Ludwig von Mises, “The Impossibility of Economic Calculation under Socialism” (1922)
Note: This extract is part of The OLL Reader: An Anthology of the Best of the OLL, the table of contents of which can be found here. It is from "Part X: The Critique of Socialism and Interventionism".
For more information on socialism see:
- Socialism: A Study Guide and Reader
- Topic: Socialism and the Classical Liberal Critique
- People: School of Thought: Socialism
- Debate: Fabian Socialism vs. Radical Liberalism
Ludwig von Mises, Socialism: An Economic and Sociological Analysis, trans. J. Kahane, Foreword by F.A. Hayek (Indianapolis: Liberty Fund, 1981).
- "CHAPTER 6: The Organization of Production Under Socialism </titles/1060#lf0069_label_347>.
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CHAPTER 6: The Organization of Production Under Socialism
1: The Socialization of the Means of Production
Under Socialism all the means of production are the property of the community. The community alone disposes of them and decides how to use them in production. The community produces, the products accrue to the community, and the community decides how those products are to be used.
Modern socialists, espcially those of the Marxian persuasion, lay great emphasis on designating the socialist community as Society, and therefore on describing the transfer of the means of production to the control of the community as the "Socialization of the means of production." In itself the expression is unobjectionable but in the connection in which it is used it is particularly designed to obscure one of the most important problems of Socialism.
The word "society," with its corresponding adjective "social," has three separate meanings. It implies, first, the abstract idea of social interrelationships, and secondly, the concrete conception of a union of the individuals themselves. Between these two sharply different meanings, a third has been interposed in ordinary speech: the abstract society is conceived as personified in such expressions as "human society," "civil society."
Now Marx uses the term with all these meanings. This would not matter as long as he made the distinction quite clear. But he does just the opposite. He interchanges them with a conjurer's skill whenever it appears to suit him. When he talks of the social character of capitalistic production he is using social in its abstract sense. When he speaks of the society which suffers during crises he means the personified society of mankind. But when he speaks of the society which is to expropriate the expropriators and socialize the means of production he means an actual social union. And all the meanings are interchanged in the links of his argument whenever he has to prove the unprovable. The reason for all this is in order to avoid using the term State or its equivalent, since this word has an unpleasant sound to all those lovers of freedom and democracy, whose support the Marxian does not wish to alienate at the outset. A programme which would give the State the general responsibility and direction of all production has no prospect of acceptance in these circles. It follows that the Marxist must continually find a phraseology which disguises the essence of the programme, which succeeds in concealing the unbridgeable abyss dividing democracy and Socialism. It does not say much for the perception of men who lived in the decades immediately preceding the World War that they did not see through this sophistry.
The modern doctrine of the state understands by the word "State" an authoritative unit, an apparatus of compulsion characterized not by its aims but by its form. But Marxism has arbitrarily limited the meaning of the word State, so that it does not include the Socialistic State. Only those states and forms of state organization are called the State which arouse the dislike of the socialist writers. For the future organization to which they aspire the term is rejected indignantly as dishonourable and degrading. It is called "Society." In this way the Marxian social democracy could at one and the same time contemplate the destruction of the existing State machine, fiercely combat all anarchistic movements, and pursue a policy which led directly to an all powerful state.14
Now it does not matter in the least what particular name is given to the coercive apparatus of the socialistic community. If we use the word "State" we have a term in common use, except in the quite uncritical Marxian literature, an expression which is generally understood and which evokes the idea it is intended to evoke. But there is no disadvantage in avoiding this term if we wish, since it arouses mixed feelings in many people, and in substituting the expression "community." The choice of terminology is purely a matter of style, and has no practical importance.
What is important is the problem of the organization of this socialistic State or community. When dealing with the concrete expression of the will of the State, the English language provides a more subtle distinction by permitting us to use the term government instead of the term state. Nothing is better designed to avoid the mysticism which in this connection has been fostered by Marxian usages to the highest degree. For the Marxists talk glibly about expressing the will of society, without giving the slightest hint how 'society' can proceed to will and act. Yet of course the community can only act through organs which it has created.
Now it follows from the very conception of the socialistic community that the organ of control must be unitary. A socialist community can have only one ultimate organ of control which combines all economic and other governmental functions. Of course this organ can be subdivided and there can be subordinate offices to which definite instructions are transmitted. But the unitary expression of the common will, which is the essential object of the socialization of the means of production and of production, necessarily implies that all offices entrusted with the supervision of different affairs shall be subordinate to one office. This office must have supreme authority to resolve all variations from the common purpose and unify the executive aim. How it is constituted, and how the general will succeeds in expressing itself in and by it, is of minor importance in the investigation of our particular problem. It does not matter whether this organ is an absolute prince or an assembly of all citizens organized as a direct or indirect democracy. It does not matter how this organ conceives its will and expresses it. For our purpose we must consider this as accomplished and we need not spend any time over the question how it can be accomplished, whether it can be accomplished or whether Socialism is already doomed because it cannot be accomplished.
At the outset of our inquiry we must postulate that the socialistic community is without foreign relations. It embraces the whole world and its inhabitants. If we conceive it as limited, so that it comprises only a part of the world and the inhabitants therein, we must assume that it has no economic relations with the territories and peoples outside its boundaries. We are to discuss the problem of the isolated socialistic community. The implications of the contemporaneous existence of several socialistic communities will be dealt with when we have surveyed the problem in complete generality.
2: Economic Calculation in the Socialist Community
The theory of economic calculation shows that in the socialistic community economic calculation would be impossible.
