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NOTE XXVI. The Impossibility of Economic Calculation Under Socialism

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Chapter 26. The Impossibility of Economic Calculation Under Socialism

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1. The Problem

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The director wants to build a house.

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Now there are many methods that can be resorted to.

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Each of them offers, from the point of view of the director, certain advantages and disadvantages

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with regard to the utilization of the future building,

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Building, and results in a different duration of the building's serviceableness.

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Each of them requires other expenditures of building materials and labor and absorbs other

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periods of production.

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Which method should the director choose?

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He cannot reduce to a common denominator the items of various materials and various kinds

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of labor to be expended.

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Therefore, he cannot compare them.

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He cannot attach either to the waiting time, period of production, or to the duration of

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serviceableness, a definite numerical expression.

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In short, he cannot, in comparing costs to be expended and gains to be earned, resort

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to any arithmetical operation.

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The plans of his architects enumerate a vast multiplicity of various items in kind.

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They refer to the physical and chemical qualities of various materials, and to the physical

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productivity of various machines, tools and procedures.

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But all their statements remain unrelated to each other.

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There is no means of establishing any connection between them.

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Imagine the plight of the director when faced with a project.

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What he needs to know is whether or not the execution of the project will increase well-being,

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that is, add something to the wealth available without impairing the satisfaction of wants

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which he considers more urgent.

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But none of the reports he receives give him any clue to the solution of this problem.

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We may for the sake of argument at first disregard the dilemmas involved in the choice of consumers

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of Money and Credit, The Theory of Money and Credit, The Theory of Money and Credit, The

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Formulas for the production of this energy should be applied.

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All these problems are raised daily in thousands and thousands of cases.

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Each case offers special conditions and requires an individual solution appropriate to these

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special data.

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The number of elements with which the director's decision has to deal is much greater than

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would be indicated by a merely technological description of the available producer's goods

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in terms of Physics and Chemistry.

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The location of each of them must be taken into consideration, as well as the serviceableness

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of the capital investments made in the past for their utilization.

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The director does not simply have to deal with coal as such, but with thousands and

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thousands of pits already in operation in various places, and with the possibilities

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is for digging new pits, with the various methods of mining in each of them, with the

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different qualities of the coal in various deposits, with the various methods for utilizing

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the coal for the production of heat, power and a great number of derivatives.

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It is permissible to say that the present state of technological knowledge makes it

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possible to produce almost anything out of almost everything.

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Our ancestors, for instance, knew only a limited number of employments for wood.

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Modern technology has added a multitude of possible new employments.

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Wood can be used for the production of paper, of various textile fibers, of foodstuffs,

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drugs and many other synthetic products.

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Today, two methods are resorted to for providing a city with clean water.

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Either one brings the water over long distances in aqueducts, an ancient method long practiced,

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or one chemically purifies the water available in the city's neighborhood.

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Why does one not produce water synthetically in factories?

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Modern technology could easily solve the technological problems involved.

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The average man in his mental inertia is ready to ridicule such projects as sheer lunacy.

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However, the only reason why the synthetic production of drinking water today, perhaps

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not at a later day, is out of the question, is that economic calculation in terms of money

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shows that it is a more expensive procedure than other methods.

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Eliminate economic calculation and you have no means of making a rational choice between

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the various alternatives.

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The socialists, it is true, object that economic calculation is not infallible.

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They say that the capitalists sometimes make mistakes in their calculation.

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Of course, this happens, and will always happen.

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For all human action points to the future, and the future is always uncertain.

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The most carefully elaborated plans are frustrated if expectations concerning the future are

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dashed to the ground.

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However, this is quite a different problem.

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Today, we calculate from the point of view of our present knowledge and of our present

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anticipation of future conditions.

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We do not deal with the problem of whether or not the director will be able to anticipate

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future conditions.

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What we have in mind is that the director cannot calculate from the point of view of

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his own present value judgments and his own present anticipations of future conditions,

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whatever they may be.

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If he invests today in the canning industry, it may happen that a change in consumers'

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tastes or in the hygienic opinions concerning the wholesomeness of canned food will one

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One day turn his investment into a malinvestment. But how can he find out today how to build

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and equip a cannery most economically? Some railroad lines constructed at the turn of

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the century would not have been built if people had at that time anticipated the impending

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advance of motoring and aviation. But those who at that time built railroads knew which

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Which of the various possible alternatives for the realization of their plans they had

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to choose, from the point of view of their appraisements and anticipations, and of the

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market prices of their day in which the valuations of the consumers were reflected?

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It is precisely this insight that the director will lack.

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He will be like a sailor on the high seas, unfamiliar with the methods of navigation,

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More like a medieval scholar entrusted with the technical operation of a railroad engine.

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We have assumed that the director has already made up his mind with regard to the construction

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of a definite plant or building.

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However, in order to make such a decision, he already needs economic calculation.

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If a hydroelectric power station is to be built, one must know whether or not this is

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is the most economical way to produce the energy needed.

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How can he know this if he cannot calculate costs and output?

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We may admit that in its initial period a socialist regime could to some extent rely

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upon the experience of the preceding age of capitalism.

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But what is to be done later as conditions change more and more?

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Of what use could the prices of 1900 be for the director in 1949?

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And what use can the director in 1980 derive from the knowledge of the prices of 1949?

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The paradox of planning is that it cannot plan because of the absence of economic calculation.

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What is called a planned economy is no economy at all.

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It is just a system of groping about in the dark.

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There is no question of a rational choice of means for the best possible attainment

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of the ultimate end sought.

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What is called conscious planning is precisely the elimination of conscious purposive action.

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2.

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Past Failures to Conceive the Problem

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For more than a hundred years, the substitution of socialist planning for private enterprise

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has been the main political issue.

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Thousands and thousands of books have been published for and against the communist plans.

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No other subject has been more eagerly discussed in private circles, in the press, in public

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gatherings, in the meetings of learned societies, in election campaigns and in parliaments.

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Wars have been fought and rivers of blood have been shed for the cause of socialism.

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Yet in all these years, the essential question has not been raised.

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It is true that some eminent economists, Hermann Heinrich Goessen, Albert Scheffler, Alfredo

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Pareto, Nicolas G. Pearson, Enrico Barone, touched upon the problem.

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But with the exception of Pearson, they did not penetrate to the core of the problem,

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and they all failed to recognize its primordial importance.

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Neither did they venture to integrate it into the system of the theory of human action.

