Collectivist Economic Planning

III ECONOMIC CALCULATION IN THE SOCIALIST COMMONWEALTH1

By LUDWIG VON MISES

(Translated from the German by S, ADLER)

INTRODUCTION.

1.   THE DISTRIBUTION OF CONSUMPTION-GOODS IN THE SOCIALIST COMMONWEALTH.

2.   THE NATURE OF ECONOMIC CALCULATION.

3.   ECONOMIC CALCULATION IN THE SOCIALIST COMMONWEALTH.

4.   RESPONSIBILITY AND INITIATIVE IN COMMUNAL CONCERNS.

5.   THE MOST RECENT SOCIALIST DOCTRINES AND THE PROBLEM OF ECONOMIC CALCULATION,

CONCLUSION.

INTRODUCTION

THERE are many socialists who have never come to grips in any way with the problems of economics, and who have made no attempt at all to form for themselves any clear conception of the conditions which determine the character of human society. There are others, who have probed deeply into the economic history of the past and present, and striven, on this basis, to construct a theory of economics of the “bourgeois” society. They have criticized freely enough the economic structure of “free” society, but have consistently neglected to apply to the economics of the disputed socialist state the same caustic acumen, which they have revealed elsewhere, not always with success. Economics, as such, figures all too sparsely in the glamorous pictures painted by the Utopians. They invariably explain how, in the cloud-cuckoo lands of their fancy, roast pigeons will in some way fly into the mouths of the comrades, but they omit to show how this miracle is to take place. Wherever they do in fact commence to be more explicit in the domain of economics, they soon find themselves at a loss—one remembers, for instance, Proudhon’s fantastic dreams of an “exchange-bank”—so that it is not difficult to point out their logical fallacies. When Marxism solemnly forbids its adherents to concern themselves with economic problems beyond the expropriation of the expropriators, it adopts no new principle, since the Utopians throughout their descriptions have also, neglected all economic considerations, and concentrated attention solely upon painting lurid pictures of existing conditions and glowing pictures of that golden age which is the natural consequence of the New Dispensation.

Whether one regards the coming of socialism as an unavoidable result of human evolution, or considers the socialization of the means of production as the greatest blessing or the worst disaster that can befall mankind, one must at least concede, that investigation into the conditions of society organized upon a socialist basis is of value as something more than “a good mental exercise, and a means of promoting political clearness and consistency of thought”.2 In an age in which we are approaching nearer and nearer to socialism, and even, in a certain sense, are dominated by it, research into the problems of the socialist state acquires added significance for the explanation of what is going on around us. Previous analyses of the exchange economy no longer suffice for a proper understanding of social phenomena in Germany and its eastern neighbours to-day. Our task in this connection is to embrace within a fairly wide range the elements of socialistic society. Attempts to achieve clarity on this subject need no further justification,

1.   THE DISTRIBUTION OF CONSUMPTION-GOODS IN THE SOCIALIST COMMONWEALTH.

Under socialism all the means of production are the property of the community. It is the community alone which can dispose of them and which determines their use in production. It goes without saying that the community will only be in a position to employ its powers of disposal through the setting up of a special body for the purpose. The structure of this body and the question of how it will articulate and represent the communal will is for us of subsidiary importance. One may assume that this last will depend upon the choice of personnel, and in cases where the power is not vested in a dictatorship, upon the majority vote of the members of the corporation.

The owner of production-goods, who has manufactured consumption-goods and thus becomes their owner, now has the choice of either consuming them himself or of having them consumed by others. But where the community becomes the owner of consumption-goods, which it has acquired in production, such a choice will no longer obtain. It cannot itself consume; it has perforce to allow others to do so. Who is to do the consuming and what is to be consumed by each is the crux of the problem of socialist distribution.

It is characteristic of socialism that the distribution of consumption-goods must be independent of the question of production and of its economic conditions. It is irreconcilable with the nature of the communal ownership of production-goods that it should rely even for a part of its distribution upon the economic imputation of the yield to the particular factors of production. It is logically absurd to speak of the worker’s enjoying the “full yield” of his work, and then to subject to a separate distribution the shares of the material factors of production. For, as we shall show, it lies in the very nature of socialist production that the shares of the particular factors of production in the national dividend cannot be ascertained, and that it is impossible in fact to gauge the relationship between expenditure and income.

What basis will be chosen for the distribution of consumption-goods among the individual comrades is for us a consideration of more or less secondary importance. Whether they will be apportioned according to individual needs, so that he gets most who needs most, or whether the superior man is to receive more than the inferior, or whether a strictly equal distribution is envisaged as the ideal, or whether service to the State is to be the criterion, is immaterial to the fact that, in any event, the portions will be meted out by the State.

Let us assume the simple proposition that distribution will be determined upon the principle that the State treats all its members alike; it is not difficult to conceive of a number of peculiarities such as age, sex, health, occupation, etc., according to which what each receives will be graded. Each comrade receives a bundle of coupons, redeemable within a certain period against a definite quantity of certain specified goods. And so he can eat several times a day, find permanent lodgings, occasional amusements and a new suit every now and again. Whether such provision for these needs is ample or not, will depend on the productivity of social labour.

Moreover, it is not necessary that every man should consume the whole of his portion. He may let some of it perish without consuming it; he may give it away in presents; he may even in so far as the nature of the goods permit, hoard it for future use. He can, however, also exchange some of them. The beer-tippler will gladly dispose of non-alcoholic drinks allotted to him, if he can get more beer in exchange, whilst the teetotaller will be ready to give up his portion of drink if he can get other goods for it. The art-lover will be willing to dispose of his cinema-tickets in order the more often to hear good music; the Philistine will be quite prepared to give up the tickets which admit him to art exhibitions in return for opportunities for pleasure he more readily understands. They will all welcome exchanges. But the material of these exchanges will always be consumption-goods. Production-goods in a socialist commonwealth are exclusively communal; they are an inalienable property of the community, and thus res extra commercium.

The principle of exchange can thus operate freely in a socialist state within the narrow limits permitted. It need not always develop in the form of direct exchanges. The same grounds which have always existed for the building-up of indirect exchange will continue in a socialist state, to place advantages in the way of those who indulge in it. It follows that the socialist state will thus also afford room for the use of a universal medium of exchange—that is, of Money. Its role will be fundamentally the same in a socialist as in a competitive society; in both it serves as the universal medium of exchange. Yet the significance of Money in a society where the means of production are State-controlled will be different from that which attaches to it in one where they are privately owned. It will be, in fact, incomparably narrower, since the material available for exchange will be narrower, inasmuch as it will be confined to consumption-goods. Moreover, just because no production-good will ever become the object of exchange, it will be impossible to determine its monetary value. Money could never fill in a socialist state the rôle it fills in a competitive society in determining the value of production-goods. Calculation in terms of money will here be impossible.

The relationships which result from this system of exchange between comrades cannot be disregarded by those responsible for the administration and distribution of products. They must take these relationships as their basis, when they seek to distribute goods per head in accordance with their exchange value. If, for instance I cigar becomes equal to 5 cigarettes, it will be impossible for the administration to fix the arbitrary value of I cigar = 3 cigarettes as a basis for the equal distribution of cigars and cigarettes respectively. If the tobacco coupons are not to be redeemed uniformly for each individual, partly against cigars, partly against cigarettes, and if some receive only cigars and others only cigarettes, either because that is their wish or because the coupon office cannot do anything else at the moment, the market conditions of exchange would then have to be observed. Otherwise everybody getting cigarettes would suffer as against those getting cigars. For the man who gets one cigar can exchange it for five cigarettes, and he is only marked down with three cigarettes.

Variations in exchange relations in the dealings between comrades will therefore entail corresponding variations in the administrations’ estimates of the representative character of the different consumption-goods. Every such variation shows that a gap has appeared between the particular needs of comrades and their satisfactions because in fact, some one commodity is more strongly desired than another.

The administration will indeed take pains to bear this point in mind also as regards production. Articles in greater demand will have to be produced in greater quantities while production of those which are less demanded will have to suffer a curtailment Such control may be possible, but one thing it will not be free to do; it must not leave it to the individual comrade to ask the value of his tobacco ticket either in cigars or cigarettes at will. If the comrade were to have the right of choice, then it might well be that the demand for cigars and cigarettes would exceed the supply, or vice versa, that cigars or cigarettes pile up in the distributing offices because no one will take them.

If one adopts the standpoint of the labour theory of value, the problem freely admits of a simple solution. The comrade is then marked up for every hour’s work put in, and this entitles him to receive the product of one hour’s labour, less the amount deducted for meeting such obligations of the community as a whole as maintenance of the unfit, education, etc.

Taking the amount deducted for covering communal expenses as one half of the labour product, each worker who had worked a full hour would be entitled only to obtain such amount of the product as really answered to half an hour’s work. Accordingly, anybody who is in a position to offer twice the labour-time taken in manufacturing an article, could take it from the market and transfer to his own use or consumption. For the clarification of our problem it will be better to assume that the State does not in fact deduct anything from the workers towards meeting its obligations, but instead imposes an income tax upon its working members. In that way every hour of work put in would carry with it the right of taking for oneself such amount of goods as entailed an hour’s work.

Yet such a manner of regulating distribution would be unworkable, since labour is not a uniform and homogeneous quantity. Between various types of labour there is necessarily a qualitative difference, which leads to a different valuation according to the difference in the conditions of demand for and supply of their products. For instance, the supply of pictures cannot be increased, ceteris paribus, without damage to the quality of the product. Yet one cannot allow the labourer who had put in an hour of the most simple type of labour to be entitled to the product of an hour’s higher type of labour. Hence, it becomes utterly impossible in any socialist community to posit a connection between the significance to the community of any type of labour and the apportionment of the yield of the communal process of production. The remuneration of labour cannot but proceed upon an arbitrary basis; it cannot be based upon the economic valuation of the yield as in a competitive state of society, where the means of production are in private hands, since—as we have seen—any such valuation is impossible in a socialist community. Economic realities impose clear limits to the community’s power of fixing the remuneration of labour on an arbitrary basis: in no circumstances can the sum expended on wages exceed the income for any length of time.

Within these limits it can do as it will. It can rule forthwith that all labour is to be reckoned of equal worth, so that every hour of work, whatever its quality, entails the same reward; it can equally well make a distinction in regard to the quality of work done. Yet in both cases it must reserve the power to control the particular distribution of the labour product. It will never be able to arrange that he who has put in an hour’s labour shall also have the right to consume the product of an hour’s labour, even leaving aside the question of differences in the quality of the labour and the products, and assuming moreover that it would be possible to gauge the amount of labour represented by any given article. For, over and above the actual labour, the production of all economic goods entails also the cost of materials. An article in which more raw material is used can never be reckoned of equal value with one in which less is used.