In any large undertaking the individual works or departments are partly independent in their accounts. They can reckon the cost of materials and labour, and it is possible at any time for an individual group to strike a separate balance and to sum up the results of its activity in figures. In this way it is possible to ascertain with what success each separate branch has been operated and thereby to make decisions concerning the reorganization, limitations or extension of existing branches or the establishment of new ones. Some mistakes are of course unavoidable in these calculations. They arise partly from the difficulty of allocating overhead costs. Other mistakes again arise from the necessity of calculating from insufficiently determined data, as, e.g. when in calculating the profitability of a certain process, depreciation of the machinery employed is determined by assuming a certain working life for the machine. But all such errors can be confined within certain narrow limits which do not upset the total result of the calculation. Whatever uncertainty remains is attributed to the uncertainty of future conditions inevitable in any imaginable state of affairs.
It seems natural then to ask why individual branches of production in a socialistic community should not make separate accounts in the same manner. But this is impossible. Separate accounts for a single branch of one and the same undertaking are possible only when prices for all kinds of goods and services are established in the market and furnish a basis of reckoning. Where there is no market there is no price system, and where there is no price system there can be no economic calculation.
Some may think that it is possible to permit exchange between the different groups of undertakings so as to establish a system of exchange relations (prices) and in this way create a basis for economic calculation in the socialistic community. Thus within a framework of a unitary economic system which does not recognize private property in the means of production, individual branches of industry with separate administration could be set up, subject of course, to the supreme economic authority, but able to transfer to each other goods and services for a consideration reckoned in a common medium of exchange. This, roughly, is how people conceive the productive organization of socialistic industry when they speak nowadays of complete socialization and the like. But here again the decisive point is evaded. Exchange relations in productive goods can only be established on the basis of private property in the means of production. If the Coal Syndicate delivers coal to the Iron Syndicate a price can be fixed only if both syndicates own the means of production in the industry. But that would not be Socialism but Syndicalism.
For those socialist writers who accept the labour theory of value the problem is, of course, quite simple.
"As soon," says Engels, "as Society has taken possession of the means of production and applies them to direct social production the labour of everyone, however different its specific use may be, will immediately become direct social labour. The amount of social labour inherent in any product does not require to be ascertained in any roundabout way: everyday experience will show how much of it on the average is necessary. Society can easily reckon how many hours of labour inhere in a steam engine, in a hectolitre of wheat of the last harvest, in a hundred square metres of cloth of a certain quality. Of course society will have to find out how much work is required for the manufacture of every article of consumption. It will have to base its plans on a consideration of the means of production at its disposal—and of course the labour force falls into this category. The utility of the different objects of consumption weighed against one another and against the labour necessary for their production will finally determine the plan. The people will decide everything quite easily without the intervention of the much-vaunted value."15
It is not part of our business here to restate the critical arguments against the labour theory of value. They interest us at this point only in so far as they enable us to judge the possibility of making labour the basis of economic calculation in a socialistic community.
At first sight it would appear that calculations based on labour take into account the natural conditions of production, as well as conditions arising from the human element. The Marxian concept of the socially necessary labour time takes the law of diminishing returns into consideration in so far as it results from different natural conditions of production. If the demand for a commodity increases and less favourable natural conditions have to be exploited, then the average socially necessary time for the production of a unit also increases. If more favourable conditions of production are discovered then the necessary quantum of social labour declines.16 But this is not enough. Computation of changes in marginal labour costs only take account of natural conditions in so far as they influence labour costs. Beyond that, the "labour" calculation breaks down. It leaves, for instance, the consumption of material factors of production entirely out of account. Suppose the socially necessary labour time for producing two commodities P and Q is ten hours, and that the production of a unit both of P and of Q requires material A, one unit of which is produced by one hour of socially necessary labour, and that the production of P involves two units of A and eight hours of labour, and of Q one unit of A and nine hours of labour. In a calculation based on labour time P and Q are equivalent, but in a calculation based on value P must be worth more than Q. The former calculation is false. Only the latter corresponds to the essence and object of economic calculation. It is true that this surplus by which the value of P exceeds that of Q, this material substratum, "is furnished by nature without the help of man,"17 but provided it is present only in such quantities that it becomes an economic factor it must also in some form enter into economic calculation.
The second deficiency of the labour calculation theory is that it disregards differences in the quality of labour. For Marx all human labour is economically homogeneous, because it is always the "productive expenditure of human brain, muscles, nerves, hands, etc." "Skilled labour is only intensified, or rather multiplied simple labour, so that a small quantity of skilled labour equals a larger quantity of simple labour. Experience shows that this resolution of skilled into simple constantly happens. A commodity may be the product of highly skilled labour, but its value equates it to the product of simple labour and represents only a certain quantity of simple labour."18 Böhm-Bawerk was justified in describing this argument as a masterpiece of astounding naivety.19 In criticizing it one may conveniently leave undecided whether one can discover a unitary physiological measure of all human labour, physical as well as "mental." For it is certain that between men themselves there are differences of capability and skill which result in differing qualities of the goods and services produced. What is ultimately decisive for the solution of the problem of the feasibility of using labour as a basis of economic calculation is the question whether one can assimilate different kinds of work to a common denominator without a valuation of the products by the consumer. It is clear that the argument which Marx brings to bear on this point has failed. Experience does indeed show that commodities enter into exchange regardless of the question whether they are the products of skilled or simple labour. But this would only prove that a definite quantity of simple labour is equal to a definite quantity of skilled labour if it were proved that labour is the source of exchange value. But not only is this unproven; it is exactly what Marx originally set out to prove. The fact that in exchange a substitute relation between simple and skilled labour has arisen in the form of wage rates—a point to which Marx does not here allude—is not in the least a proof of this homogeneity. This process of equating is a result of the working of the market, not its presupposition. Calculations based on labour cost rather than on monetary values would have to establish a purely arbitrary relation by which to resolve skilled into simple labour, and this would make them useless as an instrument for the economic organization of resources.
