A Review of "Economic Calculation in the Socialist Commonwealth"
By Jason Kauppinen
In this book, originally published in 1920, Ludwig von Mises conclusively proved that a socialist economy can not function.
The definition of "socialist economy" entails that all capital goods are the property of all citizens. An implicit consequence of this definition is that planning, central or otherwise, will take the place of market operations in capital goods.
It is possible for planners in a socialist economy to know which goods (capital and consumer) are urgently needed. However the means selected to produce all goods must be done on an arbitrary basis if market-generated capital goods prices are not available. There are two reasons why this selection must be done on an arbitrary basis and both are related to how prices are created in an open market.
First: In an open market prices are governed by values-- the cumulative valuations of all potential consumers within the market. These values are governed by the degree of importance of the desires that would have to remain unsatisfied if an individual was unable to acquire the goods or service in question. (Menger pg 171-173) Since every potential customer is free to individually form their own valuations of the good offered in the market the resultant cumulative valuation that governs the price of a good takes advantage of an intellectual division of labour.
No socialist planner is capable of replicating this process or the accuracy that each potential customer has in defining and pursuing his or her own values. Such valuations are subject to each individual's personal preferences, and particular situation, at any particular time. Socialist planners remove the price formation process from all potential consumers--disempowering them.
Second: The cumulative valuation involved in price formation in capital goods markets, when free of government interference in both that market itself and the price level generally, is self-correcting and "self-improving". The market disciplines entrepreneurs both for the goods and services that they arrange to be produced and the means by which these goods and services are produced. Those who arrange to have a good or service produced that no one wants are quickly forced to either change what they are producing or exit the particular market. Similarly entrepreneurs procuring a good or service that is in demand must also do so in the most efficient means possible with regards to the purchase and use of capital goods. Those that do not will eventually be displaced by other entrepreneurs who will be able to procure a comparable good or service more efficiently.
There is no means by which an organization of socialist planners could duplicate the incentives that entrepreneurs have to use capital goods as efficiently as possible. The motives and performance of central planners can only languish in the political realm.
Market generated capital goods prices are important because they are a critical component of the process of economic calculation. This is the process that entrepreneurs use in order to determine the most efficient use of capital goods. This process consists of two parts: knowledge of what goods are being demanded in the target market and knowledge of the prices of each factor of production required to produce the demanded goods.
Socialist planners may be able to have a rough idea of what goods consumers are demanding. However, without capital goods prices generated by an open market, they have no means to duplicate the process of economic calculation that entrepreneurs engage in. As a result, capital goods selected to produce whatever is decided upon will drift further and further away from economically efficient use over time. The result will inevitably be shortages in consumer goods, unused surpluses, and general technological stagnation.
Seventy-one years after von Mises published Economic Calculation in the Socialist Commonwealth, and one hundred million human deaths later, the failure of fully implemented socialism--communism, has been acknowledged. However, the fact that Ludwig von Mises predicted that it would fail, and how and why it would fail has yet to become general knowledge.
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