Front Page Titles (by Subject) 2: State Socialism - Socialism: An Economic and Sociological Analysis
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2: State 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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To understand the concept of State Socialism it is not sufficient to explain the term etymologically. The history of the word reflects only the fact that State Socialism was the Socialism professed by the authorities of the Prussian and other German states. Because they identified themselves with the State and with the form taken by the State and with the idea of the State generally, it suggested calling the Socialism which they adopted State Socialism. The more Marxian teaching about the class character of the State and the decay of the State obscured the fundamental idea of the State, the easier it became to use the term.
Marxian Socialism was vitally concerned in making a distinction between nationalization and socialization of the means of production. The slogans of the Social Democratic party would never have become popular if they had represented nationalization of the means of production as the ultimate aim of socialist change. For the state known to the people among whom Marxism found its widest acceptance was not such as to inspire much hope from its incursions into economic activity. The German, Austrian and Russian disciples of Marxism lived in open feud with the powers which to them represented the State. In addition they had the opportunity of gauging the results of nationalization and municipalization; and, with the best will in the world, they could not overlook the great shortcomings of state and municipal enterprise. It was quite impossible to arouse enthusiasm for a programme aiming at nationalization. A party of opposition was bound above all things to attack the hated authoritarian state; only in this way could it win over the discontented. From this need of political agitation arose the Marxian doctrine of the withering away of the state. The liberals had demanded the limitation of the authority of the state and the transfer of government to the representatives of the people; they had demanded the free state. Marx and Engels tried to outbid them by unscrupulously adopting the anarchistic doctrine of the abolition of all state authority regardless of the fact that Socialism would not mean the abolition, but rather the unrestricted expansion of the power of the state.
Equally untenable and absurd as the doctrine of the withering away of the state under Socialism is the academic distinction between nationalization and socialization which is closely bound up with it. The Marxians themselves are so conscious of the weakness of their line of argument that they usually avoid discussing this point and confine themselves to talking of the socialization of the means of production, without any further elaboration of the idea, so as to create the impression that socialization is something different from the nationalization with which everybody is acquainted. When they cannot avoid discussing this ticklish point they are obliged to admit that the nationalization of undertakings is a “preliminary stage in the acquisition of all productive powers by society itself”13 or “the natural jumping-off point in the process leading to the socialist community.”14
Thus Engels finally contents himself with entering a caveat against accepting without further ado “every” form of nationalization as socialistic. He would not in the first place describe as “steps towards Socialism,” nationalization carried out for purposes of state finance, such as might be adopted “chiefly to provide new sources of revenue independent of Parliamentary sanction.” Nevertheless for these reasons nationalization would also mean, in the Marxian language, that in one branch of production, the appropriation of surplus value by the capitalist was abolished. The same is true of nationalization carried out for political or military reasons which Engels also refused to accept as socialistic. He regards it as the criterion of socialistic nationalization that the means of production and trade taken over “should have actually out-grown the direction by joint stock companies, so that nationalization has become economically inevitable.” This necessity arises first in the case of “the large scale communications: posts, telegraphs and railways.”15 But it is precisely the largest railways in the world—the North American—and the most important telegraph lines—the deep sea cables—that have not been nationalized, whilst small unimportant lines in the etatistic countries have long been nationalized. The nationalization of the postal service moreover was primarily for political reasons and that of the railways for military ones. Can it be said that these nationalizations were “economically inevitable?” And what on earth does “economically inevitable” mean?
Kautsky, too, contents himself with rejecting the view “that every nationalization of an economic function or of an economic enterprise is a step towards Socialism and that this can be brought about by a general nationalization of the whole economic machine without the need for a fundamental change in the nature of the State.”16 But no one has ever disputed that the fundamental nature of the State would be greatly changed if it were transformed into a socialist community through the nationalization of the whole economic apparatus. Thus Kautsky is unable to say anything more than that “as long as the possessing classes are the governing classes” complete nationalization is impossible. It will be achieved when “the workers become the governing classes in the state.” Only when the proletariat has seized political power will it “transform the state into a great fundamentally self-sufficient economic society.”17 The main question—the question which alone needs an answer—whether complete nationalization carried out by another party than the socialist one would also constitute Socialism, Kautsky carefully avoids.
