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NOTE 10. A Copernican Shift

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Chapter 10. A Copernican Shift. Their ascension to power at the ballot box had taken the socialists

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by complete surprise. They were suddenly in charge and had to act, but it turned out that

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they had no idea how to put their ambitious program of socializing the economy into practice.

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The socialist literature of the previous fifty years had never dealt with the question of

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of how society, that is, in practice, the socialist government, should manage the economy.

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Such questions were deemed to be unscientific because the advent of socialism would come

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by inexorable law of nature. Marx, Engels, Taney, Lasky and all other socialist intellectuals

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until the early 1920s were convinced that socialism would eventually just be there,

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are all blown and ready to be admired. In the words of a writer highly sympathetic to

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their cause, they have not sufficiently considered the economic conditions that must be satisfied

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if a socialist state is to equal or to improve upon the standard of life provided by capitalism,

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nor have they given adequate attention, from the technical point of view, to the economic

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advantages and disadvantages of socialism as compared with capitalism. Yet unless they

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They have some understanding of the economics of a socialist state, and unless they are

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able to present its case on economic grounds, they can hardly hope to persuade the mass

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of men to believe in the state which they advocate.

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By 1919 the socialist movement had swept the political scene in Germany and Austria, but

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none of its leaders had given any thought to this problem. The greatest champion of

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of Wartime Central Planning, Walter Ratanau, 1867-1922, was fully convinced that the central

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direction of the economy should rest with the State, that is in practice in his own

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hands. He celebrated war socialism and made the case for omnipotent government in times

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of peace. His writings in the period of 1917 to 1919 in particular were the literary equivalent

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of Carpet Bombing and Shaped the Ideals of the Coming Generation, Fr. Hayek among them.

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This enormous literary output could not fail to provoke various critical reactions. Other

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statists had championed this same approach. In the aftermath of the war, then, there seemed

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suddenly to be a radical socialist mass movement that expected immediate action. There were

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There were short-lived communist governments in Hungary and Bavaria that by and large continued

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and amplified wartime central planning. Mises' old nemesis Otto Neurath became a leading

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member of the Bavarian government and published success stories of his experience and plans

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for a new society. In the few months until the late summer of 1919, the gates were wide

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open for complete communism, but the socialist leaders Carl Koltzky, Otto Bauer and Max Adler

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had no plan for how to satisfy this popular demand. One thing was clear. In distinct contrast

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to Ratenau, the Vienna socialists, the Austro-Marxists, were not at ease with the notion that central

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planning meant omnipotent government. They wanted the central plan, but the planning

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was somehow supposed to be done by all of society, not just a technocratic elite.

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In January 1919, Otto Bauer published a series of articles that he reprinted in a booklet

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with the title Der Weg zum Sozialismus, The Road to Socialism. Bauer advocated the piecemeal

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expropriation of industrial firms along syndicalist lines. The assets of the firms should henceforth

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be managed by the workers or by committees composed of workers, consumers and civil servants.

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But neither Bauer nor any of the other intellectual leaders of the socialist movement had given

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any thought to the effectiveness of their scheme. None of them had cared to compare

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and the performance of socialist and capitalist economies.

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This point has been underlined by socialist historian Edvard Mertz.

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This turned out to be the crucial strategic weakness of their ideal.

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In the fall of 1919 the situation in Austria was miserable, particularly in Vienna.

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Food was scarce, rooms were cold and the lights were dim or out.

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Mises had suffered from flu for a couple of weeks, his desk was full and he did not want

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to work.

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It was during this time that he completed one of the greatest economics articles ever written.

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He had promised Lederer that he would write a series of articles for Weber's Archiv für

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Sozialwissenschaften und Sozialpolitik, where Lederer was about to succeed Werner

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Sombart as the executive editor. On November 14th, 1919, Mises told him the title of the

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first of these pieces, Economic Calculation in the Socialist Commonwealth. This was to be the

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The centrepiece of the general treatise he was working on, which would contain a systematic

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and comprehensive critique of all varieties of socialist schemes. He must have begun this

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project soon after finishing Nation, State and Economy, and it would take him two more

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years to complete the manuscript. The timing was important. Friedrich von Mises was close

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to retirement, and although Mises was far from convinced he had much chance of following

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In Mises' old position, it was not unreasonable to hope that an impressive book publication

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shortly before the appointment could tip the balance in his favour. For various reasons,

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however, he might have thought it useful to publish the central argument beforehand in

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a separate work. One was the hope of having an immediate impact on Austrian policies,

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but there was also a pedagogic rationale from the early publication of the chapter on economic

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Calculation. Mises intended to prove that pure socialism was an economic impossibility,

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and this proof relied on a consideration that had so far escaped the notice of economists.

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In fact, his proof squarely contradicted one of the most cherished doctrines of the dominant

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Vizierian paradigm, Mises' theory of imputation. The advanced publication of the calculation

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chapter would give his readers time to absorb the central thesis of his larger treatise

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on Socialism. To prepare himself for the likely criticisms he would encounter from the economic

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establishment and other interested parties, Mises made use of his seminars to discuss

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the fundamental problems of the theory of distribution, and more particularly of imputation

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theory. A short lecture by the mathematical economist Dr Ernst Zeidler opened the first

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three sessions of the university seminar in October 1919. These were entirely dedicated

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to the problem of imputation. It is likely that Mises confronted his students at this

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point with his new ideas. Unfortunately, no records of the meetings have survived. The

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discussions must have touched on the more subtle problems of economic theory, problems

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beyond the grasp of most of the students. This was probably Mises' motivation for

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starting a separate, smaller group limited to more advanced members.

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The Argument During the first weeks of the winter semester,

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Mises fine-tuned his article on economic calculation, addressing various criticisms and remarks

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from his seminars. He eventually gave the first formal presentation in early January

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1920 in a meeting of the Nationalökonomische Gesellschaft. In the assembly were some of

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the world's best economists and Marxist scholars. Josef Schumpeter, Alfred Hamon, Max Adler,

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Dylan Bauer and several other participants at this meeting had known Mises for many years

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as a passionate champion of individualism and a fierce critic of socialism. He was considered

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more challenging than most critics, who tended to focus on the past failures of applied socialism.