2.   THE NATURE OF ECONOMIC CALCULATION

Every man who, in the course of economic life, takes a choice between the satisfaction of one need as against another, eo ipso makes a judgment of value. Such judgments of value at once include only the very satisfaction of the need itself; and from this they reflect back upon the goods of a lower, and then further upon goods of a higher order. As a rule, the man who knows his own mind is in a position to value goods of a lower order. Under simple conditions it is also possible for him without much ado to form some judgment of the significance to him of goods of a higher order. But where the state of affairs is more involved and their interconnections not so easily discernible, subtler means must be employed to accomplish a correct3 valuation of the means of production. It would not be difficult for a farmer in economic isolation to come by a distinction between the expansion of pasture-farming and the development of activity in the hunting field. In such a case the processes of production involved are relatively short and the expense and income entailed can be easily gauged. But it is quite a different matter when the choice lies between the utilization of a water-course for the manufacture of electricity or the extension of a coal-mine or the drawing up of plans for the better employment of the energies latent in raw coal. Here the roundabout processes of production are many and each is very lengthy; here the conditions necessary for the success of the enterprises which are to be initiated are diverse, so that one cannot apply merely vague valuations, but requires rather more exact estimates and some judgment of the economic issues actually involved.

Valuation can only take place in terms of units, yet it is impossible that there should ever be a unit of subjective use-value for goods. Marginal utility does not posit any unit of value, since it is obvious that the value of two units of a given stock is necessarily greater than, but less than double, the value of a single unit. Judgments of value do not measure; they merely establish grades and scales.4 Even Robinson Crusoe, when he has to make a decision where no ready judgment of value appears and where he has to construct one upon the basis of a more or less exact estimate, cannot operate solely with subjective use-value, but must take into consideration the intersubstitutability of goods on the basis of which he can then form his estimates. In such circumstances it will be impossible for him to refer all things back to one unit. Rather will he, so far as he can, refer all the elements which have to be taken into account in forming his estimate to those economic goods which can be apprehended by an obvious judgment of value—that is to say, to goods of a lower order and to pain-cost. That this is only possible in very simple conditions is obvious. In the case of more complicated and more lengthy processes of production it will, plainly, not answer.

In an exchange economy the objective exchange-value of commodities enters as the unit of economic calculation. This entails a threefold advantage. In the first place, it renders it possible to base the calculation upon the valuations of all participants in trade. The subjective use-value of each is not immediately comparable as a purely individual phenomenon with the subjective use-value of other men. It only becomes so in exchange-value, which arises out of the interplay of the subjective valuations of all who take part in exchange. But in that case calculation by exchange-value furnishes a control over the appropriate employment of goods. Anyone who wishes to make calculations in regard to a complicated process of production will immediately notice whether he has worked more economically than others or not; if he finds, from reference to the exchange-relations obtaining in the market, that he will not be able to produce profitably, this shows that others understand how to make a better use of the goods of a higher order in question. Lastly, calculation by exchange-value makes it possible to refer values back to a unit. For this purpose, since goods are mutually substitutable in accordance with the exchange-relations obtaining in the market, any possible good can be chosen. In a monetary economy it is money that is so chosen.

Monetary calculation has its limits. Money is no yardstick of value, nor yet of price. Value is not indeed measured in money, nor is price. They merely consist in money. Money as an economic good is not of stable value as has been naively, but wrongly, assumed in using it as a “standard of deferred payments”. The exchange-relationship which obtains between money and goods is subjected to constant, if (as a rule) not too violent, fluctuations originating not only from the side of other economic goods, but also from the side of money. However, these fluctuations disturb value calculations only in the slightest degree, since usually, in view of the ceaseless alternations in other economic data—these calculations will refer only to comparatively short periods of time—periods in which “good” money, at least normally, undergoes comparatively trivial fluctuations in regard to its exchange-relations. The inadequacy of the monetary calculation of value does not have its mainspring in the fact that value is then calculated in terms of a universal medium of exchange, namely money, but rather in the fact that in this system it is exchange-value and not subjective use-value on which the calculation is based. It can never obtain as a measure for the calculation of those value-determining elements which stand outside the domain of exchange transactions. If, for example, a man were to calculate the profitability of erecting a waterworks, he would not be able to include in his calculation the beauty of the waterfall which the scheme might impair, except that he may pay attention to the diminution of tourist traffic or similar changes, which may be valued in terms of money. Yet these considerations might well prove one of the factors in deciding whether or no the building is to go up at all.

It is customary to term such elements “extra-economic”. This perhaps is appropriate; we are not concerned with disputes over terminology; yet the considerations themselves can scarcely be termed irrational. In any place where men regard as significant the beauty of a neighbourhood or of a building, the health, happiness and contentment of mankind, the honour of individuals or nations, they are just as much motive-forces of rational conduct as are economic factors in the proper sense of the word, even where they are not substitutable against each other on the market and therefore do not enter into exchange-relationships.

That monetary calculation cannot embrace these factors lies in its very nature; but for the purposes of our everyday economic life this does not detract from the significance of monetary calculation. For all those ideal goods are goods of a lower order, and can hence be embraced straightway within the ambit of our judgment of values. There is therefore no difficulty in taking them into account, even though they must remain outside the sphere of monetary value. That they do not admit of such computation renders their consideration in the affairs of life easier and not harder. Once we see clearly how highly we value beauty, health, honour and pride, surely nothing can prevent us from paying a corresponding regard to them. It may seem painful to any sensitive spirit to have to balance spiritual goods against material. But that is not the fault of monetary calculation; it lies in the very nature of things themselves. Even where judgments of value can be established directly without computation in value or in money, the necessity of choosing between material and spiritual satisfaction cannot be evaded. Robinson Crusoe and the socialist state have an equal obligation to make the choice.

Anyone with a genuine sense of moral values experiences no hardship in deciding between honour and livelihood. He knows his plain duty. If a man cannot make honour his bread, yet can he renounce his bread for honour’s sake. Only they who prefer to be relieved of the agony of this decision, because they cannot bring themselves to renounce material comfort for the sake of spiritual advantage, see in the choice a profanation of true values.

Monetary calculation only has meaning within the sphere of economic organization. It is a system whereby the rules of economics may be applied in the disposition of economic goods. Economic goods only have part in this system in proportion to the extent to which they may be exchanged for money. Any extension of the sphere of monetary calculation causes misunderstanding. It cannot be regarded as constituting a kind of yardstick for the valuation of goods, and cannot be so treated in historical investigations into the development of social relationships; it cannot be used as a criterion of national wealth and income, nor as a means of gauging the value of goods which stand outside the sphere of exchange, as who should seek to estimate the extent of human losses through emigrations or wars in terms of money?5 This is mere sciolistic tomfoolery, however much it may be indulged in by otherwise perspicacious economists.

Nevertheless within these limits, which in economic life it never oversteps, monetary calculation fulfils all the requirements of economic calculation. It affords us a guide through the oppressive plenitude of economic potentialities. It enables us to extend to all goods of a higher order the judgment of value, which is bound up with and clearly evident in, the case of goods ready for consumption, or at best of production-goods of the lowest order. It renders their value capable of computation and thereby gives us the primary basis for all economic operations with goods of a higher order. Without it, all production involving processes stretching well back in time and all the longer roundabout processes of capitalistic production would be gropings in the dark.

There are two conditions governing the possibility of calculating value in terms of money. Firstly, not only must goods of a lower, but also those of a higher, order come within the ambit of exchange, if they are to be included. If they do not do so, exchange relationships would not arise. True enough, the considerations which must obtain in the case of Robinson Crusoe prepared, within the range of his own hearth, to exchange, by production, labour and flour for bread, are indistinguishable from those which obtain when he is prepared to exchange bread for clothes in the open market, and, therefore, it is to some extent true to say that every economic action, including Robinson Crusoe’s own production, can be termed exchange.6 Moreover, the mind of one man alone—be it never so cunning, is too weak to grasp the importance of any single one among the countlessly many goods of a higher order. No single man can ever master all the possibilities of production, innumerable as they are, as to be in a position to make straightway evident judgments of value without the aid of some system of computation. The distribution among a number of individuals of administrative control over economic goods in a community of men who take part in the labour of producing them, and who are economically interested in them, entails a kind of intellectual division of labour, which would not be possible without some system of calculating production and without economy.

The second condition is that there exists in fact a universally employed medium of exchange—namely, money—which plays the same part as a medium, in the exchange of production-goods also. If this were not the case, it would not be possible to reduce all exchange-relationships to a common denominator.

Only under simple conditions can economics dispense with monetary calculation. Within the narrow confines of household economy, for instance, where the father can supervise the entire economic management, it is possible to determine the significance of changes in the processes of production, without such aids to the mind, and yet with more or less of accuracy. In such a case the process develops under a relatively limited use of capital. Few of the capitalistic roundabout processes of production are here introduced: what is manufactured is, as a rule, consumption-goods or at least such goods of a higher order as stand very near to consumption-goods. The division of labour is in its rudimentary stages: one and the same labourer controls the labour of what is in effect, a complete process of production of goods ready for consumption, from beginning to end. All this is different, however, in developed communal production. The experiences of a remote and bygone period of simple production do not provide any sort of argument for establishing the possibility of an economic system without monetary calculation.

In the narrow confines of a closed household economy, it is possible throughout to review the process of production from beginning to end, and to judge all the time whether one or another mode of procedure yields more consumable goods. This, however, is no longer possible in the incomparably more involved circumstances of our own social economy. It will be evident, even in a socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e. economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location.7

It is an illusion to imagine that in a socialist state calculation in natura can take the place of monetary calculation. Calculation in natura, in an economy without exchange, can embrace consumption-goods only; it completely fails when it comes to deal with goods of a higher order. And as soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.

It is easy to overlook this fact, considering that the extent to which socialism is in evidence among us constitutes only a socialistic oasis in a society with monetary exchange, which is still a free society to a certain degree. In one sense we may agree with the socialists’ assertion which is otherwise entirely untenable and advanced only as a demagogic point, to the effect that the nationalization and municipalization of enterprise is not really socialism, since these concerns in their business organizations are so much dependent upon the environing economic system with its free commerce that they cannot be said to partake to-day of the really essential nature of a socialist economy. In state and municipal undertakings technical improvements are introduced because their effect in similar private enterprises, domestic or foreign, can be noticed, and because those private industries which produce the materials for these improvements give the impulse for their introduction. In these concerns the advantages of reorganization can be established, because they operate within the sphere of a society based upon the private ownership of the means of production and upon the system of monetary exchange, being thus capable of computation and account. This state of affairs, however, could not obtain in the case of socialist concerns operating in a purely socialistic environment.

Without economic calculation there can be no economy. Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be—in our sense of the term—no economy whatsoever. In trivial and secondary matters rational conduct might still be possible, but in general it would be impossible to speak of rational production any more. There would be no means of determining what was rational, and hence it is obvious that production could never be directed by economic considerations. What this means is clear enough, apart from its effects on the supply of commodities. Rational conduct would be divorced from the very ground which is its proper domain. Would there, in fact, be any such thing as rational conduct at all, or, indeed, such a thing as rationality and logic in thought itself? Historically, human rationality is a development of economic life. Could it then obtain when divorced therefrom?

