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Thursday, September 1, 2016

The Significance of Mises’s “Socialism”

"Socialism" is as bold and brilliant of a book as has ever been penned in the fields of economics and political economy.

That Ludwig von Mises was one of the greatest economists of the 20th century should never be doubted. Mises never worked in scientific or popular obscurity, despite the various mythologies that are told on both left and right. Prior to World War I, Mises had established himself as a leading economic theorist among the younger generation in German-language economics, and, in fact, in Continental Europe more widely, with The Theory of Money and Credit (1912). During the subsequent interwar years of the 1920s and 1930s, Mises’s reputation as a theorist and methodologist spread internationally.

Leading economic thinkers in England (such as Lionel Robbins) and in the United States (such as Frank Knight) came to closely study Mises’s contributions to economic science and engage his ideas critically. During this time, Mises’s reputation as an outstanding teacher and mentor of young economists grew as the success of his students — such as F.A. Hayek, Fritz Machlup, Oskar Morgenstern, Gottfried Haberler, Felix Kaufman, and Alfred Schutz — spread out from the German-language scientific community throughout Europe and eventually to the international scientific community. In fact, as Henry Simons once remarked in his review of Omnipotent Government in the Annals of the American Academy of Political and Social Science, “Professor Mises, patriarch of the modern Austrian School, is the greatest living teacher of economics — if one may judge by the contributions of his many distinguished students and proteges.”

That Ludwig von Mises was one of the greatest economists of the 20th century should never be doubted.

It is important to remind the reader of Mises’s status as an economic thinker because this book, Socialism: An Economic and Sociological Analysis, played a major role in establishing that reputation. In his article “Bertil Ohlin,” Paul Samuelson speculated that, had the Nobel Prize in Economic Sciences been established when the other prizes were, Mises would have been one of the early recipients.

Even though that recognition would elude him in his lifetime, Mises was named a Distinguished Fellow of the American Economic Association in 1969 and received his native country’s highest honor for scientific achievement. But Mises’s status as an eminent economist is also evidenced by the fact that he is invoked in various well-known and iconic works, such as Albert Hirschman’s The Passions and the Interests or John Kenneth Galbraith’s The Affluent Society, as the quintessential 20th century representative of the laissez-faire position.

Samuelson’s speculation is based on Mises’s contributions to technical economics in value theory, capital theory, and monetary theory. The acknowledgments from the likes of Hirschman and Galbraith are due to Mises’s contributions to social philosophy. What is most fascinating about Socialism is that both these aspects of Mises’s body of thought are on full, and brilliant, display. As Hayek has pointed out in his forward to Socialism, this book changed the minds of an entire generation of economists. Simply put, Socialism is as bold and brilliant of a book as has ever been penned in the fields of economics and political economy.

A Classic in Our Time

Though the book first appeared in English in 1932, Henry Hazlitt eventually published a review in the New York Times on January 9, 1938, and states, “No open-minded reader can fail to be impressed by the closeness of the author’s reasoning, the rigor of his logic, the power and unity of his thought.” Hazlitt goes on to argue that Mises provides the most damaging analysis of the socialist philosophy available in the literature. He stresses that Socialism, while grounded in technical economics, tackles a wider literature and addresses all the arguments that have been marshaled against capitalism and in favor of socialism. And, in Hazlitt’s judgment, Mises “does this with such power, brilliance, and completeness that this book must rank as the most devastating analysis of socialism yet penned.” Socialism, Hazlitt declares, is “an economic classic in our time.”

There are two reasons why this judgment is reached — historical context and analytical acuteness. The intellectual zeitgeist of the early 20th century exhibited a revolutionary fervor for the idea of socialism. As Mises states in the very first sentences of this book,

Socialism is the watchword and catchword of our day. The socialist idea dominates the modern spirit. The masses approve it. It expresses the thoughts and feelings of all; it has set its seal upon our time.