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It was these failures which prevented people from paying attention to their observations.

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They were disregarded and soon fell into oblivion.

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It would be a serious mistake to blame the historical school and institutionalism for

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this neglect of mankind's most vital problem.

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These two lines of thought fanatically disparage economics, the dismal science, in the interests

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of their interventionist or socialist propaganda.

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However, they have not succeeded in suppressing the study of economics entirely.

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The puzzling thing is not why the detractors of economics failed to recognize the problem,

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but why the economists were guilty of the same fault.

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It is the two fundamental errors of mathematical economics that must be indicted.

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The mathematical economists are almost exclusively intent upon the study of what they call economic

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equilibrium and the static state.

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Recourse to the imaginary construction of an evenly rotating economy is, as has been

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pointed out, an indispensable mental tool of economic reasoning.

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It is a grave mistake to consider this auxiliary tool as anything else than an imaginary construction,

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and to overlook the fact that it has not only no counterpart in reality, but cannot even

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be thought through consistently to its ultimate logical consequences.

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The mathematical economist, blinded by the prepossession that economics must be constructed

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According to the Pattern of Newtonian Mechanics, and is open to treatment by mathematical methods,

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misconstrues entirely the subject matter of his investigations.

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He no longer deals with human action, but with a soulless mechanism mysteriously actuated

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by forces not open to further analysis.

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In the imaginary construction of the evenly rotating economy, there is, of course, no

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No Room for the Entrepreneurial Function Thus the mathematical economist eliminates

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the entrepreneur from his thought.

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He has no need for this mover and shaker whose never ceasing intervention prevents the imaginary

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system from reaching the state of perfect equilibrium and static conditions.

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He hates the entrepreneur as a disturbing element.

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The prices of the factors of production, as the mathematical economist sees it, are determined

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by the intersection of two curves, not by human action.

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Moreover, in drawing his cherished curves of cost and price, the mathematical economist

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fails to see that the reduction of costs and prices to homogeneous magnitudes implies the

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use of a common medium of exchange.

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Thus, he creates the illusion that calculation of costs and prices could be resorted to even

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in the absence of a common denominator of the exchange ratios of the factors of production.

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The result is that from the writings of the mathematical economists, the imaginary construction

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of a socialist commonwealth emerges as a realizable system of cooperation under the division of

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of Labor, as a full-fledged alternative to the economic system based on private control

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of the means of production.

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The director of the socialist community will be in a position to allocate the various factors

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of production in a rational way, that is, on the ground of calculation.

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Men can have both socialist cooperation under the division of labor and rational employment

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of the factors of production.

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They are free to adopt socialism without abandoning economy and the choice of means.

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Socialism does not enjoin the renunciation of rationality in the employment of the factors

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of production.

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It is a variety of rational social action.

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An apparent verification of these errors was seen in the experience of the socialist governments

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of Soviet Russia and Nazi Germany.

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People did not realize that these were not isolated socialist systems.

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They were operating in an environment in which the price system still worked.

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They could resort to economic calculation on the ground of the prices established abroad.

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Without the aid of these prices, their actions would have been aimless and planless.

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Only because they were able to refer to these foreign prices were they able to calculate,

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to keep books and to prepare their much-talked-about plans.

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3.

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Recent Suggestions for Socialist Economic Calculation

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The socialist tracks deal with everything except the essential and unique problem of

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socialism, namely economic calculation.

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It is only in the last years that socialist writers have no longer been able to avoid

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paying attention to this primordial matter.

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They have begun to suspect that the Marxian technique of smearing bourgeois economics

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is not an entirely sufficient method for the realization of the socialist utopia.

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They have tried to substitute a theory of socialism for the scurrilous Hegelian metaphysics

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of the Marxian doctrine.

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They have embarked upon designing schemes for socialist economic calculation.

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Of course, they have lamentably failed in this task.

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It would hardly be necessary to deal with their spurious suggestions were it not for

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the fact that such examination offers a good opportunity to bring into relief fundamental

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features both of the market society and of the imaginary construction of a non-market

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society.

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The various schemes proposed can be classified in the following way.

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1. Calculation in kind is to be substituted for calculation in terms of money. This method

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is worthless. One cannot add or subtract numbers of different kinds, heterogeneous quantities.

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2. Starting from the ideas of the labor theory of value, the labor hour is recommended as

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as the unit of calculation.

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This suggestion does not take into account the original material factors of production

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and ignores the different qualities of work accomplished in the various labor hours worked

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by the same and by different people.

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3.

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The unit is to be a quantity of utility.

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However, acting man does not measure utility.

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He arranges it in scales of gradation. Market prices are not expressive of equivalence,

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but of a divergence in the valuation of the two exchanging parties. It is impermissible

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to neglect the fundamental theorem of modern economics, namely that the value attached

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to one unit of a supply of n minus one units is greater than that attached to one unit

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of a Supply of N Units 4. Calculation is to be made possible by the

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establishment of an artificial quasi-market. This scheme is dealt with in section 5 of

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this chapter. 5. Calculation is to be made with the aid of

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the differential equations of mathematical catallactics. This scheme is dealt with in

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in Section 6 of this chapter 6.

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Calculation is to be made superfluous by resorting to the method of trial and error.

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This idea is dealt with in Section 4 of this chapter.

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4.

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Trial and Error

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The entrepreneurs and capitalists do not have advance assurance about whether their plans

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Methods are the most appropriate solution for the allocation of factors of production

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to the various branches of industry.

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It is only later experience that shows them, after the event, whether they were right or

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wrong in their enterprises and investments.

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The method they apply is the method of trial and error.

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Why, say some socialists, should not the socialist director resort to the same method?

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The method of trial and error is applicable in all cases in which the correct solution

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is recognizable as such by unmistakable marks not dependent on the method of trial and error

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itself.

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If a man mislays his wallet, he may hunt for it in various places.

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If he finds it, he recognizes it as his property.

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There is no doubt about the success of the method of trial and error applied.

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He has solved his problem.

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When Ehrlich was looking for a remedy for syphilis, he tested hundreds of drugs until

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he found what he was searching for, a drug that killed the spirochetes without damaging

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the human body.

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The mark of the correct solution, the drug number 606, was that it combined these two

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qualities, as could be learned from laboratory experiment and from clinical experience.

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Things are quite different if the only mark of the correct solution is that it has been

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reached by the application of a method considered appropriate for the solution of the problem.