For a time the remembrance of the experiences gained in a competitive economy, which has obtained for some thousands of years, may provide a check to the complete collapse of the art of economy. The older methods of procedure might be retained not because of their rationality but because they appear to be hallowed by tradition. Actually, they would meanwhile have become irrational, as no longer comporting with the new conditions. Eventually, through the general reconstruction of economic thought, they will experience alterations which will render them in fact uneconomic. The supply of goods will no longer proceed anarchically of its own accord; that is true. All transactions which serve the purpose of meeting requirements will be subject to the control of a supreme authority. Yet in place of the economy of the “anarchic” method of production, recourse will be had to the senseless output of an absurd apparatus. The wheels will turn, but will run to no effect.

One may anticipate the nature of the future socialist society. There will be hundreds and thousands of factories in operation. Very few of these will be producing wares ready for use; in the majority of cases what will be manufactured will be unfinished goods and production-goods. All these concerns will be interrelated. Every good will go through a whole series of stages before it is ready for use. In the ceaseless toil and moil of this process, however, the administration will be without any means of testing their bearings. It will never be able to determine whether a given good has not been kept for a superfluous length of time in the necessary processes of production, or whether work and material have not been wasted in its completion. How will it be able to decide whether this or that method of production is the more profitable? At best it will only be able to compare the quality and quantity of the consumable end-product produced, but will in the rarest cases be in a position to compare the expenses entailed in production. It will know, or think it knows, the ends to be achieved by economic organization, and will have to regulate its activities accordingly, i.e. it will have to attain those ends with the least expense. It will have to make its computations with a view to finding the cheapest way. This computation will naturally have to be a value-computation. It is eminently clear, and requires no further proof, that it cannot be of a technical character, and that it cannot be based upon the objective use-value of goods and services.

Now, in the economic system of private ownership of the means of production, the system of computation by value is necessarily employed by each independent member of society. Everybody participates in its emergence in a double way: on the one hand as a consumer and on the other as a producer. As a consumer he establishes a scale of valuation for goods ready for use and consumption. As a producer he puts goods of a higher order into such use as produces the greatest return. In this way all goods of a higher order receive a position in the scale of valuations in accordance with the immediate state of social conditions of production and of social needs. Through the interplay of these two processes of valuation, means will be afforded for governing both consumption and production by the economic principle throughout. Every graded system of pricing proceeds from the fact that men always and ever harmonize their own requirements with their estimation of economic facts.

All this is necessarily absent from a socialist state. The administration may know exactly what goods are most urgently needed. But in so doing, it has only found what is, in fact, but one of the two necessary prerequisites for economic calculation. In the nature of the case it must, however, dispense with the other—the valuation of the means of production. It may establish the value attained by the totality of the means of production; this is obviously identical with that of all the needs thereby satisfied. It may also be able to calculate the value of any means of production by calculating the consequence of its withdrawal in relation to the satisfaction of needs. Yet it cannot reduce this value to the uniform expression of a money price, as can a competitive economy, wherein all prices can be referred back to a common expression in terms of money. In a socialist commonwealth which, whilst it need not of necessity dispense with money altogether, yet finds it impossible to use money as an expression of the price of the factors of production (including labour), money can play no role in economic calculation.8

Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labour, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all. The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money. Admittedly, monetary calculation has its inconveniences and serious defects, but we have certainly nothing better to put in its place, and for the practical purposes of life monetary calculation as it exists under a sound monetary system always suffices. Were we to dispense with it, any economic system of calculation would become absolutely impossible.

The socialist society would know how to look after itself. It would issue an edict and decide for or against the projected building. Yet this decision would depend at best upon vague estimates; it would never be based upon the foundation of an exact calculation of value.

The static state can dispense with economic calculation. For here the same events in economic life arc ever recurring; and if we assume that the first disposition of the static socialist economy follows on the basis of the final state of the competitive economy, we might at all events conceive of a socialist production system which is rationally controlled from an economic point of view. But this is only conceptually possible. For the moment, we leave aside the fact that a static state is impossible in real life, as our economic data are for ever changing, so that the static nature of economic activity is only a theoretical assumption corresponding to no real state of affairs, however necessary it may be for our thinking and for the perfection of our knowledge of economics. Even so, we must assume that the transition to socialism must, as a consequence of the levelling out of the differences in income and the resultant readjustments in consumption, and therefore production, change all economic data in such a way that a connecting link with the final state of affairs in the previously existing competitive economy becomes impossible. But then we have the spectacle of a socialist economic order floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation.

Thus in the socialist commonwealth every economic change becomes an undertaking whose success can be neither appraised in advance nor later retrospectively determined. There is only groping in the dark. Socialism is the abolition of rational economy.

3.   ECONOMIC CALCULATION IN THE SOCIALIST COMMONWEALTH

Are we really dealing with the necessary consequences of common ownership of the means of production? Is there no way in which some kind of economic calculation might be tied up with a socialist system?

In every great enterprise, each particular business or branch of business is to some extent independent in its accounting. It reckons the labour and material against each other, and it is always possible for each individual group to strike a particular balance and to approach the economic results of its activities from an accounting point of view. We can thus ascertain with what success each particular section has laboured, and accordingly draw conclusions about the reorganization, curtailment, abandonment, or expansion of existing groups and about the institution of new ones. Admittedly, some mistakes are inevitable in such a calculation. They arise partly from the difficulties consequent upon an allocation of general expenses. Yet other mistakes arise from the necessity of calculating with what are not from many points of view rigorously ascertainable data, e.g. when in the ascertainment of the profitability of a certain method of procedure we compute the amortization of the machines used on the assumption of a given duration for their usefulness. Still, all such mistakes can be confined within certain narrow limits, so that they do not disturb the net result of the calculation. What remains of uncertainty comes into the calculation of the uncertainty of future conditions, which is an inevitable concomitant of the dynamic nature of economic life.

It seems tempting to try to construct by analogy a separate estimation of the particular production groups in the socialist state also. But it is quite impossible. For each separate calculation of the particular branches of one and the same enterprise depends exclusively on the fact that it is precisely in market dealings that market prices to be taken as the bases of calculation are formed for all kinds of goods and labour employed. Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.

We might conceive of a situation, in which exchange between particular branches of business is permitted, so as to obtain the mechanism of exchange relations (prices) and thus create a basis for economic calculation even in the socialist commonwealth. Within the framework of a uniform economy knowing not private ownership of the means of production, individual labour groups are constituted independent and authoritative disposers, which have indeed to behave in accordance with the directions of the supreme economic council, but which nevertheless assign each other material goods and services only against a payment, which would have to be made in the general medium of exchange. It is roughly in this way that we conceive of the organization of the socialist running of business when we nowadays talk of complete socialization and the like. But we have still not come to the crucial point. Exchange relations between production-goods can only be established on the basis of private ownership of the means of production. When the “coal syndicate” provides the “iron syndicate” with coal, no price can be formed, except when both syndicates are the owners of the means of production employed in their business. This would not be socialization but workers’ capitalism and syndicalism.

The matter is indeed very simple for those socialist theorists who rely on the labour theory of value.

As soon as society takes possession of the means of production and applies them to production in their directly socialised form, each individual’s labour, however different its specific utility may be, becomes a priori and directly social labour. The amount of social labour invested in a product need not then be established indirectly; daily experience immediately tells us how much is necessary on an average. Society can simply calculate how many hours of labour are invested in a steam engine, a quarter of last harvest’s wheat, and a 100 yards of linen of given quality. ... To be sure, society will also have to know how much labour is needed to produce any consumption-good. It will have to arrange its production plan according to its means of production, to which labour especially belongs. The utility yielded by the various consumption-goods, weighted against each other and against the amount of labour required to produce them, will ultimately determine the plan. People will make everything simple without the mediation of the notorious “value”.9

Here it is not our task once more to advance critical objections against the labour theory of value. In this connection they can only interest us in so far as they are relevant to an assessment of the applicability of labour in the value computations of a socialist community.

On a first impression calculation in terms of labour also takes into consideration the natural non-human conditions of production. The law of diminishing returns is already allowed for in the concept of socially necessary average labour-time to the extent that its operation is due to the variety of the natural conditions of production. If the demand for a commodity increases and worse natural resources must be exploited, then the average socially necessary labour-time required for the production of a unit increases too. If more favourable natural resources are discovered, the amount of socially necessary labour diminishes.10 The consideration of the natural condition of production suffices only in so far as it is reflected in the amount of labour socially necessary. But it is in this respect that valuation in terms of labour fails. It leaves the employment of material factors of production out of account. Let the amount of socially necessary labour-time required for the production of each of the commodities P and Q be 10 hours. Further, in addition to labour the production of both P and Q requires the raw material a, a unit of which is produced by an hour’s socially necessary labour; 2 units of a and 8 hours’ labour are used in the production of P, and one unit of a and 9 hours’ labour in the production of Q. In terms of labour P and Q are equivalent, but in value terms P is more valuable than Q. The former is false, and only the latter corresponds to the nature and purpose of calculation. True, this surplus, by which according to value calculation P is more valuable than Q, this material sub-stratum “is given by nature without any addition from man”.11 Still, the fact that it is only present in such quantities that it becomes an object of economizing, must be taken into account in some form or other in value-calculation.

The second defect in calculation in terms of labour is the ignoring of the different qualities of labour. To Marx all human labour is economically of the same kind, as it is always “the productive expenditure of human brain, brawn, nerve and hand”.12

Skilled labour counts only as intensified, or rather multiplied, simple labour, so that a smaller quantity of skilled labour is equal to a larger quantity of simple labour. Experience shows that skilled labour can always be reduced in this way to the terms of simple labour. No matter that a commodity be the product of the most highly skilled labour, its value can be equated with that of the product of simple labour, so that it represents merely a definite amount of simple labour.”

Böhm-Bawerk is not far wrong when he calls this argument “a theoretical juggle of almost stupefying naïveté”.13 To judge Marx’s view we need not ask if it is possible to discover a single uniform physiological measure of all human labour, whether it be physical or “mental”. For it is certain that there exist among men varying degrees of capacity and dexterity, which cause the products and services of labour to have varying qualities. What must be conclusive in deciding the question whether reckoning in terms of labour is applicable or not, is whether it is or is not possible to bring different kinds of labour under a common denominator without the mediation of the economic subject’s valuation of their products. The proof Marx attempts to give is not successful. Experience indeed shows that goods are consumed under exchange relations without regard of the fact of their or complex labour. But this would only be a proof that given amounts of simple labour are directly made equal to given amounts of complex labour, if it were shown that labour is the source of exchange value. This not only is not demonstrated, but is what Marx is trying to demonstrate by means of these very arguments.

No more is it a proof of this homogeneity that rates of substitution between simple and complex labour are manifested in the wage rate in an exchange economy—a fact to which Marx does not allude in this context. This equalizing process is a result of market transactions and not its antecedent. Calculation in terms of labour would have to set up an arbitrary proportion for the substitution of complex by simple labour, which excludes its employment for purposes of economic administration.

