WEBVTT NOTE Why a Socialist Economy is "Impossible" 1 00:00:00.000 --> 00:00:08.000 Why a Socialist Economy is Impossible by Joseph T. Salerno, Mises' Thesis 2 00:00:08.000 --> 00:00:26.000 In economic calculation in a socialist commonwealth, Ludwig von Mises demonstrates once and forever that under socialist central planning there are no means of economic calculation and that therefore socialist economy itself is impossible, unmöglich, 3 00:00:26.000 --> 00:00:32.160 Ludwig not just inefficient or less innovative or conducted without benefit of decentralized 4 00:00:32.160 --> 00:00:36.600 knowledge but really and truly and literally impossible. 5 00:00:36.600 --> 00:00:42.000 At the same time he establishes that the necessary and sufficient conditions of the existence 6 00:00:42.000 --> 00:00:49.200 and evolution of human society are liberty, property and sound money, the liberty of each 7 00:00:49.200 --> 00:00:54.520 individual to produce and exchange according to independently formed value judgments and 8 00:00:54.520 --> 00:01:00.320 and price appraisments, unrestricted private ownership of all types and orders of producers' 9 00:01:00.320 --> 00:01:07.560 goods as well as of consumers' goods, and the existence of a universal medium of exchange 10 00:01:07.560 --> 00:01:12.160 whose value is not subject to large or unforeseeable variations. 11 00:01:12.160 --> 00:01:20.160 Abolish all or even one of these institutions, and human society disintegrates amid a conjuries 12 00:01:20.160 --> 00:01:24.840 of isolated household economies and predatory tribes. 13 00:01:24.840 --> 00:01:30.280 But not only does abolition of private ownership of the means of production by a world-embracing 14 00:01:30.280 --> 00:01:38.160 socialist state render human social existence impossible, Mises' analysis also implies 15 00:01:38.160 --> 00:01:44.080 that socialism destroys the praxeological significance of time and nullifies humanity's 16 00:01:44.080 --> 00:01:48.860 uniquely teleological contribution to the universe. 17 00:01:48.860 --> 00:01:53.700 Since Mises's critique of socialism has been the subject of significant misinterpretation 18 00:01:53.700 --> 00:02:00.660 by his followers as well as his opponents, his argument, as it is presented in this article, 19 00:02:00.660 --> 00:02:03.180 should be restated. 20 00:02:03.180 --> 00:02:09.220 The Calculation Argument Mises's path-breaking and central insight is 21 00:02:09.220 --> 00:02:16.060 that monetary calculation is the indispensable mental tool for choosing the optimum among 22 00:02:16.060 --> 00:02:23.480 and the vast array of intricately related production plans that are available for employing 23 00:02:23.480 --> 00:02:29.320 the factors of production within the framework of the social division of labor. 24 00:02:29.320 --> 00:02:35.860 Without recourse to calculating and comparing the benefits and costs of production using 25 00:02:35.860 --> 00:02:43.000 the structure of monetary prices determined at each moment on the market, the human mind 26 00:02:43.000 --> 00:02:50.880 is only capable of surveying, evaluating and directing production processes whose scope 27 00:02:50.880 --> 00:02:56.480 is drastically restricted to the compass of the primitive household economy. 28 00:02:56.480 --> 00:03:03.580 The practically unlimited number of alternative plans for allocating the factors of production 29 00:03:03.580 --> 00:03:10.740 and the overwhelming complexities of their interrelationships stem from two related facts 30 00:03:10.740 --> 00:03:12.280 about our world. 31 00:03:12.280 --> 00:03:27.880 First, our world is endowed with a wide variety of relatively non-specific resources, which to a greater or lesser degree are substitutable for one another over a broad range of production processes. 32 00:03:27.880 --> 00:03:36.980 Second, since human action itself implies the ineradicable scarcity of time as well as of resources, 33 00:03:36.980 --> 00:03:44.420 There always exists an almost inexhaustible opportunity to accumulate capital and lengthen 34 00:03:44.420 --> 00:03:50.020 the economy structure of production, thus multiplying beyond number the technical 35 00:03:50.020 --> 00:03:57.540 possibilities for combining the factors of production. Given, therefore, the infinitude 36 00:03:57.540 --> 00:04:04.500 of the relationships of complementarity and substitutability simultaneously subsisting 37 00:04:04.500 --> 00:04:31.940 and of the set of all individuals' value rankings of consumer goods would be utterly 38 00:04:31.940 --> 00:04:41.940 is only incapable of determining the optimal pattern of resource allocation, or even if a particular plan was ludicrously and destructively un-economic. 39 00:04:41.940 --> 00:04:47.940 Not only would this perfectly knowledgeable person be unable to devise a rational solution of the problem, 40 00:04:47.940 --> 00:04:53.940 he or she would be unable to even achieve a full intellectual survey of the problem in all its complexity. 41 00:04:53.940 --> 00:05:02.660 Thus, as Mises says, the mind of one man alone, be it ever so cunning, is too weak to grasp 42 00:05:02.660 --> 00:05:10.820 the importance of any single one thing among the countless many goods of a higher order. 