Chapter 10. A Copernican Shift. Their ascension to power at the ballot box had taken the socialists
by complete surprise. They were suddenly in charge and had to act, but it turned out that
they had no idea how to put their ambitious program of socializing the economy into practice.
The socialist literature of the previous fifty years had never dealt with the question of
of how society, that is, in practice, the socialist government, should manage the economy.
Such questions were deemed to be unscientific because the advent of socialism would come
by inexorable law of nature. Marx, Engels, Taney, Lasky and all other socialist intellectuals
until the early 1920s were convinced that socialism would eventually just be there,
are all blown and ready to be admired. In the words of a writer highly sympathetic to
their cause, they have not sufficiently considered the economic conditions that must be satisfied
if a socialist state is to equal or to improve upon the standard of life provided by capitalism,
nor have they given adequate attention, from the technical point of view, to the economic
advantages and disadvantages of socialism as compared with capitalism. Yet unless they
They have some understanding of the economics of a socialist state, and unless they are
able to present its case on economic grounds, they can hardly hope to persuade the mass
of men to believe in the state which they advocate.
By 1919 the socialist movement had swept the political scene in Germany and Austria, but
none of its leaders had given any thought to this problem. The greatest champion of
of Wartime Central Planning, Walter Ratanau, 1867-1922, was fully convinced that the central
direction of the economy should rest with the State, that is in practice in his own
hands. He celebrated war socialism and made the case for omnipotent government in times
of peace. His writings in the period of 1917 to 1919 in particular were the literary equivalent
of Carpet Bombing and Shaped the Ideals of the Coming Generation, Fr. Hayek among them.
This enormous literary output could not fail to provoke various critical reactions. Other
statists had championed this same approach. In the aftermath of the war, then, there seemed
suddenly to be a radical socialist mass movement that expected immediate action. There were
There were short-lived communist governments in Hungary and Bavaria that by and large continued
and amplified wartime central planning. Mises' old nemesis Otto Neurath became a leading
member of the Bavarian government and published success stories of his experience and plans
for a new society. In the few months until the late summer of 1919, the gates were wide
open for complete communism, but the socialist leaders Carl Koltzky, Otto Bauer and Max Adler
had no plan for how to satisfy this popular demand. One thing was clear. In distinct contrast
to Ratenau, the Vienna socialists, the Austro-Marxists, were not at ease with the notion that central
planning meant omnipotent government. They wanted the central plan, but the planning
was somehow supposed to be done by all of society, not just a technocratic elite.
In January 1919, Otto Bauer published a series of articles that he reprinted in a booklet
with the title Der Weg zum Sozialismus, The Road to Socialism. Bauer advocated the piecemeal
expropriation of industrial firms along syndicalist lines. The assets of the firms should henceforth
be managed by the workers or by committees composed of workers, consumers and civil servants.
But neither Bauer nor any of the other intellectual leaders of the socialist movement had given
any thought to the effectiveness of their scheme. None of them had cared to compare
and the performance of socialist and capitalist economies.
This point has been underlined by socialist historian Edvard Mertz.
This turned out to be the crucial strategic weakness of their ideal.
In the fall of 1919 the situation in Austria was miserable, particularly in Vienna.
Food was scarce, rooms were cold and the lights were dim or out.
Mises had suffered from flu for a couple of weeks, his desk was full and he did not want
to work.
It was during this time that he completed one of the greatest economics articles ever written.
He had promised Lederer that he would write a series of articles for Weber's Archiv für
Sozialwissenschaften und Sozialpolitik, where Lederer was about to succeed Werner
Sombart as the executive editor. On November 14th, 1919, Mises told him the title of the
first of these pieces, Economic Calculation in the Socialist Commonwealth. This was to be the
The centrepiece of the general treatise he was working on, which would contain a systematic
and comprehensive critique of all varieties of socialist schemes. He must have begun this
project soon after finishing Nation, State and Economy, and it would take him two more
years to complete the manuscript. The timing was important. Friedrich von Mises was close
to retirement, and although Mises was far from convinced he had much chance of following
In Mises' old position, it was not unreasonable to hope that an impressive book publication
shortly before the appointment could tip the balance in his favour. For various reasons,
however, he might have thought it useful to publish the central argument beforehand in
a separate work. One was the hope of having an immediate impact on Austrian policies,
but there was also a pedagogic rationale from the early publication of the chapter on economic
Calculation. Mises intended to prove that pure socialism was an economic impossibility,
and this proof relied on a consideration that had so far escaped the notice of economists.
In fact, his proof squarely contradicted one of the most cherished doctrines of the dominant
Vizierian paradigm, Mises' theory of imputation. The advanced publication of the calculation
chapter would give his readers time to absorb the central thesis of his larger treatise
on Socialism. To prepare himself for the likely criticisms he would encounter from the economic
establishment and other interested parties, Mises made use of his seminars to discuss
the fundamental problems of the theory of distribution, and more particularly of imputation
theory. A short lecture by the mathematical economist Dr Ernst Zeidler opened the first
three sessions of the university seminar in October 1919. These were entirely dedicated
to the problem of imputation. It is likely that Mises confronted his students at this
point with his new ideas. Unfortunately, no records of the meetings have survived. The
discussions must have touched on the more subtle problems of economic theory, problems
beyond the grasp of most of the students. This was probably Mises' motivation for
starting a separate, smaller group limited to more advanced members.
The Argument During the first weeks of the winter semester,
Mises fine-tuned his article on economic calculation, addressing various criticisms and remarks
from his seminars. He eventually gave the first formal presentation in early January
1920 in a meeting of the Nationalökonomische Gesellschaft. In the assembly were some of
the world's best economists and Marxist scholars. Josef Schumpeter, Alfred Hamon, Max Adler,
Dylan Bauer and several other participants at this meeting had known Mises for many years
as a passionate champion of individualism and a fierce critic of socialism. He was considered
more challenging than most critics, who tended to focus on the past failures of applied socialism.
