Collectivist Economic Planning

IV FURTHER CONSIDERATIONS ON THE POSSIBILITY OF ADEQUATE CALCULATION IN A SOCIALIST COMMUNITY

By GEORG HALM

(Translated from the German by H. E. BATSON)

CHAPTER I : THE PROBLEM

1. PROBLEMS OF ORGANIZATION IN THE SOCIAL ECONOMY.

2. THE COMMUNISTIC ECONOMY.

3. THE SOCIALISTIC ECONOMY.

CHAPTER II : THE CAPITALISTIC ECONOMY

4. THE ROLE OF THE PRICING PROCESS.

5. ECONOMIC AND TECHNICAL CONSIDERATIONS IN THE CAPITALISTIC ECONOMY.

CHAPTER III : THE COLLECTIVISTIC ECONOMY

6. FREEDOM OF CONSUMPTION.

7. NECESSITY FOR ECONOMIC CALCULATION.

8. CALCULATION OF THE VALUE OF LABOUR.

9. THE EXPLOITATION THEORY.

10. SCARCITY OF CAPITAL.

11. NECESSITY FOR A PROCESS OF INTEREST-DETERMINATION UNDER SOCIALISM.

12. IMPOSSIBILITY OF A PROCESS OF INTEREST-DETERMINATION UNDER SOCIALISM.

13. IMPOSSIBILITY OF A PRICING PROCESS FOR CAPITAL-GOODS.

14. DETERMINATION OF INTEREST AND RENT.

15. IMPOSSIBILITY OF A PROCESS OF WAGE-DETERMINATION.

16. DISTURBANCE OF THE MARKET ECONOMY BY PLANNING.

17. THE PROBLEM OF CAPITAL ACCUMULATION.

18. ECONOMIC AND TECHNICAL CONSIDERATIONS IN THE SOCIALISTIC ECONOMY.

CHAPTER IV : SOME POSSIBLE OBJECTIONS CONSIDERED.

19. SOCIALISTIC TENDENCIES UNDER CAPITALISM.

20. SOCIALIZATION OF THE BANKS.

21. ‘IMPUTATION OF QUANTITATIVE SIGNIFICANCES’.

22. PRICING WITH THE AID OF EQUATIONS,

23. PRICING ON A COST BASIS.

24. PLANNING.

25. FICTITIOUS COMPETITION OF PUBLIC AUTHORITIES.

CHAPTER I : THE PROBLEM

§ 1

THE question of the possibility of an adequate economic organization can refer only to a social economy. In a self-sufficient individual economy, the problem does not arise. The person at the head of an individual economy is able directly to satisfy his wants or those of the members of his household with the available labour and materials. The Economic Principle is fulfilled. The wants are satisfied equally and the available resources are employed in the most economical manner. So long as matters are on such a small scale that production and consumption can be adjusted to one another from one centre, there are no theoretical difficulties at all.

One consequence of the development of division of labour is that it makes it more and more difficult to deal with things from one centre in this way. The individual economy grows dependent upon the thousands of other individual economies with which it combines in the creation of the social product. It becomes a member of a social economy. Because of the confusing multiplicity of the relationships that division of labour brings in its train, and because cessation of individual self-sufficiency means at the same time cessation of direct correspondence between consumption and production, there arise in the social economy problems that are completely new. Nobody knows the wants of all the individuals composing the economy, nobody has a complete view of all the available means of production or a grasp of the enormous complexity of the technical processes. And consequently nobody is able to adjust his share in production to his wants. But this lack of self-sufficiency on the part of the individual means that he is in need of guidance among the innumerable possibilities that are open to him if his share in the whole process is to be done in the right place and in the right way.

§ 2

According to the way in which the division of labour between individuals is accomplished, it is usual to distinguish between communistic, capitalistic, and socialistic 1 economies. Under communism, the principles that guide isolated individual economies are applied to the social economy, as if the problem to be solved was the same in both cases. A central authority disposes over all the means of production (labour, materials, and capital-goods), determines the direction of production, and regulates consumption. Individuals have certain quantities of consumption goods allotted to them, just as they have certain labour tasks allotted to them. Once a plan of production has been settled upon, its execution can no more allow for freedom of choice in consumption than it can allow private wishes to affect the selection of the kind of work to be done. The desires of consumers can be taken into account when the plan is being constructed, assuming that suitable methods are discovered for determining wants.2 But freedom of consumers’ choice as it is known in the capitalistic economy, the right, within the limits of a given money income, to any desired portion of the social product, according to its money-price, cannot be combined with the communistic method of production. For it lies in the very nature of a social economic plan that no consideration can be paid to the special wishes of individuals except in so far as they have been allowed for in advance.

The question whether communism is economically possible is one that can hardly be formulated, let alone answered with a plain yes or no. The fundamental difficulty about this question lies in the fact that immediate application of the economic principle to the social economy is impossible. The economic principle refers to the individual economy. But if despite this, and with all due reservation, we still wish to form some opinion of the ‘economic’ advantages and disadvantages of the communistic economy, we must realize in the very first place that communism makes it impossible for the individual to fulfil the principle of equal satisfaction of wants; for the achievement of this result is absolutely impossible if there is not freedom of consumption. The individual alone knows what will satisfy his wants, the individual alone is able to make the choice between the innumerable alternatives, and even then only if he knows how much his total share of the social product is to be. It is obvious that little can be attained with the help of statistics. The only sort of inquiry that would be of any use would involve offering each individual a choice between an infinite number of combinations of goods; for it is possible for the individual to say what kind and quantity of goods he desires, only when he knows how his choice concerning any one particular good will affect all his other opportunities of satisfying his wants. That it would be possible to distribute the product throughout the community in one way or another is, of course, not open to doubt. But what was to be distributed and what was to be consumed would be determined by what had already been produced, while the question at issue is the adjustment of the product to the desires of the consumers. If the members of the community have simply to accept what has been produced, there remains no criterion of economic behaviour in production. Where, as in Soviet Russia under the Five Year Plan, the State is governed in such a way that the provision of the people with even the necessaries of life becomes almost a matter of in-difference, the purely economic point of view ceases to be relevant.

It can hardly be supposed that it would be possible for one central authority in the communistic economy to direct the process of production in all its immense diversity so that its individual parts worked together without friction. It is of course conceivable that the process of production would not be disturbed by any outward and visible crisis. But that would merely be due to the individual’s lack of power to control affairs, and to the power of the central authority, that has already been referred to, of always being able to bring production and consumption into correspondence. But since consumption would be adjusted to a disturbed and therefore diminished production, individuals would be just as hard hit by the losses as in any other economic order. If Pierson’s assertion 3 that unemployment could not be conceived of in the communistic economy is to be accepted as correct, it must be interpreted as implying nothing more than that consumption would always be adapted to what is made available by production.

§ 3

The protagonists of socialism reject communism. They wish to retain freedom of consumption and a certain degree of freedom of choice of occupation, but to do this without falling into the mistakes of the capitalistic system. For if the communist system must be criticized on the grounds that it does not provide for the fulfilment of the economic principle inasmuch as it does not provide for the satisfaction of individual needs, the capitalistic system must likewise be criticized on the grounds that, while it certainly allows the individuals composing it to act economically within the limits of their money-incomes, throughout the community as a whole there is great inequality of satisfaction, as might be imagined, because the incomes themselves are so unequal. (For even if uniform satisfaction of wants throughout the community is an unattainable ideal, owing to the impossibility of comparing the wants of different persons, yet a fairly equal distribution of incomes may be regarded as an approximation to the principle of uniform satisfaction of wants.) It has, in fact, always been one of the chief aims of socialism to level out inequalities of incomes, and in particular to prevent the receipt of ‘unearned’ interest and rent.4 It is partly from this that the demand for centralized management of production follows. For the abolition of unearned incomes involves the suppression of private property in the material means of production and as a consequence the renunciation of private economic leadership.

The socialist economy must be thought of as a mixture of capitalistic and communistic elements. Like capitalism, it permits freedom of choice in consumption and occupation. Socialism is to allow everybody, within the limits of his money-income, to choose what he will consume; and, as far as possible, it is to allow everybody to develop and use his abilities as he sees fit also. But, like communism, socialism envisages the nationalization of capital-goods and land, the elimination of unearned incomes, and the central control of economic life by the State.

This form of social economy seems peculiarly fitted to afford the advantages of both capitalism and communism without imposing their disadvantages into the bargain. It appears to combine in the happiest manner individual freedom with planned central control. It promises to achieve a considerable step towards equality of incomes without surrendering the inducement of reward in accordance with service, and to permit central regulation of production and the abolition of the ‘anarchy’ of the pure market-economy without interfering with freedom of consumption.

It is our task in what follows to investigate whether socialism is economically possible; to discover if the elements that it seeks to combine really can be combined, or if it is founded upon ignorance of the laws that govern the ways in which social institutions can be combined, and so is self-contradictory and incapable of practical realization.

It might possibly be objected that such a method of investigation is one-sided, that it deals with one particular socialistic system chosen haphazard and that it is consequently quite unable to justify any conclusion as to the impossibility of socialism in general. It is true that there are very many socialisms. This is due to the position of socialism between capitalism and communism; the various socialistic systems are distinguished from each other by their closer approximation to the one or other extreme. If social institutions can be combined ad lib., then there must be an infinite number of different possible kinds of socialistic economy. But the argument that follows shows that economic laws do not permit the arbitrary combination of what are essentially different elements. The best way of proving this is to examine the practicability of an economy in which there is free choice of consumption and occupation and centralized control of production. It will then be considered whether any change in the assumptions could alter the conclusion.

CHAPTER II : THE CAPITALISTIC ECONOMY

§ 4

Since a comparison may be the best means of revealing the nature of the socialistic economy, let us begin with a brief consideration of the present capitalistic system.

The capitalistic economy is a pure market-economy; i.e. it is not under the direction of a central authority like the communistic or the socialistic economy; its sole organization consists in the exchanges undertaken by the individual economies that are made dependent on each other by the division of labour. The individual economies have control of the means of production, the labour, capital, and land, that is in their private possession. By means of temporary transfers of saved portions of income from one person to another, the power of disposal of particular individuals can be temporarily increased, and economic activity made to a certain extent independent of the accidents of personal ownership. Individuals either produce goods and services themselves with the means of production that they own or they transfer these means of production to entrepreneurs who produce goods and services with them to sell in the market. The direction of production is determined by prices: by the prices of the means of production—costs—and the prices of the products. If a new branch of production is to be started or an old one maintained at its previous level, the prices of the products must be at least high enough to cover their costs. If the prices of the goods do not cover the costs, a loss is incurred and production has to be restricted. If the prices of the products exceed their costs, profits are made and production is extended. This happens because the leaders of the capitalistic economy are led by the desire for profit, and have no alternative to obeying this motive, in view of the competition that exists between them and of the impossibility of carrying on production indefinitely at a loss. Profitability is the sole justification for existence. Thus, from the point of view of social ethics, the endeavour to attain it is neutral.