43 00:05:10.820 --> 00:05:17.740 No single man can ever master all the possibilities of production innumerable as they are as to 44 00:05:17.740 --> 00:05:23.040 be in a position to make straightway evident judgements of value without the aid of some 45 00:05:23.040 --> 00:05:48.040 What is needed, then, to produce the cardinal numbers necessary for computing the costs and benefits of production processes, is what Mises calls the intellectual division of labour, which emerges when private property owners are at liberty to exchange goods and services against money according to their individual value judgements and price appraisements. 46 00:05:48.040 --> 00:05:52.240 Basements Thus, in a market society, every individual 47 00:05:52.240 --> 00:05:58.580 mind is accorded a dual role in determining the quantities of monetary calculation. 48 00:05:58.580 --> 00:06:04.680 In their consumer roles, all people make monetary bids for the existing stocks of final goods 49 00:06:04.680 --> 00:06:12.040 according to their subjective valuations, leading to the emergence of objective monetary 50 00:06:12.040 --> 00:06:17.600 exchange ratios which relate the values of all consumer goods to one another. 51 00:06:17.600 --> 00:06:24.000 In light of the system of consumer goods' prices thus determined, and of the existing 52 00:06:24.000 --> 00:06:31.260 knowledge of the technical conditions of production, entrepreneurs seeking to maximize monetary 53 00:06:31.260 --> 00:06:38.000 profit bid against one another to acquire the services of the productive factors currently 54 00:06:38.000 --> 00:06:45.040 available and owned by these same consumers, including those in entrepreneurial roles. 55 00:06:45.040 --> 00:06:50.260 In this competitive process, each and every type of productive service is objectively 56 00:06:50.260 --> 00:06:56.740 appraised in monetary terms according to its ultimate contribution to the production of 57 00:06:56.740 --> 00:06:58.620 consumer goods. 58 00:06:58.620 --> 00:07:04.420 There thus comes into being the market's monetary price structure, a genuinely social 59 00:07:04.420 --> 00:07:10.000 phenomenon in which every unit of exchangeable goods and services is assigned a socially 60 00:07:10.000 --> 00:07:22.000 is a very significant cardinal number, and which has its roots in the minds of every single member of society, yet must forever transcend the contribution of the individual human mind. 61 00:07:22.000 --> 00:07:35.000 Since the social price structure is continually being destroyed and recreated at every moment of time by the competitive appraisement process operating in the face of ceaseless change of the economic data, 62 00:07:35.000 --> 00:07:40.120 There is always available to entrepreneurs a means of estimating the costs and revenues 63 00:07:40.120 --> 00:07:46.040 and calculating the profitability of any thinkable process of production. 64 00:07:46.040 --> 00:07:52.200 Once private property in the non-human means of production is abolished, however, as it 65 00:07:52.200 --> 00:08:00.160 is under socialism, the appraisement process must grind to a halt, leaving only the increasingly 66 00:08:00.160 --> 00:08:04.920 irrelevant memory of the market's final price structure. 67 00:08:04.920 --> 00:08:27.920 In the absence of competitive bidding for productive resources by entrepreneurs, there is no possibility of assigning economic meaning to the amalgam of potential physical productivities embodied in each of the myriad of natural resources and capital goods now in the hands of the socialist central planners. 68 00:08:27.920 --> 00:08:55.920 Even if planners observed the money prices which continued to be generated on an unhampered market for consumer goods or substituted their own unitary scale of values, for those of their subject consumers, there would still be no possibility for the central planners to ever know or guess the opportunity costs of any social production process, 69 00:08:55.920 --> 00:09:04.920 Where actors in principle are not in a position to compare the estimated costs and benefits of their decisions, 70 00:09:04.920 --> 00:09:08.920 economizing activities by definition are ruled out. 71 00:09:08.920 --> 00:09:18.920 A society without monetary calculation, that is a socialist society, is therefore quite literally a society without an economy. 72 00:09:18.920 --> 00:09:27.240 Thus, contrary to what has become the conventional interpretation by friend and foe alike, Mises 73 00:09:27.240 --> 00:09:34.560 was not indulging in rhetorical hyperbole, but dryly stating a demonstrable conclusion 74 00:09:34.560 --> 00:09:41.360 of economic science, when he declared in this article, without economic calculation, there 75 00:09:41.360 --> 00:09:43.360 can be no economy. 76 00:09:43.360 --> 00:09:51.120 Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be, 77 00:09:51.120 --> 00:09:59.360 in our sense of the term, no economy whatsoever. Socialism is the abolition of rational economy. 78 00:10:00.080 --> 00:10:05.920 Socialism will have particularly devastating effects on the economy's capital structure. 