Mises knew in detail socialism's abysmal record, but he focused his criticism on theory,
not history. Advocates could always dismiss past failures as irrelevant to the viability
of a Future Socialist Commonwealth, but Mises challenged the very possibility of their plans
ever succeeding. In his Nation, State and Economy, he had discussed the standard criticism
that the socialists overstated the extent to which people would enjoy work for its own
sake. The socialist reply was that people currently loathed hard work only because of
the market economy in which they were objectively alienated from their labour and its products.
The future would bring forth a new socialist man, who no longer indulged in selfishness
but found instead his greatest satisfaction in the good of the collective. Mises countered
that no country had ever enjoyed the altruism of so many new socialist men more than the
German Reich under Wilhelm II. If the socialist government could not succeed in Germany, where
else could it possibly ever do so? This was a good point, but it was a trivial argument
compared to the one Mises brought up in that January 1920 meeting.
He now proceeded to explain why socialism was economically inferior, regardless of the
psychological condition and motivations of the population. Even if the future were to
produce the new socialist man, central planning still suffered a fatal shortcoming.
Mises now presented an elaborate discussion of a problem that he had only briefly touched
on in Nation, State and Economy when he mentioned the role of value and monetary calculation
and allocating resources within a national economy.
He had observed that capital goods constantly had to be replaced, not just to extend the
structure of production, but merely to maintain the existing productive apparatus.
Which capital goods should be replaced when?
As with all economic decisions, there were necessary trade-offs and questions of priority.
A rational solution to this problem presupposed that one had clear criteria for judging the
In the extent of wear and tear on the current capital goods, in a static society, in which
capital goods always are to be replaced only with others of the same kind, Mises argued,
one had a physical yardstick, namely the existing structure of production.
But in an economy subject to change, this simple method does not suffice for most means
of production, for the used up and worn out means of production are replaced not by ones
of the same kind, but by others.
In such a dynamic context, calculation in physical units, which suffices for the primitive conditions
of a stationary economy, must therefore be replaced by calculation of value in money.
Mises went on to describe the social function of the businessman's calculations. Individual
capital goods disappear in the production process. Capital as such, however, is maintained
and expanded. That is not a natural necessity independent of the will of economising persons,
However, but rather the result of deliberate activity that arranges production and consumption
so as at least to maintain the sum of value of capital, and that allots to consumption
only surpluses, and in addition, the precondition for that is the calculation of value, whose
auxiliary means is accounting. The social-economic task of accounting is to test the success
of production. It has to determine whether capital was increased, maintained or diminished.
The individual economic plan and the distribution of goods between production and consumption
is then based on previous accounting. Mises went on to stress the subjective element in
this process. Accounting is not perfect. The exactness of its numbers, which strongly impresses
the uninitiated, is only apparent. The evaluation of goods and claims that it must work with
is always based on estimates, resting on the interpretation of more or less uncertain elements.
Mises began his January 1920 talk along the same lines, stressing the vital importance
of the economic calculus for the allocation of factors of production. His audience concurred.
Most of them regretted that economic calculation as it was actually practised was a profitability
calculus that reflected the mere private interests of capitalist investors, but none of them
questioned the fact that calculation of some sort epitomised rationality in economic affairs.
Where all other criteria might be challenged, algebra and arithmetic stood fast. Now Mises
came to the heart of his argument, which he presented in two bold theses.
1. Socialist societies could not rely on economic calculus, such as it is known in market economies,
because entrepreneurial calculations are based on money prices for factors of production.
Such prices cannot exist in socialism because prices can only come into existence through
exchange and exchange presupposes the existence of at least two owners. Now the very nature
of socialism, its usual definition in fact, is that all means of production are under
a unified control. They all belong to one economic entity, society, the people, the
commonwealth or the state, whatever collective entity is named. The crucial fact is that
But from the economic point of view there is, in any socialist regime, only one owner of
all factors of production. Therefore no factor of production can be exchanged, and there
can be no money prices for factors of production, and therefore no socialist community can allocate
its factors of production on the basis of economic calculation, as it is known in capitalist
markets.
2. There are no other means of economic calculation. Such economic calculation requires money prices
Mises for factors of production, which can only come into existence where factors of
production are privately owned. Insofar as the money calculus epitomises economic rationality,
socialism is inherently irrational. It was immediately clear to the audience that Mises
was treading completely new ground. Socialism had been criticised from many angles, but
hardly anyone had doubted that the central planners could achieve gains in efficiency.
Mises' thesis, if true, would strike at the heart of the socialist agenda. It would elegantly
and crushingly refute Marx and his modern heirs, the English guild socialists and the
fashionable Austro-Marxist theoreticians, many of whom were in the audience at Mises'
presentation. In short, Mises' paper was an all-out attack on the very foundation of
the economic case for socialism, a refutation of its central tenet, which by the end of
of the war had become universally accepted. It later turned out that Mises had an important
predecessor in Nicolaas G. Pierson, the eminent Dutch economist who was also Minister of Finance
and Governor of the Dutch Central Bank. In an exchange with Austro-Marxist Karl Kautsky,
Pierson had argued that any economic system would have to solve the problem of value determination,
and that the socialists would have to demonstrate how this determination could be achieved without
and the system of market prices.
Pearson's original 1902 essay was written in Dutch and therefore did not reach a wider
public in Germany and Austria.
It was translated into German and English only after Mises' essay had started the
debate independently.
The ensuing debate both clarified the critical aspects of Mises' argument and foreshadowed
the various tacks that socialist theorists would take in the coming years as they attempted
to defend the viability of their system against the revelation of its fundamental economic
irrationality.
