Individualism and Economic Order

VII. Socialist Calculation I: The Nature and History of the Problem1

1

THERE is reason to believe that we are at last entering an era of reasoned discussion of what has long uncritically been assumed to be a reconstruction of society on rational lines. For more than half a century the belief that deliberate regulation of all social affairs must necessarily be more successful than the apparent haphazard interplay of independent individuals has continuously gained ground until today there is hardly a political group anywhere in the world which does not want central direction of most human activities in the service of one aim or another. It seemed so easy to improve upon the institutions of a free society which had come more and more to be considered as the result of mere accident, the product of a peculiar historical growth which might as well have taken a different direction. To bring order to such a chaos, to apply reason to the organization of society, and to shape it deliberately in every detail according to human wishes and the common ideas of justice seemed the only course of action worthy of a rational being.

But at the present day it is clear—it would probably be admitted by all sides—that, during the greater part of the growth of this belief, some of the most serious problems of such a reconstruction have not even been recognized, much less successfully answered. For many years discussion of socialism—and for the greater part of the period it was only from socialism proper that the movement sprang—turned almost exclusively on ethical and psychological issues. On the one hand, there was the general question whether justice required a reorganization of society on socialist lines and what principles of the distribution of income were to be regarded as just. On the other hand, there was the question whether men in general could be trusted to have the moral and psychological qualities which were dimly seen to be essential if a socialist system was to work. But, although this latter question does raise some of the real difficulties, it does not really touch the heart of the problem. What was questioned was only whether the authorities in the new state would be in a position to make people carry out their plans properly. Only the practical possibility of the execution of the plans was called in question, not whether planning, even in the ideal case where these difficulties were absent, would achieve the desired end. The problem seemed therefore to be only one of psychology or education, the “only” meaning that after initial difficulties these obstacles would certainly be overcome.

If this were true, then the economist would have nothing to say on the feasibility of such proposals, and indeed it is improbable that any scientific discussion of their merits would be possible. It would be a problem of ethics, or rather of individual judgments of value, on which different people might agree or disagree, but on which no reasoned arguments would be possible. Some of the questions might be left to the psychologist to decide, if he has really any means of saying what men would be like under entirely different circumstances. Apart from this no scientist, and least of all the economist, would have anything to say about the problems of socialism. Many people, believing that the knowledge of the economist is only applicable to the problems of a capitalist society (i.e., to problems arising out of peculiar human institutions which would be absent in a world organized on different lines), still think this to be the case.

2

Whether this widespread belief is based on a clear conviction that there would be no economic problems in a socialist world, or whether it simply proves that the people who hold it do not know what economic problems are, is not always evident. Probably usually the latter. This is not at all surprising. The big economic problems which the economist sees, and which he contends will also have to be solved in a collectivist society, are not problems which at present are solved deliberately by anybody in the sense in which the economic problems of a household reach solution. In a purely competitive society nobody bothers about any but his own economic problems. There is therefore no reason why the existence of economic problems, in the sense in which the economist uses the term, should be known to others. But the distribution of available resources between different uses, which is the economic problem, is no less a problem of society than for the individual, and, although the decision is not consciously made by anybody, the competitive mechanism does bring about some sort of solution.

No doubt, if it were put in this general way, everybody would be ready to admit that such a problem exists. But few realize that it is fundamentally different not only in difficulty but also in character from the problems of engineering. The increasing preoccupation of the modern world with problems of an engineering character tends to blind people to the totally different character of the economic problem and is probably the main cause why the nature of the latter was less and less understood. At the same time everyday terminology used in discussing either sort of problem has greatly enhanced the confusion. The familiar phrase of “trying to get the greatest results from the given means” covers both problems. The metallurgist who seeks for a method which will enable him to extract a maximum amount of metal from a given quantity of ore, the military engineer who tries to build a bridge with a given number of men in the shortest possible time, the optician who endeavors to construct a telescope which will enable the astronomer to penetrate to still more distant stars—all are concerned solely with technological problems. The common character of these problems is determined by the singleness of their purpose in every case, the absolutely determined nature of the ends to which the available means are to be devoted. Nor does it alter the fundamental character of the problem if the means available for a definite purpose is a fixed amount of money to be spent on factors of production with given prices. From this point of view the industrial engineer who decides on the best method of production of a given commodity on the basis of given prices is concerned only with technological problems, although he may speak of his trying to find the most economical method. But the only element which makes his decision in its effects an economic one is not any part of his calculations but the fact that he uses, as a basis for these calculations, prices as he finds them on the market.