79 00:10:05.920 --> 00:10:14.320 Without a unitary expression for time preferences in monetary terms, central planners will never 80 00:10:14.320 --> 00:10:20.540 know whether the investment of current resources in the higher stages of production, which 81 00:10:20.540 --> 00:10:28.320 yield physically heterogeneous and non-commensurable outputs, will generate an overall production 82 00:10:28.320 --> 00:10:35.100 structure whose parts fit together or whose intended length is adjusted to the amount 83 00:10:35.100 --> 00:10:42.960 of Capital Available, thus higher order technical processes will be undertaken whose outputs 84 00:10:42.960 --> 00:10:49.300 cannot be used in further production processes because the needed complementary producer 85 00:10:49.300 --> 00:10:52.260 goods are not available. 86 00:10:52.260 --> 00:10:58.460 In the Soviet Union, for example, in the midst of a dire undersupply of food products, new 87 00:10:58.460 --> 00:11:04.760 and unused tractors stand rusting in fields of unharvested grain because there does not 88 00:11:04.760 --> 00:11:30.760 One of the most important consequences of the fact that centrally planned economies exist within a world market economy is that the planners can observe and crudely copy capitalist economies in deciding which technical processes can coexist in a reasonably coherent capital structure. 89 00:11:30.760 --> 00:11:49.760 Had the entire world, rather than isolated nations, existed under central planning for the last half century, the global capital structure would long since have crumbled irretrievably to dust, and humanity been catapulted back to autarkic primitivism. 90 00:11:49.760 --> 00:11:57.760 Thus, from the first, Mises emphasized the point which was conveniently ignored by hostile 91 00:11:57.760 --> 00:12:04.020 and disingenuous critics that the existence of the Soviet Union and other centrally controlled 92 00:12:04.020 --> 00:12:11.640 economies is no refutation of his thesis regarding the impossibility of socialist economy. Their 93 00:12:11.640 --> 00:12:17.600 gross inefficiency notwithstanding, these economies in fact do eke out a precarious existence 94 00:12:17.600 --> 00:12:24.980 as parasites on the social appraisement process and integrated capital structure produced 95 00:12:24.980 --> 00:12:27.720 by the surrounding world market. 96 00:12:27.720 --> 00:12:35.120 As Mises points out, neither these economies nor nationalised enterprises within capitalist 97 00:12:35.120 --> 00:12:42.460 economies are genuinely socialistic because both entities are so much dependent upon the 98 00:12:42.460 --> 00:12:54.460 and the environmental economic system with its free commerce, that they cannot be said to partake of the really essential nature of a socialist economy. 99 00:12:54.460 --> 00:13:08.460 In state and municipal undertakings, technical improvements are introduced because their effect in similar private enterprises, domestic and foreign, can be noticed, 100 00:13:08.460 --> 00:13:18.460 and because those private industries, which produce the materials for these improvements, give the impulse for their introduction. 101 00:13:18.460 --> 00:13:31.460 In these concerns, the advantages of reorganization can be established because they operate within the sphere of a society based upon the private ownership of the means of production 102 00:13:31.460 --> 00:13:39.460 and upon the system of monetary exchange, being thus capable of computation and account. 103 00:13:39.460 --> 00:13:48.460 But Mises does not stop with the demonstration that socialism must eradicate economic activity within the social nexus. 104 00:13:48.460 --> 00:13:53.460 He also traces out its implications for the development of the human mind, 105 00:13:53.460 --> 00:14:11.060 With the dissolution of social production, that inevitably ensues upon the imposition of a world-embracing socialist state, humanity is reduced in short order to dependence upon economic activities carried on in relative isolation. 106 00:14:11.060 --> 00:14:27.620 The primitive production processes suitable to autarkic economies do not require economic calculation using cardinal numbers, nor do such simple processes offer much scope for purely technical calculation. 107 00:14:27.620 --> 00:14:40.620 No longer dependent upon arithmetic operations to sustain itself, the human mind begins to lose its characteristic ability to calculate. 108 00:14:40.620 --> 00:14:48.620 Mises' analysis of the effects of socialism also has another momentous implication. 109 00:14:48.620 --> 00:14:59.120 With the impossibility of building up and maintaining a capital structure in the absence of monetary calculation, 110 00:14:59.120 --> 00:15:12.620 human economy under socialism comes to consist of super-short and repetitive household processes utilizing minimal capital and with little scope for adjustment to new wants. 111 00:15:12.620 --> 00:15:22.620 The result is that time itself and the praxeological sense of a distinction between present and future ceases to play a role in human affairs. 112 00:15:22.620 --> 00:15:34.620 Men and women, in their capitalist hand-to-mouth existence, begin to passively experience time as the brute beasts do, not actively as a tool of planning and action, but passively as mere duration. 