Mises Wire

Mises as Social Rationalist Pt V: The Problem of Socialism: Calculation or Knowledge?

Editors note: One of the most important analysis of Ludwig von Mises’s social theory and his views on the origins of human society has been Dr. Joseph Salerno’s Ludwig von Mises as a Social Rationalist. This essay sparked an important debate among scholars within the Austrian school of the ideological differences between Ludwig von Mises and F.A. Hayek, enriching our understanding of the work of both great scholars. 

For the benefit of readers, we will publish during this week in six separate parts. Part I. Part II. Part III. Part IV. The complete essay can be found here

Part V

It is therefore clear that Mises’s critique of the possibility of socialism is not about knowledge but about calculation. It proceeds ineluctably from his insight that, although cardinal numbers and their arithme­tic properties are “eternal and immutable categories of the human mind,” economic calculation is “only a category inherent in acting under special conditions” or what the German Historical School referred to as an “historical category” (Mises 1966, pp. 199, 201). Thus “The system of economic calculation in monetary terms is conditioned by certain social institutions. It can operate only in an institutional setting of the division of labor and private ownership of the means of production, in which goods and services of all orders are bought and sold against a generally used medium of exchange, i.e., money” (Mises 1966, p. 229). Should these preconditions of calculable action disap­pear in the further course of social evolution, due, for example, to the abolition of private ownership of the nonhuman means of production, rational social action will become impossible and social division of labor will literally disintegrate into its component parts, into primi­tive household economies.

Simply and starkly put, Mises’s position is that “Human coopera­tion under the system of the social division of labor is possible only in the market economy. Socialism is not a realizable system of society’s economic organization because it lacks any method of eco­nomic calculation. ... The choice is between capitalism and chaos” (Mises 1966, pp. 679–80). Elsewhere Mises declares “economic calcu­lation” to be “the essential and unique problem of socialism” (1966, p. 703).

Nor did Mises ignore the so-called “knowledge problem” faced by central planners. In fact, in his later discussion socialism in Human Action, he carefully and repeatedly distinguished between the problem of calculation and that of knowledge, by explicitly assuming that the economic planners possessed full knowledge of the relevant economic data (Mises 1966, pp. 689–715).

For example, Mises prefaces his chapter on the “Impossibility of Economic Calculation under Socialism” with the following list of assumptions: “We assume that the director has at his disposal all the technological knowledge of his age. Moreover, he has a complete inventory of all the material factors of production available and a roster enumerating all manpower employable. In these respects the crowd of experts and specialists which he assembles in his offices provide him with perfect information and answer correctly all ques­tions he may ask them. We assume that the director has made up his mind with regard to the valuation of ultimate ends. ... We may assume, for the sake of argument, that a mysterious power makes everyone agree with one another and with the director in the valua­tion of ultimate ends” (1966, p. 696).

The planner thus possesses “perfect information” about the gen­eral rules of technology and about the particular circumstances of time and place relating to each consumer’s value scale and to the availability of each of the variety of factors. Now consider, as Mises does, the planner’s decision to build a house under these conditions. Mises argues that the planner still faces the insoluble problem of which of the various known technical methods for realizing his project he should select. Each of the methods employ the given factors in different quantities, each absorbs a different period of production, and each yields a building with a different physical durability.

Mises elaborates the problem confronting the planner in this situation in the following terms:

Which method should the director choose? He cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them. He cannot attach either to the waiting time (period of production) or to the duration of serviceableness a definite numerical expression. In short, he cannot, in comparing costs to be expended and gains to be earned, resort to any arithmetical operation. The plans of his archi­tects enumerate a vast multiplicity of items in kind; they refer to the physical and chemical qualities of various materials and to the physical productivity of various machines, tools, and procedures. But all their statements remain unrelated to each other. There is no means of establishing any connection between them. ... Eliminate economic calculation and you have no means of making a rational choice between the various alternatives [1966, pp. 698–99].

For Mises, therefore, “the crucial and only problem of socialism ... is a purely economic problem, and as such refers merely to means and not to ultimate ends” (1966, p. 697). In other words, it is the problem purely of Robbinsian maximizing, of deciding how given means are to be allocated in light of a given structure of ends.

In responding to the socialist criticism that capitalist calculation is fallible because it takes place under conditions of uncertainty, Mises leaves no doubt that inability to calculate and lack of knowl­edge are logically distinct problems and that the former is the rock upon which the socialist ship founders. Writes Mises:

all human action points to the future and the future is always uncertain. The most carefully elaborated plans are frustrated if expectations concerning the future are dashed to the ground. How­ever, this is a quite different problem. Today we calculate from the point of view of our present knowledge and of our present anticipation of future conditions, We do not deal with the problem of whether or not the director will be able to anticipate future conditions. What we have in mind is that the director cannot calculate from the point of view of his own present value judgments and his own present antic­ipation of future conditions, whatever they may be. If he invests today in the canning industry, it may happen that a change in consumers’ tastes or in hygienic opinions concerning the wholesomeness of canned food will one day turn his investment into a malinvestment. But how can he find out today how to build and equip a cannery most economically [1966, pp. 699–700]?

