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The problem of economic calculation

An intellectual hero of mine is the godfather of the Austrian school of economics, Ludwig Von Mises. It’s a disservice to the range and power of his thought to pigeonhole him thus but it’ll serve current purposes. In 1921 he published the weighty Socialism: An Economic and Sociological Analysis and it sent shockwaves through the intelligentsia. For decades socialism had enjoyed a charmed existence in polite circles remnants of which persist to this day. How many times have you heard someone of reasonable education and intelligence utter bland statements such as:

  • Socialism is such a good idea in theory but unfortunately it’s never been properly tried.
  • Socialism would make society so much fairer and better but there’s too many barriers to it ever actually happening.

Since the late 18th century socialism has enjoyed an Obama-eque free pass because of it’s stated (and unproven) utopianism. Proponents of socialism are taken at face value when they profess their noble ideals whereas in contrast proponents of capitalism are immediately assumed to be greedy, selfish and to be treated with suspicion. This is despite the historical record where every single socialist country was a disastrous shithole compared to it’s capitalist equivalents.

a towering intellect

Mises’ book shattered these illusions and proved unequivocally (and with arguments that haven’t been effectively answered even to this day) that socialism is not only untenable and assured final collapse, but that it necessarily creates a hell on earth that no amount of good intentions can stop. Across 1000+ pages he demolishes the ideology through detailed predictions of what society it leads to….. and this writing only 4 years after the Bolshevik revolution – before Stalin, before the collapse of the Berlin Wall. Unlike Nostradamus, Mises made detailed predictions and 80 years of history proved him right.

So if you want to know not just why socialism is inherently evil but also why it can’t work and why despite this people still take it seriously, I recommend you check out his book.I’ll briefly summarise each of the three segments here.

Socialism is evil

Capitalist societies are built upon individual freedom expressed through non-coercive market transactions. Contracts are only entered into if both sides agree to the terms and thus you can’t force any customer to buy your product nor can the customer force the business to provide them a service. In this fundamental manner capitalism supports the individual right of self-determination.

Socialist societies are built upon collective responsiblity expressed through coercive central planning. Contracts are decided by a government bureau and then dictats issued forcing people to comply under threat of negative sanctions. In this fundamental manner socialism suppresses the individual at the expense of the collective.

the workers' paradise

It’s pretty easy to see why this leads to gulags, extermination camps and purges. Imagine yourself for a moment heading the Bureau of Economic Planning and the new Five Year Plan has just been signed off by the Politburo. It is now your job to cascade the Plan downwards by issuing all the orders and regulations to accomplish it. Say, for example, the plan requires X million tonnes of coal to fire the furnaces that produce the traintracks, rolling stock, cars, hammers, cutlery etc. The Plan calculated 10,000 coal miners are needed to extract this coal but currently only 9,000 exist. You need to find 1,000 extra coal miners.

Under capitalism this problem is easily solved. Mining companies calculate the labour value of miners based on the market price for coal produced less various costs. Potential miners evaluate the offered salary and those most interested will apply for the job. If there is still a shortfall of miners and thus coal, the price of the latter increases as rival customers bidding raises demand. Mining companies find it more profitable to offer higher wages (and thus bring in more staff) than to forgo the extra sales. The vacancies are filled.

Socialism has only one solution, after cajoling has failed. Point a gun at the recalcitrant workers and force them to become miners. The Plan doesn’t have dynamic self-correcting features and it is so laborious to construct that the whole thing won’t be torn up just because a few hundred labourers would rather be bricklayers or train drivers than miners. Follow the history of socialist countries and observe how quickly they default to compulsion and labour camps. It’s built into the system.

Socialism will always collapse

Mises showed that socialism cannot ever solve the problem of economic calculation. The problem, simply stated, is this: How do you calculate how to deploy the resources (labour, materials, machinery) of a society in order to produce the goods and services that best meet the needs of the population? For example, English people need tea. How does a society figure out how many cups of tea Englishmen need in 2012? Assuming this can be done, how many kettles will be needed? Is the metal / plastic combination used to make these kettles actually better used elsewhere such as in cutlery, brake discs, watch cases, screws etc?

Under capitalism no-one makes this calculation and yet still Paris gets fed the English don’t take to streets in Tea Riots. The highly devolved market system matches capital and resources to those entrepreneurs who accurately predict and efficiently serve the wants and needs of the population. If you haven’t done so already, take a moment to consider what is abundant and what is scarce in your country. The list may look like this:

  • Abundant: cheeseburgers, Budweiser, iPhones, wristwatches, leather shoes, curtains, chairs, roses, chocolate, Xbox games, books
  • Scarce: healthcare, education

Those goods and services that are supplied by the market are plentiful, cheap, and ever-improving (consider the functionality of an iPhone 4 compared to the phones of 1990). Those supplied by government are scarce, intermittent, low quality, expensive, rationed. If the government took over management of the Sahara desert there’d be a shortage of sand within weeks.