There is, of course, a fundamental distinction of the highest importance between the nationalization or municipalization of individual undertakings which are publicly or communally run in a society otherwise maintaining the principle of private property in the means of production, and the complete socialization which tolerates no private ownership by individuals in the means of production alongside that of the socialist community. As long as only a few undertakings are run by the State, prices for the means of production will be established in the market, and it is thus still possible for State undertakings to make calculations. How far the conduct of the undertakings would be based on the results of these calculations is another question; but the very fact that to a certain extent the results of operations can be quantitatively ascertained provides the business administration of such undertakings with a gauge which would not be available to the administration of a purely socialist community. The way in which State undertakings are run may justifiably be called bad business but it is still business. In a socialist community, as we have seen, economy in the strict sense of the word, cannot exist.18
Nationalization of all the means of production involves complete Socialism. Nationalization of some of the means of production is a step towards complete Socialism. Whether we are to remain satisfied with the first step or whether we desire to proceed further does not alter its fundamental character. In the same way, if we wish to transfer all undertakings to the ownership of the organized community we cannot do otherwise than nationalize every single undertaking, simultaneously or successively.
The obscurity thrown by Marxism on the idea of socialization was strikingly illustrated in Germany and Austria when the Social Democrats came into power in November 1918. A new and hitherto almost unheard slogan became popular overnight: Socialization (Sozialisierung) was the solution. This was merely the paraphrasing of the German word Vergesellschaftung into a fine-sounding foreign word. The idea that Sozialisierung was nothing more than nationalization or municipalization could not occur to anybody; anyone who maintained this was simply believed to know nothing about it, since it was thought that between the two things yawned an abysmal gap. The Socialization Commissions set up soon after the Social Democrats acquired power were set the problem of defining Sozialisierung in such a way that, ostensibly at least, it could be distinguished from the nationalization and municipalization of the previous regime.
The first report issued by the German commission dealt with the socialization of the coal industry, and in rejecting the idea of achieving this by the nationalization of the coal mines and the coal trade it emphasized in a striking manner the shortcomings of a national coal industry. But nothing was said as to how socialization differed actually from nationalization. The report professed the opinion that “an isolated nationalization of the coal industry cannot be considered as socialization while capitalist enterprise continues in other branches of production: it would only mean the replacement of one employer by another.” But it left open the question whether an isolated “socialization” such as it intended and proposed could mean anything else under the same conditions.19 It would have been understandable if the commission had gone on to say that in order to fulfil the happy results of a socialist order of society it was not sufficient to nationalize one branch of production, and had recommended that the State should take over all undertakings at one blow, as the Bolsheviks in Russia and Hungary had done and as the Spartacists in Germany wanted to do. But it did not do this. On the contrary, it elaborated proposals for socialization which advocated the isolated nationalization of various branches of production, beginning with coal production and distribution. That the commission avoided using the term nationalization makes no difference. It was mere juristic hair-splitting when the commission proposed that the owners of the socialized German coal industry should not be the German State but a “German public coal trust” and when it went on to assert that this ownership should be conceived “only in a formal juristic sense,” but that “the material position of the private employer and thereby the possibility of exploiting workers and consumers” is denied to this public trust,20 the commission was using the emptiest of gutter catchwords. Indeed the whole report is nothing but a collection of all the popular fallacies about the evils of the capitalist system. The only way in which the coal industry, socialized in accordance with the proposals of the majority, would differ from other public undertakings is the composition of its directorate. At the head of the coal mines there should be no single official but a committee constituted in a certain way. Parturiunt montes, nascetur ridiculus mus! (The mountain labors and a ridiculous mouse is born!)
State Socialism, therefore, is not distinguished by the fact that the State is the pivot of the communal organization, since Socialism is quite inconceivable otherwise. If we wish to understand its nature we must not look to the term itself. This would take us no further than would an attempt to grasp the concept of metaphysics from an examination of the meaning of the parts that make up the word. We must ask ourselves what ideas have been associated with the expression by those who are generally regarded as the followers of the state socialistic movements, that is, the out-and-out etatists.
