Liberty Matters

Socialism’s Fundamental Error


In their response essays, Mingardi and Schneider focus on some of the key cultural elements of Socialism which Mises identifies. In particular, both explore the ways in which the interdependence of economic exchange mirrors that of our social organization. In the first half of his essay, Mingardi contrasts the “anarchy of production” under capitalism with socialist organization, pointing out that socialists often overlook a crucial element: the continuous improvement inherent in markets. Schneider’s essay highlights the extent to which Mises understood the fundamental social interdependence of economic liberalism—a far cry from the egoist brush with which collectivism often paints the capitalist system. 
The central mistake that socialists make is alluded to in Mingardi’s essay however. They think that the entire economy, and thus the entire society, can become a single factory. In terms of the organization of social relations, the socialist conflates the ability of interpersonal relations to grow from tight knit connections, like those of a family, into a larger society through the extended order. The very nature of the extended order is distinct from the types of relationships that constitute the family or close friendships, but the socialist only understands social relations, and thus economic relations, through the narrow conception of personal relationships. 
As Friedrich Hayek explains in The Fatal Conceit, the extended order “is a framework of institutions – economic, legal, and moral – into which we fit ourselves by obeying certain rules of conduct that we never made, and which we have never understood in the sense of which we understand how the things that we manufacture function” [emphasis added].[1] One way to think about how socialists misunderstand economic production then, is that they believe that an entire society can be structured in the way intimate relations are, without appreciating the transformative power of the extended order in large group social relations. The failure to understand the emergent nature of economic order in turn warps the socialist understanding of economic organization, and manifests in a belief in the viability of a centralized, expert management structure for the entire economy. This error fundamentally misunderstands the emergent nature of information in large groups, assuming instead that all economic information can be gathered and acted upon in the same way that interpersonal relations allow us to gather information from our friends, family and close associates. 
In The Mystery of the Kibbutz: Egalitarian Principles in a Capitalist World, Ran Abramitzky explores a persistent, real world example of successfully applying socialist principles that confirms this point. As Abramitzky and Russ Roberts discussed on an episode of Econtalk about the book, the typical kibbutz hews closely to Dunbar’s number—the group size of 150 or so relationships humans can personally maintain—in terms of the number of families in the community.[2] Outside its walls, the kibbutz is embedded in the extended order, drawing on the benefits of capitalist economic organization in order to support its socialist ideals on the inside. It is the extended order, not the kibbutz, that makes economic prosperity possible in the population at large. 
I am grateful to Mingardi and Schneider for their emphasis on the sociological elements of Mises’s analysis in helping to tease out socialism’s fundamental error in understanding the nature of man that underlies its quest to redefine how we organize our relations with our fellows. In the absence of a more complex theory of organization, perhaps this very misunderstanding is part of human nature, given our embodied, evolved understanding of how we form and engage in relationships with others. Indeed, the distinction between small groups and more complex, larger groups in this sense leads to a greater appreciation and awe for the extended order and the ways in which it weaves the possibilities of economic production together with the social intimacy of personal relationships through a nested arrangement of smaller-scale social systems within the extended order itself. 
[1] Hayek, F.A. The Fatal Conceit: The Errors of Socialism. The University of Chicago Press. 1991, p. 14.