Against Mises

The first proponent of the claim that socialist economic calculation was impossible was the economist of the Austrian school von Mises. In his book Human Action 1 he devoted a chapter to arguing against socialism. He had two main arguments: on the one hand he said that the socialists themselves could not agree on what socialism meant, on the other he tried show that economic calculation would be impossible without a market.

Chapter 1
The argument from discord

Mises notes that socialists have no uniform idea of what socialism is. Each socialist, or at least each group of socialists proclaims that only its view of socialism is right and that all others are misleaders, enemies of the people etc. Each socialist, he claims, implicitly assumes that the future socialist state will be headed by himself. True socialism is what he will decree. All other views are dangerous heresies best dealt with by the firing squad.

This seems to us to be a fairly accurate caricature of a substantial fraction of the socialist movement. Whilst the communist parties tended to have a fairly clear idea of what they wanted to achieve, based for the most part on an emulation of the USSR, other socialist parties have been loath to give a concrete view of how socialism should be organised. On all sides there has been a reluctance to examine the practical problems of organising a socialist economy.

1.1  Before the Russian revolution

Socialism arose first as philosophical movement by thinkers like Owen, and Fourier in the early 19th century.At that stage socialist thinkers were willing to advance quite detailed utopian plans for the reorganisation of society. Later it became a political movement of the working classes seeking a just society. Marx and Engels the socialist thinkers with the most lasting influence in the workers movement applauded the work of the early utopians in establishing the socialist movement. They were in particular full of praise for Owen. But they were severely critical of the utopias of later philosophers like Proudhon and Duhring. They claimed that the later utopians were pale reflections of the earlier pioneers and that their utopias were for the most part internally inconsistent.

Marx took the view that as a scientist he could not put forward detailed theories about socialism, a form of society that did not yet exist. Economic and social research had to base itself upon the data provided by real society. He was ready to identify features of contemporary capitalism that revealed the potential for a future socialised production system but not to construct a detailed theory of socialism in the absence of data. He was willing to say that capitalism had generated a class struggle that would lead ineluctably to the dictatorship of the proletariat and thence to a classless society. As to what this society would be like, he was only willing to give sketchy predictions: that it would be based on planned production rather than the market, that it would not use money, etc.

1.2  After the Russian revolution

After the Russian revolution, and in particular after the mid 30's the Communists held that Marx's views had been amply born out in practice. The dictatorship of the proletariat held sway, the economy was operated under a single plan and classes were being abolished. They had had to invent things as they went along. They had had to improvise and much of what they had done could not have been predicted in detail from Marx's writings. But this was to be expected, socialism was something born out of real life and history not the crystallisation of philosophers dreams. For the Communists, from the '30s to the '60s, if you wanted to know what socialism was you had just to look at Russia.

For other, non-communist, socialists the issue was more problematic. Although the great majority of socialists during the period from the '30s to the '50s took things at face value and accepted that Russia was socialist, there was always a minority who did not, and, in Western Europe during the last 30 years such views have probably come to represent a majority of socialist opinion.

1.2.1  The argument of the Social Democrats

From the early days of the communist revolution in Russia the Social Democratic parties in Europe argued that socialism could not be established by the methods of dictatorship that the Bolsheviks were using. They argued that the workers movement had during the previous decades struggled hard to win the franchise and for freedom of association and the press. To establish a one party dictatorship, impose censorship, imprison and execute political opponents went against everything that the movement had stood for.

Socialism they argued could only be established on the basis of a free press, free political parties and open parliamentary elections. A socialism that denied this was either not socialism or was not worth having. This is a clear and principled argument and the Social Democrats have stuck to it for seven decades. Its weakness was that the communists could simply retort: ``Who says you can't build socialism using a dictatorship. That's just parliamentary cretinism. We have tried dictatorship and it works. You tried parliament and where is your socialism?"