113 00:15:34.620 --> 00:15:40.060 Humanity as a teleological force in the universe is therefore necessarily a creation of the 114 00:15:40.060 --> 00:15:44.900 inextricably related phenomena of calculation and capital. 115 00:15:44.900 --> 00:15:50.900 In a meaningful sense, then, socialism not only exterminates economy and society, but 116 00:15:50.900 --> 00:15:55.140 the human intellect and spirit as well. 117 00:15:55.140 --> 00:16:00.360 Mises vs. the Hayekians It is of utmost importance to recognize that 118 00:16:00.360 --> 00:16:05.760 In his original article, as well as all later writings on the subject, Mises unswervingly 119 00:16:05.760 --> 00:16:12.640 identified the unique and insoluble problem of socialism as the impossibility of calculation, 120 00:16:12.640 --> 00:16:18.080 not, as in the case of F. A. Hayek, as an absence of an efficient mechanism for conveying 121 00:16:18.080 --> 00:16:20.520 knowledge to the planners. 122 00:16:20.520 --> 00:16:26.040 This difference between Mises and Hayek is reflected in their respective conceptions 123 00:16:26.040 --> 00:16:31.680 of the Social Function of Competition, as well as in their responses to the claims of 124 00:16:31.680 --> 00:16:35.960 the later market and mathematical socialists. 125 00:16:35.960 --> 00:16:40.920 Actually Mises anticipated and refuted both groups in his original article. 126 00:16:40.920 --> 00:16:47.040 Nonetheless, Mises's position on these issues is today generally ignored or conflated with 127 00:16:47.040 --> 00:16:48.560 Hayek's. 128 00:16:48.560 --> 00:16:55.600 For Mises, the starting point of entrepreneurial planning of production in a market economy 129 00:16:55.600 --> 00:17:02.240 is the experience of the present, actually immediately past, price structure of the market, 130 00:17:02.240 --> 00:17:10.200 as well as of the underlying economic data. Knowledge of past market prices by the entrepreneur 131 00:17:10.200 --> 00:17:16.560 does not substitute for qualitative information about the economy, as Hayek seems to argue, 132 00:17:16.560 --> 00:17:21.940 but is necessarily complementary to it. The reason for Mises is that it is price structures 133 00:17:21.940 --> 00:17:51.940 Entrepreneurs as they emerge at future moments of time that are relevant to unavoidably time consuming and therefore future-oriented production plans, but entrepreneurs can never know future prices directly. They are only able to appraise them in light of their experience of past prices and of their understanding of what transformations will take place in the present configuration of the qualitative economic data. Whether or not one prefers to characterize 134 00:17:51.940 --> 00:17:58.900 Forecasting and Appraisement as a procedure for discovery of knowledge, as Hayek does, 135 00:17:58.900 --> 00:18:04.760 what is important is that for Mises it is the indispensable starting point of the competitive 136 00:18:04.760 --> 00:18:08.700 process and not its social culminant. 137 00:18:08.700 --> 00:18:14.780 In other words, the forecasting and appraisement of future price structures in which discovery 138 00:18:14.780 --> 00:18:34.780 The Theory of New Knowledge may be said to play a role as a pre-competitive and non-social operation, that is, it precedes and conditions competitive entrepreneurial bidding for existing factors of production, and is carried on wholly within the compass of individual minds. 139 00:18:34.780 --> 00:18:42.720 The social function of competition, on the other hand, is the objective price appraisement of the higher-order goods, 140 00:18:42.720 --> 00:18:51.020 the sine qua non of entrepreneurial calculation of the profitability of alternative production plans. 141 00:18:51.020 --> 00:18:56.760 Competition, therefore, acquires the characteristic of a quintessentially social process, 142 00:18:56.760 --> 00:19:02.860 not because its operation presupposes knowledge discovery, which is inescapably an individual function, 143 00:19:02.860 --> 00:19:09.820 But because in the absence of competitively determined money prices for the factors of 144 00:19:09.820 --> 00:19:15.100 production, possession of literally all the knowledge in the world would not enable an 145 00:19:15.100 --> 00:19:21.820 individual to allocate productive resources economically within the social division of labour. 146 00:19:22.540 --> 00:19:28.220 Mises thus assumes in all his writings on the subject that the planners have full knowledge 147 00:19:28.220 --> 00:19:33.180 of consumer valuations of final goods, as well as of the various means available for producing 148 00:19:33.180 --> 00:19:38.700 these goods under known technological conditions. For example, Mises writes, 149 00:19:38.700 --> 00:19:45.740 the administration may know exactly what goods are most urgently needed. It may also be able to 150 00:19:45.740 --> 00:19:52.220 calculate the value of any means of production by calculating the consequence of its withdrawal 151 00:19:52.220 --> 00:19:55.420 in relation to the satisfaction of needs. 152 00:19:55.420 --> 00:20:05.720 Despite this knowledge, the socialist administrators would be unable to arrive at a useful social appraisement of the means of production in cardinal terms. 