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Mises knew in detail socialism's abysmal record, but he focused his criticism on theory,

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not history. Advocates could always dismiss past failures as irrelevant to the viability

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of a Future Socialist Commonwealth, but Mises challenged the very possibility of their plans

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ever succeeding. In his Nation, State and Economy, he had discussed the standard criticism

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that the socialists overstated the extent to which people would enjoy work for its own

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sake. The socialist reply was that people currently loathed hard work only because of

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the market economy in which they were objectively alienated from their labour and its products.

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The future would bring forth a new socialist man, who no longer indulged in selfishness

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but found instead his greatest satisfaction in the good of the collective. Mises countered

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that no country had ever enjoyed the altruism of so many new socialist men more than the

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German Reich under Wilhelm II. If the socialist government could not succeed in Germany, where

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else could it possibly ever do so? This was a good point, but it was a trivial argument

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compared to the one Mises brought up in that January 1920 meeting.

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He now proceeded to explain why socialism was economically inferior, regardless of the

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psychological condition and motivations of the population. Even if the future were to

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produce the new socialist man, central planning still suffered a fatal shortcoming.

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Mises now presented an elaborate discussion of a problem that he had only briefly touched

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on in Nation, State and Economy when he mentioned the role of value and monetary calculation

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and allocating resources within a national economy.

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He had observed that capital goods constantly had to be replaced, not just to extend the

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structure of production, but merely to maintain the existing productive apparatus.

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Which capital goods should be replaced when?

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As with all economic decisions, there were necessary trade-offs and questions of priority.

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A rational solution to this problem presupposed that one had clear criteria for judging the

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In the extent of wear and tear on the current capital goods, in a static society, in which

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capital goods always are to be replaced only with others of the same kind, Mises argued,

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one had a physical yardstick, namely the existing structure of production.

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But in an economy subject to change, this simple method does not suffice for most means

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of production, for the used up and worn out means of production are replaced not by ones

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of the same kind, but by others.

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In such a dynamic context, calculation in physical units, which suffices for the primitive conditions

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of a stationary economy, must therefore be replaced by calculation of value in money.

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Mises went on to describe the social function of the businessman's calculations. Individual

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capital goods disappear in the production process. Capital as such, however, is maintained

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and expanded. That is not a natural necessity independent of the will of economising persons,

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However, but rather the result of deliberate activity that arranges production and consumption

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so as at least to maintain the sum of value of capital, and that allots to consumption

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only surpluses, and in addition, the precondition for that is the calculation of value, whose

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auxiliary means is accounting. The social-economic task of accounting is to test the success

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of production. It has to determine whether capital was increased, maintained or diminished.

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The individual economic plan and the distribution of goods between production and consumption

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is then based on previous accounting. Mises went on to stress the subjective element in

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this process. Accounting is not perfect. The exactness of its numbers, which strongly impresses

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the uninitiated, is only apparent. The evaluation of goods and claims that it must work with

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is always based on estimates, resting on the interpretation of more or less uncertain elements.

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Mises began his January 1920 talk along the same lines, stressing the vital importance

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of the economic calculus for the allocation of factors of production. His audience concurred.

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Most of them regretted that economic calculation as it was actually practised was a profitability

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calculus that reflected the mere private interests of capitalist investors, but none of them

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questioned the fact that calculation of some sort epitomised rationality in economic affairs.

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Where all other criteria might be challenged, algebra and arithmetic stood fast. Now Mises

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came to the heart of his argument, which he presented in two bold theses.

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1. Socialist societies could not rely on economic calculus, such as it is known in market economies,

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because entrepreneurial calculations are based on money prices for factors of production.

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Such prices cannot exist in socialism because prices can only come into existence through

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exchange and exchange presupposes the existence of at least two owners. Now the very nature

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of socialism, its usual definition in fact, is that all means of production are under

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a unified control. They all belong to one economic entity, society, the people, the

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commonwealth or the state, whatever collective entity is named. The crucial fact is that

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But from the economic point of view there is, in any socialist regime, only one owner of

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all factors of production. Therefore no factor of production can be exchanged, and there

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can be no money prices for factors of production, and therefore no socialist community can allocate

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its factors of production on the basis of economic calculation, as it is known in capitalist

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markets.

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2. There are no other means of economic calculation. Such economic calculation requires money prices

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Mises for factors of production, which can only come into existence where factors of

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production are privately owned. Insofar as the money calculus epitomises economic rationality,

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socialism is inherently irrational. It was immediately clear to the audience that Mises

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was treading completely new ground. Socialism had been criticised from many angles, but

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hardly anyone had doubted that the central planners could achieve gains in efficiency.

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Mises' thesis, if true, would strike at the heart of the socialist agenda. It would elegantly

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and crushingly refute Marx and his modern heirs, the English guild socialists and the

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fashionable Austro-Marxist theoreticians, many of whom were in the audience at Mises'

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presentation. In short, Mises' paper was an all-out attack on the very foundation of

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the economic case for socialism, a refutation of its central tenet, which by the end of

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of the war had become universally accepted. It later turned out that Mises had an important

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predecessor in Nicolaas G. Pierson, the eminent Dutch economist who was also Minister of Finance

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and Governor of the Dutch Central Bank. In an exchange with Austro-Marxist Karl Kautsky,

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Pierson had argued that any economic system would have to solve the problem of value determination,

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and that the socialists would have to demonstrate how this determination could be achieved without

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and the system of market prices.

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Pearson's original 1902 essay was written in Dutch and therefore did not reach a wider

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public in Germany and Austria.

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It was translated into German and English only after Mises' essay had started the

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debate independently.

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The ensuing debate both clarified the critical aspects of Mises' argument and foreshadowed

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the various tacks that socialist theorists would take in the coming years as they attempted

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to defend the viability of their system against the revelation of its fundamental economic

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irrationality.

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Mises later summarized the discussion in a letter to Ledo.

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My first concern is to show that economic calculation as it is practised in the free

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economy is inconceivable in a socialist commonwealth, because it is built on the premise that money

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prices are formed for the means of production.