Socialism as a social philosophy was able to tap into a dream-aspiration that was deeply embedded in the human psyche. Socialism promised to rid the world of social ills and usher in an era of peace and harmony. The promise made was that “Paradise on Earth” was within our collective will. The exploitation of man by man would be abolished, and, for the first time in human history, a just social world would be in the grasp of mortals here on earth. Religious and secular thinkers alike were intellectually seduced by the socialist vision of ending exploitation by transcending alienation and realizing true social harmony as class warfare would disappear.

In his memoirs, Notes and Recollections, Mises discusses how he arrived at his analysis and why he stressed the strictly scientific nature of his argument in his examination of socialism and systems of social cooperation more generally.

In my publications on social cooperation I have spent much time and effort in dispute against socialist and interventionists of all varieties and trends.… It has been objected that I failed to consider the psychological aspects of the organization problem. Man has a soul, and this soul is said to be uncomfortable in a capitalist system; and that there also is willingness to suffer reduction in the living standards in exchange for a more satisfactory labor and employment structure for society.

But, Mises insists,

It is important, first, to determine whether this argument — let us call it the “heart [or emotional] argument” — is incongruent with the original argument which we may call the “head [or intellectual] argument” still being promoted by socialist and interventionists. The latter socialist argument endeavors to justify its programs with the assertion that capitalism reduces the full development of productive capabilities; production is less than the potential. Socialist production methods are expected to increase output immeasurably, and thereby create the conditions necessary for plentiful provision for everybody.

Mises concludes this discussion by stressing again the role that reason plays in human affairs:

To judge the heart argument, it is of course important to inquire into the extent of the reduction in economic well-being brought about by adopting a socialist production system.… [Socialists argue that] Economics is … unable to settle the dispute.


I dealt with this problem in a way that discredits the use of the heart argument.… I have never denied that emotional arguments explain the popularity of anti-capitalist policies. But unsuitable proposals and measures cannot be made suitable by such psychic nonsense.

Mises’s analysis of systems of social cooperation is based on a strict scientific approach of means-ends analysis. While he may have severely disagreed with the ends sought by collectivists, Mises did not focus his efforts as an economist in that direction. He was deeply committed to the ideal of value-free economic science. In that vision of scientific analysis, the economist’s task is to concentrate their critical analysis of the effectiveness of chosen means to the attainment of given ends.

Arguing from the Head to Appeal to the Heart

With regard to socialist proposals, this meant that the examination was about whether collective ownership of the means of production (the means chosen) would be effective at realizing the ends sought (the rationalization of production and the ensuing burst of productive capacity that would enable the social harmony promised). As I just pointed out, Mises did not engage the “heart argument” directly, but instead sought to address the “head argument” to temper the appeal of the “heart.”

All the dream-aspirations in the world cannot curtail the fundamental problem with socialist organization that Mises had scientifically dissected. Hazlitt pinpointed this in his review:

The greatest difficulty to the realization of socialism in Mises’s view, in short, is intellectual. It is not a mere matter of goodwill, or of willingness to cooperate energetically without personal reward. “Even angels, if they were endowed only with human reason, could not form a socialistic community.”

Socialism must forego the intellectual division of labor that economic calculation enables under a private-property market economy. As Mises puts it in Liberalism,

This is the decisive objection that economics raises against the possibility of a socialist society. It must forego the intellectual division of labor that consists in the cooperation of all entrepreneurs, landowners, and workers as producers and consumers in the formation of market prices. But without it, rationality, i.e., the possibility of economic calculation, is unthinkable.

Capitalism, in other words, is able to solve the problem of economic calculation and achieve the complex coordination of exchange and production activity.

The argument Mises provides is straightforward. Without private ownership in the means of production, there will not be a market in the means of production. Without a market for the means of production, there will not be monetary prices established on the market (which reflect the exchange ratios, or relative trade-offs people are willing to make). And, without monetary prices, reflecting the relative scarcities of different goods and services, there will be no way for economic decision-makers to engage in rational economic calculation.