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The correct result of a multiplication of two factors is recognizable only as the result

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of a correct application of the process indicated by arithmetic.

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One may try to guess the correct result by trial and error, but here the method of trial

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and error is no substitute for the arithmetical process.

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It would be quite futile if the arithmetical process did not provide a yardstick for discriminating

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what is incorrect from what is correct.

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If one wants to call entrepreneurial action an application of the method of trial and

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error, one must not forget that the correct solution is easily recognizable as such.

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It is the emergence of a surplus of proceeds over costs.

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Profit tells the entrepreneur that the consumers approve of his ventures.

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Loss that they disapprove.

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00:21:36.960 --> 00:21:43.240
The problem of socialist economic calculation is precisely this, that in the absence of

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market prices for the factors of production, a computation of profit or loss is not feasible.

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We may assume that in the socialist commonwealth there is a market for consumers' goods, and

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that money prices for consumers' goods are determined on this market.

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We may assume that the director assigns periodically to every member a certain amount of money,

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00:22:08.740 --> 00:22:13.740
and sells the consumer's goods to those bidding the highest prices.

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Or we may as well assume that a certain portion of the various consumer's goods in kind is

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allotted to each member, and that the members are free to exchange these goods against other

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are goods on a market in which the transactions are affected through a common medium of exchange,

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a sort of money.

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00:22:34.680 --> 00:22:40.680
But the characteristic mark of the socialist system is that the producer's goods are controlled

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by one agency only, in whose name the director acts, that they are neither bought nor sold,

257
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and that there are no prices for them.

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Thus, there cannot be any question of comparing input and output by the methods of arithmetic.

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00:23:00.440 --> 00:23:06.960
We do not assert that the capitalist mode of economic calculation guarantees the absolutely

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00:23:06.960 --> 00:23:12.060
best solution of the allocation of factors of production.

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Such absolutely perfect solutions of any problem are out of reach of mortal men.

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00:23:18.560 --> 00:23:24.480
What the operation of a market not sabotaged by the interference of compulsion and coercion

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can bring about is merely the best solution accessible to the human mind under the given

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00:23:30.860 --> 00:23:38.160
state of technological knowledge and the intellectual abilities of the ages' shrewdest men.

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As soon as any man discovers a discrepancy between the real state of production and a

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a Realizable Better State. The profit motive pushes him toward the utmost effort to realize

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00:23:50.820 --> 00:23:58.400
his plans. Better means, of course, more satisfactory from the point of view of the consumers buying

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00:23:58.400 --> 00:24:05.000
on the market. The sale of his products will show whether he was right or wrong in his

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00:24:05.000 --> 00:24:11.880
anticipations. The market daily tries the entrepreneurs anew and eliminates those who

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00:24:11.880 --> 00:24:18.520
who cannot stand the test. It tends to entrust the conduct of business affairs to those men

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00:24:18.520 --> 00:24:25.440
who have succeeded in filling the most urgent wants of the consumers. This is the only important

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00:24:25.440 --> 00:24:32.440
respect in which one can call the market economy a system of trial and error.

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5. The Quasi-Market

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The distinctive mark of socialism is the oneness and indivisibility of the will directing

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all production activities within the whole social system.

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When the socialists declare that order and organization are to be substituted for the

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00:24:53.500 --> 00:25:00.600
anarchy of production, conscious action for the alleged planlessness of capitalism, true

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00:25:00.600 --> 00:25:07.540
through cooperation for competition, production for use for production for profit, what they

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00:25:07.540 --> 00:25:14.060
have in mind is always the substitution of the exclusive and monopolistic power of only

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00:25:14.060 --> 00:25:21.320
one agency for the infinite multitude of the plans of the individual consumers and those

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00:25:21.320 --> 00:25:27.480
attending to the wishes of the consumers, the entrepreneurs and capitalists.

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00:25:27.480 --> 00:25:35.060
The essence of socialism is the entire elimination of the market and of catalactic competition.

283
00:25:35.060 --> 00:25:40.700
The socialist system is a system without a market and market prices for the factors of

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production and without competition.

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00:25:44.160 --> 00:25:50.340
It means the unrestricted centralization and unification of the conduct of all affairs

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00:25:50.340 --> 00:25:53.680
in the hands of one authority.

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00:25:53.680 --> 00:26:00.120
In the drafting of the unique plan that directs all economic activities, the citizens cooperate,

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00:26:00.120 --> 00:26:05.800
if at all, only by electing the director or the board of directors.

289
00:26:05.800 --> 00:26:11.680
For the rest, they are only subordinates, bound to obey unconditionally the orders

290
00:26:11.680 --> 00:26:18.520
issued by the director, and wards of whose well-being the director takes care.

291
00:26:18.520 --> 00:26:24.280
All the excellences the socialists ascribe to socialism and all the blessings they expect

292
00:26:24.280 --> 00:26:30.820
from its realization are described as the necessary outcome of this absolute unification

293
00:26:30.820 --> 00:26:33.520
and centralization.

294
00:26:33.520 --> 00:26:39.820
It is therefore nothing short of a full acknowledgement of the correctness and irrefutability of the

295
00:26:39.820 --> 00:26:46.340
economists' analysis and devastating critique of the socialists' plans that the intellectual

296
00:26:46.340 --> 00:26:52.940
Social leaders of socialism are now busy designing schemes for a socialist system in which the

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00:26:52.940 --> 00:27:01.020
market, market prices for the factors of production and catalactic competition are to be preserved.

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00:27:01.020 --> 00:27:08.020
The overwhelmingly rapid triumph of the demonstration that no economic calculation is possible under

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00:27:08.020 --> 00:27:14.300
a socialist system is without precedent indeed in the history of human thought.

300
00:27:14.300 --> 00:27:19.340
The Socialists cannot help admitting their crushing final defeat.

301
00:27:19.340 --> 00:27:26.160
They no longer claim that Socialism is matchlessly superior to Capitalism because it brushes

302
00:27:26.160 --> 00:27:30.600
away markets, market prices and competition.

303
00:27:30.600 --> 00:27:36.940
On the contrary, they are now eager to justify Socialism by pointing out that it is possible

304
00:27:36.940 --> 00:27:41.740
to preserve these institutions even under Socialism.

305
00:27:41.740 --> 00:27:48.620
They are drafting outlines for a socialism in which there are prices and competition.

306
00:27:48.620 --> 00:27:55.180
This refers, of course, only to those socialists or communists who, like professors H.D. Dickinson

307
00:27:55.180 --> 00:28:00.100
and Oskar Lange, are conversant with economic thought.