The problems which the director of all economic activities of a community would have to face would be similar to those solved by an engineer only if the order of importance of the different needs of the community were fixed in such a definite and absolute way that provision for one could always be made irrespective of cost. If it were possible for him first to decide on the best way to produce the necessary supply of, say, food as the most important need, as if it were the only need, and would think about the supply, say of clothing, only if and when some means were left over after the demand for food had been fully satisfied, then there would be no economic problem, for in such a case nothing would be left over except what could not possibly be used for the first purpose, either because it could not be turned into food or because there was no further demand for food. The criterion would simply be whether the possible maximum of foodstuffs had been produced or whether the application of different methods might not lead to a greater output. But the task would cease to be merely technological in character and would assume an entirely different nature if it were further postulated that as many resources as possible should be left over for other purposes. Then the question arises what is a greater quantity of resources. If one engineer proposed a method which would leave a great deal of land but only little labor for other purposes, while another would leave much labor and little land, how in the absence of any standard of value could it be decided which was the greater quantity? If there were only one factor of production, this could be decided unequivocally on merely technical grounds, for then the main problem in every line of production would again be reduced to one of getting the maximum quantity of product out of any given amount of the same resources. The remaining economic problem of how much to produce in every line of production would in this case be of a very simple and almost negligible nature. As soon as there are two or more factors, however, this possibility is not present.

The economic problem arises, therefore, as soon as different purposes compete for the available resources. The criterion of its presence is that costs have to be taken into account. Cost here, as anywhere, means nothing but the advantages to be derived from the use of given resources in other directions. Whether this is simply the use of part of the possible working day for recreation, or the use of material resources in an alternative line of production, makes little difference. It is clear that decisions of this sort will have to be made in any conceivable kind of economic system, wherever one has to choose between alternative employments of given resources. But the decisions between two possible alternative uses cannot be made in the absolute way which was possible in our earlier example. Even if the director of the economic system were quite clear in his mind that the food of one person is always more important than the clothing of another, that would by no means necessarily imply that it is also more important than the clothing of two or ten others. How critical the question is becomes clearer if we look at the less elementary wants. It may well be that, although the need for one additional doctor is greater than the need for one additional schoolteacher, yet under conditions where it costs three times as much to train an additional doctor as it costs to train an additional schoolteacher, three additional schoolteachers may appear preferable to one doctor.

As has been said before, the fact that in the present order of things such economic problems are not solved by the conscious decision of anybody has the effect that most people are not conscious that such problems exist. Decisions whether and how much to produce of a thing are economic decisions in this sense. But the making of such a decision by a single individual is only part of the solution of the economic problem involved. The person making such a decision makes it on the basis of given prices. The fact that by this decision he influences these prices to a certain, probably very small, extent will not influence his choice. The other part of the problem is solved by the functioning of the price system. But it is solved in a way which only a systematic study of the working of this system reveals. It has already been suggested that it is not necessary, for the working of this system, that anybody should understand it. But people are not likely to let it work if they do not understand it.

The real situation in this respect is well reflected in the popular estimate of the relative merits of the economists and the engineer. It is probably no exaggeration to say that to most people the engineer is the person who actually does things and the economist the odious individual who sits back in his armchair and explains why the well-intentioned efforts of the former are frustrated. In a sense this is not untrue. But the implication that the forces which the economist studies and the engineer is likely to disregard are unimportant and ought to be disregarded is absurd. It needs the special training of the economist to see that the spontaneous forces which limit the ambitions of the engineer themselves provide a way of solving a problem which otherwise would have to be solved deliberately.

3

There are, however, other reasons besides the increasing conspicuousness of the elaborate modern technique of production which are responsible for our contemporary failure to see the existence of economic problems. It was not always so. For a comparatively short period in the middle of the last century, the degree to which the economic problems were seen and understood by the general public was undoubtedly much higher than it is at present. But the classical system of political economy whose extraordinary influence facilitated this understanding had been based on insecure and in part definitely faulty foundations, and its popularity had been achieved at the price of a degree of oversimplification which proved to be its undoing. It was only much later, after its teaching had lost influence, that the gradual reconstruction of economic theory showed that what defects there were in its basic concepts had invalidated its explanation of the working of the economic system to a much smaller degree than had at first seemed probable. But in the interval irreparable harm had been done. The downfall of the classical system tended to discredit the very idea of theoretical analysis, and it was attempted to substitute for an understanding of the why of economic phenomena a mere description of their occurrence. In consequence, the comprehension of the nature of the economic problem, the achievement of generations of teaching, was lost. The economists who were still interested in general analysis were far too much concerned with the reconstructing of the purely abstract foundations of economic science to exert a noticeable influence on opinion regarding policy.

It 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 due only 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,2 for it was the essence of the standpoint of this school that the laws of economics could be established only by the application to the material of history of the methods of the natural sciences. The nature of this material is such that any attempt of this kind is bound to degenerate into mere record and description and a total skepticism concerning the existence of any laws at all.

It is not difficult to see why this should happen. In all sciences except those which deal with social phenomena all that experience shows us is the result of processes which we cannot directly observe and which it is our task to reconstruct. All our conclusions concerning the nature of these processes are of necessity hypothetical, and the only test of the validity of these hypotheses is that they prove equally applicable to the explanation of other phenomena. What enables us to arrive by this process of induction at the formulation of general laws or hypotheses regarding the process of causation is the fact that the possibility of experimenting, of observing the repetition of the same phenomena under identical conditions, shows the existence of definite regularities in the observed phenomena.

