The Economics of Liberty
Introduction
Today, the whole world knows about the socialist fiasco. But in 1920, when Ludwig von Mises’s journal article on “Economic Calculation in the Socialist Commonwealth” was published, he was a lone voice of truth.
“Socialism,” he wrote in the book that followed two years later, “is the watchword and the catchword of our day.” It “dominates the modern spirit” and “has set its seal upon our time. When history comes to tell our story it will write above the chapter ‘The Epoch of Socialism.’”
Until the glorious year of 1989, almost everyone seemed to agree that history was indeed on the side of socialism. The only question was the pace of the transition. The Marxists and Nazis wanted immediate revolution; the Fabians and New Dealers wanted gradualism. But for all of them, laissez-faire capitalism was the enemy.
Yet no socialist had ever written a scientific defense of socialism, nor a blueprint for exactly how the economy would function when the means of production were collectively owned.
According to Karl Marx’s doctrine, anyone questioning the socialist scheme lacked class consciousness. Bourgeois values prevented an understanding of the logic of history.
Because “people were not allowed to talk or to think about the nature of the socialist community,” Mises notes, socialism became “the dominant political movement of the late nineteenth and early twentieth centuries.”
But Mises refused to play by the socialist rules, and he challenged left-wing intellectuals with questions they were unable to answer.
If there is no private ownership of the factors of production, and thus no market prices for them, how can we calculate profit and loss? Without the ability to make profit and loss calculations, how can we judge the value of resources, determine the correctness of various methods of production, or tell whether time and resources are being wasted or put to good use?
In a market economy, prices tell us the needs of society and the best ways to meet those needs. Without prices, economic decision must be arbitrary.
Mises criticized socialism on other grounds—that it politicizes society, fosters laziness, and relies on violence, for example—but his calculation argument is the most important. With it, he showed that socialism is inherently irrational and uneconomic, as the wreckage of the East Bloc and the Third World demonstrates today.
One socialist response to Mises was to invent pretend market prices, missing the point that private property is necessary for real prices. And that is why the Misesian calculation argument has relevance for the mixed economy. It shows what is wrong with all government interventions in the free market.
In a government agency, there are no private owners. There are no market prices for its goods or services. There is no way to determine profits or losses. So its decisions must be arbitrary.
Mises’s case against socialism is also the case for laissez-faire capitalism, “the only conceivable form of social economy which is appropriate to the fulfillment of the demands which society makes of any economic organization.”
But despite their economic failure, socialist systems survived until men and women of courage brought about their political downfall. And that is what we need in America, one of the nations still moving towards bigger and more intrusive government.
The answer is not more policy analysis that accepts big government categories and advocates meaningless reforms. It is not the “privatization” of illegitimate government functions. It is not alleged free-marketeers installed in big Washington jobs.
The answer, as in Eastern Europe, is men and women willing to tell the truth about the coercion, plunder, corruption, and lies of Washington, D.C. And this is what the Ludwig von Mises Institute’s monthly Free Market tries to do, through an uncompromising advocacy of the free market, private property, individual liberty, and sound money.
In this publication and through many other Institute programs, we battle old threats like central banking and bureaucracy, and new threats like civil rights and Green-o-mania.
The first Free Market Reader proved popular on campus and among the general public. This second collection is even more timely.
To Perry Alford and the other generous donors who made this book possible, heartfelt thanks. Without men and women like this, whether in 1776 or today, the cause of liberty would be lost.
Thanks also to Murray Rothbard, dean of the Austrian school of economics, for his contributions to this volume and his inspiration; to the indispensable Jeff Tucker, managing editor of The Free Market; to Norma Marchman, for keeping everything on track; to Judy Thommesen, for wizardry in publishing; and to Lianne Araki, for proofreading.
Llewellyn H. Rockwell
Auburn, Alabama
November 22, 1990