From what has been said it is clear that the deciding factor is the process of price-determination. The pricing process is based on the circumstance that, in an economy where there is division of labour without central control, all the individual economies are dependent upon exchange, and at the same time are concerned to get as much out of it as they can. Since as a rule there are always several would-be sellers and several would-be buyers present, the acquisitive tendency, which aims at the payment of low prices and the receipt of high prices, is counteracted by the fear of competition, which produces a readiness to accept low prices and to pay high prices. Acquisitiveness and competition together are responsible for the fact that the conflict of offerers and demanders among and against each other (for each fights on two fronts: against the person with whom he is bargaining and against his competitors) leads to the establishment of the highest price at which the total supply can just be sold. In this way the prices of consumption-goods and the prices of the means of production are determined, and all the pricing processes in the community are connected with one another.

The demand for consumption-goods is determined by income-levels, which in their turn are determined by the prices of the factors of production. The demand on the part of receivers of incomes for consumptiongoods is transformed into a demand on the part of entrepreneurs for means of production. As a rule, the means of production are such as can be employed for the most various products. On that account, there will be competition among entrepreneurs in different lines of production for these means of production, quite apart from the competition among entrepreneurs in any single line of production. Since those who are offering the means of production (labourers, capitalists, and landowners) are desirous of obtaining the highest price possible, the pricing processes in the markets for means of production will tend to bring about the employment of the means of production in those particular channels where they command the highest prices. But only those entrepreneurs can pay this price who obtain a correspondingly high price for their products, i.e. who satisfy an intensive effective demand. Thus the factors of production have no constant or inherent value, but are valuable only in the degree in which they are fitted to satisfy a demand of a particular intensity and purchasing power. Of course, not only does the demand for consumption-goods determine the direction of production and the prices of the means of production, but fluctuations in the prices of the means of production, as a rise or fall of costs, influence the decisions of the entrepreneur from the other side. The margin of profit of the entrepreneur is determined from two directions: by the prices both of the products and of the means of production.

But this by no means exhausts the inter-relationships between the various processes of price-determination. Since, as has already been emphasized, demand depends upon incomes, and incomes are determined by the prices of the means of production, every alteration in the prices of the means of production, which itself has originated in a variation of the demand for commodities, must in its turn influence demand by causing a change in incomes. Furthermore, demand in the commodity markets is dependent on commodity-prices. The demand for a good changes, not only when the price of that particular good changes, but also when the prices of other goods change. Thus, not only does demand determine prices, but prices in turn also affect demand. But since the prices of consumption-goods are also influenced by costs, which are the prices of means of production, there arises a further connexion between the two great divisions of the pricing process. Finally, the supply of means of production is not a fixed quantity. Within certain limits, it may react to changes in prices, and so evoke all the reactions again that have been described.

These reciprocal price relationships have a tendency to bring the economy to a state of rest, in which every means of production is employed where it satisfies the highest effective demand, and therefore obtains the highest price—a state of equilibrium in which further variations of price are inconceivable, because there is no longer any opportunity for any supplier of goods or productive services to get higher prices or more than average profits in any other part of the economy. In this state of the economy, prices can no longer change of themselves, i.e. without a preceding change in supply or demand.

But supply and demand are partly determined by factors that lie outside the pricing process, and that restrict within more or less narrow limits their reactions to variations in prices. Demand is ultimately determined by the primary scales of values of individual human beings, the peculiar characteristics of which are not immediately dependent upon prices and incomes. And supply likewise has ultimate determinants that are largely independent of prices: the supply of means of production (i.e. the size and composition of the population, natural resources, and capital) and the knowledge of processes of production that exists at any given time (i.e. the level of technique). The ultimate causes of all variations in the pure market-economy are therefore human needs (which are measured according to the purchasing power with which they can be endowed) and the scarcity of the means that are available for the satisfaction of these needs. If the determinants of prices alter, then scope is offered for new acquisitive and competitive activities, and there is again a tendency for a state to be reached which represents the new optimum of private activity in the new conditions (and which, of course, must not be confused with any such social optimum as would be implied in the idea of an economic harmony between private and social interests).

§ 5

Nevertheless, it may be asserted not only that this organization of social economic activity leads to a rapid and fairly exact accommodation of production to continual changes in effective demand, and thus to an automatic arrangement of the productive forces in the whole economic process so as to achieve this result, but also that it provides individuals at the same time with a motive for fulfilling the economic principle as far as possible, in the sense of using given means to secure the greatest possible results. Since, under competitive conditions, individuals are not free to raise the prices of the goods they sell or to force down the prices of the factors of production they buy, they must take pains to employ in the most advantageous way possible the means of production that are at their disposal. This is particularly true of the entrepreneur, whose function it is to combine the means of production in suitable ways. The entrepreneur will endeavour to reduce costs by using the smallest possible amount of means of production to obtain a given yield, so setting free means of production which become available to society for other productive purposes. Very often this ‘rationalization’ of the productive process will consist in an introduction of new productive techniques, for the entrepreneur will constantly endeavour to disturb the state of equilibrium in order to obtain private ad-vantage from a reduction of costs. Under competitive conditions, this advantage must in the long run benefit the consumer; for other entrepreneurs will follow the example of the first and, by increasing supply, will always force prices down to the level of the reduced costs.

But the delicacy of the reaction to technical progress and the complexity of the economic problem would be greatly under-estimated if we assumed that the choice of the most suitable technique of production was never anything more than a purely technical problem, so that the selection of the technically best method of production meant the fulfilment of the economic principle. In choosing the best means of production, the entrepreneur needs in addition the guidance afforded by the pricing process. The best organization of an undertaking from the technical point of view need not always be the best from the economic point of view. That method of production which is technically inferior may be economically superior; as, for example, when the use of cheaper building material or inferior fuel saves more than is lost by the qualitative or quantitative inferiority of the result. Of course, the technical result is one of the factors that determine the choice of methods of production, but the decision is modified by considerations of costs, i.e. by considerations of a question of pure economic fact. Not only for solving the problem of which goods are to be produced, but also for answering the question of how these goods are to be produced, the guidance afforded by the pricing process cannot be dispensed with. In a communistic economy, as the example of Soviet Russia shows, there would be a tendency to confuse the technical with the economic optimum, because in all probability the absence of any way of discovering the economic value of the means of production would lead to the adoption of the best methods from the technical point of view. It is very significant that socialists are always criticizing the capitalistic economy on the grounds that it only exploits the productive possibilities of modern technique in a very imperfect manner. This objection can be explained in part by a failure to distinguish between social and private considerations, the concept of the technical optimum from the individual point of view being transferred by simple multiplication to the social economy. But in reality it is nothing but the consideration of other individual economies and the needs that they have to satisfy that justifies the renunciation of the optimum technical equipment of the individual undertakings; for this renunciation releases means of production that are wanted more urgently in other branches of production and employs means of production that could not produce an equal product elsewhere. Thus, to take economic considerations into account along with technical considerations does not mean paying attention to private profit at the cost of social benefit; on the contrary, it implies a simultaneous, if unconscious, regard to all branches of production, such as, in fact, might be expected from those who advocate central control of the whole social process of production. But the ‘technocrats’ of all times have had so little comprehension of the economic principle that they have confused the functioning of the technical apparatus of production with soundness in economic affairs. From the fact that technique is independent of questions of economic organization they draw the comforting conclusion that a disturbance of the organization of production through a change in the social foundations of the economy need not even be considered as a possibility. We shall not go very far wrong if we regard the technocratical attitude of socialist theorists, which is as old as the socialist movement itself, as one of the chief reasons why the problem of the centralized control of economic life, so far from being adequately handled—not to speak of anything like a positive solution,—has until very recently hardly been so much as formulated.

CHAPTER III : THE SOCIALISTIC ECONOMY

§ 6

In what follows we shall have to investigate how production is to be organized in a socialistic economy based on division of labour, and what advantages and disadvantages such a new order would have in comparison with capitalism. Since it has been assumed that there would be free consumers’ choice in the socialistic economy, production would have to be accommodated to a demand that was always variable and uncontrolled. Production would not govern consumption, but consumption production. Socialism is not like communism, under which goods are produced arbitrarily and then doled out to the consumers; but neither is it like capitalism, under which, according to socialist opinion, it is not the consumers who determine the direction of production, but the entrepreneurs, acting for motives of profit; under which, that is to say, profitability, not productivity, is supposed to be the deciding factor.

The opinion that the socialist economy is peculiarly adapted to the satisfaction of needs, in contrast to the ‘anarchistic’ capitalistic economy, which is only focused upon profits and not upon real needs, can hardly be called correct. It is precisely the endeavour to make profits which induces the entrepreneur to turn to those branches of production in which effective demand awaits satisfaction, and to abandon production where a falling demand no longer promises selling-prices that will cover costs. Not even centralized control of production could conform more closely to uncontrolled demand. The immediate object of the entrepreneur may certainly be to attain the greatest possible profit. But it would be a mistake to suppose that profitability and productivity must necessarily diverge. In an economy governed by motives of private gain, when anybody obtains large profits because he has been better able to satisfy the demand than his competitors, or because better organization of production has enabled him to reduce his costs below the average, then private and social advantage coincide and profitability and productivity are identical. It is true that there are many cases in which profitability and productivity are not identical. Protective duties may prove profitable to the protected industries, but they need not be productive if they cripple international division of labour. Or an increase in land-rents, though profitable for land-owners, is, from the social point of view, an indication of increasing scarcity of good land, i.e. an indication of a tendency to decreasing productivity. But neither protection nor the law of diminishing returns to land are characteristically capitalistic.

The oft-repeated argument about the anarchy of the capitalistic economy and its profit-yielding unproductiveness can hardly be explained except by supposing that the existence of certain kinds of luxury-production at the same time as many consumers with low incomes lack even the necessaries of life is regarded by the critics of capitalism as one of its defects, while the real responsibility for this unsatisfactory state of affairs lies with inequality of incomes and the irrationality of certain forms of expenditure.