On economic grounds, the Social Democrats had less to say against communism. Social Democracy has a `liberal' definition of socialism both in the sense of looseness and in the Manchester sense. A mixed economy with social welfare legislation and some elements of industrial planning would certainly qualify, so their economic criticism of Soviet Communism is that it was not necessary to go so far. The economic direction was not in question, rather it was the council of moderation. Public ownership of the means of production, planning, welfare rights and an egalitarian income distribution were accepted as socialist objectives by both Communists and Social Democrats. The latter presented themselves as the democratic socialists without challenging the socialism of the latter, only their totalitarianism.

1.2.2  The argument of the Trotyskyists

Although there has been considerable overlap between Trotskyism and Social Democracy, with all Social Democratic parties worth their salt having Trotskyist fractions, their founder was a Communist and in consequence their arguments as to why the Soviet Union was not socialist start from different premises. The key points were:

  1. Socialism in one country:
    1. It is in principle impossible to build socialism in a single country.
    2. The USSR is one country.
    3. It follows that the USSR could not be socialist.
  2. The argument from plenty:
    1. Socialism is only possible in conditions of abundance when mankind passes from the real of necessity to freedom.
    2. The USSR was plagued by shortages, which in turn stem from it being an isolated country.
    3. Hence the USSR could not be socialist.

Socialism in one country

What is the `question' of socialism in one country? There seem to be not one but several possible questions. Here are some:
  1. Is socialism possible in one country?
  2. Is socialism possible in more than one country?
  3. In the long term is socialism more stable in:

    1. A single country
    2. Many countries

In short our answers to this would be 1) Yes, 2) Yes, 3) a. This may seem a bit paradoxical but our meaning will become clearer as the argument progresses.

From our perspective questions 1 and 2 are partly empirical. Only partly, because the meaning of the question still relies upon the interpretation on makes of the word country. This is commonly used to refer to a nationstate, but nations and states are not coterminous. The USSR was an international organisation of proletarian state power not a nation state in the old sense. If by country we mean explicitly a nation then it must be said that we lack empirical evidence to decide if socialism is possible in a single country. If by a country then we mean a single state power, then we have historical experience of the existence of a single socialist state from the early '30s to the late '40s. The time period given is determined by the point at which the distinguishing characteristics of a socialist economy came into being. On either definition of a country: nation, or unitary state power, then since the late 1950s it has been clear that a plurality of socialist countries can co-exist. We give the late 50s as the crucial period here, since until then the Peoples Democracies of Eastern Europe were only nominally independent state powers, Communist Parties there were the effective agents of state power and the CPs remained so tightly co-ordinated that it was doubtful that the states could really be considered as independent. China, where the CP was independent of Moscow, had not established a socialist economy in the early 50's. On the question of whether socialism is more stable in one country or several, it appears that it is more stable in one provided that by `country' one means a unitary state power. A unitary state power is better placed to present a united front to the hostile capitalist world, and best placed to coordinate the economic development of nations at different levels of development. One only has to consider what the chances of socialism's survival would have been had the USSR not been formed, and had there existed instead a multiplicity of sovereign nation-states on its current territory. The imperialist powers would undoubtedly have picked them off one by one. In the post war period, splits between socialist states: USSR/Jugoslavia or USSR/China or China/Vietnam have been exploited to disasterous effect by the USA and hamstrung socialisms economic development. In a paradoxical sense, it can be said that the abandonment of the policy of socialism in one country in the sense of a monolithic state by the communist movement in the late '40s early '50s contributed to their collapse in 1990.