308
00:28:00.100 --> 00:28:05.180
The dull hosts of the intellectuals will not abandon their superstitious belief in the

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00:28:05.180 --> 00:28:08.580
superiority of socialism.

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00:28:08.580 --> 00:28:11.340
Superstitions die hard.

311
00:28:11.340 --> 00:28:15.900
What these neo-socialists suggest is really paradoxical.

312
00:28:15.900 --> 00:28:21.900
They want to abolish private control of the means of production, market exchange, market

313
00:28:21.900 --> 00:28:24.420
prices and competition.

314
00:28:24.420 --> 00:28:30.260
But at the same time, they want to organize the socialist utopia in such a way that people

315
00:28:30.260 --> 00:28:34.760
could act as if these things were still present.

316
00:28:34.760 --> 00:28:41.260
They want people to play market as children play war, railroad or school.

317
00:28:41.260 --> 00:28:49.380
They do not comprehend how such childish play differs from the real thing it tries to imitate.

318
00:28:49.380 --> 00:28:55.960
It was, say these neo-socialists, a serious mistake on the part of the older socialists,

319
00:28:55.960 --> 00:29:03.100
that is, of all socialists before 1920, to believe that socialism necessarily requires

320
00:29:03.100 --> 00:29:09.140
the abolition of the market and of market exchange, and even that this fact is both

321
00:29:09.140 --> 00:29:14.820
the essential element and the preeminent feature of a socialist economy.

322
00:29:14.820 --> 00:29:22.140
This idea is, as they reluctantly admit, preposterous, and its realization would result in a chaotic

323
00:29:22.140 --> 00:29:23.700
muddle.

324
00:29:23.700 --> 00:29:29.140
But fortunately, they say, there is a better pattern for socialism available.

325
00:29:29.140 --> 00:29:34.560
It is possible to instruct the managers of the various production units to conduct the

326
00:29:34.560 --> 00:29:39.480
The Affairs of their unit in the same way they did under capitalism.

327
00:29:39.480 --> 00:29:45.920
The manager of a corporation operates in the market society not on his account and at his

328
00:29:45.920 --> 00:29:52.080
own peril, but for the benefit of the corporation, that is, the shareholders.

329
00:29:52.080 --> 00:29:58.200
He will go on under socialism in the same way, with the same care and attention.

330
00:29:58.200 --> 00:30:03.120
The only difference will consist in the fact that the fruits of his endeavors will enrich

331
00:30:03.120 --> 00:30:07.120
Watch the whole society, not the shareholders.

332
00:30:07.120 --> 00:30:13.360
For the rest, he will buy and sell, recruit and pay workers, and try to make profits in

333
00:30:13.360 --> 00:30:15.920
the same way he did before.

334
00:30:15.920 --> 00:30:21.720
The transition from the managerial system of mature capitalism to the managerial system

335
00:30:21.720 --> 00:30:27.120
of the planned socialist commonwealth will be smoothly affected.

336
00:30:27.120 --> 00:30:32.200
Nothing will change except the ownership of the capital invested.

337
00:30:32.200 --> 00:30:46.600
The cardinal fallacy implied in this and all kindred proposals is that they look at the

338
00:30:46.600 --> 00:30:52.820
economic problem from the perspective of the subaltern clerk, whose intellectual horizon

339
00:30:52.820 --> 00:30:56.760
does not extend beyond subordinate tasks.

340
00:30:56.760 --> 00:31:02.080
They consider the structure of industrial production and the allocation of capital to

341
00:31:02.080 --> 00:31:08.380
and the various branches and production aggregates as rigid, and do not take into account the

342
00:31:08.380 --> 00:31:15.180
necessity of altering this structure in order to adjust it to changes in conditions.

343
00:31:15.180 --> 00:31:21.540
What they have in mind is a world in which no further changes occur and economic history

344
00:31:21.540 --> 00:31:24.420
has reached its final stage.

345
00:31:24.420 --> 00:31:30.220
They fail to realize that the operations of the corporate officers consist merely in the

346
00:31:30.220 --> 00:31:36.900
the loyal execution of the tasks entrusted to them by their bosses, the shareholders,

347
00:31:36.900 --> 00:31:42.100
and that in performing the orders received, they are forced to adjust themselves to the

348
00:31:42.100 --> 00:31:47.960
structure of the market prices, ultimately determined by factors other than the various

349
00:31:47.960 --> 00:31:50.860
managerial operations.

350
00:31:50.860 --> 00:31:56.500
The operations of the managers, their buying and selling, are only a small segment of the

351
00:31:56.500 --> 00:31:59.740
totality of market operations.

352
00:31:59.740 --> 00:32:06.580
The market of the capitalist society also performs all those operations which allocate the capital

353
00:32:06.580 --> 00:32:10.600
goods to the various branches of industry.

354
00:32:10.600 --> 00:32:17.400
The entrepreneurs and capitalists establish corporations and other firms, enlarge or reduce

355
00:32:17.400 --> 00:32:22.660
their size, dissolve them or merge them with other enterprises.

356
00:32:22.660 --> 00:32:29.680
They buy and sell the shares and bonds of already existing and of new corporations.

357
00:32:29.680 --> 00:32:33.600
They grant, withdraw and recover credits.

358
00:32:33.600 --> 00:32:39.680
In short, they perform all those acts, the totality of which is called the capital and

359
00:32:39.680 --> 00:32:41.560
money market.

360
00:32:41.560 --> 00:32:48.020
It is these financial transactions of promoters and speculators that direct production into

361
00:32:48.020 --> 00:32:53.720
those channels in which it satisfies the most urgent wants of the consumers in the best

362
00:32:53.720 --> 00:32:55.980
possible way.

363
00:32:55.980 --> 00:33:00.560
These transactions constitute the market as such.

364
00:33:00.560 --> 00:33:06.280
If one eliminates them, one does not preserve any part of the market.

365
00:33:06.280 --> 00:33:13.840
What remains is a fragment that cannot exist alone and cannot function as a market.

366
00:33:13.840 --> 00:33:19.560
The role that the loyal corporation manager plays in the conduct of business is much more

367
00:33:19.560 --> 00:33:23.720
modest than the authors of these plans assume.

368
00:33:23.720 --> 00:33:30.600
Mises is only a managerial function, a subsidiary assistance granted to the entrepreneurs and

369
00:33:30.600 --> 00:33:35.480
capitalists which refers only to subordinate tasks.