The biggest reason is that without markets you can’t solve the problem of economic calculation. Markets provide prices information that signal consumer demand and incentivise businesses to increase/decrease production and to innovate in new directions. This information is an emergent propert of millions of micro-transactions conducted by self-interested actors with no concern for the macro picture. Socialism has to perform it’s calculation based on top-down social surveys, almost like a sociologist. This causes many problems.

  1. Do you know how many pizzas you will eat next year? I certainly don’t. It’s not even theoretically possible to know because often the decision to order a pizza is made five minutes before the order is placed. You were planning to catch a live show at the blues bar in Soho with some friends but the weather turned to heavy rain so you all stay home. Rather than waste the evening you assemble in the cinema room and watch The Godfather. Stomachs begin to rumble and the women have the night off. So you confer and order pizza. This decision was unknowable more than a couple of hours in advance at most. The world is full of consumption decisions made upon a whim of circumstance that are unknowable even to the decision makers themselves. How can a central planning agency collate such information with sufficient accuracy and foresight to formulate a plan? It can’t. This is an epistemological problem that cannot be solved with supercomputers.
  2. Anyone who’s ever trained in social research (I have) knows that finding out what people think is far more difficult than simply asking them. Imagine taking out your clipboard and approaching twenty strangers with the question “How often do you masturbate?” What’s the bet you get the answers they want you to hear (if any answer is forthcoming at all) rather than the truth? Under socialism interviewees are quite aware that their answers could just as easily disappear into an unmarked draw as to critically redirect production.

The end result of these problems (Mises gives many more) is that central planning is horribly inefficient. Capital is destroyed, resources simulatneously squandered or untapped, and people’s needs unmet. This is why Soviet states had both breadlines around the block and empty stores with dreary unwanted appliances. You can still see this if you visit Cuba.

Socialism can never be eradicated

Karl Marx is indirectly responsible for more misery and squalor than any other historical figure and it all stems from a neat sleight of hand he played in the mid-nineteenth century. Essentially, Marx rebranded socialism from witless utopianism (in which form it had already been discarded twenty years earlier) to pseudo-science. In his brilliant introduction, Mises credits Marx with three rebranding successes that transformed socialism from a stupid failed idea into a stupid successful meme. Importantly, none of Marx’s arguments withstand a moment’s scrutiny but because they appeal to emotions (and particularly the human hunger for meaning) they stuck.

1. Socialism is inevitable due to dialectical materialism. Marx took the laughable “logic” of his mentor Hegel’s dialectic in which every social structure (the thesis) contains seeds of it’s own destruction (the antithesis) which will necessarily be resolved by the emergence of a radically new structure (the synthesis). Hegel used this to show the advance of the human Spirit throughout history and is hopelessly teleological. If you don’t believe me, just read him. It’s nonsensical. Marx tapped into this intellectual heritage to add a sheen of authority to his own rewriting of history in order to argue that capitalism (thesis) creates is own internal contradictions that lead to revolution (antithesis) and it’s final resolution in communism (synthesis). World communism represents a final solution to the dialectic and thus the end of history. People actually bought that. It gave great confidence to motivate socialist agitators that they were pre-ordained with victory while similarly undermining the confidence of those opponents credulous enough to believe it.

2. Socialist institutions cannot be analysed ahead of time. The utopian socialists had been savaged by political philosophers in the early 1800s as their fantasy worlds were shown to be untenable. Marx countered with the idea of infrastructure/superstructure. Put simply, the economic organisation of a society (feudal/capitalist/socialist etc) determines all associated laws, culture, knowledge, arts. People are so constrained by the ways of thinking in any given epoch that they cannot perceive alternatives. The very knowledge that we take as truth are just culturally-conditioned and specific to the form of economic organisation. Again this is ridiculous – as if the engineering knowledge that allowed aquaducts to be built in feudal Roman times suddenly became inaccurate with the shift to capitalism. After all, the aquaducts remained standing! What Marx achieved was to deny the legitimacy of any inquiry into how a socialist society would operate. You can’t know until you get there!

useful idiots

3. Socialism will correct the injustices of an epoch. People don’t like to be taken for suckers and thus if you can convince them they are being played, they’ll believe alot of rubbish (feminism succeeded with women this way). The emotional motivation for socialism is greedy, envy and revenge fantasies against those who occupy a higher social station than the socialist. Marx was able to provide a thin veneer of righteousness to socialism not by waxing lyrical about the win-win paradise of the utopian socialist but rather by justifying the indignation of the vast sea of people who are unhappy with their lot in life. His labour theory of value (which I’ll demolish in a later post) concluded that the poor are poor precisely because the rich exploit them. The riches they have are stolen and illegitimate and thus the workers have every right to take them by force. This sweetens the ugly motivation of revenge behind a pious mask of justice.

