The Free Market Reader

 

5 SOCIALISM

The Politics of Famine

Murray N. Rothbard

The media focuses primarily on the horrifying shots of the starving children, and secondarily on the charges and counter-charges about which governments—the Western or the Ethiopian—are responsible for relief not getting to the starving thousands on time. In the midst of the media blitz, the important and basic questions get lost in the shuffle. For example, why does Nature seem to frown only on socialist countries? If the problem is drought, why do the rains only elude countries that are socialist or heavily statist? Why does the United States never suffer from poor climate?

The root of famine lies not in the gods or in our stars but in the actions of man. Climate is not the reason that Russia before Communism was a heavy exporter of grain, while now the Soviet Union is a grain importer. Nature is not responsible for the fact that, of all the countries of East Africa, the Marxist-Leninist nations of Ethiopia and Mozambique are now the major sufferers from mass famine and starvation. Given causes yield given effects, and it is an ineluctable law of nature and of man that if agriculture is systematically crippled and exploited, food production will collapse, and famine will be the result.

The root of the problem is the Third World, where (a) agriculture is overwhelmingly the most important industry, and (b) the people are not affluent enough, in any crisis, to purchase food from abroad. Hence, to Third World people, agriculture is the most precious activity, and it becomes particularly important that it not be hobbled or discouraged in any way. Yet, wherever there is production, there are also parasitic classes living off the producers. The Third World in our century has been the favorite arena for applied Marxism, for revolutions, coups, or domination by Marxist intellectuals. Whenever such new ruling classes have taken over, and have imposed statist or full socialist rule, the class most looted, exploited, and oppressed has been the major productive class: the farmers or peasantry. Literally tens of millions of the most productive farmers were slaughtered by the Russian and Chinese Communist regimes, and the remainder were forced off their private lands and onto cooperative or state farms, where their productivity plummeted, and food production gravely declined.

And even in those countries where land was not directly nationalized, the new burgeoning state apparatus flourished on the backs of the peasantry, by levying heavy taxes and by forcing peasants to sell grain to the state at far below market prices. The artificially cheap food was then used to subsidize foods supplies for the urban population which formed the major base of support for the new bureaucratic class. The standard paradigm in African and in Asian countries has been as follows: British, French, Portuguese, or whatever imperialism carved out artificial boundaries of what they dubbed “colonies,” and established capital cities to administer and rule over the mass of peasantry. The new class of higher and lower bureaucrats lived off the peasants by taxing them and forcing them to sell their produce artificially cheaply to the state. When the imperial powers pulled out, they turned over these new nations to the tender mercies of Marxist intellectuals, generally trained in London, Paris, or Lisbon, who imposed socialism or far greater statism, thereby aggravating the problem enormously. Furthermore, a vicious spiral was set up, similar to the one that brought the Roman Empire to its knees. The oppressed and exploited peasantry, tired of being looted for the sake of the urban sector, decided to leave the farm and go sign up in the welfare state provided in the capital city. This makes the farmer’s lot still worse, hence more of them leave the farm, despite brutal measures trying to prevent them from leaving. The result of this spiral is famine.

Thus, most African governments force farmers to sell all their crops to the state at only a half or even a third of market value. Ethiopia, as a Marxist-Leninist government, also forced the farmers onto highly inefficient state farms, and tried to keep them working there by brutal oppression.

The answer to famine in Ethiopia or elsewhere is not international food relief. Since relief is invariably under the control of the recipient government, the food generally gets diverted from the farms to line the pockets of government officials to subsidize the already well-fed urban population. The answer to famine is to liberate the peasantry of the Third World from the brutality and exploitation of the state ruling class. The answer to famine is freedom and private property.

Mises and Gorbachev: Why Socialism Still Doesn’t Work

Tom Bethell

Last summer, the following headline appeared over a page-one story by Dusko Doder in the Washington Post:

Gorbachev’s Vigor Raises Expectations
New Soviet Leader Focuses on Economy

Mr. Doder proceeded to inform us that the new Soviet “leader” (what an odd word to use, by the way) had been showing an “almost breathtaking determination to make changes in the Soviet economy.”

Two weeks later Serge Schmemann of the New York Times wrote of “the depth of excitement and hope that Mr. Gorbachev seems to have tapped across the land in his first 100 days in office.”

Since Gorbachev’s accession, there have been many similar stories, conveying a ventriloquized media enthusiasm for the new “leader.” There can be no doubt that, in the opinion of many U.S. journalists, the socialist economic system of state-controlled resources and central command has not worked well lately in the Soviet Union because the men in charge have been elderly and incompetent. In other words, there is nothing wrong with the system itself—provided it is managed by a skillful, vigorous elite.

Robert Kaiser of the Washington Post put it this way in an article headlined “Now Russia Will Change.” Gorbachev, he said, is a “new kind of Soviet man.” He is “young, well-educated, vital, relaxed and by all outward appearances self-confident.” True, Kaiser conceded, there were problems in the economy—“corruption,” for example, and “inefficiency.” Also an “entrenched bureaucracy.” But all this would no doubt soon change with the vigorous Mr. G. at the helm.

Well, Mr. Kaiser (who was the Post’s correspondent in Moscow in the early 1970s) is in for a big disappointment. And so are the poor, long-suffering Russian people. Nothing is likely to change, although it is possible that Gorbachev will make things worse.

The great difficulty for Mr. Gorbachev is this: socialist economies all have a serious defect which cannot be resolved by vigor or good intentions. This defect was spelled out by Ludwig von Mises as long ago as 1920—before the evidence of socialist failure was available. His analysis amounted to a prediction that has been verified.

The problem is this: It is one thing for central planners to draw up a plan of production. It is quite another thing to carry it out. Here we encounter the famous “problem of economic calculation” formulated by Mises. How can you (the planners) know what should be produced, before you know what people want? And people cannot know what they want unless they first know the price of things. But prices themselves can only be established when people are permitted to own things and to exchange them among themselves. But people do not have these rights in centrally planned economies.