370
00:33:35.480 --> 00:33:40.320
It can never become a substitute for the entrepreneurial function.

371
00:33:40.320 --> 00:33:45.680
The speculators, promoters, investors and money lenders in determining the structure

372
00:33:45.680 --> 00:33:52.420
of the stock and commodity exchanges and of the money market circumscribe the orbit within

373
00:33:52.420 --> 00:33:58.620
which definite minor tasks can be entrusted to the manager's discretion.

374
00:33:58.620 --> 00:34:04.380
In attending to these tasks, the manager must adjust his procedures to the structure of

375
00:34:04.380 --> 00:34:11.300
the market created by factors which go far beyond the managerial functions.

376
00:34:11.300 --> 00:34:15.700
Our problem does not refer to the managerial activities.

377
00:34:15.700 --> 00:34:21.420
It concerns the allocation of capital to the various branches of industry.

378
00:34:21.420 --> 00:34:27.560
The question is, in which branches should production be increased or restricted?

379
00:34:27.560 --> 00:34:31.960
In which branches should the objective of production be altered?

380
00:34:31.960 --> 00:34:35.480
What new branches should be inaugurated?

381
00:34:35.480 --> 00:34:41.120
With regard to these issues, it is vain to cite the honest corporation manager and his

382
00:34:41.120 --> 00:34:43.900
well-tried efficiency.

383
00:34:43.900 --> 00:34:51.280
Those who confuse entrepreneurship and management close their eyes to the economic problem.

384
00:34:51.280 --> 00:34:58.480
In labor disputes, the parties are not management and labor, but entrepreneurship, or capital,

385
00:34:58.480 --> 00:35:02.480
and the salaried and wage-receiving employees.

386
00:35:02.480 --> 00:35:06.520
The capitalist system is not a managerial system.

387
00:35:06.520 --> 00:35:09.720
It is an entrepreneurial system.

388
00:35:09.720 --> 00:35:15.600
One does not detract from the merits of corporation managers if one establishes the fact that

389
00:35:15.600 --> 00:35:21.080
and it is not their conduct that determines the allocation of the factors of production

390
00:35:21.080 --> 00:35:24.380
to the various lines of industry.

391
00:35:24.380 --> 00:35:29.760
Nobody has ever suggested that the socialist commonwealth could invite the promoters and

392
00:35:29.760 --> 00:35:35.600
speculators to continue their speculations and then deliver their profits to the common

393
00:35:35.600 --> 00:35:37.380
chest.

394
00:35:37.380 --> 00:35:43.480
Those suggesting a quasi-market for the socialist system have never wanted to preserve the stock

395
00:35:43.480 --> 00:35:51.840
and commodity exchanges, the trading in futures, and the bankers and money lenders as quasi-institutions.

396
00:35:51.840 --> 00:35:56.340
One cannot play speculation and investment.

397
00:35:56.340 --> 00:36:02.500
The speculators and investors expose their own wealth, their own destiny.

398
00:36:02.500 --> 00:36:09.640
This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy.

399
00:36:09.640 --> 00:36:15.600
If one relieves them of this responsibility, one deprives them of their very character.

400
00:36:15.600 --> 00:36:21.020
They are no longer businessmen, but just a group of men to whom the director has handed

401
00:36:21.020 --> 00:36:27.080
over his main task, the supreme direction of the conduct of affairs.

402
00:36:27.080 --> 00:36:33.960
Then they, and not the nominal director, become the true directors, and have to face the same

403
00:36:33.960 --> 00:36:46.060
In recognition of the fact that such an idea would be simply nonsensical, the advocates

404
00:36:46.060 --> 00:36:52.020
of the quasi-market plan sometimes vaguely recommend another way out.

405
00:36:52.020 --> 00:36:58.400
The directors should act as a bank lending the available funds to the highest bidder.

406
00:36:58.400 --> 00:37:01.640
This again is an abortive idea.

407
00:37:01.640 --> 00:37:07.760
All those who can bid for these funds have, as is self-evident in a socialist order of

408
00:37:07.760 --> 00:37:11.240
society, no property of their own.

409
00:37:11.240 --> 00:37:17.640
In bidding, they are not restrained by any financial dangers they themselves run in promising

410
00:37:17.640 --> 00:37:21.520
too high a rate of interest for the funds borrowed.

411
00:37:21.520 --> 00:37:28.340
They do not, in the least, alleviate the burden of responsibility incumbent upon the director.

412
00:37:28.340 --> 00:37:34.940
The insecurity of the funds lent to them is in no way restricted by the partial guarantee

413
00:37:34.940 --> 00:37:41.660
which the borrower's own means provide in credit transactions under capitalism.

414
00:37:41.660 --> 00:37:49.820
All the hazards of this insecurity fall only upon society, the exclusive owner of all resources

415
00:37:49.820 --> 00:37:51.380
available.

416
00:37:51.380 --> 00:37:56.500
If the director were without hesitation to allocate the funds available to those who

417
00:37:56.500 --> 00:38:04.500
If he would bid most, he would simply put a premium upon audacity, carelessness and unreasonable optimism.

418
00:38:04.500 --> 00:38:10.500
He would abdicate in favor of the least scrupulous visionaries or scoundrels.

419
00:38:10.500 --> 00:38:17.500
He must reserve to himself the decision on how society's funds should be utilized.

420
00:38:17.500 --> 00:38:20.500
But then we are back again where we started.

421
00:38:20.500 --> 00:38:35.500
The director, in his endeavors to direct production activities, is not aided by the division of intellectual labor, which, under capitalism, provides a practicable method for economic calculation.

422
00:38:35.500 --> 00:38:45.500
The employment of the means of production can be controlled either by private owners or by the social apparatus of coercion and compulsion.

423
00:38:45.500 --> 00:38:51.740
In the first case, there is a market, there are market prices for all factors of production,

424
00:38:51.740 --> 00:38:55.100
and economic calculation is possible.

425
00:38:55.100 --> 00:38:58.860
In the second case, all these things are absent.

426
00:38:58.860 --> 00:39:04.340
It is vain to comfort oneself with the hope that the organs of the collective economy

427
00:39:04.340 --> 00:39:07.720
will be omnipresent and omniscient.

428
00:39:07.720 --> 00:39:13.880
We do not deal in praxeology with the acts of the omnipresent and omniscient deity, but

429
00:39:13.880 --> 00:39:19.340
with the actions of men endowed with a human mind only.