153 00:20:05.720 --> 00:20:12.720 This can only occur where there exists private ownership and exchange of productive resources, 154 00:20:12.720 --> 00:20:19.520 which generate catalactic competition among independent producers resulting in the imputation 155 00:20:20.160 --> 00:20:27.920 of meaningful money prices to the resources. Anticipating the future arguments of market 156 00:20:27.920 --> 00:20:34.640 socialists, Mises reasons that any attempt to implement monetary calculation by forcing 157 00:20:34.640 --> 00:20:41.840 or inducing managers of socialist enterprises to act as profit maximizing or even more absurdly 158 00:21:11.840 --> 00:21:34.840 In the business of these so-called parametric prices of market socialism, and their failure to replicate the price structure of the market derives from the circumstance that they are wholly conditioned by the system of rewards and penalties and other arrangements instituted by the monopoly owners of the factors of production, the planners, to guide the behavior of their managers. 159 00:21:34.840 --> 00:21:40.520 But this system of managerial incentives is itself a construct of the individual human 160 00:21:40.520 --> 00:21:45.580 mind, which would first have to solve for itself the problem of valuing the factors 161 00:21:45.580 --> 00:21:51.040 of production before it could even hope to derive the proper but now superfluous incentive 162 00:21:51.040 --> 00:21:58.400 structure. Hayek and his followers are skeptical regarding how quickly and effectively dispersed 163 00:21:58.400 --> 00:22:04.280 knowledge of the changing economic circumstances can be incorporated into the socialist price 164 00:22:04.280 --> 00:22:12.120 System. But for Mises' analysis, this is quite beside the point. Regardless of how well informed 165 00:22:12.120 --> 00:22:18.680 the socialist managers are, their bids in the market for factors of production, to which the 166 00:22:18.680 --> 00:22:24.520 central planners are supposed to adjust the price parameters of the system, emerge from an arbitrary 167 00:22:24.520 --> 00:22:32.040 set of directives from the planners themselves, and not from competition among private property 168 00:22:32.040 --> 00:22:39.160 Owners. The prices could be no more useless for the task of economic calculation if the 169 00:22:39.160 --> 00:22:44.280 planners eschewed the elaborate and wasteful charade of orchestrating a pseudo-market and 170 00:22:44.280 --> 00:22:49.640 simply picked them out of a hat. From the Misesian point of view, moreover, the shortcomings 171 00:22:49.640 --> 00:22:54.200 of the prices of market socialism do not stem from the fact that such prices are supposed 172 00:22:54.200 --> 00:22:59.560 to be treated as parametric by the managers, as has been curiously argued recently by some 173 00:22:59.560 --> 00:23:13.560 The problem is precisely that such prices are not genuinely parametric from the point of view of all members of the social body. 174 00:23:13.560 --> 00:23:26.560 The prices which emerge on the free market are meaningful for economic calculation because and to the extent that they are determined by a social appraisement process, 175 00:23:26.560 --> 00:23:35.060 which, though it is the inevitable outcome of the mental operations of all consumers and producers, 176 00:23:35.060 --> 00:23:45.060 yet enters as an unalterable external factor in the buying and selling plans of every individual actor. 177 00:23:45.060 --> 00:23:51.060 In the 1930s, Hayek and the British Misesian Lionel, later Lord Robbins, 178 00:23:51.060 --> 00:24:04.060 made a fateful and wholly unwarranted concession to those who contended that the methods of mathematical economics could be successfully bent to yield a solution for the socialist calculation problem. 179 00:24:04.060 --> 00:24:16.060 In response to the argument that prices of the factors of production would emerge from the solution of a set of simultaneous equations which incorporated the given data of the economic system, 180 00:24:16.060 --> 00:24:21.580 Hayek and Robbins argued that in theory this was true, but in practice highly problematic. 181 00:24:22.300 --> 00:24:28.220 The reason for its impracticality according to Hayek and Robbins is that in the real world economy, 182 00:24:28.220 --> 00:24:35.340 consumer wants available resources and technology are subject to continual and unforeseeable change. 183 00:24:35.900 --> 00:24:41.340 Therefore, by the time the planners had assembled the vast amount of information needed to formulate 184 00:24:41.340 --> 00:25:00.340 In order to manipulate the massive equation system, and succeeded in solving it manually or mechanically, since there were no high-speed computers in the 1930s, the system of prices which merged would be completely inapplicable to the current economy, whose underlying data had changed rapidly and unpredictably in the meantime. 185 00:25:00.340 --> 00:25:19.340 Unfortunately, the Hayek-Robbins response was construed by most economists to mean that the theoretical debate over socialist calculation had come to an end with the concession from the Misesian side that socialism could calculate after all, though perhaps a day late in practice. 