Mises later summarized the discussion in a letter to Ledo.
My first concern is to show that economic calculation as it is practised in the free
economy is inconceivable in a socialist commonwealth, because it is built on the premise that money
prices are formed for the means of production.
This part of my presentation has generally met with full consent in the discussion in
and the Nationale Ökonomischen Gesellschaft
The Socialist Commonwealth gives each comrade a certain amount of accounting money as income and then leaves it to free pricing to bring about prices through exchanges. This proposal is, however, unsuited to circumvent the problem I have pointed out, for the higher-order goods remain extra commercium. Consequently,
it is impossible to sort out prices for them even in terms of this accounting money, and
thus economic calculation becomes impossible in the sphere of production. The substance
of my argument which I believe to have evidenced in my proof is precisely this, that economic
calculation in the free economy is not applicable in the Commonwealth, and I also do not see
any conceivable economic calculation that the socialist Commonwealth could adopt. I believe
that this presents the most important problem of socialisation, a problem far more important
for socialist theory than, formally, the problem of the average rate of profit. Mises's comparison
in the last sentence refers to a debate initiated by Boehm-Bawerk, who had subjected Marxist
theory of the average rate of profit to scathing and devastating criticism. This was the beginning
of what turned out to be the protracted socialist calculation debate, which continues to be
One of the most significant controversies in modern economics. The meeting of the Nationalökonomische Gesellschaft had ended in triumph for Mises. He had turned the obligatory rearguard action that everybody expected him to deliver into a surprise attack against the very heart of socialism. Vienna's Austro-Marxist elite was left speechless. They had believed that the intellectual war had long been won, and that all that was left was the resistance of special interests
and the unenlightened. His triumph would become ever more complete over the following weeks,
months and years, when it became increasingly obvious that the objections of his opponents
were spurious and that he had already anticipated most of them.
Amy Lederer's comments are a case in point. He did not attend the January 1920 meeting
of the Nationale Ökonomie Gesellschaft, but sent Mises his typewritten comments in an
An Undated Letter Just as Adler and Hillenbauer waxed eloquent
about the blessings of an as yet unknown socialist calculation system, which would incorporate
alternatives to capitalist money calculation, but he did not state what such a system would
consist in, Lederer claimed that a future socialist economic calculation would be essentially
different from capitalistic calculation in that many moments would be included in the
calculation, some would be lacking, and some would be evaluated differently. This all points
to another kind of system, but a system nevertheless. It is at that point, within a system, where
universal factors are found, that operative methods of calculation for the system originate.
Lederer also observed that capitalist accounting does not give photographs of reality, but
only stylised models, which heavily depend on the subjective element of the entrepreneur's
But Mises had already conceded these points, which were irrelevant to his thesis. In fact,
he did not claim that economic calculation was more objective in capitalism than in socialism,
but that any economic calculation required the existence of money prices for capital
goods. It is true that in capitalism the relevant prices, future money prices, had to be guessed,
but the point was that only in capitalism were there any prices to be guessed at all.
Finally, Leder misinterpreted Mises' claims that socialist economies could not be rationally
directed to mean that socialist societies would not produce any rational leaders, but
Mises' real point was that socialism would be deprived of any criteria whatsoever for
the rational allocation of resources. Without such criteria, even the greatest leader would
be unable to organise the structure of production in an efficient way. Mises wrote, It is not
Not at all my contention that a socialist commonwealth would not develop leader types.
I assume, though, that these leaders will not excel in the rational, but in the sentimental
and intuitive sphere. A good assumption indeed. Mises here sums up the essence of political
leadership in the age of the omnipotent state.
The Intellectual Context The political implications of Mises' argument
were obvious. If Mises was right, full socialism was not a viable option. Only capitalism or
some mixed economy that accommodated the market remained on the menu of feasible political
constitutions. Yet Mises' socialist calculation argument had a much wider theoretical significance
than was apparent to most economists in the 1920s and 1930s. It was in fact the first
and decisive step toward building the theory of production on completely different foundations
Thanks in particular to the writings and towering personal influence of Friedrich von Mises,
most Austrian School economists had unwittingly come to accept John Stuart Mill's dogma
that production and distribution are two separate spheres of human life, which are separable
in both economic analysis and political practice. In Mill's view, production was essentially
is truly a matter of technology, whereas distribution was a question of distributive justice, and
economic science dealt exclusively with one particular distributive system, namely the
market economy. Says Mill, It is evident that of the two great departments of political
economy, the production of wealth and its distribution, the consideration of value has
to do with the latter alone, and with that, only so far as competition and not usage or
or custom is the distributing agency. The conditions and laws of production would be
the same as they are if the arrangements of society did not depend on exchange, or did
not admit of it. Accordingly, questions of ownership and of appropriation were deemed
to be the proper subject of legal scholarship, not economic analysis. This account of the
relation between production and distribution did not comport well with Carl Menger's theory
Theory of the order of goods, according to which higher order goods derive their value
from lower order goods, and thus ultimately from consumers' goods. Factors of production
are valuable only because they serve to produce consumers' goods. The value of streets, machines,
cars, petroleum, etc., is thus derived from the value of the enjoyment that they help
bring about. This common sense observation turned classical economics on its head. The
The Cost of Production Theories of Value held that consumers' goods are valuable only because they are produced with valuable inputs.
It was not a straightforward task to explain precisely how factors of production derive their value from the value of consumers' goods.
What does it mean to derive value or, in other words, what does it mean to say that an actor imputes the value of a consumer's good to a factor of production?
Carl Menger had only very briefly dealt with the problem of imputation.