Etatistic Socialism is distinguished from other socialist systems in two ways. In contradistinction to many other socialist movements which contemplate the greatest possible measure of equality in the distribution of the social income between individuals, Etatistic Socialism makes the basis of distribution the merit and rank of the individual. It is obviously superfluous to point out that judgment of merit is purely subjective and cannot in any way be tested from a scientific view of human relations. Etatism has quite definite views about the ethical value of individual classes in the community. It is imbued with a high esteem for the monarchy, the nobility, big landowners, the clergy, professional soldiers, especially the officer class, and officials. With certain reservations it also allots a privileged position to savants and to artists. Peasants and small tradesmen are in a special class and below them come the manual labourers. At the bottom are the unreliable elements which are discontented with the sphere of action and the income allotted to them by the etatist plan and strive to improve their material position. The etatist mentally arranges a hierarchy of the members composing his future state. The more noble will have more power, more honours and more income than the less noble. What is noble and what is ignoble will be decided above all by tradition. To the etatist the worst feature of the capitalist system is that it does not assign income according to his valuation of merit. That a milk dealer or a manufacturer of trouser buttons should draw a larger income than the sprig of a noble family, than a privy councillor or a lieutenant, strikes him as intolerable. In order to remedy this state of affairs the capitalist system must be replaced by the etatistic.
This attempt on the part of the etatists to maintain the traditional social order of rank and the ethical valuation of different classes, in no way contemplates transferring all property in the means of production to the formal ownership of the State. This indeed, in the etatistic view, would be a complete subversion of all historical rights. Only the large undertakings would be nationalized, and even then an exception would be made in favour of large scale agriculture, especially inherited family property. In agriculture and in small and medium-sized industries private property is to continue in name at least. In the same way the free professions will be allowed scope, with certain limitations. But all enterprises must become essentially state undertakings. The agriculturist will retain the name and title of owner, but he will be forbidden “egotistically to look merely to mercantile profit”; he has the “duty to execute the aims of the State.”21 For agriculture, according to the etatist, is a public office. “The agriculturist is a state official and must cultivate for the needs of the State according to his best knowledge and conscience, or according to state orders. If he gets his interest and sufficient to maintain himself he has everything he is entitled to demand.”22 The same applies to the artisan and the trader. For the independent entrepreneur with free control over the means of production there is as little room in State Socialism as in any other Socialism. The authorities control prices and decide what and how much shall be produced and in what way. There will be no speculation for “excessive” profit. Officials will see to it that no one draws more than the appropriate “fair income,” that is to say an income ensuring him a standard of life appropriate to his rank. Any excess will be “taxed away.”
Marxian writers are also of the opinion that to bring Socialism about, small undertakings need not necessarily be transferred directly to public ownership. Indeed they have regarded this as quite impossible; the only way in which socialization can be carried out for these small undertakings is to leave them in the formal possession of their owners and simply subject them to the all-embracing supervision of the State. Kautsky himself says that “no socialist worthy of serious consideration has ever demanded that peasants should be expropriated, let alone their property confiscated.”23 Neither does Kautsky propose to socialize small producers by expropriating their property.24 The peasant and the craftsman will be fitted into the machinery of the socialist community in such a way that their production and the valuation of their products will be regulated by the economic administration whilst nominally the property will remain theirs. The abolition of the free market will transform them from independent owners and entrepreneurs into functionaries of the socialist community, distinguished from other citizens only by the form of the remuneration.25 It cannot therefore be regarded as a peculiarity of the etatistic socialist scheme that in this way remnants of private property in the means of production formally persist. The only characteristic peculiarity is the extent to which this method of arranging the social conditions of production is applied. It has already been said that etatism in general proposes in the same way to leave the large landowners—with the exception perhaps of the latifundia owners—in formal possession of their property. What is still more important is that it proceeds upon the assumption that the greater part of the population will find work in agriculture and small concerns, and that comparatively few will enter the direct service of the State as employees in large undertakings. Not only is etatism opposed to orthodox Marxists, as represented by Kautsky, through its theory that small scale agriculture is not less productive than large scale agriculture, but it is also of the opinion that in industry too, small scale undertakings have a great scope for operation at the side of the large concerns. This is the second peculiarity which distinguishes State Socialism from other socialist systems, especially social-democracy.
