Front Page Titles (by Subject) CHAPTER 11: The Impracticability of Socialism - Socialism: An Economic and Sociological Analysis
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CHAPTER 11: The Impracticability of Socialism - Ludwig von Mises, Socialism: An Economic and Sociological Analysis 
Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981).
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The Impracticability of Socialism
The Fundamental Problems of a Socialist Economy Under Conditions of Change
The preceding investigations have shown the difficulties confronting the establishment of a socialist order of society. In a socialist community the possibility of economic calculations is lacking: it is therefore impossible to ascertain the cost and result of an economic operation or to make the result of the calculation the test of the operation. This in itself would be sufficient to make Socialism impracticable. But, quite apart from that, another insurmountable obstacle stands in its way. It is impossible to find a form of organization which makes the economic action of the individual independent of the co-operation of other citizens without leaving it open to all the risks of mere gambling. These are the two problems, and without their solution the realization of Socialism appears impracticable unless in a completely stationary state.
Too little attention has hitherto been given to these fundamental questions. The first has generally been almost ignored. The reason for this is that people have not been able to get rid of the idea that labour time can afford an efficient measure of value. But even many of those who recognize that the labour theory of value is untenable continue to believe that value can be measured. The frequent attempts which have been made to discover a standard of value prove this. To understand the problem of economic calculation it was necessary to recognize the true character of the exchange relations expressed in the prices of the market.
The existence of this important problem could be revealed only by the methods of the modern subjective theory of value. In actual practice although the tendency has been all in the direction of Socialism, the problem has not become so urgent as to attract general attention.
It is quite otherwise with the second problem. The more communal enterprise extends, the more attention is drawn to the bad business results of nationalized and municipalized undertakings. It is impossible to miss the cause of the difficulty: a child could see where something was lacking. So that it cannot be said that this problem has not been tackled. But the way in which it has been tackled has been deplorably inadequate. Its organic connection with the essential nature of socialist enterprise has been regarded as merely a question of better selection of persons. It has not been realized that even exceptionally gifted men of high character cannot solve the problems created by socialist control of industry.
As far as most socialists are concerned, recognition of these problems is obstructed, not only by their rigid adherence to the labour theory of value but also by their whole conception of economic activity. They fail to realize that industry must be constantly changing: their conception of the socialist community is always static. As long as they are criticizing the capitalist order they deal throughout with the phenomena of a progressive economy and they paint in glaring colours the friction caused by economic change. But they seem to regard all change and not only the friction caused by it, as a peculiar attribute of the capitalist order. In the happy kingdom of the future everything will develop without movement or friction.
We can see this best if we think of the picture of the entrepreneur which is generally drawn by socialists. In such a picture the entrepreneur is characterized only by the special way he derives his income. Clearly any analysis of the capitalist order must take as its central point not capital nor the capitalists but the entrepreneur. But Socialism, including Marxian Socialism, sees in the entrepreneur someone alien to the process of production, someone whose whole work consists in the appropriation of surplus value. It will be sufficient to expropriate these parasites to bring about a socialist society. The recollection of the liberation of the peasants and the abolition of slavery hovers vaguely in Marx’s mind and even more so in the minds of many other socialists. But they fail to see that the position of the feudal lord was quite different from that of the entrepreneur. The feudal lord had no influence on production. He stood outside the process of production: only when it was finished did he step in with a claim to a share in the yield. But in so far as the lord of the manor and the slave owner were also leaders of production they retained their position even after the abolition of serfdom and slavery. The fact that henceforward they had to give the workers the value of their labour did not change their economic function. But the entrepreneur fulfils a task which must be performed even in a socialist community. This the Socialist does not see; or at least refuses to see.
Socialism’s misunderstanding of the entrepreneur degenerates into idiosyncrasy whenever the word speculator is mentioned. Even Marx, unmindful of the good resolutions which animated him, proceeds entirely along “petty bourgeois” lines in this connection and his school has even surpassed him. All socialists overlook the fact that even in a socialist community every economic operation must be based on an uncertain future, and that its economic consequence remains uncertain even if it is technically successful. They see in the uncertainty which leads to speculation a consequence of the anarchy of production, whilst in fact it is a necessary result of changing economic conditions.