Zurechnung. Notice, however, that Menger had no predecessor for his solution of the problem
of joint production. It is safe to say that he and Boehm-Bawerk believed that the value
of consumer goods depended on the legal situation of the acting individuals. Hence, in their
view, production was interrelated with distribution. But in their writings, both focused heavily
on the conditions existing in a market economy and neglected the question of how the results
The importance of the analysis were modified under the impact of different legal frameworks.
The only early Austrian who addressed the problem of the relationship between value
and distribution in any systematic way was Friedrich von Mises. He recognized the importance
of the question and proposed an original answer that he based on an elaboration of Menger's
theory of value imputation. Menger had based his analysis of imputation on the premise
that value is a quantity, or at any rate some sort of extensive entity. This assumption
was necessary for his imputation theory, because if value did not have such an extended nature,
it would be unintelligible from what it was that was imputed to something else. It was
also an assumption shared by the greatest authorities in German economics.
Consider the number one German economics textbook of Menger's day, Karl Heinrich Rao, Grundsätze
and the Volkswirtschaftslehre. On page 166 he says,
Strength and Duration
Wieser unquestioningly adopted Menger's premise that value is a quantity, and added further
speculations on the nature of value to the Mengerian fabric. In particular, he came up
with two new claims about value that would prove to have great significance for the political
implications of his own value theory, and which foreshadowed the way economic analysis
would be practiced during the rest of the twentieth century.
First, Wieser advocated the use of the fiction that one could meaningfully speak of value
without respect to the wealth or income of the acting person. He himself recognized his
stipulation as a fiction, and he justified the use of fictions as a necessary device
of scientific analysis. In fact, as significant as the political implications of Visa's natural
value theory are in their own right, it is equally important to stress the impact of
Visa's methodology on the wider profession. Mathematical economics had made no secret
of the fact that their reasoning relied on fictions, even though they believed that the
error introduced by unrealistic stipulations was negligible in most cases. In contrast,
verbal economists like Menger stressed the necessity for science to describe reality.
They were reluctant to use mathematical tools precisely because they saw no way to reconcile
the use of such tools with their quest for realism. Mises broke with this tradition by
by consciously insisting on the legitimacy of deductions from fiction.
The value that is independent of income and wealth is natural value. Of course, the natural
value of capital goods is derived from the natural value of consumers' goods. How the
natural value of consumers' goods is imputed to capital goods is the subject matter of
imputation theory. Second, natural value is objective in the sense that it is the same
for All Persons. For example, Wieser claimed that an increase in the quantity of money
entails the same decrease of the value of money for every individual, and he therefore
also held that the marginal value of any given amount of money is lower for a rich person
than for a poor person. Thus, in spite of some statements in which he stressed that
value was always related to an acting individual, in his theory of natural value Wieser completely
dissociated the value of goods from any context of concrete human action. This was the starting
point for his theory of the shortcomings of capitalism and also for his policy recommendations.
It is obvious that real-life monetary economies are not likely to bring about the same results
as an economy in which natural value reigns. According to Wieser, only if all members of
society are perfectly equal in their wealth and income position do the values of a monetary
The Theory of Money and Credit
The practical nub of Mises' theory and his great innovation was to turn upside down the
roles of value theory in production and distribution. In Mill's scheme, value theory played no
role in production, but exclusively concerned distributive questions in the contingent framework
of a market economy. In contrast, Mises pointed out that while the value of goods could be
neglected in decisions about their distribution, the question of value was central to decisions
Modern marginal value theory not only served to explain the value of all goods in all types
of social organization, but could also be applied in all conceivable societies to solve
the problem of evaluating and allocating factors of production. Contrary to Mill, therefore,
value theory was a truly universal theory, and, we might add, it was a truly scientific
Theory, because it did not commit the academic economist to any particular political program,
just as Maxwell's equations did not commit a physicist to any political party.
Wieser fervently denounced the intimate relationship between the various schools of economic thought
and the political agendas they were backing up, criticizing these schools for not pursuing
pure knowledge, that is, for Wieser knowledge untainted by political implications.
In contrast, his approach covered a certain most inner domain of economic truths, truths
relating to elements that remain common to all social organisations. Clearly this guaranteed
political impartiality and therefore, in his view, scientific objectivity.
Capitalist calculation in terms of money prices was only one particular application, and a
rather deficient one, of the general principles of value calculus. By the end of the First
World War, Wieser's analytical framework had become orthodoxy.
The best illustration is the fact that Max Weber invited him to write a general treatise
on economics for the prestigious Grundriss der Sozialökonomik series, which was supposed
to portray the present state of the social sciences. Wieser thus wrote his Theorie der
gesellschaftlichen Wirtschaft. The work was first published in 1914 and remained the main
Work of Reference in German Language Economics until the early 1930s. A second edition appeared
in 1924. It is true that the technical details of his imputation theory were challenged and
that it competed with Boehm-Bawerk's slightly different approach. Works on the technical
problems of imputation theory abounded from the 1890s and proliferated until the 1930s
without leading to any solution. But the general postulates and distinctions on which
which value imputation theory relied, had not met with serious resistance from any major
champion of theoretical economics. Most notably Boehm-Bawerk had no substantial objections
to offer. He was not enthusiastic about Wieser's emphasis on the use of fictions in economics,
but he too adopted Menger's conception of value as an extended entity that can be imputed
to other objects. Thus he compounded the confusion that Wieser had created among younger economic
Theorists The only theoretical challenge to the Vizierian
orthodoxy came from a young Russian Marxist who for some time had been a member of Boehm-Bawerk's
seminar and who later became Soviet Russia's top economist. In his Economic Theory of the
Leisure Class, which was first published in Russian in 1917, Nikolai Bukharin presented
an all-out attack on the new marginalist price theory, selecting as his prime target the
Austrian School because it is generally known that the most powerful opponent of Marxism
is the Austrian School. One of Bookerin's main objectives was to explain why the Austrian
pretensions to the universality of the value theory were untenable. He observed, While
Marx is concerned with the historically determined relations between men, Berm Bawerk presents
universal forms of the relations between men and things, but he went on, these universal
Capital forms are not sufficient to explain market prices because market prices result,
among other things, from certain contingent features of the capitalist system, most notably
private property and the production of commodities.