The argument from plenty

The argument from plenty is convincingly dealt with by Nove 2 , we can give a brief summary of its problems here. Consider the standards of life of the working classes of Europe when Marx or even Lenin were writing. Now consider what the conception of abundance would have been then: adequate and nutritious food, warm clothing and good dry shoes, houses with good heating and sanitation, access to education, culture, literature and leisure, an 8 hour day, free medical treatment. Given the conditions of life of the 19th century British proletariat, or the workers in Czarist Russia this would have seemed abundance 3. Cars, televisions, home video cameras would not have featured. By the standards that the workers movement originally had in mind, the workers of East Germany, Czechoslovakia and to large extent the USSR were already entering into an age of abundance by the '80s4. Despite this these economies were still clearly in the thrall of scarcity. This was true whether the measure of scarcity was the presence of queues, the budgetary constraints faced by the government or the aspirations of the population for oriental luxuries. The advance of technology had given rise to new aspirations which had yet to be met. In any technically advancing world this is bound to be the case. Newly developed technologies open up possibilities that can not immediately be met in unlimited quantities. It may well be the case that in market economies advertising artificially stimulates these needs, (which is the case against advertising), but even in the absence of adverts there was no lack of demand on the black market for Sony products in the USSR. Beyond this, it is an open question as to whether the current living standard of say France could be extended to the whole world population given the ultimately limited resources of the globe. It is even questionable whether the establishment of a socialist world economy would, in the short run at least, be helpful in alleviating scarcity in the USSR. Although its national income per head is below that of the leading capitalist countries, it is still well above average by world standards. As such, it might be expected that it would have to make substantial aid contributions to socialist countries in the third world. The contributions that it made to Vietnam, Cuba, Angola etc, were already a subject of some popular resentment.

1.2.3  The argument of the Left Communists

Another school of socialist thought was the Communist Left criticised by Lenin in his pamphlet Left Wing Communism . Given his influence at the time, their views came to be largely discredited. Their most articulate theorist was Amadeo Bordiga, the founder of the Italian Communist party. Supprisingly enough, he remained politically active down to the 1960's. In 1952 Stalin published his booklet Economic Problems of Socialism in the USSR which set the terms of communist orthodox debate about the Soviet Economy. Shortly thereafter a publication by Bordiga appeared under the imprimature of the International Communist Party, called Dialogue with Stalin. In this Bordiga argued against the idea that the USSR was socialist, holding instead that its economy was a form of state capitalism. Some of his arguments parallel those of the Trotskyists, that socialism was not possible in one country and that it demanded abundance. To this he added the argument that the USSR continued to be a commodity producing society. The Marxist vision of socialism had always been one in which commodity production was abolished, he argued. But in the USSR workers still worked for money wages and payed Roubles for goods in the shops.

At a formal level he was certainly correct in this. But the difficulties involved in establishing a genuine market economy in Eastern Europe after the counter revolution of 1990 indicate that the social reality behind money and prices in these countries was somewhat different from that in the West. In the consumer goods markets, the prices bore little relation either to the amount of social labour required to produce them or to demand. In producer goods there was not really a market at all, since money alone did not suffice to ensure supply of a good if it had not been allocated in the plan. Bordiga was right in raising the existence of money and the commodity form as a potential problem, but like other left communists he was none to specific as to what alternative form of economic calculation should be used.

1.2.4  The argument of the Maoists

During the 1960s the Maoist section of the Communist Party of China started to argue that the USSR had reverted to capitalism. It was claimed that Khrushchev and then Kosygin, had taken the road to capitalism and that the USSR had passed from being a socialist state to being a social-imperialist one.

Given that the economic changes introduced by Khrushchev were fairly minimal this argument was hard to sustain. If, however, one views them as allegorical comments on an internal Chinese political debate about the appropriate way forward, then they make a lot more sense. Within China there was a fierce struggle between the Maoists and the followers of Liu Shaoqi and Deng. Liu was stigmatised as China's Khrushchev. Alternatively this can be seen as labeling Khrushchev as Russia's Liu.

If the economic policies followed by Deng after he came to power are indicative of what was being proposed in secret party debates during the '60s then the charges of `capitalist roadism' seem to have been accurate in the Chinese context. But until Gorbachov, those advocating similar measures in Russia were far from the centers of political power.