It was long thought that the labour theory of value provided a necessary ethical basis for the demand to socialize the means of production. We know now that this was an error. Although the majority of socialists have adopted this view and although even Marx with his professedly non-ethical standpoint could not shake it off, it is clear that, on the one hand, the political demands for the introduction of the socialistic method of production neither need nor receive support from the labour theory of value, and, on the other hand, that those who hold different views on the nature and cause of value can also have socialistic tendencies. But from another point of view, the labour theory of value is still an essential dogma for the advocates of the socialistic method of production. For socialistic production in a society based on division of labour seems practicable only if there is an objective recognizable unit of value which would enable economic calculations to be made in an exchangeless and moneyless community and labour seems the only thing to serve this purpose.
3: Recent Socialist Doctrines and the Problems of Economic Calculation
The problem of economic calculation is the fundamental problem of Socialism. That for decades people could write and talk about Socialism without touching this problem only shows how devastating were the effects of the Marxian prohibition on scientific scrutiny of the nature and working of a socialist economy.20
To prove that economic calculation would be impossible in the socialist community is to prove also that Socialism is impracticable. Everything brought forward in favour of Socialism during the last hundred years, in thousands of writings and speeches, all the blood which has been spilt by the supporters of Socialism, cannot make socialism workable. The masses may long for it ever so ardently, innumerable revolutions and wars may be fought for it, still it will never be realised. Every attempt to carry it out will lead to syndicalism or, by some other route, to chaos, which will quickly dissolve the society, based upon the division of labour, into tiny autarkous groups.
The discovery of this fact is clearly most inconvenient for the socialist parties, and socialists of all kinds have poured out attempts to refute my arguments and to invent a system of economic calculation for Socialism. They have not been successful. They have not produced a single new argument which I have not already taken account of.21 Nothing has shaken the proof that under Socialism economic calculation is impossible.22
The attempt of the Russian Bolsheviks to transfer Socialism from a party programme into real life has not encountered the problem of economic calculation under Socialism, for the Soviet Republics exist within a world which forms money prices for all means of production. The rulers of the Soviet Republics base the calculations on which they make their decisions on these prices. Without the help of these prices their actions would be aimless and planless. Only so far as they refer to this price system, are they able to calculate and keep books and prepare their plans. Their position is the same as the position of the state and municipal Socialism of other countries: the problem of socialist economic calculation has not yet arisen for them. State and municipal enterprises calculate with those prices of the means of production and of consumption goods which are formed on the market. Therefore it would be precipitate to conclude from the fact that municipal and state enterprises exist, that socialist economic calculation is possible.
We know indeed that socialist enterprises in single branches of production are practicable only because of the help they get from their non-socialist environment. State and municipality can carry on their own enterprises because the taxes which capitalist enterprises pay, cover their losses. In a similar manner Russia, which left to herself would long ago have collapsed, has been supported by finance from capitalist countries. But incomparably more important than this material assistance, which the capitalist economy gives to socialist enterprises, is the mental assistance. Without the basis for calculation which Capitalism places at the disposal of Socialism, in the shape of market prices, socialist enterprises would never be carried on, even within single branches of production or individual countries.
Socialist writers may continue to publish books about the decay of Capitalism and the coming of the socialist millennium: they may paint the evils of Capitalism in lurid colours and contrast with them an enticing picture of the blessings of a socialist society; their writings may continue to impress the thoughtless—but all this cannot alter the fate of the socialist idea.23 The attempt to reform the world socialistically might destroy civilization. It would never set up a successful socialist community.
4: The Artificial Market as the Solution of the Problem of Economic Calculation
Some of the younger socialists believe that the socialist community could solve the problem of economic calculation by the creation of an artificial market for the means of production. They admit that it was an error on the part of the older socialists to have sought to realize Socialism through the suspension of the market and the abolition of pricing for goods of higher orders; they hold that it was an error to have seen in the suppression of the market and of the price system the essence of the socialistic ideal. And they contend that if it is not to degenerate into a meaningless chaos in which the whole of our civilization would disappear, the socialist community equally with the capitalistic community, must create a market in which all goods and services may be priced. On the basis of such arrangements, they think, the socialist community will be able to make its calculations as easily as the capitalist entrepreneurs.
Unfortunately the supporters of such proposals do not see (or perhaps will not see) that it is not possible to divorce the market and its functions in regard to the formation of prices from the working of a society which is based on private property in the means of production and in which, subject to the rules of such a society, the landlords, capitalists and entrepreneurs can dispose of their property as they think fit. For the motive force of the whole process which gives rise to market prices for the factors of production is the ceaseless search on the part of the capitalists and the entrepreneurs to maximize their profits by serving the consumers' wishes. Without the striving of the entrepreneurs (including the shareholders) for profit, of the landlords for rent, of the capitalists for interest and the labourers for wages, the successful functioning of the whole mechanism is not to be thought of. It is only the prospect of profit which directs production into those channels in which the demands of the consumer are best satisfied at least cost. If the prospect of profit disappears the mechanism of the market loses its mainspring, for it is only this prospect which sets it in motion and maintains it in operation. The market is thus the focal point of the capitalist order of society; it is the essence of Capitalism. Only under Capitalism, therefore, is it possible; it cannot be "artificially" imitated under Socialism.
The advocates of the artificial market, however, are of the opinion that an artificial market can be created by instructing the controllers of the different industrial units to act as if they were entrepreneurs in a capitalistic state. They argue that even under Capitalism the managers of joint stock companies work not for themselves but for the companies, that is to say, for the shareholders. Under Socialism, therefore, it would be possible for them to act in exactly the same way as before, with the same circumspection and devotion to duty. The only difference would be that under socialism the product of the manager's labours would go to the community rather than to the shareholders. In such a way, in contrast to all socialists who have written on the subject hitherto, especially the Marxians, they think it would be possible to construct a decentralized, as opposed to a centralized, Socialism.
