Section 2. The Nature of Economic Calculation
Every man who in the course of economic life takes a choice between the satisfaction of one need as against another,
eo ipso makes a judgment of value.
Such judgments of value at once include only the very satisfaction of the need itself,
and from this they reflect back upon the goods of a lower and then further upon goods of a higher order.
As a rule, the man who knows his own mind is in a position to value goods of a lower order.
Under simple conditions, it is also possible for him without much ado to form some judgment of the significance to him of goods of a higher order.
But, where the state of affairs is more involved and their interconnections not so easily discernible,
subtler means must be employed to accomplish a correct valuation of the means of production.
It would not be difficult for a farmer in economic isolation to come by a distinction
between the expansion of pasture farming and the development of activity in the hunting
field.
In such a case the processes of production involved are relatively short and the expense
and income entailed can be easily gauged.
But it is quite a different matter when the choice lies between the utilization of a water
Water course for the manufacture of electricity or the extension of a coal mine or the drawing
up of plans for the better employment of the energies latent in raw coal.
Here the roundabout processes of production are many and each is very lengthy.
Here the conditions necessary for the success of the enterprises which are to be initiated
are diverse so that one cannot apply merely vague valuations but requires rather more
more exact estimates and some judgment of the economic issues actually involved.
Valuation can only take place in terms of units, yet it is impossible that there should
ever be a unit of subjective use-value for goods.
Marginal utility does not posit any unit of value, since it is obvious that the value
of two units of a given stock is necessarily greater than, but less than double, the value
of a single unit.
Estimates of value do not measure, they merely establish grades and scales. Even Robinson
Crusoe, when he has to make a decision where no ready judgment of value appears, and where
he has to construct one upon the basis of a more or less exact estimate, cannot operate
solely with subjective use value, but must take into consideration the intersubstitutability
of goods on the basis of which he can then form his estimates.
In such circumstances it will be impossible for him to refer all things back to one unit.
Rather will he so far as he can refer all the elements which have to be taken into account
in forming his estimate to those economic goods which can be apprehended by an obvious
judgment of value, that is to say, to goods of a lower order and to pain cost.
That this is only possible in very simple conditions is obvious.
In the case of more complicated and more lengthy processes of production, it will plainly not
answer.
In an exchange economy, the objective exchange value of commodities enters as the unit of
economic calculation.
This entails a threefold advantage.
In the first place, it renders it possible to base the calculation upon the valuations
of all participants in trade.
The subjective use-value of each is not immediately comparable as a purely individual phenomenon,
with the subjective use-value of other men.
It only becomes so in exchange-value, which arises out of the interplay of the subjective
valuations of all who take part in exchange.
But in that case, calculation by exchange-value furnishes a control over the appropriate employment
of goods.
Anyone who wishes to make calculations in regard to a complicated process of production will
immediately notice whether he has worked more economically than others or not.
If he finds, from reference to the exchange relations obtaining in the market, that he
will not be able to produce profitably, this shows that others understand how to make a
better use of the goods of higher order in question.
Lastly, calculation by exchange value makes it possible to refer values back to a unit.
For this purpose, since goods are mutually substitutable in accordance with the exchange
relations obtaining in the market, any possible good can be chosen.
In a monetary economy it is money that is so chosen.
Monetary calculation has its limits.
Money is no yardstick of value, nor yet of price.
Value is not indeed measured in money, nor is price.
They merely consist in money.
Money as an economic good is not of stable value as has been naively but wrongly assumed
in using it as a standard of deferred payments.
The exchange relationship which obtains between money and goods is subjected to constant,
if as a rule not too violent, fluctuations originating not only from the side of other
economic goods but also from the side of money.
However, these fluctuations disturb value calculations only in the slightest degree, since usually, in view of the ceaseless alternations in other economic data,
these calculations will refer only to comparatively short periods of time, periods in which good money, at least normally, undergoes comparatively trivial fluctuations in regard to its exchange relations.
The inadequacy of the monetary calculation of value does not have its mainspring in the fact that value is then calculated in terms of a universal medium of exchange, namely money, but rather in the fact that in this system it is exchange value and not subjective use value on which the calculation is based.
It can never obtain as a measure for the calculation of those value determining elements which stand outside the domain of exchange transactions.
If, for example, a man were to calculate the profitability of erecting a water works, he would not be able to include in his calculation the beauty of the waterfall which the scheme might impair, except that he may pay attention to the diminution of tourist traffic or similar changes which may be valued in terms of money, yet these considerations might well prove one of the factors in deciding whether or not the building is to go up at all. It is customary to term such elements extra-economic. This perhaps is appropriate.