The planners can, of course, decide beforehand what goods are to be manufactured, whether or not the people really want them. But as Trygve Hoff points out in his book Economic Calculation in the Socialist Society, only the most primitive planning can proceed in this way. In real life the planners and their subordinate factory managers bump up against the central fact of economic life—scarcity. There is not enough of everything to go around. One is tempted to say that there is not enough of anything to go around—if it is both desirable and free. (Air seems to be the only exception.)

It is worth noting that when, in the 1920s and 1930s economists tried to rebut Mises, some of them went so far as to challenge the assumption of scarcity, suggesting that it was a chimera stage-managed by nefarious monopolists. But if we assume that scarcity is a reality, as we must, then we are forced to conclude that goods must be priced. And yet the central planners do not know how to price them in the absence of markets.

Prices depend for their formation on the real possibility of personal profit or loss. Try to imagine a serious game of poker played with Monopoly money. All psychological incentive is removed by the knowledge that at the end of the evening, no one playing is really going to lose or gain anything.

In The Foundations of Morality, Henry Hazlitt made one of the clearest statements of the problem of socialist pricing:

“If I am a government commissar selling something I don’t really own, and you are another government commissar buying it with money that isn’t really yours, then neither of us really cares what the price is. When, as in a socialist or communist country, the heads of mines and factories, or stores and collective farms, are mere salaried government bureaucrats, and sell their finished products to still other bureaucrats, the so-called prices at which they buy and sell are mere book-keeping fictions. Such bureaucrats are merely playing an artificial game called ‘free market.’ They cannot make a socialist system work like a free-market system merely by imitating prices while ignoring private property.”

The Polish economist Oskar Lange tried to save the day for the socialist by claiming that prices could be established by trial and error: set prices at a given level and then move it up or down depending on whether it yields a shortage or a surplus. But here the socialist run into their second great difficulty—the transmission of information to the central planning authority. How do the central planners know where things are in shortage and where they are in surplus? (This problem was first elucidated by F. A. Hayek.) The point is that it is difficult and expensive to move information to a central point.

Alternatively, one could say that only a comparatively small amount of information can be crammed into a central point. Here we may think of another analogy. How do you get a message onto President Reagan’s desk? Obviously you can’t just call him up, and if you write, your message will compete with the thousands of letters that arrive each day. A lot of money is spent in Washington trying to solve this problem. The same problem exists for Soviet commissars trying to get the attention of the people in Moscow who have decision-making authority.

In response to these various difficulties there are, I believe, three options open to the planning authority (over which Mr. Gorbachev presides). It can turn a blind eye on the various underling officials and managers as they make transactions and exchanges among themselves without getting permission from Moscow. This option—de facto decentralization—is labeled “corruption,” however, and it is very unpopular with those who think that socialism should be made to work according to the prescriptions of Lenin. Leonid Brezhnev evidently used the “blind-eye” method. But with Yuri Andropov there was a crackdown. Various officials were shot to discourage the others.

“Crackdown” is in fact the second option, and the one preferred by reformers everywhere, including, of course, American liberals. Gorbachev is Andropov’s protégé and he may well try to go this route. Apparently he already tried it in agriculture, over which he earlier presided. Grain production declined from 237 million tons in 1978 to 170 million tons in 1984. (Such declines are normally attributed to “bad weather.”) Nonetheless Gorbachev was promoted, and he may well now attempt a more general crackdown. If he does, he would provoke a more general decline in Soviet production.

The third option is for Gorbachev to attempt to decentralize the system—i.e. to legalize many of the actions previously labeled corrupt. This in effect is a movement away from socialism. It would be the best thing Gorbachev could attempt, but here he will run up against the “entrenched bureaucracy” that Robert Kaiser alluded to. Decentralizing the Soviet economy depends on issuing orders that are the functional equivalent of telling captains that they no longer need to obey majors, and corporals that they are on a par with sergeants.

The point is that it is very difficult to get such unpopular orders to pass down the chain of command. Colonels will always find ways of obstructing commands that have the effects of denying their own authority. (In the reverse direction, the Soviet economy suffers from an equally serious problem: just as unpopular orders won’t travel downhill, so unpopular information won’t travel uphill. Reports of unfulfilled plans and quotas tend to be ameliorated as they move closer to the center.)

Of the various problems associated with the Soviet economy (and all socialist economies) the “entrenched bureaucracy” is the one that U.S. journalists are beginning to appreciate and describe. For example in late May David Ignatius wrote in the Wall Street Journal:

It may prove impossible to both increase the independence of individual Soviet enterprises and retain full central control of the economy. Says Arnold Horelick, the director of the Rand-UCLA Center for the Study of Soviet International Behaviour: “I would describe Gorbachev’s reforms as trying to have his cake and eat it, too.”

Maybe China will prove me wrong. I hope so. But at present the evident suggests that communism cannot be reformed from within. My guess is that of the three options listed here, the “Brezhnev-blind-eye” is the only one that is remotely workable—not that it produces brilliant results—and Mr. Gorbachev will almost certainly resort to it if he stays in his office for any length of time.

A Trip to Poland

Murray N. Rothbard

This March, I spent a fascinating week at a conference at a hotel in Mrogowo, in the lake country of northern Poland (formerly East Prussia). The conference, a broad-ranging symposium on “Economics and Social Change,” was hosted by the Institute of Sociology at the University of Warsaw, and sponsored by a group of English conservative and free-market scholars.

Even though economically, as one of the Western participants noted, Poland is a “giant slum,” its countryside, small towns, and cities in evident and grim decay, this gallant nation is intellectually the freest in the Eastern bloc. There is no other country in the Soviet orbit at which a conference of this sort could possibly be held.