It is easy to see that socialism, too, would have to provide for just such an adjustment of production to demand as that provided by capitalism; that socialism, like capitalism, would have to accommodate production to the prices of consumption-goods. If price-movements were not accepted as a guide, then production would have to go on independently of them, according to some universal scale of values or other; but in that case supply and demand would no longer correspond to each other in such a way that the demand-price was at the same time the price which would cover the cost of production. To accommodate production to the urgency, necessity, or usefulness of the demands that have to be met, as for example Robert Deumer5 recommends, instead of simply to the criterion of prices, would amount to a systematic disorganization of the economy. For either production is planned, in which case freedom of consumers’ choice must be abolished; or else consumption is left free, in which case production must be accommodated to it. The only way in which freedom of consumption can be interfered with, with even comparative safety, is by the extension of collective demand and the consequent artificial restriction of individual demands. Roads, parks, or playing-fields can be constructed, for instance, and the necessary resources secured by restricting the branches of production that satisfy the demands of individuals; and this, under capitalism, ultimately means increased taxation, and, under socialism, appropriate central direction. But what is not possible is on the one hand to allow freedom of consumption and on the other hand to produce according to a plan. Planning and freedom of choice cannot possibly be realized simultaneously. All proposals that aim at accommodating consumption to production are either misconceived or communistic.

§ 7

If freedom of consumers’ choice means that production must be guided by the prices of consumption-goods, it remains to be shown how this accommodation of production to demand can be achieved in the socialist economy.

If consumption in the socialistic economy is uncontrolled; if everybody, so far as his monetary resources permit, is allowed to buy what he likes, then for every product a certain price will be established in the consumption-goods market (for according to our assumptions such a market must exist in the socialist economy too). If we first of all take supply as given, a rising price will indicate an increasing demand, a falling price a decreasing demand. But it would be a great mistake to suppose that these price-movements alone would be a sufficient guide to production; for the prices of consumption-goods can have no significance for the central authority of the socialistic economy except in relation to costs of production. Even the capitalistic entrepreneur is unable to act in accordance with the economic principle if he only knows about the probable prices that can be obtained and not about the costs of production. Economic management is always based upon a comparison of the prices of the products and their costs of production. Thus, not only have consumption-goods to be valued, but intermediate goods and means of production also. Only when the values of the means of production can be compared with one another and with the values of their products is economic management possible6; for only then is it possible to decide in which branch of production it will be best to employ a certain quantity of scarce means of production (which for purposes of simplification may be assumed to be employable in the production of many different kinds of goods). To employ means of production to the value of 100 monetary units in the production of goods that can only command a price of 80 units, when they might have been used for the production of goods to the value of 100 or more, is uneconomic. For the fact that considerably more would have been offered in the second case for the product of the same quantity of the same kind of means of production shows that this alternative product would have satisfied a greater effective demand. If it were not possible to compare costs and prices, a correct decision could never be arrived at.

Neither could a correct decision be arrived at if identical quantities of means of production were credited with different values in different avenues of employment. If production is to be regulated by the economic principle, a homogeneous pricing process of the means of production is obviously indispensable. A brief description has already been given of the way in which this pricing process works under capitalism. In what may be called the factor markets (e.g. the labour and capital markets), labour and capital are demanded and offered, and if there is competition on both sides, a price is determined which reaches its normal level when the demand is so limited by it that it can just be satisfied with the available supply. Since local differences are soon reduced to costs of transport, the prices of homogeneous goods are necessarily uniform. For different varieties of a factor of production, which are not interchangeable with one another, the prices will be different, but the proportions between these prices will be determined by the relative scarcities of the various kinds of factor. If certain goods that are in great demand cannot be produced except with the aid of a highly-specialized kind of labour, this labour will command a higher price than labour which is easy to obtain and easy to replace. Thus, here again the deciding point is scarcity in relation to demand. Every change in the supply of the factor in question and every change in the demand for it must exert an influence on its price until the subsequent increase or decrease in its supply or demand leads to the establishment of a new equilibrium.

If labour were the only factor of production, then the total wages bill would have to be just sufficient to buy the total product; for total wages, total incomes (which would consist solely of wages), and total prices, would necessarily be equal. And these totals would have to be distributed according to relative scarcities, on the one hand among the different kinds of goods, and on the other hand among the different kinds of labour, because only such a distribution could adjust supply and demand to one another.

§ 8

Since, ex hypothesi, there is to be free choice of occupation in the socialistic economy also, that is to say, the individual is to be left free to decide what services he will offer, the relationships that have been described as existing under capitalism can also be assumed to exist under socialism. In fact, they appear to be even more true of the socialistic economy than of the capitalistic; for they were based on the assumption that labour is the only factor of production. Now under capitalism this assumption does not hold good; for land and capital are also subject to the pricing process and so enter along with labour into costs of production and commodity-prices. Furthermore, within this pricing process, an unearned income is obtained from the ownership of these material means of production. It is quite otherwise under socialism. For the very purpose of doing away with this unearned income, the material means of production are removed from private ownership and transferred to the direct ownership of the community. According to many socialists, no price at all need then be paid for these material means of production, for the socialistic economy, being the owner of them, need no longer stimulate the supply of capital or land by suitably high prices. Nobody need pay for the use of means of production if he owns them himself.

Now if wages are the only costs of production that need be considered, and if there is free choice of occupation and a free market for the determination of wages, the problem of price-determination and economic calculation under socialism is well on the way to solution. The only important point of difference between this case and the similar case assumed to exist under capitalism is that the present is one not of bilateral, but only of unilateral, competition. And this not only in the market for consumption-goods, but also in the labour market. For in the socialistic economy, the State alone demands labour; and in the socialistic economy, likewise, the State alone distributes goods. Thus the central authority has a monopoly, both in the labour market and in the commodity market; that is to say, in the labour market it can arbitrarily determine the demand, in the commodity market the supply, and consequently in both cases the price. Of course, since it may be assumed that the authorities in a socialistic community would not exploit their power to the disadvantage of the labourers or the consumers (who are the same persons), this State monopoly, which would be far greater than any monopoly that has ever been known, could not be objected to on grounds of principle. The question, however, does arise, of whether the lack of competition on the demand side of the labour market and on the supply side of the commodity market would not result in the pricing process becoming too unwieldy, inasmuch as the characteristic under-bidding and out-bidding, that is essential for the rapid determination of prices, would in such circumstances be lacking. But still, perhaps it is justifiable to assume that this unwieldiness might possibly be compensated for by the way in which the socialistic central authority would set itself out as far as possible to meet the wishes of the labourers and consumers. And we need not investigate here the possible danger that wages would be raised above the normal level in attempts to shield the labourers from the effects of market fluctuations for which they were not responsible, or that equalitarian ideals would cause certain key-services to be insufficiently rewarded. But it should be remarked that any such utilization of the monopolistic position of the State would mean a departure from the principle of freedom of choice in consumption and occupation.

§ 9

But, these small difficulties pointed out, the problem of the socialistic economy must by no means be regarded as finished with. For the supposition of the socialists, that nothing but labour need have a value in the socialistic economy, that no factors but labour need enter into economic calculation, is entirely unfounded. All that can be said is that the supply of the material means of production would not have to be tempted by the offer of prices as at present under capitalism. But the evocation of supply is not the sole function of the pricing process of the material means of production, even in the capitalistic market-economy. Even if the capitalist agreed to renounce his interest and the landowner his rent, interest and rent would still be paid in the capitalistic economy, because capital and land are scarce. Only by means of suitably high prices could the demand for the means of production be so far restricted as to enable the available quantity to go round. It remains to be seen whether the same is true of the socialistic economy.

It must first be pointed out that a socialistic economy is not an economy that renounces the use of capital-goods in production. Everybody is agreed that the socialistic economy must in this sense be capitalistic also. In fact, the extent to which the socialistic economy is to be furnished with capital is often estimated with excessive optimism.

What the socialist means by capitalism is not an economic system in which capital is used, but a social order in which a relationship of exploitation on a class basis exists between those who own the material means of production and those who do not, a sort of monopoly relationship which yields a profit or tribute to the owners in the form of a ‘surplus value’. Since the labourers possess no means of production of any sort and yet cannot put their labour to good use without the assistance of land and capital-goods, they are driven to offer their labour to the owners of these means of production with an urgency which the capitalist does not share, and which therefore gives him the power to exploit them. According to socialist opinion, interest arises solely from this kind of exploitation. If the unilateral monopoly position were destroyed by the transference of the material means of production to the ownership of the community, then, it is asserted, surplus value and interest would cease to exist, and the labourer would be able to secure the full product of his labour. If this is true, it is obviously unnecessary to reckon with interest in the socialistic economy.

If it should be objected that interest is a price that has to be paid because of the scarcity of capital-goods, and that it is therefore necessary for restricting the demand in any sort of economic organization that is based upon exchange, it is argued that capital, in fact, is not scarce. Capital-goods, it is declared, can be manufactured at any time in any desired quantity, for nothing further is necessary for their production than labour, on the one hand, and materials, on the other hand, which are either obtainable as gifts of nature or else in their turn can be produced by labour. The only primary factor of production, it is said, is thus seen to be labour, for all produced means of production can be resolved into the labour necessary for their production. The only scarcity that can be ascribed to capital-goods is therefore the scarcity of the labour that produces them. Any scarcity other than this is inconceivable, if it is true that any desired capital-goods can always be manufactured at any time out of labour and materials.

§ 10

There is, however, a flaw in this argument. It is by no means possible to requisition any desired quantity of labour and materials for the manufacture of capital-goods. If more than a certain proportion of the limited quantity of available labour and materials were devoted to the production of capital-goods, the output of consumption-goods would have to be correspondingly restricted. But the output of consumption-goods cannot be restricted any farther than immediate needs permit. It is true that the output of production-goods is in the last analysis destined to be nothing other than an output of consumption-goods; it is even true that the ultimate output of consumption-goods may thus be far more abundant than anything that could be obtained in the present. (It is on this account that capital is in universal demand and increased possession of capital means the same thing as increased productivity.) But the increase of productivity does not occur until later, while for the present that amount of satisfaction that might be enjoyed must be forgone, in order to make possible the institution of what are called ‘roundabout’ methods of production, i.e. in order to make possible the production of capital-goods, the employment of which is to increase the productivity of labour.

Now in so far as labour and material are at first used for the manufacture of machines, plant, and so forth, a period of time must elapse before they are able to satisfy wants. The satisfaction of the wants must be waited for, and, in every economic order, the possible extent of this waiting is limited. Even the controlling authority of a socialistic economy could hardly propose to devote many more labourers to the production of production-goods than does the capitalistic economy. The impossibility of unlimited capital-accumulation is particularly obvious if the typical consumer in the capitalistic economy is borne in mind and it is observed that only a fraction of his income, and often not even this, can be spared over and above current expenditure for the accumulation of savings. And what is true of the individual is also true of society; society is equally obliged to look to current needs before it can think about a more abundant satisfaction of future needs. The lower the standard of satisfaction in the present, the harder it is, of course, to accomplish any restriction of consumption. Thus, in impoverished countries, the formation of new capital is a slow process.

