Austrian Economics Wiki

Socialism is the system of social organization in which private property and the distribution of income are subject to social control; it also refers to the political movements aimed at putting that system into practice.[1]


The origins of socialism as a political movement lie in the Industrial Revolution. Its intellectual roots, however, reach back almost as far as recorded thought — even as far as Moses, according to one history of the subject. Socialist or communist ideas certainly play an important part in the ideas of the ancient Greek philosopher Plato, whose Republic depicts an austere society in which men and women of the "guardian" class share with each other not only their few material goods but also their spouses and children. Early Christian communities also practiced the sharing of goods and labour, a simple form of socialism subsequently followed in certain forms of monasticism. Several monastic orders continue these practices today.

Christianity and Platonism were combined in More’s Utopia, which apparently recommends communal ownership as a way of controlling the sins of pride, envy, and greed. Land and houses are common property on More’s imaginary island of Utopia, where everyone works for at least two years on the communal farms and people change houses every 10 years so that no one develops pride of possession. Money has been abolished, and people are free to take what they need from common storehouses. All the Utopians live simply, moreover, so that they are able to meet their needs with only a few hours of work a day, leaving the rest for leisure.

More’s Utopia is not so much a blueprint for a socialist society as it is a commentary on the failings he perceived in the supposedly Christian societies of his day. Religious and political turmoil, however, soon inspired others to try to put utopian ideas into practice. Common ownership was one of the aims of the brief Anabaptist regime in the Westphalian city of Münster during the Protestant Reformation, and several communist or socialist sects sprang up in England in the wake of the Civil Wars (1642–51). Chief among them was the Diggers, whose members claimed that God had created the world for people to share, not to divide and exploit for private profit. When they acted on this belief by digging and planting on land that was not legally theirs, they ran afoul of Oliver Cromwell’s Protectorate, which forcibly disbanded them.

Whether utopian or practical, these early visions of socialism were largely agrarian. This remained true as late as the French Revolution, when the journalist François-Noël Babeuf and other radicals complained that the Revolution had failed to fulfill the ideals of liberty, equality, and fraternity. Adherence to "the precious principle of equality," Babeuf argued, requires the abolition of private property and common enjoyment of the land and its fruits. Such beliefs led to his execution for conspiring to overthrow the government. The publicity that followed his trial and death, however, made him a hero to many in the 19th century who reacted against the emergence of industrial capitalism.[1]

Economic calculation debate[]

The seeds of the calculation debate had been planted by a host of economists before Ludwig von Mises posed the central question "in such a form as to make it impossible that it should ever again disappear." Mises' article, adapted from a lecture of a year earlier, appeared in the spring of 1920 entitled "Economic Calculation in the Socialist Commonwealth" (pdf). The famous challenge of Mises was uncompromising and to the point: "Where there is no free market, there is no pricing mechanism: without a pricing mechanism, there is no economic calculation." Two years later the argument was enlarged in a wide-ranging critique of socialism, entitled Die Gemeinwirtschaft ("Socialism", html, pdf).

The main effect of Mises' arguments has been best summed up by the renowned socialist economist Oskar Lange: "It was [Mises'] powerful challenge that forced the socialists to recognize the importance of an adequate system of economic accounting in a socialist economy. Even more, it was chiefly due to Professor Mises' challenge that many socialists became aware of the very existence of such a problem." But the real effect, was to force the socialists to retreat from a pure advocacy of Marxian socialism to a compromise watered down with "competitive" infusions-market socialism.[2]

Even if the socialists have been able to create a mighty army of citizens all eager to do the bidding of their masters, what exactly would the socialist 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?

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 prices based on genuine profit-seeking exchanges by private owners of these means of production. Since the very essence of socialism is collective ownership of the means of production, the planning board would not be able to plan, or to make any sort of rational economic decisions. Its decisions would necessarily be completely arbitrary and chaotic, and therefore the existence of a socialist planned economy is literally "impossible" (to use a term long ridiculed by Mises's critics).

