A full century ago, the world was forever changed by the October Revolution and the eventual emergence of the red army as the victors of the Russian Civil War. Though the history of the civil war itself is a very interesting topic, and will be dealt with in a later piece, I find this anniversary to be a most opportune time to address the ideology of the war’s victors (the Soviets), Socialism. For we need not the mountains of empirical evidence gathered over the course of the great Soviet experiment to effectively judge the merits of their program from an economic standpoint. The ethics of Socialism, again, are a very different topic which I will not be addressing here.
The theory of the Socialist economy, despite how its modern apologists may try to frame the issue, is rooted fundamentally in the collective ownership of the means of production. Socialism, in essence, is the absence of private property. As Vladimir Lenin himself is said to have put it, after the socialist revolution the whole of the economy was to become “like one factory”. Under such an arrangement, no capitalist would have the perverse incentive to “exploit” the working population, as no capitalists (defined as the owners of the means of production) would exist.
The Socialist however has a response to this critique! After the revolution they say, we will all transform into the “New Socialist Man”, unconcerned with money incentives or other forms of primitive greed. Man, says the Socialist, will evolve into an altruistic being who thinks only of serving the collective. No more concerned with money incentives than the common Borg! This is the origin of the “Not Real Socialism” defense popularized on social media in recent years. “The Soviet Union wasn’t real Socialism”, say the apologists, “had the Soviet Union been an example of real Socialism, we would have seen the emergence of the new socialist man!” The same defense is trotted out for ever case you may throw at them: Cuba, Venezuela, the Third Reich, Cambodia, East Germany, etc. As ridiculous as this defense may seem, many are committed to it and refuse to believe otherwise. Therefore the incentive problem is an insufficient argument for convincing dedicated Socialists.
Enter Ludwig Von Mises. At the time of the Bolshevik Revolution, Mises was an esteemed economist working in Vienna, Austria-Hungary. Mises’ hometown was actually in Lemberg, Galicia, which would later be incorporated into the Soviet Union as Lviv, Ukraine SSR. Needless to say, as an economist and Eastern European, Mises faced the spread of Socialism right before his eyes. Mises was quite familiar with the Socialists pronouncements about their “New Socialist Man” and sought to develop a definitive argument to defeat it.
It would be in his monumental 1920 article Economic Calculation in the Socialist Commonwealth , that Mises would accomplish his goal. Mises begins his article by not disputing the argument of awakening of the “New Socialist Man”, but by completely accepting it. From this point, Mises is able to carry the Socialist argument through to its logical conclusion. Mises supposed first that all citizens in the Socialist Commonwealth were firmly dedicated to the cause of the revolution and were incapable of greed or selfishness, essentially throwing out the incentive problem. It is immediately after this point however that Mises discovers a brand new problem with the Socialist program: the problem of economic calculation.
In short, in a Socialist society with no prices (or with some arbitrary prices) it would impossible to rationally allocate scarce resources. In a capitalist economy, where prices are determined by the subjective valuations of individuals in the community, producers are driven to produce goods using the least expensive inputs available. Take the example of two factories, one which produces nuts and bolts, the other which produces steel beams. The nuts and bolts can be made out of either steel or zinc. The steel beams (obviously) can only be made out of steel. Should the nuts and bolts be made of steel or zinc? In the capitalist economy, the prices of these basic inputs are determined by supply and demand. It is through the price system that resources are able to be directed to their most highly valued end. The steel beam factory’s demand for steel in a capitalist economy would bid up the price of steel relative to zinc. This factory is willing to pay this additional premium for steel because zinc is useless to them. The factory which produces nuts and bolts however has a choice, and they will opt to use the cheaper zinc. In a socialist economy where the means of production are collectively owned, prices cannot emerge. Therefore there is no rational way for the manager of the factory producing nuts and bolts to decide between using steel or zinc. Opting for steel of course would likely cause a shortage.
In a simple economy with two producers, it would be easy enough for a socialist planning board to order one firm to use zinc and the other to use steel. This however becomes impossible in a modern industrial economy with an innumerable number of inputs going into an innumerable number of products. It is simply impossible to calculate where and how each resource should be used in the absence of real prices. Therefore, “real Socialism” itself is not only impractical, it is truly impossible. I recommend any defender of capitalism study
carefully and take this argument to heart, for no Socialist has dared to refute it successfully.