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Friday, February 10, 2023

What Mises Understood about Prices and Trade That Socialist Economists Did Not

Ludwig von Mises understood that without free market prices, planning would necessarily be irrational. 

Socialism is a very popular system. Vermont Senator Bernie Sanders attracts thousands of fellow economic innocents on college campuses, and even professional economists of the ilk of Paul Samuelson were taken in by the siren song of this ineffective and evil system. (He predicted in his economics textbook that the USSR would overtake the American economy).

There stood Ludwig von Mises, like the Rock of Gibraltar, standing in the path of socialists of all types and varieties. He laid down the line: under socialism without free market prices, planning would necessarily be irrational. How and why, then, the existence of this pernicious system in Russia from 1917 to 1991 with the dissolution of the Soviet Union. How is it that socialism still exists in places like Cuba, North Korea, and Venezuela? That is because market prices, generated elsewhere, were available to the economic dictators. During the period of USSR socialism, there was the Chicago board of trade and Consumers’ Reports. They made market prices available to the Soviet planners; they were a not-totally-unreasonable approximation to Russian realities. Nowadays, at least quasi-market prices are available in many areas of the world (they are only quasi since every government, bar none, engages in taxes and subsidies, price ceilings and floors, etc., which would not exist in the pure free market, and thus still misallocate resources on their basis).

Without prices that reflect consumer desires and relative scarcities, it is impossible to determine whether platinum or steel should be used, for example, for rails for locomotives. The former is more efficient, but is needed elsewhere in the economy. But to what degree? Or, should a tunnel be dug through a mountain; or should the new road go all around it? The former is much more expensive, now, but will save gigantic transportation costs for years to come. Without accurate prices and interest rates, it is impossible to make a rational calculation of the relevant benefits and costs. Should rowboats be constructed of wood, metal or plastic? A rational decision, again depends upon free market prices, which are to the economy what maps are to geography.

It is no accident that there was virtually one-way traffic between East and West Germany, and between North and South Korea. The latter in each pair instituted systems that were at least within sight of the free enterprise, private property, limited government system advocated by Mises. The former were—and now are in the case of last mentioned—economic basket cases.

But Mises’ contribution to the socialist calculation debate—in his 1922 book Socialism: An Economic and Sociological Analysis—was but the tip of the iceberg in terms of his overall accomplishments. He also made important contributions to the theory of money in his 1912 book The Theory of Money and Credit. There, he demonstrated that whichever monetary commodity arises from the free interplay of market forces is the only path to soundness. He must be credited with a critique of interventionism (small interventions escalate); he did so in his 1977 book A Critique of Interventionism. In many of his publications he made the case for private property rights and economic freedom (the two are necessarily intertwined). His sterling contribution to the Austrian business cycle theory (an artificial lowering of the interest rates creates an unsustainable boom, which necessarily ends in a depression) can be found in his 1912 book, The Theory of Money and Credit.

Perhaps his most profound contribution concerns praxeology (in his 1962 book, The Ultimate Foundation of Economic Science and especially in his magisterial 1949 book, Human Action). This is the view that there is such a thing as economic law, which can only be illustrated, not tested. For example, there is human action: to deny this is to necessarily engage in human action. This led to an entirely different methodology for economics, one very much incompatible with the neo-classical mainstream, which to this day remains rooted in logical positivism (there is no such thing as economic law in the neo-classical school; there are only hypotheses, which are not necessarily true.). For example, Mises pointed out that voluntary trade necessarily raises economic welfare, at least ex ante.

That voluntary exchange necessarily raises economic welfare, at least ex ante, is the logical conclusion of the action axiom and is the very meaning of voluntary exchange. Thus this law cannot be disproven by any amount of data. This methodology has yet to persuade neo-classical mainstream economists, unfortunately.

However, when the utter failure of socialist economics was definitively exposed for all to see in the demise of the Soviet Union, Robert Heilbroner, who had spent most of his career as an unabashed socialist, raised the white flag and admitted that Mises was correct about socialism in a September 1990 New Yorker article entitled “After Communism.” 

So there may still be hope that some prominent exponent of “positive economics” will someday admit that Mises was right about praxeology too.

  • Walter Edward Block is an American economist and anarcho-capitalist theorist who holds the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the J. A. Butt School of Business at Loyola University New Orleans. He is a member of the FEE Faculty Network.
  • Robert Batemarco teaches economics on an adjunct basis at Fordham University and Manhattan College. He was formerly book review editor of The Freeman. He is a member of the FEE Faculty Network.