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The Fallacies of German Socialism in War and Peace

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Ludwig von Mises's Nation, State, and Economy is a rationalist-utilitarian analysis of the three manifestations of German imperialism:

  1. past German imperialism for the sake of national greatness,
  2. economic central planning in World War I (war socialism), which accelerated the introduction of full-blown socialism, and
  3. the blossoming imperialism of the social democrats under the banner of syndicalism and the dictatorship of the proletariat.

Although Mises does not define imperialism explicitly, he understands it to be the exact opposite of “self-determination, self-administration, self-rule.”1 Liberal democracy was historically embodied in “the ideas of 1789,” which demanded “the most exact and complete application” of the principles of “full freedom of movement of persons and goods, the most comprehensive protection of the property and freedom of each individual,” and “removal of all state compulsion in the school system.”2

He explained that war socialism, far from supporting the German war effort, was one of five disastrous errors that had led the Central Powers to such a crushing defeat.3 To its advocates, the emergency situation that confronted the German economy at the outset of the war, or the great tasks that it now confronted, were sufficient justification for compulsory central planning on all levels. But such a justification is based in logical fallacy. It was true, Mises granted, that there was an emergency and that the structure of production had to be adjusted as quickly as possible from peacetime to wartime conditions. But it does not follow that the government should then run the economy. The correct question was whether central planning would be better than the free market at achieving the necessary adjustments. Mises proceeded to demonstrate that this was not the case.4

He also showed that the apparent blessings of wartime socialism were a dangerous illusion, created by the accompany inginflation. The increase of all prices had falsified the economic calculations of the entrepreneurs. The higher entries in their books falsified their profit-and-loss accounting, to the point that they believed they were making profits when in fact they were consuming their capital. Similarly, he debunked the widespread myth that war finance through government debts was a way of making future generations pay for the war effort. This view, he said, was “completely wrong”:

War can be waged only with present goods. One can fight only with weapons that are already on hand; one can take everything needed for war only from wealth already on hand. From the economic point of view, the present generation wages war, and it must also bear all material costs of war.5

General misunderstanding of the economic nature and consequences of wartime central planning was instrumental in reducing resistance to the accelerated introduction of full socialism.

The socialists themselves denounced the wartime economic regime, partly because they did not welcome an association in the minds of the general public between socialism and war, but also in part from their own intellectual confusion. Mises objected:

[S]ocialism means the transfer of the means of production out of the private ownership of individuals into the ownership of society. That alone and nothing else is socialism. All the rest is unimportant. It is a matter of complete indifference for deciding our question, for example, who holds power in a socialized community, whether a hereditary emperor, a Caesar, or the democratically organized whole of the people.6

In the third chapter of Nation, State, and Economy, Mises explained that the confusion about the nature of socialism resulted from the fact that the program of the socialist parties in Germany and Austria integrated three distinct elements: Marxist centralist socialism, syndicalism (radical labor-unionism), and democratic government.

The socialists had championed democracy because Karl Marx’s theory predicted that socialism would be the rule of the proletarian majority.7 This part of their program, in which they continued the old classical-liberal agenda that German liberals themselves had abandoned, had created widespread sympathy for the socialist cause even in bourgeois circles. But majority rule was not a central tenet of socialism. The only essential element was central control of all means of production through a dictatorship of the proletariat. And it was this precept of the socialist creed that would have to stand up to rational scrutiny, or else socialism would have to be discarded: is the compulsory central control of production more efficient than private ownership of the means of production? 8​ All other considerations were secondary. For example, Mises observed that there was no necessity, in 1919, to wait for the proletarians to become a majority in Germany and Austria, because the majority of the general population was already socialist. But if the socialist case for central planning was invalid, then no power on earth could maintain a socialist order.

The dictatorship of the proletariat wants to use terror to nip any stirring up of opposition in the bud. Socialism is believed established for all eternity once its property has been taken away from the bourgeoisie and all possibility of public criticism has been abolished. It cannot be denied, of course, that much can be done in this way, that, above all, all European civilization can thus be destroyed; but one does not thereby build a socialist order of society. If the communist social order is less suited than one resting on private ownership of the means of production to bring about “the greatest happiness of the greatest number,” then the ideas of liberalism cannot be killed even by terrorist measures.9

Mises pointed out that the socialist case crucially relied on the conviction that once the socialized society is realized, its members would be guided by entirely different motivations than from those of their former lives. Rather than pursuing their own interests, they would now think only of serving their community. But if one is skeptical of the feasibility of such a New Socialist Man—if one seeks instead a system that will reconcile the private interests of real-world human beings with those of the larger community, then liberalism had already found such a system: private property.10

