Economic Calculation, Quantitative Laws, and the "Impossibility" of Socialism

Bryan Caplan Department of Economics and Center for Study of Public Choice George Mason University Fairfa ! "# $$%&% bcaplan'gmu(edu )%&*++&*$&$, -une! $%%$

Abstract: .he calculation literature primarily focuses on whether economic calculation is impossible under socialism( But this looses sight of the most interesting #ustrian claim/ .he absence of calculation ma0es socialism itself impossible( .he current paper critically analy1es this neglected thesis! and concludes the #ustrians lac0 any sound argument for this e treme position( 2ndeed! Misesian methodology rules out the possibility of such an argument( 3istorical evidence suggests that bad incentives * not lac0 of calculation * 4as the main source of socialism5s defects( Boett0e5s 6$%%%7 defense of the 8socialism is impossible8 position misreads Mises and fails on its o4n terms(

2 4ould li0e to especially than0 Pete Boett0e for countless hours of stimulating debate( Further gratitude is o4ed to .yler Co4en! Ed Stringham! #ndre4 Farrant! Scott Beaulier! 9obin 3anson! Peter :eeson! Ben Po4ell! and Eric Crampton for comments and discussion( Scott Beaulier provided e cellent research assistance( .he standard disclaimer applies(

Economic Calculation, Quantitative Laws, and the "Impossibility" of Socialism

Abstract: .he calculation literature primarily focuses on whether economic calculation is impossible under socialism( But this looses sight of the most interesting #ustrian claim/ .he absence of calculation ma0es socialism itself impossible( .he current paper critically analy1es this neglected thesis! and concludes the #ustrians lac0 any sound argument for this e treme position( 2ndeed! Misesian methodology rules out the possibility of such an argument( 3istorical evidence suggests that bad incentives * not lac0 of calculation * 4as the main source of socialism5s defects( Boett0e5s 6$%%%7 defense of the 8socialism is impossible8 position misreads Mises and fails on its o4n terms(

8.his isn5t Mission Difficult! Mr( 3unt( 2t5s Mission 2mpossible(8

& #nthony 3op0ins in Mission: Impossible 2 ! Introduction Peter Boett0e 6;++<7 calls economic calculation 8the #ustrian contribution to political economy(8 =ther #ustrians might see this as an overstatement! but in any case!

#ustrians typically do ran0 the economic calculation problem as the most important and>or fundamental economic argument against socialism( Much of the e pansive

literature on economic calculation! unsurprisingly! e amines whether it is in fact true that socialism precludes economic calculation( 6Mises ;+<;! ;+??@ 3aye0 ;+&A@ :ange and .aylor ;+&<@ :avoie ;+<A@ Steele ;++$@ Cald4ell ;++)7 #nother strand investigates why socialism precludes economic calculation( Does it! as 3aye0 emphasi1ed! hinge on dispersed 0no4ledge@ or! as Mises seemed to affirm! is the problem even more deeply rootedB 6Salerno ;++&@ Boett0e $%%;@ Cald4ell ;++)7

2n this article! 2 pursue a different line of criticism( #t the outset! 2 accede to the #ustrian claim that full*blo4n socialism means an end to economic calculation( 2 sidestep the related debate on 4hether or not the 3aye0ian and Misesian positions need to be 8dehomogeni1ed(8 6Salerno ;++&7 Chat concerns me! instead! is the #ustrian

contention that the economic calculation argument has some sort of privileged position in the e tended family of anti*socialist economic arguments@ that it is! in Mises5 4ords! 8the decisive obDection that economics raises against the possibility of a socialist society(8 6Mises ;++?! p()A7

Chy 4ould this special place be assigned to itB .he origin! in all li0elihood! lies in Mises5 emphatic insistence that the problem of economic calculation renders socialism 8impossible(8 =ther critics of socialism! ho4ever strident! rarely if ever concluded that

, socialism could never be( 2f Mises 4ere correct! then! it 4ould be easy to see 4hy his obDection stands head and shoulders above the rest( 2f you have do1ens of reasons 4hy doing E is a bad idea! but only one of these sho4s that E cannot be done! it ma0es sense to a4ard the latter argument the gold medal(

.he thesis of this article is that such a gold medal is undeserved( ; Mises and the rest of the #ustrians lac0 any sound argument for the e treme claim that socialism is 8impossible(8 2ndeed! it is a short Dump from a pair of Mises5 other theses to the opposite conclusion( .o be specific! Mises5 reDection of Fuantitative la4s in economics and his observations on 8calculation in 0ind8 rule the 8impossibility8 conclusion out of court(

.he paper is organi1ed as follo4s(

Section t4o summari1es Mises5 position on

economic calculation and the impossibility of socialism( Section three elaborates my claim that Mises is 4rong on his o4n terms( Section four critici1es the effort to appeal to historical evidence that 8Mises 4as right(8 Section five responds to Peter Boett0e5s alternative reading of the meaning of 8impossibility(8 implications and concludes( Section si e plores broader

