sort of irresponsible spender of the taxpayers’ money. As this is out of the question, the government must give attention to many details of the management. It must define in a precise way the quality and the quantity of the services to be rendered and the commodities to be sold; it must issue detailed instructions concerning the methods to be applied in the purchase of material factors of production and in hiring and rewarding labor. As the account of profit or loss is not to be considered the criterion of the management’s success or failure, the only means to make the manager responsible to the boss, the treasury, is to limit his discretion by rules and regulations. If he believes that it is expedient to spend more than these instructions allow, he must make an application for a special allotment of money. In this case the decision rests with his boss, the government, or the municipality. At any rate the manager is not a business executive but a bureaucrat, that is an officer bound to abide by various instructions. The criterion of good management is not the approval of the customers resulting in an excess of revenue over costs but the strict obedience to a set of bureaucratic rules. The supreme rule of management is subservience to such rules.

Of course, the government or the town council will be eager to draft these rules and regulations in such a way that the services rendered become as useful as they want them to be and the deficit not higher than they want to have it. But this does not remove the bureaucratic character of the conduct of affairs. The management is under the necessity of abiding by a code of instructions. This alone matters. The manager is not answerable if his actions are correct from the point of view of this code. His main task cannot be efficiency as such, but efficiency within the limits of subservience to the regulations. His position is not that of an executive in a profit-seeking enterprise but that of a civil servant, for instance, the head of a police department.

The only alternative to profit-seeking business is bureaucratic management. It would be utterly impracticable to delegate to any individual or group of individuals the power to draw freely on public funds. It is necessary to curb the power of the managers of nationalized or municipalized systems by bureaucratic makeshifts if they are not to be made irresponsible spenders of public money and if their management is not to disorganize the whole budget.

[1]For a more searching treatment of this primordial problem see: Mises, Socialism, an Economic and Sociological Analysis, translated by Kahane (New York, 1936), pp 113‑122, 131‑142, 516‑521; Mises, Nationaloekonomie (Geneva, 1940), pp. 188‑223, 634‑645; Hayek, Collectivist Economic Planning (London, 1935); Hayek, “Socialist Calculation: The Competitive Solution” (Economica, VII, 125‑149).

[2]Mises, Omnipotent Government (New Haven, 1944), pp. 55-58.

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