Front Page Titles (by Subject) CHAPTER 31: Economic Democracy - Socialism: An Economic and Sociological Analysis
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CHAPTER 31: Economic Democracy - 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 Slogan “Economic Democracy”
One of the more important arguments in favor of Socialism is that contained in the slogan “self-government by industry.” As in the political sphere the King’s absolutism was broken by the peoples’ right to share decisions and later by its sole right to decide, so the absolutism of owners of the means of production and of entrepreneurs is to be abolished by consumers and workers. Democracy is incomplete as long as everyone is obliged to submit to the dictatorship of the owners. The worst part of Capitalism is by no means inequality of income; more unbearable still is the power which it gives the capitalists over their fellow citizens. As long as this state of affairs continues there can be no personal freedom. The People must take the administration of economic matters into their own hands, just as they have taken over the government of the state.57
There is a double error in this argument. It misconceives on the one hand, the nature and function of political democracy, and on the other, the nature of the social order based on private ownership in the means of production.
We have already shown that the essence of democracy is to be found neither in the electoral system, nor in the discussions and resolutions of national councils, nor in any sort of committee appointed by these councils. These are merely the technical tools of political democracy. Its real function is to make peace. Democratic institutions make the will of the people effective in political matters, by ensuring that its rulers and administrators are elected by the people’s votes. Thus are eliminated those dangers to peaceful social development which might result from any clash between the will of the rulers and public opinion. Civil war is averted through the operation of institutions which facilitate a peaceful change of the government. In the economic order based on private ownership in the means of production no special institutions, such as political democracy has created for itself, are needed to achieve corresponding success. Free competition does all that is needed. All production must bend to the consumers’ will. From the moment it fails to conform to the consumers’ demands it becomes unprofitable. Thus free competition compels the obedience of the producer to the consumer’s will and also, in case of need, the transfer of the means of production from the hands of those unwilling or unable to achieve what the consumer demands in to the hands of those better able to direct production. The lord of production is the consumer. From this point of view the capitalist society is a democracy in which every penny represents a ballot paper. It is a democracy with an imperative and immediately revocable mandate to its deputies.58
It is a consumers’ democracy. By themselves the producers, as such, are quite unable to order the direction of production. This is as true of the entrepreneur as of the worker; both must bow ultimately to the consumers’ wishes. And it could not well be otherwise. People produce, not for the sake of production, but for the goods that may be consumed. As producer in an economy based on the division of labour, a man is merely the agent of the community and as such has to obey. Only as a consumer can he command.
The entrepreneur is thus no more than an overseer of production. He of course exercises power over the worker. But he cannot exercise it arbitrarily. He must use it in accordance with the requirements of that productive activity which corresponds to the consumers’ wishes. To the individual wage-earner whose outlook is enclosed by the narrow horizon of daily work, the entrepreneur’s decisions may seem arbitrary and capricious. Seen from too close up the shape of things lose their true significance. If the entrepreneur’s disposal of production injures the worker’s momentary interest, it is sure to seem to him unfounded and arbitrary. He will not realize that the entrepreneur works under the rule of a strict law. True, the entrepreneur is free to give full rein to his whims, to dismiss workers off hand, to cling stubbornly to antiquated processes, deliberately to choose unsuitable methods of production and to allow himself to be guided by motives which conflict with the demands of consumers. But when and in so far as he does this he must pay for it, and if he does not restrain himself in time he will be driven, by the loss of his property, into a position where he can inflict no further damage. Special means of controlling his behavior are unnecessary. The market controls him more strictly and exactingly than could any government or other organ of society.59
Every attempt to replace this rule of the consumers by a rule of producers is absurd. It would run contrary to the very nature of the productive process. We have already treated an example of this in greater detail—the example most important for modern conditions—the example of the syndicalist economy. What is true of it, is true of any producers’ policy. All economy must be a consumers’ economy. The absurdity of these endeavours to institute “economic democracy” by the creation of syndicalist institutions becomes apparent if we imagine these institutions transferred to the political field. For example, would it be democracy if judges had to decide what laws should be in force and how they should be administered? Or if soldiers had to decide at whose disposal they would place their arms and how to use them? No, judges and solders have to conform to law if the state is not to become an arbitrary despotism. The catchword “industrial self-government” is the most blatant of all misconceptions of the nature of democracy.
