Review of Austrian Economics - The Ludwig von Mises Institute

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The End of Socialism and the Calculation Debate Revisited Murray N. Rothbard* At the root of the dazzling revolutionary implosion and collapse of socialism and central planning in the "socialist bloc" is what everyone concedes to be a disastrous economic failure. The peoples and the intellectuals of Eastern Europe and the Soviet Union are crying out not only for free speech, democratic assembly, and glasnost, but also for private property and free markets. And yet, if I may be pardoned a moment of nostalgia, four-and a-half-decades ago, when I entered graduate school, the economics Establishment of that era was closing the book on what had been for two decades the famed "socialist calculation debate." And they had all decided, left, right, and center, that there was not a thing economically wrong with socialism: that socialism's only problems, such as they might be, were political. Economically, socialism could work just as well as capitalism. Mises and the Challenge of Calculation Before Ludwig von Mises raised the calculation problem in his celebrated article in 1920, 1 everyone, socialists and non-socialists alike, had long realized that socialism suffered from an incentive problem. If, for example, everyone under socialism were to receive an equal income, or, in another variant, everyone was supposed to produce "according to his ability" but receive "according to his needs," then, to sum it up in the famous question: Who, under socialism, will take out the garbage? That *Murray N. Rothbard is the S. J. Hall distinguished professor of economics at the University of Nevada, Las Vegas and editor of the Review of Austrian Economics. Mises's article, published in 1920 in German, "Die Wirtschaftsrechnung im sozialistischen Gemeinwesen," was only made available in English in 1935: Mises, "Economic Calculation in the Socialist Commonwealth," in F. A. Hayek, ed., Collectivist Economic Planning (London: Routledge and Sons, 1935), pp. 87-130. The article was republished as a monograph by the Mises Institute with a notable postscript by Professor Joseph T. Salerno (Ludwig von Mises, Economic Calculation in the Socialist Commonwealth [Auburn, Ala.: Ludwig von Mises Institute, 1990]). The Review of Austrian Economics, Vol. 5, No. 2 (1991): 51-76 ISSN 0889-3047 51
52 The Review of Austrian Economics, Vol. 5, No. 2 is, what will be the incentive to do the grubby jobs, and, furthermore, to do them well? Or, to put it another way, what would be the incentive to work hard and be productive at any job? The traditional socialist answer held that the socialist society would transform human nature, would purge it of selfishness, and remold it to create a New Socialist Man. That new man would be devoid of any selfish, or indeed any self-determined, goals; his only wish would be to work as hard and as eagerly as possible to achieve the goals and obey the orders of the socialist State. Throughout the history of socialism, socialist ultras, such as the early Lenin and Bukharin under "War Communism," and later Mao Tse-tung and Che Guevara, have sought to replace material by so-called "moral" incentives. This notion was properly and wittily ridiculed by Alexander Gray as "the idea that the world may find its driving force in a Birthday Honours List (giving to the King, if necessary, 165 birthdays a year)." 2 At any rate, the socialists soon found that voluntary methods could hardly yield them the New Socialist Man. But even the most determined and bloodthirsty methods could not avail to create this robotic New Socialist Man. And it is a testament to the spirit of freedom that cannot be extinguished in the human breast that the socialists continued to fail dismally, despite decades of systemic terror. But the uniqueness and the crucial importance of Mises's challenge to socialism is that it was totally unrelated to the well-known incentive problem. Mises in effect said: All right, suppose that the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, the socialist planners. What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient? Mises demonstrated that, in any economy more complex than the Crusoe or primitive family level, the socialist planning board would simply not know what to do, or how to answer any of these vital questions. Developing the momentous concept of calculation, Mises pointed out that the planning board could not answer these questions because socialism would lack the indispensable tool that private entrepreneurs use to appraise and calculate: the existence of a market in the means of production, a market that brings about money 2 Alexander Gray, The Socialist Tradition (London: Longmans, Green, 1946), p. 90.
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Review of Austrian Economics - The Ludwig von Mises Institute

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