It is perhaps unnecessary further to elaborate the picture of the ideal State drawn by the state socialists. Over a large part of Europe it has been for decades the tacit ideal of millions, and everyone knows it even if no one has clearly defined it. It is the Socialism of the peaceful loyal civil servant, of the land-owner, the peasant, the small producer and of countless workers and employees. It is the Socialism of the professors, the famous “socialists of the chair”—the Kathedersozialismus—it is the Socialism of artists, poets, writers in an epoch of the history of art plainly bearing all the signs of decay. It is the Socialism supported by the churches of all denominations. It is the Socialism of Caesarism and of Imperialism, the ideal of the so-called “social monarchy.” It is this that the policy of most European states, especially the German states, envisaged as the distant goal of man’s endeavours. It is the social ideal of the age which prepared the Great War26 and perished with it.
A Socialism which allots the shares of individuals in the social dividend according to merit and rank can be conceived only in the form of State Socialism. The hierarchy on which it bases its distribution is the only one popular enough not to arouse overwhelming opposition. Although it is less able to withstand rationalist criticism than many others that might be suggested, nevertheless it has the sanction of age. In so far as State Socialism attempts to perpetuate this hierarchy and to prevent any change in the scale of social relationships, the description “conservative socialism,” sometimes applied to it, is justified.27 In fact it is imbued more than any other form of Socialism with ideas that credit the possibility of complete crystallization and changelessness of economic conditions: its followers regard every economic innovation as superfluous and even harmful. And corresponding to this attitude is the method by which Etatism wishes to attain its ends. If Marxian Socialism is the social ideal of those who expect nothing except through a radical subversion of the existing order by bloody revolutions, State Socialism is the ideal of those who call in the police at the slightest sign of trouble. Marxism relies upon the infallible judgment of a proletariat filled with the revolutionary spirit, Etatism upon the infallibility of the reigning authority. They both agree in belief in a political absolutism which does not admit the possibility of error.
In contrast to State Socialism, Municipal Socialism presents no special form of the socialist ideal. The municipalization of undertakings is not regarded as a general principle on which to base a new arrangement of economic life. It would affect only undertakings with a market limited in space. In a rigorous system of State Socialism the municipal undertakings would be subordinated to the chief economic administration and would be no freer to develop than the agricultural and industrial undertakings nominally remaining in private hands.
[13. ]Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, p. 299. Publisher’s Note: p. 385 in the English edition.
[14. ]Kautsky, Das Erfurter Programm, 12th ed. (Stuttgart, 1914), p. 129.
[15. ]Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, pp. 298 ff. Publisher’s Note: p. 385n in the English edition.
[16. ]Kautsky, Das Erfurter Programm, p. 129.
[17. ]Kautsky, Das Erfurter Programm, p. 130
[18. ]See, pp. 102 ff.
[19. ]Bericht der Sozialisierungskommission über die Frage der Sozialisierung des Kohlenbergbaues vom 31 Juli 1920, with appendix: Vorläufiger Bericht vom 15 Februar 1919 2nd ed. (Berlin, 1920), pp. 32 ff.
[20. ]Bericht der Sozialisierungskommission über die Frage der Sozialisierung des Kohlenbergbaues vom 31 Juli, 1920, with appendix: Vorläufiger Bericht vom 15 Februar 1919, 2nd ed. (Berlin, 1920), p. 37. 216 245
[21. ]Philipp v. Arnim, Ideen zu einer vollständigen landwirtschaftlichen Buchhaltung, 1805, p. vi (quoted by Waltz, Vom Reinertrag in der Landwirtschaft, p. 20).
[22. ]Philipp v. Arnim, Ideen zu einer vollständigen landwirtschaftlichen Buchhaltung, 1805, p. 2 (quoted in Waltz, op. cit., p. 21). See also Lenz, Agrarlehre und Agrarpolitik der deutschen Romantik, Berlin, 1912, p. 84. See similar remarks of Prince Alois Liechtenstein, a leader of the Austrian Christian Socialists, quoted in Nitti, Le Socialisme Catholique (Paris, 1894), pp. 370 ff.
[23. ]Kautsky, Die Soziale Revolution, II, p. 33.
[24. ]Ibid., p. 35.
[25. ]Bourguin, Die sozialistischen Systeme, pp. 62 ff.
[26. ]World War I.
[27. ]Andler, Les Origines du Socialisme d’Etat en Allemagne, 2nd ed. (Paris, 1911), p. 2, specially stresses this character of state Socialism.