430
00:39:19.340 --> 00:39:24.680
Such a mind cannot plan without economic calculation.

431
00:39:24.680 --> 00:39:30.520
A socialist system with a market and market prices is as self-contradictory as is the

432
00:39:30.520 --> 00:39:34.160
notion of a triangular square.

433
00:39:34.160 --> 00:39:40.240
Production is directed either by profit-seeking businessmen or by the decisions of a director

434
00:39:40.240 --> 00:39:44.880
to whom supreme and exclusive power is entrusted.

435
00:39:44.880 --> 00:39:50.040
There are produced either those things from the sale of which the entrepreneurs expect

436
00:39:50.040 --> 00:39:56.560
the highest profits, or those things which the director wants to be produced.

437
00:39:56.560 --> 00:40:02.420
The question is, who should be master, the consumers or the director?

438
00:40:02.420 --> 00:40:09.000
With whom should the ultimate decision rest whether a concrete supply of factors of production

439
00:40:09.000 --> 00:40:14.480
should be employed for the production of the consumer's good A, or the consumer's good

440
00:40:14.480 --> 00:40:22.560
B. Such a question does not allow of any evasive answer. It must be answered in a straightforward

441
00:40:22.560 --> 00:40:25.640
and unambiguous way.

442
00:40:25.640 --> 00:40:32.680
6. The Differential Equations of Mathematical Economics

443
00:40:32.680 --> 00:40:38.160
In order to appraise adequately the idea that the differential equations of mathematical

444
00:40:38.160 --> 00:40:44.800
Economics, could be utilized for socialist economic calculation, we must remember what

445
00:40:44.800 --> 00:40:48.440
these equations really mean.

446
00:40:48.440 --> 00:40:54.360
In devising the imaginary construction of an evenly rotating economy, we assume that

447
00:40:54.360 --> 00:40:59.840
all the factors of production are employed in such a way that each of them renders the

448
00:40:59.840 --> 00:41:04.840
most highly valued services it can possibly render.

449
00:41:04.840 --> 00:41:10.380
No further change in the employment of any of these factors could improve the state of

450
00:41:10.380 --> 00:41:14.760
want satisfaction under prevailing conditions.

451
00:41:14.760 --> 00:41:20.500
This situation, in which no further changes in the disposition of the factors of production

452
00:41:20.500 --> 00:41:25.920
are resorted to, is described by means of differential equations.

453
00:41:25.920 --> 00:41:32.660
However, these equations do not provide any information about the human actions by means

454
00:41:32.660 --> 00:42:02.660
The Theory of Money and Credit

455
00:42:02.660 --> 00:42:08.860
If we assume that A is perfectly divisible and take the unit of A as infinitesimal,

456
00:42:08.860 --> 00:42:15.300
it would be a serious blunder to assert that the marginal utility of A is the same in both

457
00:42:15.300 --> 00:42:17.440
employments.

458
00:42:17.440 --> 00:42:22.500
This state of equilibrium is a purely imaginary construction.

459
00:42:22.500 --> 00:42:26.400
In a changing world, it can never be realized.

460
00:42:26.400 --> 00:42:33.720
differs from today's state as well as from any other realizable state of affairs.

461
00:42:33.720 --> 00:42:40.740
In the market economy, it is entrepreneurial action that again and again reshuffles exchange

462
00:42:40.740 --> 00:42:45.540
ratios and the allocation of the factors of production.

463
00:42:45.540 --> 00:42:51.340
An enterprising man discovers a discrepancy between the prices of the complementary factors

464
00:42:51.340 --> 00:42:58.660
and the future prices of the products as he anticipates them, and tries to take advantage

465
00:42:58.660 --> 00:43:02.340
of this discrepancy for his own profit.

466
00:43:02.340 --> 00:43:08.540
The future price which he has in mind is, to be sure, not the hypothetical equilibrium

467
00:43:08.540 --> 00:43:10.060
price.

468
00:43:10.060 --> 00:43:15.940
No actor has anything to do with equilibrium and equilibrium prices.

469
00:43:15.940 --> 00:43:19.760
These notions are foreign to real life and action.

470
00:43:19.760 --> 00:43:26.160
They are auxiliary tools of praxeological reasoning, for which there is no metal means

471
00:43:26.160 --> 00:43:31.880
to conceive the ceaseless restlessness of action, other than to contrast it with the

472
00:43:31.880 --> 00:43:34.940
notion of perfect quiet.

473
00:43:34.940 --> 00:43:41.360
For the theorists' reasoning, every change is a step forward on a road, which, provided

474
00:43:41.360 --> 00:43:47.800
no further new data appear, finally leads to a state of equilibrium.

475
00:43:47.800 --> 00:43:53.360
Neither the theorists, nor the capitalists and entrepreneurs, nor the consumers, are

476
00:43:53.360 --> 00:43:59.560
in a position to form, on the ground of their familiarity with present conditions, an opinion

477
00:43:59.560 --> 00:44:03.540
about the height of such an equilibrium price.

478
00:44:03.540 --> 00:44:06.520
There is no need for such an opinion.

479
00:44:06.520 --> 00:44:13.280
What impels a man toward change and innovation is not the vision of equilibrium prices, but

480
00:44:13.280 --> 00:44:19.120
the anticipation of the height of the prices of a limited number of articles as they will

481
00:44:19.120 --> 00:44:24.720
prevail on the market on the date at which he plans to sell.

482
00:44:24.720 --> 00:44:31.040
What the entrepreneur, in embarking upon a definite project, has in mind, is only the

483
00:44:31.040 --> 00:44:38.120
first steps of a transformation which, provided no changes in the data occur other than those

484
00:44:38.120 --> 00:44:45.120
The values induced by his project would result in establishing the state of equilibrium.

485
00:44:45.120 --> 00:44:51.480
But for a utilization of the equations describing the state of equilibrium, a knowledge of the

486
00:44:51.480 --> 00:44:58.860
gradation of the values of consumers' goods in this state of equilibrium is required.

487
00:44:58.860 --> 00:45:04.520
This gradation is one of the elements of these equations assumed as known.

488
00:45:04.520 --> 00:45:12.400
Yet the director knows only his present valuations, not also his valuations under the hypothetical

489
00:45:12.400 --> 00:45:14.760
state of equilibrium.