Said Bukharin, it is obvious that even the most fundamental phenomenon of political economy,
that of value, cannot be explained on the basis of the circumstance common to all times
and People's That Commodity Satisfy Some Human Need. Yet, this is the method of the Austrian School.
We therefore reach the conclusion that the Austrian School is pursuing an absolutely
erroneous methodological course in ignoring the peculiarities of capitalism.
Mises's socialist calculation argument buried the old Vizierian approach, but it also overturned
the doctrines of Mill and Marx as well. First, Mises joined with Bukharin in his critique of
of the Older Austrians by arguing that there can be no general principle of value calculation
because there is no such thing as value calculation in the first place. There is only price calculation,
and it comes into existence only at those times and places where the means of production
are privately owned. The existence of economic calculation is a historically contingent event.
Second, Mises showed that this very historical contingency of the economic calculus played
made out against Marx and the Marxists. Rationality in economic affairs exists only to the extent
that capital goods are privately owned, and the reverse holds true as well. The more socialist
any given historical order was, the less rational it was. A rational economic order is not a
fact of nature, but depends entirely on fragile institutions that need to be cultivated through
a sustained cultural and political effort. Third, Mises smashed Mill's dogma of the
separate realms of production and distribution. Production in capitalism is guided by the
individual businessman's calculations, but these calculations are contingent on the existence
of private property in the means of production. They cannot be performed in systems lacking
such property rights. It follows that production does depend on distribution and distribution
Mises' case for the impossibility of socialist calculation relied on two insights of previous
authors which he had integrated into his brief exposition on value theory in chapter 2 of
Theory of Money and Credit. The first of these insights originated from the works of Georg
Simmel and Josef Schlumberger, who had characterised the essence of economic action as exchange.
Every human action exchanges a supposedly superior state of affairs against an inferior
one. Today one would of course say choose rather than exchange, but the point is the
same. As Mises later argued, this essential feature of human action is also the foundation
of the phenomenon of value. In the few passages that he devotes to value theory and theory
of money and credit, Mises decisively elaborates on Menger's definition of values as the importance
Menger also defined value as a judgment economising men make about the importance of the goods
at their disposal for the maintenance of their lives and wellbeing. Hence value does not
exist outside the consciousness of men. In Menger's definition of value, which contrasted
But somewhat with his actual analysis of value, value was a characteristic feature of a single
economic good. In contrast, Mises defined the value of one good in explicit context with
the value of another good with which it was compared, and he stressed that this comparison
was based on choice as it involved acts of valuation. In short, Mises agreed with Schumpeter
that value had nothing to do with want satisfaction or any other feelings, and that therefore
Economists did not have to engage in psychological analysis. Value is ordinal, it is relative,
it is a relation, it is not a quantity. Mises emphasized these heterodox observations, then
went on to define value as being inextricably bound to human choices. Every economic transaction
presupposes a comparison of values, but the necessity for such a comparison, as well as
Because the possibility of it is due only to the circumstance that the person concerned
has to choose between several commodities. With these lines, Mises set the Austrian Theory
of Value, the cornerstone of economic analysis, on a completely new trajectory. Carl Menger
had resolutely rejected the notion that the phenomenon of value could somehow depend on
human choices. He believed that any reference to free will in this context would deny economics
altogether the status of an exact science, he went on.
Whether and under what conditions a thing is useful to me, whether and under what conditions
it is a good, whether and under what conditions it is an economic good, whether and under
what conditions it possesses value for me, and how large the measure of this value is
for me, whether and under what conditions an economic exchange of goods will take place
between two economising individuals, and the limits within which a price can be established,
if an exchange does occur. These and many other matters are fully as independent of
my will as any law of chemistry is of the will of the practising chemist. Menger therefore
stressed the will-independent factors determining the pricing process. Market prices resulted
ultimately from individual needs that had to be satisfied with scarce means. He realised
that human beings had to have knowledge of this causal connection between means and ends.
But the Mengerian analysis of the pricing process paid scant attention to this subjective
factor. The posthumous second edition of his principles, 1923, reinforced the stress on
the objective factors of the pricing process. Among other things, Menger here distinguishes
between imaginary and real human wants. See our discussion in chapter 14.
In Menger's account, the theory of value and prices was a subdivision of a Platonic theory of good. With Mises, it became part of a reality-based theory of human action.
Second, Mises combined this choice-based theory of value with Franz Kuhl's insight that the value's underlying individual decision-making cannot be measured.
After reviewing the works in the field, he was convinced that Franz Kuhl was correct in his emphasis of value as a purely ordinal relationship between economic goods, always tied to the context given by a concrete person at a concrete time and a concrete place.
Acts of valuation are not susceptible of any kind of measurement.
It is true that everybody is able to say whether a certain piece of bread seems more valuable
to him than a certain piece of iron, or less valuable than a certain piece of meat, and
it is therefore true that everybody is in a position to draw up an immense list of comparative
values, a list which will hold good only for a given point of time, since it must assume
a given combination of wants and commodities, and economic activity has no other basis than
and the value scales thus constructed by individuals.
An exchange will take place when two commodity units are placed in a different order on the
value scales of two different persons. In a market, exchanges will continue until it's
no longer possible for reciprocal surrender of commodities by any two individuals to result
in their each acquiring commodities that stand higher on their value scales than those surrendered.
If an individual wishes to make an exchange on an economic basis, he has merely to consider
the comparative significance in his own judgment of the quantities of commodities in question.