The only restriction was that the announced titles of the papers had to be ideologically neutral. But, once the conference ran that particular gauntlet, and the meeting was approved by the authorities, anyone could—and did—say whatever they wished. (In my case, I bowdlerized the title of my paper, “Concepts of the Role of Intellectuals in Social Change Towards Laissez-Faire,” by discreetly omitting the last three words, although the actual content of the talk remained the same.)

The first paper of the meeting was delivered by Professor Antony Flew, a distinguished English philosopher, who likes nothing better than to deliver—with intelligence and wit—zingers at the Left. Flew pulled no punches, pointing out the importance and necessity of property rights and the free market. The fascinating thing was that no Polish eyebrow was raised, and no Polish scholar reacted in horror. Quite the contrary. And it was enormously inspiring to see every one of the twenty-odd Polish scholars denouncing the government, even though it was obvious to every one of us that there was a government agent listening intently to the proceedings. (The agent—the travel guide and director of the trip—was obviously highly intelligent, and aware of what was going on.)

The Poles ranged from libertarian to middle-of-the-road to dissident Marxist, but it was markedly evident that not one of them had any use whatsoever for the Communist regime. In addition to being opposed to Communism, none of the Polish scholars at the meeting had much use for any government. One told me, “of course, any act of government is done for the power and wealth of the government officials, and not for the ‘public interest,’ ‘common good,’ ‘general welfare,’ or any other reasons offered.”

“Yes,” I said, “but the government’s propaganda always says that they perform these actions for the common good, etc.” The Polish professor looked at me quizzically: “Who believes government propaganda?” I replied that, “unfortunately, in the United States, most people believe government propaganda.” He was incredulous.

The Polish scholars all knew English very well, a virtue that unfortunately we Westerners couldn’t begin to reciprocate. Nevertheless, a real camaraderie developed. One amusing culture gap was the Polish waiters in our hotel (what passes for a “luxury hotel” in Poland is roughly equivalent to a low-end interstate motel in the U.S.) having to deal with the “kids” of the conference, two young English scholars who are insistent vegetarians. Poland is a land with a very high meat consumption per capita (the Communists never collectivised agriculture), but where meat is now rationed, and it was beyond the comprehension of the Polish waiters that two young privileged Westerners would keep calling for “more vegetables” while turning down top-grade beef and pork. Fortunately, there was always a Polish professor nearby who could serve as interpreter for these outlandish requests.

The most moving moment of the meeting came at the banquet on the final night, when the English sociologist who directed the conference, after thanking our Polish hosts, raised a glass and offered a heartfelt toast to “a free, sovereign, and Catholic Poland.” Every one of us understood his intent, and everyone in that room, Protestants and unbelievers included, raised a glass and drank with fervor. Including the government agent.

The Misesian Revolution in Poland

Lawrence W. Reed

I’ve lectured about “The Origin, Nature, and History of Money from an Austrian Perspective” in the United States a couple dozen times. But until it actually happened last November, I never expected to do it in socialist Poland.

I spent a week there, living with and interviewing activists in the Polish underground. I entered and exited the country legally, but my itinerary and escorts were provided by a new opposition group called the Freedom and Peace Movement.

During the trip, the government learned what I was doing and customs agents at the Warsaw airport delayed my departure flight for two hours, strip-searching and interrogating me, and confiscating all my tapes and film. But they could not steal my memories about the Misesian excitement percolating through the vast Polish underground.

The 50 or so students who gathered quietly to hear my first lecture on money listened intently. Then they asked questions which indicated a sophistication far beyond anything I had expected. And their devotion to the free market was intense and scholarly. “How do you know so much about laissez-faire economics?” I asked.

An economics major at Jagiellonian University in Cracow, responded, “Thanks to our underground press, we probably know more than American students.” As the week went by, I came to appreciate just how true that was. The burgeoning interest in Austrian economics is, as a professor at the University of Warsaw noted, “the most important recent development” among students of economics. He privately recommends the works of Mises, Hayek, and Rothbard to his students, who then acquire copies on the black (i.e., free) market.

Underground publishing houses in Poland produce hundreds of books and magazines a year, often in editions of more than 10,000. Attending a secret dinner party one evening hosted by several underground printer-entrepreneurs, I was astonished to hear their plans to ultimately publish and distribute every work of Mises’s. “Anything Austrian or libertarian immediately becomes a bestseller,” said one.

Already, students are reading Mises’s Socialism and Theory of Money and Credit. A professor who attended one of my lectures quoted from Rothbard’s The Mystery of Banking. The same professor has written a popular underground book advocating that Poles who care about political liberty first work for laissez-faire economics.

The young intellectual activists I met, especially those involved in the Freedom and Peace Movement, explain Polish economic problems from a perspective that would gratify Mises. Everything from toilet-paper shortages to industrial pollution is understood as a direct and inevitable consequence of “central planning” and the absence of a “market-price mechanism.” The basket-case Polish economy, said one Cracow student, “is a living laboratory of the silliness of socialism.”

Under the surface, Poland is seething with anti-government ferment. And the works of Ludwig von Mises and his students are part of the reason—testimony once again to the potency of truth.

Mises and the Soviet Free Market

Lawrence W. Reed

Not many Soviet citizens have ever read Ludwig von Mises’s great Socialism. The Soviet government doesn’t want the people to know the truth about a command economy. They are supposed to be good, little citizens—pacified and rendered docile by the benevolence of the omnipotent state.

But even if the Soviet public doesn’t understand exactly why the official economy doesn’t work, they want as little to do with it as possible. In their own actions, they show consistent preference for free markets over government markets, even though demonstrating that preference is risky.

The reason that Soviet socialism has flopped is—as Mises proved in 1922—that all centrally “planned” economies must, by their very nature, fail.

Given the fact of nature that everybody can’t have everything they want—that is, that there is economic scarcity—there must be some means of directing resources to their most efficient uses.

