Mises and the Economics of Socialism

As we have seen, Mises saw military service at the front in the Carpathians during World War I, and spent the last of die war years in the economics division of the Department of War in Vienna. Yet immediately after returning to civilian life, Mises plunged into his scientific work. Besides his 1919 book (the English title of which would be Nation, State and Economy), he published only one year later his famous paper on the economics of socialism, "Die Wirtschaftsrechnung im Sozialistischen Gemeinwesen."

With this paper, Mises initiated the celebrated interwar debate on the possibility of economic calculation. It seems likely that Mises did not see this article as offering any economic insights that were not already well known to the economically literate. He was directing his message at well-meaning proponents of socialism who were ignorant of the bask fundamentals of economic understanding. Nonetheless this article was to play an important role in the development of Mises' own understanding and expositions of economic theory. And it had the eventual effect of making Mises' name as an economist known in far wider professional circles, both in Europe and in die U.K., than might have followed simply from his prominence in the Austrian political economy and financial debates of the immediate postwar years.

Mises followed up his paper on the economics of socialism with a book-length study of socialism in all its dimensions (its subsequent English translation was subtided "An Economic and Sociological Analysis"). This book, published in 1922, included the virtually verbatim republication (as a chapter) of the earlier paper. It is quite clear that Mises considered the theoretical core of his critique of all forms of socialism (including intervention-ism) to be the primary argument in his 1920 paper. This argument was that rational central planning is a contradiction in terms—because, without the help of market prices for resources, socialist planners are simply unable to calculate economically. Since a socialist economy necessarily lacks a market in which independent agents competitively buy and sell economic resources, such an economy lacks any market prices for such resources. But without resource prices, would-be central planners, no matter how diligent and dedicated they may be, are simply unable to assess the extent to which use of a given resource for one specific purpose entails corresponding sacrifices in the myriad alternative lines of production (to which this resource might have been alternatively allocated). In other words, planners have no way of calculating die comparative urgency of competing poten tial uses for any particular unit of a resource. The pattern of resource allocation which the central planners finally adopt cannot, therefore, be considered the outcome of a rational plan. There is no assurance, nor even any systematic likelihood, that this adopted pattern of resource allocation achieves a volume, and a composition, of outputs which the central planners would deem to be preferable to all other possible alternatives.

Mises presented this lesson in economics as his critique of the possibility of socialist planning; it was a lesson implied by and derived from the economic theory of the market economy. What Mises was in effect teaching his readers was an appreciation of the manner in which market prices convey information to decision makers in a capitalist system, permitting their decisions to take mutual account of (and thus to become spontaneously coordinated with) the decisions being made by others. It was this lesson which constituted, for Mises, the core of economic science, and the very fountainhead of all economic understanding. Although Hayek would, a decade and a half later, present his own critique of die socialist economy in somewhat different language, there is every reason to conclude that, in supporting Mises in his critique, Hayek was subscribing to the same core economic understanding that inspired his mentor. In fact, Mises was, in his theoretical critique of socialist planning, laying out his Austrian theory of the market process in a way that would, eventually, clearly differentiate that theory from the mainstream microeconomic understanding of die manner in which the market economy works.

Mises' Socialism appeared ten years later in a second, revised edition (1932), and this second edition was translated into English in 1936. It was this later edition which attracted a great deal of attention, both from professional economists and intellectuals more generally. Much of this attention took die form of ideologically based attacks on the work; after all, the thirties were the years in which socialism was widely seen as both the moral and economic hope of the future. Nonetheless, professional economists could not but recognize the cogency of the theory upon which Mises based his critique. In a later chapter we shall see, in particular, how Oskar Lange and Abba P. Lerner, both professional economists with strong sympathies for socialism, attempted to deal with die theoretical challenge with which Mises had confronted them.

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