We are not concerned with disputes over terminology, yet the considerations themselves can scarcely
be termed irrational. In any place where men regard a significant the beauty of a neighborhood
or of a building, the health, happiness, and contentment of mankind, the honor of individuals
or nations, they are just as much motive forces of rational conduct as are economic factors
in the proper sense of the word, even where they are not substitutable against each other
that monetary calculation cannot embrace these factors lies in its very nature, but for the purposes of our everyday economic life this does not detract from the significance of monetary calculation, for all those ideal goods are goods of a lower order and can hence be embraced straightway within the ambit of our judgment of values, there is therefore no difficulty in taking them into account even though they must remain outside the
and the sphere of monetary value.
That they do not admit of such computation
renders their consideration in the affairs of life easier and not harder.
Once we see clearly how highly we value beauty, health, honor and pride,
surely nothing can prevent us from paying a corresponding regard to them.
It may seem painful to any sensitive spirit
to have to balance spiritual goods against material,
but that is not the fault of monetary calculation.
It lies in the very nature of things themselves.
If our judgments of value can be established directly without computation in value or in money,
the necessity of choosing between material and spiritual satisfaction cannot be evaded.
Robinson Crusoe and the socialist state have an equal obligation to make the choice.
Anyone with a genuine sense of moral values experiences no hardship in deciding between honor and livelihood.
He knows his plain duty. If a man cannot make honor his bread, yet can he renounce his bread for honor's sake, only they who prefer to be relieved of the agony of this decision, because they cannot bring themselves to renounce material comfort for the sake of spiritual advantage, seeing the choice a profanation of true values.
Monetary calculation only has meaning within the sphere of economic organization.
It is a system whereby the rules of economics may be applied in the disposition of economic goods.
Economic goods only have part in this system in proportion to the extent to which they may be exchanged for money.
Any extension of the sphere of monetary calculation causes misunderstanding.
It cannot be regarded as constituting a kind of yardstick for the valuation of goods
and cannot be so treated in historical investigations into the development of social relationships.
It cannot be used as a criterion of national wealth and income, nor as a means of gauging
the value of goods which stand outside the sphere of exchange, as who should seek to
estimate the extent of human losses through emigrations or wars in terms of money.
This is mere stylistic tomfoolery.
However much it may be indulged in by otherwise perspicacious economists.
Nonetheless, within these limits, which in economic life it never overlaps, monetary calculation
fulfills all the requirements of economic calculation.
It affords us a guide through the oppressive plentitude of economic potentialities.
It enables us to extend, to all goods of a higher order, the judgment of value, which
which is bound up with and clearly evident in the case of goods ready for consumption or, at best, of production goods of the lowest order.
It renders their value capable of computation and thereby gives us the primary basis for all economic operations with goods of a higher order.
Without it, all production involving processes stretching well back in time, and all the longer roundabout processes of capitalistic production, would be gropings in the dark.
There are two conditions governing the possibility of calculating value in terms of money.
Firstly, not only must goods of a lower but also those of a higher order come within the ambit of exchange, if they are to be included.
If they do not do so, exchange relationships would not arise.
True enough, the considerations which must obtain in the case of Robinson Crusoe prepared within the range of his own hearth to exchange, by production, labor and flour for bread, are indistinguishable from those which obtain when he is prepared to exchange bread for clothes in the open market, and therefore it is to some extent true to say that every economic action, including Robinson Crusoe's own production, can be termed exchange. Moreover, the mind of one man alone, be it
Ever so cunning is too weak to grasp the importance of any single one among the countlessly
many goods of higher order.
No single man can ever master all the possibilities of production innumerable as they are as to
be in a position to make straightway evident judgments of value without the aid of some
system of computation.
The distribution among a number of individuals of administrative control over economic goods
in a community of men who take part in the labor of producing them and who are economically
interested in them, entails a kind of intellectual division of labor, which would not be possible
without some system of calculating production and without economy.
The second condition is that there exists in fact a universally employed medium of exchange,
namely money, which plays the same part as a medium in the exchange of production goods
also.
If this were not the case, it would not be possible to reduce all exchange relationships
to a common denominator.
Only under simple conditions can economics dispense with monetary calculations.
Within the narrow confines of household economy, for instance, where the father can supervise
the entire economic management, it is possible to determine the significance of changes in
the processes of production without such aids to the mind, and yet with more or less of
accuracy.