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This part of my presentation has generally met with full consent in the discussion in

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and the Nationale Ökonomischen Gesellschaft

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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,

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it is impossible to sort out prices for them even in terms of this accounting money, and

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thus economic calculation becomes impossible in the sphere of production. The substance

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of my argument which I believe to have evidenced in my proof is precisely this, that economic

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calculation in the free economy is not applicable in the Commonwealth, and I also do not see

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any conceivable economic calculation that the socialist Commonwealth could adopt. I believe

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that this presents the most important problem of socialisation, a problem far more important

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for socialist theory than, formally, the problem of the average rate of profit. Mises's comparison

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in the last sentence refers to a debate initiated by Boehm-Bawerk, who had subjected Marxist

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theory of the average rate of profit to scathing and devastating criticism. This was the beginning

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of what turned out to be the protracted socialist calculation debate, which continues to be

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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

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and the unenlightened. His triumph would become ever more complete over the following weeks,

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months and years, when it became increasingly obvious that the objections of his opponents

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were spurious and that he had already anticipated most of them.

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Amy Lederer's comments are a case in point. He did not attend the January 1920 meeting

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of the Nationale Ökonomie Gesellschaft, but sent Mises his typewritten comments in an

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An Undated Letter Just as Adler and Hillenbauer waxed eloquent

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about the blessings of an as yet unknown socialist calculation system, which would incorporate

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alternatives to capitalist money calculation, but he did not state what such a system would

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consist in, Lederer claimed that a future socialist economic calculation would be essentially

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different from capitalistic calculation in that many moments would be included in the

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calculation, some would be lacking, and some would be evaluated differently. This all points

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to another kind of system, but a system nevertheless. It is at that point, within a system, where

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universal factors are found, that operative methods of calculation for the system originate.

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Lederer also observed that capitalist accounting does not give photographs of reality, but

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only stylised models, which heavily depend on the subjective element of the entrepreneur's

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But Mises had already conceded these points, which were irrelevant to his thesis. In fact,

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he did not claim that economic calculation was more objective in capitalism than in socialism,

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but that any economic calculation required the existence of money prices for capital

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goods. It is true that in capitalism the relevant prices, future money prices, had to be guessed,

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but the point was that only in capitalism were there any prices to be guessed at all.

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Finally, Leder misinterpreted Mises' claims that socialist economies could not be rationally

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directed to mean that socialist societies would not produce any rational leaders, but

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Mises' real point was that socialism would be deprived of any criteria whatsoever for

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the rational allocation of resources. Without such criteria, even the greatest leader would

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be unable to organise the structure of production in an efficient way. Mises wrote, It is not

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Not at all my contention that a socialist commonwealth would not develop leader types.

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I assume, though, that these leaders will not excel in the rational, but in the sentimental

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and intuitive sphere. A good assumption indeed. Mises here sums up the essence of political

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leadership in the age of the omnipotent state.

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The Intellectual Context The political implications of Mises' argument

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were obvious. If Mises was right, full socialism was not a viable option. Only capitalism or

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some mixed economy that accommodated the market remained on the menu of feasible political

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constitutions. Yet Mises' socialist calculation argument had a much wider theoretical significance

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than was apparent to most economists in the 1920s and 1930s. It was in fact the first

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and decisive step toward building the theory of production on completely different foundations

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Thanks in particular to the writings and towering personal influence of Friedrich von Mises,

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most Austrian School economists had unwittingly come to accept John Stuart Mill's dogma

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that production and distribution are two separate spheres of human life, which are separable

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in both economic analysis and political practice. In Mill's view, production was essentially

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is truly a matter of technology, whereas distribution was a question of distributive justice, and

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economic science dealt exclusively with one particular distributive system, namely the

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market economy. Says Mill, It is evident that of the two great departments of political

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economy, the production of wealth and its distribution, the consideration of value has

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to do with the latter alone, and with that, only so far as competition and not usage or

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or custom is the distributing agency. The conditions and laws of production would be

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the same as they are if the arrangements of society did not depend on exchange, or did

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not admit of it. Accordingly, questions of ownership and of appropriation were deemed

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to be the proper subject of legal scholarship, not economic analysis. This account of the

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relation between production and distribution did not comport well with Carl Menger's theory

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Theory of the order of goods, according to which higher order goods derive their value

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from lower order goods, and thus ultimately from consumers' goods. Factors of production

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are valuable only because they serve to produce consumers' goods. The value of streets, machines,

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cars, petroleum, etc., is thus derived from the value of the enjoyment that they help

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bring about. This common sense observation turned classical economics on its head. The

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The Cost of Production Theories of Value held that consumers' goods are valuable only because they are produced with valuable inputs.

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It was not a straightforward task to explain precisely how factors of production derive their value from the value of consumers' goods.

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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?

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Carl Menger had only very briefly dealt with the problem of imputation.

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Zurechnung. Notice, however, that Menger had no predecessor for his solution of the problem

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of joint production. It is safe to say that he and Boehm-Bawerk believed that the value

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of consumer goods depended on the legal situation of the acting individuals. Hence, in their

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view, production was interrelated with distribution. But in their writings, both focused heavily

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on the conditions existing in a market economy and neglected the question of how the results

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The importance of the analysis were modified under the impact of different legal frameworks.

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The only early Austrian who addressed the problem of the relationship between value

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and distribution in any systematic way was Friedrich von Mises. He recognized the importance

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of the question and proposed an original answer that he based on an elaboration of Menger's

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theory of value imputation. Menger had based his analysis of imputation on the premise

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that value is a quantity, or at any rate some sort of extensive entity. This assumption

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was necessary for his imputation theory, because if value did not have such an extended nature,

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it would be unintelligible from what it was that was imputed to something else. It was

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also an assumption shared by the greatest authorities in German economics.

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Consider the number one German economics textbook of Menger's day, Karl Heinrich Rao, Grundsätze

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and the Volkswirtschaftslehre. On page 166 he says,

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Strength and Duration

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Wieser unquestioningly adopted Menger's premise that value is a quantity, and added further

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speculations on the nature of value to the Mengerian fabric. In particular, he came up

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with two new claims about value that would prove to have great significance for the political

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implications of his own value theory, and which foreshadowed the way economic analysis

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would be practiced during the rest of the twentieth century.