In the social sciences, however, the situation is the exact reverse. On the one hand, experiment is impossible, and we have therefore no knowledge of definite regularities in the complex phenomena in the same sense as we have in the natural sciences. But, on the other hand, the position of man, midway between natural and social phenomena—of the one of which he is an effect and of the other a cause—brings it about that the essential basic facts which we need for the explanation of social phenomena are part of common experience, part of the stuff of our thinking. In the social sciences it is the elements of the complex phenomena which are known beyond the possibility of dispute. In the natural sciences they can be at best only surmised. The existence of these elements is so much more certain than any regularities in the complex phenomena to which they give rise that it is they which constitute the truly empirical factor in the social sciences. There can be little doubt that it is this different position of the empirical element in the process of reasoning in the two groups of disciplines which is at the root of much of the confusion with regard to their logical character. There can be no doubt that the social as well as the natural sciences have to employ deductive reasoning. The essential difference is that in the natural sciences the process of deduction has to start from some hypothesis which is the result of inductive generalizations, while in the social sciences it starts directly from known empirical elements and uses them to find the regularities in the complex phenomena which direct observations cannot establish. They are, so to speak, empirically deductive sciences, proceeding from the known elements to the regularities in the complex phenomena which cannot be directly established. But this is not the place to discuss questions of methodology for their own sake. Our concern is only to show how it came that in the era of the great triumphs of empiricism in the natural sciences an attempt was made to force the same empirical methods on the social sciences which was bound to lead to disaster. To start here at the wrong end, to seek for regularities of complex phenomena which could never be observed twice under identical conditions, could not but lead to the conclusion that there were no general laws, no inherent necessities determined by the permanent nature of the constituting elements, and that the only task of economic science in particular was a description of historical change. It was only with this abandonment of the appropriate methods of procedure, well established in the classical period, that it began to be thought that there were no laws of social life other than those made by men and that all observed phenomena were all only the product of social or legal institutions, merely “historical categories,” and did not in any way arise out of the basic economic problems which humanity has to face.

4

In many respects the most powerful school of socialism the world has so far seen is essentially a product of this kind of historicism. Although in some points Karl Marx adopted the tools of the classical economists, he made little use of their main permanent contribution—their analysis of competition. But he did wholeheartedly accept the central contention of the historical school that most of the phenomena of economic life were not the result of permanent causes but the product only of a special historical development. It is no accident that the country where the historical school had had the greatest vogue, Germany, was also the country where Marxism was most readily accepted.

The 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. 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 a 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.3

Marx’s attitude on this point had a lasting effect on the socialists of his school. To speculate about the actual organization of the socialist society immediately stigmatized the unfortunate writer as being “unscientific,” the most dreaded condemnation to which a member of the “scientific” school of socialism could expose himself. But even outside the Marxian camp the common descent of all modern branches of socialism from some essentially historical or “institutional” view of economic phenomena had the effect of successfully smothering all attempts to study the problems any constructive socialist policy would have to solve. As we shall see, it was only in reply to criticism from the outside that this task was ultimately undertaken.

5

We have now reached a point at which it becomes necessary clearly to separate several different aspects of the program which we have so far lumped together as socialistic. For the earlier part of the period in which the belief in central planning grew it is historically justified to identify, without much qualification, the idea of socialism and that of planning. In so far as the main economic problems are concerned, this is still the case today. Yet it must be admitted that in many other respects modern socialists and other modern planners are fully entitled to disclaim any responsibility for each other’s program. What we must distinguish here are the ends aimed at and the means which have been proposed or are in fact necessary for the purpose. The ambiguities which exist in this connection arise out of the fact that the means necessary to achieve the ends of socialism in the narrower sense may be used for other ends and that the problems with which we are concerned arise out of the means and not the ends.

The common end of all socialism in the narrower sense, of “proletarian” socialism, is the improvement of the position of the property-less classes of society by a redistribution of income derived from property. This implies collective ownership of the material means of production and collectivist direction and control of their use. The same collectivist methods may, however, be applied in the service of quite different ends. An aristocratic dictatorship, for example, may use the same methods to further the interest of some racial or other elite or in the service of some other decidedly anti-equalitarian purpose. The situation is further complicated by the fact that the method of collectivist ownership and control which is essential for any of these attempts to dissociate the distribution of income from the private ownership of the means of production admits of application in different degrees. For the present it will be convenient to use the term “socialism” to describe the traditional socialist ends and to use the term “planning” to describe the method, although later we shall use “socialism” in the wider sense. In the narrower sense of the term it can be said, then, that it is possible to have much planning with little socialism or little planning and much socialism. The method of planning in any case can certainly be used for purposes which have nothing to do with the ethical aims of socialism. Whether it is equally possible to dissociate socialism completely from planning—and the criticisms directed against the method have led to attempts in this direction—is a question which we shall have to investigate later.