490
00:45:14.760 --> 00:45:20.300
He believes that with regard to his present valuations, the allocation of the factors

491
00:45:20.300 --> 00:45:25.040
of production is unsatisfactory and wants to change it.

492
00:45:25.040 --> 00:45:31.140
But he knows nothing about how he himself will value on the day the equilibrium will

493
00:45:31.140 --> 00:45:33.000
be reached.

494
00:45:33.000 --> 00:45:39.400
These valuations will reflect the conditions resulting from the successive changes in production

495
00:45:39.400 --> 00:45:42.720
he himself inaugurates.

496
00:45:42.720 --> 00:45:50.200
We call the present day D1, and the day the equilibrium will be established Dn.

497
00:45:50.200 --> 00:45:56.560
Accordingly, we name the following magnitudes corresponding to these two days.

498
00:45:56.560 --> 00:46:03.040
The scale of valuation of the goods of the first order, V1 and VN.

499
00:46:03.040 --> 00:46:09.880
The total supply of all original factors of production, O1 and ON.

500
00:46:09.880 --> 00:46:16.540
The total supply of all produced factors of production, P1 and PN.

501
00:46:16.540 --> 00:46:25.200
And summarize, O1 plus P1 as M1 and ON plus PN as MN.

502
00:46:25.200 --> 00:46:32.320
Finally, we call the state of technological knowledge T1 and Tn.

503
00:46:32.320 --> 00:46:42.520
For the solution of the equations, a knowledge of Vn, On plus Pn equals Mn and Tn is required.

504
00:46:42.520 --> 00:46:51.760
But what we know today is merely V1, O1 plus P1 equals M1 and T1.

505
00:46:51.760 --> 00:46:59.600
It would be impermissible to assume that these magnitudes for D1 are equal to those for Dn,

506
00:46:59.600 --> 00:47:06.640
because the state of equilibrium cannot be attained if further changes in the data occur.

507
00:47:06.640 --> 00:47:12.480
The absence of further changes in the data, which is the condition required for the establishment

508
00:47:12.480 --> 00:47:19.400
of equilibrium, refers only to such changes as could derange the adjustment of conditions

509
00:47:19.400 --> 00:47:25.220
to the operation of those elements which are already operating today.

510
00:47:25.220 --> 00:47:32.300
The system cannot attain the state of equilibrium if new elements, penetrating from without,

511
00:47:32.300 --> 00:47:38.220
divert it from those movements which tend toward the establishment of equilibrium.

512
00:47:38.220 --> 00:47:44.460
But as long as the equilibrium is not yet attained, the system is in a continuous movement

513
00:47:44.460 --> 00:47:46.980
which changes the data.

514
00:47:46.980 --> 00:47:53.260
The tendency toward the establishment of equilibrium, not interrupted by the emergence of any changes

515
00:47:53.260 --> 00:48:00.460
in the data coming from without, is in itself a succession of changes in the data.

516
00:48:00.460 --> 00:48:07.860
P1 is a set of magnitudes that do not correspond to today's valuations.

517
00:48:07.860 --> 00:48:14.780
It is the outcome of actions which were guided by past valuations and faced a state of technological

518
00:48:14.780 --> 00:48:24.780
and of information about available resources of primary factors of production, which was different from the present state.

519
00:48:24.780 --> 00:48:34.780
One of the reasons why the system is not in equilibrium is precisely the fact that P1 is not adjusted to present conditions.

520
00:48:34.780 --> 00:48:42.780
There are plants, tools and supplies of other factors of production which would not exist under equilibrium,

521
00:48:42.780 --> 00:48:49.780
and other plants, tools and supplies must be produced in order to establish equilibrium.

522
00:48:49.780 --> 00:48:58.780
Equilibrium will emerge only when these disturbing parts of P1, as far as they are still utilizable,

523
00:48:58.780 --> 00:49:05.780
will be worn out and replaced by items which correspond to the state of the other synchronous data,

524
00:49:05.780 --> 00:49:08.780
namely V, O and T.

525
00:49:08.780 --> 00:49:16.340
What acting man needs to know is not the state of affairs under equilibrium, but information

526
00:49:16.340 --> 00:49:25.080
about the most appropriate method of transforming by successive steps P1 into PN.

527
00:49:25.080 --> 00:49:30.200
With regard to this task, the equations are useless.

528
00:49:30.200 --> 00:49:37.380
One cannot master these problems by eliminating P and relying only upon O.

529
00:49:37.380 --> 00:49:43.720
It is true that the mode of utilizing the original factors of production uniquely determines

530
00:49:43.720 --> 00:49:50.980
the quality and quantity of the produced factors of production, the intermediary products.

531
00:49:50.980 --> 00:49:58.140
But the information that could be won in this way refers only to the conditions of equilibrium.

532
00:49:58.140 --> 00:50:04.780
It does not tell us anything about the methods and procedures to be resorted to for the realization

533
00:50:04.780 --> 00:50:07.020
of equilibrium.

534
00:50:07.020 --> 00:50:13.940
Today we are confronted with a supply of P1 which differs from the state of equilibrium.

535
00:50:13.940 --> 00:50:21.740
We must take into account real conditions, that is, P1, and not the hypothetical conditions

536
00:50:21.740 --> 00:50:24.420
of Pn.

537
00:50:24.420 --> 00:50:30.500
This hypothetical future state of equilibrium will appear when all methods of production

538
00:50:30.500 --> 00:50:37.740
have been adjusted to the valuations of the actors and to the state of technological knowledge.

539
00:50:37.740 --> 00:50:43.380
Then one will work in the most appropriate locations with the most adequate technological

540
00:50:43.380 --> 00:50:44.380
methods.

541
00:50:44.380 --> 00:50:47.300
Today's economy is different.

542
00:50:47.300 --> 00:50:53.800
It operates with other means, which do not correspond to the equilibrium state and cannot

543
00:50:53.800 --> 00:51:01.440
be taken into account in a system of equations describing this state in mathematical symbols.

544
00:51:01.440 --> 00:51:07.800
The knowledge of conditions which will prevail under equilibrium is useless for the director

545
00:51:07.800 --> 00:51:12.940
whose task it is to act today under present conditions.

546
00:51:12.940 --> 00:51:19.400
What he must learn is how to proceed in the most economical way with the means available

547
00:51:19.400 --> 00:51:26.040
Today, which are the inheritance of an age with different valuations, a different technological

548
00:51:26.040 --> 00:51:31.440
knowledge and different information about problems of location.