In the course of intense discussion throughout the 1920s and 1930s, the socialist economists were honest enough to take Mises's criticism seriously, and to throw in the towel on most traditional socialist programs: in particular, the original communist vision that workers, not needing such institutions as bourgeois money fetishism, would simply produce and place their products on some vast socialist heap, with everyone simply taking from that heap "according to his needs."

The socialist economists also abandoned the Marxian variant that everyone should be paid according to the labor time embodied into his product. In contrast, what came to be known as the Lange-Lerner solution, acclaimed by virtually all economists, asserted that the socialist planning board could easily resolve the calculation problem by ordering its various managers to fix accounting prices. Then, according to the contribution of Professor Fred M. Taylor, the central planning board could find the proper prices in much the same way as the capitalist market: trial and error. Thus, given a stock of consumer goods, if the accounting prices are set too low, there will be a shortage, and the planners will raise prices until the shortage disappears and the market is cleared. If, on the other hand, prices are set too high, there will be a surplus on the shelves, and the planners will lower the price, until the markets are cleared. The solution is simplicity itself!

Set aside the obvious absurdity of trusting a coercive governmental monopoly to act somehow as if it were in "perfect competition" with parts of itself. Another grievous flaw in the Lange model is thinking that general equilibrium, a world of certainty where there is no room for the driving force of entrepreneurship, can somehow be used to depict the real world. The actual world is one not of changeless "givens" but of incessant change and systemic uncertainty. Because of this uncertainty, the capitalist entrepreneur, who stakes assets and resources in attempting to achieve profits and avoid losses, becomes the crucial actor in the economic system, an actor who can in no way be portrayed by a world of general equilibrium. Furthermore, it is ludicrous, as Hayek pointed out, to think of general equilibrium as the only legitimate "theory," with all other areas or problems dismissed as mere matters of practicality and degree. No economic theory worth its salt can be worthwhile if it omits the role of the entrepreneur in an uncertain world. The "equations" are not simply excellent theory that faces problems in practice; for in order to be "good," a theory must be useful in explaining real life.

Moreover, in his later rebuttal to the champions of the Pareto-Barone equations, Mises points out that the crucial problem is not simply that the economy is not and can never be in the general equilibrium state described by these differential equations. In addition to other grave problems with the equilibrium model (e.g.: that the socialist planners do not now know their value scales in future equilibrium; that money and monetary exchange cannot fit into the model; that units of productive factors are neither perfectly divisible nor infinitesimal-and that marginal utilities, of different people cannot be equated-on the market or anywhere else), the equations "do not provide any information about the human actions by means of which the hypothetical state of equilibrium" has been or can be reached. In short, the equations offer no information whatever on how to get from the existing disequilibrium state to the general equilibrium goal.

Another grave flaw in the Lange-Taylor trial-and-error approach is that it concentrates on consumer goods pricing. It is true that retailers, given the stock of a certain type of good, can clear the market by adjusting the prices of that good upward or downward. But, as Mises pointed out in his original 1920 article, consumers goods are not the real problem. Consumers, these "market socialists" are postulating, are free to express their values by using money they had earned on a range of consumers' goods. Even the labor market — at least in principle — can be treated as a market with self-owning suppliers who are free to accept or reject bids for their labor and to move to different occupations. The real problem, as Mises has insisted from the beginning, is in all the intermediate markets for land and capital goods. Producers have to use land and capital resources to decide what the stocks of the various consumer goods should be. Here there are a huge number of markets where the State monopoly can only be both buyer and seller for each transaction, and these intra-monopoly, intra-state transactions permeate the most vital markets of an advanced economy — the complex lattice-work of the capital markets. And here is precisely where calculational chaos necessarily reigns, and there is no way for rationality to intrude on the immense number of decisions on the allocation of prices and factors of production in the structure of capital goods.

Mises discussed in Human Action the "trial-and-error" method, and pointed out that this process only works in the capitalist market. There the entrepreneurs are strongly motivated to make greater profits and to avoid losses, and further, such a criterion does not apply to the capital goods or land market under socialism where all resources are controlled by one entity, the government.