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First, Wieser advocated the use of the fiction that one could meaningfully speak of value

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without respect to the wealth or income of the acting person. He himself recognized his

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stipulation as a fiction, and he justified the use of fictions as a necessary device

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of scientific analysis. In fact, as significant as the political implications of Visa's natural

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value theory are in their own right, it is equally important to stress the impact of

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Visa's methodology on the wider profession. Mathematical economics had made no secret

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of the fact that their reasoning relied on fictions, even though they believed that the

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error introduced by unrealistic stipulations was negligible in most cases. In contrast,

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verbal economists like Menger stressed the necessity for science to describe reality.

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They were reluctant to use mathematical tools precisely because they saw no way to reconcile

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the use of such tools with their quest for realism. Mises broke with this tradition by

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by consciously insisting on the legitimacy of deductions from fiction.

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The value that is independent of income and wealth is natural value. Of course, the natural

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value of capital goods is derived from the natural value of consumers' goods. How the

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natural value of consumers' goods is imputed to capital goods is the subject matter of

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imputation theory. Second, natural value is objective in the sense that it is the same

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for All Persons. For example, Wieser claimed that an increase in the quantity of money

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entails the same decrease of the value of money for every individual, and he therefore

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also held that the marginal value of any given amount of money is lower for a rich person

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than for a poor person. Thus, in spite of some statements in which he stressed that

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value was always related to an acting individual, in his theory of natural value Wieser completely

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dissociated the value of goods from any context of concrete human action. This was the starting

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point for his theory of the shortcomings of capitalism and also for his policy recommendations.

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It is obvious that real-life monetary economies are not likely to bring about the same results

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as an economy in which natural value reigns. According to Wieser, only if all members of

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society are perfectly equal in their wealth and income position do the values of a monetary

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The Theory of Money and Credit

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The practical nub of Mises' theory and his great innovation was to turn upside down the

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roles of value theory in production and distribution. In Mill's scheme, value theory played no

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role in production, but exclusively concerned distributive questions in the contingent framework

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of a market economy. In contrast, Mises pointed out that while the value of goods could be

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neglected in decisions about their distribution, the question of value was central to decisions

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Modern marginal value theory not only served to explain the value of all goods in all types

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of social organization, but could also be applied in all conceivable societies to solve

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the problem of evaluating and allocating factors of production. Contrary to Mill, therefore,

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value theory was a truly universal theory, and, we might add, it was a truly scientific

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Theory, because it did not commit the academic economist to any particular political program,

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just as Maxwell's equations did not commit a physicist to any political party.

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Wieser fervently denounced the intimate relationship between the various schools of economic thought

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and the political agendas they were backing up, criticizing these schools for not pursuing

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pure knowledge, that is, for Wieser knowledge untainted by political implications.

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In contrast, his approach covered a certain most inner domain of economic truths, truths

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relating to elements that remain common to all social organisations. Clearly this guaranteed

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political impartiality and therefore, in his view, scientific objectivity.

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Capitalist calculation in terms of money prices was only one particular application, and a

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rather deficient one, of the general principles of value calculus. By the end of the First

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World War, Wieser's analytical framework had become orthodoxy.

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The best illustration is the fact that Max Weber invited him to write a general treatise

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on economics for the prestigious Grundriss der Sozialökonomik series, which was supposed

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to portray the present state of the social sciences. Wieser thus wrote his Theorie der

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gesellschaftlichen Wirtschaft. The work was first published in 1914 and remained the main

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Work of Reference in German Language Economics until the early 1930s. A second edition appeared

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in 1924. It is true that the technical details of his imputation theory were challenged and

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that it competed with Boehm-Bawerk's slightly different approach. Works on the technical

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problems of imputation theory abounded from the 1890s and proliferated until the 1930s

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without leading to any solution. But the general postulates and distinctions on which

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which value imputation theory relied, had not met with serious resistance from any major

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champion of theoretical economics. Most notably Boehm-Bawerk had no substantial objections

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to offer. He was not enthusiastic about Wieser's emphasis on the use of fictions in economics,

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but he too adopted Menger's conception of value as an extended entity that can be imputed

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to other objects. Thus he compounded the confusion that Wieser had created among younger economic

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Theorists The only theoretical challenge to the Vizierian

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orthodoxy came from a young Russian Marxist who for some time had been a member of Boehm-Bawerk's

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seminar and who later became Soviet Russia's top economist. In his Economic Theory of the

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Leisure Class, which was first published in Russian in 1917, Nikolai Bukharin presented

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an all-out attack on the new marginalist price theory, selecting as his prime target the

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Austrian School because it is generally known that the most powerful opponent of Marxism

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is the Austrian School. One of Bookerin's main objectives was to explain why the Austrian

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pretensions to the universality of the value theory were untenable. He observed, While

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Marx is concerned with the historically determined relations between men, Berm Bawerk presents

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universal forms of the relations between men and things, but he went on, these universal

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Capital forms are not sufficient to explain market prices because market prices result,

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among other things, from certain contingent features of the capitalist system, most notably

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private property and the production of commodities.

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Said Bukharin, it is obvious that even the most fundamental phenomenon of political economy,

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that of value, cannot be explained on the basis of the circumstance common to all times

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and People's That Commodity Satisfy Some Human Need. Yet, this is the method of the Austrian School.

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We therefore reach the conclusion that the Austrian School is pursuing an absolutely

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erroneous methodological course in ignoring the peculiarities of capitalism.

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Mises's socialist calculation argument buried the old Vizierian approach, but it also overturned

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the doctrines of Mill and Marx as well. First, Mises joined with Bukharin in his critique of

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of the Older Austrians by arguing that there can be no general principle of value calculation

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because there is no such thing as value calculation in the first place. There is only price calculation,

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and it comes into existence only at those times and places where the means of production

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are privately owned. The existence of economic calculation is a historically contingent event.