That it is possible, not only in theory but also in practice, to separate the problem of the method from that of the end is very fortunate for the purposes of scientific discussion. On the validity of the ultimate ends science has nothing to say. They may be accepted or rejected, but they cannot be proved or disproved. All that we can rationally argue about is whether and to what extent given measures will lead to the desired results. If, however, the method in question were only proposed as a means for one particular end, it might prove difficult, in practice, to keep the argument about the technical question and the judgments of value quite apart. But, since the same problem of means arises in connection with altogether different ethical ideals, one may hope that it will be possible to keep value judgments altogether out of the discussion.

The common condition necessary for the achievement of a distribution of income which is independent of individual ownership of resources—the common proximate end of socialism and other anticapitalistic movements—is that the authority which decides on the principles of this distribution should also have control over the resources. Now, whatever the substance of these principles of distribution, these ideas about the just or otherwise desirable division of income, they must be similar in one purely formal but highly important respect: They must be stated in the form of a scale of importance of a number of competing individual ends. It is this formal aspect, this fact that one central authority has to solve the economic problem of distributing a limited amount of resources between a practically infinite number of competing purposes, that constitutes the problem of socialism as a method. The fundamental question is whether it is possible under the complex conditions of a large modern society for such a central authority to carry out the implications of any such scale of values with a reasonable degree of accuracy, with a degree of success equaling or approaching the results of competitive capitalism, not whether any particular set of values of this sort is in any way superior to another. It is the methods common to socialism in the narrower sense and all the other modern movements for a planned society, not the particular ends of socialism, with which we are here concerned.

6

Since in all that follows we shall be concerned only with the methods to be employed and not with the ends aimed at, from now onward it will be convenient to use the term “socialism” in this wider sense. In this sense it covers therefore any case of collectivist control of productive resources, no matter in whose interest this control is used. But while we need for our purpose no further definition of the concrete ends followed, there is still need for a further definition of the exact methods we want to consider. There are, of course, many kinds of socialism, but the traditional names of these different types, like “communism,” “syndicalism,” “guild socialism,” have never quite corresponded to the classification of methods which we want, and most of them have in recent times become so closely connected with political parties rather than with definite programs that they are hardly useful for our purpose. What is relevant for us is essentially the degree to which the central control and direction of the resources is carried in each of the different types. To see to what extent variation on this point is possible, it is perhaps best to begin with the most familiar type of socialism and then to examine to what extent its arrangements can be altered in different directions.

The program which is at once the most widely advocated and has the greatest prima facie plausibility provides not only for collective ownership but also for unified central direction of the use of all material resources of production. At the same time it envisages continued freedom of choice in consumption and continued freedom in the choice of occupation. At least it is essentially in this form that Marxism has been interpreted by the social-democratic parties on the Continent, and it is the form in which socialism is imagined by the greatest number of people. It is in this form, too, that socialism has been most widely discussed; most of the more recent criticism is focused on this variety. Indeed, so widely has it been treated as the only important socialist program that in most discussions on the economic problems of socialism the authors concerned have neglected to specify which kind of socialism they had in mind. This has had somewhat unfortunate effects, for it never became quite clear whether particular objections or criticisms applied only to this particular form or to all the forms of socialism.

For this reason it is necessary right from the outset to keep the alternative possibilities in mind and to consider carefully at every stage of the discussion whether any particular problem arises out of the assumptions which must underlie any socialist program or whether they are only due to assumptions made in some particular case. Freedom of the choice of the consumer or freedom of occupation, for example, are by no means necessary attributes of any socialist program, and although earlier socialists have generally repudiated the suggestion that socialism would abolish these freedoms, more recently criticisms of the socialist position have been met by the answer that the supposed difficulties would arise only if they were retained; and that it was by no means too high a price for the other advantages of socialism if their abolition should prove necessary. It is therefore necessary to consider this extreme form of socialism equally with the others. It corresponds in most respects to what in the past used to be called “communism,” i.e., a system in which not only the means of production but all goods were collectively owned and in which, in addition to this, the central authority would also be in a position to order any person to do any task.

This kind of society where everything is centrally directed may be regarded as the limiting case of a long series of other systems of a lesser degree of centralization. The more familiar type discussed already stands somewhat further in the direction of decentralization. But it still involves planning on a most extensive scale—minute direction of practically all productive activity by one central authority. The earlier systems of more decentralized socialism like guild socialism or syndicalism need not concern us here, since it seems now to be fairly generally admitted that they provide no mechanism whatever for a rational direction of economic activity. More recently, however, there has arisen, again mainly in response to criticism, a tendency among socialist thinkers to reintroduce a certain degree of competition into their schemes in order to overcome the difficulty which they admit would arise in the case of completely centralized planning. There is no need at this stage to consider in detail the forms in which competition between individual producers may be combined with socialism. This will be done later on.4 But it is necessary from the outset to be aware of them. This for two reasons. In the first place, in order to remain conscious throughout the further discussion that the completely centralized direction of all economic activity which is generally regarded as typical of all socialism may conceivably be varied to some extent; and, in the second—even more important—in order that we may see clearly what degree of central control must be retained in order that we may reasonably speak of socialism or what are the minimum assumptions which will entitle us to regard a system as coming within our field. Even if collective ownership of productive resources should be found to be compatible with competitive determination of the purposes for which individual units of resources are to be used and the method of their employment, we must still assume that the questions, “Who is to exercise command over a given quantity of resources for the community?” or “With what amount of resources are the different ‘entrepreneurs’ to be intrusted?” will have to be decided by one central authority. This seems to be the minimum assumption consistent with the idea of collective ownership, the smallest degree of central control which would still enable the community to retain command over the income derived from the material means of production.