186 00:25:19.340 --> 00:25:24.500 Moreover, some modern Austrian economists, in a belated effort to reclaim the theoretical 187 00:25:24.500 --> 00:25:30.100 high ground, reconstructed the case against socialism along the lines suggested by Hayek's 188 00:25:30.100 --> 00:25:35.380 later articles on knowledge and competition, which for all their subtle and compelling 189 00:25:35.380 --> 00:25:43.100 argumentation are disturbingly quasi-walrasian, seemingly disregarding the lack of time between 190 00:25:43.100 --> 00:25:45.420 present and future prices. 191 00:25:45.420 --> 00:25:51.080 The result has been an unacknowledged but momentous retreat from the original and unfettered 192 00:25:51.080 --> 00:25:57.140 Misesian critique, emphasizing the absolute impossibility of economic calculation without 193 00:25:57.140 --> 00:26:02.700 market prices, to a categorically different Hayekian position, criticizing the relative 194 00:26:02.700 --> 00:26:09.220 inefficiency of non-market mechanisms for discovery, communication, and use of knowledge 195 00:26:09.220 --> 00:26:12.100 in the allocation of productive resources. 196 00:26:12.100 --> 00:26:33.100 In sharp contrast to the Hayek-Robbins rejoinder and the reconstructed Austrian position, Mises's neglected refutation of the mathematical socialists, which is outlined in his original article and elaborated upon in Human Action, does not deviate in the slightest from the fundamental and crucial calculation perspective. 197 00:26:33.100 --> 00:26:38.940 Thus, Mises assumes that the economic data underlying an existing market economy are 198 00:26:38.940 --> 00:26:45.400 suddenly and forever frozen and revealed to newly appointed central planners. 199 00:26:45.400 --> 00:26:49.900 With brilliant insight, Mises demonstrates that even with Hayekian knowledge problems 200 00:26:49.900 --> 00:26:55.620 thus banished from consideration, the planners would still be unable to calculate the optimal 201 00:26:55.620 --> 00:27:00.300 or any pattern of deployment for the factors of production. 202 00:27:00.300 --> 00:27:06.620 The reason is that the existing capital structure and acquired skills and locations of the labor 203 00:27:06.620 --> 00:27:12.660 force are initially maladjusted to the newly prevailing equilibrium configuration of the 204 00:27:12.660 --> 00:27:13.660 data. 205 00:27:13.660 --> 00:27:19.820 The planners therefore would be forced to decide how to allocate the flow of productive services 206 00:27:19.820 --> 00:27:26.100 among the myriads of potential technical production processes and labor retraining and relocation 207 00:27:26.100 --> 00:27:31.900 Projects, so as to secure the optimal path of adjustment to equilibrium for the existing 208 00:27:31.900 --> 00:27:36.100 stocks of capital goods, labour skills and housing. 209 00:27:36.100 --> 00:27:40.880 The bewildering complexity of this allocation decision rests on the fact that the planners 210 00:27:40.880 --> 00:27:45.700 will be confronted with altered conditions at every moment of time during this disequilibrium 211 00:27:45.700 --> 00:27:51.060 transition process, since the quantities and qualities of the available productive 212 00:27:51.060 --> 00:27:57.780 of Services themselves are in constant flux due to the circumstance that they originate 213 00:27:57.780 --> 00:28:03.700 in the very stocks of physical assets and labour skills that are being progressively 214 00:28:03.700 --> 00:28:05.700 transformed. 215 00:28:05.700 --> 00:28:12.900 Complicating this problem beyond conception is the added fact that the levelling of incomes 216 00:28:12.900 --> 00:28:18.780 under the new socialist regime and the inevitable fluctuation of current incomes attending the 217 00:28:18.780 --> 00:28:24.500 The transformation of the production structure would affect a continual revolution in the 218 00:28:24.500 --> 00:28:28.540 structure of consumer demands during the transition period. 219 00:28:28.540 --> 00:28:34.660 Mises is surely not overstating his case when he concludes that the transition to socialism 220 00:28:34.660 --> 00:28:40.260 must change all economic data in such a way that a connecting link with the final state 221 00:28:40.260 --> 00:28:45.660 of affairs in the previously existed competitive economy becomes impossible. 222 00:28:45.660 --> 00:28:50.360 But then we have the spectacle of a socialist economic order floundering on the ocean of 223 00:28:50.360 --> 00:28:58.300 possible and conceivable economic combinations without the compass of economic calculation. 224 00:28:58.300 --> 00:29:04.500 Even if mathematics, therefore, yields a consistent set of prices for the given data of equilibrium, 225 00:29:04.500 --> 00:29:12.940 this solution is inapplicable to the calculation problems of the dynamic approach to equilibrium. 226 00:29:12.940 --> 00:29:20.040 In this situation, use of such prices to allocate resources does not allow the economy to achieve 227 00:29:20.040 --> 00:29:25.220 equilibrium at any rate before the capital structure and the entire system of social 228 00:29:25.220 --> 00:29:27.740 production is demolished. 