This was a critique, not only of socialism, but of the entire Walrasian general equilibrium model. The major fallacy of the "market socialists," Mises pointed out, is that they look at the economic problem from the point of view of the manager of the individual firm, who seeks to make profits or avoid losses within a rigid framework of a given, external allocation of capital to each of the various branches of industry and indeed to the firm itself. In other words, the "market socialist" manager is akin, not to the real driving force of the capitalist market, the capitalist entrepreneur, but rather to the relatively economically insignificant manager of the corporate firm under capitalism.

They consider the structure of industrial production and the allocation of capital to the various branches and production aggregates as rigid, and do not take into account the necessity of altering this structure in order to adjust it to changes in conditions. They fail to realize that the operations of the corporate officers consist merely in the loyal execution of the tasks entrusted to them by their bosses, the shareholders. The operations of the managers, their buying and selling, are only a small segment of the totality of market operations. The market of the capitalist society also performs those operations which allocate the capital goods to the various branches of industry. The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce their size, dissolve them or merge them with other enterprises; they buy and sell the shares and bonds of already existing and of new corporations; they grant, withdraw, and recover credits; in short they perform all those acts the totality of which is called the capital and money market. It is these financial transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of the consumers in the best possible way.

But no "market socialist" has ever suggested preserving or carrying over, much less understood the importance of, the specifically entrepreneurial functions of capitalism:

Nobody has ever suggested that the socialist commonwealth could invite the promoters and speculators to continue their speculations and then deliver their profits to the common chest. Those suggesting a quasi-market for the socialist system have never wanted to preserve the stock and commodity exchanges, the trading in futures, and the bankers and money-lenders as quasi-institutions. One cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character. They are no longer businessmen, but just a group of men to whom the director has handed over his main task, the supreme direction of the conduct of affairs. Then they--and not the nominal director--become the true directors and have to face the same problem the nominal director could not solve: the problem of calculation.[3]

For Mises, in short, the key to the capitalist market economy and its successful functioning is the entrepreneurial forecasting and decision-making of private owners and investors. The key is emphatically not the more minor decisions made by corporate managers within a framework already set by entrepreneurs and the capital markets.

For Hayek, the major problem for the socialist planning board is its lack of knowledge. Without a market, the socialist planning board has no means of knowing the value-scales of the consumers, or the supply of resources or available technologies. The capitalist economy is, for Hayek, a valuable means of disseminating knowledge from one individual to another through the pricing "signals" of the free market. A static, general equilibrium economy would be able to overcome the Hayekian problem of dispersed knowledge, since eventually all data would come to be known by all, but the ever-changing, uncertain data of the real world prevents the socialist planning board from acquiring such knowledge. Hence, as is usual for Hayek, the argument for the free economy and against statism rests on an argument from ignorance. But to Mises the central problem is not "knowledge." He explicitly points out that even if the socialist planners knew perfectly, and eagerly wished to satisfy, the value priorities of the consumers, and even if they enjoyed a perfect knowledge of all resources and all technologies, they still would not be able to calculate, for lack of a price system of the means of production.

In a critique of socialism by Professor Georg Halm:

Because capital is no longer owned by many private persons, but by the community, which itself disposes of it directly, a rate of interest can no longer be determined. A pricing process is always possible only when demand and supply meet in a market…. In the socialist economy … there can be no demand and no supply when the capital from the outset is in the possession of its intending user, in this case the socialistic central authority. Now it might perhaps be suggested that, since the rate of interest cannot be determined automatically, it should be fixed by the central authority. But this likewise would be quite impossible. It is true that the central authority would know quite well how many capital goods of a given kind it possessed or could procure…; it would know the capacity of the existing plant in the various branches of production; but it would not know how scarce capital was. For the scarcity of means of production must always be related to the demand for them, whose fluctuations give rise to variations in the value of the good in question… If it should be objected that a price for consumption-goods would be established, and that in consequence the intensity of the demand and so the value of the means of production would be determinate, this would be a further serious mistake…. The demand for means of production, labor and capital goods, is only indirect.

Halm then adds that the central authority, contrary to his above concession, would not even be able to find out how much capital it is employing. For capital goods are heterogeneous, and therefore how "can the total plant of one factory be compared with that of another? How can a comparison be made between the values of even only two capital-goods?" In short, while under capitalism such comparisons can be made by means of money prices set on the market for every good, in the socialist economy the absence of genuine money prices arising out of a market precludes any such value comparisons. Hence, there is also no way for a socialist system to rationally estimate the costs (which are dependent on prices in factor markets) of any process of production.

