Economic Calculation in the Socialist Commonwealth
by Ludwig von Mises (1920)
Foreword by Yuri Maltsev
The twentieth century has witnessed the beginning, development, and end of the most tragic experiment in human history: socialism. The experiment resulted in tremendous human losses, destruction of potentially rich economies, and colossal ecological disasters. The experiment has ended, but the devastation will affect the lives and health of generations to come.
The real tragedy of this experiment is that Ludwig von Mises and his followers--among the best economic minds of this century--had exposed the truth about socialism in 1920, yet their warnings went unheeded.
In this essay, "Economic Calculation in the Socialist Commonwealth," Mises examines Marxism's most fundamental claims. In doing so, Mises exposes socialism as a utopian scheme that is illogical, uneconomic, and unworkable at its core. It is "impossible" and must fail because it is devoid of economic rationale; it provides no means for any objective basis of economic calculation and thus no way to assign resources to their most productive uses. In 1920, howeverthe enthusiasm for socialism was so strong, especially among Western intellectuals, that Mises's short and insightful masterpiece was either not understood or deliberately distorted by his critics.
Yet the actual implementation of socialism showed the complete validity of his analysis. Socialism attempted to replace billions of individual decisions made by sovereign consumers in the market with "rational economic planning" by a few vested with the power to determine the who, what, how, and when of production and consumption. It led to widespread shortages, starvation, and mass frustration of the population. When the Soviet government set 22 million prices, 460,000 wage rates, and over 90 million work quotas for 110 million government employees, chaos and shortages were the inevitable result. The socialist state destroyed work ethic, deprived people of entrepreneurial opportunity and initiative, and led to a widespread welfare mentality.
Socialism produced political monsters like Stalin and Mao Tse-Tung, and led to unheard-of crimes against humanity in all communist states. The destruction of Russia and Kampuchea, the humiliation of the Chinese and Eastern European people, are not "distortions of socialism" as the defenders of this doctrine would like to convince us: they are inevitable consequences of the destruction of the market which started with an attempt to replace the economic decisions of free individuals by the "wisdom of the planners."
The real character of the so-called centrally planned economy is well illustrated by a quip I heard several years ago by Soviet economist Nikolai Fedorenko. He said that a fully balanced, checked, and detailed economic plan for the next year would be ready, with the help of computers, in 30,000 years. There are millions of product variants; there are hundreds of thousands of enterprises; it is necessary to make billions of decisions on inputs and outputs; the plans must relate to labor force, material supplies, wages, costs, prices, "planned profits," investments, transportation, storage, and distribution. These decisions originate from different parts of the planning hierarchy. They are, as a rule, inconsistent and contradictory to each other because they reflect the conflicting interests of different strata of bureaucracy. Because the next year's plan must be ready by next year, and not in 29,999 years, it is inevitably neither balanced nor rational. And Mises proved that without private property in the means of production, even with 30,000 years of computer time, they still couldn't make socialism work.
The defenders of socialism found themselves in a theoretical and practical deadlock as soon as they destroyed the institution of private property. Thus they resorted to the creation of artificial schemes. In the Soviet economy, profit is planned as a function of the cost. Enterprises are given "control figures" which determine the "planned profits" as a percentage of the costs. Thus the more you spend, the higher your profits. Under conditions of 100% monopolization, this simple device completely ruined the economies of the Soviet Union, Eastern Europe, and other "socialist" states to an extent comparable only to the barbarian invasions of Rome.
Today, the disastrous consequences of enforcing the utopia on the unfortunate populations of the communist states are clear even to their leaders. As Mises predicted, despite the "cloud-cuckoo lands of their fancy," roasted pigeons failed to fly into the mouths of the comrades. And even according to official Soviet statistics, 234 of 277 basic consumer goods included by the USSR State Committee on Statistics in the "market basket" of the Soviet people are "missing" from the state distribution system.
Yet Western advocates of socialism are still singing the old tune about the necessity to restrict property rights and replace the market with the "wisdom" of rational central planning.
In 1920, the world neglected or rejected Mises's warning that "socialism is the abolition of rational economy." We cannot afford to repeat this mistake today. We must stay alert to all schemes that would draw us into a new round of state experimentation on the people and the economy.
"Private property of the material factors of production," Mises emphasized, "is not a restriction of the freedom of all other people to choose what suits them. It is, on the contrary, the means that assigns to the common man in his capacity as a buyer, supremacy in all economic affairs. It is the means to stimulate a nation's most enterprising men to exert themselves to the best of their abilities in the service of all of the people."
We must never again forget or ignore the insights of this great thinker, for the sake of liberty and the generations to come.
Yuri N. Maltsev
Senior Fellow, International Center for Develop-
ment Policy; The Ludwig von Mises Institute;
and Senior Researcher, Institute of Economics,
Academy of Sciences, USSR (1987-89)