It is because socialism lacks the means to calculate, therefore, that Mises emphatically denies that men “are free to adopt socialism without abandoning economy in the choice of means” or that “Social­ism does not enjoin the renunciation of rationality in the employment of the factors of production” (1966, p. 7 02).

Mises approaches the knowledge versus calculation issue from still another angle. He assumes that human history has, in effect, come to an end and that all further changes in the economic data have ceased. He assumes in addition that the socialist central planner is miraculously endowed with perfect knowledge relating to the full data of this final equilibrium state. Even in this situation the planner confronts a problem requiring economic calculation. The planner must decide how to utilize most economically the means of production bequeathed by the past, e.g., the existing capital structure and acquired skills and location of the labor force, which are not yet adjusted to their equilibrium configurations. For, as Mises points out,

as long as the equilibrium is not yet attained, the system is in a continuous movement which changes the data. The tendency toward the establishment of equilibrium, not interrupted by the emergence of any changes in the data coming from without, is in itself a succession of changes in the data. ... The knowledge of conditions which will prevail under equilibrium is useless for the director whose task it is to act today under present conditions. What he must learn is how to proceed in the most economical way with the means available today which are the inheritance of an age with different valuations, a different technological knowledge, and different information about problems of location. He must know which step is the next he must take. ... [Thus] even if ... we assume that a miraculous inspiration has enabled the director without economic calculation to solve all problems concerning the most advantageous arrangement of all pro­duction activities and that the precise image of the final goal he must aim at is present to his mind, there remain essential problems which cannot be dealt with without economic calculation [1966, pp. 712–13].

There is a significant implication of our interpretation of Mises’s critique of socialism. Although the market economy has perfectly solved the problem of economic calculation — its very existence attests to the veracity of this conclusion — praxeologically, at least, it is on all fours with socialism with regard to the knowledge problem. For the imperfection of knowledge deriving from uncertainty of the future is a category of all human action, which cannot be overcome by recourse to the market price system, entrepreneurial alertness, the competi­tive discovery process, and so on. In any event, comparisons between centrally planned and market economies on the basis of their alter­native mechanisms for discovering and disseminating knowledge have little more than heuristic value, precisely because, even assum­ing conditions of perfect knowledge, calculable, and therefore pur­poseful, action is logically impossible under central planning. On the other hand, a market economy in which relatively obtuse and men­tally inert entrepreneurs appraise and plan on the basis of spotty and inaccurate knowledge of future conditions could still exist and oper­ate because it would permit the calculations necessary for the Robbinsian economizing of scarce productive factors.

On this basis, we are led to reject the revisionist “discovery-pro­cess view” of the socialist calculation debate at least as it applies to Mises’s contribution (Hayek’s is another matter). This view has been recently enunciated by Israel Kirzner (1988) and Don Lavoie (1985) and basically concludes that the Austrian position in the debate “represented a critique of socialism only because and to the extent that markets under capitalism indeed constitute such a dynamic process of entrepreneurial discovery” (Kirzner 1988, p. 3). But this ignores Mises’s key insight that the theory of monetary calculation and calculable action does not belong to the theory of catallactics. As a logical inference from categorial uncertainty, “It is part of the general theory of praxeology” (Mises 1966, p. 398, fn.1) and, as such, is a logical antecedent of catallactic theorems relating to the dynamic role of the entrepreneur-promoter in the functioning of the market process.

The Kirzner-Lavoie approach also errs in distinguishing the advan­tages of economic calculation from “the broader issue of the social advantages of the price system” (Kirzner 1988, p. 12). As we have documented in great detail above, however, Mises never made this distinction, even in his most mature view of the market process as presented in Human Action. In fact Mises conceived the social advantage of the price system to be that it made practicable human society itself by providing the cardinal numbers for computing the costs and benefits of purposive action undertaken within the social division of labor. Finally, Mises, in sharp contrast to the discovery-process approach, denied that prices are directly relevant to the entrepreneurial discov­ery of information about future market conditions. On the one hand, according to the regression theorem, relative prices of the past are logically unrelated to relative prices which will emerge on future markets. On the other hand, future prices themselves must be ap­praised in light of the logically prior process of entrepreneurial discovery or, more accurately, “understanding’’ of yet to emerge mar­ket conditions.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
What is the Mises Institute?

The Mises Institute is a non-profit organization that exists to promote teaching and research in the Austrian School of economics, individual freedom, honest history, and international peace, in the tradition of Ludwig von Mises and Murray N. Rothbard. 

Non-political, non-partisan, and non-PC, we advocate a radical shift in the intellectual climate, away from statism and toward a private property order. We believe that our foundational ideas are of permanent value, and oppose all efforts at compromise, sellout, and amalgamation of these ideas with fashionable political, cultural, and social doctrines inimical to their spirit.

Become a Member
Mises Institute