It was long supposed that the labour theory of value was indispensable to socialism, so that the demand for the nationalization of the means of production should have an ethical basis. To-day we know this for the error it is. Although the majority of socialist supporters have thus employed this misconception, and although Marx, however much he fundamentally took another point of view, was not altogether free from it, it is clear that the political call for the introduction of socialized production neither requires nor can obtain the support of the labour theory of value on the one hand, and that on the other those people holding different views on the nature and origin of economic value can be socialists according to their sentiments. Yet the labour theory of value is inherently necessary for the supporters of socialist production in a sense other than that usually intended. In the main socialist production might only appear rationally realizable, if it provided an objectively recognizable unit of value, which would permit of economic calculation in an economy where neither money nor exchange were present. And only labour can conceivably be considered as such.

4.   RESPONSIBILITY AND INITIATIVE IN COMMUNAL CONCERNS

The problem of responsibility and initiative in socialist enterprises is closely connected with that of economic calculation. It is now universally agreed that the exclusion of free initiative and individual responsibility, on which the successes of private enterprise depend, constitutes the most serious menace to socialist economic organization.14

The majority of socialists silently pass this problem by. Others believe they can answer it with an allusion to the directors of companies; in spite of the fact that they are not the owners of the means of production, enterprises under their control have flourished. If society, instead of company shareholders, becomes the owner of the means of production, nothing will have altered. The directors would not work less satisfactorily for society than for shareholders.

We must distinguish between two groups of joint-stock companies and similar concerns. In the first group, consisting for the large part of smaller companies, a few individuals unite in a common enterprise in the legal form of a company. They are often the heirs of the founders of the company, or often previous competitors who have amalgamated. Here the actual control and management of business is in the hands of the shareholders themselves or at least of some of the shareholders, who do business in their own interest; or in that of closely related shareholders such as wives, minors, etc. The directors in their capacity as members of the board of management or of the board of control, and sometimes also in an attenuated legal capacity, themselves exercise the decisive influence in the conduct of affairs. Nor is this affected by the circumstance that sometimes part of the share-capital is held by a financial consortium or bank. Here in fact the company is only differentiated from the public commercial company by its legal form.

The situation is quite different in the case of largescale companies, where only a fraction of the shareholders, i.e. the big shareholders, participate in the actual control of the enterprise. And these usually have the same interest in the firm’s prosperity as any property holder. Still, it may well be that they have interests other than those of the vast majority of small shareholders, who are excluded from the management even if they own the larger part of the share-capital. Severe collisions may occur, when the firm’s business is so handled on behalf of the directors that the shareholders are injured. But be that as it may, it is clear that the real holders of power in companies run the business in their own interest, whether it coincides with that of the shareholders or not. In the long run it will generally be to the advantage of the solid company administrator, who is not merely bent on making a transient profit, to represent the shareholders’ interests only in every case and to avoid manipulations which might damage them. This holds good in the first instance for banks and financial groups, which should not trifle at the public’s expense with the credit they enjoy. Thus it is not merely on the prescriptiveness of ethical motives that the success of companies depends.

The situation is completely transformed when an undertaking is nationalized. The motive force disappears with the exclusion of the material interests of private individuals, and if State and municipal enterprises thrive at all, they owe it to the taking over of “management” from private enterprise, or to the fact that they are ever driven to reforms and innovations by the business men from whom they purchase their instruments of production and raw material.

Since we are in a position to survey decades of State and socialist endeavour, it is now generally recognized that there is no internal pressure to reform and improvement of production in socialist undertakings, that they cannot be adjusted to the changing conditions of demand, and that in a word they are a dead limb in the economic organism. All attempts to breathe life into them have so far been in vain. It was supposed that a reform in the system of remuneration might achieve the desired end. If the managers of these enterprises were interested in the yield, it was thought they would be in a position comparable to that of the manager of large-scale companies. This is a fatal error. The managers of largescale companies are bound up with the interests of the businesses they administer in an entirely different way from what could be the case in public concerns. They are either already owners of a not inconsiderable fraction of the share capital, or hope to become so in due course. Further, they are in a position to obtain profits by stock-exchange speculation in the company’s shares. They have the prospect of bequeathing their positions to, or at least securing part of their influence for, their heirs. The type to which the success of joint-stock companies is to be attributed, is not that of a complacently prosperous managing director resembling the civil servant in his outlook and experience; rather it is precisely the manager, promoter, and man of affairs, who is himself interested as a shareholder, whom it is the aim of all nationalization and municipalization to exclude.

It is not generally legitimate to appeal in a socialist context to such arguments in order to ensure the success of an economic order built on socialist foundations. All socialist systems, including that of Karl Marx, and his orthodox supporters, proceed from the assumption that in a socialist society a conflict between the interests of the particular and general could not possibly arise. Everybody will act in his own interest in giving of his best because he participates in the product of all economic activity. The obvious objection that the individual is very little concerned whether he himself is diligent and enthusiastic, and that it is of greater moment to him that everybody else should be, is either completely ignored or is insufficiently dealt with by them. They believe they can construct a socialist commonwealth on the basis of the Categorical Imperative alone. How lightly it is their wont to proceed in this way is best shown by Kautsky when he says, “If socialism is a social necessity, then it would be human nature and not socialism which would have to readjust itself, if ever the two clashed.” 15 This is nothing but sheer Utopianism.

But even if we for the moment grant that these Utopian expectations can actually be realized, that each individual in a socialist society will exert himself with the same zeal as he does to-day in a society where he is subjected to the pressure of free competition, there still remains the problem of measuring the result of economic activity in a socialist commonwealth which does not permit of any economic calculation. We cannot act economically if we are not in a position to understand economizing.

A popular slogan affirms that if we think less bureaucratically and more commercially in communal enterprises, they will work just as well as private enterprises. The leading positions must be occupied by merchants, and then income will grow apace. Unfortunately “commercial-mindedness” is not something external, which can be arbitrarily transferred. A merchant’s qualities are not the property of a person depending on inborn aptitude, nor are they acquired by studies in a commercial school or by working in a commercial house, or even by having been a business man oneself for some period of time. The entrepreneur’s commercial attitude and activity arises from his position in the economic process and is lost with its disappearance. When a successful business man is appointed the manager of a public enterprise, he may still bring with him certain experiences from his previous occupation, and be able to turn them to good account in a routine fashion for some time. Still, with his entry into communal activity he ceases to be a merchant and becomes as much a bureaucrat as any other placeman in the public employ. It is not a knowledge of bookkeeping, of business organization, or of the style of commercial correspondence, or even a dispensation from a commercial high-school, which makes the merchant, but his characteristic position in the production process, which allows of the identification of the firm’s and his own interests. It is no solution of the problem when Otto Bauer in his most recently published work proposes that the directors of the National Central Bank, on whom leadership in the economic process will be conferred, should be nominated by a Collegium, to which representatives of the teaching staff of the commercial high schools would also belong.16 Like Plato’s philosophers, the directors so appointed may well be the wisest and best of their kind, but they cannot be merchants in their posts as leaders of a socialist society, even if they should have been previously.

It is a general complaint that the administration of public undertakings lacks initiative. It is believed that this might be remedied by changes in organization. This also is a grievous mistake. The management of a socialist concern cannot entirely be placed in the hands of a single individual, because there must always be the suspicion that he will permit errors inflicting heavy damages on the community. But if the important conclusions are made dependent on the votes of committees, or on the consent of the relevant government offices, then limitations are imposed on the individual’s initiative. Committees are rarely inclined to introduce bold innovations. The lack of free initiative in public business rests not on an absence of organization, it is inherent in the nature of the business itself. One cannot transfer free disposal of the factors of production to an employee, however high his rank, and this becomes even less possible, the more strongly he is materially interested in the successful performance of his duties; for in practice the propertyless manager can only be held morally responsible for losses incurred. And so ethical losses are juxtaposed with opportunities for material gain. The property owner on the other hand himself bears responsibility, as he himself must primarily feel the loss arising from unwisely conducted business. It is precisely in this that there is a characteristic difference between liberal and socialist production.

5.   THE MOST RECENT SOCIALIST DOCTRINES AND THE PROBLEM OF ECONOMIC CALCULATION

Since recent events helped socialist parties to obtain power in Russia, Hungary, Germany and Austria, and have thus made the execution of a socialist nationalization programme a topical issue, Marxist writers have themselves begun to deal more closely with the problems of the regulation of the socialist commonwealth. But even now they still cautiously avoid the crucial question, leaving it to be tackled by the despised “Utopians”. They themselves prefer to confine their attention to what is to be done in the immediate future; they are for ever drawing up programmes of the path to Socialism and not of Socialism itself. The only possible conclusion from all these writings is that they are not even conscious of the larger problem of economic calculation in a socialist society.

To Otto Bauer the nationalization of the banks appears the final and decisive step in the carrying through of the socialist nationalization programme. If all banks are nationalized and amalgamated into a single central bank, then its administrative board becomes “the supreme economic authority, the chief administrative organ of the whole economy. Only by nationalization of the banks does society obtain the power to regulate its labour according to a plan, and to distribute its resources rationally among the various branches of production, so as to adapt them to the nation’s needs.” 17 Bauer is not discussing the monetary arrangements which will prevail in the socialist commonwealth after the completion of the nationalization of the banks. Like other Marxists he is trying to show how simply and obviously the future socialist order of society will evolve from the conditions prevailing in a developed capitalist economy. “It suffices to transfer to the nation’s representatives the power now exercised by bank shareholders through the Administrative Boards they elect,” 18 in order to socialize the banks and thus to lay the last brick on the edifice of socialism. Bauer leaves his readers completely ignorant of the fact that the nature of the banks is entirely changed in the process of nationalization and amalgamation into one central bank. Once the banks merge into a single bank, their essence is wholly transformed; they are then in a position to issue credit without any limitation.19 In this fashion the monetary system as we know it to-day disappears of itself. When in addition the single central bank is nationalized in a society, which is otherwise already completely socialized, market dealings disappear and all exchange transactions are abolished. At the same time the Bank ceases to be a bank, its specific functions are extinguished, for there is no longer any place for it in such a society. It may be that the name “Bank” is retained, that the Supreme Economic Council of the socialist community is called the Board of Directors of the Bank, and that they hold their meetings in a building formerly occupied by a bank. But it is no longer a bank, it fulfils none of those functions which a bank fulfils in an economic system resting on the private ownership of the means of production and the use of a general medium of exchange-money. It no longer distributes any credit, for a socialist society makes credit of necessity impossible. Bauer himself does not tell us what a bank is, but he begins his chapter on the nationalization of the banks with the sentence: “All disposable capital flows into a common pool in the banks.” 20 As a Marxist must he not raise the question of what the banks’ activities will be after the abolition of capitalism?

All other writers who have grappled with the problems of the organization of the socialist commonwealth are guilty of similar confusions. They do not realize that the bases of economic calculation are removed by the exclusion of exchange and the pricing mechanism, and that something must be substituted in its place, if all economy is not to be abolished and a hopeless chaos is not to result. People believe that socialist institutions might evolve without further ado from those of a capitalist economy. This is not at all the case. And it becomes all the more grotesque when we talk of banks, bank management, etc. in a socialist commonwealth.