One way to do this is to have central planners set prices and production, telling people what to buy, how much to buy, and when to buy. But, as Mises pointed out in Socialism:

In any social order, even under Socialism, it can very easily be decided which kind and what number of consumption goods should be produced. No one has ever denied that. But once this decision has been made, there still remains the problem of ascertaining how the existing means of production can be used most effectively to produce these goods in question. In order to solve this problem it is necessary that there should be economic calculation. And economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production. That is to say, there must exist money prices of land, raw materials, semimanufactures; that is to say, there must be money wages and interest rates.

For calculation to occur, says Mises, there must be money prices. Those can only come from free markets, never governments. Socialism is thus always doomed to fail.

The problem of this argument for socialists is it doesn’t rely on ethical standards or political ideologies. Neither does it say, like so many arguments in favor of markets, that markets are better because they make people richer. (Although it is, of course, true that socialism is immoral, and that it makes people poor.) It rather says of socialism the most damning thing of all to these alleged scientists: that their “scientific socialism” makes rational economic calculation impossible.

Mises simply argues that all exchange relationships established by the government are necessarily arbitrary. In fact, any government intervention hinders economic calculation, and makes the allocation of resources an irrational process.

We take the miracle of market pricing for granted. But notice what happens when government hampers the pricing mechanism. Think of the times that the U.S. government has put price controls on goods like oil. Pandemonium ensues. The Soviet economy is under constant price controls. How do they know, for example, in clothing production what the proper ratio is between ties and socks? The only way to know is to allow people to freely buy and sell, thus expressing their own subjective valuations and personal preferences, and allow the market to establish the proper ratio.

If there is a problem at the tie-sock level, how could a socialist economy run? It has no pricing system upon which to base judgments about production. How do you make any decisions without market pricing? How are production costs figured? How do you know if you’re making profits or losses? There is no way without a market. Prices in the Soviet Union are approximated from their own black market or from other countries.

A spokesman for the Soviet Foreign Ministry, in an unintended tribute to Mises, recently told some visiting Americans that his dream was to have “the entire world Communist. Except New Zealand.” Why the exception? “We have to have somebody to tell us the prices.”

Mises wrote his critique in 1922. It was the most telling blow socialism ever received, and socialists are still trying to answer it. Mises forced socialists to think about how socialism works in practice. After more than 65 years, he has not been answered.

Socialists of all stripes, from Marx to Galbraith, typically wax eloquent on the alleged evils of capitalism, but never spell out how their version of society would operate. If the economy is to be planned, what’s the plan? This is the socialist mystery of the missing blueprints, and Mises was the first to call their bluff.

Whatever kind of economy they want, socialists inevitably claim that the Soviet economy isn’t it. That’s not real socialism, they say. But no matter what socialists want, when the means of production are put in the hands of the state, the Soviet economy is what they’re going to get: rich politicians, impoverished masses, and irrational use of resources. The Soviet Union is socialism in action.

I have visited the Soviet Union three times since March 1985, and I have always been impressed by the size and vitality of the underground economy, the vast and murky world of the “black” market—the free network of illegal production and trade that enables millions of dissatisfied comrades to meet their needs.

Ordinary Russians have taught themselves to dodge and weave around the state with surprising skill and daring, as Hedrick Smith notes in his bestseller, The Russians:

This counter-economy has become an integral part of the Soviet system, a built-in permanent feature of Soviet society. It encompasses everything from petty bribing, black marketing, wholesale thieving from the state, and underground private manufacturing, all the way up to a full-fledged godfather operation which was exposed and led to the downfall of a high Communist Party figure. . . . It operates on an almost oriental scale and with a brazen normality that would undoubtedly incense the original Bolshevik revolutionaries.

On more than one occasion, I have been propositioned for my blue jeans or tennis shoes (once even in Red Square) by young Russians who seem to appear out of nowhere, quickly arrange a time and place to consummate the transaction, then disappear into the crowd.

A vast market in American dollars bubbles beneath the surface of official life in Russia, despite harsh penalties. A short walk down the street from one’s hotel usually brings one or two currency traders to your side, whispering “rubles for dollars” at three and four times the legal rate.

One young man in Leningrad told me he earns about 400 rubles a month, but less than a quarter of it is legal. The rest he earns by marketing contraband books and other items smuggled in from the West. Last year he bought a car—rarely a private possession in the workers’ paradise—for about 8,000 rubles. He registered it in his father’s name, so the state wouldn’t question where he got the money.

Russian dentists, he told me, do not use Novocain, even when pulling teeth, thanks to state misallocation. But he pays his dentist a little extra under the table. Many dentists have their own illegal private practices—complete with painkillers—during off-hours, and that’s when the quality of care goes up.

American movies are popular in the Soviet underground. People duplicate copies and sell dozens all over Leningrad. If you’re caught, you get years in the slammer.

Practically everybody in the Soviet Union is trading and exchanging on the free market. Still, empty official slogans are plastered on buildings or mounted on rooftops all over the place proclaiming “The Plan of the 27th Party Congress Will Be Fulfilled” or, even more laughable, “The Party and the People Are One!”

The Soviet state has been successful so far in keeping articles and books by Ludwig von Mises and other free-market thinkers extremely rare. Still people grumble about the state, then go about their private and profitable affairs. But I’d like to change that. If the insights of Socialism became widely known, Gorbachev would be staring a real revolution in the face.

Freedom vs. Planning

Richard Ebeling

As the 20th century began, the most widely held vision of the future was socialist: capitalism would be replaced by central planning and the state would own all the means of production.

The 20th century is ending with the socialist ideal in complete disarray. The heads of socialist governments everywhere declare that economic progress requires individual initiative and private enterprise. They admit that only competition and a market price system can bring economic coordination to a complex system of division of labor.

