Mises on Socialism

Gary North

In 1920, Ludwig von Mises' article was published, "Economic Calculation in the Socialist Commonwealth." You can download the article here.

In it, he argued that central economic planning is inherently irrational. Why? Because central planners need prices to show them what any scarce resource costs. These prices must be generated through competition in a society that allows freedom of entry into markets. Socialism does not allow this. http://bit.ly/MisesOnMoney Socialist planners, if successful in centralizing production and distribution, would have no prices to guide their planning. They would not know what any asset, product, or service costs. They would have to copy prices in non-socialist societies. So, the more successful that the government's planners are in centralizing the economy, the less rational the economy will be. Therefore, Mises concluded, socialism is irrational. It is an ideal that cannot be attained in the real world. It is inherently utopian [nowhere], suitable only for nowhere.

This article for a time became the focus of defenders of socialism. But none of them could refute it. So, over time, economists who defended central planning of any kind either ignored the article or else they said it had been refuted. The article went down what George Orwell (Eric Blair) in his dystopian novel 1984 called the memory hole.

EVIDENCE FROM ECONOMIC HISTORY

Mises argued that economic theory cannot be refuted by economic facts. Facts must be interpreted by theory.

This raises a question of economic epistemology. Epistemology asks this: "What can we know, and how can we know it?" Can facts validate a theory? Mises would have said no. Yet what happened six decades after his article was published seems to validate his article.

There was an implication of Mises' argument that he did not mention in his article. Long before reaching this utopian ideal, socialist economies will prove to be increasingly irrational. They will not be able to sustain economic growth comparable to that enjoyed by market-based societies.

In 1979, Communist China abandoned central planning in the agricultural sector. This launched the longest period of rapid and sustained economic growth in the history of any large nation. It matched the economic growth of South Korea, 1950 to 1990. But South Korea was much smaller.

Next, in the late 1980's, the economy of the Soviet Union began to implode. On December 25, 1991, Soviet date, Mikhail Gorbachev formally dissolved the USSR. The red flag over the Kremlin was lowered for the last time. The genocidal experiment was over.

These two developments seemed to validate Mises' theory in 1920. Socialism really is irrational.

Because socialism is inherently irrational, it cannot produce economic growth to match that of free market societies. This contrast can be seen in this satellite photo of the two Koreas. I know of no visual image that better validates Mises' theory.

IMPACT

In his Postscript to the 1990 reprint of this essay, Joseph Salerno offered this assessment:

The significance of Mises's 1920 article extends far beyond its devastating demonstration of the impossibility of socialist economy and society. It provides the rationale for the price system, purely free markets, the security of private property against all encroachments, and sound money. Its thesis will continue to be relevant as long as economists and policy-makers want to understand why even minor government economic interventions consistently fail to achieve socially beneficial results. "Economic Calculation in the Socialist Commonwealth" surely ranks among the most important economic articles written this century.

I would add this: or any century.

In 1922, Mises extended his article into a monumental book: Socialism: An Economic and Sociological Analysis. You can download it here. No book on socialism has matched it for its theoretical rigor, its assessment of socialism's failures in real-world applications, and its observations on why socialism appealed to intellectuals and also voters.

This book attracted the first generation of young economists who became free market economists. They switched from socialism. Most prominent among them were F. A. Hayek, Wilhelm Röpke, Gottfried Haberler, and Fritz Machlup. In 1961, Prof. Haberler listed young economists who attended his weekly seminar. No one received academic credit for attending. The seminar was informal and independent of any organization. Mises invited attendees. It was an honor to be invited. They came from all over the world at their own expense. The list is here

In this department, I will summarize Mises' arguments against socialism. I want it to complement my 2011 book, Mises on Money, which you can download here.

I hope these articles help you understand why socialism cannot work, not just in practice (North Korea), but in theory.