229 00:29:27.740 --> 00:29:35.100 Thus, Mises's original thesis stands on its own against all counter-arguments and without 230 00:29:35.100 --> 00:29:41.100 any need for qualification or emendation, without private ownership of the means of 231 00:29:41.100 --> 00:29:47.940 of Production, and Catallactic Competition for them, there cannot exist economic calculation 232 00:29:47.940 --> 00:29:54.060 and rational allocation of resources under conditions of the social division of labor. 233 00:29:54.060 --> 00:30:01.340 In short, socialist economy and society are impossible, beyond socialism. 234 00:30:01.340 --> 00:30:07.980 But though Mises's thesis may remain valid, is it still relevant in a world in which socialist 235 00:30:07.980 --> 00:30:20.520 The answer is a resounding yes, for Mises' argument implies that every step that takes 236 00:30:20.520 --> 00:30:25.800 us away from private ownership of the means of production, and from the use of money, 237 00:30:25.800 --> 00:30:29.920 also takes us away from rational economics. 238 00:30:29.920 --> 00:30:35.420 The never-ending growth of the bloated, rapacious, unjust and unlovely American and other Western-style 239 00:30:35.420 --> 00:30:40.420 and Welfare States, involves an ongoing series of such steps. 240 00:30:40.420 --> 00:30:45.660 Looking at it from another angle, the blessedly defunct planned economies of Eastern Europe, 241 00:30:45.660 --> 00:30:51.340 as noted above, were far from being genuinely socialist economies in the Misesian sense 242 00:30:51.340 --> 00:30:58.420 because of their ability to trade in and observe the capital complementarities and prices of 243 00:30:58.420 --> 00:30:59.920 the world market. 244 00:30:59.920 --> 00:31:05.980 They were, and the Soviet Union, China and others still are, gigantic monopoloid entities 245 00:31:05.980 --> 00:31:11.860 that suppress internal markets for capital goods, yet maintain subjective and objective 246 00:31:11.860 --> 00:31:17.280 relationships with the world market order which enables them to crudely calculate their 247 00:31:17.280 --> 00:31:18.280 actions. 248 00:31:18.280 --> 00:31:26.320 As the parasitic welfare state expands its power of monetary inflation and of regulating 249 00:31:26.320 --> 00:31:33.900 and intervening into its host mixed economy, we can expect productive activities to become 250 00:31:33.900 --> 00:31:40.720 more chaotic and guided less and less by socially determined market prices. 251 00:31:40.720 --> 00:31:46.280 In fact, long before a state of complete socialization is achieved, economy and society will begin 252 00:31:46.280 --> 00:31:51.600 to disintegrate amid failures of markets to clear, increasing barter, less efficient 253 00:31:51.600 --> 00:32:14.600 The dangers currently threatening to plunge sectors of the U.S. economy into calculational chaos can be illustrated with a few examples. 254 00:32:14.600 --> 00:32:16.600 Let us consider inflation. 255 00:32:16.600 --> 00:32:45.600 One of the most important factors operating to restrain governments of the United States and other mixed economies from reinstituting the inflationary monetary policies which brought us the double-digit rates of price increases in the 1970s is the coexistence of closely integrated global capital markets and independent national fiat currencies issued by central banks jealous of their prerogatives. 256 00:32:45.600 --> 00:33:02.600 Any nation that attempts a highly inflationary monetary policy courts the prospect of a rapidly depreciating exchange rate for its currency, a flight of investors from its domestic capital market, and a stratospheric climb in interest rates. 257 00:33:02.600 --> 00:33:11.600 In the current jargon, monetary authorities, even of large nations such as the United States, have lost control of domestic interest rates. 258 00:33:11.600 --> 00:33:18.600 Now, there is a much-valued movement afoot to affect greater international coordination 259 00:33:18.600 --> 00:33:24.720 of monetary and fiscal policies, or even to introduce a supranational central bank empowered 260 00:33:24.720 --> 00:33:26.920 to issue its own fiat currency. 261 00:33:26.920 --> 00:33:31.960 At bottom, such proposals seek to loosen the restraints on monetary inflation at the domestic 262 00:33:31.960 --> 00:33:39.280 level and allow politicians and bureaucrats, and their allowed special interests, to surreptitiously 263 00:33:39.280 --> 00:33:46.160 extract an expanding flow of lucre or welfare from the productive sectors of their economies. 264 00:33:46.880 --> 00:33:52.000 More importantly, from our point of view, these international monetary arrangements greatly 265 00:33:52.000 --> 00:33:56.800 increase the threat of hyperinflation and the consequent disintegration of the world market 266 00:33:56.800 --> 00:34:04.960 economy. Moreover, even if it were reigned in before hiving off into hyperinflationary currency 267 00:34:04.960 --> 00:34:10.660 If the currency collapsed, a bout of galloping inflation in an economy with a highly developed 268 00:34:10.660 --> 00:34:17.200 and complex capital structure would drastically falsify monetary calculation and cause capital 269 00:34:17.200 --> 00:34:21.500 consumption and a drastic plunge in living standards. 270 00:34:21.500 --> 00:34:26.120 Another area in which we face the prospect of calculational chaos is healthcare. 