All the dream-aspirations in the world cannot curtail the fundamental problem with socialist organization.Rational economic calculation is impossible in a world without private property rights and the monetary prices that emerge within the competitive market process. By definition, socialism eliminates the basis of the market economy, i.e., private property in the means of production; the system must find some other mechanism to serve the role that economic calculation plays in the market process. Without the ability to engage in rational economic calculation, economic decision-makers will be stumbling and bumbling in the dark. As Mises puts it, without economic calculation, “all production by lengthy and roundabout processes would be so many steps in the dark.”

The reason why this objection is so decisive is because it requires the reader to consider explicitly how much they take for granted, given that they live within a market economy where so much of the necessary foundation for social cooperation under the division of labor is simply part of the background of our mundane economic existence. But besides exploding popular fallacies, one of the other main tasks of the economist is to unlock the mystery of the mundane to students and citizens.

The Role of Economic Calculation

John Maynard Keynes famously argued in The General Theory of Employment, Interest and Money that within the capitalist economy, economic decision-makers were ensnared in the “dark forces of time and ignorance.” According to Keynes, the speculative nature of our future economic endeavors is prone to significant coordination problems when savings and investments are decoupled, and economic instability can result in mass unemployment.

Unlike the socialist critique of capitalism that is the subject of Mises’s Socialism, Keynes’s critique of the macroeconomic instability of capitalism is a variant of the interventionist critique that Mises deals with in works such as Human Action. But putting aside their critical and significant difference, Mises does not actually deny the situation that Keynes identified.

The ability to engage in economic calculation allows us to pierce through that dark fog of time and ignorance.Economic decision-makers in a capitalist economy must always act with respect to production in an uncertain world and within the complexities of a modern monetary economy. Realizing the great benefits from social cooperation under the division of labor depends on the ability of the social system to coordinate the dispersed activities of thousands, perhaps millions, of individuals. But this is precisely why Mises put so much emphasis on economic calculation.

The private property market economy generates prices that guide decisions, and profit-and-loss accounting provide the necessary feedback to the shuffling and reshuffling of resources and time among alternative opportunities. Monetary calculation is never perfect in guiding us through the sea of economic change, but it does enable us to navigate those sometimes-turbulent waters. It provides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgments of value which directly apply only to consumption goods — or, at best, to production goods of the lowest order — to all goods of higher orders.

In short, the ability to engage in economic calculation allows us to pierce through that dark fog of time and ignorance, and organize economic activity in as rational a manner as is humanly possible. Absent that ability to rationally calculate, rational economic organization is not possible.

Economic calculation is what enables decision-makers within the market as a whole to sort through the numerous array of technologically feasible projects and select only those projects that are economical. As Mises puts it,

But the real business of economic administration, the adaptation of means to ends only begins when such a decision is taken [i.e., choosing between alternatives, including alternative methods of production]. And only economics calculation makes this adaptation possible. Without such assistance, in the bewildering chaos of alternative materials and processes, the human mind would be at a complete loss. Whenever we had to decide between different processes or different centres of production, we would be entirely at sea.

The economic problem is not one of ascertaining the technological possibilities and efficiency of certain machinery of production. Instead, the economic problem is one of coordinating the plans of individuals within the economy through time, and to do so in such a way that the production plans of some mesh with the consumption demands of others, and the mutual gains from exchange tend toward exhaustion.

“Without calculation,” Mises writes,

economic activity is impossible. Since under Socialism economic calculation is impossible, under Socialism there can be no economic activity in our sense of the word. In small and insignificant things rational action might still persist. But, for the most part, is would no longer be possible to speak of rational production. In the absence of criteria of rationality, production could not be consciously economical.

Economic Practicality

The political economists — classical as well as modern — do address questions of the conditions that constitute a “good society.” But they insist that there are technical economic principles that must be incorporated into the analysis of philosophical assessments of social systems.

Critics of economics say that economists know the price of everything but the value of nothing. Nothing, perhaps, is so intellectually dangerous in the policy sciences as an economist who knows only economics, except, I would add, a moral philosopher who knows no economics at all.