Such an estimate of relative values in no way involves the idea of measurement.
In these passages, Mises almost anticipates his socialist calculation argument. His 1920
essay on the calculation problem under socialism merely spelled out an important implication
In the early 1920s, almost nobody understood value the way Mises defined it. It was certainly
not difficult to overlook a revision of value theory that was buried in a book on money.
Moreover, most of his readers were only superficially acquainted with theoretical problems in the
first place. Those with interests in monetary theory typically had only a thin background
in general value theory, and economists interested in general value theory were unlikely to search
for and ponder the value-theoretical disquisitions of a young monetary economist.
As time went on, Mises's position became even more marginalised, with the result that
Triumph
By the beginning of 1922, Mises had finished the manuscript of his treatise on socialism
and was looking for a good academic publisher. He had published parts of it beforehand, the
chapter on economic calculation. He also tried to publish chapter three, The Social Order
and the Political Constitution, in a Festschrift vor Max Weber, but this project did not materialise
because socialism appeared before the other book.
Dunkel und Ruhmlot in Munich declined because of the difficult inflationary situation that
had begun to wreck the German economy, making the publication of a 500-page scientific treatise
a major risk.
Moore in Tübingen was interested, but asked Mises to cut 20% of the manuscript.
Mises kept looking.
In February, he signed a contract with Gustav Fischer in Jena.
Their contract had made only vague stipulations about the adjustment of Mises' royalties
to the ongoing inflation.
This fact is revealing as to Mises' priorities and his sense for business.
When prices rose dramatically between a conclusion of the negotiations in February and the completion
of the production process in July, Mises was very happy that Fischer raised the honorarium
on a courtesy basis by 50%. Mises received 19,200 marks for the book in July 1922. This
was the equivalent of $38.92. A few months later, by October 1922, the marks still in
precipitous decline, the dollar equivalent of Mises' Honorarium shrank to $6.04. We
may suppose, however, that Mises was quick to exchange his marks against Cronin, which
which had a stable dollar exchange rate, thus Fischer turned out to be a good choice and
remained Mises's book publisher throughout the 1920s.
The book turned out to be a great success. One decisive factor in its sweeping victory
was the growing sense among German economists that the reigning historicism and the Kathedra
Socialism had done far more harm than good. Already before the war there were signs of
The Decline in German Socialist Orthodoxy The Defeat in the First World War accelerated
the fall and a wider academic audience became receptive to alternative paradigms.
In this situation, Mises' main thesis was confirmed and endorsed by two great authorities
in German social science, Max Weber and Heinrich Herkner.
In his Wirtschaft und Gesellschaft, Economy and Society, published posthumously in 1922,
Weber argued along the same lines as Mises in his 1920 article, that a socialist planning
board could not base its allocation of resources on economic calculation. Contrasting capitalist
money price calculation with calculations in kind that authors like Otto Neurath had
proposed, Weber observed that the comparison of different kinds of processes of production
with the use of different kinds of raw materials and different ways of treating them is carried
out today by making a calculation of comparative profitability on terms of money costs. For
accounting in kind, on the other hand, there are formidable problems involved here which
are incapable of objective solution. In the spring of 1990, Neurath was a member of a
short-lived revolutionary Bavarian government in Munich, acting as director of the Zentrale
Wirtschaftsamt, Office of the Centrally Planned Economy. After the suppression of the revolution,
Marx Weber defended him in court. Weber's ensuing discussion showed that he had fully
grasped the nature of the problem, its concrete manifestation, and its capitalist solution.
An enterprise is always faced with the question as to whether any of its parts is operating
irrationally, that is, unprofitably, and if so, why. It is a question of determining which
which components of its real physical expenditures, that is, of the costs in terms of capital
accounting, could be saved and, above all, could more rationally be used elsewhere. This
can be determined with relative ease in an exposed calculation of the relation between
accounting costs and receipts in money terms, the former including in particular the interest
charge allocated to that account. But it is exceedingly difficult to do this entirely
in terms of an in-kind calculation, and indeed, it can be accomplished at all only in very
simple cases. This, one may believe, is not a matter of circumstances, which could overcome
by technical improvements in the methods of calculation, but of fundamental limitations,
which makes really exact accounting in terms of calculations in kind impossible in principle.
Even the introduction of non-monetary systems of remuneration could not overcome the problem
System of Eradicating Irrationalities, because these measures would be unsuitable to identify
irrationalities in the first place. The essential question is that of how it is possible to
discover at what point in the organisation it would be profitable to employ such measures,
because there existed at that point certain elements of irrationality. It is in finding
out these points that accounting in kind encounters difficulties, which in exposed calculation
Imputation in money terms does not have to contend with.
Weber then went on to point out the crucial fact preventing the application of schemes
for calculation in kind, namely that only money imputation works.
Utility imputation is a camera.
The fundamental limitations of accounting in kind as the basis of calculation in enterprise
of a type which could include the heterocephalus and heteronomous units of production in a
in a planned economy are to be found in the problem of imputation, which in such a system
cannot take the simple form of an exposed calculation of profit or loss on the books,
but rather that very controversial form which it has in the theory of marginal utility.
In order to make possible a rational utilisation of the means of production, a system of in-kind
accounting would have to determine value indicators of some kind for the individual capital goods
Indications which could take over the role of the prices used in book valuation in modern
business accounting, but it is not at all clear how such indicators could be established
and in particular verified. Whether, for instance, they should vary from one production unit
to the next on the basis of economic location, or whether they should be uniform for the
entire economy on the basis of social utility, that is, of present and future consumption
Requirements. They were warned against the misconception that this problem was of a merely
technical nature, one that could eventually be overcome once enough human resources were
invested in finding a solution. Nothing is gained by assuming that, if only the problem
of a non-monetary economy were seriously enough attacked, a suitable accounting method would
be discovered or invented. The problem is fundamental to any kind of complete socialisation. We
We cannot speak of a rational, planned economy, so long as in this decisive respect we have
no instrument for elaborating a rational plan.