In the socialist community, too, it is not the workers in separate branches of production who decide what is to be done in their own particular economic territory, but the supreme authority of society. If this were not so, we should have not Socialism but Syndicalism, and between these two there is no possible compromise.
The Consumer as the Deciding Factor in Production
People sometimes maintain that in guarding their own interests entrepreneurs force production in a direction opposed to the interests of consumers. The entrepreneurs have no scruples about “creating or intensifying the public’s need for things which provide for merely sensual gratification but inflict harm on health or spiritual welfare.” For instance the fight against alcoholism, the dread menace to national health and welfare, is said to be made more difficult because of the opposition “of the vested interests of alcohol capitalism to all attempts to combat it.” The habit of smoking would not be “so widespread and so greatly on the increase among the young if economic interests played no role in promoting it.” “Luxury articles, baubles and tinsel of all kinds, trashy and obscene publications” are today “forced upon the public because the producers profit by them or hope to do so.”60 It is common knowledge that the large-scale arming of the Powers and therefore, indirectly, war itself are ascribed to the machinations of “armament-capital.”
Entrepreneurs and capitalists in search of investments turn towards those branches of production from which they hope to obtain the greatest profit. They try to fathom the future wants of consumers so as to gain a general survey of demand. As Capitalism is constantly creating new wealth for all and extending the satisfaction of wants, consumers are frequently in the position of being able to satisfy wants which formerly remained unsatisfied. Thus it becomes a special task of the capitalist entrepreneur to find out what formerly unsatisfied wants can now be provided for. This is what people have in mind when they say that Capitalism creates wants in order to satisfy them.
The nature of the things demanded by the consumer does not concern the entrepreneur and the capitalist. They are merely the obedient servants of the consumer and it is not their business to prescribe what the consumer shall enjoy. They give him poison and murderous weapons if he wants them. But nothing could be more erroneous than to suppose that products which serve a bad or harmful purpose bring in more than those which serve a good one. The highest profit is obtained from articles for which there is the most urgent demand. The profit-seeker therefore sets about producing those commodities in which there is the greatest disproportion between supply and demand. Of course, once he has invested his capital, it is to his interest to see that the demand for his product increases. He tries to expand sales. But in the long run he cannot prevail against a change of demand. Neither can he obtain much advantage from growth in the demand for his products, for new enterprises turn their attention to his branch of industry and thereby tend to reduce his profits to the average.
Mankind does not drink alcohol because there are breweries, distilleries, and vineyards; men brew beer, distil spirits, and grow grapes because of the demand for alcoholic drinks. “Alcohol-capital” has not created drinking habits any more than it has created drinking songs. The capitalists who own shares in breweries and distilleries would have preferred shares in publishing firms for devotional books, had the demand been for spiritual and not spirituous substance. “Armament capital” did not create wars; wars created “armament capital.” It was not Krupp and Schneider who incited the nations to war, but imperialist writers and politicians.
If a man thinks alcohol and nicotine harmful, let him abstain from them. Let him try, if he will, to convert his fellows to his own views on abstinence. What is certain is that he cannot, in a capitalist society, whose basic principle is the self-determination and self-responsibility of each individual, force them against their will to renounce alcohol and nicotine. If this inability to impose his will on others causes him regret, then at least he can console himself with the thought that neither is he at the mercy of the commands of others.