All of this was anticipated by Ludwig von Mises almost 70 years ago in his famous 1920 article, “Economic Calculation in the Socialist Commonwealth” and in his monumental treatise, Socialism: An Economic and Sociological Analysis (1922).

Mises conclusively demonstrated that without market-generated prices, expressed in terms of a common medium of exchange, it is impossible to use society’s scarce resources in a rational manner. A central planner might know the technological potentials of the resources at his disposal, but he has no way to know what economic values to assign to those resources. He cannot know how to allocate resources among alternative lines of production, and thus cannot rationally service consumers’ demands. This insight means that our choice of economic systems can only be between free-market capitalism and “planned chaos.” “There is no third solution, no middle way,” says Mises.

It is clear that socialism has lost the war on the battlefield of ideas. But free-market capitalism has not yet won. Both in the United States and around the world, policy-makers promote the “mixed economy,” a hodgepodge of competition and state control. Intellectuals on both the collectivist left and the conservative right have enshrined the idea of state intervention.

Capitalism delivers the goods, they say, but the distribution of these goods is “unfair.” The profit motive is a powerful engine for individual initiative and creativity, but too often the commodities produced are “socially undesirable” and exist only at the expense of the good society. And while competition is desirable to keep producers on their toes, too much of a good thing can be bad. Thus government needs to protect competitors from “unfair” competition, domestic and foreign.

Free market replies to every one of these arguments for state intervention can be found in the writings of Ludwig von Mises: in Liberalism (1927), Critique of Interventionism (1929), Human Action (1949), Planning for Freedom (1952), The Anti-capitalist Mentality (1956), and Economic Policy (1979).

What about the argument that capitalism “unfairly” distributes the goods produced by it? Mises demonstrates that the argument is based on a false conception of the free-market process. Production and distribution are two sides of the same coin. Production requires the combined use of various factors of production, and labor is one of those resources. Each resource is offered a price, through entrepreneurial judgments, for its service equal to its relative value as a contribution to the production of commodities. Each factor of production contracts for the services it will render before there is a product available for sale.

The entrepreneur develops expectations about what consumers would be willing to pay in the future for the product being considered, and offers wages to laborers and payment for services of other resources.

But who are the consumers? Ultimately, they are the very same laborers and resource owners whom the entrepreneur is considering hiring. It is thus the laborers and resource owners, in their roles as consumers, who determine what their own relative income shares will be. They do so through their decisions about what they wish to buy and what prices they are willing to pay for them.

Thus, if some groups of workers believe they are “unfairly” paid, they have no one to accuse but themselves and the other laborers. They have failed to spend a greater percentage of their income on the particular products that the workers produce.

“Producers” and “consumers” are really the same people. And because this is always true in the free market, the second charge against free-market capitalism, that it produces “socially undesirable” products, also fails.

First, as Mises forcefully argued, there is no dichotomy between “society” and the individuals comprising it. Nothing happens to or for “society” that doesn’t originate with the individuals whose actions create societal relationships.

Second, in the free market, competition makes the entrepreneur the servant and not the master of the economic process. The entrepreneur must ultimately supply what individuals in their role as consumers demand. An entrepreneur who fails to do this will be driven from business and other entrepreneurs more sensitive to consumer wishes will replace him.

Finally, when people say that some product is “socially undesirable,” they really mean that people in society are demanding things of which they disapprove. But rather than attempt to use reason to persuade others to change their buying preferences, they want to use government to coerce them into abstinence. To answer this, Mises argued that freedom is indivisible. Once it is admitted that government has the right to infringe on the peaceful and personal preferences of individuals in one area, state interference cannot logically be excluded from other spheres. At the end of this road is the totalitarian state (see Liberalism, pp. 52-57).

In Human Action, Mises showed that free markets mean social cooperation, not social conflict. It is through this process of competition that we know who, among the various suppliers, can most successfully satisfy consumers’ demands at the least cost and, therefore, at the lowest price. And through this process each individual finds his most efficient and profitable place in the social system of the division of labor.

He who asks for state protection from the rigors of competition, Mises explains, is asking for special privilege at the expense of the other members of society. He is demanding special regulations, tariffs, or subsidies in order to receive a higher relative income than what others in the free-market economy are willing to pay him for his products or services.

If the government grants the special privilege, the results are disruptive of the peaceful free market process of economic change and progress. When other members of society begin to obtain government privileges and protections, the cumulative effect is declining production, less innovation, higher prices, and a lower standard of living for the members of the whole society.

Mises’s most important contribution to understanding the fallacies of state intervention is his demonstration that “the Middle-of-the-Road Leads to Socialism.” All government interventions and regulations are inherently destabilizing and disruptive. And the logical consequences of one set of interventions is that the government will extend its controls to more and more sectors of the economy to “repair” the damage created by the first set of controls.

If, for example, the government imposes price controls in one part of the economy, the controls will distort the existing free-market relationships between prices and the costs of production. If the controlled price is set below the costs of production, sellers in that part of the economy will no longer be able to produce the same amount of the product as before. If the government wants high production levels, it must extend the price controls to the prices of the factors that go into making that product. But those factors of production have, in turn, been produced with other resources whose prices will also have to be controlled.

The interdependency of all prices and all markets in a system of division of labor means that if the government decides to control one part of the economy, it must end up controlling all of it. Finally, when the controls and regulations pervade every portion of the economy, the free market is completely supplanted by the state, and socialism replaces capitalism through piecemeal interventionism. In short, as Mises says, “the middle-of-the-road policy is not an economic system that can last. It is a method for the realization of socialism by installments.”

But what would logically happen if government remains on the interventionist road is different from what must happen.

Mises repeatedly observed that the Western world was moving toward collectivism. But he also emphasized that “the trend can be reversed as was the case with many other trends in history.” In the realm of human action no choices are “inevitable.” History is made by men, and men are ultimately guided by ideas.

