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LudwigvonMises.pptxCapitalism and Socialism
Week-12
Economic Calculation In The Socialist Commonwealth – Ludwig von Mises
The Nature of Economic Calculation
Every man who, in the course of economic life, takes a choice between the satisfaction of one need as against another, eo ipso makes a judgment of value. Such judgments of value at once include only the very satisfaction of the need itself; and from this they reflect back upon the goods of a lower, and then further upon goods of a higher order. As a rule, the man who knows his own mind is in a position to value goods of a lower order. Under simple conditions it is also possible for him without much ado to form some judgment of the significance to him of goods of a higher order. But where the state of affairs is more involved and their interconnections not so easily discernible, subtler means must be employed to accomplish a correct valuation of the means of production.
It would not be difficult for a farmer in economic isolation to come by a distinction between the expansion of pasture-farming and the development of activity in the hunting field. In such a case the processes of production involved are relatively short and the expense and income entailed can be easily gauged. But it is quite a different matter when the choice lies between the utilization of a water-course for the manufacture of electricity or the extension of a coal mine or the drawing up of plans for the better employment of the energies latent in raw coal. Here the roundabout processes of production are many and each is very lengthy; here the conditions necessary for the success of the enterprises which are to be initiated are diverse, so that one cannot apply merely vague valuations, but requires rather more exact estimates and some judgment of the economic issues actually involved.
Valuation can only take place in terms of units, yet it is impossible that there should ever be a unit of subjective use value for goods. Marginal utility does not posit any unit of value, since it is obvious that the value of two units of a given stock is necessarily greater than, but less than double, the value of a single unit. Judgments of value do not measure; they merely establish grades and scales.
The Nature of Economic Calculation
In an exchange economy the objective exchange value of commodities enters as the unit of economic calculation. This entails a threefold advantage
In the first place, it renders it possible to base the calculation upon the valuations of all participants in trade. The subjective use value of each is not immediately comparable as a purely individual phenomenon with the subjective use value of other men. It only becomes so in exchange value, which arises out of the interplay of the subjective valuations of all who take part in exchange.
But in that case calculation by exchange value furnishes a control over the appropriate employment of goods. Anyone who wishes to make calculations in regard to a complicated process of production will immediately notice whether he has worked more economically than others or not; if he finds, from reference to the exchange relations obtaining in the market, that he will not be able to produce profitably, this shows that others understand how to make a better use of the goods of higher order in question.
Lastly, calculation by exchange value makes it possible to refer values back to a unit. For this purpose, since goods are mutually substitutable in accordance with the exchange relations obtaining in the market, any possible good can be chosen. In a monetary economy it is money that is so chosen.
The Nature of Economic Calculation
In the narrow confines of a closed household economy, it is possible throughout to review the process of production from beginning to end, and to judge all the time whether one or another mode of procedure yields more consumable goods. This, however, is no longer possible in the incomparably more involved circumstances of our own social economy. It will be evident, even in the socialist society, that 1,000 hectoliters of wine are better than 800, and it is not difficult to decide whether it desires 1,000 hectoliters of wine rather than 500 of oil. There is no need for any system of calculation to establish this fact: the deciding element is the will of the economic subjects involved. But once this decision has been taken, the real task of rational economic direction only commences, i.e. economically, to place the means at the service of the end. That can only be done with some kind of economic calculation. The human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid. It would simply stand perplexed before the problems of management and location.
It is an illusion to imagine that in a socialist state calculation in natura can take the place of monetary calculation. Calculation in natura, in an economy without exchange, can embrace consumption goods only; it completely fails when it comes to dealing with goods of a higher order. And as soon as one gives up the conception of a freely established monetary price for goods of a higher order, rational production becomes completely impossible. Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.
Without economic calculation there can be no economy . Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be—in our sense of the term--no economy whatsoever. (…) All transactions which serve the purpose of meeting requirements will be subject to the control of a supreme authority. Yet in place of the economy of the “anarchic” method of production, recourse will be had to the senseless output of an absurd apparatus. The wheels will turn, but will run to no effect.
The Nature of Economic Calculation
In the economic system of private ownership of the means of production, the system of computation by value is necessarily employed by each independent member of society. Everybody participates in its emergence in a double way: on the one hand as a consumer and on the other as a producer. As a consumer he establishes a scale of valuation for goods ready for use in consumption. As a producer he puts goods of a higher order into such use as produces the greatest return. In this way all goods of a higher order receive a position in the scale of valuations in accordance with the immediate state of social conditions of production and of social needs. Through the interplay of these two processes of valuation, means will be afforded for governing both consumption and production by the economic principle throughout. Every graded system of pricing proceeds from the fact that men always and ever harmonized their own requirements with their estimation of economic facts.
All this is necessarily absent from a socialist state. The administration may know exactly what goods are most urgently needed. But in so doing, it has only found what is, in fact, but one of the two necessary prerequisites for economic calculation. In the nature of the case it must, however, dispense with the other-- the valuation of the means of production. It may establish the value attained by the totality of the means of production; this is obviously identical with that of all the needs thereby satisfied. It may also be able to calculate the value of any means of production by calculating the consequence of its withdrawal in relation to the satisfaction of needs. Yet it cannot reduce this value to the uniform expression of a money price, as can a competitive economy, wherein all prices can be referred back to a common expression in terms of money. In a socialist commonwealth which, whilst it need not of necessity dispense with money altogether, yet finds it impossible to use money as an expression of the price of the factors of production (including labor), money can play no role in economic calculation.