The great mass of people are incapable of realizing that in economic life nothing is permanent except change. They regard the existing state of affairs as eternal; as it has been so shall it always be. But even if they were in a position to envision the πάντα ΄ρεῑ (everything simple or all so easy) they would be baffled by the problems to be solved. To see and to act in advance, to follow new ways, is always the concern only of the few, the leaders. Socialism is the economic policy of the crowd, of the masses, remote from insight into the nature of economic activity. Socialist theory is the precipitate of their views on economic matters—it is created and supported by those who find economic life alien, and do not comprehend it.
Among socialists only Saint-Simon realized to some extent the position of the entrepreneurs in the capitalistic economy. As a result he is often denied the name of Socialist. The others completely fail to realize that the functions of entrepreneurs in the capitalist order must be performed in a socialist community also. This is reflected most clearly in the writings of Lenin. According to him the work performed in a capitalist order by those whom he refused to designate as “working” can be boiled down to “Auditing of Production and Distribution” and “keeping the records of labour and products.” This could easily be attended to by the armed workers, “by the whole of the armed people.”91 Lenin quite rightly separates these functions of the “capitalists and clerks” from the work of the technically trained higher personnel, not however missing the opportunity to take a side thrust at scientifically trained people by giving expression to that contempt for all highly skilled work which is characteristic of Marxian proletarian snobbishness. “This recording, this exercise of audit,” he says, “Capitalism has simplified to the utmost and has reduced to extremely simple operations of superintendence and book-entry within the grasp of anyone able to read and write. To control these operations a knowledge of elementary arithmetic and the drawing of correct receipts is sufficient.”92 It is therefore possible straight-way to enable all members of society to do these things for themselves.93 This is all, absolutely all that Lenin had to say on this problem; and no socialist has a word more to say. They have no greater perception of the essentials of economic life than the errand boy, whose only idea of the work of the entrepreneur is that he covers pieces of paper with letters and figures.
It was for this reason that it was quite impossible for Lenin to realize the causes of the failure of his policy. In his life and his reading he remained so far removed from the facts of economic life that he was as great a stranger to the work of the bourgeoisie as a Hottentot to the work of an explorer taking geographical measurements. When he saw that his work could proceed no further on the original lines he decided to rely no longer on references to “armed workers” in order to compel the “bourgeois” experts to co-operate: instead they were to receive “high remuneration” for “a short transition period” so that they could set the socialist order going and thus render themselves superfluous. He even thought it possible that this would take place within a year.94
Those socialists who do not think of the socialist community as the strongly centralized organization conceived by their more clearheaded brethren and which alone is logically conceivable, believe that the difficulties confronting the management of industry can be solved by democratic institutions inside undertakings. They believe that individual industries could be allowed to conduct their operations with a certain degree of independence without endangering the uniformity and the correct co-ordination of industry. If every enterprise were placed under the control of a workers’ committee, no further difficulties could exist. In all this there is a whole crop of fallacies and errors. The problem of economic management with which we are here concerned lies much less in the work of individual industries than in harmonizing the work of individual concerns in the whole economic system. It deals with such questions as dissolving, extending, transforming and limiting existing undertakings and establishing new undertakings—matters which can never be decided by the workers of one industry. The problems of conducting an industry stretch far beyond the individual concern.