A victory for free-market capitalism is possible. Just as theory and experience refuted the case for socialism, the same can happen to state intervention and the “mixed economy.”

In fact, in terms of practical results, state intervention is already defunct. But people must be shown how to read the signs left behind by a controlled, taxed, and welfarist “mixed economy.” People must understand why it happened and what it demonstrates, that if we want peace, prosperity, and liberty, there is no alternative to free-market capitalism.

Thanks to Ludwig von Mises, we have the arguments and insights to lead us in the battle of ideas.

Why Socialism Must Fail

Hans-Hermann Hoppe

Socialism and capitalism offer radically different solutions to the problem posed by scarcity: everybody can’t have everything they want when they want it, so how can we effectively decide who will own and control the resources we have? The chosen solution has profound implications. It can mean the difference between prosperity and impoverishment, voluntary exchange and political coercion, even totalitarianism and liberty.

The capitalist system solves the problem of scarcity by recognizing the right of private property. The first one to use a good is its owner. Others can acquire it only through trade and voluntary contracts. But until the owner of the property decides to make a contract to trade his property, he can do whatever he wants with it, so long as he does not interfere with or physically damage the property owned by others.

The socialist system attempts to solve the problem of ownership in a completely different way. Just as in capitalism, people can own consumer products. But in socialism, property which serves as the means of production are collectively owned. No person can own the machines and other resources which go into producing consumption goods. Mankind, so to speak, owns them. If people use the means of production, they can do so only as caretakers for the entire community.

Economic law guarantees that harmful economic and sociological effects will always follow the socialization of the means of production. The socialist experiment will always end in failure.

First, socialism results in less investment, less saving, and lower standards of living. When socialism is initially imposed, property must be redistributed. The means of production are taken away from current users and producers and given to the community of caretakers. Even though the owners and users of the means of production acquired them through mutual consent from previous users, they are transferred to people who, at best, become users and producers of things they didn’t own previously.

Under this system, previous owners are penalized in favor of new owners. The non-users, non-producers, and non-contractors of the means of production are favored by being promoted to the rank of caretaker over property which they had not previously used, produced, or contracted to use. Thus the income for the non-user, non-producer, and non-contractor rises. It is the same for the non-saver who benefits at the expense of the saver from whom the saved property is confiscated.

Clearly, then, if socialism favors the non-user, non-producer, non-contractor, and non-saver, it raises the costs that have to be born by users, producers, contractors, and savers. It is easy to see why there will be fewer people in these latter roles. There will be less original appropriation of natural resources, less production of new factors of production, and less contracting. There will be less preparation for the future because everyone’s investment outlets dry up. There will be less saving and more consuming, less work and more leisure.

This adds up to fewer consumption goods being available for exchange, which reduces everyone’s standard of living. If people are willing to take the risk, they will have to go underground to compensate for these losses.

Second, socialism results in inefficiencies, shortages, and prodigious waste. This is the insight of Ludwig von Mises who discovered that rational economic calculation is impossible under socialism. He showed that capital goods under socialism are at best used in the production of second-rate needs, and at worst, in production that satisfies no needs whatsoever.

Mises’s insight is simple but extremely important: because the means of production under socialism cannot be sold, there are no market prices for them. The socialist caretaker cannot establish the monetary costs involved in using the resources or in making changes in the length of production processes. Nor can he compare these costs with the monetary income from sales. He is not allowed to take offers from others who want to use his means of production, so he cannot know what his foregone opportunities are. Without knowing foregone opportunities, he cannot know his costs. He cannot even know if the way he produces is efficient or inefficient, desired or undesired, rational or irrational. He cannot know whether he is satisfying less or more urgent needs of consumers.

In capitalism, money prices and free markets provide this information to the producer. But in socialism, there are no prices for capital goods and no opportunities for exchange. The caretaker is left in the dark. And because he can’t know the status of his current production strategy, he can’t know how to improve it. The less producers are able to calculate and engage in improvement, the more likely wastes and shortages become. In an economy where the consumer market for his products is very large, the producer’s dilemma is even worse. It hardly needs to be pointed out: when there is no rational economic calculation, society will sink into progressively worsening impoverishment.

Third, socialism results in over-utilization of the factors of production until they fall into disrepair and become vandalized. A private owner in capitalism has the right to sell his factor of production at any time and keep the revenues derived from the sale. So it is to his advantage to avoid lowering its capital value. Because he owns it, his objective is to maximize the value of the factor responsible for producing the goods and services he sells.

The status of the socialist caretaker is entirely different. He cannot sell his factor of production, so he has little or no incentive to insure that it retains its value. His incentive will instead be to increase the output of his factor of production without regard to its dwindling value. There is also the chance that if the caretaker perceives opportunities of employing the means of production for private purposes—like making goods for the black market—he will be encouraged to increase the output at the expense of capital values. No matter which way you look at it, under socialism without private ownership and free markets, producers will be inclined to consume capital values by over-using them. Capital consumption leads to impoverishment.

Fourth, socialism leads to a reduction in the quality of goods and services available for the consumer. Under capitalism, an individual businessman can maintain and expand his firm only if he recovers his costs of production. And since the demand for the firm’s products depends on consumer evaluations of price and quality (price being one criterion of quality), product quality must be a constant concern of producers. This is only possible with private ownership and market exchange.

Things are entirely different under socialism. Not only are the means of production collectively owned, but so too is the income derived from the sale of the output. This is another way of saying that the producer’s income has little or no connection with consumer evaluation of the producer’s work. This fact, of course, is known by every producer.

The producer has no reason to make a special effort to improve the quality of his product. He will instead devote relatively less time and effort to producing what consumers want and spend more time doing what he wants. Socialism is a system that incites the producer to be lazy.

Fifth, socialism leads to the politicization of society. Hardly anything can be worse for the production of wealth.