In such a case, the process develops under a relatively limited use of capital.
Few of the capitalistic roundabout processes of production are here introduced.
What is manufactured is, as a rule, consumption goods, or at least such goods of a higher
order as stand very near to consumption goods.
The division of labor is, in its rudimentary stages, one and the same laborer controls
the labor of what is in effect a complete process of production of goods ready for consumption
from beginning to end. All this is different, however, in developed communal production.
The experiences of a remote and bygone period of simple production do not provide any sort
of argument for establishing the possibility of an economic system without monetary calculation.
In the narrow confines of a closed household economy, it is possible throughout to review
the process of production from beginning to end and to judge all the time whether one
One or another mode of procedure yields more consumable goods. This, however, is no longer
possible in the incomparably more involved circumstances of our own social economy. It
will be evident, even in the socialist society, that 1,000 hectoliters of wine are better
than 800, and it is not difficult to decide whether it desires 1,000 hectoliters of wine
rather than 500 of oil. There is no need for any system of calculation to establish this
In this fact, the deciding element is the will of the economic subjects involved, but once this decision has been taken, the real task of rational economic direction only commences, i.e. economically, to place the means at the service of the end.
That can only be done with some kind of economic calculation.
If the human mind cannot orientate itself properly among the bewildering mass of intermediate products and potentialities of production without such aid, it would simply stand perplexed before the problems of management and location.
It is an illusion to imagine that in a socialist state calculation in natura can take the place of monetary calculation.
Calculation in natura, in an economy without exchange, can embrace consumption goods only.
It completely fails when it comes to dealing with goods of a higher order.
And as soon as one gives up the conception of a freely established monetary price for goods of a higher order,
rational production becomes completely impossible.
Every step that takes us away from private ownership of the means of production and from the use of money
also takes us away from rational economics.
It is easy to overlook this fact, considering that the extent to which socialism is in evidence among us
constitutes only a socialistic oasis in a society with monetary exchange,
which is still a free society to a certain degree.
In one sense we may agree with the socialist assertion,
which is otherwise entirely untenable and advanced only as a demagogic point,
To the effect that the nationalization and municipalization of enterprise is not really socialism, since these concerns in their business organizations are so much dependent upon the environing economic system with its free commerce, that they cannot be said to partake today of the really essential nature of a socialist economy.
In state and municipal undertakings, technical improvements are introduced because their effect in similar private enterprises, domestic or foreign, can be noticed.
are noticed, and because those private industries which produce the materials for these improvements
give the impulse for their introduction.
In these concerns the advantages of reorganization can be established because they operate within
the sphere of a society based upon private ownership of the means of production and upon
the system of monetary exchange, being thus capable of computation and account.
This state of affairs, however, could not obtain in the case of socialist concerns operating
in a purely socialistic environment.
Without economic calculation there can be no economy, hence in a socialist state wherein
the pursuit of economic calculation is impossible, there can be in our sense of the term no economy
whatsoever.
In trivial and secondary matters, rational conduct might still be possible, but in general
it would be impossible to speak of rational production anymore.
There would be no means of determining what was rational,
and hence it is obvious that production could never be directed by economic considerations.
What this means is clear enough.
Apart from its effects on the supply of commodities,
rational conduct would be divorced from the very ground which is its proper domain.
Would there in fact be any such thing as rational conduct at all,
or indeed such a thing as rationality and logic and thought itself,
historically human rationality is a development of economic life.
Could it then obtain, when divorced therefrom,
for a time the remembrance of the experiences gained in a competitive economy,
which has obtained for some thousands of years, may provide a check
to the complete collapse of the art of economy.
The older methods of procedure might be retained
not because of their rationality, but because they appear to be hallowed by tradition.
Actually, they would meanwhile have become irrational, as no longer comporting with the new conditions.
Eventually, through the general reconstruction of economic thought, they will experience alterations, which will render them in fact uneconomic.
The supply of goods will no longer proceed anarchically of its own accord, that is true.
All transactions which serve the purpose of meeting requirements will be subject to the control of a supreme authority.
Yet in place of the economy of the anarchic method of production, recourse will be had to the senseless output of an absurd apparatus.
The wheels will turn but will run to no effect. One may anticipate the nature of the future socialist society.
There will be hundreds and thousands of factories in operation. Very few of these will be producing wares ready for use.
In the majority of cases, what will be manufactured will be unfinished goods and production goods.
All these concerns will be interrelated. Every good will go through a whole series of stages before it is ready for use.
In the ceaseless toil and moil of this process, however, the administration will be without any means of testing their bearings.