Some socialists reproach the capitalist social order primarily for the rich variety of its goods. Instead of producing uniform products, which could be brought out on the largest scale, people manufacture hundreds and thousands of types of each commodity, and production is made much more expensive thereby. Socialism would put at the comrades’ disposal only uniform goods; it would unify production and thereby raise national productivity. Simultaneously Socialism would dissolve separate family households, and in their place provide communal kitchens and hotel-like dwellings; this, too, would increase social wealth by eliminating the waste of labour power in tiny kitchens which serve only a few consumers. Many socialist writings, above all those of Walter Rathenau, have dealt with these ideas in great detail.61
Under Capitalism each buyer has to decide whether he prefers the cheaper uniformity of mass production or the greater expense of articles specially manufactured to suit the taste of the individual or the small group. There is unmistakably a tendency towards progressive uniformity of production and consumption through standardization. Commodities used in the productive process itself are daily becoming more standardized. The shrewd entrepreneur soon discovers the advantage of using the standard type—with its lower purchasing cost, its replaceability and adaptability to other productive processes rather than articles produced by a special process. The movement to standardize the implements of production is impeded today by the fact that numerous enterprises are indirectly or directly socialized. As they are not rationally controlled, no stress is laid on the advantage of using standard types. Army administrations, municipal building departments, State railways, and similar authorities resist, with bureaucratic obstinacy, the adoption of types in universal use. The unification of the production of machines, factory equipment and semi-finished products does not require a change to Socialism. On the contrary, Capitalism does this more quickly of its own accord.
It is otherwise with goods for use and consumption. If a man satifies his special, personal taste in preference to using the uniform products of mass production and believes that his satisfaction balances the extra cost, then one cannot objectively prove him wrong. If my friend prefers to dress, be housed, and eat as it pleases him and not to do as everyone else does, who can blame him? For his happiness lies in the satisfaction of his wishes; he wants to live as he pleases and not as I or others would live were we in his place. It is his valuation that counts, not mine or other people’s. I may be able to prove to him that the judgments on which he bases his values are false. For example I may demonstrate that the foods he consumes have a smaller nutritional value than he assumed. But if his values have been built, not on untenable views about the relation of cause and effect, but on subjective sentiments and feelings, my arguments cannot change his mind. If, notwithstanding the advantages claimed for hotel life and communal kitchens, he still prefers a separate household because such sentiments as “own home” and “own hearth” weigh with him more than arguments in favour of unitary organization, then nothing further remains to be said. If he wishes to furnish his dwelling according to his personal taste and not according to the public taste which guides the furniture manufacturer, there are no arguments with which to refute him. If, knowing the effects of alcohol, he still drinks it, because he is prepared to pay even dearly for the pleasure it gives him, I may certainly, from the standpoint of my values, call him unwise, but it is his will, his valuation that will decide. If I, as a dictator, or as a member of a despotically ruling majority, prohibit the drinking of alcohol, I do not thus raise the productivity of social production. Those who condemn alcohol would have avoided it without prohibition. For all others, the prohibition of an enjoyment which they value above anything they can obtain by renouncing it means a falling-off in satisfaction.
The contrast of productivity and profitableness, which, as we see from arguments explained in a previous chapter, is valueless for the understanding of the working of production directed to given ends, must lead definitely to false conclusions if applied to the ends of economic action.62 In dealing with means to a given end, one may call this process or that the more practical, that is, capable of a higher yield. But when we ask whether this or that means gives a greater direct increase of welfare to the individual, we have no objective standards that will serve. Here the subjective will of man is the deciding factor. A man’s preference for water, milk, or wine does not depend on the physiological effects of these drinks, but on his valuation of the effects. If a man drinks wine and not water I cannot say he is acting irrationally. At most I can say that in his place I would not do so. But his pursuit of happiness is his own business, not mine.
If the socialist community does not supply the comrades with the goods which they themselves want to enjoy, but with those which the rules think they ought to enjoy, the sum of satisfactions is not increased, but diminished. One certainly could not call this violation of the individual will “economic democracy.”
For it is an essential difference between capitalist and socialist production that under Capitalism men provide for themselves, while under Socialism they are provided for. The socialist wants to feed and house humanity and cover its nakedness. But men prefer to eat, dwell, dress and generally to seek happiness after their own fashion.