Reference to the conditions that have developed in Russia and Hungary under Soviet rule proves nothing. What we have there is nothing but a picture of the destruction of an existing order of social production, for which a closed peasant household economy has been substituted. All branches of production depending on social division of labour are in a state of entire dissolution. What is happening under the rule of Lenin and Trotsky is merely destruction and annihilation. Whether, as the liberals hold, socialism must inevitably draw these consequences in its train, or whether, as the socialists retort, this is only a result of the fact that the Soviet Republic is attacked from without, is a question of no interest to us in this context. All that has to be established is the fact that the Soviet socialist commonwealth has not even begun to discuss the problem of economic calculation, nor has it any cause to do so. For where things are still produced for the market in Soviet Russia in spite of governmental prohibitions, they are valued in terms of money, for there exists to that extent private ownership of the means of production, and goods are sold against money. Even the Government cannot deny the necessity, which it confirms by increasing the amount of money in circulation, of retaining a monetary system for at least the transition period.

That the essence of the problem to be faced has not yet come to light in Soviet Russia, Lenin’s statements in his essay on Die nächsten Aufgaben der Sowjetmacht best show. In the dictator’s deliberations there ever recurs the thought that the immediate and most pressing task of Russian Communism is “the organization of bookkeeping and control of those concerns, in which the capitalists have already been expropriated, and of all other economic concerns”.21 Even so Lenin is far from realizing that an entirely new problem is here involved which it is impossible to solve with the conceptual instruments of “bourgeois” culture. Like a real politician, he does not bother with issues beyond his nose. He still finds himself surrounded by monetary transactions, and does not notice that with progressive socialization money also necessarily loses its function as the medium of exchange in general use, to the extent that private property and with it exchange disappear. The implication of Lenin’s reflections is that he would like to re-introduce into Soviet business “bourgeois” bookkeeping carried on on a monetary basis. Therefore he also desires to restore “bourgeois experts” to a state of grace.22 For the rest Lenin is as little aware as Bauer of the fact that in a socialist commonwealth the functions of the bank are unthinkable in their existing sense. He wishes to go farther with the “nationalization of the banks” and to proceed “to a transformation of the banks into the nodal point of social bookkeeping under socialism”.23

Lenin’s ideas on the socialist economic system, to which he is striving to lead his people, are generally obscure.

“The socialist state”, he says “can only arise as a net of producing and consuming communes, which conscientiously record their production and consumption, go about their labour economically, uninterruptedly raise their labour productivity and thus attain the possibility of lowering the working day to seven or six hours or even lower.” 24 “Every factory, every village appears as a production and consumption commune having the right and obligation to apply the general Soviet legislation in its own way (‘in its own way’ not in the sense of its violation but in the sense of the variety of its forms of realisation), and to solve in its own way the problem of calculating the production and distribution of products.” 25

“The chief communes must and will serve the most backward ones as educators, teachers, and stimulating leaders.” The successes of the chief communes must be broadcast in all their details in order to provide a good example. The communes “showing good business results” should be immediately rewarded “by a curtailment of the working day and with an increase in wages, and by allowing more attention to be paid to cultural and aesthetic goods and values”.26

We can infer that Lenin’s ideal is a state of society in which the means of production are not the property of a few districts, municipalities, or even of the workers in the concern, but of the whole community. His ideal is socialist and not syndicalist. This need not be specially stressed for a Marxist such as Lenin. It is not extraordinary of Lenin the theorist, but of Lenin the statesman, who is the leader of the syndicalist and small-holding peasant Russian revolution. However, at the moment we are engaged with the writer Lenin and may consider his ideals separately, without letting ourselves be disturbed by the picture of sober reality. According to Lenin the theorist, every large agricultural and industrial concern is a member of the great commonwealth of labour. Those who are active in this commonwealth have the right of self-government; they exercise a profound influence on the direction of production and again on the distribution of the goods they are assigned for consumption. Still labour is the property of the whole society, and as its product belongs to society also, it therefore disposes of its distribution. How, we must now ask, is calculation in the economy carried on in a socialist commonwealth which is so organized? Lenin gives us a most inadequate answer by referring us back to statistics. We must

bring statistics to the masses, make it popular, so that the active population will gradually learn by themselves to understand and realise how much and what kind of work must be done, how much and what kind of recreation should be taken, so that the comparison of the economy’s industrial results in the case of individual communes becomes the object of general interest and education.27

From these scanty allusions it is impossible to infer what Lenin understands by statistics and whether he is thinking of monetary or in natura computation. In any case, we must refer back to what we have said about the impossibility of learning the money prices of production-goods in a socialist commonwealth and about the difficulties standing in the way of in natura valuation.28 Statistics would only be applicable to economic calculation if it could go beyond the in natura calculation, whose ill-suitedness for this purpose we have demonstrated. It is naturally impossible where no exchange relations are formed between goods in the process of trade.

CONCLUSION

It must follow from what we have been able to establish in our previous arguments that the protagonists of a socialist system of production claim preference for it on the ground of greater rationality as against an economy so constituted as to depend on private ownership of the means of production. We have no need to consider this opinion within the framework of the present essay, in so far as it falls back on the assertion that rational economic activity necessarily cannot be perfect, because certain forces are operative which hinder its pursuance. In this connection we may only pay attention to the economic and technical reason for this opinion. There hovers before the holders of this tenet a muddled conception of technical rationality, which stands in antithesis to economic rationality, on which also they are not very clear. They are wont to overlook the fact that “all technical rationality of production is identical with a low level of specific expenditure in the processes of production”.29 They overlook the fact that technical calculation is not enough to realize the “degree of general and teleologica1 expediency” 30 of an event; that it can only grade individual events according to their significance; but that it can never guide us in those judgments which are demanded by the economic complex as a whole. Only because of the fact that technical considerations can be based on profitability can we overcome the difficulty arising from the complexity of the relations between the mighty system of present-day production on the one hand and demand and the efficiency of enterprises and economic units on the other; and can we gain the complete picture of the situation in its totality, which rational economic activity requires.31

These theories are dominated by a confused conception of the primacy of objective use-value. In fact, so far as economic administration is concerned, objective use-value can only acquire significance for the economy through the influence it derives from subjective use-value on the formation of the exchange-relations of economic goods. A second confused idea is inexplicably involved—the observer’s personal judgment of the utility of goods as opposed to the judgments of the people participating in economic transactions. If anyone finds it “irrational” to spend as much as is expended in society on smoking, drinking, and similar enjoyments, then doubtless he is right from the point of view of his own personal scale of values. But in so judging, he is ignoring the fact that economy is a means, and that, without prejudice to the rational considerations influencing its pattern, the scale of ultimate ends is a matter for conation and not for cognition.

The knowledge of the fact that rational economic activity is impossible in a socialist commonwealth cannot, of course, be used as an argument either for or against socialism. Whoever is prepared himself to enter upon socialism on ethical grounds on the supposition that the provision of goods of a lower order for human beings under a system of a common ownership of the means of production is diminished, or whoever is guided by ascetic ideals in his desire for socialism, will not allow himself to be influenced in his endeavours by what we have said. Still less will those “culture” socialists be deterred who, like Muckle, expect from socialism primarily “the dissolution of the most frightful of all barbarisms—capitalist rationality”.32 But he who expects a rational economic system from socialism will be forced to re-examine his views.

 

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33 [This article appeared originally under the title “Die Wirtschaftsrechnung im sozialistischen Gemeinwesen” in the Archiv für Sozialwissenschaften, vol. 47, 1920,—Ed.]

34 v. Kautsky, The Social Revolution and on the Morrow of the Social Revolution, London, 1907, Part II, p. 1.

35 Using that term, of course, in the sense only of the valuating subject, and not in an objective and universally applicable sense.

36 Čuhel, Zur Lehre von den Bedürfnissen, Innsbruck, 1907, pp. 198 ff.

37 Cf. Wieser, Über den Ursprung und dir Hauptgesetze des wirtschof-lichen Wertes, Vienna, 1884, pp. 185 ff.

38 Cf. Mises, Theorie des Geldes u. der Umlaufsmittel, Munich and Leipzig, 1912, p. 16, with the references there given.

39 Gottl-Ottlilienfeld, Wirtschaft u. Technik (Grundriss d. Sozialökonomik, Section II, Tübingen, 1914), p. 216.

40 This fact is also recognized by Neurath (Durch die Kriegswirtschaft zur Naturalwirtschaft, Munich, 1919, pp. 216 f.). He advances the view that every complete administrative economy is, in the final analysis, a natural economy. “Socialization”, he says, “is thus the pursuit of natural economy.” Neurath merely overlooks the insuperable difficulties that would have to develop with economic calculation in the socialist commonwealth.

41 Engels, Dührings Umwälzung des Wissenschaft, 7th ed., pp. 335 f.

42 Marx, Capital, translated by Eden and Cedar Paul, p. 9.

43 Marx, ibid., p. 12.

44 Marx, ibid., pp. 13 et seq.

45 Cf. Böhm-Bawerk, Capital and Interest, p. 384.

46 Cf. Vorläufiger Bericht der Sozialisierungskommission über die Frage der Sozialisierung des Kohlenbergbaues, concluded 15th February, 1919 (Berlin, 1919), p. 13.

47 Cf. Kautsky, Preface to Atlanticus (Ballod), Produktion und Konsum im Sozialstaat, Stuttgart, 1898, p. 14.

48 Cf. Bauer, Der Weg zum Sozialismus, Vienna, 1919, p. 25.

49 Bauer, op cit., pp. 26 f.

50 Ibid., p. 25.

51 Mises, op. cit., pp. 474 ff.

52 Bauer, op. cit., p. 24.

53 Cf. Lenin ; Die nächsten Aufgaben der Sowjetmacht, Berlin, 1918, pp. 12 f., 22 ff.

54 Op. cit., p. 15.

55 Ibid., pp. 21 and 26. Compare also Bucharin, Das Programm der Kommunisten, Zürich, 1918, pp. 27 ff.

56 Cf. Lenin, op. cit., pp. 24 f.

57 Ibid., p. 32.

58 Ibid., p. 33.

59 Op. cit., p. 33.

60 Neurath, too (cf. op. cit., pp. 212 et seq.), imputes great importance to statistics for the setting up of the socialist economic plan.

61 Cf. Gottl, op, cit., p. 220.

62 Ibid., p. 219.

63 Ibid., p. 225.

64 Cf. Muckle, Das Kulturideal des Sozialismus, Munich and Leipzig, p. 213. On the other hand, Muckle demands the “highest degree of rationalisation of economic life in order to curtail hours of labour, and to permit man to withdraw to an island where he can listen to the melody of his being”.

