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Quotations about Liberty and Power

About this Quotation:

This quote is going online on the day of the 20th anniversary of the coming down of the Berlin Wall - a symbol of both the Cold War as well as the communist system of eastern Europe. The wall was built to prevent East Berliners fleeing in huge numbers to the West and, as the communist economic system steadily stagnated and began to collapse under its own weight of inefficiency and absurdity, the forces of opposition built to such a point that even a concrete wall could not contain those eager for change. What is amazing is that the most systematic critique of socialist central planning of the economy was penned by Ludwig von Mises only 5 years after the coming to power of the Bolshevik Party in late 1917. The first serious and disastrous attempt to collectivise the Russian economy began under the rule of Lenin and this was followed soon afterwards by Stalin’s First Five Year plan of 1928. Mises was writing during this period and his prescient analysis was as correct then as well as 67 years later when the Berlin Wall was breached by angry demonstrators.

9 November, 2009

Mises200

Ludwig von Mises on the impossibility of rational economic planning under Socialism (1922)

Read the full quote in context here.

The Austrian economist Ludwig von Mises (1881-1973) as early as 1922 (a mere 5 years after the Bolshevik Revolution in Russia) showed that a centrally planned economy (a key platform of the socialists) was both morally wrong because it violated property rights as well as utterly impractical because it prevented the rational allocation of resources. In his view, the socialist experiment could only lead to dictatorship and chaos:

The fundamental objection advanced against the practicability of socialism refers to the impossibility of economic calculation. It has been demonstrated in an irrefutable way that a socialist commonwealth would not be in a position to apply economic calculation. Where there are no market prices for the factors of production because they are neither bought nor sold, it is impossible to resort to calculation in planning future action and in determining the result of past action. A socialist management of production would simply not know whether or not what it plans and executes is the most appropriate means to attain the ends sought. It will operate in the dark, as it were. It will squander the scarce factors of production both material and human (labour). Chaos and poverty for all will unavoidably result.

The full passage from which this quotation was taken can be be viewed below (front page quote in bold):

But which of the many socialist plans, contradicting one another, should be adopted? Every socialist sect passionately proclaims that its own brand is alone genuine socialism and that all other sects advocate counterfeit, entirely pernicious measures. In fighting one another, the various socialist factions resort to the same methods of abstract reasoning which they stigmatize as vain apriorism whenever they are applied against the correctness of their own statements and the expediency and practicability of their own schemes. There is, of course, no other method available. The fallacies implied in a system of abstract reasoning—such as socialism is—cannot be smashed otherwise than by abstract reasoning.

The fundamental objection advanced against the practicability of socialism refers to the impossibility of economic calculation. It has been demonstrated in an irrefutable way that a socialist commonwealth would not be in a position to apply economic calculation. Where there are no market prices for the factors of production because they are neither bought nor sold, it is impossible to resort to calculation in planning future action and in determining the result of past action. A socialist management of production would simply not know whether or not what it plans and executes is the most appropriate means to attain the ends sought. It will operate in the dark, as it were. It will squander the scarce factors of production both material and human (labour). Chaos and poverty for all will unavoidably result.

All earlier socialists were too narrow-minded to see this essential point. Neither did the earlier economists conceive its full importance. When the present writer in 1920 showed the impossibility of economic calculation under socialism, the apologists of socialism embarked upon the search for a method of calculation applicable to a socialist system. They utterly failed in these endeavours. The futility of the schemes they produced could easily be shown. Those communists who were not entirely intimidated by the fear of the Soviet executioners, for instance Trotsky, freely admitted that economic accounting is unthinkable without market relations. The intellectual bankruptcy of the socialist doctrine can no longer be disguised. In spite of its unprecedented popularity, socialism is done for. No economist can any longer question its impracticability. The avowal of socialist ideas is today the proof of a complete ignorance of the basic problems of economics. The socialist’s claims are as vain as those of the astrologers and the magicians.

With regard to this essential problem of socialism, viz., economic calculation, the Russian “experiment” is of no avail. The Soviets are operating within a world the greater part of which still clings to a market economy. They base the calculations on which they make their decisions on the prices established abroad. Without the help of these prices their actions would be aimless and planless. Only as far as they refer to this foreign price system are they able to calculate, keep books and prepare their plans. In this respect one may agree with the statement of various socialist and communist authors that socialism in one or a few countries only is not yet true socialism. Of course, these authors attach a quite different meaning to their assertion. They want to say that the full blessings of socialism can be reaped only in a world-embracing socialist community. Those familiar with the teachings of economics must, on the contrary, recognize that socialism will result in full chaos precisely if it is applied in the greater part of the world.

[More works by Ludwig von Mises (1881 – 1973)]