Socialism, at least its Marxist version, says its goal is complete equality. The Marxists observe that once you allow private property in the means of production, you allow differences. If I own resource A, then you do not own it and our relationship toward resource A becomes different and unequal. By abolishing private property in the means of production with one stroke, say the Marxists, everyone becomes co-owner of everything. This reflects everyone’s equal standing as a human being.

The reality is much different. Declaring everyone a co-owner of everything only nominally solves differences in ownership. It does not solve the real underlying problem: there remain differences in the power to control what is done with resources.

In capitalism, the person who owns a resource can also control what is done with it. In a socialized economy, this isn’t true because there is no longer any owner. Nonetheless the problem of control remains. Who is going to decide what is to be done with what? Under socialism, there is only one way: people settle their disagreements over the control of property by superimposing one will upon another. As long as there are differences, people will settle them through political means.

If people want to improve their income under socialism they have to move toward a more highly valued position in the hierarchy of caretakers. That takes political talent. Under such a system, people will have to spend less time and effort developing their productive skills and more time and effort improving their political talents.

As people shift out of their roles as producers and users of resources, we find that their personalities change. They no longer cultivate the ability to anticipate situations of scarcity, to take up productive opportunities, to be aware of technological possibilities, to anticipate changes in consumer demand, and to develop strategies of marketing. They no longer have to be able to initiate, to work, and to respond to the needs of others.

Instead, people develop the ability to assemble public support for their own position and opinion through means of persuasion, demagoguery, and intrigue, through promises, bribes, and threats. Different people rise to the top under socialism than under capitalism. The higher on the socialist hierarchy you look, the more you will find people who are too incompetent to do the job they are supposed to do. It is no hindrance in a caretaker-politician’s career to be dumb, indolent, inefficient, and uncaring. He only needs superior political skills. This too contributes to the impoverishment of society.

The United States is not fully socialized, but already we see the disastrous effects of a politicized society as our own politicians continue to encroach on the rights of private property owners. All the impoverishing effects of socialism are with us in the U.S.: reduced levels of investment and saving, the misallocation of resources, the overutilization and vandalization of factors of production, and the inferior quality of products and services. And these are only tastes of life under total socialism.

Massachusetts and the Mussolinization of America

Llewellyn H. Rockwell Jr.

Official socialism has probably never been a threat in America, but the corporate state has. And is.

It all began in 1919 when ex-Marxist Benito Mussolini wrote the Fascist Party platform, calling for central planning through a “partnership” of government, business, and labor. By 1925 he was in total power.

Not all of Mussolini’s admirers were in Italy. The cover story of the New York Times Magazine for October 24, 1926, gushed:

The most approachable as well as the most interesting statesman in Europe. He is a voracious learner who never makes the same mistake twice. . . . The whole country is keyed up by his energy. . . .

The whole economic structure of the nation has been charted out in a graph that shows it as a huge corporation with the Government as the directorate. He explains it clearly and patiently, reminding you that he started his career as a teacher.

An earlier New York Times editorial (October 31, 1922) had explained:

In Italy as everywhere the great complaint against democracy today is its inefficiency. . . . Neither the failures nor the successes of (Russia’s) Bolshevist Government offer much of an example to the Western world. Dr. Mussolini’s experiment will perhaps tell us something more about the possibilities of oligarchic administration.

Although Herbert Hoover in many ways prefigured him, it was Franklin D. Roosevelt who first tried to create an explicit corporate state in America with his National Recovery Administration (NRA). With its fascist-style Blue Eagle emblem, the NRA coordinated big business and labor in a central plan, and outlawed competition. The NRA even employed vigilante groups to spy on smaller businesses and report if they violated the plan.

Just as in Mussolini’s Italy, the beneficiaries of the U.S. corporate state were—in addition to the government itself—established economic interest groups. NRA cheerleaders included the National Association of Manufacturers, the U.S. Chamber of Commerce, the American Bar Association, the United Mine Workers, the Amalgamated Clothing Workers, and—above all—Gerard Swope of General Electric, who helped draft the NRA act.

Only the courage of the Supreme Court, which ruled that the NRA was unconstitutional, prevented the establishment of a fascist economy in our country. FDR denounced the “nine old men” and tried to pack the court with NRA proponents. But the American people, including most of his supporters, opposed the power grab, and he lost. That did not end the battle, however.

Today, there are many elements of a corporate state in Washington. But in Massachusetts, Michael Dukakis has come closest to actually establishing one. Wrote the Washington Post recently:

Corporate Massachusetts is in a de facto alliance with the state and a host of potentially conflicting interests, including . . . organized labor . . . , all of whom serve on agency boards and are also recipients of agency grants. . . .

Not only has Dukakis drawn these business leaders into what amounts to limited partnerships with state government, with the governor as the dominant general partner, but also these quasi-public agencies have formed a web of financial arrangements with at least 3,000 corporations across the state. The state government effectively has been entrenched in almost every nook and cranny of the private sector.

The tools Dukakis used to create this alliance for central planning included a larger bureaucracy; subsidized loans, bailouts, and outright grants for big businesses; and guaranteed high wages for unions.

Those on the Massachusetts gravy line include the insurance industry, especially John Hancock Mutual Life; high-tech corporations like our old friend GE, Digital Equipment Corp., and Raytheon; and banks like the Bank of Boston. Each is represented on the boards of the Massachusetts Capital Resources Corp., the Massachusetts Industrial Finance Agency, and similar corporate-statist entities. And all march in profitable lock-step with the state. The only losers are taxpayers, consumers, and businesses without political connections.

The Post notes that Dukakis’s policies “diverge sharply from the more traditional type of partisan politics emphasizing ideological splits between business and labor.”

With guaranteed profits, corporations are partially liberated from consumer control. In return, they agree to pay the above-market wages that labor unions demand, and otherwise cooperate with the state. But what will be the economic result?