In order to judge properly such proposals, it is necessary in the first place to realize that these controllers of individual industrial units would have to be appointed. Under Capitalism the managers of the joint stock companies are appointed either directly or indirectly by the shareholders. In so far as the shareholders give to the managers power to produce by the means of the company's (i.e. the shareholders') stock they are risking their own property or a part of their own property. The speculation (for it is necessarily a speculation) may succeed and bring profit; it may, however, misfire and bring about the loss of the whole or a part of the capital concerned. This committing of one's own capital to a business whose outcome is uncertain and to men whose future ability is still a matter of conjecture whatever one may know of their past, is the essence of joint stock company enterprise.
Now it is a complete fallacy to suppose that the problem of economic calculation in a socialist community relates solely to matters which fall into the sphere of the daily business routine of managers of joint stock companies. It is clear that such a belief can only arise from exclusive concentration on the idea of a stationary economic system—a conception which no doubt is useful for the solution of many theoretical problems but which has no counterpart in fact and which, if exclusively regarded, can even be positively misleading. It is clear that under stationary conditions the problem of economic calculation does not really arise. When we think of the stationary society, we think of an economy in which all the factors of production are already used in such a way as, under the given conditions, to provide the maximum of the things which are demanded by consumers. That is to say, under stationary conditions there no longer exists a problem for economic calculation to solve. The essential function of economic calculation has by hypothesis already been performed. There is no need for an apparatus of calculation. To use a popular but not altogether satisfactory terminology we can say that the problem of economic calculation is of economic dynamics: it is no problem of economic statics.
The problem of economic calculation is a problem which arises in an economy which is perpetually subject to change, an economy which every day is confronted with new problems which have to be solved. Now in order to solve such problems it is above all necessary that capital should be withdrawn from particular lines of production, from particular undertakings and concerns and should be applied in other lines of production, in other undertakings and concerns. This is not a matter for the managers of joint stock companies, it is essentially a matter for the capitalists—the capitalists who buy and sell stocks and shares, who make loans and recover them, who make deposits in the banks and draw them out of the banks again, who speculate in all kinds of commodities. It is these operations of speculative capitalists which create those conditions of the money market, the stock exchanges and the wholesale markets which have to be taken for granted by the manager of the joint stock company, who, according to the socialist writers we are considering, is to be conceived as nothing but the reliable and conscientious servant of the company. It is the speculative capitalists who create the data to which he has to adjust his business and which therefore gives direction to his trading operations.
It follows therefore that it is a fundamental deficiency of all these socialistic constructions which invoke the "artificial market" and artificial competition as a way out of the problem of economic calculation, that they rest on the belief that the market for factors of production is affected only by producers buying and selling commodities. It is not possible to eliminate from such markets the influence of the supply of capital from the capitalists and the demand for capital by the entrepreneurs, without destroying the mechanism itself.
Faced with this difficulty, the socialist is likely to propose that the socialist state as owner of all capital and all means of production should simply direct capital to those undertakings which promise the highest return. The available capital, he will contend, should go to those undertakings which offer the highest rate of profit. But such a state of affairs would simply mean that those managers who were less cautious and more optimistic would receive capital to enlarge their undertakings while more cautious and more skeptical managers would go away empty-handed. Under Capitalism, the capitalist decides to whom he will entrust his own capital. The beliefs of the managers of joint stock companies regarding the future prospects of their undertakings and the hopes of project-makers regarding the profitability of their plans are not in any way decisive. The mechanism of the money market and the capital market decides. This indeed is its main task: to serve the economic system as a whole, to judge the profitability of alternative openings and not blindly to follow what the managers of particular concerns, limited by the narrow horizon of their own undertakings, are tempted to propose.
To understand this completely, it is essential to realise that the capitalist does not just invest his capital in those undertakings which offer high interest or high profit; he attempts rather to strike a balance between his desire for profit and his estimate of the risk of loss. He must exercise foresight. If he does not do so then he suffers losses—losses that bring it about that his disposition over the factors of production is transferred to the hands of others who know better how to weigh the risks and the prospects of business speculation.
Now if it is to remain socialistic, the socialist State cannot leave to other hands that disposition over capital which permits the enlargement of existing undertakings, the contraction of others and the bringing into being of undertakings that are completely new. And it is scarcely to be assumed that socialists of whatever persuasion would seriously propose that this function should be made over to some group of people who would "simply" have the business of doing what capitalists and speculators do under capitalistic conditions, the only difference being that the product of their foresight should not belong to them but to the community. Proposals of this sort may well be made concerning the managers of joint stock companies. They can never be extended to capitalists and speculators, for no socialist would dispute that the function which capitalists and speculators perform under Capitalism, namely directing the use of capital goods into that direction in which they best serve the demands of the consumer, is only performed because they are under the incentive to preserve their property and to make profits which increase it or at least allow them to live without diminishing their capital.
It follows therefore that the socialist community can do nothing but place the disposition over capital in the hands of the State or to be exact in the hands of the men who, as the governing authority, carry out the business of the State. And that signifies elimination of the market, which indeed is the fundamental aim of Socialism, for the guidance of economic activity by the market implies organization of production and a distribution of the product according to that disposition of the spending power of individual members of society which makes itself felt on the market; that is to say, it implies precisely that which it is the goal of Socialism to eliminate.
If the socialists attempt to belittle the significance of the problem of economic calculation in the Socialist community, on the ground that the forces of the market do not lead to ethically justifiable arrangements, they simply show that they do not understand the real nature of the problem. It is not a question of whether there shall be produced cannons or clothes, dwelling houses or churches, luxuries or subsistence. In any social order, even under Socialism, it can very easily be decided which kind and what number of consumption goods should be produced. No one has ever denied that. But once this decision has been made, there still remains the problem of ascertaining how the existing means of production can be used most effectively to produce these goods in question. In order to solve this problem it is necessary that there should be economic calculation. And economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production. That is to say, there must exist money prices of land, raw materials, semimanufactures; that is to say, there must be money wages and interest rates.