• 1Some of the points on which I can only touch here I have developed at somewhat greater length in my inaugural address on the Trend of Economic Thinking, Economica, May, 1933.
• 2A useful collection of the different allusions to this problem in Marx’s works, particularly in the Randglossen zum Gothaer Programm (1875), will be found in K. Tisch, Wirtschaftsrechnung und Verteilung im zentralistisch organisierten sozialistischen Gemeinwesen, 1932, pp. 110-15.
• 3Cf. L. V. Mises, Interventionismus, Jena, 1929.
• 4Cf. particularly F. v. Wieser, Natural Value, London, 1893, passim.
• 5H. H. Gossen, Entwicklung der Gesetze des Menschlichen Verkehrs und der daraus fliessenden Regeln für menschliches Handeln, Braunschweig, 1854, p. 231 : “Dazu folgt aber ausserdem aus den im vorstehenden gefundenen Sätzen über das Geniessen, und infolgedessen über das Steigen und Sinken des Werthes jeder Sache mit Verminderung und Vermehrung der Masse und der Art, dass nur durch Feststellung des Privateigenthums der Massstab gefunden wird zur Bestimmung der Quantität, welche den Verhältnissen angemessen am Zweckmässigsten von jedem Gegenstand zu produzieren ist. Darum würde denn die von Communisten projectierte Zentralbehörde zur Verteilung der verschiedenen Arbeiten sehr bald die Erfahrung machen, dass sie sich eine Aufgabe gestellt habe, deren Lösung die Kräfte einzelner Menschen weit übersteigt” (italics in the original).
• 6A completely neglected attempt to solve the problem from the socialist side, which shows at least some realization of the real difficulty, was made by G. Sulzer, Die Zukunft des Sozialismus, Dresden, 1899.
• 7In addition to his general work on interest, his essay on “Macht und ökonomisches Gesetz” (Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1914) should be specially mentioned, which in many ways must be regarded as a direct predecessor of the later critical work.
• 8V. Pareto, Cours d’Economie Politique, Vol. II, Lausanne, 1897, pp. 364 et seq.
• 9O. Neurath, Durch die Kriegswirtschaft zur Naturalwirtsckaft, München, 1919.
• 10This plan was originally developed in a memorandum submitted to the Cabinet of the Reich on May 7, 1919, and later developed by R. Wissel in two pamphlets, Die Planwirtschaft, Hamburg, 1920, and Praktische Wirtschaftspolitik, Berlin, 1919.
• 11Die Wirtschaftsrechnung im sozialistischen Gemeinwesen, Archiv für Sozialwissenchaften und Sozialpolitik, Vol. 47/1, April, 1920. Most of this article has been embodied in the more elaborate discussion of the economic problems of a socialist community in Part II of Professor Mises’ Gemeinwirtschaft, Jena, 1922, 2nd ed., 1932.
• 12E. Cannan, A History of the Theories of Production and Distribution, 1893, 3rd edition, 1917, p. 395. Professor Cannan has later also made an important contribution to the problem of the international relation between socialist states. Cf. his essay on “The Incompatibility of Socialism and Nationalism” in The Economic Outlook, London, 1912.
• 13Cf. Böhm-Bawerk, Capital and Interest, p. 384.
• 14Cf. Vorläufiger Bericht der Sozialisierungskommission über die Frage der Sozialisierung des Kohlenbergbaues, concluded 15th February, 1919 (Berlin, 1919), p. 13.
• 15Max Weber, Wirtschaft und Gesellschaft (Grundriss der Sozialökonomik, Vol. III), Tübingen, 1921, pp. 55-6.
• 16The original title under which these lectures appeared in the winter 1921-2 in the Russian journal Ekonomist was the Problems of Social Economy under Socialism. They were later reprinted in Russian as a pamphlet which appeared in Berlin, 1923, and a German translation under the title Die Lehren des Marxismus im Lichte der russischen Revolution was published in Berlin, 1928.
• 17It is perhaps necessary in this connection to state explicitly that it would be wholly inconclusive if such a comparison were made between capitalism as it exists (or is supposed still to exist) and socialism as it might work under ideal assumptions—or between capitalism as it might be in its ideal form and socialism in some imperfect form. If the comparison is to be of any value for the question of principle, it has to be made on the assumption that either system is realized in the form which is most rational under the given condition of human nature and external circumstances which must of course be accepted.
• 18An English translation of this lecture, originally given in Delft on April 24, 1902, and soon afterwards published in German, together with that of another lecture given two days earlier at the same place, was published in London, 1907, under the title, The Social Revolution and On the Morrow of the Social Revolution.
• 19Mises, op. cit., pp. 474 ff.
• 20A noteworthy early and independent exposition of the way in which the problem of value will make itself felt in a socialist society and of the difficulties which would impede the rational distribution of resources in such a society occurs in a little known small book by John Bowen, Conditions of Social Welfare, London, 1926, particularly pp. 23 et seq.
• 21Cf. Lenin ; Die nächsten Aufgaben der Sowjetmacht, Berlin, 1918, pp. 12 f., 22 ff.
• 22Op. cit., p. 15.
• 23O. Bauer, Der Weg zum Sozialismus, Wien, 1919.
• 24Cf. Lenin, op. cit., pp. 24 f.
• 25Ibid., p. 32.
• 26Ibid., p. 33.
• 27Op. cit., p. 33.
• 28Neurath, too (cf. op. cit., pp. 212 et seq.), imputes great importance to statistics for the setting up of the socialist economic plan.
• 29Cf. Gottl, op, cit., p. 220.
• 30Ibid., p. 219.
• 31Ibid., p. 225.
• 32Cf. Muckle, Das Kulturideal des Sozialismus, Munich and Leipzig, p. 213. On the other hand, Muckle demands the “highest degree of rationalisation of economic life in order to curtail hours of labour, and to permit man to withdraw to an island where he can listen to the melody of his being”.
• 33It was largely owing to this temporary eclipse of analytical economics that the real problems connected with the suggestions of a planned economy have received so surprisingly little careful examination. But this eclipse itself was by no means only due to the inherent weaknesses and the consequent need for reconstruction of the old economics. Nor would it have had the same effect if it had not coincided with the rise of another movement definitely hostile to rational methods in economics. The common cause which at the same time undermined the position of economic theory and furthered the growth of a school of socialism, which positively discouraged any speculation of the actual working of the society of the future, was the rise of the so-called historical school in economics. For it was the essence of the standpoint of this school, that the laws of economics could only be established by the application to the material of history of the methods of the natural sciences. And the nature of this material is such that any such attempt is bound to degenerate into mere record and description and a total scepticism concerning the existence of any laws at all.
• 34The fact that this most influential school of socialism was so closely related to the general antitheoretical tendencies in the social sciences of the time had a most profound effect on all further discussion of the real problems of socialism. Not only did the whole outlook create a peculiar inability to see any of the permanent economic problems which are independent of the historical framework, but Marx and the Marxians also proceeded, quite consistently, positively to discourage any inquiry into the actual organization and working of the socialist society of the future. If the change was to be brought about by the inexorable logic of history, if it was the inevitable result of evolution, there was little need for knowing in detail what exactly the new society would be like. And if nearly all the factors which determined economic activity in the present society would be absent, if there would be no problems in the new society except those determined by the new institutions which the process of historical change would have created, then there was indeed little possibility of solving any of its problems beforehand. Marx himself had only scorn and ridicule for any such attempt deliberately to construct a working plan of such an “utopia”. Only occasionally, and then in this negative form, do we find in his works statements about what the new society would not be like. One may search his writings in vain for any definite statement of the general principles on which the economic activity in the socialist community would be directed.
• 35It is impossible within the scope of this discussion of socialism to enter further into this separate problem of state intervention in a capitalistic society. It is mentioned here only to say explicitly that it is excluded from our considerations. In our opinion well-accepted analysis shows that it does not provide an alternative which can be rationally chosen or which can be expected to provide a stable or satisfactory solution of any of the problems to which it is applied.
• 36The omnipresence of this problem of value wherever there is rational action was the basic fact from which a systematic exploration of the forms, under which it would make its appearance under different organizations of economic life, could proceed. And up to a certain point from the very beginning the problems of a centrally directed economy found a prominent place in the expositions of modem economics. It was obviously so much simpler to discuss the fundamental problems on the assumption of the existence of a single scale of values consistently followed than on the assumption of a multiplicity of individuals following their personal scales, that in the early chapters of the new systems the assumption of a communist state was frequently used—and used with considerable advantage—as an expository device. But it was used only to demonstrate that any solution would necessarily give rise to essentially the same value phenomena—rent, wages, and interest, etc.—which we actually observe in a competitive society, and the authors then generally proceeded to show how the interaction of independent activities of the individuals produced these phenomena spontaneously without inquiring further whether they could be produced in a complex modern society by any other means. The mere absence of an agreed common scale of values seemed to deprive that problem of any practical importance. It is true that some of the earlier writers of the new school not only thought that they had actually solved the problem of socialism but also believed that their utility calculus provided a means which made it possible to combine individual utility scale into a scale of ends objectively valid for society as a whole. But it is now generally recognized that this latter belief was just an illusion and that there is no scientific criterion which would enable us to compare or assess the relative importance of needs of different persons, although conclusions implying such illegitimate interpersonal comparisons of utilities can probably still be found in discussions of special problems.
• 37But it is evident that as the progress of the analysis of the competitive system revealed the complexity of the problems which it solved spontaneously, economists became more and more sceptical about the possibility of solving the same problems by deliberate decision. It is perhaps worth noting that as early as 1854 the most famous among the predecessors of the modern “marginal utility” school, the German, H. H. Gossen, had come to the conclusion that the central economic authority projected by the communists would soon find that it had set itself a task which far exceeded the powers of individual men. Among the later economists of the modern school the point in which already Gossen based his objection, the difficulty of rational calculation when there is no private property, was frequently hinted at. It was particularly clearly put by Professor Cannan, who stressed the fact that the aims of socialists and communists could only be achieved by “abolishing both the institution of private property and the practice of exchange, without which value, in any reasonable sense of the word, cannot exist”. But beyond general statements of this sort, critical examination of the possibilities of a socialist economic policy made little headway, for the simple reason that no concrete socialist proposal of how these problems would be overcome existed to be examined.
• 38But it is evident that as the progress of the analysis of the competitive system revealed the complexity of the problems which it solved spontaneously, economists became more and more sceptical about the possibility of solving the same problems by deliberate decision. It is perhaps worth noting that as early as 1854 the most famous among the predecessors of the modern “marginal utility” school, the German, H. H. Gossen, had come to the conclusion that the central economic authority projected by the communists would soon find that it had set itself a task which far exceeded the powers of individual men. Among the later economists of the modern school the point in which already Gossen based his objection, the difficulty of rational calculation when there is no private property, was frequently hinted at. It was particularly clearly put by Professor Cannan, who stressed the fact that the aims of socialists and communists could only be achieved by “abolishing both the institution of private property and the practice of exchange, without which value, in any reasonable sense of the word, cannot exist”. But beyond general statements of this sort, critical examination of the possibilities of a socialist economic policy made little headway, for the simple reason that no concrete socialist proposal of how these problems would be overcome existed to be examined.
• 39All the further discussions of the economic problems of socialism which appeared before the War confined themselves more or less to the demonstration that the main categories of prices, as wages, rent and interest, would have to figure at least in the calculations of the planning authority in the same way in which they appear to-day and would be determined by essentially the same factors. The modern development of the theory of interest played a particularly important rôle in this connection, and after Böhm-Bawerk it was particularly Professor Cassel who showed convincingly that interest would have to form an important element in the rational calculation of economic activity. But none of these authors even attempted to show how these essential magnitudes could be arrived at in practice. The one author who at least approached the problem was the Italian economist Enrico Barone who in 1908 in an article on the Ministry of Production in the Collectivist State developed certain suggestions of Pareto’s. This article is of considerable interest as an example of how it was thought that the tools of mathematical analysis of economic problems might be utilized to solve the tasks of the central planning authority. An English translation will be found as an appendix to this volume.