7

Without some such central control of the means of production, planning in the sense in which we have used the term ceases to be a problem. It becomes unthinkable. This would probably be agreed by the majority of economists of all camps, although most other people who believe in planning still think of it as something which could be rationally attempted inside the framework of a society based on private property. In fact, however, if by “planning” is meant the actual direction of productive activity by authoritative prescription, of either the quantities to be produced, the methods of production to be used, or the prices to be fixed, it can be easily shown, not that such a thing is impossible, but that any isolated measure of this sort will cause reactions which will defeat its own end, and that any attempt to act consistently will necessitate further and further measures of control until all economic activity is brought under one central authority.

It 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.5

But here, again, it is necessary to guard against misunderstanding. To say that partial planning of the kind we are alluding to is irrational is, however, not equivalent to saying that the only form of capitalism which can be rationally advocated is that of complete laissez faire in the old sense. There is no reason to assume that the historically given legal institutions are necessarily the most “natural” in any sense. The recognition of the principle of private property does not by any means necessarily imply that the particular delimitation of the contents of this right as determined by the existing laws are the most appropriate. The question as to which is the most appropriate permanent framework which will secure the smoothest and most efficient working of competition is of the greatest importance and one which, it must be admitted, has been sadly neglected by economists.

But, on the other hand, to admit the possibility of changes in the legal framework is not to admit the possibility of a further type of planning in the sense in which we have used the word so far. There is an essential distinction here which must not be overlooked: the distinction between a permanent legal framework so devised as to provide all the necessary incentives to private initiative to bring about the adaptations required by any change and a system where such adaptations are brought about by central direction. It is this, and not the question of the maintenance of the existing order versus the introduction of new institutions, which is the real issue. In a sense both systems can be described as being the product of rational planning. But in the one case this planning is concerned only with the permanent framework of institutions and may be dispensed with if one is willing to accept the institutions which have grown in a slow historical process, while in the other it has to deal with day-to-day changes of every sort.

There can be no doubt that planning of this sort involves changes of a type and magnitude hitherto unknown in human history. It is sometimes urged that the changes now in progress are merely a return to the social forms of the preindustrial era. But this is a misapprehension. Even when the medieval guild system was at its height, and when restrictions to commerce were most extensive, they were not used as a means actually to direct individual activity. They were certainly not the most rational permanent framework for individual activity which could have been devised, but they were essentially only a permanent framework inside which current activity by individual initiative had free play. With our attempts to use the old apparatus of restrictionism as an instrument of almost day-to-day adjustment to change, we have already gone much further in the direction of central planning of current activity than has ever been attempted before. If we follow the path on which we have started, if we try to act consistently and to combat the self-frustrating tendencies of any isolated act of planning, we shall certainly embark upon an experiment which until recently had no parallel in history. But even at this stage we have gone very far. If we are to judge the potentialities aright, it is necessary to realize that the system under which we live, choked up with attempts at partial planning and restrictionism, is almost as far from any system of capitalism which could be rationally advocated as it is different from any consistent system of planning. It is important to realize in any investigation of the possibilities of planning that it is a fallacy to suppose capitalism as it exists today is the alternative. We are certainly as far from capitalism in its pure form as we are from any system of central planning. The world of today is just interventionist chaos.

8

Classical political economy broke down mainly because it failed to base its explanation of the fundamental phenomenon of value on the same analysis of the springs of economic activity which it had so successfully applied to the analysis of the more complex phenomena of competition. The labor theory of value was the product of a search after some illusory substance of value rather than an analysis of the behavior of the economic subject. The decisive step in the progress of economics was taken when economists began to ask what exactly were the circumstances which made individuals behave toward goods in a particular way. To ask the question in this form led immediately to the recognition that to attach a definite significance or value to the units of different goods was a necessary step in the solution of the general problem which arises everywhere when a multiplicity of ends compete for a limited quantity of means.

The 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. Up to a certain point from the very beginning the problems of a centrally directed economy found a prominent place in the expositions of modern 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.6 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 are no scientific criteria 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 still be found in discussions of special problems.