The Nature of Economic Calculation
Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all. The drawing up of bills on an economic basis is only possible where all the goods concerned can be referred back to money. Admittedly, monetary calculation has its inconveniences and serious defects, but we have certainly nothing better to put in its place, and for the practical purposes of life monetary calculation as it exists under a sound monetary system always suffices. Were we to dispense with it, any economic system of calculation would become absolutely impossible.
In every great enterprise, each particular business or branch of business is to some extent independent in its accounting. It reckons the labor and material against each other, and it is always possible for each individual group to strike a particular balance and to approach the economic results of its activities from an accounting point of view. We can thus ascertain with what success each particular section has labored, and accordingly draw conclusions about the reorganization, curtailment, abandonment, or expansion of existing groups and about the institution of new ones. (…) It seems tempting to try to construct by analogy a separate estimation of the particular production groups in the socialist state also. But it is quite impossible. For each separate calculation of the particular branches of one and the same enterprise depends exclusively on the fact that is precisely in market dealings that market prices to be taken as the bases of calculation are formed for all kinds of goods and labor employed. Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.
The Nature of Economic Calculation
On a first impression calculation in terms of labor also takes into consideration the natural non-human conditions of production. The law of diminishing returns is already allowed for in the concept of socially necessary average labor time to the extent that its operation is due to the variety of the natural conditions of production. If the demand for a commodity increases and worse natural resources must be exploited, then the average socially necessary labor time required for the production of a unit increases too. If more favorable natural resources are discovered, the amount of socially necessary labor diminishes. The consideration of the natural condition of production suffices only in so far as it is reflected in the amount of labor socially necessary. But it is in this respect that valuation in terms of labor fails. It leaves the employment of material factors of production out of account. Let the amount of socially necessary labor time required for the production of each of the commodities P and Q be 10 hours. Further, in addition to labor the production of both P and Q requires the raw material a, a unit of which is produced by an hour’s socially necessary labor; 2 units of a and 8 hours’ labor are used in the production of P, and one unit of a and 9 hours’ labor in the production of Q. In terms of labor P and Q are equivalent, but in value terms P is more valuable than Q. The former is false, and only the latter corresponds to the nature and purpose of calculation. True, this surplus, by which according to value calculation P is more valuable than Q, this material sub-stratum “is given by nature without any addition from man.” Still, the fact that it is only present in such quantities that it becomes an object of economizing, must be taken into account in some form or other in value calculation.
The Nature of Economic Calculation
(…) the directors of companies; in spite of the fact that they are not the owners of the means of production, enterprises under their control have flourished. If society, instead of company shareholders, becomes the owner of the means of production, nothing will have altered. The directors would not work less satisfactorily for society than for shareholders. We must distinguish between two groups of joint-stock companies and similar concerns. In the first group, consisting for the large part of smaller companies, a few individuals unite in a common enterprise in the legal form of a company. They are often the heirs of the founders of the company, or often previous competitors who have amalgamated. Here the actual control and management of business is in the hands of the shareholders themselves or at least of some of the shareholders, who do business in their own interest; or in that of closely related shareholders such as wives, minors, etc. The directors in their capacity as members of the board of management or of the board of control, and sometimes also in an attenuated legal capacity, themselves exercise the decisive influence in the conduct of affairs. Nor is this affected by the circumstance that sometimes part of the share-capital is held by a financial consortium or bank. Here in fact the company is only differentiated from the public commercial company by its legal form.
The situation is quite different in the case of large-scale companies, where only a fraction of the shareholders, i.e. the big shareholders, participate in the actual control of the enterprise. And these usually have the same interest in the firm’s prosperity as any property holder. Still, it may well be that they have interests other than those of the vast majority of small shareholders, who are excluded from the management even if they own the larger part of the share capital. Severe collisions may occur, when the firm’s business is so handled on behalf of the directors that the shareholders are injured. But be that as it may, it is clear that the real holders of power in companies run the business in their own interest, whether it coincides with that of the shareholders or not. In the long run it will generally be to the advantage of the solid company administrator, who is not merely bent on making a transient profit, to represent the shareholders’ interests only in every case and to avoid manipulations which might damage them. This holds good in the first instance for banks and financial groups, which should not trifle at the public’s expense with the credit they enjoy. Thus it is not merely on the prescriptiveness of ethical motives that the success of companies depends.
The situation is completely transformed when an undertaking is nationalized. The motive force disappears with the exclusion of the material interests of private individuals, and if State and municipal enterprises thrive at all, they owe it to the taking over of “management” from private enterprise, or to the fact that they are ever driven to reforms and innovations by the business men from whom they purchase their instruments of production and raw material. Since we are in a position to survey decades of State and socialist endeavor, it is now generally recognized that there is no internal pressure to reform and improvement of production in socialist undertakings, that they cannot be adjusted to the changing conditions of demand, and that in a word they are a dead limb in the economic organism.