"! Economic Calculation and the "Impossibility" of Socialism 2n Socialism 6;+<;7! Mises carefully and sympathetically surveys earlier economistsG obDections to socialism( 3e gives collective credit to the Hliberal schoolGsI conclusion that Hproductivity under Socialism 4ould sin0 so lo4 that 4ant and poverty 4ould be general(I 6ibid! p(;A+7 Mises also gives individual credit to a number of earlier critics of socialism( #gainst the socialist claim that intrinsic motivation 6the Doy of 4or07 could supplant
1

For a 4ider*ranging critiFue of #ustrian economics! see Caplan 6;+++7! as 4ell as Bloc0 6;+++7! 3Jlsmann 6;+++7! and Caplan 6$%%;7(

A e trinsic motivation 6pay7! Mises cites -evons on the increasing marginal disutility of labor( 6ibid! p(;,A7 2n his analysis of 4or0 incentives under capitalism and socialism! Mises appeals to Clar0Gs marginal productivity analysis( 6ibid! p(;A$7 Mises spends

several pages rebutting -ohn Stuart MillGs claim that time 4ages leave 4or0ers under capitalism 4ith incentives as 4ea0 as socialismGs( .he cause of MillGs mista0e! says Mises! is that Mill Hdid not survive to see the transformation of economics by the subDective theory of value! and he did not 0no4 the connection bet4een 4age rates and the marginal productivity of labour(I 6ibid! p(;AA7 =nce again! then! Mises pays homage to earlier critics of socialism(

2n absolute terms! moreover! Mises thin0s his forebears5 intellectual contribution is impressive( #s he puts it! H.he 4eight of this obDection raised to the socialist plans is so over4helming that no Dudicious man could hesitate to choose capitalism(I 6Mises ;+??! p(?<%7 .his sets the bar high@ to do better! Mises apparently reFuires an obDection 4eighty enough to convince some of the inDudicious( Ko small tas0( Kevertheless! Mises feels up to the challenge( 3e begins by lucidly e ploring the role of economic calculation under capitalism( Cith that ground4or0 laid! it is rather easy for him to sho4 that government o4nership of the means of production renders economic calculation impossible( 2f the state o4ns all of the capital goods! there 4ill be no mar0et for capital goods@ 4ith no mar0et! no mar0et prices@ no mar0et prices! no 4ay to calculate profit* and*loss( LED(

So far 2 have no obDections( Mises ma0es a sound and original point( .he hitch is that Mises claims to have accomplished far more( 3e Fuic0ly tells us that! H.he problem of economic calculation is the fundamental problem of socialism(I 6Mises ;+<;! p(;;?7

? .hen he goes one step further/ H.o prove that economic calculation 4ould be impossible in the socialist community is to prove also that Socialism is impracticable(I 6Mises ;+<;! p(;;)7 Kot impractical! but impracticable( 2f that leaves any doubt in the readerGs mind! Mises finally declares that H.he attempt to reform the 4orld socialistically might destroy civili1ation( 2t 4ould never set up a successful socialist community(I 6Mises ;+<;! p(;;<7

2f all this is correct! MisesG marginal intellectual contribution to the critiFue of socialism is indeed vast($ .his is precisely ho4 Mises sees it( #s he puts it in Human Action 6;+??7/
2f no other obDections could be raised to the socialist plans than that socialism 4ill lo4er the standard of living of all or at least of the immense maDority! it 4ould be impossible for pra eology to pronounce a final Dudgment( Men 4ould have to decide the issue bet4een capitalism and socialism on the ground of Dudgments of value and of Dudgments of relevance( .hey 4ould have to choose bet4een the t4o systems as they choose bet4een many others things((( However, the true state of affairs is entirely different ((( Socialism is not a reali1able system of society5s economic organi1ation because it lac0s any method of economic calculation((( Socialism cannot be reali1ed because it is beyond human po4er to establish it as a social system( 6ibid! pp(?)+*<%@ emphasis added7

#! $here %ises &oes $ron': Quantitative Laws and Calculation in (ind Mises tells us that monetary calculation 8is impossible under socialism(8 6;++?! p()$7 8.he leadership of a socialist society!8 conseFuently! 84ould thus be confronted by a problem that it could not possibly solve((( .he resulting chaos in the economy 4ould culminate Fuic0ly and irresistibly in universal impoverishment and a retrogression to the primitive conditions in 4hich our ancestors once lived(8 6;++?! pp()$*&7 Kotice that

Mises is actually ma0ing t4o distinct HimpossibilityI claims about economic calculation and socialism/

Mises does ac0no4ledge a debt to Hsome eminent economists * 3ermann 3einrich Gossen! #lbert SchMffle! "ilfredo Pareto! Ki0olaas G( Pierson! Enrico Barone(I But! he insists! H4ith the e ception of Pierson! they did not penetrate the core of the problem! and they all failed to recogni1e its primordial significance(8 6Mises ;+??! p()%;7

) Impossibility # 1: Socialism ma es economic calculation impossible!

Impossibility # 2: "ue to this problem, socialism is impossible!