It will never be able to determine whether a given good has not been kept for a superfluous length of time in the necessary processes of production,
or whether work and material have not been wasted in its completion.
How will it be able to decide whether this or that method of production is the more profitable?
At best, it will only be able to compare the quality and quantity of the consumable end product produced,
but will in the rarest cases be in a position to compare the expenses entailed in production.
It will know, or think it knows, the ends to be achieved by economic organization,
and will have to regulate its activities accordingly, i.e. it will have to attain those ends with the least expense.
It will have to make its computations with a view to finding the cheapest way.
This computation will naturally have to be a value computation.
It is eminently clear and requires no further proof that it cannot be of a technical character
and that it cannot be based upon the objective use value of goods and services.
Now, in the economic system of private ownership of the means of production, the system of
computation by value is necessarily employed by each independent member of society. Everybody
participates in its emergence in a double way, on the one hand as a consumer and on
the other as a producer. As a consumer, he establishes a scale of valuation for goods
ready for use and consumption. As a producer, he puts goods of a higher order into such
In this way, all goods of a higher order receive a position in the scale of valuations in accordance with the immediate state of social conditions of production and of social needs.
Through the interplay of these two processes of valuation, means will be afforded for governing both consumption and production by the economic principle throughout.
Every graded system of pricing proceeds from the fact that men always and ever harmonize their own requirements with their estimation of economic facts.
All this is necessarily absent from a socialist state. The administration may know exactly what goods are most urgently needed,
but in so doing it has only found what is in fact but one of the two necessary prerequisites for economic calculation.
In the nature of the case, it must, however, dispense with the other, the valuation of the means of production.
It may establish the value attained by the totality of the means of production,
this is obviously identical with that of all the needs thereby satisfied.
It may also be able to calculate the value of any means of production
by calculating the consequence of its withdrawal in relation to the satisfaction of needs.
of Needs. Yet, it cannot reduce this value to the uniform expression of a money price,
as can a competitive economy, wherein all prices can be referred back to a common expression
in terms of money. In a socialist commonwealth, which, whilst it need not of necessity dispense
with money altogether, yet finds it impossible to use money as an expression of the price
of the factors of production including labor, money can play no role in economic calculation.
Picture the building of a new railroad.
Should it be built at all, and if so, which out of a number of conceivable roads should
be built?
In a competitive and monetary economy, this question would be answered by monetary calculation.
The new road will render less expense of the transport of some goods, and it may be possible
to calculate whether this reduction of expense transcends that involved in the building and
upkeep of the next line.
That can only be calculated in money.
It is not possible to attain the desired end merely by counterbalancing the various physical
expenses and physical savings.
Where one cannot express hours of labor, iron, coal, all kinds of building material, machines
and other things necessary for the construction and upkeep of the railroad in a common unit,
it is not possible to make calculations at all.
The drawing up of bills on an economic basis is only possible where all the goods concerned
can be referred back to money.
Admittedly, monetary calculation has its inconveniences and serious defects, but we have certainly
nothing better to put in its place, and for the practical purposes of life, monetary calculation
as it exists under a sound monetary system always suffices. Were we to dispense with
it, any economic system of calculation would become absolutely impossible. The socialist
society would know how to look after itself. It would issue an edict and decide for or
or against the projected building, yet this decision would depend at best upon vague estimates.
It would never be based upon the foundation of an exact calculation of value.
The static state can dispense with economic calculation, for here the same events in economic
life are ever recurring, and if we assume that the first disposition of the static socialist
economy follows on the basis of the final state of the competitive economy, we might,
Let all events conceive of a socialist production system which is rationally controlled from
an economic point of view, but this is only conceptually possible.
For the moment we leave aside the fact that a static state is impossible in real life,
as our economic data are forever changing, so that the static nature of economic activity
is only a theoretical assumption, corresponding to no real state of affairs, however necessary
may be for our thinking and for the perfection of our knowledge of economics.
Even so, we must assume that the transition to socialism must, as a consequence of the leveling out of the differences in income
and the resultant readjustments in consumption and therefore production, change all economic data in such a way
that a connecting link with the final state of affairs in the previously existing competitive economy becomes impossible.
But then we have the spectacle of a socialist economic order floundering in the ocean of possible and conceivable economic combinations without the compass of economic calculation.
Thus, in the socialist commonwealth, every economic change becomes an undertaking whose success can be neither appraised in advance nor later retrospectively determined.
There is only groping in the dark. Socialism is the abolition of rational economy.