Economic Calculation in the Socialist Commonwealth

by Ludwig von Mises

Production goods in a socialist commonwealth are exclusively communal; they are an inalienable property of the community, and thus res extra commercium.

Moreover, just because no production good will ever become the object of exchange, it will be impossible to determine its monetary value. Money could never fill in a socialist state the role it fills in a competitive society in determining the value of production goods. Calculation in terms of money will here be impossible.

Valuation can only take place in terms of units, yet it is impossible that there should ever be a unit of subjective use value for goods. Marginal utility does not posit any unit of value, since it is obvious that the value of two units of a given stock is necessarily greater than, but less than double, the value of a single unit. Judgments of value do not measure; they merely establish grades and scales.

Anyone who wishes to make calculations in regard to a complicated process of production will immediately notice whether he has worked more economically than others or not; if he finds, from reference to the exchange relations obtaining in the market, that he will not be able to produce profitably, this shows that others understand how to make a better use of the goods of higher order in question.

Monetary calculation has its limits. Money is no yardstick of value, nor yet of price. Value is not indeed measured in money, nor is price. They merely consist in money. Money as an economic good is not of stable value as has been naïvely, but wrongly, assumed in using it as a “standard of deferred payments.” The exchange-relationship which obtains between money and goods is subjected to constant, if (as a rule) not too violent, fluctuations originating not only from the side of other economic goods, but also from the side of money. However, these fluctuations disturb value calculations only in the slightest degree, since usually, in view of the ceaseless alternations in other economic data–these calculations will refer only to comparatively short periods of time–periods in which “good” money, at least normally, undergoes comparatively trivial fluctuations in regard to its exchange relations.

Any extension of the sphere of monetary calculation causes misunderstanding. It cannot be regarded as constituting a kind of yardstick for the valuation of goods, and cannot be so treated in historical investigations into the development of social relationships; it cannot be used as a criterion of national wealth and income, nor as a means of gauging the value of goods which stand outside the sphere of exchange, as who should seek to estimate the extent of human losses through emigrations or wars in terms of money?5 This is mere sciolistic tomfoolery, however much it may be indulged in by otherwise perspicacious economists.

It will be evident, even in the socialist society, that 1,000 hectolitres of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectolitres of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e. economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location. 7

Now, in the economic system of private ownership of the means of production, the system of computation by value is necessarily employed by each independent member of society. Everybody participates in its emergence in a double way: on the one hand as a consumer and on the other as a producer. As a consumer he establishes a scale of valuation for goods ready for use in consumption. As a producer he puts goods of a higher order into such use as produces the greatest return. In this way all goods of a higher order receive a position in the scale of valuations in accordance with the immediate state of social conditions of production and of social needs. Through the interplay of these two processes of valuation, means will be afforded for governing both consumption and production by the economic principle throughout. Every graded system of pricing proceeds from the fact that men always and ever harmonized their own requirements with their estimation of economic facts.

Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all.

Even so, we must assume that the transition to socialism must, as a consequence of the levelling out of the differences in income and the resultant readjustments in consumption, and therefore production, change all economic data in such a way that a connecting link with the final state of affairs in the previously existing competitive economy becomes impossible. But then we have the spectacle of a socialist economic order floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation. Thus in the socialist commonwealth every economic change becomes an undertaking whose success can be neither appraised in advance nor later retrospectively determined. There is only groping in the dark. Socialism is the abolition of rational economy.

Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.

Skilled labour counts only as intensified, or rather multiplied, simple labour, so that a smaller quantity of skilled labour is equal to a larger quantity of simple labour. Experience shows that skilled labour can always be reduced in this way to the terms of simple labour. No matter that a commodity be the product of the most highly skilled labour, its value can be equated with that of the product of simple labour, so that it represents merely a definite amount of simple labour. Böhm-Bawerk is not far wrong when he calls this argument “a theoretical juggle of almost stupefying naïveté.13 To judge Marx’s view we need not ask if it is possible to discover a single uniform physiological measure of all human labor, whether it be physical or “mental.” For it is certain that there exist among men varying degrees of capacity and dexterity, which cause the products and services of labor to have varying qualities.

No more is it a proof of this homogeneity that rates of substitution between simple and complex labor are manifested in the wage rate in an exchange economy–a fact to which Marx does not allude in this context. This equalizing process is a result of market transactions and not its antecedent. Calculation in terms of labor would have to set up an arbitrary proportion for the substitution of complex by simple labor, which excludes its employment for purposes of economic administration.