"irtually all replies to Mises focus on the first of these t4o impossibilities(

=n

2mpossibility N ;! though! 2 grant that Mises is right( 2 am no more impressed than Mises by the litany of socialist schemes to salvage economic calculation( 2 share his

bemusement at mar0et socialism/ H.hey 4ant to abolish private control of the means of production! mar0et e change! mar0et prices! and competition( But at the same time they 4ant to organi1e the socialist utopia in such a 4ay that people could act as if these things 4ere still present( .hey 4ant people to play mar0et as children play 4ar! railroad! or school(I 6Mises ;+??! p()%?*)7

Chere Mises dra4s surprisingly little fire is on the second impossibility( 3e ta0es great pain to clearly lay out the argument for 2mpossibility N ;! but not so for 2mpossibility N $( 2ndeed! most of the HargumentsI for the latter amount to a mi of repetition and

metaphor( .hus! Mises tells us that H=nly under very simple conditions is it possible to dispense 4ith money calculationsI 6Mises ;+<;! p(;%;7@ H=nce society abandons free pricing of production goods rational production becomes impossibleI 6Mises ;+<;! p(;%$7@ 8# socialist management of production 4ould simply not 0no4 4hether or not 4hat it plans and e ecutes is the most appropriate means to attain the ends sought( 2t 4ill operate in the dar0! as it 4ere( 2t 4ill sFuander factors of production both material and human((( Chaos and poverty 4ill unavoidably result!8 6Mises ;+<;! p(A&A7@

HMonetary calculation is the guiding star of action under the social system of division of labor( 2t is the compass of the man embar0ing on production!I 6Mises ;+??! p($$+7@ H=ur

< civili1ation is inseparably lin0ed 4ith our methods of economic calculation( 2t 4ould perish if 4e 4ere to abandon this most precious intellectual tool of actingI 6Mises ;+??! p($&%7@ H.he prosperity that has made it possible for many more people to inhabit the earth today than in the precapitalist era is due solely to the capitalist method of lengthy chains of production! 4hich necessarily reFuires monetary calculation(I 6Mises ;++?! p()$7 2n short! one searches in vain in MisesG copious 4ritings for any affirmative

defense * theoretical or empirical * of 2mpossibility N $(&

#dmittedly! the fact that Mises fails to supply an argument does not sho4 that no such argument e ists( 3o4ever! the 4ea0ness of his position runs deeper( 2mpossibility N $ is inconsistent 4ith a basic element of the Misesian system/ the reDection of Fuantitative la4s( Mises repeatedly insists that economic theory gives nothing but #ualitative la4s( For e ample! in Human Action 6;+??7! Mises asserts that/
.he impracticality of measurement is not due to the lac0 of technical methods for the establishment of measure( 2t is due to the absence of constant relations( 2f it 4ere only caused by technical insufficiency! at least an appro imate estimation 4ould be possible in some cases( But the main fact is that there are no constant relations( Economics is not! as ignorant positivists repeat again and again! bac04ard because it is not 8Fuantitative(8 2t is not Fuantitative because there are no constants( Statistical figures referring to economic events are historical data( .hey tell us 4hat happened in a nonrepeatable historical case( 6ibid! p(A?7

2f so! then ho4 could he possibly 0no4 by economic theory alone that the negative effect of the lac0 of economic calculation 4ould be severe enough to put socialism beyond the realm of possibilityB, Granted! the socialist economy 4ould suffer to some de$ree due
3

Chat is arguably Mises5 most eloFuent prediction of catastrophe points to the danger of economic illiteracy rather than the absence of calculation/ 8But if they Oman0indP fail to ta0e the best advantage of it Othe body of economic 0no4ledgeP and disregard its teachings and 4arnings! they 4ill not annul economics@ they 4ill stamp out society and the human race(8 6;+??! p(<<A7
4

2n fact! Mises raises doubts about the ability to economic theory to unambiguously state that the real*4orld effect of calculation on prosperity is positiveQ 2n his discussion of 8e ternal costs!8 Mises recogni1es that 82t is true that 4here a considerable part of the costs incurred are e ternal

+ to the absence of economic calculation@ but ho4! from his o4n perspective! could Mises 0no4 that this difficulty is so severe that society 4ould collapseB 9othbard 6;+?$7

provides an especially bald formulation of this leap of Misesian logic/ 8#s the area of incalculability increases! the degrees of irrationality! misallocation! loss! impoverishment! etc(! become greater( Under one o4ner or one cartel for the 4hole productive system! there 4ould be no possible areas of calculation at all! and therefore complete economic chaos 4ould prevail(8 6p(A,<@ emphasis in the original7 8.herefore8BQ .he final clause does not follo4( -ust because more incalculability leads to more economic chaos does not imply that complete incalculability leads to complete economic chaos(

=bserve further that Mises ac0no4ledges the obvious point that a lone 9obinson Crusoe has the ability to 4eigh his options( #s Mises e plains! 82solated man can easily decide 4hether to e tend his hunting or cultivation( .he processes of production he has to ta0e into account are relatively short( .he e penditure they demand and the product they afford can easily be perceived as a 4hole(8 6Mises ;+<;! p(+<7 Crusoe runs his one* man economy under the guidance of 4hat Mises calls 8calculation in 0ind(8 3e mentally 4eighs his preferences and opportunities( Chy 4ould a socialist planner be unable to do the sameB Mises5 only response is to declare this method un4or0able for a larger economy/ 8.o suppose that a socialist community could substitute calculations in 0ind for calculations in terms of money is an illusion( 2n an economy that does not practice
costs from the point of vie4 of the acting individuals or firms! the economic calculation established by them is manifestly defective and their results deceptive(8 6;+??! pp(?A)*<7 3e replies that this concern 8could be removed by a reform of the la4s concerning liability for damages inflicted and by rescinding the institutional barriers preventing the full operation of private o4nership(8 6p(?A<7 Until these reforms are put into place! though! it is theoretically possible that economic calculation is 4orse than nothing(