Mises is in some fundamental sense asking a very basic question: “Look comrades, these plans for a rationally planned economy that ushers in a new world order are beautiful and all that, but can you explain to me precisely how the chickens will end up on the workers’ dinner tables so they will be fed?”

We must always learn to temper our “heart” with the rational analysis of the “head” if we want to make progress in the sciences of man.In other words, how is this economic system going to work at a very basic level to deliver the goods and services in a reasonably efficient manner? The “rationalization” of production cannot possibly be a project rife with endemic waste caused by confusion. But that is precisely what Mises is challenging the socialist idea with. The consequences of their chosen means (collective ownership in the means of production) mean that they will be unable to realize their stated end (rationalization of production and the harmony of social relations) precisely because the means are incoherent with regard to the ends sought.

The dream-aspiration of socialism crashes against the hard rock of economic reality. Nobody has stated the ultimate disillusionment that socialism must result in more clearly than Mises, because, ironically, nobody has stated the aspirations as sympathetically and demonstrated the implications of economic critique so forcefully as Mises.

It is important to always remember the distinction Mises used between “heart arguments” and “head arguments,” and we must always learn to temper our “heart” with the rational analysis of the “head” if we want to make progress in the sciences of man. Mises is a master economic theorist and critical thinker at his best, doing what great economists do.

With that in mind, the readers should prepare themselves for an amazing intellectual adventure with Socialism. Mises’s critique is comprehensive and addresses not only the hard-boiled socialism of Marxism and central planning of the Soviet variety, he also addresses syndicalism and cooperatives, as well as Christian socialism. Basically, every form of socialism that has been advocated is addressed and shown to be wanting on its own terms. And, while he would revisit the various attempts to refute his “impossibility” thesis at greater length in Human Action, Mises does anticipate and counter several of the most important ideas of the economics of socialism within Socialism. In the process, he deals not only with the critical ideas of monopoly, instability, and inequality, but also the proper role of equilibrium in economic theorizing, the role of mathematics in economic analysis, and the suitability of efforts to employ pseudo or artificial markets to solve the coordination problem that socialist planning must confront.

The Capitalist Market Achievement

Embedded in this devastating critique of socialism is a nuanced and brilliant defense of the private-property, free-market economy. Mises’s understanding of the market economy was refined through this diagnosis of the efforts to critique the capitalist system made throughout socialist and interventionist thought. What socialism cannot achieve, capitalism achieves every day.

Prices without property are an illusion, and entrepreneurship without profits is game-playing.By thoroughly studying the implications of why a system that abolished private ownership in the means of production would prove unworkable due to the inability to engage in economic calculation, Mises was able to highlight why property, prices, profit, and loss are such essential institutions to the coordination of economic activity within a capitalist system. Prices without property are an illusion, and entrepreneurship without profits is game-playing.

The problem with socialism is neither managerial motivation nor incentivizing labor, however difficult those problems may be. The problem is one that will confront even the well-meaning and self-motivated: absent the context of the competitive market economy, the knowledge necessary to engage in the required economic calculations will be absent. In critiquing those who believe they have found a substitute for the competitive market process, Mises inadvertently sows the seeds for a mature understanding of the entrepreneurial market process. In short, one of the key characteristic contributions of the modern Austrian school of economics to 20th-century economic science takes shape in the debate over socialist calculation.

But hasn’t this debate really been dead since 1989 and 1991?

Soviet-style central planning is perhaps not the rallying call it once was, but, as Mises shows throughout Socialism, the ideas that socialist thinkers deployed in criticizing capitalism permeate our intellectual culture, including the economics profession. Criticisms of monopoly power, capitalist speculation, and unequal income distribution exist throughout. And the offered remedies often — not always — demonstrate the same incomprehension of the intricate web of economic activity that is strung together by the incentives, information, and innovation that are produced by property, prices, profit, and loss.