§ 11

So, to resume, it can be taken as established that ‘saving’, the ‘restriction of present needs’, in the interest of future needs ’, is always—in every economic order without exception—possible to a limited degree only. But since the productive effects of capital make the demand for capital-goods insatiable; since agriculture and industry could go on employing more capital to an unlimited extent; since innumerable technical inventions that are already known are still awaiting application, while new improvements of the apparatus of production are discovered every day, and there are wide possibilities of extension for those methods that have already been put into operation; because of all this, the supply of capital must always remain small in comparison with the enormous demand for it, and power of disposal over factors of production for the purpose of producing capital-goods will always have to be restricted. Therefore capital also is a ‘primary’ factor of production, in the sense that it possesses a value of its own that cannot be ascribed to any other factor of production; in the sense that it must be dealt with in a particular fashion, on the basis of its own particular price.

This can in no way be altered by the fact that capital in the socialistic economy is owned by the community. In view of the scarcity of capital in relation to the need for it, the socialistic economy like any other must endeavour so to employ its capital as the accommodation of production to the free choice of consumers requires. The capital will have to be employed in those particular branches of production that represent an effective demand sufficient to allow for the inclusion of a payment for interest in the price of the product over and above its labour-cost. Wants that are not backed by sufficient purchasing power to be able to pay this supplement must remain excluded from satisfaction. Goods produced with the aid of capital cannot be sold for their mere labour-cost for the very reason that if they were sold at this price the demand for capital-goods would greatly exceed the available supply of them. To illustrate this point it will suffice to imagine the demand for houses that might be expected if rents did not include interest on the capital employed in building, i.e. if they had only to cover the cost of amortization. But in this case the significant thing is not simply that the price exceeds the labour-cost. The price must exceed the labour-cost by an amount just sufficient to cover all other costs, including interest; and the interest on the capital-sums employed must be just so high that the demand for all consumption-goods produced with the use of capital is sufficiently restricted for the available capital to suffice for their production. Wants that cannot be endowed with enough purchasing power to pay this interest have to go unsatisfied. For the whole meaning of economic calculation, in this case the calculation of interest, is of course simply to employ the scarce means of production so that they are distributed among all the wants in an economic manner. Since ex hypothesi each individual’s consumption is to be decided quite freely within the limits of his monetary resources, there is no other possibility than to limit it by means of prices. It is obvious that the pricing process for capital must be homogeneous, that interest must be uniformly calculated as a percentage of the amount of capital expended. For only if it has a uniform unit-price is it possible for capital to be distributed among different uses according to their importance. Moreover, it is a peculiarity of capital that so long as it retains its monetary form it is completely fungible and universally applicable, so that a single price is established throughout the capital market, in a different and simpler manner from that in the labour market.7

The fact that interest is necessary in the socialistic economy is thus beyond doubt. Given free consumers’ choice, some restriction of the indirect demand of the consumers for scarce capital-goods is absolutely essential. But freedom of consumption does not leave the manner in which this comes about open to arbitrary decision (as in the case of rationing), but requires that attention be paid to the relative urgency of the demands. The only way in which this accommodation can be brought about is by establishing a uniform price for the use of capital and satisfying only those demands that are prepared to pay this price. Interest must be high enough to accommodate the total supply of capital and the total demand for it to one another.

§ 12

Now it is unfortunate that this allowance for interest, the need for which is urgently dictated by economic considerations, cannot be adopted in the socialistic economy. Perhaps this is the most serious objection that can be maintained against socialism. On this account, it requires closer examination.

When the socialists assert that interest is unnecessary in the socialistic economy because the central authority, which owns all capital-goods, does not find it necessary to pay itself a price for the use of these capital-goods, they unwittingly put their finger on the principal difficulty. Because capital is no longer owned by many private persons, but by the community, which itself disposes of it directly, a rate of interest can no longer be determined. A pricing process is always possible only when demand and supply meet in a market, when the competition of many offerers and demanders, the mutual out-bidding on the part of the buyers and under-cutting on the part of the sellers, leads by trial and error to the gradual emergence of a price, which may be called normal because it is that price at which the available supply, no more and no less, can be exactly disposed of. At present, in the capitalistic economy, interest is determined in the capital market, in which the offerers of capital and the demanders of capital meet in free competition. In the socialistic economy such a process of interest-determination would be impossible. There can be no demand and no supply when the capital from the outset is in the possession of its intending user, in this case the socialistic central authority.

Now it might perhaps be suggested that, since the rate of interest cannot be determined automatically, it should be fixed by the central authority. But this likewise would be quite impossible. It is true that the central authority would know quite well how many capital-goods of a given kind it possessed or could procure by means of a compulsory restriction of consumption ; it would know the capacity of the existing plant in the various branches of production ; but it would not know how scarce capital was. For the scarcity of means of production must always be related to the demand for them, whose fluctuations give rise to variations in the value of the good in question, in this case capital, even if the supply of it remains constant.

If it should be objected that a price for consumption-goods would be established, and that in consequence the intensity of the demand and so the value of the means of production would be determinate, this would be a further serious mistake. The demand in the commodity market is in the first place only a demand for consumption-goods. The demand for means of production, labour and capital-goods, is only indirect. If there is only one single factor of production that has to be taken into account, as was previously assumed with regard to labour, and if, even under socialism, this factor has its own proper market-price (which is a reasonable assumption to make in view of the freedom of choice of occupation which prevails under socialism), then an adequate determination of prices is conceivable. But not so when several factors of production take part in the production of goods and a special price is not determined for each of them in separate factor markets. For, of course, the essential thing is the possibility of establishing a comparison between known commodity-prices and known costs of production. Any sort of economic calculation that aims at deducing the value of the factors of production from the prices of the commodities is consequently impracticable.

§ 13

If the prices of various products that have been produced with the aid of capital exceed their labour costs, that alone is not sufficient for determining the rate of interest, for the margin may be due to the employment of capital-goods of the most varied kinds.

This brings us to a new difficulty. The central authority can never find out how much capital is being employed ! How can the total plant of one factory be compared with that of another? How can a comparison be made between the values of even only two capital-goods? The question seems an idle one simply because our experience of the capitalistic economy leads us to assume as self-evident the possibility of a comparative valuation of capital-goods. In the market for capital-goods, particular capital-goods fetch particular prices, which are determined by supply and demand, and, in the long run, by cost. The socialistic economy no more provides such a pricing process of capital-goods than it provides a process of interest-determination. The central authority itself produces the machines it requires and need not buy them in the market for capital-goods. But it is not even possible to determine the costs of production of capital-goods ; for they themselves are the product of labour and capital, and a value must therefore be ascribed to capital in advance in order to permit the determination of the cost of using capital. Now to use a fictitious rate of interest in order to calculate a value of capital-goods that may be taken as given in determining the rate of interest, is to argue in a circle.

But if the prices of capital-goods cannot be ascertained, it cannot be determined whether given margins between labour-costs and commodity-prices are to be attributed to a greater or smaller quantity of capital. It is impossible for the central authority to find any standard of comparison for the values of capital-goods of different kinds. And for this reason, even if it were possible for it to discover the normal rate of interest (although actually this would be quite out of the question), it would still be impossible for it to undertake a process of interest-determination. For interest is a price that is calculated as a certain fraction of a value that is expressed as a sum of money. It is, indeed, on this account that a homogeneous pricing process for all the different kinds of capital-good is possible only in the form of an interest-determining process. If capital-goods cannot be reduced to a common denominator by being stated in terms of money-value, then the process of interest-determination is robbed of its technical basis. But if we are obliged to treat each individual capital-good as a peculiar factor of production that is not comparable with any other, we most seriously offend against the requirement that the pricing process should be homogeneous, without fulfilment of which a rational direction of production in the market economy is inconceivable.

So even if a certain margin could be calculated, by subtracting wage-costs from the prices of consumption-goods, it would still be impossible to direct the use of capital in accordance with it. For the amount of capital employed would still remain unknown, and so the amounts of surplus product per unit of capital could not be determined. Apart from this, and even supposing that such a calculation were possible, it still could be used as a basis for the correct organization of production only if it were possible to compare the surplus product so calculated with a normal rate of interest. For only then would it be possible to say in which branches of production an increased investment of capital would be economic (viz. those in which the surplus product exceeded the normal rate of interest) and in which branches an extension of investment must be forgone (because the interest-costs would not be completely covered by the surplus product). But it has already been pointed out that in the socialistic economy the normal rate of interest cannot be ascertained.

§ 14

But in reality it is not possible to calculate interest from the margin between labour-cost and commodity-price, even with the limitations already referred to. For, besides covering labour-costs and capital-costs, commodity-prices usually contain payment for the use of scarce natural forces, or other rents of one sort or another, which cannot be regarded as a price for the use of capital. In a community where land of various qualities has to be taken into use because the land of the best quality is not alone sufficient for all the production that is required, the employment of the superior land yields a rent, inasmuch as a product equal to that of the poorer land can be obtained from it with a smaller outlay of labour and capital. Thus rent is the equivalent of saved labour and capital ; or, in other words, it is the extra product of good land compared with poorer when the same quantity of labour and capital is employed on each. Rents also exist in manufacturing industry wherever the conditions of production vary and the scarcity of the products supplied under the more favourable conditions causes their price to rise high enough to cover the costs of production even under the less favourable conditions.

It is obvious that this big differentiation of the costs of production of goods of the same kind introduces additional difficulties into the problem. For even if the attempt were made to avoid this new complication, by reckoning in together all the undertakings producing a given good as if they constituted one undertaking only, and using their average cost to determine market price, so that the rents were passed on to the consumers in the form of lower prices, the results of the attempt, in the absence of adequate knowledge of the costs actually incurred, would necessarily remain extremely dubious.

§ 15

Until now we have made the assumption that, given freedom of choice of occupation, a price would at least be established for labour, so that it would be possible, by comparing labour-costs and commodity-prices, at least to calculate some crude kind of interest, in the form of a price in excess of labour-cost due to the scarcity of the products made with the help of capital-goods. But even this assumption is untenable. The description of the way in which a rate of wages might be determined in the socialistic economy was based on the assumption that labour is the only factor that costs anything. This assumption is essential for establishing a direct relationship between commodity-prices and wages ; for unless it is possible to ascertain the product of labour directly, the central authority does not know what wages it can afford to pay to any particular kind of labour, and is therefore unable to direct the available labour-supply into those branches of production in which it can satisfy the highest effective demand and in which on that account the highest wages can be paid.