1.2.5  Summary

It is now a century and more since Marx was writing and there is much more historical evidence to go on. We have had extensive opportunities to observe societies that were by common understanding called socialist. we say by common understanding, being well aware that some people dissent from this, but whether one takes account of the constitutions of these societies, which proclaimed them to be socialist, the common view of their citizens who believed them to be socialist or the common view of the international press which declared them to be socialist that appears to have been the consensus view.

Many currents of thought in the socialist movement have dissented from this consensus, on the grounds that the conditions in countries of `actually existing' socialism violated numerous socialist ideals.

This may well be true, but as materialists we can not judge the material world by the standards of the ideal. It is not the job of reality to materialise our ideals. Reality just is in all its glories horrors and contraditions. In judging the reality of socialism by comparing it with ideals advanced by its early advocates one is adopting an unusual criterion. We do not judge feudalism or capitalism by the standards of an ideal, were we to do that we would soon find that no real capitalist society corresponded in whole to this ideal. One may note here that it was a common argument by opponents of Marxism to say that since welfare state Britain differed in many respects from the ideal type of 19th century capitalism, it was no longer really capitalist.

If one advances a theory about a class of society before it ever comes into existence the scientific status of that theory is not strong. If the predictions of the theory come to conflict with later observation one can either decide that the theory needs modification or that reality has been misbehaving. If one adopts the later policy and says that socialism has never existed anywhere in the world, one may hope ( we think vainly ) to escape the current political unpopularity of existing socialism, but one has hardly advanced ones ability to practically intervene in the contradictions that led to this unpopularity. An ideal can be kept pristine but its very distance from reality vitiates its practical political force and one is left in precisely the predicament that Marx criticised in Utopianism.

We therefore take an empirical approach to determining what have been the distinguishing characteristics of socialist society.

These seem to be the significant structural features that marked off the socialist world from the capitalist. These are also the features that the advocates of capitalism in these countries wish to abolish.

Those socialists to the left of Social Democracy who deny that socialism has ever existed do not generally specify which of them are incompatible with socialism. One has to assume that the socialist systems they advocate would share most of these features. Exceptions to this are perhaps the Bordigist International Communist Party, who argue that the continued existence of money was a decisive factor in preventing the USSR etc from ever having been socialist.

Our view is that although it is fruitless to question whether the USSR was socialist, it does not follow that one has to accept the political and economic policies followed by its government. If one abandons the utopian viewpoint and sees socialism as concrete form of society with its own contradictory forms of development, then one can start to ask just what economic and social policies should be followed in a socialist state. Any real society is fraught with contradictions, and is either destroyed by them or develops by resolving them.

By the 1930s it was widely recognised that liberal capitalism had reached a dead end and offered the world no prospect other than an appalling alternation of world war and economic recession. Not supprisingly many people concluded that only Nazism or Communism offered any hope for the future. By the 1950s that had all changed. The subordination of all other capitalist powers to the USA, keynesian economics, GATT and the IMF had transformed its prospects.

The economic contradictions of the socialist world have been evident and growing for a couple of decades. It is now as self evident that socialism is finished as it was that capitalism was finished in the '30s. As self evident and as false. Our opinion is that the crisis of socialism stems primarily from bad economic policies and can be resolved by a radical transformation of these policies. We do not put our views forward as an unvarying blueprint and anathemise every deviation from them. We do claim that they are more soundly based, and more likely to be sucessful than the economic policies followed by socialist governments in the recent past.

Chapter 2
The argument from calculation

The director 5 wants to build a house. Now, there are many methods that can be resorted to. Each of them offers, from the point of view of the director certain advantages and disadvantages with regard to the utilization of the future building, and results in a different duration of the building's serviceableness; each of them requires other expenditures of building materials and labor and absorbs other periods of production. Which method should the director chose? He cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them. He cannot attach either to the waiting time (period of production) or to the duration of serviceableness a definite numerical expression. In short, he cannot in comparing costs to be expended or gains to be earned, resort to any arithmetical operations. 6

Mises is concerned above all with the issue of the choice of techniques to be used in the production process. The claim is that only a market, by reducing all costs and benefits to the common denominator money allows rational comparison of alternative possibilities.