• 40All the further discussions of the economic problems of socialism which appeared before the War confined themselves more or less to the demonstration that the main categories of prices, as wages, rent and interest, would have to figure at least in the calculations of the planning authority in the same way in which they appear to-day and would be determined by essentially the same factors. The modern development of the theory of interest played a particularly important rôle in this connection, and after Böhm-Bawerk it was particularly Professor Cassel who showed convincingly that interest would have to form an important element in the rational calculation of economic activity. But none of these authors even attempted to show how these essential magnitudes could be arrived at in practice. The one author who at least approached the problem was the Italian economist Enrico Barone who in 1908 in an article on the Ministry of Production in the Collectivist State developed certain suggestions of Pareto’s. This article is of considerable interest as an example of how it was thought that the tools of mathematical analysis of economic problems might be utilized to solve the tasks of the central planning authority. An English translation will be found as an appendix to this volume.
• 41Among these early socialist contributions to the discussions, in many ways the most interesting and in any case the most representative for the still very limited recognition of the nature of the economic problems involved, is a book by Dr. O. Neurath which appeared in 1919, in which the author tried to show that war experiences had shown that it was possible to dispense with any considerations of value in the administration of the supply of commodities and that all the calculations of the central planning authorities should and could be carried out in natura, i.e. that the calculations need not be carried through in terms of some common unit of value but that they could be made in kind. Neurath was quite oblivious of the insuperaole difficulties which the absence of value calculations would put in the way of any rational economic use of the resources and even seemed to consider it as an advantage. Similar structures apply to the works published about the same time by one of the leading spirits of the Austrian social-democratic party, Dr. O. Bauer. It is impossible here to give any detailed account of the argument of these and a number of other related publications of that time. They have to be mentioned, however, because they are important as representative expression of socialist thought just before the impact of the new criticism and because much of this criticism is naturally directly or implicitly concerned with these works.
• 42In Germany discussion centred round the proposals of the “socialization commission” set up to discuss the possibilities of the transfer of individual industries to the ownership and control of the State, It was this commission or in connection with its deliberations that economists like Professor E. Lederer and Professor E. Heimann and the ill-fated W. Rathenau developed plans for socialization which became the main topic of discussion among economists. For our purpose, however, these proposals are less interesting than their Austrian counterparts because they did not contemplate a completely socialized system but were mainly concerned with the problem of the organization of individual socialized industries in an otherwise competitive system, For this reason their authors did not have to confront the main problems of a really socialist system. They are important, nevertheless, as symptoms of the state of public opinion at the time and in the nation where the more scientific examination of these problems began. One of the projects of this period deserves perhaps special mention not only because its authors are the inventors of the now fashionable term “planned economy”, but also because it so closely resembles the proposals for planning now so prevalent in this country. This is the plan developed in 1919 by the Reichswirtschaftsminister R. Wissel and his under-secretary of state W. v. Moellendorf. But interesting as their proposals of organization of individual industries are and relevant as is the discussion to which they gave rise to many of the problems discussed in England at the present moment, they cannot be regarded as socialist proposals of the kind discussed here, but belong to the halfway house between capitalism and socialism, discussion of which for reasons mentioned above has been deliberately excluded from the present work.
• 43The distinction of having first formulated the central problem of socialist economics in such a form as to make it impossible that it should ever again disappear from the discussion belongs to the Austrian economist Professor Ludwig von Mises. In an article on Economic Calculation in a Socialist Community, which appeared in the spring of 1920, he demonstrated that the possibility of rational calculation in our present economic system was based on the fact that prices expressed in money provided the essential condition which made such reckoning possible. The essential point where Professor Mises went far beyond anything done by his predecessors was the detailed demonstration that an economic use of the available resources was only possible if this pricing was applied not only to the final product but also to all the intermediate products and factors of production, and that no other process was conceivable which would take in the same way account of all the relevant facts as did the pricing process of the competitive market. A translation of this article is contained in the present volume and it is hoped that the larger work in which it was later incorporated will also soon be available in an English edition. Together the two works represent the starting-point from which all the discussions of the economic problems of socialism, whether constructive or critical, which aspire to be taken seriously must necessarily proceed. As the main argument is contained in the article reproduced later in this volume, nothing further need to be said about it at this point.
• 44But it is evident that as the progress of the analysis of the competitive system revealed the complexity of the problems which it solved spontaneously, economists became more and more sceptical about the possibility of solving the same problems by deliberate decision. It is perhaps worth noting that as early as 1854 the most famous among the predecessors of the modern “marginal utility” school, the German, H. H. Gossen, had come to the conclusion that the central economic authority projected by the communists would soon find that it had set itself a task which far exceeded the powers of individual men. Among the later economists of the modern school the point in which already Gossen based his objection, the difficulty of rational calculation when there is no private property, was frequently hinted at. It was particularly clearly put by Professor Cannan, who stressed the fact that the aims of socialists and communists could only be achieved by “abolishing both the institution of private property and the practice of exchange, without which value, in any reasonable sense of the word, cannot exist”. But beyond general statements of this sort, critical examination of the possibilities of a socialist economic policy made little headway, for the simple reason that no concrete socialist proposal of how these problems would be overcome existed to be examined.
• 45Böhm-Bawerk is not far wrong when he calls this argument “a theoretical juggle of almost stupefying naïveté”. To judge Marx’s view we need not ask if it is possible to discover a single uniform physiological measure of all human labour, whether it be physical or “mental”. For it is certain that there exist among men varying degrees of capacity and dexterity, which cause the products and services of labour to have varying qualities. What must be conclusive in deciding the question whether reckoning in terms of labour is applicable or not, is whether it is or is not possible to bring different kinds of labour under a common denominator without the mediation of the economic subject’s valuation of their products. The proof Marx attempts to give is not successful. Experience indeed shows that goods are consumed under exchange relations without regard of the fact of their or complex labour. But this would only be a proof that given amounts of simple labour are directly made equal to given amounts of complex labour, if it were shown that labour is the source of exchange value. This not only is not demonstrated, but is what Marx is trying to demonstrate by means of these very arguments.
• 46The problem of responsibility and initiative in socialist enterprises is closely connected with that of economic calculation. It is now universally agreed that the exclusion of free initiative and individual responsibility, on which the successes of private enterprise depend, constitutes the most serious menace to socialist economic organization.
• 47The assumption that some system of accounting would in time be found or invented if one only tried seriously to tackle the problem of a moneyless economy does not help here : the problem is the fundamental problem of any complete socialization and it is certainly impossible to talk of a rationally “planned economy” while in so far as the all-decisive point is concerned no means for the construction of a “plan” is known.
• 48A practically simultaneous development of the same ideas is to be found in Russia. Here in the summer of 1920 in the short interval after the first military successes of the new system, when it had for once become possible to utter criticisms in public, Professor Boris Brutzkus, a distinguished economist mainly known for his studies in the agricultural problems of Russia, subjected to a searching criticism in a series of lectures the doctrines governing the action of the communist rulers. These lectures, which appeared under the title “ The Problems of Social Economy under Socialism ” in a Russian journal and were only many years later made accessible to a wider public in a German translation, show in their main conclusion a remarkable resemblance to the doctrines of Mises and Max Weber, although they arose out of the study of the concrete problems which Russia had to face at that time, and although they were written at a time when their author, cut off from all communication with the outside world, could not have known of the similar efforts of the Austrian and German scholars. Like Professor Mises and Max Weber his criticism centres round the impossibility of a rational calculation in a centrally directed economy from which prices are necessarily absent. An English translation of this essay, together with discussion of the development of economic planning in Russia which conforms in a remarkable way to the expectations which could be based on such theories, will appear simultaneously with the present book as a companion volume to it.
• 49But it was only natural that even where Professor Mises’ main thesis was conceded this did not mean an abandonment of the search for a way to realize the socialist ideals. Its main effect was to divert attention from what had so far been universally considered as the most practicable forms of socialist organization to the exploration of alternative schemes. It is possible to distinguish two main types of reaction among those who conceded his central argument. In the first place there were those who thought that the loss of efficiency, the decline in general wealth which will be the effect of the absence of a means of rational calculation, would not be too high a price for the realization of a more just distribution of this wealth. Of course if this attitude is based on a clear realization of what this choice implies there is no more to be said about it, except that it seems doubtful whether those who maintain it would find many who will agree with their idea. The real difficulty here is, of course, that for most people the decision on this point will depend on the extent to which the impossibility of rational calculation would lead to a reduction of output in a centrally directed economy compared with that of a competitive system. And although in the opinion of the present writer it seems that careful study can leave no doubt about the enormous magnitude of that difference, it must be admitted that there is no simple way to prove how great that difference would be. The answer here cannot be derived from general considerations but will have to be based on a careful comparative study of the working of the two alternative systems, and presupposes a much greater knowledge of the problems involved than can possibly be acquired in any other way but by a systematic study of economics.
• 50It was only early in the present century that at last a general statement of the kind we have just examined concerning the impracticability of socialism by the eminent Dutch economist, N. G. Pierson, provoked K. Kautsky, then the leading theoretician of Marxian socialism, to break the traditional silence about the actual working of the future socialist state, and to give in a lecture, still somewhat hesitantly and with many apologies, a description of what would happen on the Morrow of the Revolution. But Kautsky only showed that he was not even really aware of the problem which the economists had seen. He thus gave Pierson the opportunity to demonstrate in detail, in an article which first appeared in the Dutch Economist, that a socialist state would have its problems of value just as any other economic system and that the task socialists had to solve was to show how in the absence of a pricing system the value of different goods was to be determined. This article is the first important contribution to the modern discussion of the economic aspects of socialism, and although it remained practically unknown outside of Holland and was only made accessible in a German version after the discussion had been started independently by others, it remains of special interest as the only important discussion of these problems published before the War. It is particularly valuable for its discussion of the problems arising out of the international trade between several socialist communities. An English translation is now reproduced in the next section in the volume and we need therefore say no more about its argument.
• 51To Otto Bauer the nationalization of the banks appears the final and decisive step in the carrying through of the socialist nationalization programme. If all banks are nationalized and amalgamated into a single central bank, then its administrative board becomes “the supreme economic authority, the chief administrative organ of the whole economy. Only by nationalization of the banks does society obtain the power to regulate its labour according to a plan, and to distribute its resources rationally among the various branches of production, so as to adapt them to the nation’s needs.” Bauer is not discussing the monetary arrangements which will prevail in the socialist commonwealth after the completion of the nationalization of the banks. Like other Marxists he is trying to show how simply and obviously the future socialist order of society will evolve from the conditions prevailing in a developed capitalist economy. “It suffices to transfer to the nation’s representatives the power now exercised by bank shareholders through the Administrative Boards they elect,” in order to socialize the banks and thus to lay the last brick on the edifice of socialism. Bauer leaves his readers completely ignorant of the fact that the nature of the banks is entirely changed in the process of nationalization and amalgamation into one central bank. Once the banks merge into a single bank, their essence is wholly transformed; they are then in a position to issue credit without any limitation. In this fashion the monetary system as we know it to-day disappears of itself. When in addition the single central bank is nationalized in a society, which is otherwise already completely socialized, market dealings disappear and all exchange transactions are abolished. At the same time the Bank ceases to be a bank, its specific functions are extinguished, for there is no longer any place for it in such a society. It may be that the name “Bank” is retained, that the Supreme Economic Council of the socialist community is called the Board of Directors of the Bank, and that they hold their meetings in a building formerly occupied by a bank. But it is no longer a bank, it fulfils none of those functions which a bank fulfils in an economic system resting on the private ownership of the means of production and the use of a general medium of exchange-money. It no longer distributes any credit, for a socialist society makes credit of necessity impossible. Bauer himself does not tell us what a bank is, but he begins his chapter on the nationalization of the banks with the sentence: “All disposable capital flows into a common pool in the banks.” As a Marxist must he not raise the question of what the banks’ activities will be after the abolition of capitalism?