Apparently, Weber and Mises had developed substantially the same ideas in complete independence
from one another. Weber died on June 14, 1920, and thus might have read Mises's archive
paper, which had come out in February or March of that year. The editors of Economy and Society
He referred to Mises's work at the end of the chapter on calculation in kind, stating,
During the printing of this work, an essay by Ludwig von Mises dealing with these problems
came out. It is likely, however, that Mises provided the initial inspiration for Weber
in their many hours of conversation during Weber's visit to the University of Vienna
in the summer semester of 1918. Both men were among the faculty of a course for army officers
that dealt with various fundamental political problems. In one of the sessions Weber delivered
a lecture on the general problems of socialism. It was subsequently published with his approval
from stenographical notes. It is significant that Weber does not even hint at the issue
of economic calculation in this lecture. Be that as it may, the important fact is that
when Weber died at the age of 56 on June 14, 1920, he and Mises agreed on the socialist
Calculation Question, and when Weber's Magnum Opus was eventually published in 1922, it
weighed in with the full authority of its author on the side of Mises, causing great
consternation among mainstream economists in Germany who were still steeped in the Catella
Socialist tradition. As if to reinforce Weber and Mises, Vladimir Lenin, leader of the world's
model of socialism, announced a partial retreat on the economic front. Soviet Russia would
to begin a new economic policy bringing greater freedom for trade and commerce. Attempts to
abolish money and markets had produced precisely the chaos that Mises argued was inevitable
under full socialism.
But the real knockout for academic socialism in Germany came at the hands of its own vicar.
Heinrich Herkner had succeeded Schmoller in his position at the University of Berlin and
Schmoller was the president of the Verein für Sozialpolitik. For practical purposes this meant he had become Schmoller's heir as head of the historical school and of the German social policy movement.
In September 1922, at the Vereins fiftieth Jubilee meeting in Eisenach, it became obvious that Herkner had to be counted among those who abhorred the excesses of historicism and academic socialism.
He called for more moderation, which meant, in practical terms, a reconsideration of the tenets of classical economics.
Heckner stated that even the great Schmoller had convided to him shortly before his death,
that he was concerned about the inability of the younger generation to think in terms
of free trade. This inability, Heckner argued, had led to exaggerated views about the power
of the state relative to the operation of economic law, and the nefarious consequences
could be seen. These views had already become acceptable. Heckner's speech was received
with great applause. In the following year, in a widely read paper on the changed implications
of economic science for social policy, Kirchner argued that the labour unions had severely
hampered economic reconstruction after the war. This concerned in particular their resistance
to longer working hours and to any limitations on their power to strike. They were the prime
movers behind the political forces that subjected the German economy to an ever more complex
and its web of regulations. Historically astute economists had apprehensions about the ultimate
result of this movement, either some perverse guild oligarchy or a mercantilist police state.
As an actual reaction to such excesses, there would be excesses in the opposite direction.
The influence of the dreaded Manchester School would rebound. Then Harkner singled out Mises's
is socialism as the single most important work of this liberal resurgence, endorsing virtually
all criticisms that Mises had levelled against socialism.
Hayekler urged his colleagues to thoroughly examine the ideas of these new theoretical
economists, stating,
We encounter by far the most important performance of this line of research in the brilliantly
written and inspired work by the Vienna economist Ludwig Mises, Die Gemeinwirtschaft, with full
Full command of the most recent scientific achievements, and partly on the basis of new
points of view, the author quite devastatingly criticises all variants of socialism and everything
that he considers to be socialism.
This took Mises' socialism from the limited exposure of the ivory tower and made it infamous
throughout the socialist movement. The unheard of concessions and even praise for one of
and the hated theorists caused outrage in the labour unions and angry reassessments of
Herkner's position in official socialist circles. Yet Herkner's authority also forced
the German mainstream economists to re-evaluate their cherished scientific and political tenets.
The influential Heinrich Pesch recognized Mises as the head of the new Manchesterism.
He explained, because of his clever and original critique of socialism, Mises has met with
with regard and approval even among those authors who, in distinct contrast to him,
advocate the legal protection of children and women, and compulsory workers' insurance.
Peche was the leading champion of solidarism, a version of socialism that Mises had criticised
in his book. Many of these authors now began to see that the unsuccessful application of
socialist schemes in the post-war period had nothing to do with a lack of psychological
or ideological preparedness on the part of the population, it sprang from the inner deficiencies
of those schemes themselves, flaws highlighted in the works of Mises and Weber.
More and more scholars came to renounce their former socialist ideals. This process came
to be known as the Crisis of Social Policy. How much Mises and his work stood at the centre
The nature of this crisis can be inferred from the fact that by October 1924 more than
20 monographs and papers had been published on the sole subject of economic calculation.
Some 35 years later, Mises evaluated the impact of his socialist calculation argument and
found it had shifted the terms of subsequent debate. He observed that all arguments advanced
in favour of the Great Reform, collapsed. From that time on, socialists no longer based
their hopes upon the power of their arguments, but upon the resentment, envy and hatred of
the masses. Today, even the adepts of scientific socialism rely exclusively upon these emotional
factors. The basis of contemporary socialism and interventionism is judgements of value.
Mises is praised as the only fair variety of society's economic organisation.
The Incomplete Revolution The kernel of Mises' theory of calculation
is this. While calculation in terms of money prices is the essential intellectual tool
of entrepreneurs acting in a market economy, calculation in terms of value is impossible.
A calculus can only be performed with multiples of an extended unit. For example, one can
can add one apple to another apple, or one grain of silver to another grain of silver.