But 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 skeptical 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.7 Among the later economists of the modern school the point in which Gossen had already 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.”8 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.9

It 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.10 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 World War I. It is particularly valuable for its discussion of the problems arising out of the international trade between several socialist communities.11

All the further discussions of the economic problems of socialism which appeared before the first World 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 today and would be determined by essentially the same factors. The modern development of the theory of interest played a particularly important role in this connection, and after Böhm-Bawerk12 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.13 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.14

9

When, with the end of the war of 1914–18, socialist parties came into power in most of the states of central and eastern Europe, the discussion on all these problems necessarily entered a new and decisive phase. The victorious socialist parties had now to think of a definite program of action, and the socialist literature of the years immediately following World War I was for the first time largely concerned with the practical question of how to organize production on socialist lines. These discussions were very much under the influence of the experience of the war years when the states had set up food and raw material administrations to deal with the serious shortage of the most essential commodities. It was generally assumed that this had shown that not only was central direction of economic activity practicable and even superior to a system of competition but also that the special technique of planning developed to cope with the problems of war economics might be equally applied to the permanent administration of a socialist economy.

Apart from Russia, where the rapidity of change in the years immediately following the revolution left little time for quiet reflection, it was mainly in Germany and even more so in Austria that these questions were most seriously debated. Particularly in the latter country whose socialists had long played a leading role in the intellectual development of socialism, and where a strong and undivided socialist party had probably exercised a greater influence on its economic policy than in any other country outside Russia, the problems of socialism had assumed enormous practical importance. It may perhaps be mentioned in passing that it is rather curious how little serious study has been devoted to the economic experiences of that country in the decade after the first World War, although they are probably more relevant to the problems of a socialist policy in the Western world than anything that has happened in Russia. But, whatever one may think about the importance of the actual experiments made in Austria, there can be little doubt that the theoretical contributions made there to the understanding of the problems will prove to be a considerable force in the intellectual history of our time.

Among these early socialist contributions to the discussions, in many ways the most interesting and in any case the most characteristic for the still very limited recognition of the nature of the economic problems involved, is a book by Otto Neurath which appeared in 1919, in which the author tried to show that war experiences had revealed 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.15 Neurath was quite oblivious of the insuperable 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 strictures apply to the works published about the same time by one of the leading spirits of the Austrian social-democratic party, Bauer.16 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 directed or implicitly concerned with these works.

In Germany discussion centered 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 E. Lederer and 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 face the main problems of a really socialist system. They are important, nevertheless, as symptoms of the state of public opinion at the time when and in the nation in which 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 [1935] so prevalent in Great Britain. This is the plan developed in 1919 by the Reichswirtschaftsminister, R. Wissel, and his undersecretary of state, W. von Moellendorf.17 But interesting as their proposals of organization of individual industries are and relevant to many of the problems discussed in England at the present moment as is the discussion to which they gave rise, 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 essay.

10

The 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, 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.18 The essential point on which 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 in the same way take account of all the relevant facts as did the pricing process of the competitive market. Together with the larger work in which this article was later incorporated Professor Mises’ study represents 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.

While Professor Mises’ writings contain beyond doubt the most complete and successful exposition of what from then onward became the central problem, and while they had by far the greatest influence on all further discussions, it is an interesting coincidence that about the same time two other distinguished authors arrived independently at very similar conclusions. The first was the great German sociologist, Max Weber, who in his posthumous magnum opus, Wirtschaft und Gesellschaft, which appeared in 1921, dealt expressly with the conditions which in a complex economic system made rational decisions possible. Like Mises (whose article he quotes as having come to his notice only when his own discussion was already set up in print), he insisted that the in natura calculations proposed by the leading advocates of a planned economy could not provide a rational solution of the problems which the authorities in such a system would have to solve. He emphasized in particular that the rational use and the preservation of capital could be secured only in a system based on exchange and the use of money and that the wastes due to the impossibility of rational calculation in a completely socialized system might be serious enough to make it impossible to maintain alive the present populations of the more densely inhabited countries.

“The 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.”19

A 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, 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,20 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 centers round the impossibility of a rational calculation in a centrally directed economy from which prices are necessarily absent.

11

Although to some extent Max Weber and Professor Brutzkus share the credit of having pointed out independently the central problem of the economics of socialism, it was the more complete and systematic exposition of Professor Mises, particularly in his larger work on Die Gemeinwirtschaft, which has mainly influenced the trend of further discussion on the Continent. In the years immediately succeeding its publication a number of attempts were made to meet his challenge directly and to show that he was wrong in his main thesis and that even in a strictly centrally directed economic system values could be exactly determined without any serious difficulties. But, although the discussion on this point dragged on for several years, in the course of which Mises twice replied to his critics,21 it became more and more clear that, in so far as a strictly centrally directed planned system of the type originally proposed by most socialists was concerned, his central thesis could not be refuted. Much of the objections made at first were really more a quibbling about words caused by the fact that Mises had occasionally used the somewhat loose statement that socialism was “impossible,” while what he meant was that socialism made rational calculation impossible. Of course any proposed course of action, if the proposal has any meaning at all, is possible in the strict sense of the word, i.e., it may be tried. The question can only be whether it will lead to the expected results, that is, whether the proposed course of action is consistent with the aims which it is intended to serve. In so far as it had been hoped to achieve by means of central direction of all economic activity at one and the same time a distribution of income independent of private property in the means of production and a volume of output which was at least approximately the same or even greater than that procured under free competition, it was more and more generally admitted that this was not a practicable way to achieve these ends.