If capital as well as labour is used in production, it is no longer possible to establish this direct connexion between prices and wages. Since, under modern conditions, practically every kind of good is produced by both labour and capital, it will hardly ever be possible to derive the value of the labour from the value of the product. In normal cases, the attribution of their respective shares to labour and capital will be an insoluble problem. Independent determination of the value of labour, by comparison of the supply of a given type of labour with the demand for it on the part of the central authority, is impossible, because so long as the central authority is ignorant of the value of the product of the labour, its demand for the labour must be unknown or arbitrary. But the product of the labour cannot be separated from the product of the capital, neither can the share attributable to labour be calculated by subtracting the capital-cost from the commodity-price ; for the capital-cost, as has been shown already, is also unknown.

§ 16

Thus, in whatever direction the problem of economic calculation in the socialistic economy is investigated, insoluble difficulties are revealed. They are all to be ascribed to the nationalization of the material means of production, which are consequently no longer subject to a free pricing process. Nationalization of the means of production involves the central control of economic activity. The inevitable presence of this centralistic element, which must partake rather of the nature of a planned economy than of an exchange economy, must necessarily disturb the pricing process which, according to our assumption, is still present even under socialism. For the pricing process, as we have attempted to show, is an endless network of exchange-relationships from which individual pieces cannot be arbitrarily torn without injuring the rest. If the threads of these relationships are cut, by making it impossible for all the material means of production to enter into a pricing process based on free individual exchange, then those parts of the pricing process that remain will lack that tautness and interdependence which is the sine qua non of an effective exchange economy.

If the absence of an adequate pricing process prevents production from being carried on in such a way that the scarce factors of production are distributed according to the criterion of effective demand, then freedom of choice of consumption does not mean very much. For the freedom of choice would not control production ; it would apply only to goods that had been produced already, while what is wanted above all is that demand should control the allocation, not merely of commodities, but also of means of production. But, if this is so, socialism differs from communism only in its allowing the consumer a free selection from among existing consumption-goods and in its achieving the necessary restriction of demand by appropriate price-fixing, while under communism a method of distribution similar to war-time rationing would be adopted. Thus the atrophy of the exchange elements in socialism as compared with its planned elements extends to its solution of the problem of distribution.

§ 17

It might possibly be objected to this criticism of socialism that the way in which it would restrict satisfaction by failing to produce according to needs would be more than compensated by the opportunities for increasing consumption that would be afforded by the abolition of unearned incomes. If the profits of ownership of the material means of production go directly to the central authority, it may be asserted that the central authority will clearly be able to redistribute this profit. But to argue in this way would obviously be to forget that the socialistic economy, like any other, must take steps to maintain the output of capital-goods. Consumed capital-goods must be replaced and, in a progressive economy, a steadily increasing stream of new and better capital-goods must be maintained. This end can be achieved only if fewer consumption-goods are produced than could have been produced with the available means ; or, in other words, if those who are employed in the consumption-goods industries obtain less than the full product of their labour, so that a sufficient surplus remains to support those who are employed in the capital-goods industries also. There is no question of everybody receiving the full product of his labour.

Now since the prices of consumption-goods must be higher than the total labour-costs incurred (because of the scarcity of material means of production), and since only wage-incomes affect purchasing power (because ex hypothesi there is to be no other sort of personal income), then less goods must be consumed in the socialistic economy than are produced ; i.e. means of production must remain free for the production of capital-goods. It is clear that the central authority’s income from material means of production must be put to a very similar use to that which a large part of the unearned income of capitalism is put to at present. It is true that the socialistic authority might decide to accumulate less than its full income from capital and land, and to allow a greater or smaller part of this income to be used for the production of consumption-goods, which would result in a fall in the prices of the consumption-goods in question and thus in an increase in the real incomes of the consumers (since a given income would now command more consumption-goods). It is also conceivable that the central authority might accumulate more capital than the margin between total receipts from the sale of final products and total labour-cost. It might employ a greater proportion of labour and other means of production in the production of capital-goods, and then, of course, it would have fewer consumption-goods to sell and would limit the demand by selling them at higher prices. But, in any case, capital could not be accumulated except at the cost of consumption. Thus it would be a mistake to suppose that consumption could be materially increased in the socialistic economy by doing away with the unearned income of the capitalistic economy. If the socialistic economy is to be as productive as the capitalistic economy, then it must maintain as big a capital equipment. Hence, the supply of necessaries could be increased only by directing to their production those resources that are at present used for luxury purposes. If it were possible, after certain transition difficulties had been overcome, to produce necessaries with the means of production that have hitherto been used for producing luxuries, that (according to the principle of uniform satisfaction of wants) would be a step in the right direction. But it must be pointed out, that to imagine that this increase of satisfaction could prove anything like a compensation for the decrease that would inevitably result from the lack of guidance in production, would be to over-estimate its amount considerably.

§ 18

The principal object of the preceding criticism has been to show that, despite freedom of consumers’ choice, it would not be possible in the socialistic economy to accommodate production to demand, and that a considerable sacrifice of productivity would therefore be necessitated. For, however great its technical perfection may be, the production of the wrong kinds of things must always be comparatively worthless. Not merely does such production offend against the principle of uniform satisfaction of wants ; at the same time it leaves unfulfilled the requirement that the greatest possible result is to be obtained with a given set of means.

This latter requirement, however, is usually understood in a narrower sense than the above. It is usually understood to mean only that a branch of production is to be conducted in an economic manner, assuming that it is desirable to engage in it at all. Thus it still remains to ask, can the socialistic economy produce economically in this narrower sense or has the capitalistic economy an advantage over it in this respect also? Opinions on this point differ widely. It is those very socialists who see clearly that no considerable advance can be made by a mere change in distribution, who often incline to the view that socialistic methods could greatly increase the total product. But there are others who have very grave doubts whether the socialist economy could even so much as succeed in equalling the capitalistic level of productivity.

It is true that this problem of the rationalization of production under socialism cannot be entirely isolated from the problem, already dealt with, of a correct division of the means of production among the various branches of production. These problems, as has been shown, are connected by the fact that economic decisions must reckon, not with a single branch of production, but with all branches of production, and that from this point of view the means of production that are needed for the technical improvement of a process in one branch of production often prove to be still more urgently required in another branch, while partial substitutes for their products in the former branch are abundant. It is possible to make a satisfactory selection among the infinite possibilities of productive organization only if unequivocal decisions can be arrived at from extremely precise data concerning the costs that would be incurred. Since the socialistic economy cannot command an adequate pricing process, a truly economic organization of individual branches of production under it is fundamentally impossible. In the socialistic economy, as in the communistic, the probable tendency will be to introduce wherever possible those methods that are the best technically, possibly without it ever being realized that the best from the technical point of view need not be the best from the economic point of view.

In this connexion, it must also be remembered that it is continually asserted and re-asserted by socialists that the anticipated increase in the incomes of the working classes (in consequence of the abolition of unearned incomes) is only the first step towards an enormous increase of productivity which it has never before been possible to attain because there has been insufficient purchasing power to carry off the goods produced. The untenability of this assertion (which, of course, is also put forward in support of claims for constantly increasing wages within the framework of the capitalistic system), is evident from the contradiction that lies in the intention, on the one hand, to devote all unearned income to the extension of consumption and so, of course, to diminish capital accumulation in a corresponding measure, coupled with the belief, on the other hand, that it is possible, despite this diminished capital accumulation, to extend production to any desired extent.

Neither do there seem to be adequate grounds for supposing that new methods of organization and improvements in the technique of production will be discovered in greater number in the socialistic economy than under capitalism. At present there is insufficient experience to go upon. But it should be pointed out that the growth and development of the capitalistic economy was paralleled by an improvement of technique and an increase of productivity of such an astonishing magnitude that it is justifiable to assume a necessary connexion between this advance and the present form of economic organization.

But if capitalism and socialism are compared in regard to productivity, there is one point above all that must not be overlooked : the capitalistic economy is by its very nature a competitive economy. Under capitalism those will secure the greatest profits who are able to draw the custom of buyers from their rivals by offering their goods at lower prices. No other form of social economy can provide in the very principle of its organization so strong an incentive to economic behaviour as the competitive economy, unless mankind changes so much that other motives of human conduct prove to be as effective as the motive of gain is at present.

It would be impossible for the motive of gain to be as effective under socialism as it is under capitalism. The initiative of the private entrepreneur would be lacking. Those who for the sake of principle act economically even when they incur unpopularity by so doing (as, for example, when a public authority in a capitalistic country unselfishly adopts a most difficult policy of economy solely for the purpose of doing its share in relieving the country from an excessive burden of taxation)—such as these would remain exceptional even in the socialistic economy. But what is worst of all is that even those who were willing to act economically would not be able to do so, because they would not have an adequate pricing process to go upon.

 

CHAPTER IV : SOME POSSIBLE OBJECTIONS CONSIDERED

§ 19

It is not possible to deal with all the objections against the arguments of the preceding chapter that might be based upon alternative assumptions concerning the structure of the socialistic economy. Between free competition and exchange-less communism there are endless conceivable combinations of the various structural elements of the social economy. In fact, it was for this reason that the decision was made to examine the socialistic economy as a type lying between the two extremes. Mixed forms which too nearly approach one or other of the two extremes, capitalism or communism, are not of interest in a theoretical investigation of the possibility of socialistic economic calculation, because the problem to be investigated either does not arise under them or else is already disposed of.

Reference, for example, to the monopolistic combinations of the modern capitalistic economy cannot demonstrate the possibility of a systematic socialistic economy. Whenever allusion is made to present-day evolutionary tendencies as a basis for the argument (as if it were established beyond doubt) that the capitalistic economy is automatically changing into a socialistic, this can only be a consequence of a lack of understanding of the problem of economic calculation under socialism. It must never be forgotten that the economic management of all the monopolistic structures that it is usual to refer to in this connexion—public undertakings, autonomous boards, cartels, pools, trusts, and the like—would be inconceivable without the constant guidance of the pricing process. The fact that such monopolistic organizations are able to influence the pricing process within certain limits in no way affects the fact that they form part of it. And this is what matters, that despite the tendency towards combination there exists an entirely adequate, and in some circumstances even an improved, mechanism of exchange between individual undertakings which provides a foundation for a complete pricing process and hence for economic behaviour. But socialism means nationalization of production and hence the abolition of the exchange relationships that constitute the essence of the market economy. If the independent undertakings as such are done away with, and made by decree dependent members of a planned economy, then an entirely new problem arises, fundamentally different from that of managing the independent undertakings or combinations of them : the problem of directing the whole economic process without pricing, which, as we have attempted to point out, has not yet been solved.