;% e change! calculations in 0ind can never cover more than consumption goods( .hey brea0 do4n completely 4here goods of higher order are concerned(8 6Mises ;+<;! p(;%$7

.his suggests a series of Fuestions(

Does Crusoe5s one*man 8socialism8 become

impossible 4hen Friday sho4s upB 3ardly( Chat if a hundred people Doin their isolated collectiveB # thousandB # millionB Chen does the absence of economic calculation doom themB Mises has bo ed himself in( 3e has to eventually dra4 the line and say 8# socialist society of this si1e or larger is impossible(8 But in dra4ing such a line! he violates his o4n strictures against Fuantitative economics(

=ne might be tempted to claim that the distinction bet4een the Crusoe economy and the modern economy is a Fualitative one( .he modern economy uses 8higher order goods!8 4hereas the Crusoe economy involves only consumption goods( But this 4ill not do( Misesian correctly describes Crusoe5s productive processes as 8relatively short(8 So even Crusoe5s techniFues are roundabout to a certain e tent( .hey do not differ in 0ind from more advanced techniFues(

)! *he Appeal to +istory So 2mpossibility N $ is a Fuantitative Dudgment/ Crusoe could survive 4ithout calculation! but a modern economy could not( Mises has no theoretical argument to support this position! and indeed on his o4n terms could never construct such an argument( .he only 4ay to salvage 2mpossibility N $ is to reinterpret it as an empirical claim and loo0 to the evidence of history( Mises 4ould have reDected this inversion/ 8in the field of

purposive human action and social relations no e periments can be made and no

e periments have ever been made(8 6;+<;! p(A&$7( 2ndeed! so 4ould Boett0e(

;; But

other #ustrians might see things differently! so let us no4 consider the merits of the historical argument some 4ould be tempted to advance(

#n historical approach 4as only beginning to be feasible 4hen Socialism 4as initially published in ;+$$( .he 9ussian Civil Car 4as Dust dying do4n( .he remainder of the t4entieth century! though! has endo4ed us 4ith a 4ealth of facts! enriched by the retreat from socialism and the opening of closed societies to Cestern historians( Does this body of history confirm 2mpossibility N $B Some #ustrians at least seem to ans4er in the affirmative( For instance! in spite of Boett0e5s methodological stance! he approvingly Fuotes :avoie to this effect/ 82n the failure of Car Communism and the retreat to the KEP the impossibility of planning as articulated theoretically in the Mises*3aye0 critiFue 4as directly demonstrated in practice(8 6Boett0e ;++%! p();7

.he historical failures of socialism are indeed enormous( Five million starved to death during :enin5s short tenure as Soviet dictator( 6Pipes ;++,@ :andauer ;+A+7 Seven

million starved to death during Stalin5s terror*famine( 6ConFuest ;+<?@ :andauer ;+A+7 .hirty million perished during Mao5s Great :eap For4ard( 6Bec0er ;++?7 .he living

faced other horrors( 2n the name of the proletariat! socialism revived both slavery and serfdom on a massive scale( Millions 4ere sent to slave labor camps to toil in inhuman conditions( Far larger numbers 4ere tied to their collective farms for life! loc0ed in place by internal passport systems( 6:andauer ;+A+@ ConFuest ;++%! ;+<?@ Bec0er ;++?7 .he abuses most familiar to the Cestern 4orld * li0e the Berlin Call * 4ere the media*

Personal correspondence(

friendly side of socialism(

;$ .he lines and shortages endemic under Bre1hnev and

Gorbachev 4ere the system at its best(

.he Fuestion! though! is not whether socialism 4as a catastrophe! but why( Can the great failures of socialism be largely attributed to economic calculation problemsB .he facts say other4ise( Each of the maDor famines * to ta0e the most shoc0ing set of socialist calamities * follo4s a common script( First! the socialist leadership decides to sei1e the peasants5 land and force them to labor for a fraction of their customary earnings( .o forestall resistance! they sentence successful farmers and village leaders 680ula0s87 to slave labor camps( =nce collectivi1ation begins! the resistance is vigorous! but unorgani1ed( .he peasants respond by slaughtering their livestoc0! hiding food! and other4ise trying to salvage as much of their property as possible( Ke t! the government sends men 4ith guns to get 4hat they 4ant by any means necessary * even if it means e propriating the ne t year5s seed grain( Peasants then starve by the millions until all resistance is bro0en! and they submit to the rule of the collective farm( Even then! the farmers do the absolute minimum of 4or0 they can get a4ay 4ith! and put their surplus energy into tending their small remaining private plots of land( .hese tiny bastions of capitalism typically 4ind up producing a stunning fraction of the total crop(