But 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 would 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. 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.22

The second type of reaction to Professor Mises’ criticism was to regard it as valid only as regards the particular form of socialism against which it was mainly directed and to try to construct other schemes that would be immune to that criticism. A very considerable and probably the more interesting part of the later discussions on the Continent tended to move in that direction. There are two main tendencies of such speculation. On the one hand, it was attempted to overcome the difficulties in question by extending the element of planning even further than had been contemplated before, so as to abolish completely the free choice of the consumer and the free choice of occupation. Or, on the other hand, it was attempted to introduce various elements of competition. To what extent these proposals really overcome any of the difficulties and to what extent they are practical is considered in various sections of Collective Economic Planning.

• 1[*] The twelfth Finlay Lecture, delivered at University College, Dublin, on December 17, 1945. Published by Hodges, Figgis & Co., Ltd., Dublin, and B. H. Blackwell, Ltd., Oxford, 1946.
• 2Both the term “individualism” and the term “socialism” are originally the creation of the Saint-Simonians, the founders of modern socialism. They first coined the term “individualism” to describe the competitive society to which they were opposed and then invented the word “socialism” to describe the centrally planned society in which all activity was directed on the same principle that applied within a single factory. See on the origin of these terms the present author’s article on “The Counter-Revolution of Science,” Economica, VIII (new ser., 1941), 146.
• 3R. Bisset, Life of Edmund Burke (2d ed., 1800), II, 429. Cf. also W. C. Dunn, “Adam Smith and Edmund Burke: Complimentary Contemporaries,” Southern Economic Journal (University of North Carolina), Vol. VII, No. 3 (January, 1941).
• 4Carl Menger, who was among the first in modern times consciously to revive the methodical individualism of Adam Smith and his school, was probably also the first to point out the connection between the design theory of social institutions and socialism. See his Untersuchungen über die Methode der Sozialwissenschaften (1883), esp. Book IV, chap. 2, toward the end of which (p. 208) he speaks of “a pragmatism which, against the intention of its representatives, leads inevitably to socialism.”
• 5Edmund Burke, Reflections on the Revolution in France (1790), in Works (World’s Classics ed.), IV, 105: “Thus the commonwealth itself would, in a few generations, be disconnected into the dust and powder of individuality, and at length dispersed to all winds of heaven.” That Burke (as A. M. Osborn points out in her book on Rousseau and Burke [Oxford, 1940], p. 23), after he had first attacked Rousseau for his extreme “individualism,” later attacked him for his extreme collectivism was far from inconsistent but merely the result of the fact that in the case of Rousseau, as in that of all others, the rationalistic individualism which they preached inevitably led to collectivism.
• 6Alexis de Tocqueville, Democracy in America, trans. Henry Reeve (London, 1864), Vol. II, Book II, chap. 2, where De Tocqueville defines individualism as “a mature and calm feeling, which disposes each member of the community to sever himself from the mass of his fellows, and to draw apart with his family and friends; so that, after he has thus formed a little circle of his own, he willingly leaves society at large to itself.” The translator in a note to this passage apologizes for introducing the French term “individualism” into English and explains that he knows “no English word exactly equivalent to the expression.” As Albert Schatz pointed out in the book mentioned below, De Tocqueville’s use of the well-established French term in this peculiar sense is entirely arbitrary and leads to serious confusion with the established meaning.
• 7In his excellent survey of the history of individualist theories the late Albert Schatz rightly concludes that “nous voyons tout d’abord avec évidence ce que l’individualisme n’est pas. C’est précisément ce qu’on croit communément qu’il est: un système d’isolèment dans l’existence et une apologie de l’égoisme” (L’Individualisme économique et social [Paris, 1907], p. 558). This book, to which I am much indebted, deserves to be much more widely known as a contribution not only to the subject indicated by its title but to the history of economic theory in general.
• 8In this respect, as Karl Pribram has made clear, individualism is a necessary result of philosophical nominalism, while the collectivist theories have their roots in the “realist” or (as K. R. Popper now more appropriately calls it) “essentialist” tradition (Pribram, Die Entstehung der individualistischen Sozialphilosophie [Leipzig, 1912]). But this “nominalist” approach is characteristic only of true individualism, while the false individualism of Rousseau and the physiocrats, in accordance with the Cartesian origin, is strongly “realist” or “essentialist.”
• 9Adam Ferguson, An Essay on the History of Civil Society (1st ed., 1767), p. 187. Cf. also ibid.: “The forms of society are derived from an obscure and distant origin; they arise, long before the date of philosophy, from the instincts, not from the speculations of man. . . . We ascribe to a previous design, what came to be known only by experience, what no human wisdom could foresee, and what, without the concurring humour and disposition of his age, no authority could enable an individual to execute” (pp. 187 and 188).