It follows that there is nothing in common between these tendencies in the organization of the members of an individualistic system and any general planning of the whole social economy ; that, in fact, the most definite boundary that can be drawn in economics separates them, the boundary between the individual economy and the social economy. Realization of this would make it impossible to assert that the capitalistic economy is automatically changing into a socialistic economy with free consumers’ choice and public ownership of the material means of production ; and even more clearly impossible to assert that this evolutionary tendency has gone so far that ‘the outlines of the new economic order’ are already discernible.8

Probably the frequent reference to this supposed automatic development results from the same reason that led Marx to restrict himself to criticizing capitalism and describing its inevitable collapse : the fact that it is impossible to make any pronouncement about the form of the socialistic economy of the future. The only difference between the two views is that according to the one the new order is to be heralded by the development and improvement of capitalism and, according to the other, by its complete collapse. We are not free to suppose that it is justifiable for the evolutionary theory (as compared with the collapse theory) to refrain from a more exact description of the practical organization of the socialistic economy on the ground of an expectation that the structure will be transformed bit by bit, without its decay and destruction being waited for. For the mistake in the evolutionary theory lies in its taking tendencies, which are working themselves out without in any way transgressing the conditions of the capitalistic market economy, and making them the basis of the assertion that the market economy might change into a planned economy of an entirely different nature from its own.

§ 20

Other objections may be passed over because they abandon the fundamental assumptions which are the source of the difficulties, particularly the assumption of free consumers’ choice, and because they consequently approach too closely to the other, communistic, extreme. This is not always obvious, because those who hold such views mostly remain quite unconscious of the fact that they actually would abrogate this freedom. It is all the easier for the true state of affairs to be disguised because projects of the kind referred to here are often intended to be completely restricted to the limits of the pure market economy and to bring about what seem to be only trivial alterations in the organization of production (and not in that of distribution at all). Such, for example, are the multifarious proposals for the socialization of credit and the nationalization of the banks, which have the object of making it possible to influence production in accordance with some scheme or other of economic planning. Such schemes provide that credit would no longer be granted with regard to capacity and willingness to pay a given rate of interest, but allotted, with regard to considerations of economic productivity, to individual branches of production at artificially high or low rates. The decision would be made by the central banking authority ; that is to say, from the consumers’ point of view, it would be an arbitrary decision. The fact that the consumer, within the limits of his restricted money-income, would be free to decide what to consume, would clearly no longer be of importance, since a truly free consumers’ choice can only be spoken of where the consumers control production by means of their demand prices and not where they merely compete for what has already been produced. Despite their innocuous appearance, such proposals and objections are definitely of a communistic character, and consequently inadmissible in a discussion of the possibilities of the socialistic economy. They settle the problem of adjusting production to demand by giving it up in advance.9

§ 21

Thus there remain two groups of objections which are distinguished from one another by the fact that the one group (approaching the communistic ideal of central planning) asserts the possibility of controlling economic life without an effective determination of market prices for the factors of production and that the other (approaching the capitalistic extreme) asserts the possibility of a competitive pricing process within individual factor markets under socialism. But the essential thing is that both groups retain the presuppositions of freedom of consumers’ choice and of the socialization of at least the material means of production, and thus hold that competition in the factor markets is reconcilable with public ownership, and that central control of economic life is reconcilable with freedom of consumers’ choice.

Some theorists think it possible to overcome the difficulties referred to by reference to the possibility of an ‘imputation of quantitative significances’. Eduard Heimann, for example, says 10 that the valuation of consumption-goods is ‘reflected’ in the valuation of the factors of production, that the prices in the markets for consumption-goods are ‘transmitted’ through all the stages of production (and apparently without reference to the situation of the parties in the production-goods markets), that the values of consumption-goods and of the factors of production are connected by an ‘elastic string’ and that it is consequently possible, even if private property is abolished, to ‘calculate the significance of each factor in the manufacture of goods if the prices of the products are given’.

It must be pointed out that of course it is not enough to show that there is some sort of connexion between the value of the product and the value of the total number of units of means of production employed. For this alone will not permit independent determination of the value of the individual factors of production. Since as a rule all three factors share in production, and since the proportions of their shares may vary indefinitely, it is quite impossible to ascribe a particular share of value to labour, capital, and land in any given instance. It is not even correct to say that the value of the whole product is the value of the three combined factors of production. For economic calculation essentially consists in the comparison of known costs of production with known or estimated commodity-prices. The essence of the process lies in ascertaining the existence of a profit or loss, on the basis of which, and not without which, production can be organized efficiently. Thus it is necessary above all that means of production that can be used for many different employments shall be valued individually and independently, quite apart from the accidental circumstances of any particular employment ; for this alone will make possible the comparison of costs and prices that is the foundation of economic calculation. What is wanted is not a postliminious imputation of accidental commodity-prices among the accidental combination of means of production employed (a process that can never give individual values for the factors), but immediate light on the question of what costs are to be incurred, obtained from an independent valuation of the separate factors of production, taking into consideration the different possibilities of employment that are open to them.

But all the possibilities of employment can be taken into consideration in this way only within a complete pricing process, and not by any such device as imagining ‘each good changed over from one employment to another until it has actually attained the highest attainable significance’.11 If factors are experimentally moved about, the total utilities of the products alter, and it is in the highest degree questionable whether the increase in the total utility of a good that results from the addition of a certain unit of a factor should be completely imputed to this particular unit. For the increased yield is the product of the co-operation of all the various factors of production employed. And besides, it is obvious that imaginary extensions and contractions of production cannot demonstrate an increase or decrease of total utility. The impossibility of comparing the wants of different persons makes it quite impracticable to express exactly, as changes in quantitative amounts of significance, the reactions of the consumers to such an attempt.

Such singular proposals as these are obviously based upon the supposition that it would be just as possible for the central authority of the socialistic economy as for the manager of a self-sufficent farm to weigh all the alternative possibilities of production and consumption against one another and so to arrive at a decision about them. But examples of the actual practice of such a method are limited to isolated economies that are small enough for all the conditions of production and demand within it, and so the values to which these give rise, to be surveyed at a glance. When the total demand is built up of innumerable incommensurable scales of valuation ; when the division of labour is carried to the utmost extreme of partition into countless interdependent tasks ; when, that is to say, the enormous process of production is beyond the power of apprehension of any individual, or even of the central authority ; then any ‘imputation’ other than through market-pricing is inconceivable. The management of a self-sufficient farmstead and the control of a modern social economy are tasks that differ from one another not merely in degree but in kind. If the assumption of free consumers’ choice is to mean that individuals’ subjective valuations are to be taken account of in the social economy also, they must be translated into sufficiently objective terms by the pricing process to make an adequate economic calculation possible. The pricing processes in the consumption-goods markets are not enough. There must also be a real pricing process in the markets for means of production. No meaning can be assigned to any proposal to replace this pricing process by a process of ‘imputation’, which, being a purely individual construction of a scale of values, has no relevance to the objectivized sphere of the social economy.

§ 22

It has been asserted, with no better foundation, that mathematical economics provides us with exact methods ‘for determining the equilibrium prices of the means of production without the assistance of the market and its processes’12 What is meant here is the systems of equations such as have sometimes been used to demonstrate the functional relationships that we have referred to. If, in particular, Professor Cassel’s well-known price formulae have been interpreted as if their assistance would enable the prices of the means of a production in a socialistic economy to be priced without market competition, Professor Cassel himself is partly to blame. For he declares that ‘in the centrally and rationally organized socialistic economy, the cost principle would in fact have to be adhered to much more closely than is possible in the existing economic order’13

According to Professor Cassel, the ideal pricing process must be conceived of in the following terms :

If the quantities of the various factors of production that are available for the production of commodities in any year are given, then, if the prices of the factors are provisionally regarded as known, the prices of the finished commodities can be calculated in accordance with the principle of cost. This makes it possible to calculate the demand for each commodity, and since the principle of cost requires that this demand must be met (and in such a way that each demand bears the full cost of its satisfaction and that the total demand for each commodity is equal to the total supply), then it is also possible to calculate the quantity of each commodity to be produced. Now, if the technique of production is quite fixed and unalterable, it is possible to calculate the quantities of each factor that are required in production. And since the cost principle demands that these quantities must coincide with the amount available for each factor, an equation can be obtained, which is obviously what is necessary and sufficient for determining the prices of these factors of production.14

It is clear that what Professor Cassel provides us with here is not an explanation that will fit actual pricing processes, but an ideal price scheme to which actual pricing processes arc to be fitted. Instead of a causal explanation, he gives us rules and principles. He does not help us ‘to understand the type of connexion between cause and effect that is characteristic of the social economy.’15 Such an understanding can be attained only by taking account of the acquisitive and competitive impulses and by supposing the means of production to be in private ownership. For only in such circumstances can the existence of adequate pricing processes be assumed. But Cassel thinks that competition should be replaced by the cost principle so as to make the pure theory of the exchange economy applicable to the socialistic economy in which there cannot be an adequate competitive pricing process because the material means of production are to be in the ownership of the community.

Even if Professor Cassel himself does not fall into the crude error of hoping actually to calculate prices with the help of equations established according to this scheme, he does nevertheless lend it his support by asserting that prices could be adequately determined in the socialistic economy according to the principle of cost. The pricing process, of course, has not the teleological character, that this implies. But, in any case, prices could not be calculated with the help of the equations, because these equations (or formulae, as it would be more correct to call them) give no expression for the functions connecting the dependent with the independent variables.

§ 23

Many claim to have discovered in the application of the methods of calculation developed by the modern science of business administration what appears to be a staggeringly simple solution of the problem. Such arguments as the following are typical :

In the manufacture of a given good the department concerned first receives all the materials necessary for that stage of production from the stores manager. Each worker or group of workers has to complete the allotted process in a period of time which is based upon stop-watch readings. Thus the exact amount of time occupied in the manufacture of a good can be determined. Materials are reckoned at cost price and wage costs are calculated at piece-rates or time-rates. The cost of production consists of the costs of materials and labour plus a supplement for general overhead costs. . . . It follows that as far as costs of production are concerned it is completely a matter of indifference whether the factory in question competes with others or works with them as part of a general industrial plan. Costs of production plus marketing costs, together with a margin of profit, are the ultimate data for calculating the price of the commodity.16

This account is so devoid of meaning that one would hesitate to quote it if it were not unfortunately typical of the common belief that technical data provide a sufficient basis for answering economic questions. Rates of wages, however, cannot be read off from stop-watches, and so they, as well as the prices of the raw materials, are simply assumed as given. Writers in this strain clearly fail to realize that the very point at issue is the manner in which the prices are determined which serve as a basis for comparison of costs and selling prices. Neither are they any more conscious of the fact that without knowledge of these prices it is impossible to decide what processes of production are to be adopted ; for this decision is made not solely by the works manager on technical grounds, but also by the entrepreneur, who is guided by economic considerations.