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Second, Mises showed that this very historical contingency of the economic calculus played

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made out against Marx and the Marxists. Rationality in economic affairs exists only to the extent

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that capital goods are privately owned, and the reverse holds true as well. The more socialist

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any given historical order was, the less rational it was. A rational economic order is not a

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fact of nature, but depends entirely on fragile institutions that need to be cultivated through

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a sustained cultural and political effort. Third, Mises smashed Mill's dogma of the

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separate realms of production and distribution. Production in capitalism is guided by the

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individual businessman's calculations, but these calculations are contingent on the existence

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of private property in the means of production. They cannot be performed in systems lacking

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such property rights. It follows that production does depend on distribution and distribution

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Mises' case for the impossibility of socialist calculation relied on two insights of previous

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authors which he had integrated into his brief exposition on value theory in chapter 2 of

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Theory of Money and Credit. The first of these insights originated from the works of Georg

372
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Simmel and Josef Schlumberger, who had characterised the essence of economic action as exchange.

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Every human action exchanges a supposedly superior state of affairs against an inferior

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one. Today one would of course say choose rather than exchange, but the point is the

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same. As Mises later argued, this essential feature of human action is also the foundation

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of the phenomenon of value. In the few passages that he devotes to value theory and theory

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of money and credit, Mises decisively elaborates on Menger's definition of values as the importance

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Menger also defined value as a judgment economising men make about the importance of the goods

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at their disposal for the maintenance of their lives and wellbeing. Hence value does not

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exist outside the consciousness of men. In Menger's definition of value, which contrasted

381
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But somewhat with his actual analysis of value, value was a characteristic feature of a single

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economic good. In contrast, Mises defined the value of one good in explicit context with

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the value of another good with which it was compared, and he stressed that this comparison

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was based on choice as it involved acts of valuation. In short, Mises agreed with Schumpeter

385
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that value had nothing to do with want satisfaction or any other feelings, and that therefore

386
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Economists did not have to engage in psychological analysis. Value is ordinal, it is relative,

387
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it is a relation, it is not a quantity. Mises emphasized these heterodox observations, then

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went on to define value as being inextricably bound to human choices. Every economic transaction

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presupposes a comparison of values, but the necessity for such a comparison, as well as

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Because the possibility of it is due only to the circumstance that the person concerned

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has to choose between several commodities. With these lines, Mises set the Austrian Theory

392
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of Value, the cornerstone of economic analysis, on a completely new trajectory. Carl Menger

393
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had resolutely rejected the notion that the phenomenon of value could somehow depend on

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human choices. He believed that any reference to free will in this context would deny economics

395
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altogether the status of an exact science, he went on.

396
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Whether and under what conditions a thing is useful to me, whether and under what conditions

397
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it is a good, whether and under what conditions it is an economic good, whether and under

398
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what conditions it possesses value for me, and how large the measure of this value is

399
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for me, whether and under what conditions an economic exchange of goods will take place

400
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between two economising individuals, and the limits within which a price can be established,

401
00:38:26.160 --> 00:38:31.080
if an exchange does occur. These and many other matters are fully as independent of

402
00:38:31.080 --> 00:38:37.120
my will as any law of chemistry is of the will of the practising chemist. Menger therefore

403
00:38:37.120 --> 00:38:42.600
stressed the will-independent factors determining the pricing process. Market prices resulted

404
00:38:42.600 --> 00:38:49.000
ultimately from individual needs that had to be satisfied with scarce means. He realised

405
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that human beings had to have knowledge of this causal connection between means and ends.

406
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But the Mengerian analysis of the pricing process paid scant attention to this subjective

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factor. The posthumous second edition of his principles, 1923, reinforced the stress on

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the objective factors of the pricing process. Among other things, Menger here distinguishes

409
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between imaginary and real human wants. See our discussion in chapter 14.

410
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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.

411
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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.

412
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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.

413
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Acts of valuation are not susceptible of any kind of measurement.

414
00:40:02.500 --> 00:40:07.940
It is true that everybody is able to say whether a certain piece of bread seems more valuable

415
00:40:07.940 --> 00:40:12.940
to him than a certain piece of iron, or less valuable than a certain piece of meat, and

416
00:40:12.940 --> 00:40:17.620
it is therefore true that everybody is in a position to draw up an immense list of comparative

417
00:40:17.620 --> 00:40:23.000
values, a list which will hold good only for a given point of time, since it must assume

418
00:40:23.000 --> 00:40:28.660
a given combination of wants and commodities, and economic activity has no other basis than

419
00:40:28.660 --> 00:40:32.820
and the value scales thus constructed by individuals.

420
00:40:32.820 --> 00:40:37.500
An exchange will take place when two commodity units are placed in a different order on the

421
00:40:37.500 --> 00:40:43.420
value scales of two different persons. In a market, exchanges will continue until it's

422
00:40:43.420 --> 00:40:48.860
no longer possible for reciprocal surrender of commodities by any two individuals to result

423
00:40:48.860 --> 00:40:55.440
in their each acquiring commodities that stand higher on their value scales than those surrendered.

424
00:40:55.440 --> 00:41:00.320
If an individual wishes to make an exchange on an economic basis, he has merely to consider

425
00:41:00.320 --> 00:41:06.720
the comparative significance in his own judgment of the quantities of commodities in question.

426
00:41:06.720 --> 00:41:12.200
Such an estimate of relative values in no way involves the idea of measurement.

427
00:41:12.200 --> 00:41:18.400
In these passages, Mises almost anticipates his socialist calculation argument. His 1920

428
00:41:18.400 --> 00:41:23.200
essay on the calculation problem under socialism merely spelled out an important implication

429
00:41:23.200 --> 00:41:47.260
In the early 1920s, almost nobody understood value the way Mises defined it. It was certainly

430
00:41:47.260 --> 00:41:52.440
not difficult to overlook a revision of value theory that was buried in a book on money.

431
00:41:52.440 --> 00:41:57.440
Moreover, most of his readers were only superficially acquainted with theoretical problems in the

432
00:41:57.440 --> 00:42:03.000
first place. Those with interests in monetary theory typically had only a thin background

433
00:42:03.000 --> 00:42:09.040
in general value theory, and economists interested in general value theory were unlikely to search

434
00:42:09.040 --> 00:42:15.800
for and ponder the value-theoretical disquisitions of a young monetary economist.