But the decisive rebuttal has been leveled by Mises in Human Action: the Soviet Union and Eastern European economies were not fully socialist because they were, after all, islands in a world capitalist market. The communist planners were therefore able, albeit clumsily and imperfectly, to use prices set by world markets as indispensable guidelines for the pricing and allocation of capital resources.

Mises's insight was confirmed as early as the mid-1950s, when the British economist Peter Wiles visited Poland, where Oskar Lange was helping to plan Polish socialism. Wiles asked the Polish economists how they planned the economic system. As reported, "What actually happens is that "world prices", i.e. capitalist world prices, are used in all intra-[Soviet] bloc trade. They are translated into rubles ... entered into bilateral clearing accounts."[4]

Other critiques[]

Before Ludwig von Mises raised the calculation problem in his celebrated article (see in full in 1920, 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 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)." At any rate, the socialists soon found that voluntary methods could hardly yield them this robotic New Socialist Man, nor could the most determined and bloodthirsty methods. 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.

Ever since 1917, or at least since Stalin's great leap forward into socialism in the early 1930s, the defenders of the possibility of socialism had one final, fallback argument. When all the arguments had been hashed over, the defenders of socialism could simply fall back on one point: Well, socialism exists, doesn't it? When all is said and done, it exists, and therefore it must be, for one reason or another, possible. Mises must clearly be wrong, even if the "practical" arguments of Hayek or Robbins, arguments of mere degrees of efficiency, need to be soberly considered.

This triumphal conclusion now rings hollow, since the economies of the Soviet Union and the other socialist bloc countries have now manifestly broken down. And it also turns out that the Soviet GNP and production figures that have been taken at face value for decades have been nothing but a pack of lies, designed to deceive not the United States, but the Soviet managers' own ruling elite.

But apart from all that, this sort of seemingly decisive empiricist counter to the Misesian critique reveals the perils of using allegedly simple and brute "facts" to rebut theory in the sciences of human action. For why must we assume that the Soviet Union and the Eastern European countries ever really enjoyed full and complete socialism? There are many reasons to believe that, try as they might, the communist rulers were never able to impose total socialism and central planning. For one thing, it is now known that the entire Soviet economy and society has been shot through with a vast network of black markets and evasions of controls, fueled by a pervasive system of bribery known as blat to allow escape from those controls. Managers who could not meet their annual production quotas were approached by illegal entrepreneurs and labor teams to help them meet the quotas and get paid off the books. And black markets in foreign exchange have long been familiar to every tourist. Long before the Eastern European collapse of communism, these countries stopped trying to stamp out their black markets in hard currency, even though they were blatantly visible in the streets of Warsaw, Budapest, and Prague. Without uncontrolled black markets fueled by bribery, the communist economies may well have collapsed long ago. This historical point has also been bolstered by Michael Polanyi's "span of control" theory, which denies the possibility of effective central planning from a rather different viewpoint than Mises's.[4]


Until the middle of the nineteenth century no one ventured to dispute the fact that the logical structure of mind is unchangeable and common to all human beings. All human interrelations are based on this assumption of a uniform logical structure. Men enter into discussions; they speak to each other; they write letters and books; they try to prove or to disprove. Some men can think deeper and more refined thoughts than others. There are men who unfortunately cannot grasp a process of inference in long chains of deductive reasoning. But as far as a man is able to think and to follow a process of discursive thought, he always clings to the same ultimate principles of reasoning that are applied by all other men. There are people who cannot count further than three; but their counting, as far as it goes, does not differ from that of Gauss or Laplace. Daily, it is true, people violate logical principles in reasoning. But who­ever examines their inferences competently can uncover their errors.