§ 24

It might perhaps be suggested that prices could simply be fixed by the central authority. This has, in fact, been explicitly demanded as far as the rate of interest is concerned. But if this were done, the case would be one of central planning of production without regard to the controlling element of consumers’ choice. All that it would mean would be controlling production through the medium of fictitious prices instead of directly reckoning in units of goods and services. In Soviet Russia, an attempt is being made to employ both kinds of planning side by side. But this method, of course, is practicable only if there is no intention of letting real scarcity prices be determined for the products, which would be expected to coincide with the fictitious cost prices. For this coincidence cannot be achieved if production is directed without regard to scales of wants and yet the final valuation of the product left to uncontrolled demand. Such a policy must necessarily lead to communism, i.e. it must cease to be socialistic, because a pricing process determined by the value-scales of individuals is irreconcilable with an arbitrary programme of production and would have to be abandoned in favour of maximum prices and rationing.

It might be objected that a completely free market is not appropriate to a socialistic economy and that what is lost in this way should be replaced by planned elements ; that, in fact, the peculiar characteristic of the centrally-controlled economy is that it is controlled with regard to social interest and without regard to considerations of private profitability. However true this may appear, and however necessary such an attitude may be on the part of those who support socialistic ideals, it remains difficult to see how central control of the economy can be reconciled with the assumption of a really free choice of consumption and occupation. If the want of an adequate pricing process compels the central authority to construct a general economic plan, it will also compel it to dispose of labour as it sees fit. But in that case the labourers can no longer be allowed a free choice of occupation. If the allocation of the labour should be brought about by appropriate wage policies, prices in the labour market would have to vary much more than in the capitalistic economy, since the demands for labour would follow the plan, without regard to the prices that had to be paid, and the freedom of occupation that existed in such circumstances would be as problematic as the freedom of consumption that exists in a commodity market where the only choice offered is that between goods that have already been produced.

§ 25

Whereas the objections that have been dealt with so far attempt to show that economic calculation would be possible in the socialistic economy without competition, and thus imply that an adequate competitive pricing process would not exist, or at least would not be necessary, in another group of objections the greatest stress is laid upon the assertion that exchange relationships would exist even apart from private property, and that an adequate competitive pricing process could therefore be maintained even in a planned economy. Often the same writers who put forward the theory that there would be competition between different branches of the civil service also hold the view already discussed that quantitative significance could be imputed to commodities ; but such an attempt to make assurance doubly sure scarcely carries conviction.

Nothing need be said of the common argument ‘that State railways compete with State canals and that State coal mines similarly cannot help coming into competition with State electricity undertakings’,17 except that it betrays complete ignorance of the fundamental problems of the socialistic economy. Nobody can deny the obvious fact that business relationships do exist between public undertakings or assert that the possibility of exchange relationships in the present economic order is bound up with the existence of private property—in individual cases. But this in no way affects the fact that the pricing process as a whole, the foundation of the present economic order, is based upon private property, and that public undertakings only participate in normal business relationships and compete with other undertakings (among which are other public undertakings) because they are run, not on administrative, but on business, lines, and above all because their pricing processes conform to the general pricing process. As is well known, this is what also constitutes the distinction between partial and complete socialization, of which Liefmann says that ‘what is called partial socialization is no socialization at all in the true sense, because it in no way alters the present-day economic order’,18 and of which Mises rightly observes that all partial socialization is only made possible by ‘the actions of the undertakings in question being so far supported by the uncontrolled commercial organism that surrounds them that the essential characteristics of the socialistic economy cannot appear in them at all’. 19

Heimann 20 is somewhat more penetrating, although it is unfortunate that he should restrict himself to mere suggestions and leave the constructive work to the critic, as is the common practice of socialistic theorists. For the establishment of competition (which he himself, it is true, puts in inverted commas), it is enough for Heimann that supply and demand should emanate from different public authorities which ‘have a different personnel and an ideal and material interest in the results of their work According to Heimann, everything would then go on ‘ just as under present conditions. . . . Consumers’ demands for products would be transformed into the demands for means of production on the part of the producing undertakings—whether communistic or capitalistic makes no difference—and interest and wages would be determined exactly as hitherto. . . . Both the form and the content of economic calculation would therefore be retained. Nothing is altered in the economic constitution of this form of organization, and consequently it would function in the old manner And, despite all this, the decisive step into socialism would have been taken, private ownership of the means of production have been abolished, and ‘personal’ distribution separated from ‘functional’ There would be no more unearned incomes, for rent and interest would go directly to the central authority.

Thus, apparently, the only change is that the managers of the individual public undertakings are no longer the owners of the means of production over which they have power of disposal, and no longer receive the profits or have to bear the losses. Any participation in the profits would have to be restricted within the narrowest limits if all considerable private accumulation of capital had to be prevented in order to preserve the public ownership of the means of production. That the socialistic economy is to this extent psychologically inferior to the capitalistic is admitted by many socialistic theorists. It forgoes ‘the stimulus to good service which lies in the capitalistic connexion between economic calculation and income ’ (Heimann). The importance of this statement can only be gauged after an investigation into the degree in which the profit-making tendency is the indispensable motive force of the capitalistic economy and into the question of whether an adequate substitute for it could be found in the socialistic economy. Those who advocate economic planning are at this point in the position of having to count upon a change of the general attitude towards economic life without being able to educe any presumption of its reliability or any reason why it should come about at all.

The manager of a planned economic undertaking holds a monopoly position in the market. There is no supply except by the public authorities and it may be supposed that all the production in any one branch of industry is comprised within a single undertaking, at least for accounting purposes. That is the least that may be expected from planned control of production. And as has already been pointed out, the elimination of rent demands a similar unification. It follows that the manager of such a branch of industry will possess, according to capitalistic standards, an unusual amount of power, and that precautions will have to be taken to see that he does not abuse it. In a communistic economy the necessity for absolute subordination to the general plan would, in theory, prevent any arbitrary exercise of power on the part of individuals. But in a socialistic economy, which is to be controlled by the competition of public authorities, the managers of the individual monopolies would have to be given a certain amount of freedom. If they were furthermore required to make profits, the danger of monopolistic abuses would be extraordinarily great.

Heimann attempts to avoid this danger by demanding ‘complete restraint’ on the part of the monopolists.21 The monopolists are to see that prices cover costs ; they are simply to follow demand schedules instead of themselves initiating supply schedules, thus ‘ceasing to act as independent parties and leaving the mechanism of the market in free operation’.

It is clear that such a restriction as this of the use of monopoly power cannot prove very reassuring. Since the monopolists no longer bear any risks and are able to compensate any loss by raising prices, provision must be made for strict control. And the question of an adequate check leads us back to the question with which we started : whether it is possible under socialism to have a competitive pricing process in the factor markets and so a genuine calculation of profits in individual undertakings.

The various public authorities ‘compete’ in the factor markets. According to our assumptions, the demand for capital and labour is dependent upon changes in the prices of the products and in the profits which arise in consequence of these changes. Capital is exclusively owned by the community, which receives all interest-payments and all the profits of the individual undertakings. The demand for capital in the individual industries is restricted by a uniform rate of interest that is just high enough to restrict the total demand to the level of the available resources. Under communism, credit is allotted arbitrarily, but under our present assumptions this must be avoided. But there cannot be a genuine pricing process in the credit market because of the monopoly which is enjoyed by the central authority. The rate of interest must be fixed experimentally. And so all the objections that have already been considered arise again.

Obviously the central authority cannot be satisfied with the simple promise that the branches of industry that are demanding capital will pay a certain rate of interest. In any case, all interest and profit goes to the central authority ; and, in the absence of personal responsibility, promises of payment have a very different character from that which they bear in the capitalistic economy, and one that makes much stricter control necessary. What is necessary is to determine whether the industries in question can be expected to be able to pay a given sum of interest out of their gross profits and to yield a net profit in addition ; but, of course, not at the expense of a sufficiently monopolistic treatment of the consumers.

Unified accounting in all branches of industry would necessarily be a task so difficult as to be practically insoluble, if only because the enterprises concerned would be so extremely numerous and the different kinds of organization and production technique so varied. It is certain that this task would be incomparably more difficult to perform than the similar task in the communistic economy, which would only involve a comparison of the actual figures with those of the general plan ; for under socialism, each figure would have to be checked with regard to the efficiency of the whole under-taking, which in its turn could only be determined by comparison with the figures of all the other enterprises according to the principle of homogeneous price determination.

Thus the decisive question is whether it is possible to determine net profits at all within individual branches of industry. The problem is one of comparing commodity-prices with costs. The difficulty arises from the reciprocal monopoly relationships. Even in the commodity markets, real competition prevails only on the demand side ; supplies are in the hands of monopolists who determine the extent of production and so the level of prices. In these circumstances, even if costs could be assumed as known, it would be uncommonly difficult to decide whether profits were due to an efficient organization of production, a correct estimate of demand, or a monopolistic exploitation of consumers. In the capitalistic economy, uncertainties of this kind cannot arise, so far as there is competition within the individual branches of production. Thus the problem of competition in the socialistic economy is already involved in the fact that the monopolistic difficulties which appear here and there in the capitalistic economy extend throughout the whole of the socialistic economy. Even in the markets for consumption-goods there are only monopoly prices.

But the monopoly problem becomes considerably more complicated when we turn to the markets for the means of production. It has already been pointed out that there would be an absolute monopoly of supply in the capital market. But the demanders too would be monopolists. It is true that they would ‘compete’ with one another for the available supply, but only in regard to profits the calculation of which is the very point at issue, especially considering the ease with which true profits may be confused with monopoly profits. It is not conceivable that a normal rate of interest would be arrived at in these circumstances, because the monopolists would always be able to raise the rate they were paying. All they need do would be to restrict production accordingly. Within the industry there would be no such competition as would prevent such action on the part of a private entrepreneur. Thus it is quite conceivable that the individual monopolists would exploit their monopoly position to raise the rate of interest. Neither would such a tendency be at all surprising, seeing that there would be an absolute monopoly on the supply side, and that the position of the suppliers would therefore be incomparably more powerful than that of the demanders. There would be no force that could be relied upon to reduce the rate of interest to normal.