In their daily politics, the socialists had long since turned away from Marxist orthodoxy to become the political branch of the labor unions, which Marx had despised as “petty bourgeois.” They espoused the down-to-earth agenda of their constituency and trumpeted their Marxist heritage only in election speeches.But from both a theoretical and practical point of view, the labor-unionist program was even worse than Marxist socialism. It destroyed the division of labor and the spirit of cooperation:

Syndicalism deliberately places the producer interest of the workers in the foreground. In making worker groups owners of the means of production (not in so many words but in substance), it does not abolish private property. It also does not assure equality. It does remove the existing inequality of distribution but introduces a new one, for the value of the capital invested in individual enterprises or sectors of production does not correspond at all to the number of workers employed in them. The income of each single worker will be all the greater, the smaller the number of fellow workers employed in his enterprise or sector of production and the greater the value of the material means of production employed in it. The syndicalistically organized state would be no socialist state but a state of worker capitalism, since the individual worker groups would be owners of the capital.

Syndicalism would make all repatterning of production impossible; it leaves no room free for economic progress. In its entire intellectual character it suits the age of peasants and craftsmen, in which economic relations are rather stationary.11

Labor-unionism is therefore purely destructive. It is locally organized robbery elevated to a general principle. Mises’s criticism did not focus on its moral reprehensibility, however, but on its inability to sustain the large-scale division of labor characteristic of modern civilization. Labor-unionism was an utterly unsuitable means to pursue the greatest happiness of the greatest number.

Excerpted from Chapter 8 of Mises: The Last Knight of Liberalism 
  • 1. Mises, Nation, Staat und Wirtschaft, p. 37; Nation, State, and Economy, p. 46.
  • 2. Mises, Nation, Staat und Wirtschaft, p. 79; Nation, State, and Economy, p. 96. In contrast, the majority principle was in his eyes merely a means, rather than a constituent part of democracy; see Nation, Staat und Wirtschaft, p. 36.
  • 3. The other errors were military and political. The military errors were, (1) to expect the war to be short, and (2) to expect miracles from unceasing offensives. The political errors were (3) not to anticipate a war on all fronts, and (4) to make the interests of the East-Elbian Junkers supreme in German politics. See Mises, Nation, Staat und Wirtschaft, pp. 111ff.
  • 4. His views on war finance had an impact on young free-market oriented economists of the interwar period such as Stefan Possony (Die Wehrwirtschaft des totalen Krieges [Vienna: Gerold, 1938]) and Georg Holzbauer (Barzahlung und Zahlungsmittelversorgung in militärisch besetzten Gebieten [Jena: Gustav Fischer, 1939]), but also on interventionists like Adolf Lampe (Allgemeine Wehrwirtschaft [Jena: Gustav Fischer, 1938]). Lampe had a preference for “playing markets” though. He suggested that entrepreneurial activities be centrally guided.
  • 5. Mises, Nation, Staat und Wirtschaft, p. 137; Nation, State, and Economy, p. 168. He went on to explain that war finance through debts (rather than through taxation or inflation) merely modifies the future distribution of resources.
  • 6. Mises, Nation, Staat und Wirtschaft, p. 140; Nation, State, and Economy, p. 172.
  • 7. Mises observes that the German socialists had stuck to the tenet of democracy only because until 1914 they had always been in the opposition and therefore bore no responsibility for their co-nationals in the eastern territories. With the onset of World War I, when they came to power in Germany and Austria, they slowly changed their minds and would have followed in the footsteps of the German liberals, but with the loss of the eastern provinces the problem of mixed nations disappeared as well. See Mises, Nation, Staat und Wirtschaft, pp. 105f.
  • 8. See Mises, Nation, Staat und Wirtschaft, p. 152f.; Nation, State, and Economy, p. 185f.
  • 9. Mises, Nation, Staat und Wirtschaft, p. 169; Nation, State, and Economy, p. 206.
  • 10. See Mises, Nation, Staat und Wirtschaft, pp. 157ff. In his later work, based on the socialist-calculation argument, he would show that the problem is the impossibility of identifying what the interests of the commonwealth are.
  • 11. Mises, Nation, Staat und Wirtschaft, pp. 163f.; Nation, State, and Economy, p. 199.

Jörg Guido Hülsmann is senior fellow of the Mises Institute where he holds the 2018 Peterson-Luddy Chair and was director of research for Mises Fellows in residence 1999-2004.  He is author of Mises: The Last Knight of Liberalism and The Ethics of Money Production. He teaches in France, at Université d'Angers. His full CV is here.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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