549
00:51:31.440 --> 00:51:35.920
He must know which step is the next he must make.

550
00:51:35.920 --> 00:51:40.340
In this dilemma, the equations provide no help.

551
00:51:40.340 --> 00:51:46.200
Let us assume that an isolated country whose economic conditions are those of Central Europe

552
00:51:46.200 --> 00:51:51.720
in the Middle of the Nineteenth Century is ruled by a director who is perfectly familiar

553
00:51:51.720 --> 00:51:55.740
with the American technology of our day.

554
00:51:55.740 --> 00:52:01.440
This director knows by and large to what goal he should lead the economy of the country

555
00:52:01.440 --> 00:52:03.880
entrusted to his care.

556
00:52:03.880 --> 00:52:10.640
Yet even a full knowledge of today's American conditions could not be of use to him in regard

557
00:52:10.640 --> 00:52:17.280
to the problem of transforming by successive steps, in the most appropriate and expedient

558
00:52:17.280 --> 00:52:23.280
way, the given economic system into the system aimed at.

559
00:52:23.280 --> 00:52:28.680
Even if, for the sake of argument, we assume that a miraculous inspiration has enabled

560
00:52:28.680 --> 00:52:34.840
the director, without economic calculation, to solve all problems concerning the most

561
00:52:34.840 --> 00:52:41.040
and the advantageous arrangement of all production activities, and that the precise image of

562
00:52:41.040 --> 00:52:46.020
the final goal he must aim at is present to his mind.

563
00:52:46.020 --> 00:52:53.120
There remain essential problems which cannot be dealt with without economic calculation.

564
00:52:53.120 --> 00:52:59.260
For the director's task is not to begin from the very bottom of civilization and to start

565
00:52:59.260 --> 00:53:02.220
economic history from scratch.

566
00:53:02.220 --> 00:53:08.600
The elements with the aid of which he must operate are not only natural resources untouched

567
00:53:08.600 --> 00:53:11.160
by previous utilization.

568
00:53:11.160 --> 00:53:17.500
There are also the capital goods produced in the past and not convertible or not perfectly

569
00:53:17.500 --> 00:53:20.660
convertible for new projects.

570
00:53:20.660 --> 00:53:27.420
It is in precisely these artifacts produced under a constellation in which valuations,

571
00:53:27.420 --> 00:53:33.260
Technological knowledge and many other things were different from what they are today, that

572
00:53:33.260 --> 00:53:35.980
our wealth is embodied.

573
00:53:35.980 --> 00:53:42.280
Their structure, quality, quantity and location is of primary importance in the choice of

574
00:53:42.280 --> 00:53:45.860
all further economic operations.

575
00:53:45.860 --> 00:53:50.580
Some of them may be absolutely useless for any further employment.

576
00:53:50.580 --> 00:53:54.100
They must remain unused capacity.

577
00:53:54.100 --> 00:54:00.100
But the greater part of them must be utilized if we do not want to start anew from the extreme

578
00:54:00.100 --> 00:54:06.580
poverty and destitution of primitive man, and want to survive the period which separates

579
00:54:06.580 --> 00:54:11.960
us from the day on which the reconstruction of the apparatus of production, according

580
00:54:11.960 --> 00:54:15.560
to the new plans, will be accomplished.

581
00:54:15.560 --> 00:54:22.260
The director cannot merely erect a new construction without bothering about his ward's fate in

582
00:54:22.260 --> 00:54:24.060
the waiting period.

583
00:54:24.060 --> 00:54:30.420
We must try to take advantage of every piece of the already available capital goods in

584
00:54:30.420 --> 00:54:33.200
the best possible way.

585
00:54:33.200 --> 00:54:39.900
Not only the technocrats, but socialists of all shades of opinion repeat again and again

586
00:54:39.900 --> 00:54:46.740
that what makes the achievement of their ambitious plans realizable is the enormous wealth hitherto

587
00:54:46.740 --> 00:54:48.780
accumulated.

588
00:54:48.780 --> 00:54:54.420
But in the same breath, they disregard the fact that this wealth consists to a great

589
00:54:54.420 --> 00:55:01.340
extent in capital goods produced in the past, and more or less antiquated from the point

590
00:55:01.340 --> 00:55:06.780
of view of our present valuations and technological knowledge.

591
00:55:06.780 --> 00:55:13.060
As they see it, the only aim of production is to transform the industrial apparatus in

592
00:55:13.060 --> 00:55:18.460
such a way as to make life more abundant for later generations.

593
00:55:18.460 --> 00:55:24.620
In their eyes, contemporaries are simply a lost generation, people whose only purpose

594
00:55:24.620 --> 00:55:29.460
it must be to toil and trouble for the benefit of the unborn.

595
00:55:29.460 --> 00:55:33.060
However, real men are different.

596
00:55:33.060 --> 00:55:39.300
They want not only to create a better world for their grandsons to live in, they themselves

597
00:55:39.300 --> 00:55:42.160
also want to enjoy life.

598
00:55:42.160 --> 00:55:48.980
They want to utilize in the most efficient way those capital goods which are now available.

599
00:55:48.980 --> 00:55:54.640
They aim at a better future, but they want to attain this goal in the most economical

600
00:55:54.640 --> 00:55:55.960
way.

601
00:55:55.960 --> 00:56:03.580
For the realization of this desire, too, they cannot do without economic calculation.

602
00:56:03.580 --> 00:56:09.260
It was a serious mistake to believe that the state of equilibrium could be computed by

603
00:56:09.260 --> 00:56:14.900
by means of mathematical operations on the basis of the knowledge of conditions in a

604
00:56:14.900 --> 00:56:18.020
non-equilibrium state.

605
00:56:18.020 --> 00:56:23.420
It was no less erroneous to believe that such a knowledge of the conditions under a hypothetical

606
00:56:23.420 --> 00:56:29.880
state of equilibrium could be of any use for acting man in his search for the best possible

607
00:56:29.880 --> 00:56:36.380
solution of the problems with which he is faced in his daily choices and activities.

608
00:56:36.380 --> 00:56:41.960
There is, therefore, no need to stress the point that the fabulous number of equations

609
00:56:41.960 --> 00:56:48.460
which one would have to solve each day anew for a practical utilization of the method

610
00:56:48.460 --> 00:56:54.800
would make the whole idea absurd even if it were really a reasonable substitute for the

611
00:56:54.800 --> 00:56:56.800
The Market's Economic Calculation