If we assume, however, that in spite of all these difficulties capital is distributed among the individual branches of industry in correspondence with the demand for it, then primary products, capital-goods, and labour will be demanded with this purchasing power. On the markets for raw materials and capital-goods, monopolists are opposed to one another ; it is difficult to see how a market-price can be established. If it should be suggested that all intermediate products should be supplied to the next stage of production at prime cost, the questions would arise of how the prime cost could be calculated, and of how the capital could be distributed in accordance with profits if ex definitions there are to be no profits in the production of raw materials and the manufacture of capital-goods.

As for the determination of the price of labour, it must be repeated that the apparent precision of the process, even with a free choice of occupation, would be destroyed by the lack of precision of the process of interest-determination. And furthermore, all the objections that arise from the monopolistic position of the employers, in both the labour and the commodity markets, and that have already been touched upon in connexion with the question of interest, are equally valid in the present connexion.

But the problem becomes still more complicated if, as many socialistic theorists advocate, we separate personal from functional distribution here also. How are we to conceive of the determination of wages in a labour market co-existing with an arbitrary allocation of incomes? It might perhaps be suggested that a central labour office could supply labour at the existing ‘market-price’ and then proceed to pay an entirely different wage based upon some ethical criterion or other. But in such circumstances it is difficult to see, not only how the total supply of labour is to be distributed among individual industries in the first place, that is to say, how the choice of occupation on the part of new recruits is to be regulated, but also how a given supply of each kind of labour is to be distributed among the individual branches of a particular industry. A further difficulty, that does not arise in regard to capital, springs from the fact that the labour must have many different prices, and not one uniform price, because of its heterogeneous nature. Probably demand, and so a tendency towards low wages, would be in the stronger position in the case of such labour as had relatively few uses, and supply, and so a tendency towards high wages, in the case of such labour as had relatively many uses. This would therefore mean a tendency for highly specialized labour to be underpaid and for relatively unspecialized labour to be overpaid ; a consequence that gives food for thought.

This examination of the conditions that would prevail in the ‘markets’ for means of production should have made it clear that it would be entirely correct to say that real competition would exist only in the markets for consumption-goods, and that the competition between public authorities for the means of production would be competition in inverted commas only. All that those in charge of economic activity have ostensibly to do is to transform the consumers’ demand for products into a demand for means of production. They are supposed to play no active role at all, but passively to set the mechanism of the free market in motion. But it is important to remember in this connexion that, in the first place, the competition in the markets for consumption-goods is only unilateral, and that, in the second place, there cannot be markets for the means of production at all if there is an absolute monopoly on their supply side and ex hypothesi no active demand at all.

Of course it will be said that it would be the function of the managers of the socialistic economy, by transforming the demand for products into a demand for means of production, to bring the competition of the consumers into immediate contact with the scarce means of production. But this is to forget that an independent pricing process of the factors of production is just as necessary for economic calculation as is the pricing process of the product ; and that such a pricing process cannot be brought about by attempting to breathe some of the life of the genuine competition of the commodity-market into the socialistic industrial scheme. Consumers’ demand alone is not a sufficient basis for a genuine pricing process in the markets for means of production. For this, although ultimately the decisive side, is nevertheless only one side of the general pricing process. Supply (as reflecting the scarcity of means of production in relation to unlimited needs) must also be taken account of. The laws of price cannot be fulfilled without it. But on the supply side the socialization of the means of production does away with all real competition. It is not a question of transferring competition on the demand side, in however artificial a manner, but of securing competition on the supply side. Socialistic theorists make the mistake of imagining it possible to replace competition on both the demand and supply sides by an actual and a fictitious competition, both on the demand side. At a pinch it is conceivable that individual public authorities might compete with one another on the demand side ; with a centralized supply of capital (and labour), competition on the supply side is necessarily out of the question. But even if the labourers competed among themselves, the situation, as has been shown, would not be materially improved.

Thus there results a graduated monopoly : free competition among consumers, and monopoly on the part of those who supply consumption-goods ; fictitious competition among those who demand means of production, and absolute monopoly among those who supply labour and capital. Demand is restricted, not by a pricing process, but by experimental price-fixing. Instead of the means of production being distributed automatically they are allocated according to estimates of results, which, in the absence of exact cost accounting, would not really be feasible at all. Thus, an automatic grouping of the factors of production will, in all probability, also be replaced by arbitrary allocation as a necessary counterpart to the arbitrary allocation of incomes (which, it must be admitted, the pricing of the factors of production would render impossible). With all this, exact calculation of profit and loss would be more necessary in the socialistic economy than in the capitalistic, for where all calculations are recognized as fictitious (and there would be no genuine counting of costs), and where the struggle for existence does not compel adequate recognition of the economic principle, negligence increases, and with it the need for safeguards along purely accounting lines. A decline in individual responsibility means an inevitable expansion of the central auditing apparatus.

 

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22 [Because of the somewhat different meaning which the term socialism has assumed in present-day Germany, the author had in his original German manuscript used the terms ‘collectivism’ and ‘collectivistic’, where in the translation the more familiar ‘socialism’ and ‘socialistic’ are used. Ed.]

23 In the opinion of the socialist Carl Landauer, this is an inadmissible assumption and all schemes for determining human wants apart from the evidence of an actual demand for goods (whether by statistical estimates or otherwise) are quite impracticable. Cp. Planwirtschaft und Verkehrswirtschaft, Munich and Leipzig, 1931, p. 114.

24 N. G. Pierson, ‘The Problem of Value in a Socialist Community’. See above, Part II of the present volume, p. 51.

25 ‘The chief aim of Socialism is to equalize people’s economic position, not necessarily to establish exact equality of incomes and resources, but to eliminate the causes of those gross inequalities which distinguish the individualist system’. R. G. Hawtrey, The Economic Problem, London, 1926, p. 337.

26 In his book Die Verstaatlichung des Kredits, Munich and Leipzig, 1927.

27 On this and what follows compare the path-breaking investigations of Ludwig Mises, Economic Calculation in the Socialist Commonwealth (see preceding section of the present volume) and Die Gemeinwirtschaft, Untersuchungen über den Sozialismus, 2nd edition, Jena, 1932.

28 In the capitalistic economy the rate of interest varies according as the capital is lent for a longer or a shorter period. The author’s ‘Das Zinsproblem am Geld- und Kapitalmarkt’, Jahrbücher für Nationalökonomie und Statistik, 133, Bd., 1926, pp. 1 ff. may be consulted upon this special problem, which need not be dealt with in the present place.

29 As is asserted in the economic programme of the social-democratic trade unions. Cp. Wirtschaftsdemokratie : Ihr Wesen, Weg und Ziel. Pub. for the Allgemeine Deutsche Gewerkschaftsbund by Fritz Naphtali, Berlin, 1928.

30 Further objections are dealt with in the present writer’s article on ‘Sozialisierung des Bankwesens’, in the Handwörterbuch des Bankwesens, Berlin, 1932.

31 Eduard Heimann, Mehrwert und Gemeinwirtschaft : kritische und positive Beiträge zur Theorie des Sozialismus, Berlin, 1922 ; Kapitalismus und Sozialismus (particularly III, ‘Zur Kritik des Kapitalismus und der Nationalökonomie’), Potsdam, 1931.

32 Carl Landauer, Planwirtschaft und Verkehrswirtschaft, Munich and Leipzig, 1931, p. 119.

33 Kläre Tisch, Wirtschaftsrechnung und Verteilung im zentralisch organisierten sozialistischen Gemeinwesen, Bonner Dissertation, 1932, p. 24.

34 Gustav Cassel, Theoretische Sozialökonomie, 4th edition, Leipzig, 1927, p.115.

35 Gustav Cassel, ‘Der Ausgangspunkt der theoretischen Nationalökonomie’, Zeitschrift für die gesamte Staatswissenschaft, 58. Jahrg., 1902, pp. 696-7.

36 Ibid., p. 696,

37 Roderich von Ungern-Sternberg, Die Planung als Ordnungsprinzip der deutschen Industriewirtschaft, Stuttgart, 1932, pp. 56-7,

38 Kromphardt in the Zeitschrift für Nationalökonomie, Bd. I, Vienna, 1930 (review of the present writer’s book Die Konkurrenz, Munich and Leipzig, 1929).

39 Robert Liefmann, Geschichte und Kritik des Sozialismus, Leipzig, 1922, p. 165.

40 Ludwig Mises, Die Gemeinwirtschaft, 2nd ed. Jena, 1932, p. 98.

41 Eduard Heimann, Kapitalismus und Sozialismus (especially II. ‘Ueber Konkurrenz, Monopol und sozialistische Wirtschaft’), Potsdam, 1931. My references to Dr. Heimann are not intended to provoke a re-discussion of a long-standing difference of opinion between us, but merely to provide an independent statement of the objections with which I am concerned without laying myself under the obligation to outline the concept of fictitious competition in the socialistic economy and so exposing myself to the charge of having deliberately chosen an unfavourable example.

42 In a similar fashion the guild socialists demand a control of production by guilds, neither in their own interests alone nor solely in that of the consumer,’ but in the common interest. The guilds, however, are not to work for profit at all, but only to meet demand. There is to be no competition, and the State is only quite occasionally to fix prices. It is absolutely impossible to discover the principles according to which such a society could be governed. Since there is, however, no way in which prices could be determined otherwise, the State would after all be responsible for apportioning the work of production among the different guilds. And thus guild socialism would relapse into communism, although the freedom which the guilds would enjoy is supposed to give it an advantage even over socialism.

• 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.
• 10E. 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.
• 11This 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.
• 12Die 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.
• 13An 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.
• 14Max Weber, Wirtschaft und Gesellschaft (Grundriss der Sozialökonomik, Vol. III), Tübingen, 1921, pp. 55-6.
• 15O. Bauer, Der Weg zum Sozialismus, Wien, 1919.
• 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.
• 18A 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.
• 19Ibid., p. 33.
• 20Cf. Böhm-Bawerk, Capital and Interest, p. 384.
• 21Cf. Lenin ; Die nächsten Aufgaben der Sowjetmacht, Berlin, 1918, pp. 12 f., 22 ff.
• 22It 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.
• 23The 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.
• 24It 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.
• 25The 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.
• 26But 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.
• 27But 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.
• 28All 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.
• 29All 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.
• 30Among 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.
• 31But 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.
• 32In 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.
• 33The 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.
• 34It 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.
• 35The 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.
• 36Among 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.
• 37A 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.
• 38But 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.
• 39In 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.
• 40“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”.
• 41Böhm-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.
• 42That 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”.