Kothing in this sad story involves economic calculation( Chile good data is hard to come by! there is little reason to believe that a significant fraction of 9ussian or Chinese peasants in the pre*Communist era 4ere even familiar 4ith * let alone practiced * profit* and*loss accounting(?
6

2f calculation 4as not being practiced before the socialist

9ichard Pipes5 %ussia &nder the 'ld %e$ime5s 6;+),! pp(;,;*;)%7 chapter on agriculture does not specifically discuss accounting! but his general discussion of the bac04ardness of the 9ussian peasantry ma0es their use of accounting highly improbable( 2n van 3oepen5s 6;++A7 revie4 of pre*Communist Chinese accounting! there is no suggestion that it 4as practiced by

;& revolution! economic decline after the socialist revolution can hardly be blamed on the absence of calculation under socialism(

2nstead! the tragedy of collectivi1ation all boils do4n to incentives( .he rulers had bad incentives because they proverbially held absolute po4er( .hey 0ne4 they could

e propriate the entire farming population! retain po4er! and continue to enDoy three sFuare meals a day( During collectivi1ation! farmers had bad incentives to proverbially 8use it or lose it8 * to consume their personal resources before they 4ere sei1ed( Bad incentives continued after collectivi1ation! because the system re4arded Communist officials! guards! and informers! instead of farmers 4ith a green thumb( .hat is 4hy millions died of hunger in the 4a0e of collectivi1ation! and 4hy the Soviet economy suffered from chronic food shortages(

Calculation problems 4ere probably more serious in industry than agriculture( #gain! though! the evidence for incentive problems is massive! 4hile signs of calculation problems are spotty( 2n 3edric0 Smith5s 6;+),7 classic study of late Communism! Consider for

practically every industrial pathology traces bac0 to bad incentives( e ample ho4 one Soviet engineer analy1es industrial 8storming8/

Usually at the start of the month an enterprise is virtually paraly1ed after the storming in the final days of the preceding month((( # lot have to put in t4o shifts a day during storming((( .hey 4or0 all day both Saturdays and Sundays! their normal days off( Management doesn5t have the right Oto pay them for overtimeP because it has a ceiling on payroll and financial inspection organs chec0 on that( Sometimes if a 4or0er is badly needed! he can get time*and*a*half or double time off to compensate for his overtime((( So usually there are a lot of 4or0ers off ordinary farmers( 2n personal correspondence! Chinese historian Rhengyuan Fu! author of Autocratic (radition and )hinese *olitics 6;++&7 confirms the non*use of accounting in pre* Communist Chinese agriculture(

;,
at the start of the month and the enterprise is in a state of paralysis((( 2n spite of the Plan and seemingly definite delivery deadlines! suppliers don5t fulfill the Plan or meet delivery schedules((( 2n other countries! production normally goes on throughout the month((( but here! it can only begin on the ;, th or $%th 4hen all materials have been received( So factories must fulfill about <% percent of the Plan OFuotasP in the last ;%*;A days( Ko one cares any longer about Fuality( "olume is the main thing((( 6Smith ;+),! pp($<?*)7

2t is one incentive problem after another/ .he ban on overtime pay(

.he lac0 of

incentives for prompt deliveries( EFual re4ards for products of uneFual Fuality( Smith goes on to observe that in the sectors that the party leadership genuinely cares about! the Soviet economy sets up good incentives and gets better results/
Kot only do defense and space efforts get top national priority and funding! but they also operate on a different system from the rest of the economy( Samuel Pisar! an #merican la4yer! 4riter! and consultant on East*Cest trade! made the shre4d observation to me that the military sector is 8the only sector of the Soviet economy 4hich operates li0e a mar0et economy! in the sense that the customers pull out of the economic mechanism the 0inds of 4eaponry they 4ant((( O.Phe military! li0e customers in the Cest((( can say! 5Ko! no! no! that isn5t 4hat 4e 4ant(58 6ibid! pp(&;$*&7

.hus! common sense! unaided by comple

accounting! could both diagnose the

ailments of! and prescribe remedies for! the most glaring failures of Soviet industry( Chen the leadership 4as determined to get results! they bent the perverse rules that permeated the rest of the economy(

.he evidence for the priority of incentives over calculation goes deeper( =ne elementary function of economic calculation is to figure out the optimal si1e of industrial plants( #gain and again! though! Soviet planners disregarded evidence on scale economies from Cestern industry( ChyB Because their goal 4as propaganda rather than

production( Smith delivers a telling e pose of the Sama 9iver .ruc0 Factory * intended to be the 4orld5s largest * 8an archetype of the gigantomania of Soviet planners((( a symbol of the Soviet faith that bigger means better and the Soviet determination to have the biggest at any cost(8 6ibid! p($+;7 .he planners could easily have piggybac0ed on

;A Cestern estimates of optimal scale! but they declined to do so( So lac0 of incentives * not inability to calculate * 4as once again the root problem(

Perhaps the most plausible response to the historical evidence is that Mises5 argument in fact applied only to an isolated socialist economy( Mises repeatedly emphasi1ed that one socialist country could free ride off of the information provided by the 4orld price system/ 8People do not reali1e that OSoviet 9ussia and Ka1i GermanyP 4ere not isolated socialist systems((( .hey could resort to economic calculation on the ground of the prices established abroad((( =nly because they 4ere able to refer to these foreign prices 4ere they able to calculate! to 0eep boo0s! and to prepare their much tal0ed about plans(8 6Mises ;+??! pp()%$*&7 So perhaps it is no surprise that socialist economies suffered chiefly from bad incentives rather than calculational chaos(