Thus the alternative is still either Socialism or a market economy.
5: Profitability and Productivity
The economic activity of the socialist community is subject to the same external conditions as govern an economic system based on private property in the means of production or indeed any conceivable economic system. The economic principle applies to it in the same way as to any and to all economic systems: that is to say it recognizes an hierarchy of ends, and must therefore strive to achieve the more important before the less important. This is the essence of economic activity.
lt is obvious that the production activities of the socialist community will involve not only labour but also material instruments of production. According to a very widespread custom, these material instruments of production are called capital. Capitalist production is that which adopts wise roundabout methods in contrast with a non-capitalistic production which goes directly to its end in a hand to mouth manner.24 If we adhere to this terminology, we must admit that the socialist community must also work with capital and will therefore produce capitalistically. Capital conceived as the intermediate products, which arise at the different stages of production by indirect methods, would not, at any rate at first25 be abolished by Socialism. It would merely be transferred from individual to common possession.
But if, as we have suggested above, we wish to understand by capitalistic production that economic system in which money-calculation is employed, so that we can summarize under the term capital a set of goods devoted to production and evaluated in terms of money, and can attempt to estimate the results of economic activity by the variations in the value of capital, then it is clear that socialist methods of production cannot be termed capitalistic. In quite another sense than the Marxians we can distinguish between socialistic and capitalistic methods of production, and between Socialism and Capitalism.
The characteristic feature of the capitalistic method of production, as it appears to socialists, is that the producer works to obtain a profit. Capitalistic production is production for profit, socialist production will be production for the satisfaction of needs. That capitalistic production aims at profit is quite true. But to achieve a profit, that is a result greater in value than the costs, must also be the aim of the socialist community. If economic activity is rationally directed, that is if it satisfies more urgent before less urgent needs, it has already achieved profits, since the cost, i.e. the value of the most important of the unsatisfied needs, is less than the result attained. In the capitalistic system profits can only be obtained if production meets a comparatively urgent demand. Whoever produces without attending to the relation between supply and demand fails to achieve the result at which he is aiming. To direct production towards profit simply means to direct it to satisfy other people's demand: in this sense it may be contrasted with isolated man's production for personal needs. But he also is working for profit in the sense used above. Between production for profit and production for needs there is no contrast.26
The contrasting of production for profit and production for needs is closely connected with the common practice of contrasting productivity and profitability or the "social" and "private" economic point of view. An economic action is said to be profitable if in the capitalist system it yields an excess of receipts over costs. An economic action is said to be productive when, seen from the point of view of a hypothetical socialist community, the yield exceeds the cost involved. Now in some cases productivity and profitability do not coincide. Some economic acts which are profitable are not productive and, vice versa, some are productive but not profitable. For those naively biased in favour of Socialism, as is the case even with most economists, this fact is sufficient to condemn the capitalistic order of society. Whatever a socialist community would do seems to them undisputably good and reasonable: that anything different can happen in a capitalistic society is, in their opinion, an abuse which cannot be tolerated. But an examination of the cases in which profitability and productivity are alleged not to coincide will show that this judgment is purely subjective, and that the scientific cloak with which it is invested is a sham.27
In the majority of cases in which it is usually assumed that there is a contrast between profitability and productivity no such contrast exists. This is true, for example, of profits from speculation. Speculation in the capitalist system performs a function which must be performed in any economic system however organized: it provides for the adjustment of supply and demand over time and space. The source of the profit of speculation is enhanced value which is independent of any particular form of economic organization. When the speculator purchases at a low price products which come on the market in comparatively large quantities and sells them at a higher price when the demand has again increased, his gains represent, from a business and from the economic point of view, an increase of value. That in a socialist order the community and not the individual would get this much grudged and maligned profit we do not deny. But that is not the significance of the problem in which we are interested. The point which concerns us here is that the alleged contrast between profitability and productivity does not exist in this case. Speculation performs an economic service which cannot conceivably be eliminated from any economic system. If it is eliminated, as socialists intend to do, then some other organization must take over its functions: the community itself must become a speculator. Without speculation there can be no economic activity reaching beyond the immediate present.
A contrast between profitability and productivity is sometimes supposed to be discovered by picking out a particular process and considering it by itself. People may perhaps characterize as unproductive certain features peculiar to the constitution of the capitalistic organization of industry, e.g. selling expenses, advertising costs and the like are characterized as unproductive. This is not legitimate. We must consider the result of the complete process, not the individual stages. We must not consider the constituent expenses without setting against them the result to which they contribute.28
6: Gross and Net Product
The most ambitious attempt to contrast productivity and profitability derives from the examination of the relationship between gross product and net product. It is clear that every entrepreneur in the capitalist system aims at achieving the largest net product. But it is asserted that rightly considered the object of economic activity should be to achieve not the largest net product but the largest gross product.
This belief, however, is a fallacy based upon primitive speculations regarding valuation. But judged by its widespread acceptance even today it is a very popular fallacy. It is implicit when people say that a certain line of production is to be recommended because it employs a large number of workers, or when a particular improvement in production is opposed because it may deprive people of a living.
If the advocates of such views were logical they would have to admit that the gross product principle applies not only to labour but also to the material instruments of production. The entrepreneur carries production up to the point where it ceases to yield a net product. Let us assume that production beyond this point requires material instruments only and not labour. Is it in the interest of society that the entrepreneur should extend production so as to obtain a larger gross product? Would society do so if it had the control of production? Both questions must be answered with a decided no. The fact that further production does not pay shows that the instruments of production could be applied to a more urgent purpose in the economic system. If, nevertheless, they are applied to the unprofitable line then they will be lacking in places where they are more urgently needed. This is true under both Capitalism and Socialism. Even a socialist community, supposing it acted rationally, would not push certain lines of production indefinitely and neglect others. Even a socialist community would discontinue a particular line of production when further production would not cover the expense, that is to say, at the point where further production would mean failure to satisfy a more urgent need elsewhere.