Yet, in the course of the nineteenth century has this been contested. Marx and the Marxians, foremost among them the "proletarian philosopher" Dietzgen, taught that thought is determined by the thinker's class position. What thinking produces is not truth but "ideologies." This word means, in the context of Marxian philosophy, a disguise of the selfish interest of the social class to which the thinking individual is attached. It is therefore useless to discuss anything with people of another social class. Ideologies do not need to be refuted by discursive reasoning; they must be unmasked by denouncing the class position, the social background, of their authors. Thus Marxians do not discuss the merits of physical theories; they merely uncover the "bourgeois" origin of the physicists.

The Marxians have resorted to polylogism because they could not refute by logical methods the theories developed by "bour­geois" economics, or the inferences drawn from these theories demonstrating the impracticability of socialism. As they could not rationally demonstrate the soundness of their own ideas or the un­soundness of their adversaries' ideas, they have denounced the accepted logical methods. The success of this Marxian stratagem was unprecedented. It has rendered proof against any reasonable criticism all the absurdities of Marxian would-be economics and would-be sociology. Only by the logical tricks of polylogism could etatism gain a hold on the modern mind.

Polylogism is so inherently nonsensical that it cannot be carried consistently to its ultimate logical consequences. No Marxian was bold enough to draw all the conclusions that his own epistemological viewpoint would require. The principle of polylogism would lead to the inference that Marxian teachings also are not objec­tively true but are only "ideological" statements. But the Marxians deny it. They claim for their own doctrines the character of abso­lute truth. Thus Dietzgen teaches that "the ideas of proletarian logic are not party ideas but the outcome of logic pure and sim­ple." The proletarian logic is not "ideology" but absolute logic. Present-day Marxians, who label their teachings the sociology of knowledge, give proof of the same inconsistency.

We may reasonably assume as hypothesis that man's mental abilities are the outcome of his bodily features. Of course, we can­not demonstrate the correctness of this hypothesis, but neither is it possible to demonstrate the correctness of the opposite view as ex­pressed in the theological hypothesis. We are forced to recognize that we do not know how out of physiological processes thoughts result. We have some vague notions of the detrimental effects pro­duced by traumatic or other damage inflicted on certain bodily organs; we know that such damage may restrict or completely de­stroy the mental abilities and functions of men. But that is all. It would be no less than insolent humbug to assert that the natural sciences provide us with any information concerning the alleged diversity of the logical structure of mind. Polylogism cannot be derived from physiology or anatomy or any other of the natural sciences.

Neither Marxian nor Nazi polylogism ever went further than to declare that the logical structure of mind is different with various classes or races. They never ventured to demonstrate precisely in what the logic of the proletarians differs from the logic of the bour­geois, or in what the logic of the Aryans differs from the logic of the Jews or the British. It is not enough to reject wholesale the Ri­cardian theory of comparative cost or the Einstein theory of rela­tivity by unmasking the alleged racial background of their authors. What is wanted is first to develop a system of Aryan logic different from non-Aryan logic. Then it would be necessary to examine point by point these two contested theories and to show where in their reasoning inferences are made which—although correct from the viewpoint of non-Aryan logic—are invalid from the viewpoint of Aryan logic. And, finally, it should be explained what kind of conclusions the replacement of the non-Aryan inferences by the correct Aryan inferences must lead to. But all this never has been and never can be ventured by anybody. Polylogism, whether Marxian or Aryan, or whatever, has never entered into details.[5]

Main article: Polylogism


  1. 1.0 1.1 Encyclopædia Britannica. "socialism." Encyclopædia Britannica Online, referenced 2010-07-06.
  2. Robert Bradley, Jr. "Market Socialism: A Subjectivist Evaluation" (pdf), The Journal of Libertarian Studies, Vol. V, No. 1 (Winter 1981). Referenced 2010-07-06.
  3. Ludwig von Mises. "XXVI. The Impossibility of Economic Calculation under Socialism: Quasi-market", online version of Human Action, referenced 2010-07-07.
  4. 4.0 4.1 Murray N. Rothbard. "The End of Socialism and the Calculation Debate Revisited", Mises Daily, reposted from The Review of Austrian Economics in 1991. Referenced 2010-07-07.
  5. Ludwig von Mises. "Omnipotent Government: The Peculiar Characteristics of German Nationalism" from Omnipotent Government, 6. Polylogism. Referenced 2010-07-09.

External links[]