But this response is too facile( 3istorically! socialist countries have often acted as if they 4ere isolated! turning their bac0s on the 4orld price system( 2n other 4ords! Mises is only half right to say that Soviet planners 8utili1e the intellectual methods of the capitalist system that they fanatically condemn(8 6Mises ;+??! p($A+7 .hey freFuently heeded their o4n fanatical condemnation by deliberately pursuing proDects that Cestern accounting 4ould council against( .hat did not ma0e e istence of socialist countries 8impossible!8 and even then! incentive problems predominated(

,! -oett.e and the %eanin' of "Impossibility" and "Socialism" 3as this entire article been attac0ing a stra4 manB Some #ustrians! most notably Peter Boett0e! might be inclined to say so( 2f 4e interpret 8socialism is impossible8 as

8socialism can never e ist!8 or 8socialism necessarily collapses into famine and chaos8

then #ustrian claims sound overblo4n(

;? But Boett0e suggests that claims about

8impossibility8 can and should be understood in a subtler sense of the 4ord( Luoting Boett0e/
.he #ustrian conDecture is that socialism as traditionally defined 4as strictly spea0ing impossible because the chosen means 6social o4nership of the means of production7 is incoherent 4ith regard to the ends sought 6enhanced social cooperation and advanced material production7( .he attempt to achieve the socialist system in practice generated unintended and undesirable conseFuences from the point of vie4 of the original aspirations of socialism( 6$%%%! pp()*<@ emphasis in the original7

Kotice that on Boett0e5s account of intellectual history! the alleged ends of socialism 68enhanced social cooperation and advanced material production87 are part of the meanin$ of the 4ord 8socialism(8 # 8socialism8 unable to achieve these ends does not Fualify as 8socialism!8 no matter ho4 pervasive and long*lasting government o4nership is() 2n an intriguing footnote! Boett0e specifically attributes his interpretation to Mises himself/
Mises5s point 4as simply that in order for socialism to achieve the multiplicity of ends representative of the original aspirations of the model! it 4ould have to succeed in reali1ing the end of rationali1ing production( Mises did not deny that various models of socialism emphasi1ed different ends! but all coherent models of socialism reFuired rationali1ation of production! and it 4as this claim that Mises denied 4as possible 4ith social o4nership of the means of production( 6ibid! p(&& fn <7

2n response! 2 maintain that 6a7 Boett0e misreads Mises! and 6b7 even if Boett0e5s interpretation 4ere correct! it 4ould still face the difficulties previously discussed(

+oett e misreads Mises! Unli0e Boett0e! Mises does not insert goals li0e 8advanced material production8 into the definition of socialism( < 3e intentionally leaves the aims of
7

Boett0e confirms my reading in a directly lin0ed footnote/ 82f socialism is redefined! then of course the impossibility claim must be rela ed(8 6ibid! p(&& fn <7 %edefinition 4ould only be useful if the missing traits of 8enhanced social cooperation and advanced material production8 4ere part of the original definition of socialism(
8

#dmittedly! Mises does leave himself one definitional escape hatch because he defines socialism in polar terms/ 8O.Phere is no such thing as a mi ed economy! a system that 4ould be in part capitalistic and in part socialist((( 2f 4ithin a society based on private o4nership by the means

;) the socialist planner open! declining to 8discuss his value Dudgments and his choice of ultimate ends(8 6;+??! p(?+?7 2nstead! Mises thin0s of socialism in structural terms/
.he mar0et economy must be strictly differentiated from the second thin0able * although not reali1able * system of social cooperation under the division of labor/ the system of social or governmental o4nership of the means of production( .his second system is commonly called socialism! communism! planned economy! or state capitalism((( Production is directed by the mar0et or by the decrees of a production tsar or a committee of production tsars( 6;+??! p($A<7

Chen he elaborates! Mises continues to emphasi1e the structure of socialism! not its aspirations/
.he essential mar0 of socialism is that one will alone acts( 2t is immaterial 4hose 4ill it is( .he director may be an anointed 0ing or a dictator! ruling by virtue of his charisma! he may be a FJhrer or a board of FJhrers appointed by the vote of the people( .he main thing is that the employment of all factors of production is directed by one agency only( =ne 4ill alone chooses! decides! directs! acts! gives orders( #ll the rest simply obey orders and instructions( 6;+??! p(?+A@ emphasis in the original7

2ndeed! Mises specifically ridicules socialists for spreading 8semantic confusion(8 8OPPeople call all that they deem good and praise4orthy 5socialist(5 .he regular scheme of arguing is this/ # man arbitrarily calls anything he disli0es 5capitalistic!5 and then deduces from this appellation that the thing is bad(8+ 6Mises ;+??! p($?<7 Boett0e simply inverts these definitional games! saying! in effect! 82f 5socialism5 has bad effects! it is not really socialism( Moreover! since it has to have these bad effects! socialism strictly

of production some of these means are publicly o4ned and operated((( this does not ma0e for a mi ed system 4hich 4ould combine socialism and capitalism(8 6;+??! p($A<7 Strictly spea0ing! then! the presence of a single blac0 mar0eteer on the planet 4ould vitiate the apparent e istence of 8socialism8Q From this standpoint! the 8impossibility8 of socialism 4ould be rather trivial( .o the best of my 0no4ledge! though! Mises never made this argument(