435
00:42:15.800 --> 00:42:21.920
As time went on, Mises's position became even more marginalised, with the result that

436
00:42:21.920 --> 00:42:32.000
Triumph

437
00:42:32.000 --> 00:42:38.320
By the beginning of 1922, Mises had finished the manuscript of his treatise on socialism

438
00:42:38.320 --> 00:42:43.920
and was looking for a good academic publisher. He had published parts of it beforehand, the

439
00:42:43.920 --> 00:42:49.260
chapter on economic calculation. He also tried to publish chapter three, The Social Order

440
00:42:49.260 --> 00:42:55.820
and the Political Constitution, in a Festschrift vor Max Weber, but this project did not materialise

441
00:42:55.820 --> 00:42:58.700
because socialism appeared before the other book.

442
00:42:58.700 --> 00:43:03.420
Dunkel und Ruhmlot in Munich declined because of the difficult inflationary situation that

443
00:43:03.420 --> 00:43:09.800
had begun to wreck the German economy, making the publication of a 500-page scientific treatise

444
00:43:09.800 --> 00:43:11.460
a major risk.

445
00:43:11.460 --> 00:43:17.060
Moore in Tübingen was interested, but asked Mises to cut 20% of the manuscript.

446
00:43:17.060 --> 00:43:18.620
Mises kept looking.

447
00:43:18.620 --> 00:43:23.460
In February, he signed a contract with Gustav Fischer in Jena.

448
00:43:23.460 --> 00:43:27.780
Their contract had made only vague stipulations about the adjustment of Mises' royalties

449
00:43:27.780 --> 00:43:29.820
to the ongoing inflation.

450
00:43:29.820 --> 00:43:34.960
This fact is revealing as to Mises' priorities and his sense for business.

451
00:43:34.960 --> 00:43:40.060
When prices rose dramatically between a conclusion of the negotiations in February and the completion

452
00:43:40.060 --> 00:43:46.260
of the production process in July, Mises was very happy that Fischer raised the honorarium

453
00:43:46.260 --> 00:43:54.740
on a courtesy basis by 50%. Mises received 19,200 marks for the book in July 1922. This

454
00:43:54.740 --> 00:44:01.980
was the equivalent of $38.92. A few months later, by October 1922, the marks still in

455
00:44:01.980 --> 00:44:08.220
precipitous decline, the dollar equivalent of Mises' Honorarium shrank to $6.04. We

456
00:44:08.220 --> 00:44:12.940
may suppose, however, that Mises was quick to exchange his marks against Cronin, which

457
00:44:12.940 --> 00:44:18.160
which had a stable dollar exchange rate, thus Fischer turned out to be a good choice and

458
00:44:18.160 --> 00:44:23.000
remained Mises's book publisher throughout the 1920s.

459
00:44:23.000 --> 00:44:28.700
The book turned out to be a great success. One decisive factor in its sweeping victory

460
00:44:28.700 --> 00:44:34.540
was the growing sense among German economists that the reigning historicism and the Kathedra

461
00:44:34.540 --> 00:44:40.220
Socialism had done far more harm than good. Already before the war there were signs of

462
00:44:40.220 --> 00:44:45.300
The Decline in German Socialist Orthodoxy The Defeat in the First World War accelerated

463
00:44:45.300 --> 00:44:50.740
the fall and a wider academic audience became receptive to alternative paradigms.

464
00:44:50.740 --> 00:44:56.240
In this situation, Mises' main thesis was confirmed and endorsed by two great authorities

465
00:44:56.240 --> 00:45:01.040
in German social science, Max Weber and Heinrich Herkner.

466
00:45:01.040 --> 00:45:07.120
In his Wirtschaft und Gesellschaft, Economy and Society, published posthumously in 1922,

467
00:45:07.120 --> 00:45:12.440
Weber argued along the same lines as Mises in his 1920 article, that a socialist planning

468
00:45:12.440 --> 00:45:18.880
board could not base its allocation of resources on economic calculation. Contrasting capitalist

469
00:45:18.880 --> 00:45:24.800
money price calculation with calculations in kind that authors like Otto Neurath had

470
00:45:24.800 --> 00:45:29.880
proposed, Weber observed that the comparison of different kinds of processes of production

471
00:45:29.880 --> 00:45:34.640
with the use of different kinds of raw materials and different ways of treating them is carried

472
00:45:34.640 --> 00:45:40.640
out today by making a calculation of comparative profitability on terms of money costs. For

473
00:45:40.640 --> 00:45:44.760
accounting in kind, on the other hand, there are formidable problems involved here which

474
00:45:44.760 --> 00:45:50.800
are incapable of objective solution. In the spring of 1990, Neurath was a member of a

475
00:45:50.800 --> 00:45:56.800
short-lived revolutionary Bavarian government in Munich, acting as director of the Zentrale

476
00:45:56.800 --> 00:46:02.320
Wirtschaftsamt, Office of the Centrally Planned Economy. After the suppression of the revolution,

477
00:46:02.320 --> 00:46:07.240
Marx Weber defended him in court. Weber's ensuing discussion showed that he had fully

478
00:46:07.240 --> 00:46:14.200
grasped the nature of the problem, its concrete manifestation, and its capitalist solution.

479
00:46:14.200 --> 00:46:18.960
An enterprise is always faced with the question as to whether any of its parts is operating

480
00:46:18.960 --> 00:46:26.400
irrationally, that is, unprofitably, and if so, why. It is a question of determining which

481
00:46:26.400 --> 00:46:32.120
which components of its real physical expenditures, that is, of the costs in terms of capital

482
00:46:32.120 --> 00:46:37.600
accounting, could be saved and, above all, could more rationally be used elsewhere. This

483
00:46:37.600 --> 00:46:42.120
can be determined with relative ease in an exposed calculation of the relation between

484
00:46:42.120 --> 00:46:48.000
accounting costs and receipts in money terms, the former including in particular the interest

485
00:46:48.000 --> 00:46:52.960
charge allocated to that account. But it is exceedingly difficult to do this entirely

486
00:46:52.960 --> 00:46:59.220
in terms of an in-kind calculation, and indeed, it can be accomplished at all only in very

487
00:46:59.220 --> 00:47:04.800
simple cases. This, one may believe, is not a matter of circumstances, which could overcome

488
00:47:04.800 --> 00:47:09.360
by technical improvements in the methods of calculation, but of fundamental limitations,

489
00:47:09.360 --> 00:47:15.360
which makes really exact accounting in terms of calculations in kind impossible in principle.