In contrast, one cannot add a telephone to a piano concerto, and still less can one add
wittiness to silence. These things are incommensurable, and therefore cannot be linked through mathematical
operations. So it is with value. One cannot quantify the value of a thing, because value
Value is not extensive and therefore not measurable. However, value can be qualitatively imputed
from consumer goods to factors of production in the sense of a value dependency. Those
factors of production are valuable only because they serve to produce valuable consumer goods.
But there is no such thing as quantitative value and thus no value calculation. There
There is only price calculation. In the 1940s Mises expressed this idea with great clarity
in his economic treatise, which summarised a lifetime of reflection on this problem.
One can add up prices expressed in terms of money, but not scales of preference, that
is, value scales. One cannot divide values or single out quotas of them. A value judgement
never consists in anything other than preferring A to B. The process of value imputation does
does not result in derivation of the value of the single productive agents from the value
of their joint product. It does not bring about results which could serve as elements
of economic calculation. It is only the market that, in establishing prices for each factor
of production, creates the conditions required for economic calculation.
Economic calculation always deals with prices, never with values. A few years later he wrote,
Value is not intrinsic, it is not in things and conditions, but in the valuing subject.
It is impossible to ascribe value to one thing or state of affairs only. Valuation invariably
compares one thing or condition with another thing or condition. It grades various states
of the external world. It contrasts one thing or state, whether real or imagined, with another
thing or state, whether real or imagined, and arranges both in a scale of what the author
Whether of the judgment likes better and what less. These insights opened up new perspectives
on the social sciences and on the evolution of human societies. If compelled to single
out the idea that best characterised Mises' overall contribution to human knowledge, one
would have to name his general theory of economic calculation. The 1920 article on socialist
calculation was the first step toward the elaboration of this theory.
Just virtually the entire profession of academic economists, who since the days of Adam Smith
had reasoned on the tacit premise that all human action can be based on some sort of
economic calculus. Mises held that this possibility exists only in a market economy. Outside the
market there are only personal value judgements. Economic rationality is politically and historically
contingent. The extensive and intensive division of labour, capital-intensive production, the
rational allocation of factors of production, all the economic premises of human civilisation
have existed only in those societies that protected private property rights in the means
of production. Yet when Mises published his original essay on economic calculation under
socialism he did not express himself as unambiguously as he would later. In 1920 it was clear to
his readers that he thought that it was impossible to measure value, yet he seemed to conceive
As a value cannot be measured. It is, however, possible to compare it with other similar
feelings. Significantly, in the second edition of 1924, Mises adopted a non-psychological
theory of value conceiving a value as an act rather than a feeling. He deleted the above
sentence from his book and replaced it with the following. Acts of valuation are not susceptible
Mises' own wording actually encouraged speculations of this sort. In the early 1920s, he did
not stress that economic calculation always deals with prices, never with values. Quite
But to the contrary, in the very article in which he pointed out the problems of economic
calculation in socialist regimes, he repeatedly characterised economic calculation as a value
calculation or calculation of value.
To some extent, this confusion came out of the terminology. Mises used the word value
in two distinct ways. The term viat has the same ambivalent meaning in German as its English
Translation Value. It means value in a qualitative sense, but can also mean an exchange ratio
on the market. But beyond the issue of terminology, there was genuine, substantial confusion on
Mises's part. For example, in his 1922 treatise on socialism, which was, after all, based
on the 1920 essay, he wrote, under capitalism, capital and labour move until marginal utilities
These are everywhere equal. This statement cannot be reconciled with the impossibility
of value calculation. His younger readers, who were most familiar with Friedrich von
Mises' exposition of Austrian value theory, must have assumed that Mises and Mises were
in substantial agreement on value theory. After all, Mises did not contest the notion
that economic calculation was essentially a value calculus. He merely pointed out that
that only in the market economy was there an arithmetic unit price that allowed for the
calculated use of factors of production, whereas socialist regimes lacked such a unit. Ironically,
the only reviewer who recognised the critical difference between a cool Mises theory of
value and the dominant Miserian theory was Carl Landauer, a fanatical socialist who loaded
his two reviews of socialism with personal invectives against the author. Landauer wrote,
With his basic thesis, Mises enters into complete opposition to the main idea of the marginal utility school that economic calculation in terms of marginal utility is not a feature of any particular economic order, but can and must be applied in the communist order just as in the capitalist one.
The statements Mises made around 1920 in his writings and correspondence lead to the conclusion
that he himself did not yet fully grasp the connection between his value theory and his
theory of economic calculation. In none of these early writings could he bring himself
to the categorical judgement that economic calculation always deals with prices, never
with values. It is hardly surprising, then, that his readers and students missed the point
as well. They mistook the 1920 essay for a clever technical challenge to the socialist
leadership. They did not see, and possibly could not see, the depth of the issue. Mises
had made the first step toward a revolutionary revision of economic science and political
philosophy, but he was unable to communicate the full message. As a consequence, he lacked
and the necessary impact to turn the rising generation of Austrian economists away from
Viserion economics. Brilliant young men such as Hayek, Haberler, Machlup, Morgenstern and
other fourth generation Austrian economists were schooled in the notion that value calculation
was an uncontested tenet of economic science. When Mises recognised his pedagogical shortcomings
and spelled out the epistemological implications of his value theory in a series of papers
that were published in the late 1920s and early 1930s. It was already too late.
Friedrich von Hayek had already begun to rethink and reformulate the socialist calculation
argument from a Miserian point of view, which made the argument much weaker than it had
been in Mises's hands. Characteristically, Hayek himself believed that he was merely
Clarifying the Misesian Position. This confusion plagued the Austrian School for several decades
until the important differences between the Misesian and the Hayekian approaches were
highlighted in the early 1990s.