Mises tellingly compares their linguistic gymnastics to the 4ay that the 8Ka1is used 5-e4ish5 as a synonym of both 5capitalist5 and 5bourgeois(58 6;+??! p($?<7

;< spea0ing cannot happen(8 Mises! in contrast! sees this sort of redefinition as deliberate obsfucation/
=ne deprives oneself of the semantic tools to deal adeFuately 4ith the problems of contemporary history and economic policies if one acFuiesces in a different terminology( .his faulty nomenclature becomes understandable only if 4e 4ant to prevent people from 0no4ing 4hat the mar0et economy really is( 6;+??! p($?+7

2t is 4orth adding that Mises5 concept of socialism! unli0e Boett0e5s! is consistent 4ith the standard dictionary analysis of the 4ord 6Merriam*Cebster5s Collegiate Dictionary ;++,! p(;;;,7/
so!cial!ism n 6;<&)7 ;/ any of various economic and political theories advocating collective or governmental o4nership and administration of the means of production and distribution of goods $ a/ a system of society or group living in 4hich there is no private property b/ a system or condition of society in 4hich the means of production are o4ned and controlled by the state &/ a stage of society in Mar ist theory transitional bet4een capitalism and communism and distinguished by uneFual distribution of goods and pay according to 4or0 done

Given Boett0e5s appeal to the traditional definition of socialism! it is at best curious that a good dictionary neglects to mention 8enhanced social cooperation and advanced material production8 or anything remotely li0e them( .he 8tradition8 is apparently a 4ell* 0ept secret(

2n any case! 4hen Mises moves from the semantics of socialism to its substance! he clearly means something stronger than 8socialism 4ill be unable to rationali1e production(8 2n Human Action! he emphatically insists that elimination of economic

calculation 4ould call do4n a secular apocalypse/

;+
Socialism cannot be reali1ed because it is beyond human po4er to establish it as a social system( .he choice is bet4een capitalism and chaos( # man 4ho chooses bet4een drin0ing a glass of mil0 and a glass of potassium cyanide does not choose bet4een t4o beverages@ he chooses bet4een life and death( # society that chooses bet4een capitalism and socialism does not choose bet4een t4o social systems@ it chooses bet4een social cooperation and disintegration of society( 6H! p(?<%7

2n addition! Mises deliberately spotlights the vulnerability of the standard incentive*based critiFue of socialism to t4o comebac0s( First! the socialist could admit that socialism 4ould reduce total production and therefore average consumption! but still maintain that median consumption 4ould rise due to more egalitarian distribution( #n intellectually honest socialist could assert the follo4ing/
82t may be true that *! the total net income turned out in a mar0et society! is larger than p! the total net income turned out in a socialist society( But if the socialist system assigns to each of its members an eFual share of p 6vi1(! p,-.d7! all those 4hose income in the mar0et society is smaller than d are favored by the substitution of socialism for capitalism( 2t may happen that this group of people includes the maDority of men(8 6Mises ;+??! p(?)<7

Second! the intellectually honest socialist might freely admit that total production 4ill fall so drastically due to reduced labor productivity that even the poorest 4ill be 4orse off/
8OCPe spurn the mar0et economy in spite of the fact that it supplies everybody 4ith more goods than socialism( Ce disapprove of capitalism on ethical grounds as an unfair and amoral system( Ce prefer socialism on grounds commonly called non*economic and put up 4ith the fact that it impairs everybody5s material 4ell*being(8 6ibid! p(?)+7

3e concludes/ 82t is obvious that this type of prosocialist argumentation cannot be touched by the liberal reasoning concernin$ the productivity of labor(8 6;+??! p(?)+@ emphasis added7 Chat is Mises doing hereB 3is self*conscious aim is to sho4 that the economic calculation argument succeeds where the standard incentive/based criti#ue of socialism fails( .he latter fails in Mises5 eyes precisely because! contrary to Boett0e! 8rationali1ation of production8 is not integral to 8all coherent models of socialism(8 ;%
10

Mises did of course recogni1e that socialists 4illing to give up significant material advantages

$% Mises must therefore ta0e the debate up a notch! and threaten not a lo4er standard of living! but armageddon(

2ndeed! on Boett0e5s reading of Mises! the calculation argument is superfluous( .he means of socialism is 8incoherent8 4ith regard to the ends of 8enhanced social cooperation and advanced material production8B But on Mises5 o4n account! this

Fuestion 4as as ed and answered by his predecessors/ 8Ko Dudicious man can fail to conclude from the evidence of these considerations that in the mar0et economy the productivity of labor is incomparable higher than under socialism(8 6Mises ;+??! p(?)<7 .his point can be made 4ithout any mention of economic calculation( 2t is only 4hen the socialist openly abandons the ends of 8enhanced social cooperation and advanced material production8 that the Misesian contribution has a chance to come into its o4n(