But what is true of the increased use of material instruments is true exactly in the same way of the increased use of labour. If labour is devoted to a particular line of production to the point where it only increases the gross product while the net product declines, it is being withheld from some other line where it could perform more valuable service. And here, again, the only result of neglecting the principle of net product is that more urgent wants remain unsatisfied whilst less urgent ones are met. It is this fact, and no other which is made evident in the mechanism of the capitalist system by the decline in the net product. In a socialist community it would be the duty of the economic administration to see that similar misapplications of economic activity did not occur. Here, therefore, is no discrepancy between profitability and productivity. Even from the socialist standpoint, the largest possible net product and not the largest possible gross product must be the aim of economic activity.
Nevertheless, people continue to maintain the contrary, sometimes of production in general, sometimes of labour alone and sometimes of agricultural production. That capitalist activity is directed solely toward the attainment of the largest net product is adversely criticized and State intervention is called for to redress the alleged abuse.
This discussion has a lengthy ancestry. Adam Smith maintained that different lines of production should be regarded as more or less productive according to the greater or smaller amount of labour which they set in motion.29 For this he was adversely criticized by Ricardo who pointed out that welfare of the people increased only through an enlargement of the net product and not of the gross product.30For this Ricardo was severely attacked. Even J. B. Say misunderstood him and accused him of an utter disregard for the welfare of so many human beings.31 While Sismondi, who was fond of meeting economic arguments by sentimental declamations, thought he could dispose of the problem by witticism: he said that a king who could produce net product by pressing a button would, according to Ricardo, make the nation superfluous.32 Bernhardi followed Sismondi on this point.33 Proudhon went as far as to epitomize the contrast between socialistic and private enterprise in the formula: that although society must strive for the largest gross product the aim of the entrepreneur is the largest net product.34 Marx avoids committing himself on this point, but he fills two chapters of the first book of Das Kapital with a sentimental exposition in which the transition from intensive to extensive agricultural methods is depicted in  the darkest colour as, in the words of Sir Thomas More, a system "where sheep eat up men," and manages in the course of this discussion to confuse the large expropriations achieved by the political power of the nobility, which characterized European agrarian history in the first centuries of modern times, with the changes in the methods of cultivation initiated later on by the landowners.35
Since then declamations on this scheme have formed the stock equipment of the controversial writings and speeches of the socialists. A German agricultural economist, Freiherr von der Goltz, has tried to prove that the attainment of the largest possible gross product is not only productive from the social point of view but is also profitable from the individual point of view. He thinks that a large gross product naturally presupposes a large net product, and to that extent the interests of the individuals whose main object is to achieve a large net product coincide with those of the State which desires a large gross product.36 But he can offer no proof of this.
Much more logical than these efforts to overcome the apparent contrast between social and private interests by ignoring obvious facts of agricultural accountancy, is the position taken up by followers of the romantic school of economic thought, particularly the German etatists, viz. that the agriculturist has the status of a civil servant, and is therefore obliged to work in the public interest. Since this is said to require the largest possible gross product it follows that the farmer, uninfluenced by commercial spirit, ideas or interests, and regardless of the disadvantages, which may be entailed, must devote himself to the attainment of this end.37 All these writers take it for granted that the interests of the community are served by the largest gross product. But they do not go out of their way to prove it. When they do try, they only argue from the point of view of Machtpolitik (power politics) or Nationalpolitik (national policy). The State has an interest in a strong agricultural population since the agricultural population is conservative; agriculture supplies the largest number of soldiers; provision must be made for feeding the population in time of war and so on.
In contrast to this an attempt to justify the gross product principle by economic reasoning has been made by Landry. He will only admit that the effort to attain the greatest net product is socially advantageous in so far as the costs which no longer yield a profit arise from the use of material instruments of production. When the application of labour is involved he thinks quite otherwise. Then, from the economic point of view the application of labour costs nothing: social welfare is not thereby diminished. Wage economies which result in a diminution of the gross product are harmful.38 He arrives at this conclusion by assuming that the labour force thus released could find no employment elsewhere. But this is absolutely wrong. The need of society for labour is never satisfied as long as labour is not a "free good." The released workers find other employment where they have to supply work more urgent from the economic point of view. If Landry were right it would have been better if all the labour-saving machinery had never existed, and the attitude of those workers who resist all technical innovations which economize labour and who destroy such machinery would be justified. There is no reason why there should be a distinction between the employment of material instruments and of labour. That, in view of the price of the material instruments and the price of their products, an increase of production in the same line is not profitable, is due to the fact that the material instruments are required in some other line to satisfy more urgent needs. But this is equally true of labour. Workers who are employed in unprofitably increasing the gross product are withheld from other lines of production in which they are more urgently required. That their wages are too high for an increase in  production involving a larger gross product to be profitable, results indeed from the fact that the marginal productivity of labour in general is higher than in the particular line of production in question, where it is applied beyond the limits determined by the net product principle. There is no contrast whatever here between social and private interests: a socialist organization would not act differently from an entrepreneur in the capitalist organization.
Of course there are plenty of other arguments which can be adduced to show that adherence to the net product principle may be harmful. They are common to all nationalist-militarist thinking, and are the well-known arguments used to support every protectionist policy. A nation must be populous because its political and military standing in the world depends upon numbers. It must aim at economic self-sufficiency or at least it must produce its food at home and so on. In the end Landry has to fall back on such arguments to support his theory.39 To examine such arguments would be out of place in a discussion of the isolated socialist community.
