Front Page Titles (by Subject) APPENDIX A CONTRIBUTION TO THE CRITIQUE OF ATTEMPTS TO CONSTRUCT A SYSTEM OF ECONOMIC CALCULATION FOR THE SOCIALIST COMMUNITY - Socialism: An Economic and Sociological Analysis
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APPENDIX A CONTRIBUTION TO THE CRITIQUE OF ATTEMPTS TO CONSTRUCT A SYSTEM OF ECONOMIC CALCULATION FOR THE SOCIALIST COMMUNITY - 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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We may divide the various attempts, which have been made to think out a system of economic calculation which would work under Socialism, into two main groups. In so doing we leave out of count works based on the labour theory of value which are misleading from the very outset. The first would contain those which may be designated syndicalist constructions, the second those which try to evade the impossibility of solving the problem by assuming that economic data do not change. The error in both groups of proposals should be clear from what we have said above (pp. 97-130). The following criticism, which I have made of two typical constructions of this kind, is intended to add further elucidations.41
In an article entitled “Sozialistische Rechnungslegung” (Socialist Accounting)42 Karl Polányi has attempted to solve what he calls “the problem of socialist accounting” which is, according to him, “generally recognized to be the key problem of the socialist economy.” Polányi first admits unreservedly that he considers the solution of the problem impossible “in a central administrative economy.”43 His attempt to solve the problem is designed only for ’a functionally organized socialist transition-economy.” This is the name he gives to a type of society corresponding approximately to the ideal of the English Guild Socialists. But his concept of the nature and possibilities of his system is, unfortunately, no less nebulous and vague than that of the Guild Socialists themselves. The political community “is considered to be ’the owner of the means of production’; but no direct right of disposing of production is implied by this ownership.” This right belongs to associations of producers, elected by workers in the various branches of production. The several individual producers’ associations are to be amalgamated as the Congress of producers’ associations, which “represents the whole of production.” Confronting this is the “Commune,” as the second “functional main association of society.” The Commune is not only the political organ, but also the “real bearer of the community’s higher aims.” Each of these two functional associations exercise “within its own sphere the legislative and executive functions.” Agreements between these functional main associations constitute the highest power in society.44
Now the defect in this system is the obscurity in which it evades the central problem—Socialism or Syndicalism? With the Guild-Socialists, Polányi expressly assigns to society, to the Commune, ownership of the means of production. In doing so he seems to think he has said enough to save his system from the charge of Syndicalism. But in the next sentence he withdraws what he has said. Ownership is the right of disposal. If the right of disposal belongs not to the Commune, but to the producers’ association, these are the owners, and we have before us a syndicalist community. One or the other it must be; between Syndicalism and Socialism there can be no compromise or reconciliation. Polányi does not see this. He says: “Functional representatives (associations) of one and of the same person can never irreconcilably conflict with each other; this is the fundamental idea of every functional constitution. For the settlement of each conflict, as it arises, either joint committees of the Commune and the Producers’ Association are provided or a kind of Supreme Constitutional Court (co-ordinating organs), which has, however, no legislative power and only limited executive power (guarding law and order, etc.).”45 This fundamental idea of the functional form of constitution is, however, wrong. If the political parliament is to be formed by the votes of all citizens, with equal voting rights for each—and this condition is implied by Polányi and all other similar systems—then the parliament and the congress of producers’ associations, which is the result of an electoral structure quite differently built up, may, easily, conflict. These conflicts cannot be settled by joint committees or by law courts. The committees can settle the quarrel only if one or other of the main associations preponderates within them. If both are equally strong, the committee can come to no decision. If one of the two associations preponderates the ultimate decision lies with it. A law court cannot settle questions of political or economic practice. Law courts can give judgment only on the basis of already existing norms, which they apply to individual cases. If they are to deal with questions of utility, then they are in reality not law courts but supreme political authorities, and everything we have said about the committee is true of them.
If the final decision rests with neither the Commune nor the Congress of Producers’ Associations, the system cannot live at all. If ultimate decision lies with the Commune, we have to deal with a “central administrative economy,” and this, as even Polányi admits, could not calculate economically. If the Producers’ Associations decide, then we have a syndicalist community.
Polányi’s obscurity on this fundamental point allows him to accept a merely apparent solution as an actual workable solution of the problem. His associations and sub-associations maintain a mutual exchange-relationship; they receive and give as if they were owners. Thus a market and market-prices are formed. But because he thinks he has surmounted the unbridgeable gulf between Socialism and Syndicalism, Polányi does not perceive that this is incompatible with Socialism. We might say much more about other errors in the details of Polányi’s system. But in view of his fundamental mistake they are of little interest, as they are peculiar to Polányi’s train of thought. That fundamental mistake is, however, no peculiarity of Polányi’s; all guild socialist systems share it. Polányi has the merit of having worked out this system more clearly than most other writers. He has thus exposed its weakness more clearly. He must also be given due credit for having realized that economic calculation would be impossible in a centralized administrative economy with no markets.
Another contribution to our problem comes from Eduard Heimann.46 Heimann is a believer in an ethical or religious Socialism. But his political views do not blind him to the problem of economic calculation. In treating this, he follows the arguments of Max Weber. Max Weber had seen that this was the “absolutely central” problem for Socialism, and had shown in a detailed discussion, in which he rejected Otto Neurath’s pet dreams of “calculation in kind” (“Naturalrechnung”) that rational economic action was impossible without money and money-accounting.47 Heimann therefore tries to prove that one could calculate in a socialist economy.