+oett e0s position is as problematic as Mises0! For the sa0e of argument! suppose you buy Boett0e5s interpretation of 8impossibility(8 Does the calculation problem really sho4 that socialism is 8impossible8 in the Boett0ean sense of the 4ordB Does it sho4 that socialism is 8incoherent 4ith regard to the ends of enhanced social cooperation and advanced material production8B

.o be fran0! this Fuestion is a little hard to ans4er because Boett0e5s language is so idiosyncratic( 2f 2 siphon a gallon of gas out of my car! is my action 8incoherent 4ith

for their ideal 4ere in the minority/ 82t cannot be denied that this haughty indifference 4ith regard to material 4ell*being is a privilege reserved to ivory*to4er intellectuals! secluded from reality! and ascetic anchorites( Chat made socialism popular 4ith the immense maDority of its supporters 4as! on the contrary! the illusion that it 4ould supply them 4ith more amenities than capitalism(8 6Mises ;+??! p(?)+7

regard to the ends of driving home and 4atching (he Simpsons8B

$; Presumably by

8incoherence 4ith regard to an end8 Boett0e means something stronger than 8ma0es success less li0ely(8 .he most natural interpretation is that 8E is incoherent 4ith respect to end T!8 means 8T 4ill certainly not happen if you do E(8

2f so! the assertion that 8socialism is incoherent 4ith regard to the ends of enhanced social cooperation and advanced material production8 is clearly false(;; :ac0 of

calculation definitely ma0es it more difficult for socialism to attain the ends of 8enhanced social cooperation and advanced material production(8 But difficult is not impossible( :et the economic calculation problem be as severe as you li0e( 2t remains conceivable that it is more than counter*balanced by other forces( .echnological progress alone might be enough to do the Dob( 8impossible8 is empty hyperbole( .hus! even on Boett0ean terms! calling socialism

=nce again! it 4ould be futile for Boett0e5s defenders to appeal to the historical record! if they 4ere so inclined( 3istory does tell us that socialism 4as a disaster( But on most readings! mine included! socialism5s horrors and the inconveniences ali0e 4ere driven by bad incentives! not lac0 of calculation( 2ndeed! socialist regimes often ignored the

information the international price system put at their disposal( .rue! one could ta0e a more agnostic vie4 of the causal mi ture underlying the failure of socialism( But

salvaging Boett0e5s position reFuires affirmative historical evidence that calculation dominates incentives( .his reFuirement remains unsatisfied(
11

Chat if Boett0e interprets 8E is incoherent 4ith respect to end T!8 to mean 8T is e1tremely unli ely to happen if you do E8B .his claim is not clearly false! but it does remain an unsupported Fuantitative Dudgment( .here 4ould be at least as much basis for claiming that 8socialism is incoherent 4ith regard to the ends of enhanced social cooperation and advanced material production8 because of reduced labor productivity( .his leaves the #ustrians 4ithout a uniFuely potent anti*socialist argument(

$$ /! Conclusion Cithout a doubt! Mises provides a novel and intellectually stimulating perspective on the economics of socialism/
.he impracticability of Socialism is the result of intellectual! not moral! incapacity( Even angels! if they 4ere endo4ed only 4ith human reason! could not form a socialistic community( 2f a socialist community 4ere capable of economic calculation! it could be set up 4ithout any change in men5s moral character( 6;+<;! p(,%)7

But ideas must be Dudged by their truth! not their entertainment value( Mises got one important point right/ socialism ma0es economic calculation impossible( But he 4as 4rong to infer that socialism itself 4as impossible( Economic theory provides no basis 4hatever for this logical leap( 2f Crusoe can survive 4ithout calculation! then economic theory cannot rule out the possibility that a much larger calculationless society can mimic Crusoe5s success(

.he collapse of Communism has led #ustrians to loudly proclaim that 8Mises 4as right(8 Tes! he 4as right that socialism 4as a terrible economic system * and only the collapse of Communism has sho4n us ho4 bad it really 4as( 3o4ever! recent history does nothing to sho4 that economic calculation 4as the insuperable difficulty of socialist economies( .here is no natural e periment of a socialist economy that suffered solely from its lac0 of economic calculation( 2ndeed! historical collectivi1ation in less*developed economies comes close to the opposite natural e periment/ since calculation had generally not ta0en root in the first place! the subseFuent dislocations must be largely chal0ed up to bad incentives( .hus! economic history as 4ell as pure economic theory fails to establish that the economic calculation problem 4as a severe challenge for socialism( 2ndeed! the bul0 of the historical record points in other directions(

$& 2n "oltaire5s )andide 6$%%%7! a philosophical optimist is finally driven to 4onder! 82f this is the best of all possible 4orlds! 4hat on earth are the others li0eB8 6p(;&7 # parallel Fuestion comes to mind 4hen Boett0e dubs economic calculation 8 the #ustrian contribution to political economy(8 2f Mises had really produced an original proof that socialism 4ould lead to armageddon! the #ustrian contribution 4ould be large( But no such proof e ists( 2f! ho4ever! Mises holds the alternate position Boett0e attributes to him! the best that the #ustrian school has to offer is an insight of modest importance(

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