Socialism as Expression of the Will of the Majority
The number of our contemporaries who decide in favour of Socialism because the majority has already so decided is by no means negligible. “Most people want Socialism; the masses no longer support the capitalist social order, therefore we must socialize.” One hears this constantly. But it is not a convincing argument in the eyes of those who reject Socialism. Certainly if the majority want Socialism, Socialism we shall have. Nobody has shown more clearly than the liberal philosophers that there is no resisting public opinion, and that the majority decides, even when it is in error. If the majority makes a mistake, the minority must also suffer the consequences and cannot complain. Has it not been party to the error in having failed to enlighten the majority?
But in discussing what is to be, the argument that the great mass of people violently demand Socialism would be valid only if Socialism were desired as an ultimate end for its own sake. But this is by no means so. Like all other forms of social organization Socialism is only a means, not an end in itself. Those who want Socialism, like those who reject it, want well-being and happiness, and they are socialists only because they believe that Socialism is the best way to achieve this. If they were convinced that the liberal order of society was better able to fulfill their wishes they would become liberals. Therefore, the argument that one must be socialist because the masses demand Socialism is the worst possible argument against an enemy of Socialism. The will of the people is the highest law for the representatives of the people who have to execute its commands. But those who seek to direct thought must not bend to this will. Only he is a pioneer who speaks out and attempts to bring his fellow citizens to his ways of thinking, even when they differ from those generally held. This argument that one should defer to the masses is nothing else than a demand that those who still oppose Socialism by reasonable criticism should abdicate reason itself. That such an argument can be put forward only shows how far the socialization of intellectual life has already gone. In the very darkest epochs of early history, such arguments have not been used. Those who opposed the prejudices of the greatest number were never told that their opinions were false simply because the majority thought otherwise.
If Socialism is inherently impracticable the fact that everyone desires it will not enable us to accomplish it.
[57. ]“The central wrong of the Capitalist system is neither the poverty of the poor nor the riches of the rich: it is the power which the mere ownership of the instruments of production gives to a relatively small section of the community over the actions of their fellow-citizens and over the mental and physical environment of successive generations. Under such a system personal freedom becomes, for large masses of the people, little better than a mockery.... What the Socialist aims at is the substitution, for this Dictatorship of the Capitalist, of govermnet of the people by the people and for the people, in all the industries and services by which the people live.” Sidney and Beatrice Webb, A Constitution for the Socialist Commonwealth of Great Britain (London, 1920), pp. xiii ff. See also Cole, Guild Socialism Re-stated (London, 1920), pp. 12 ff.
[58. ]“The market is a democracy where every penny gives a right to vote.” Fetter, The Principles of Economics, pp. 394, 410. See also Schumpeter, Theorie der wirtschaftlichen Entwicklung (Leipzig, 1912), pp. 32 ff. Nothing is more topsy-turvy than a saying such as: “Who is less questioned at the building of a house in a large city than its future tenants?” Lenz, Macht unt Wirtshaft (Munich, 1915), p. 32. Every buider tries to build in a way that best suits the wishes of the future tenants, so that he may be able to let the buildings as quickly and profitably as possible. See also the striking remarks in Withers, The Case for Capitalism (London, 1920), pp. 41 ff.
[59. ]People overlook this entirely when, like the Webbs, A Constitution for the Socialist Commonwealth of Great Britain, p. xii, they say that the workers have to obey the orders “of irresponsible masters intent on their own pleasure or their own gain.”
[60. ]Messer, Ethik (Leipzig, 1918), pp. 111 ff.; Natorp, Sozialidealismus (Berlin, 1920), p. 13.
[61. ]Rathenau, Die neue Wirtschaft (Berlin, 1918), pp. 41 ff.; also the critique of Wiese, Freie Wirtschaft (Leipzig, 1918).
[62. ]See pp. 123 ff., 350 ff.