271 00:34:26.120 --> 00:34:30.420 By wildly subsidizing and stimulating the demand for healthcare services of selected 272 00:34:30.420 --> 00:34:36.260 Special Interest Groups, beginning in the mid-1960s, the United States government precipitated 273 00:34:36.260 --> 00:34:41.300 a never-ending and catastrophic upward spiral of healthcare costs. 274 00:34:41.300 --> 00:34:46.340 In addition, the irrational and labyrinthine structure of regulations and prohibitions 275 00:34:46.340 --> 00:34:51.820 imposed by government on the industry has massively distorted resource allocation, restricted 276 00:34:51.820 --> 00:34:55.780 supply and further driven up the costs of medical care. 277 00:34:55.780 --> 00:35:00.220 The tragic but predictable result of such intervention is that many of the unsubsidized 278 00:35:00.220 --> 00:35:04.620 as members of society have been effectively priced out of the market for health care. 279 00:35:04.620 --> 00:35:11.540 The simple and humane solution to this tragedy is to quickly terminate these antisocial subsidies 280 00:35:11.540 --> 00:35:17.460 and dismantle the destructive regulatory structure, permitting the competitive price appraisal 281 00:35:17.460 --> 00:35:21.860 and resource allocation process to operate unimpeded. 282 00:35:21.860 --> 00:35:26.620 But of course, the internal dynamic of the welfare state is never to retrench and risk 283 00:35:26.620 --> 00:35:40.620 and its disaffection of its pampered and powerful constituencies, for example, the American Medical Association, the American Association for Retired Persons, the entrenched bureaucracies of non-profit hospitals, and so on. 284 00:35:40.620 --> 00:35:55.620 And so we face the prospect of National Healthcare Insurance, which is a euphemism for the thoroughgoing socialization of the healthcare sector, with its resultant shortages, further suppression of competitive incentives, and deterioration of quality. 285 00:35:55.620 --> 00:36:07.620 But this is simply another example of the man logic of the welfare state, since the government produces nothing that is valuable in terms of social appraisement. 286 00:36:07.620 --> 00:36:19.620 It can only supply welfare to some by siphoning off the resources and destroying the economic arrangements that support the welfare of others. 287 00:36:19.620 --> 00:36:37.620 In attempting to repair the politically unpopular destruction of its earlier policies, it is driven to further isolated acts of destruction, until it arrives with cruel and ultimate irony at the policy for the systematic destruction of society and human welfare, that is socialism. 288 00:36:37.620 --> 00:36:44.620 Finally, we have environmental policies which are becoming progressively broader in scope and more draconian in enforcement. 289 00:36:44.620 --> 00:36:51.620 To the extent that such policies go beyond the protection of individual rights and property, and they are now far, far beyond that point, 290 00:36:51.620 --> 00:36:56.620 they become antisocial and destructive of capital and living standards. 291 00:36:56.620 --> 00:37:03.620 In fact, in many if not in most cases, it is the obliteration of economic productivity per se which is intended, 292 00:37:03.620 --> 00:37:13.620 and which constitutes the in-kind welfare subsidy to the well-heeled and well-organized minority of upper-middle-class environmentalists. 293 00:37:13.620 --> 00:37:20.620 This is true, for example, of environmental regulations that prohibit development activities for the majority of Alaskan land 294 00:37:20.620 --> 00:37:28.620 and along much of the California coastline, as well as of recent calls for suppressing development of Amazon rainforests 295 00:37:28.620 --> 00:37:34.320 and Coercively Maintaining the Entire Continent of Antarctica Forever Wild. 296 00:37:34.320 --> 00:37:41.620 Needless to say, thoroughgoing and centralized land use regulations, which some fanatical environmentalists are calling for, 297 00:37:41.620 --> 00:37:48.320 are tantamount to the abolition of private property and national resources and business structures. 298 00:37:48.320 --> 00:37:57.620 The connection between environmentalism and socialism is even stronger when we realize that what socialism brings about unintentionally, 299 00:37:57.620 --> 00:38:07.060 The abolition of humanity, as a teleological force shaping nature to its purposes, is precisely the aim of the radical environmentalist program. 300 00:38:07.060 --> 00:38:08.500 Conclusion 301 00:38:08.500 --> 00:38:18.580 The significance of Mises's 1920 article extends far beyond its devastating demonstration of the impossibility of socialist economy and society. 302 00:38:18.580 --> 00:38:27.580 It provides the rationale for the price system, purely free markets, the security of private property against all encroachments, and sound money. 303 00:38:27.580 --> 00:38:42.580 Its thesis will continue to be relevant as long as economists and policymakers want to understand why even minor government economic interventions consistently fail to achieve socially beneficial results. 304 00:38:42.580 --> 00:38:52.580 Economic calculation in the socialist commonwealth surely ranks among the most important economic articles written this century.