He reviews various possible ways in which this could be done and rejects them all.

  1. Calculation in kind is rejected because one can not add together quantities of different inputs unless one first converts them to a common unit of measurement like money. This is at first sight a reasonable argument but it involves certain presuppositions about the nature of calculation to which we will return.
  2. Calculation in terms of the labour theory of value is rejected in a single sentence:
    This suggestion does not take into account the original material factors of production and ignores the different qualities of work accomplished in the various labor-hours worked by the same and by different people. 7

    This is a somewhat brief treatment of the issue so our reply can also be concise. We have shown in other chapters that the labour theory of value does allow one to assign definite measures to the different value creating powers of labours of different degrees of skill. The essence of the method is to cost the training of workers in terms of labour also and impute this to the work they do once they have been trained. As for the failure to take into account the original material factors of production, the classical theory of rent shows how the level of differential ground rent is governed by the marginal labour costs of production. There is no reason why this calculation can not be applied directly in a socialist economy. If this basis were followed, then the resulting environmental destruction should be no worse than that routinely produced by the application of the same principle in market economies.

    Given the widespread environmental damage produced to the world's natural ecosystems from the bourgeois principle of valuing natural resources on the basis of marginal costs of production, we hope that a socialist planning agency would adopt somewhat stricter rules.

  3. He rejects the suggestion that the unit of measure be utility on the grounds that this is not directly measurable. We would agree with this.
  4. He rejects what is essentially the market socialist approach on the ground that the market is essentially the pursuit of self interest and that its effective operation implies the existence of risk taking entrepreneurs. If one accepts that the pursuit of self interest through the market is necessary for economic calculation then it is inconsistent to try and exclude the function of the entrepreneur. In the view of what has happened in USSR since Gorbachov, this was a politically astute observation. Once the socialists have conceded the virtue of the market it is hard to denounce the vice of the exploiter clothed as it now is in the shining raiment of enterprise.
  5. He argues against the use of ``the differential equations of mathematical economics'' as a technique of socialist economic calculation. It is not clear exactly which differential equations he means, but they appear to be those of comparative statics. Modern economics tends to assume that a differential equation will involve derivatives with respect to time, and thus that its function is to capture the dynamics of an economy. We assume that Mises means simply the differential calculus which is used in neo-classical economics to deduce static equilibrium conditions. The gist of his argument is that the equilibrium condition dealt with in comparative statics is an entirely abstract construction which never really occurs. The economy is constantly in a process of change and current resources available to it are always a hangover from the past unsuited to current wants.

    This is all true enough, but it does not prove that it is impossible to plan how best to use current resources to achieve a given future output. Our algorithm for plan balancing taking into account current stocks is one of probably many mathematical procedures that could be followed to achieve this end.

  6. He also rejects what he calls the method of trial and error. This is the most interesting in our current context because it bears some relationg to what we advocate.

    We may assume that in the socialist commonwealth there is a market for consumers goods and that money prices for consumers goods are determined on this market. We may assume that the director assigns periodically to every member a certain amount of money and sells the consumer goods to those bidding the highest prices. ... But the characteristic mark of the socialist system is that the producers' goods are controlled by one agency only in whose name the director acts, that they are neither bought nor sold, and that there are no prices for them. Thus there can not be any question of comparing input and output by the methods of arithmetic. 8

    This mechanism is similar to that which we advocate for the distribution of personal consumer goods. Mises again concentrates on the alleged impossibility of applying arithmetical methods to comparing inputs with outputs in the absence of markets for means of production. Our answer is simple, the planning agency knows:
    1. the labour contents of the different means of production,
    2. the number of labour tokens that each consumer good will fetch on sale to individuals
    from this it is possible to compare the social cost of producing something with the valuation put on it by consumers. Dealing with producer goods is a little more complicated. In this case we have no market to give us a measure of demand for the good, but we do have the more direct information derived from input/output analysis. We know how much of each intermediate good will be required to meet a given mix of final consumer goods. We do not need a market in intermediate goods to determine how much should be produced.