490
00:47:15.360 --> 00:47:20.160
Even the introduction of non-monetary systems of remuneration could not overcome the problem

491
00:47:20.160 --> 00:47:25.740
System of Eradicating Irrationalities, because these measures would be unsuitable to identify

492
00:47:25.740 --> 00:47:30.720
irrationalities in the first place. The essential question is that of how it is possible to

493
00:47:30.720 --> 00:47:37.160
discover at what point in the organisation it would be profitable to employ such measures,

494
00:47:37.160 --> 00:47:41.920
because there existed at that point certain elements of irrationality. It is in finding

495
00:47:41.920 --> 00:47:47.360
out these points that accounting in kind encounters difficulties, which in exposed calculation

496
00:47:47.360 --> 00:47:50.400
Imputation in money terms does not have to contend with.

497
00:47:50.400 --> 00:47:55.320
Weber then went on to point out the crucial fact preventing the application of schemes

498
00:47:55.320 --> 00:48:00.680
for calculation in kind, namely that only money imputation works.

499
00:48:00.680 --> 00:48:03.520
Utility imputation is a camera.

500
00:48:03.520 --> 00:48:08.540
The fundamental limitations of accounting in kind as the basis of calculation in enterprise

501
00:48:08.540 --> 00:48:13.080
of a type which could include the heterocephalus and heteronomous units of production in a

502
00:48:13.080 --> 00:48:17.920
in a planned economy are to be found in the problem of imputation, which in such a system

503
00:48:17.920 --> 00:48:23.560
cannot take the simple form of an exposed calculation of profit or loss on the books,

504
00:48:23.560 --> 00:48:28.480
but rather that very controversial form which it has in the theory of marginal utility.

505
00:48:28.480 --> 00:48:33.520
In order to make possible a rational utilisation of the means of production, a system of in-kind

506
00:48:33.520 --> 00:48:39.620
accounting would have to determine value indicators of some kind for the individual capital goods

507
00:48:39.620 --> 00:48:44.280
Indications which could take over the role of the prices used in book valuation in modern

508
00:48:44.280 --> 00:48:48.980
business accounting, but it is not at all clear how such indicators could be established

509
00:48:48.980 --> 00:48:54.140
and in particular verified. Whether, for instance, they should vary from one production unit

510
00:48:54.140 --> 00:48:59.180
to the next on the basis of economic location, or whether they should be uniform for the

511
00:48:59.180 --> 00:49:04.940
entire economy on the basis of social utility, that is, of present and future consumption

512
00:49:04.940 --> 00:49:10.480
Requirements. They were warned against the misconception that this problem was of a merely

513
00:49:10.480 --> 00:49:15.100
technical nature, one that could eventually be overcome once enough human resources were

514
00:49:15.100 --> 00:49:20.780
invested in finding a solution. Nothing is gained by assuming that, if only the problem

515
00:49:20.780 --> 00:49:25.340
of a non-monetary economy were seriously enough attacked, a suitable accounting method would

516
00:49:25.340 --> 00:49:31.620
be discovered or invented. The problem is fundamental to any kind of complete socialisation. We

517
00:49:31.620 --> 00:49:36.580
We cannot speak of a rational, planned economy, so long as in this decisive respect we have

518
00:49:36.580 --> 00:49:40.180
no instrument for elaborating a rational plan.

519
00:49:40.180 --> 00:49:46.140
Apparently, Weber and Mises had developed substantially the same ideas in complete independence

520
00:49:46.140 --> 00:49:52.020
from one another. Weber died on June 14, 1920, and thus might have read Mises's archive

521
00:49:52.020 --> 00:49:58.100
paper, which had come out in February or March of that year. The editors of Economy and Society

522
00:49:58.100 --> 00:50:03.380
He referred to Mises's work at the end of the chapter on calculation in kind, stating,

523
00:50:03.380 --> 00:50:07.660
During the printing of this work, an essay by Ludwig von Mises dealing with these problems

524
00:50:07.660 --> 00:50:13.420
came out. It is likely, however, that Mises provided the initial inspiration for Weber

525
00:50:13.420 --> 00:50:17.140
in their many hours of conversation during Weber's visit to the University of Vienna

526
00:50:17.140 --> 00:50:23.260
in the summer semester of 1918. Both men were among the faculty of a course for army officers

527
00:50:23.260 --> 00:50:28.500
that dealt with various fundamental political problems. In one of the sessions Weber delivered

528
00:50:28.500 --> 00:50:33.760
a lecture on the general problems of socialism. It was subsequently published with his approval

529
00:50:33.760 --> 00:50:38.820
from stenographical notes. It is significant that Weber does not even hint at the issue

530
00:50:38.820 --> 00:50:44.420
of economic calculation in this lecture. Be that as it may, the important fact is that

531
00:50:44.420 --> 00:50:50.380
when Weber died at the age of 56 on June 14, 1920, he and Mises agreed on the socialist

532
00:50:50.380 --> 00:50:56.500
Calculation Question, and when Weber's Magnum Opus was eventually published in 1922, it

533
00:50:56.500 --> 00:51:01.460
weighed in with the full authority of its author on the side of Mises, causing great

534
00:51:01.460 --> 00:51:06.580
consternation among mainstream economists in Germany who were still steeped in the Catella

535
00:51:06.580 --> 00:51:13.100
Socialist tradition. As if to reinforce Weber and Mises, Vladimir Lenin, leader of the world's

536
00:51:13.100 --> 00:51:18.940
model of socialism, announced a partial retreat on the economic front. Soviet Russia would

537
00:51:18.940 --> 00:51:24.580
to begin a new economic policy bringing greater freedom for trade and commerce. Attempts to

538
00:51:24.580 --> 00:51:30.540
abolish money and markets had produced precisely the chaos that Mises argued was inevitable

539
00:51:30.540 --> 00:51:33.340
under full socialism.

540
00:51:33.340 --> 00:51:38.700
But the real knockout for academic socialism in Germany came at the hands of its own vicar.