All socialist systems, including that of Karl Marx, and his orthodox supporters, proceed from the assumption that in a socialist society a conflict between the interests of the particular and general could not possibly arise. Everybody will act in his own interest in giving of his best because he participates in the product of all economic activity.

We cannot act economically if we are not in a position to understand economizing.

A popular slogan affirms that if we think less bureaucratically and more commercially in communal enterprises, they will work just as well as private enterprises. The leading positions must be occupied by merchants, and then income will grow apace. Unfortunately “commercial-mindedness” is not something external, which can be arbitrarily transferred. A merchant’s qualities are not the property of a person depending on inborn aptitude, nor are they acquired by studies in a commercial school or by working in a commercial house, or even by having been a business man oneself for some period of time. The entrepreneur’s commercial attitude and activity arises from his position in the economic process and is lost with its disappearance. When a successful business man is appointed the manager of a public enterprise, he may still bring with him certain experiences from his previous occupation, and be able to turn them to good account in a routine fashion for some time. Still, with his entry into communal activity he ceases to be a merchant and becomes as much a bureaucrat as any other placeman in the public employ. It is not a knowledge of bookkeeping, of business organization, or of the style of commercial correspondence, or even a dispensation from a commercial high school, which makes the merchant, but his characteristic position in the production process, which allows of the identification of the firm’s and his own interests. It is no solution of the problem when Otto Bauer in h...

That the essence of the problem to be faced has not yet come to light in Soviet Russia, Lenin’s statements in his essay on Die nächsten Aufgaben der Sowjetmacht best show. In the dictator’s deliberations there ever recurs the thought that the immediate and most pressing task of Russian communism is “the organization of bookkeeping and control of those concerns, in which the capitalists have already been expropriated, and of all other economic concerns.”23 Even so Lenin is far from realizing that an entirely new problem is here involved which it is impossible to solve with the conceptual instruments of “bourgeois” culture. Like a real politician, he does not bother with issues beyond his nose. He still finds himself surrounded by monetary transactions, and does not notice that with progressive socialization money also necessarily loses its function as the medium of exchange in general use, to the extent that private property and with it exchange disappear.

30 Statistics would only be applicable to economic calculation if it could go beyond the in natura calculation, whose ill-suitedness for this purpose we have demonstrated. It is naturally impossible where no exchange relations are formed between goods in the process of trade.

These theories are dominated by a confused conception of the primacy of objective use value. In fact, so far as economic administration is concerned, objective use value can only acquire significance for the economy through the influence it derives from subjective use value on the formation of the exchange relations of economic goods. A second confused idea is inexplicably involved–the observer’s personal judgment of the utility of goods as opposed to the judgments of the people participating in economic transactions. If anyone finds it “irrational” to spend as much as is expended in society on smoking, drinking, and similar enjoyments, then doubtless he is right from the point of view of his own personal scale of values. But in so judging, he is ignoring the fact that economy is a means, and that, without prejudice to the rational considerations influencing its pattern, the scale of ultimate ends is a matter for conation and not for cognition.

The Calculation Argument (1) Mises’s pathbreaking and central insight is that monetary calculation is the indispensable mental tool for choosing the optimum among the vast array of intricately-related production plans that are available for employing the factors of production within the framework of the social division of labor. Without recourse to calculating and comparing the benefits and costs of production using the structure of monetary prices determined at each moment on the market, the human mind is only capable of surveying, evaluating, and directing production processes whose scope is drastically restricted to the compass of the primitive household economy. The practically unlimited number of alternative plans for allocating the factors of production and the overwhelming complexities of their interrelationships stem from two related facts about our world. First, our world is endowed with a wide variety of relatively “nonspecific” resources, which to a greater or lesser degree are substitutable for one another over a broad range of production processes. Second, since human action itself implies the ineradicable scarcity of time as well as of resources, there always exists an almost inexhaustible opportunity to accumulate capital and lengthen the economy’s structure of production, thus multiplying beyond number the technical possibilities for combining the factors of production.

Thus in a market society every individual mind is accorded a dual role in determining the quantities of monetary calculation. In their consumer roles, all people make monetary bids for the existing stocks of final goods according to their subjective valuations, leading to the emergence of objective monetary exchange ratios which relate the values of all consumer goods to one another.