I strongly recommend Mises’ work. I’ve merely scratched the surface with this post.

5 responses

  1. j.d. don julian

    “Capitalist societies are built upon individual freedom expressed through non-coercive market transactions. Contracts are only entered into if both sides agree to the terms and thus you can’t force any customer to buy your product nor can the customer force the business to provide them a service.”

    This is ahistorical and untrue… its bizarre to me that an otherwise intelligent person can make statements like this, even teenagers can see through these kinds of claims. Of course part of the time what you say is true. But capitalist countries’s governments have historically been incredibly coercive both on their subjects and on other countries. A lot of the wealth accumulated in what are the wealthiest countries today was accumulated with state intervention via military forces, and of course through explicitly coercive methods, the slave labor of millions of people and the forced appropriation of resources in the colonies.

    Free market capitalism is just as mythological and utopian as socialism, they can both exist in small scales but when societies of millions are concerned nether has ever been implemented. Free market capitalism without state intervention has never existed anywhere.

    This is not a defence of any particular model of socialism, I just disagree with your description of history.

    [Britain and the US through most of the 1800s were mostly free market and this was the greatest period of improvement to mass living standards that ever existed. Colonialism was on the fringes and was mostly cost-neutral to the respective country. It's a Lefty myth that Europe got rich off colonialism. Capitalism does not involve the absence of government, it involves a nightwatchman state. CC.]

    March 16, 2012 at 3:43 am

    • Boxcar

      Slaves are de facto not participants in colonial capitalism, they’re resources. Since we don’t use slaves anymore, that argument is a bit of a red herring. Ah, but many leftists say, we enslave consumers to products and third-world workers to poor wages and living conditions. Well….absence of active dissent is consent. If you don’t like the way the system works you can always go live in a cave, and I doubt anyone would stop you. But that cave will, for most people, be infinitely worse than even the most meager fringes of modern convenience. This isn’t to say I disagree with progressive politics, rather with the attempt to stall and derail real economic critique with these notions of white privilege.

      I would also refrain from using teenagers as any sort of intellectual measuring tape.

      March 16, 2012 at 6:19 pm

  2. blackmetalcommando

    What you say, whilst true, isn’t the whole story. Tribes, nations and empires have always warred with and invaded their neighbours. Capitalist countries are no exception, but certainly theft of resources and slavery pre-dates capitalism and didn’t disappear under communism. As the article suggests, socialism is essentially a state run slave labour camp that builds a wall to imprison the entire population.

    March 16, 2012 at 5:30 pm

  3. Hawk

    Fact is that our current monetary system is basically socialist. It’s not capitalist, it’s socialist. Central banks assume to know how much money the economy needs and print accordingly (or not). Add to that the problem of a fiat paper money system backed by nothing and you’ve got the financial crisis desaster currently unfolding. For more info see this excellent book: http://www.wizardcoinsupply.com/money-socialism.html

    “You can still see this if you visit Cuba.”

    Exactly. Been there myself and can confirm. The problem is that die-hard lefties who visit the island won’t still be convinced but blame Cuba’s troubles on the “American embargo” and the evil capitalist world. There’s no such thing as an embargo there. You can get anything you want on the black market there. Anything. US-products are shipped via Mexico.

    It’s true that the biggest advances in wealth creation happened in free-market and freedom-leaning societies. Burocracies, legal jungles, big government and central planning destroy wealth. There’s a reason why the USA, why the EUSSR are going down these days. [Correct. CC.]

    March 16, 2012 at 8:16 pm

  4. Hawk

    What many people don’t know is that the Soviet Union, in it’s early years, built it’s industrial base with massive US help. Red Army trucks and tractors were running on Ford engines, blueprints were shipped for free, JP Morgan and other western bankers financed Lenin etc. Historians Carroll Quigley and Anthony Sutton documented this. During WW2 Stalin only won the war with massive military aid from his western allies (and the brutal russian winter).

    North Korea today is still leeching off old soviet technology from the 1960′s.
    Hugo Chávez plays Santa Claus on his poor with $$$ oil revenues.

    Socialism “works” as long as capitalists pay the bill. After that, it quickly collapses.

    March 16, 2012 at 9:01 pm

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