• 52In the English-speaking world the discussion of these problems began at a considerably later date than on the Continent, and, although it probably began on a somewhat higher level, thus avoiding many of the more elementary mistakes, and has in the last few years produced a number of important studies (also listed in the Appendix just referred to), it has made little use of the results of the discussions on the Continent. Yet clearly it is wasted effort to disregard these precedents. It is the purpose of this volume therefore to present within two covers the main results of the critical analysis of socialist planning attempted by Continental scholars. Together with the translation of Professor Mises’ major work and the companion volume containing Professor Brutzkus’ studies on Russia it should give a fairly comprehensive survey of the problems raised by any kind of planning.
• 53That the essence of the problem to be faced has not yet come to light in Soviet Russia, Lenin’s statements in his essay on Die nächsten Aufgaben der Sowjetmacht best show. In the dictator’s deliberations there ever recurs the thought that the immediate and most pressing task of Russian Communism is “the organization of bookkeeping and control of those concerns, in which the capitalists have already been expropriated, and of all other economic concerns”. Even so Lenin is far from realizing that an entirely new problem is here involved which it is impossible to solve with the conceptual instruments of “bourgeois” culture. Like a real politician, he does not bother with issues beyond his nose. He still finds himself surrounded by monetary transactions, and does not notice that with progressive socialization money also necessarily loses its function as the medium of exchange in general use, to the extent that private property and with it exchange disappear. The implication of Lenin’s reflections is that he would like to re-introduce into Soviet business “bourgeois” bookkeeping carried on on a monetary basis. Therefore he also desires to restore “bourgeois experts” to a state of grace. For the rest Lenin is as little aware as Bauer of the fact that in a socialist commonwealth the functions of the bank are unthinkable in their existing sense. He wishes to go farther with the “nationalization of the banks” and to proceed “to a transformation of the banks into the nodal point of social bookkeeping under socialism”.
• 54That the essence of the problem to be faced has not yet come to light in Soviet Russia, Lenin’s statements in his essay on Die nächsten Aufgaben der Sowjetmacht best show. In the dictator’s deliberations there ever recurs the thought that the immediate and most pressing task of Russian Communism is “the organization of bookkeeping and control of those concerns, in which the capitalists have already been expropriated, and of all other economic concerns”. Even so Lenin is far from realizing that an entirely new problem is here involved which it is impossible to solve with the conceptual instruments of “bourgeois” culture. Like a real politician, he does not bother with issues beyond his nose. He still finds himself surrounded by monetary transactions, and does not notice that with progressive socialization money also necessarily loses its function as the medium of exchange in general use, to the extent that private property and with it exchange disappear. The implication of Lenin’s reflections is that he would like to re-introduce into Soviet business “bourgeois” bookkeeping carried on on a monetary basis. Therefore he also desires to restore “bourgeois experts” to a state of grace. For the rest Lenin is as little aware as Bauer of the fact that in a socialist commonwealth the functions of the bank are unthinkable in their existing sense. He wishes to go farther with the “nationalization of the banks” and to proceed “to a transformation of the banks into the nodal point of social bookkeeping under socialism”.
• 55Among these early socialist contributions to the discussions, in many ways the most interesting and in any case the most representative for the still very limited recognition of the nature of the economic problems involved, is a book by Dr. O. Neurath which appeared in 1919, in which the author tried to show that war experiences had shown that it was possible to dispense with any considerations of value in the administration of the supply of commodities and that all the calculations of the central planning authorities should and could be carried out in natura, i.e. that the calculations need not be carried through in terms of some common unit of value but that they could be made in kind. Neurath was quite oblivious of the insuperaole difficulties which the absence of value calculations would put in the way of any rational economic use of the resources and even seemed to consider it as an advantage. Similar structures apply to the works published about the same time by one of the leading spirits of the Austrian social-democratic party, Dr. O. Bauer. It is impossible here to give any detailed account of the argument of these and a number of other related publications of that time. They have to be mentioned, however, because they are important as representative expression of socialist thought just before the impact of the new criticism and because much of this criticism is naturally directly or implicitly concerned with these works.
• 56“The socialist state”, he says “can only arise as a net of producing and consuming communes, which conscientiously record their production and consumption, go about their labour economically, uninterruptedly raise their labour productivity and thus attain the possibility of lowering the working day to seven or six hours or even lower.” “Every factory, every village appears as a production and consumption commune having the right and obligation to apply the general Soviet legislation in its own way (‘in its own way’ not in the sense of its violation but in the sense of the variety of its forms of realisation), and to solve in its own way the problem of calculating the production and distribution of products.”
• 57“The socialist state”, he says “can only arise as a net of producing and consuming communes, which conscientiously record their production and consumption, go about their labour economically, uninterruptedly raise their labour productivity and thus attain the possibility of lowering the working day to seven or six hours or even lower.” “Every factory, every village appears as a production and consumption commune having the right and obligation to apply the general Soviet legislation in its own way (‘in its own way’ not in the sense of its violation but in the sense of the variety of its forms of realisation), and to solve in its own way the problem of calculating the production and distribution of products.”
• 58“The chief communes must and will serve the most backward ones as educators, teachers, and stimulating leaders.” The successes of the chief communes must be broadcast in all their details in order to provide a good example. The communes “showing good business results” should be immediately rewarded “by a curtailment of the working day and with an increase in wages, and by allowing more attention to be paid to cultural and aesthetic goods and values”.
• 59bring statistics to the masses, make it popular, so that the active population will gradually learn by themselves to understand and realise how much and what kind of work must be done, how much and what kind of recreation should be taken, so that the comparison of the economy’s industrial results in the case of individual communes becomes the object of general interest and education.
• 60From these scanty allusions it is impossible to infer what Lenin understands by statistics and whether he is thinking of monetary or in natura computation. In any case, we must refer back to what we have said about the impossibility of learning the money prices of production-goods in a socialist commonwealth and about the difficulties standing in the way of in natura valuation. Statistics would only be applicable to economic calculation if it could go beyond the in natura calculation, whose ill-suitedness for this purpose we have demonstrated. It is naturally impossible where no exchange relations are formed between goods in the process of trade.
• 61It must follow from what we have been able to establish in our previous arguments that the protagonists of a socialist system of production claim preference for it on the ground of greater rationality as against an economy so constituted as to depend on private ownership of the means of production. We have no need to consider this opinion within the framework of the present essay, in so far as it falls back on the assertion that rational economic activity necessarily cannot be perfect, because certain forces are operative which hinder its pursuance. In this connection we may only pay attention to the economic and technical reason for this opinion. There hovers before the holders of this tenet a muddled conception of technical rationality, which stands in antithesis to economic rationality, on which also they are not very clear. They are wont to overlook the fact that “all technical rationality of production is identical with a low level of specific expenditure in the processes of production”. They overlook the fact that technical calculation is not enough to realize the “degree of general and teleologica1 expediency” of an event; that it can only grade individual events according to their significance; but that it can never guide us in those judgments which are demanded by the economic complex as a whole. Only because of the fact that technical considerations can be based on profitability can we overcome the difficulty arising from the complexity of the relations between the mighty system of present-day production on the one hand and demand and the efficiency of enterprises and economic units on the other; and can we gain the complete picture of the situation in its totality, which rational economic activity requires.
• 62It must follow from what we have been able to establish in our previous arguments that the protagonists of a socialist system of production claim preference for it on the ground of greater rationality as against an economy so constituted as to depend on private ownership of the means of production. We have no need to consider this opinion within the framework of the present essay, in so far as it falls back on the assertion that rational economic activity necessarily cannot be perfect, because certain forces are operative which hinder its pursuance. In this connection we may only pay attention to the economic and technical reason for this opinion. There hovers before the holders of this tenet a muddled conception of technical rationality, which stands in antithesis to economic rationality, on which also they are not very clear. They are wont to overlook the fact that “all technical rationality of production is identical with a low level of specific expenditure in the processes of production”. They overlook the fact that technical calculation is not enough to realize the “degree of general and teleologica1 expediency” of an event; that it can only grade individual events according to their significance; but that it can never guide us in those judgments which are demanded by the economic complex as a whole. Only because of the fact that technical considerations can be based on profitability can we overcome the difficulty arising from the complexity of the relations between the mighty system of present-day production on the one hand and demand and the efficiency of enterprises and economic units on the other; and can we gain the complete picture of the situation in its totality, which rational economic activity requires.
• 63It must follow from what we have been able to establish in our previous arguments that the protagonists of a socialist system of production claim preference for it on the ground of greater rationality as against an economy so constituted as to depend on private ownership of the means of production. We have no need to consider this opinion within the framework of the present essay, in so far as it falls back on the assertion that rational economic activity necessarily cannot be perfect, because certain forces are operative which hinder its pursuance. In this connection we may only pay attention to the economic and technical reason for this opinion. There hovers before the holders of this tenet a muddled conception of technical rationality, which stands in antithesis to economic rationality, on which also they are not very clear. They are wont to overlook the fact that “all technical rationality of production is identical with a low level of specific expenditure in the processes of production”. They overlook the fact that technical calculation is not enough to realize the “degree of general and teleologica1 expediency” of an event; that it can only grade individual events according to their significance; but that it can never guide us in those judgments which are demanded by the economic complex as a whole. Only because of the fact that technical considerations can be based on profitability can we overcome the difficulty arising from the complexity of the relations between the mighty system of present-day production on the one hand and demand and the efficiency of enterprises and economic units on the other; and can we gain the complete picture of the situation in its totality, which rational economic activity requires.
• 64The knowledge of the fact that rational economic activity is impossible in a socialist commonwealth cannot, of course, be used as an argument either for or against socialism. Whoever is prepared himself to enter upon socialism on ethical grounds on the supposition that the provision of goods of a lower order for human beings under a system of a common ownership of the means of production is diminished, or whoever is guided by ascetic ideals in his desire for socialism, will not allow himself to be influenced in his endeavours by what we have said. Still less will those “culture” socialists be deterred who, like Muckle, expect from socialism primarily “the dissolution of the most frightful of all barbarisms—capitalist rationality”. But he who expects a rational economic system from socialism will be forced to re-examine his views.