But if the arguments we have examined are untrue it follows that the socialist community must adopt net product and not gross product as the guiding principle of economic activity. The socialist community equally with the capitalist society will also transform arable into grass land, if it is possible to put more productive land under the plough elsewhere. In spite of Sir Thomas More, "sheep will eat up men" even in Utopia, and the rulers of the socialist community will act no differently from the Duchess of Sutherland, that "economically instructed person," as Marx once jeeringly called her.40
The net product principle is true for every line of production. Agriculture is no exception. The dictum of Thaer, the German pioneer of modern agriculture, that the aim of the agriculturist must be a high net yield "even from the standpoint of the public welfare" still holds good.41
See the critique of Kelsen, "Staat und Gesellschaft," in Sozialismus und Staat (Leipzig, 1923), pp. 11 ff. and pp. 20 ff.
Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, pp. 335 ff. Publisher's Note: In the English edition, Anti-Dühring: Herrn Eugen Dühring's Revolution in Science, pp. 429 ff.
Marx, Das Kapital, Vol. 1, pp. 5 ff. Publisher's Note: In English, see Marx, Karl. Capital: A Critique of Political Economy. 3 volumes. Vol. I. The Process of Capitalist Production. Translated from the 3rd German edition by Samuel Moore and Edward Aveling. Edited by Frederick Engels. Revised and amplified according to the 4th German edition by Ernest Untermann. Chicago: Charles H. Kerr & Co., 1906. (Note: This Volume I also reprinted by Random House as a Modern Library Giant, with same paging as the Kerr edition.) Vol. II. The Process of Circulation of Capital. Vol. III. The Process of Capitalist Production as a Whole. Both Volumes II and III were translated by Ernest Untermann and edited by Frederick Engels. Both were published by the same Charles H. Kerr & Co. of Chicago in 1909. In this footnote, pp. 5 ff. refers to pp. 45 ff. in the English Vol. I.
Ibid., pp. 9 ff. Publisher's Note: pp. 50 ff. in English translation.
Ibid., pp. 10 ff. Publisher's Note: pp. 51-52 in English translation.
Böhm-Bawerk, Kapital und Kapitalzins, Vol. I, 3rd ed. (Innsbruck, 1914), p. 531. Publisher's Note: Böhm-Bawerk's three volume work in English is: Böhm-Bawerk, Eugen von. Capital and Interest. 3 volumes. (South Holland, Illinois: Libertarian Press, 1959.) Volume I. History and Critique of Interest Theories. Translated by George D. Huncke and Hans F. Sennholz.
We may point out here that as early as 1854 Gossen knew "that only through private property is the measure found for determining the quantity of each commodity which it would be best to produce under given conditions. Therefore, the central authority, proposed by the communists, for the distribution of the various tasks and their reward, would very soon find that it had taken on a job the solution of which far surpasses the abilities of individual men." (Gossen, Entwicklung der Gesetze des menschlichen Verkehrs, new ed., [Berlin, 1889] p. 231.) Pareto (Cours d'Économie Politique, Vol. II, Lausanne, 1897, pp. 364 ff.) and Barone ("Il Ministro della Produzione nello Stato Coletivista" in Giornale degli Economisti, Vol. XXXVII, 1908, pp. 409 ff.) did not penetrate to the core of the problem. Pierson clearly and completely recognized the problem in 1902. See his Das Wertproblem in der sozialistischen Gesellschaft (German translation by Hayek, Zeitschrift für Volkswirtschaft, New Series, Vol. IV, 1925, pp. 607 ff.) Publisher's Note: Both the Barone article ("The Ministry of Production in the Collectivist State," pp. 245-290) and the Pierson article ("The Problem of Value in the Socialist Society," pp. 41-85) are included in the Hayek edited Collectivist Economic Planning.
I have briefly discussed the most important of these replies in two short essays—"Neue Beiträge zurn Problem der sozialistischen Wirtschaftsrechnung" (Archiv für Sozialwissenschaft, Vol. LI, pp. 488-500) and "Neue Schriften zum Problem der sozialistischen Wirtschaftsrechnung" (Ibid., Vol. LX, pp. 187-90. Publisher's Note: "Neue Beiträge zum Problem der sozialistischen Wirtschaftsrechnung" appears in part as the Appendix of this book on p. 473. The second essay mentioned by Mises in this footnote was published in 1928 and has not been translated into English. The essay was a review of recent literature on economic calculations under socialism.
In scientific literature there is no more doubt about this. See Max Weber, "Wirtschaft und Gesellschaft" (Grundriss der Sozialökonomik, Vol. III), Tübingen, 1922, pp. 45-59; Adolf Weber, Allgemeine Volkswirtschaftslehre, 4th ed., Munich and Leipzig, 1932, Vol. II, pp. 369 ff.; Brutzkus, Die Lehren des Marxismus im Lichte der russischen Revolution, Berlin, 1928, pp. 21 ff.; C. A. Verrijn Stuart, "Winstbejag versus behoeftenbevrediging" (Overdruk Economist, Vol, 76 No. 1), pp. 28 ff.; Pohle-Halm, Kapitalismus und Sozialismus, 4th ed., Berlin, 1931, pp. 237 ff.
Characteristic of this branch of literature is the recently published work of C. Landauer, Planwirtschaft und Verkehrswirtschaft (Munich and Leipzig, 1931). Here the writer deals with the problem of economic calculation quite naively, at first by asserting that in a socialist society "the individual enterprises...could buy from each other, just as capitalist enterprises buy from each other" (p. 114). A few pages on he explains that "besides this" the socialist state will "have to set up a control accountancy in kind"; the state will be "the only one able to do this because in contrast to Capitalism it controls production itself" (p. 122). Landauer cannot understand that—and why—one is not permitted to add and subtract figures of different denominations. Such a case is, of course, beyond help.
