Front Page Titles (by Subject) 3.: The Socialist Economy - Interventionism: An Economic Analysis
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3.: The Socialist Economy - Ludwig von Mises, Interventionism: An Economic Analysis 
Interventionism: An Economic Analysis, Edited with a Foreword by Bettina Bien Greaves (Indianapolis: Liberty Fund, 2011).
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Interventionism was written by Ludwig von Mises in 1940 and is here translated from the original German by Thomas Francis McManus and Heinrich Bund. Editorial additions and index © 1998, 2011 by Liberty Fund, Inc. Interventionism was originally published in 1998 by Foundation for Economic Education, Inc.
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The Socialist Economy
In the socialist order all means of production are owned by the nation. The government decides what should be produced and how it should be produced and allots each individual a share of the consumers’ goods for his consumption.
This system might be realized according to two different patterns.
The one pattern—we may call it the Marxian or Russian pattern—is purely bureaucratic. All economic enterprises are departments of the government just as are the administrations of the army and the navy or the postal system. Every single plant, shop, or farm stands in the same relation to the superior central organization as does a post office to the postal system. The whole nation forms one single labor army with compulsory service; the commander of this army is the chief of state.
The second pattern—we may call it the German system—differs from the first one in that it, seemingly and nominally, maintains private ownership of the means of production, entrepreneurship, and market exchange. Entrepreneurs do the buying and selling, pay the workers, contract debts, and pay interest and amortization. But they are entrepreneurs in name only. The government tells these seeming entrepreneurs what and how to produce, at what prices, and from whom to buy, at what prices, and to whom to sell. The government decrees to whom and under what terms the capitalists should entrust their funds and where and at what wages laborers should work. Market exchange is but a sham. As all prices, wages, and interest rates are being fixed by the authority, they are prices, wages, and interest rates in appearance only; in reality they are merely determinations of quantity relations in authoritarian orders. The authority, not the consumers, directs production. This is socialism with the outward appearance of capitalism. The labels of the capitalistic market economy are retained, but they signify here something entirely different from what they mean in the true market economy.
We have to point out this possibility to prevent a confusion of socialism and interventionism. The system of a hampered market economy or interventionism differs from socialism by the very fact that it is still a market economy. The authority seeks to influence the market by the intervention of its coercive power, but it does not want to eliminate the market completely. It desires that production and consumption should develop along lines different from those prescribed by the unhindered market, and it wants to achieve this aim by injecting into the workings of the market, orders, commands, and prohibitions, for whose enforcement the power and constraint apparatus stand ready. But these are isolated interventions; they do not combine into a completely integrated system which regulates all prices, wages, and interest rates, and which thus places the direction of production and consumption in the hands of the authority.
It is not the task of this essay to raise the question whether a socialist economy is feasible. The subject matter of our analysis is interventionism, not socialism. Consequently, it is only incidentally that we point out that socialism is unworkable as a universal economic system, because a socialist society would not be able to make rational calculations in economic matters. The economic calculation which we use in the capitalistic economy is based on market prices, which are formed in the market for all goods and services, consequently for producers’ goods and for labor services as well. Only money prices make it possible to bring costs which originate through the expenditure of various goods and different qualities of labor to a common denominator so they may be compared with prices which were realized or which can be realized on the market. Thus it is possible to establish, in definite figures, the probable effect of a planned action and to know the actual effect of actions carried out in the past. In a socialist economy which does not have prices for producers’ goods—there being no market for the means of production because they are all owned by the state—the opportunity to make such calculations would not exist.
Let us assume, for instance, that the government of a socialist country would want to build a house. The house may be built of brick or wood, stone, concrete, or steel. Each of these ways offers, as seen from the point of view of the evaluating government, various advantages, requires different expenditures of labor and materials, and requires a different production period. On which method will the government decide? It cannot reduce the different expenditures of labor and materials of various kinds to a common denominator and, therefore, cannot compare them. It cannot make either the construction period or the use period play a calculable part in its considerations. Therefore it cannot compare expenditures and benefits, costs and returns. It does not know whether or not its decisions concerning its use of the factors of production are rational from the standpoint of its own valuation of consumers’ goods.
Around the middle of the [nineteenth] century, for example, the suggestion might have been presented to such a government to restrict sheep-rearing considerably in Europe and to find a new location for it in Australia. Or the suggestion might have been made to replace horse power with steam power. What means did the government have at its disposal to ascertain whether these and other innovations were advantageous from an economic standpoint?
Yes, say the socialists, but capitalistic calculation is not infallible either; the capitalist too may err. Certainly, this has happened before and will happen again, because all economic activity looks toward the future, and the future is always unknown. All plans become futile when the expectations with regard to future developments are not fulfilled. But this objection is beside the point. Today, we calculate from the standpoint of our present knowledge and from the standpoint of our present expectations about the future. The problem does not lie in the fact that the government may err because it may misjudge the future, but rather in its inability to make calculations even from the standpoint of its present valuations and expectations. If, for instance, a government proceeds with the erection of tuberculosis hospitals it may discover later, when a simpler and more efficient means of combating the disease is found, that it invested capital and labor unwisely. But the crux of the problem is: How can the government know today how to build such hospitals in the most economical way?
Some railways would not have been built around 1900 if one could have foreseen, at that time, the development of motor traffic and aviation. But the entrepreneur who built railways then knew which among the construction alternatives he had to choose from the standpoint of his valuations and expectations at that time, and on the basis of market prices reflecting entrepreneurial evaluations of prospective demand. But this is exactly what the government of a socialist community will not know. It will be like the captain of a ship trying to sail the high seas without the resources of science or art of navigation.
We have presupposed that the government has decided to undertake a certain project. But even to arrive at this decision requires economic calculation. The decision in favor of building a power plant can only be made when it is established that this project would not divert means of production from more urgent uses. How shall this be ascertained without calculation?