The functioning of the system as a whole mechanism is often overlooked. The reader of Socialism will be surprised, as they go through the book, how many old ideas of socialist thinkers have become presumptions in our political dialogue, and how many of Mises’s astute criticisms of popular fallacies apply to today in the realm of public policy.

Mises’s Technicalities

One final note on Mises’s use of language. The careful student of Mises will not see the word “praxeology” in Socialism; instead, the word “sociology” is used. Don’t be alarmed. Mises was a practicing praxeologist throughout his career. In 1922 (and then again in 1932 when the book appeared in English) Mises did not yet use the term praxeology. He still thought he was working within the broadly speaking Weberian tradition of interpretative sociology for the general theory of human action and the more narrowly developed branch of that broader science — economics — where he is following in the footsteps of Menger and Böhm-Bawerk. Mises was compelled to shift to the term praxeology and abandon the Weberian terminology of sociology to capture his understanding of the general science of human action because of the way that sociology had developed during the interwar years under the influence of Durkheim.

The careful student of Hayek and his critique of socialism may also wonder where Mises’s critique of rational constructivism and defense of spontaneous order is in his critique of socialism. But the failure to see his argument against constructivism and in support of spontaneous order is to not read the text closely. Of course, there are differences between Mises and Hayek — in fact, significant ones that should be debated. But their similarities in thought on the fundamental issues in sociology and economics, and the problems raised in the socialist-calculation debate, should be acknowledged and are important to stress.

Without economic calculation, the economic system cannot realize the benefits of social cooperation.As mentioned already, the critical idea to Mises in social organization is cooperation under the division of labor. Without economic calculation, the economic system cannot achieve the complex coordination of the division of labor, and thus cannot realize the benefits of social cooperation. Mises’s emphasis on the intellectual division of labor is later elaborated on in Hayek’s discussion of the division of knowledge in society. The presentations no doubt differ in emphasis, but there should be little doubt that they are in the same intellectual vein.

A similar argument can be made for Mises and Hayek on the spontaneous order of the market economy. Mises’s analytical focus is on the purposive nature of human action, whereas Hayek can be read as focusing on the unintended consequences of human action. But the careful student of Hayek must remember that he stressed the phraseology of the Scottish Enlightenment thinkers, “Of human action, but not of human design” — and Hayek constantly drew inspiration in this endeavor from Carl Menger, who argued that the most important problems in the social sciences are associated with asking the question, “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?”

The careful student of Mises is directed to closely read the section in Socialism where he contrasts organism and organization. Organization is the direct design and administration of the social order, whereas organism refers to the unplanned order. As Mises says,

Organization is an association based on authority, organism is mutuality. The primitive thinker always sees things as having been organized from outside, never having grown themselves, organically. (emphasis added)

But, Mises continues,

In recognizing the nature of organism and sweeping away the exclusiveness of the concept of organization, science made one of its great steps forward. With all deference to earlier thinkers one may say that in the domain of Social Science this was achieved mainly in the eighteenth century, and that Classical Political Economy and its immediate precursors played the chief part.

In other words, it is Adam Smith and his contemporaries who made possible the scientific advancement of sociology and economics that Mises is working within, and contributing so vitally to, with his analysis in Socialism.

Mises was indeed among the greatest economic thinkers of the 20th century. His contributions are justly recognized in value theory, capital theory, monetary theory, comparative economic systems, and the methodology of economic science. Each new generation must read his works anew and focus on how his work remains such a vital contribution to the “extended present” that constitutes the conversation over the centuries in the “worldly philosophy.”

Mises rises above others precisely because he was both an astute technical economist and a bold social philosopher. Socialism puts those skills on display on every page. I have been reading this book since I was a college student in the early 1980s, and I have been teaching the book every year since I started my college teaching career in the late 1980s. I learn something new every time I read it. I encourage the reader to do the same. As Henry Hazlitt said in his review, Socialism is an “economic classic in our time.” My only modification would be that the test of time has demonstrated that it is, in fact, an economic classic for all time.

  • Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.