State and municipal Socialism have supplied enough unfavourable experience to compel the closest attention to the problem of economic control. But etatists in general have treated this problem no less inadequately than those who have dealt with it in Bolshevik Russia. General opinion seems to regard the main evil of communal undertakings to be due to the fact that they are not run on “business” lines. Now rightly understood this catchword could lead to a correct view on the problem. Communal enterprise does indeed lack the spirit of the business man, and the very problem for Socialism here is to create something to put in its place. But the catchword is not understood in this way at all. It is an offspring of the bureaucratic mind: that is to say it comes from people for whom all human activity represents the fulfillment of formal official and professional duties. Officialdom classifies activity according to the capacity for undertaking it formally acquired by means of examinations and a certain period of service. “Training” and “length of service” are the only things which the official brings to the “job.” If the work of a body of officials appears unsatisfactory, there can be only one explanation: the officials have not had the right training, and future appointments must be made differently. It is therefore proposed that a different training should be required of future candidates. If only the officials of the communal undertaking came with a business training, the undertaking would be more business-like. But for the official who cannot enter into the spirit of capitalist industry this means nothing more than certain external manifestations of business technique: prompter replies to inquiries, the adoption of certain technical office appliances, which have not yet been sufficiently introduced into the departments, such as typewriters, copying machines, etc., the reduction of unnecessary duplication, and other things. In this way “the business spirit” penetrates into the offices of communal enterprise. And people are greatly surprised when these men trained on these lines, also fail, fail even worse than the much-maligned civil servants, who in fact, show themselves superior at least in formal schooling.
It is not difficult to expose the fallacies inherent in such notions. The attributes of the business man cannot be divorced from the position of the entrepreneur in the capitalist order. “Business” is not in itself a quality innate in a person; only the qualities of mind and character essential to a business man can be inborn. Still less is it an accomplishment which can be acquired by study, though the knowledge and the accomplishments needed by a business man can be taught and learned. A man does not become a business man by passing some years in commercial training or in a commercial institute, nor by a knowledge of book-keeping and the jargon of commerce, nor by a skill in languages and typing and shorthand. These are things which the clerk requires. But the clerk is not a business man, even though in ordinary speech he may be called a “trained business man.”
When these obvious truths became clear in the end the experiment was tried of making entrepreneurs, who had worked successfully for many years, the managers of public enterprises. The result was lamentable. They did no better than the others; furthermore they lacked the sense for formal routine which distinguishes the life-long official. The reason was obvious. An entrepreneur deprived of his characteristic role in economic life ceases to be a business man. However much experience and routine he may bring to his new task he will still only be an official in it.
It is just as useless to attempt to solve the problem by new methods of remuneration. It is thought that if the managers of public enterprises were better paid, competition for these posts would arise and make it possible to select the best men. Many go even further and believe that the difficulties will be overcome by granting the managers a share in the profits. It is significant that these proposals have hardly ever been put in practice, although they appear quite practicable as long as public undertakings exist alongside private enterprises, and as long as the possibility of economic calculation permits the ascertainment of the result achieved by the public enterprise which is not the case under pure Socialism. But the problem is not nearly so much the question of the manager’s share in the profit, as of his share in the losses which arise through his conduct of business. Except in a purely moral sense the property-less manager of a public undertaking can be made answerable only for a comparatively small part of the losses. To make a man materially interested in profits and hardly concerned in losses simply encourages a lack of seriousness. This is the experience, not only of public undertakings but also of all private enterprises, which have granted to comparatively poor employees in managerial posts rights to a percentage of the profits.
It is an evasion of the problem to put one’s faith in the hope that the moral purification of mankind, which the socialists expect to occur when their aims are realized, will of itself make everything perfectly right. Whether Socialism will or will not have the moral effect expected from it may here be conveniently left undecided. But the problems with which we are concerned do not arise from the moral shortcomings of humanity. They are problems of the logic of will and action which must arise at all times and in all places.
Capitalism the Only Solution
But let us disregard the fact that up to now all socialist efforts have been baffled by these problems, and let us attempt to trace out the lines on which the solution ought to be sought. Only by making such an attempt can we throw any light on the question whether such a solution is possible in the framework of a socialist order of society.
The first step which would be necessary would be to form sections inside the socialist community to which the management of definite branches of business would be entrusted. As long as the industry of a socialist community is directed by one single authority which makes all arrangements and bears all the responsibility, a solution of the problems is inconceivable, because all the other workers are only acting instruments without independent delimited spheres of operation and consequently without any special responsibility. What we must aim at is precisely the possibility not only of supervising and controlling the whole process, but of considering and judging separately the subsidiary processes which take place within a narrower sphere.