Throughout, Mises identifies calculation with arithmetic. This is understandable since commercial calculation and arithmetic have been strongly associated. Calculation 9 and arithmetical operations are practically synonymous. But calculation can be seen as a particular instance of the more general phenomenon of computation or simulation. What a control system requires is the ability to compute. This is true whether the control system in question is a set of firms operating in a market, a planning agency, an autopilot on an aircraft or a butterfly's nervous system. But it is by no means necessary for this computation to proceed by arithmetical means.

The important thing is that the control system is able to model significant aspects of the system being controlled. Firms do this by means of the procedures of stock control and accountancy in which marks on paper model the location and movement of commodities. In preparing these marks the rules of arithmetic are followed. The applicability of arithmetic to the problem relies upon number theory being a model for the properties of commodities. A butterfly in flight has to control its thoracic muscles to direct its movement towards objects, flowers or fruit, that are likely to provide it with energy sources. In doing this it has to compute which of many possible wing movements are likely to bring it nearer to nectar. As far as can be determined it performs these computations without the benefit of a training in arithmetic.

To use economic terminology the butterfly has many choices open to it. Different sequences of muscle movement have different costs in terms of energy consumption and bring different benefits in terms of nectar. Its nervous system has to try to minimise the costs and maximise the benefits using non-arithmetical methods of computation. The continued survival of butterflies is evidence of their computational proficiency. A planning agency is likely to make widespread use of arithmetic and indeed, if one wants to make localised decisions on the optimal use of resources by arithmetic means, then Mises arguments about the need to convert different products into some common denominator for purposes of calculation are correct. This is exactly the role played by labour values in our proposal: they allow engineers to have a good estimate of what is likely to be a cheap method of production.

If, however, one is wanting to perform global optimizations on the whole economy, other computational techniques having much in common with the way nervous systems are thought to work are appropriate. These can in principle be performed without resort to arithmetic. Indeed Oskar Lange pioneered such approaches in the 1950's when he constructed a hydraulic model of the Polish economy for planning purposes. Mises, like many bourgeois theorists confuses the particular historical form in which a function is carried out with its essence. He reasons that :

  1. Economies must optimize.
  2. Arithmetic allows us to construct ordering relations over numbers, which can be used for optimization.
  3. If one is to order numbers they must be of the same sort.
  4. This requires conversion into a common unit of measure.
  5. Money is a method of converting into a common unit of measure.
  6. Hence all economies need money.

The problems with this argument lie in the steps 2 and 5. While propositions 2 and 5 are true, they do not support conclusion 6. To reach that conclusion we sould need stronger claims:

2. Arithmetical orderings are the only way of achieving optimization.

5. Money is the only practical metric.

As we have shown, these stronger claims are false: there are non arithmetical methods of optimsation and money is not the only method of converting into a common unit of measure.


1 Human Action, L von Mises, 1949, Hodge and Company, London

2 Economics of Feasible Socialism , pp 15-20

3 It would still be abundance to most of the worlds population. It is easy to forget, living in Western Europe, that the norm for the world capitalist economy is Mexico city rather than Berlin, Lagos rather than Stockholm.

4 Whilst for significant sections of the population even a rich free market economy like the USA fails to provide abundance of such necessities.

5 The 'director' is von Mises term for the dictator of a socialist state: a peculiar adoption of capitalist corporate terminology that is perhaps understandable for a book published in 1940. His argument however is not dependent on the planning process being subordinated to the will of a single individual, but is more general so that for 'director' one could read: planning agency.

6 Human Action, p694

7 Human Action,p 699.

8 Human Action, p 701

9 From calculus a pebble or stone used in counting.

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