Whilst Polányi proceeds from a system allied to the English guild socialists, Heimann develops proposals parallel to the German ideas for a planned economy. It is characteristic that the arguments, nevertheless, resemble Polányi’s on the only point that matters: they are regrettably vague just where they ought to be explicit about the relationship between the individual productive groups, into which the society organized according to planned economy is to be divided, and society as a whole. Thus he is able to speak of trade taking place as in a market,48 without noticing that the planned economy, completely and logically carried through, is tradeless and that what might be called buying and selling should, according to its nature, be described quite otherwise. Heimann makes this mistake because he thinks that the characteristic mark of the planned economy is above all the monopolistic amalgamation of individual branches of production, instead of the dependence of production on the unitary will of a central organ. This mistake is all the more astonishing as the very name “planned economy” and all the arguments brought forward to support it stress particularly that the economic direction would be unitary. Heimann does indeed see the hollowness of the propaganda which works with the catchword “anarchy of production.”49 But this ought never to have allowed him to forget that just this point and nothing else, is what sharply divides Socialism from Capitalism.
Like most writers who have dealt with the planned economy, Heimann does not notice that a planned economy logically carried out is nothing more than pure Socialism and differs from the strictly centrally organized socialist community only in externals. That under the unitary direction of the central authority the administration of individual branches of production is entrusted to seemingly independent departments does not alter the fact that only the central authority directs. The relations between the individual departments are settled, not on the market by the competition of buyers and sellers, but the command of authority. The problem is this: that there is no standard by which one may account and calculate the effects of these authoritarian interventions, because the central authority cannot be guided by exchange-relationships formed on a market. The authority may indeed base its calculations on substitution-relations, which it determines itself. But this decision is arbitrary; it is not based, as are market prices, on the subjective valuations of individuals and imputed to the producers’ goods by the cooperation of all those active in production and trade. Rational economic calculation cannot therefore be based upon it.
Heimann achieves an apparent solution of the problem by invoking the theory of costs. Economic calculation is to be based upon cost computations, prices are to be calculated on the basis of the average costs of production, including wages, of the works attached to the accounting-office.50 This is a solution which might have satisfied us two or three generations ago. It is not enough nowadays. If by costs we mean the loss of utility which a different use of the factors of production could have avoided, it is easy to see that Heimann is moving in a circle. In the socialist community only an order from the central authority could enable industry to use the factors of production elsewhere, and the problem is just whether this authority could calculate so as to decide upon such an order. The competition of entrepreneurs who, in a social order based on private property, try to use goods and services most profitably, is replaced in the planned economy—as in every imaginable form of socialist society—by actions-according-to-plan of the supreme authority. Now it is only by this competition between entrepreneurs, trying to wrest from each other the material means of production and the services of labour, that the prices of the factors of production are formed. Where production is to be carried on “according to plan,” that is, by a central authority to whom everything is subject, the basis of calculation of profitability vanishes; only accounting in kind remains. Heimann says: “As soon as real competition exists on the market for consumers’ goods, the price-relationships thus determined spread from there through all the stages of production, provided that pricing is effected reasonably; and this happens independently of the constitution of the parties in the markets for producers’ goods.”51 This, however, would only be the case if there were genuine competition. Heimann conceives society to be the association of a number of “monopolists,” that is, of departments of the socialist community, to each of which is entrusted the exclusive working of a delimited field of production. If these buy producers’ goods on the “market,” it is not competition, because the central authority has in advance assigned to them the field in which they are to be active and which they must not leave. Competition exists only when everyone produces what seems to promise the best profit. I have tried to show that this can only be ensured by private ownership in the means of production.
Heimann’s picture of the socialist community considers only the current transformation of raw materials into consumers’ goods; it thus creates the impression that the individual departments could proceed independently. Far more important than this part of the productive process is the renewal of capital and the investment of newly-formed capital. This is the central problem of economic calculation, not the problem of disposing of the circulating capital already in existence. One cannot base decisions of this sort, which are binding for years and decades ahead, on the momentary demand for consumers’ goods. One must look to the future, that is, one must be “speculative.” Heimann’s scheme, which enlarges or restricts production mechanically and automatically, so to speak, according to the present demand for consumers’ goods, fails here entirely. For to solve the problem of value by going back to costs would suffice only for a theoretically conceivable state of equilibrium, imaginatively conceivable but empirically non-existent. Only in such an imaginary state of equilibrium do price and costs coincide, not in a changing economy.
For this reason, in my judgment, Heimann’s attempt to solve the problem, which I submit I have shown to be unsolvable, breaks down.
[41. ]Archiv für Sozialwissenschaft, Vol. LI, pp. 490-95. Publisher’s Note: The article Mises cites here is his “Neue Beiträge Zum Problem der sozialistischen Wirtschaftsrechnung.”
[42. ]Ibid., Vol. XLIX, pp. 377-420.
[43. ]Ibid., pp. 378 and 419.
[44. ]Archiv für Sozialwissenschaft, Vol. XLIX, p. 404.
[45. ]Ibid., p. 404 n20.
[46. ]Heimann, Mehrwert und Gemeinwirtschaft, kritische und positive Beiträge zur Theorie des Sozialismus (Berlin, 1922).
[47. ]Max Weber, Wirtschaft und Gesellschaft, op. cit., pp. 45-9.
[48. ]Heimann, op. cit., pp. 184 ff.
[49. ]Ibid., p. 174.
[50. ]Heimann, op. cit., p. 185.
[51. ]Ibid., pp. 188 ff.