• 10Cf. Schatz, op. cit., pp. 41–42, 81, 378, 568–69, esp. the passage quoted by him (p. 41, n. 1) from an article by Albert Sorel (“Comment j’ai lu la ‘Réforme sociale,’” in Réforme sociale, November 1, 1906, p. 614): “Quel que fut mon respect, assez commandé et indirect encore pour le Discours de la méthode, je savais déja que de ce fameux discours il était sorti autant de déraison sociale et d’aberrations métaphysiques, d’abstractions et d’utopies, que de données positives, que s’il menait à Comte il avait aussie mené à Rousseau.” On the influence of Descartes on Rousseau see further P. Janet, Histoire de la science politique (3d ed., 1887), p. 423; F. Bouillier, Histoire de la philosophie cartésienne (3d ed., 1868), p. 643; and H. Michel, L’Idée de l’état (3d ed., 1898), p. 68.
• 11The decisive importance of Mandeville in the history of economics, long overlooked or appreciated only by a few authors (particularly Edwin Cannan and Albert Schatz), is now beginning to be recognized, thanks mainly to the magnificent edition of the Fable of the Bees which we owe to the late F. B. Kaye. Although the fundamental ideas of Mandeville’s work are already implied in the original poem of 1705, the decisive elaboration and especially his full account of the origin of the division of labor, of money, and of language occur only in Part II of the Fable which was published in 1728 (see Bernard Mandeville, The Fable of the Bees, ed. F. B. Kaye [Oxford, 1924], II, 142, 287–88, 349–50). There is space here to quote only the crucial passage from his account of the development of the division of labor where he observes that “we often ascribe to the excellency of man’s genius, and the depth of his penetration, what is in reality owing to the length of time, and the experience of many generations, all of them very little differing from one another in natural parts and sagacity” (ibid., p. 142).
• 12Réné Descartes, A Discourse on Method (Everyman’s ed.), pp. 10–11.
• 13On the characteristic approach of the engineer type of mind to economic phenomena compare the present author’s study on “Scientism and the Study of Society,” Economica, Vols. IX-XI (new ser., 1942–44), esp. XI, 34 fï.
• 14Since this lecture was first published I have become acquainted with an instructive article by Jerome Rosenthal on “Attitudes of Some Modern Rationalists to History” (Journal of the History of Ideas, IV, No. 4 [October, 1943], 429–56), which shows in considerable detail the antihistorical attitude of Descartes and particularly his disciple Malebranche and gives interesting examples of the contempt expressed by Descartes in his Recherche de la vérité par la lumière naturelle for the study of history, languages, geography, and especially the classics.
• 15James Bonar, Philosophy and Political Economy (1893), p. 85.
• 16A. W. Benn, in his History of English Rationalism in the Nineteenth Century (1906), says rightly: “With Quesnay, following nature meant ascertaining by a study of the world about us and of its laws what conduct is most conducive to health and happiness; and the natural rights meant liberty to pursue the course so ascertained. Such liberty only belongs to the wise and good, and can only be granted to those whom the tutelary authority in the state is pleased to regard as such. With Adam Smith and his disciples, on the other hand, nature means the totality of impulses and instincts by which the individual members of society are animated; and their contention is that the best arrangements result from giving free play to those forces in the confidence that partial failure will be more than compensated by successes elsewhere, and that the pursuit of his own interest by each will work out in the greatest happiness of all” (I, 289).
• 17Edmund Burke, Thoughts and Details on Scarcity (1795), in Works (World’s Classics ed.), VI, 15.
• 18This phrase is used over and over again by De Tocqueville to describe the effects of socialism, but see particularly Oeuvres completes, IX (1886), 541, where he says: “Si, en definitive, j’avais à trouver une formule générale pour exprimer ce que m’apparait le socialisme dans son ensemble, je dirais que c’est une nouvelle formule de la servitude.” Perhaps I may be allowed to add that it was this phrase of De Tocqueville’s which suggested to me the title of a recent book of mine.
• 19John Locke, Two Treatises of Government (1690), Book II, chap. 4, §22: “Freedom of men under government is to have a standing rule to live by, common to every one of that society and made by the legislative power erected in it.”
• 20Lerner, op. cit., p. 5.
• 21Lord Acton, “Nationality” (1862), reprinted in The History of Freedom and Other Essays (1907), p. 288.
• 22The actions a government can expediently take to reduce really avoidable uncertainty for the individuals are a subject which has given rise to so many confusions that I am afraid to let the brief allusion to it in the text stand without some further explanation. The point is that, while it is easy to protect a particular person or group against the loss which might be caused by an unforseen change, by preventing people from taking notice of the change after it has occurred, this merely shifts the loss onto other shoulders but does not prevent it. If, e.g., capital invested in very expensive plant is protected against obsolescence by new inventions by prohibiting the introduction of such new inventions, this increases the security of the owners of the existing plant but deprives the public of the benefit of the new inventions. Or, in other words, it does not really reduce uncertainty for society as a whole if we make the behavior of the people more predictable by preventing them from adapting themselves to an unforeseen change in their knowledge of the world. The only genuine reduction of uncertainty consists in increasing its knowledge, but never in preventing people from making use of new knowledge.