In this respect at least, our procedure runs parallel to all past attempts to solve our problem. It is clear to everyone that the desired aim can be achieved only if responsibility is built up from below. We must therefore start from a single industry or from a single branch of industry. It makes no difference whether the unit with which we start is large or small since the same principle which we have once used for our division can be again used when it is necessary to divide too large a unit. Much more important than the question where and how often the division shall be made is the question how in spite of the division of industry into parts we can preserve that unity of cooperation without which a social economy is impossible.
We imagine then the economic order of the socialist community to be divided into any number of parts each of which is put in the charge of a particular manager. Every manager of a section is charged with the full responsibility for his operations. This means that the profit or a very considerable part of the profit accrues to him; on the other hand the burden of losses falls upon him, insomuch as the means of production which he squanders through bad measures will not be replaced by society. If he squanders all the means of production under his care he ceases to be manager of a section and is reduced to the ranks of the masses.
If this personal responsibility of the section manager is not to be a mere sham, then his operations must be clearly marked off from that of other managers. Everything he receives from other section managers in the form of raw materials or partly manufactured goods for further working or for use as instruments in his section and all the work which he gets performed in his section will be debited to him; everything he delivers to other sections or for consumption will be credited to him. It is necessary, however, that he should be left free choice to decide what machines, raw materials, partly manufactured goods, and labour forces he will employ in his section and what he will produce in it. If he is not given this freedom he cannot be burdened with any responsibility. For it would not be his fault if at the command of the supreme controlling authority he had produced something for which, under existing conditions, there was no corresponding demand, or if his section was handicapped because it received its material from other sections in an unsuitable condition, or, what comes to the same thing, at too high a charge. In the first event, the failure of his section would be attributable to the dispositions of the supreme control, in the latter to the failures of the sections which produced the material. But on the other hand the community must also be free to claim the same rights which it allows to the section manager. This means that it takes the products which he has produced only according to its requirements, and only if it can obtain them at the lowest rate of charge, and it charges him with the labour, which it supplies to him at the highest rate it is in a position to obtain: that is to say it supplies the labour to the highest bidder.
Society as a production community now falls into three groups. The supreme direction forms one. Its function is merely to supervise the orderly course of the process of production as a whole, the execution of which is completely detailed to the section managers. The third group is the citizens who are not in the service of the supreme administration and are not section managers. Between the two groups stand the section managers as a special group: they have received from the community once and for all at the beginning of the regime an allotment of the means of production for which they have had to pay nothing, and they continue to receive from it the labour force of the members of the third group, who are assigned to the highest bidders amongst them. The central administration which has to credit each member of the third group with everything it has received from the section managers for his labour power, or, in case it employs him directly in its own sphere of operation, with everything which it might have received from the section managers for his labour power, will then distribute the consumption goods to the highest bidders amongst the citizens of all three groups. The proceeds will be credited to the section managers who have delivered the products.
By such an arrangement of the community, the section manager can be made fully responsible for his doings. The sphere for which he bears responsibility is sharply delimited from that for which others bear the responsibility. Here we are no longer faced with the total result of the economic activity of the whole industrial community in which the contribution of one individual cannot be distinguished from that of another. The “productive contribution” of each individual section manager is open to separate judgment, as is also that of each individual citizen in the three groups.
It is clear that the section managers must be permitted to change, extend or contract their section according to the prevailing course of demand on the part of the citizens as indicated in the market for consumption goods. They must therefore be in a position to sell those means of production in their section which are more urgently required in other sections, to these other sections: and they ought to demand as much for them as they can obtain under the existing conditions....
The Foreign Relations of a Socialist Community
[91. ]Lenin, Staat und Revolution, p. 94. Publisher’s Note: p. 304 in the English edition.
[92. ]Ibid., p. 95. Publisher’s Note: pp. 304-305 in the English edition.
[93. ]Ibid., p. 96. Publisher’s Note: p. 305 in the English edition.
[94. ]Lenin, Die nächsten Aufgaben der Sowjetmacht (Berlin, 1918), pp. 16 ff.