In 1920, Ludwig von Mises showed in “Economic Calculation in the Socialist Commonwealth” that there can be no rational central planning.

In a free market, consumers’ spending decisions tell producers what and how much to produce. If consumers prefer Fords to Chevrolets, they tell Ford Motor Company to make more cars by buying more of them, thereby driving up the price of Fords relative to Chevrolets and attracting more investment to Ford. Because of the free market in capital goods, Ford is able to devote more resources to production than Chevrolet.

This process enables firms to rationally calculate the “structure of production” from the beginning to the end, to use scarce resources to satisfy the most highly valued goals of consumers.

Mises showed that under socialism, economic calculation is impossible. Since capital goods are owned collectively, they cannot be bought or sold and therefore can have no money prices. Therefore, the desires of consumers cannot be served, no matter what the intentions of the producers. This is why the Soviet shoe factory is incapable of making the styles, colors, or numbers of shoes that consumers want, no matter how hard the managers try.

But Mises’s argument must also apply to the corporate state. To the extent that some corporations enjoy state-privileged positions, they are partially protected from competition. Their capital goods have money prices, unlike under socialism, but they are not freely set prices. Thanks to state favoritism, competitors have less opportunity to bid those resources away, so consumers’ desires cannot be fully served.

We saw an example of this with the Chrysler bailout. Consumers sought to divert resources from the Chrysler Corp. to other car manufacturers, which produced better products at better prices. So in response to the pressure group composed of Chrysler executives, union workers, large shareholders, and big bank creditors, politicians gave the company massive federal financing. Consumers wanted rational economic calculation, but the government prevented it, thereby making the rest of us poorer.

The bigger the corporate state becomes, the less consumers’ desires will be satisfied. As Misesian analysis shows, the corporate state must be an economic failure, no matter what miracles are claimed. Tragically, fascism is all too often a political success.

The Collapse of Socialism

Murray N. Rothbard

We are now living thorough the most significant and exciting event of the 20th century: nothing less than the collapse of socialism.

Before the rise of the new idea of socialism in the mid and late 19th century, the great struggle of social and political philosophy was crystal-clear. On one side was the exciting and liberating idea of classical liberalism, emerging since the 17th century: of free trade and free markets, individual liberty, separation of Church and State, minimal government, and international peace. This was the movement that ushered in and championed the Industrial Revolution, which, for the first time in human history, created an economy geared to the desires of and abundance for the great mass of consumers.

On the other side were the forces of Tory statism, of the Old Order of Throne and Altar, of feudalism, absolutism, and mercantilism, of special privileges and cartels granted by Big Government, of war, and impoverishment for the mass of their subjects.

In the field of ideas, and in action and in institutions, the classical liberals were rapidly on the way to winning this battle. The world had come to realize that freedom, and the growth of industry and standards of living for all, must go hand in hand.

Then, in the 19th century, the onward march of freedom and classical liberalism was derailed by the growth of a new idea: socialism. Rather than rejecting industrialism and the welfare of the masses of people as the Tories had done, socialists professed that they could and would do far better by the masses and bring about “genuine freedom” by creating a state more coercive and totalitarian than the Tories had ever contemplated. Through “scientific” central planning, socialism could and would usher in a world of freedom and superabundance for all.

The 20th century put the triumphant idealism of the 19th into practice, and so our century became the Age of Socialism. Half the world became fully and consistently socialist, and the other half came fairly close to that ideal. And now, after decades of calling themselves the wave of the future, and deriding all their opponents as hopelessly “reactionary” (i.e. not in tune with modern thinking), “paleolithic,” and “Neanderthal,” socialism, throughout the world, has been rapidly packing it in. For that is what glasnost and perestroika amount to.

Ludwig von Mises, at the dawn of the Socialist Century, warned, in a famous article, that socialism simply could not work: that it could not run an industrial economy, and could not even satisfy the goals of the central planners themselves, much less of the mass of consumers in whose name they speak. For decades Mises was derided, and discredited, and various mathematical models were worked out in alleged “refutation” of his lucid and elegant demonstration.

And now, in the leading socialist countries throughout the world: in Soviet Russia, in Hungary, in China, in Yugoslavia, governments are rushing to abandon socialism. Decentralization, markets, profit and loss tests, allowing inefficient firms to go bankrupt, all are being adopted. And why are the socialist countries willing to go through this enormous and truly revolutionary upheaval? Because they are really saying that Mises was right, after all, that socialism doesn’t work, and that only desocialized free markets can run a modern economy.

Some are even willing to give up some political power, allow greater criticism, secret ballots and elections, and even, as in Soviet Estonia, to allow a one-and-one half party system, because they are implicitly conceding that Mises was right: that you can’t have economic freedom and private property without intellectual and political freedom, that you can’t have perestroika without glasnost.

It is truly inspiring to see how freedom exerts its own “domino effect.” Country after socialist country has been trying to top each other to see how far and how fast each one can go down the road of freedom and desocialization.

But much of this gripping drama has been concealed from the American public because, for the last 40 years, our opinion-molders have told us that the only enemy is Communism. Our leaders have shifted the focus away from socialism itself to a variant that is different only because it is more militant and consistent.

This has enabled modern liberals, who share many of the same statist ideas, to separate competing groups of socialists from the horrors of socialism in action. Thus, Trotskyists, Social Democrats, democratic socialists, or whatever, are able to pass themselves off as anti-Communist good guys, while the blame for the Gulag or Cambodian genocide is removed from socialism itself.

Now it is clear that none of this will wash. The enemy of freedom, of prosperity, of truly rational economics is socialism period, and not just one specific group of socialists.

As even the “socialist bloc” begins to throw in the towel, there are virtually no Russians or Chinese or Hungarians or Yugoslavs left who have any use for socialism. The only genuine socialists these days are intellectuals in the West who are enjoying a comfortable and even luxurious living within the supposed bastions of capitalism.