Böhm-Bawerk, Kapital und Kapitalzins, Vol. II, 3rd ed. (Innsbruck, 1912), p. 21. Publisher's Note: The page in the English (Sennholz/Huncke) translation of Böhm-Bawerk, referred to here is page 14 in Volume II. Böhm-Bawerk, Eugen von. Capital and Interest. 3 volumes. South Holland, Illinois: Libertarian Press, 1959. [Information re Vol. I above.] Volume II. Positive Theory of Capital.Translated by George D. Huncke; Hans F. Sennholz, Consulting Economist. Volume III. Further Essays on Capital and Interest. Translated by Hans F. Sennholz.
The limitation comprised in the words "at first" is not intended to mean that Socialism will later on, say after attaining a "higher stage of the communist society," intentionally set about abolishing capital in the sense used here. Socialism can never plan the return to the life from hand to mouth. Rather do I want to point out here that Socialism must, by inner necessity, lead to the gradual consumption of capital.
Pohle-Halm, Kapitalismus und Sozialismus, pp. 12 ff.
On Monopoly see pp. 344 ff. and on "uneconomic" consumption see p. 401 ff.
See pp. 140 ff., 160 ff.
A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book II, Chap. V (London 1776, Vol. I, pp. 437 ff.).
Ricardo, Principles of Political Economy and Taxation, Chap. XXVI (Works, ed. MacCulloch, 2nd ed. [London 1852] pp. 220 ff.).
Say, in his Notes to Constancio's French Edition of Ricardo's works, Vol. II (Paris, 1819), pp. 222 ff.
Sismondi, Nouveaux Principes d'Économie Politique (Paris, 1819), Vol. ii, p. 331 footnote.
Bernhardi, Versuch einer Kritik der Grande, die für grosses und kleines Grundeigentum angeführt werden (Petersburg, 1849), pp. 367 ff.; also Cronbach, Das landwirtschaftliche Betriebsproblem in der deutschen Nationalökonomie bis zur Mitte des 19. Jahrhunderts (Vienna, 1907), pp. 292 ff.
"La société recherche le plus grand produit brut, par consequent la plus grande population possible, parce que pour elle produit brut et produit net son identiques. Le monopole, au contraire, vise constamment au plus grand produit net, dût-il ne l'obtenir qu'au prix de l'extermination du genre humain." ("Society seeks the largest gross product and thus the largest possible population, because for it gross product and net product are the same thing. On the other hand, monopoly continually aims at the highest net product which it can obtain only at the price of exterminating the human race.") Proudhon, Système des contradictions économiques ou philosophie de la misère (Paris, 1846), Vol. I, p. 270. In Proudhon's language "Monopoly" means the same as Private Property. Ibid., Vol. i, p. 236; also Landry, L'utilité sociale de la propriété individuelle (Paris, 1901), p. 76.
Marx, Das Kapital, Vol. I, pp. 613-726. The arguments about "the theory of compensation for the workers displaced by machinery" (ibid., pp. 403-12) are vain in view of the Marginal Utility Theory. Publisher's Note: The page references cited here are pp. 738-821 and 478-488, respectively, in the English edition.
Goltz, Agrarwesen und Agrarpolitik, 2nd ed. (Jena, 1904), p. 53; also Waltz, Vom Reinertrag in der Landwirtschaft (Stuttgart and Berlin, 1904), pp. 27 ff. Goltz contradicts himself in his arguments, for, to the assertion mentioned above, he adds immediately: "Nevertheless the amount remaining as net profit from the gross product after deducting costs varies considerably. On the average it is greater with extensive than with intensive cultivation."
See Waltz, op. cit. pp. 19 ff. on Adam Müller, Bülow-Cummerow and Phillipp v. Arnim, and pp. 30 ff. on Rudolf Meyer and Adolf Wagner.
Landry, L'utilité sociale de la propriété individuelle, pp. 109, 127 ff.
Landry, L'utilité sociale de la propriété individuelle, pp. 109, 127 ff.
Marx, Das Kapital, Vol. I, p. 695.
Quoted by Waltz, Vom Reinertrag in der Landwirtschaft, p. 29.
Readings from the OLL Reader
- Alexis de Tocqueville, “On Socialism” (1848)
- Auberon Herbert, “Against Force and Socialist Compulsion” (1898)
- Bruce Smith, “True Liberalism vs. Socialism” (1888)
- David A. Wells, “Free Trade” (1882)
- Eugen Richter, “Economic Chaos after the Socialist Revolution” (1893)
- Eugen von Böhm-Bawerk, “The Error in the Marxist System” (1896)
- Frédéric Bastiat, “Individualism and Fraternity” (June 1848)
- Gustave de Molinari, “Protection and Restrictions on Free Trade” (1853)
- Gustave de Molinari, “On Socialism and Property Rights” (1849)
- H.B. Acton, “Marxist Ethics” (1955)
- Herbert Spencer, “From Freedom to Bondage” (1891)
- John Stuart Mill, “The Difficulties of Socialism” (1879)
- Ludwig von Mises, “Socialism, Interventionism, and the Free Market” (1949)
- Ludwig von Mises, “The Impossibility of Economic Calculation under Socialism” (1922)
- No. 11: William Graham Sumner, “The Conquest of the United States by Spain” (1898)
- No. 25: Étienne de la Boétie, “The Discourse of Voluntary Servitude” (1576)
- No. 70: David Hume, “Idea of a Perfect Commonwealth” (1777)
- No. 71: Lysander Spooner, “Natural Law; or the Science of Justice” (1882)
- No. 72: “Three Agreements of the People” (1647-49)
- No. 74: John Millar, “Circumstances which tend to increase the power of the Sovereign” (1771)
- No. 75: William Graham Sumner, “The Forgotten Man and Woman” (1883)
- Thomas Mackay “The Interest of the Working Class in Free Exchange” (1894)
- Wordsworth Donisthorpe, “An Analysis of Socialism” (1889)
- Yves Guyot, “The Socialist Tyranny” (1893)