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THE IMPOSSIBILITY OF SOCIALISM

BY RICHARD M. EBELING

In May, 1988, the Soviet newspaper, Pravda, ran an article
which summarized the condition of the Soviet socialist
economy: "Not one of the 170 essential sectors has fulfilled
the objectives of the Plan a single time over the last 20
years . . . this has brought about a chain reaction of
hardship and imbalance which has led to 'planned anarchy'
. .  . the disequilibrium has affected every pore of our
economy, and has become legendary."

The term used in the article -- "planned anarchy" -- captures
the essence of socialism. But it also rings out as a
vindication of one of the greatest critics of socialism in the
20th century: the Austrian economist, Ludwig von Mises.

Seventy years ago, in 1920, the Soviet experience was only
three years old. But already, under the name of "War
Communism," Lenin's Bolsheviks had nationalized industry, done
away with market prices and wages, declared the end of a money
economy and introduced planning in the form of a centrally-
directed command economy.

That same year, 1920, Ludwig von Mises published one of the
most important essays in the history of economics: "Economic
Calculation in the Socialist Commonwealth." In less than fifty
pages, Mises demonstrated clearly and irrefutably that
socialism was doomed to fail. He incorporated his argument
into his 1922 treatise, Socialism, An Economic and
Sociological Analysis. Here, the economic principles of a
socialist system were analyzed in the wider context of the
social, political and cultural pathologies of a collectivist
order.

It is not an accident that every experiment with socialism has
created what Pravda called "planned anarchy," or as Mises
entitled one of his own books in the 1940s, Planned Chaos.
Even if we ignore the fact that the rulers of socialist
countries have cared very little for the welfare of their own
subjects; even if we discount the lack of personal incentives
in socialist economies; and even if we disregard the total
lack of concern for the consumer under socialism; the basic
problem remains the same: the most well-intentioned socialist
planner just does not know what to do.

The heart of Mises' argument against socialism is that central
planning by the government destroys the essential tool --
competitively-formed market prices -- by which people in a
society make rational economic decisions.

A modern economy with an advanced system of division of labor,
sophisticated technologies and a wide variety of capital
equipment is just too complex for planners to successfully
organize and oversee. There is just too much knowledge (and
too many different types of knowledge) dispersed among too
many people. The planner is unable to centralize all of the
relevant and ever-changing information in a complex society.
He is unable to arrange everything in the economy in just the
right way in order to "get it right."

Mises explained that in a market economy free of government
intervention, this problem which the socialist planner faces
is non-existent. The key, Mises said, is private property and
individual freedom. In a system of division of labor, in which
all of the transactions require the voluntary consent of
buyers and sellers, self-interest is (as Adam Smith argued
long ago) harnessed to the common good. No one can acquire
what someone else possesses unless he, in turn, offers that
person something he is willing to take in trade. Thus,
improvement in each individual's condition requires that he
consider the wants and desires of his fellow men.

But in a far-flung, world-encompassing system of division of
labor, in which potential trading partners are separated by
time and space, how do people discover what they should
produce in order to satisfy the consumer demands of others?
And how do they produce efficiently, i.e., with the least
economic waste?

Mises explained that the institution of private property made
all of this possible. Ownership and voluntary exchange create
opportunities for gains from trade. Competitive bids and
offers for various goods and services generate market prices
at which transactions are consummated. And these prices convey
useful information to everyone in the market about what
products are in demand in the rest of the world.

At the same time, private ownership of the means of production
permits the acquisition and hire of resources and labor for
the production of goods that consumers may desire to purchase.
The competitive bids of entrepreneurs for the purchase of
those means of production generate market prices for the
necessary resources. These prices enable businessmen to
evaluate the relative value and profitability of using means
of production in alternative ways. They provide the means to
determine which products to produce in the economically least-
costly manner.

Also, since money serves as the common medium through which
all transactions are undertaken, the market value of all goods
and services, and all means of production, are reduced to a
common denominator for simplified comparison and evaluation --
their money prices on the market.

This, Mises said, is what makes possible "economic
calculation" in a market economy. Men are free to make their
own choices. Market prices that arise out of those choices
enable each individual to acquire and share information about
what others desire in the market. The market provides the
method by which people can make their own free decisions in an
economically efficient manner. The entire process redounds to
the benefit of society as a whole.

The problem with socialism, Mises insisted, is that it short-
circuits the "economic calculation" process. And it does so by
abolishing private ownership of the means of production and
eliminating peaceful, voluntary exchange. With no legal right
of ownership, there is neither ability nor incentive to buy
and sell; with nothing to buy and sell, there are no bids and
offers for commodities or resources; with no bids and offers,
there are no consummated exchanges; with no consummated
exchanges, there arise no market prices; and without market
prices expressing the relative values of commodities and
resources, there exists no rational way of knowing what they
are actually worth to people; therefore, businessmen cannot
know how they should economically and efficiently be used to
satisfy the wants and desires of the consuming public.

The socialist planner, therefore, is left trying to steer the
collectivist economy blindfolded. He cannot know what products
to produce, the relative quantities to produce, and the
economically most appropriate way to produce them with the
resources and labor at his central command. This leads to
"planned chaos," as Mises called it, or to "planned anarchy"
to which Pravda referred.

Ludwig von Mises was born on September 29, 1881. This month
marks the 109th anniversary of his birth. (He died on October
10, 1973 at the age of 92.) His greatest work, Human Action, A
Treatise on Economics, was published on September 14, 1949,
forty-one years ago this month. Throughout most of his life,
he was one of the most uncompromising defenders of human
liberty and the free market economy. And he was the most
important critic of socialism in the 20th century.

But during his life, he was vilified and hated by a large part
of the intellectual community, including many in the economics
profession, around the world. What was his "crime"?  In an era
in which the reigning ideology has been collectivism of one
form or another, in which the State has been worshipped as a
god, and in which unswerving obedience to the State is to be
given, Ludwig von Mises defended the individual and his
freedom against omnipotent governments.

But he did more than that. He also tore to shreds the
socialist fantasy that proclaimed that prosperity could come
from central planning. He not only argued that prosperity and
freedom were compatible, he proved that prosperity could come
only through freedom and free markets. Socialism as a means
for improving the condition of man is impossible.

Socialism is dying around the world. Those who have lived
under socialism are trying to rediscover the rules and
institutions of a market economy. Ludwig von Mises' life was
dedicated to showing why socialism had to die and why there is
no substitute for a free economy. His courage and devotion to
the principles of freedom shall stand as a model and ideal for
all of us to emulate in future ages.

Professor Ebeling is the Ludwig von Mises Professor of
Economics at Hillsdale College and also serves as Vice-
President of Academic Affairs of The Future of Freedom
Foundation, P.O. Box 9752, Denver, CO 80209.

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From the September 1990 issue of FREEDOM DAILY,
Copyright (c) 1990, The Future of Freedom Foundation,
PO Box 9752, Denver, Colorado 80209, 303-777-3588.
Permission granted to reprint; please give appropriate credit
and send one copy of reprinted material to the Foundation.