541
00:51:38.700 --> 00:51:44.060
Heinrich Herkner had succeeded Schmoller in his position at the University of Berlin and

542
00:51:44.060 --> 00:51:56.060
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.

543
00:51:56.060 --> 00:52:09.460
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.

544
00:52:09.460 --> 00:52:17.260
He called for more moderation, which meant, in practical terms, a reconsideration of the tenets of classical economics.

545
00:52:17.260 --> 00:52:22.420
Heckner stated that even the great Schmoller had convided to him shortly before his death,

546
00:52:22.420 --> 00:52:26.980
that he was concerned about the inability of the younger generation to think in terms

547
00:52:26.980 --> 00:52:32.920
of free trade. This inability, Heckner argued, had led to exaggerated views about the power

548
00:52:32.920 --> 00:52:38.200
of the state relative to the operation of economic law, and the nefarious consequences

549
00:52:38.200 --> 00:52:43.940
could be seen. These views had already become acceptable. Heckner's speech was received

550
00:52:43.940 --> 00:52:49.920
with great applause. In the following year, in a widely read paper on the changed implications

551
00:52:49.920 --> 00:52:55.780
of economic science for social policy, Kirchner argued that the labour unions had severely

552
00:52:55.780 --> 00:53:01.300
hampered economic reconstruction after the war. This concerned in particular their resistance

553
00:53:01.300 --> 00:53:07.460
to longer working hours and to any limitations on their power to strike. They were the prime

554
00:53:07.460 --> 00:53:12.860
movers behind the political forces that subjected the German economy to an ever more complex

555
00:53:12.860 --> 00:53:19.540
and its web of regulations. Historically astute economists had apprehensions about the ultimate

556
00:53:19.540 --> 00:53:28.320
result of this movement, either some perverse guild oligarchy or a mercantilist police state.

557
00:53:28.320 --> 00:53:33.680
As an actual reaction to such excesses, there would be excesses in the opposite direction.

558
00:53:33.680 --> 00:53:39.980
The influence of the dreaded Manchester School would rebound. Then Harkner singled out Mises's

559
00:53:39.980 --> 00:53:46.260
is socialism as the single most important work of this liberal resurgence, endorsing virtually

560
00:53:46.260 --> 00:53:50.500
all criticisms that Mises had levelled against socialism.

561
00:53:50.500 --> 00:53:55.380
Hayekler urged his colleagues to thoroughly examine the ideas of these new theoretical

562
00:53:55.380 --> 00:53:57.180
economists, stating,

563
00:53:57.180 --> 00:54:03.180
We encounter by far the most important performance of this line of research in the brilliantly

564
00:54:03.180 --> 00:54:09.740
written and inspired work by the Vienna economist Ludwig Mises, Die Gemeinwirtschaft, with full

565
00:54:09.740 --> 00:54:14.060
Full command of the most recent scientific achievements, and partly on the basis of new

566
00:54:14.060 --> 00:54:20.540
points of view, the author quite devastatingly criticises all variants of socialism and everything

567
00:54:20.540 --> 00:54:24.500
that he considers to be socialism.

568
00:54:24.500 --> 00:54:30.580
This took Mises' socialism from the limited exposure of the ivory tower and made it infamous

569
00:54:30.580 --> 00:54:36.540
throughout the socialist movement. The unheard of concessions and even praise for one of

570
00:54:36.540 --> 00:54:42.380
and the hated theorists caused outrage in the labour unions and angry reassessments of

571
00:54:42.380 --> 00:54:47.940
Herkner's position in official socialist circles. Yet Herkner's authority also forced

572
00:54:47.940 --> 00:54:54.060
the German mainstream economists to re-evaluate their cherished scientific and political tenets.

573
00:54:54.060 --> 00:55:00.380
The influential Heinrich Pesch recognized Mises as the head of the new Manchesterism.

574
00:55:00.380 --> 00:55:05.740
He explained, because of his clever and original critique of socialism, Mises has met with

575
00:55:05.740 --> 00:55:10.620
with regard and approval even among those authors who, in distinct contrast to him,

576
00:55:10.620 --> 00:55:15.980
advocate the legal protection of children and women, and compulsory workers' insurance.

577
00:55:15.980 --> 00:55:21.020
Peche was the leading champion of solidarism, a version of socialism that Mises had criticised

578
00:55:21.020 --> 00:55:26.580
in his book. Many of these authors now began to see that the unsuccessful application of

579
00:55:26.580 --> 00:55:31.100
socialist schemes in the post-war period had nothing to do with a lack of psychological

580
00:55:31.100 --> 00:55:37.300
or ideological preparedness on the part of the population, it sprang from the inner deficiencies

581
00:55:37.300 --> 00:55:44.220
of those schemes themselves, flaws highlighted in the works of Mises and Weber.

582
00:55:44.220 --> 00:55:49.500
More and more scholars came to renounce their former socialist ideals. This process came

583
00:55:49.500 --> 00:55:55.940
to be known as the Crisis of Social Policy. How much Mises and his work stood at the centre

584
00:55:55.940 --> 00:56:01.100
The nature of this crisis can be inferred from the fact that by October 1924 more than

585
00:56:01.100 --> 00:56:07.780
20 monographs and papers had been published on the sole subject of economic calculation.

586
00:56:07.780 --> 00:56:13.620
Some 35 years later, Mises evaluated the impact of his socialist calculation argument and

587
00:56:13.620 --> 00:56:19.820
found it had shifted the terms of subsequent debate. He observed that all arguments advanced

588
00:56:19.820 --> 00:56:26.000
in favour of the Great Reform, collapsed. From that time on, socialists no longer based

589
00:56:26.000 --> 00:56:31.340
their hopes upon the power of their arguments, but upon the resentment, envy and hatred of

590
00:56:31.340 --> 00:56:38.020
the masses. Today, even the adepts of scientific socialism rely exclusively upon these emotional

591
00:56:38.020 --> 00:56:45.460
factors. The basis of contemporary socialism and interventionism is judgements of value.

592
00:56:45.460 --> 00:56:52.140
Mises is praised as the only fair variety of society's economic organisation.

593
00:56:52.140 --> 00:56:57.180
The Incomplete Revolution The kernel of Mises' theory of calculation

594
00:56:57.180 --> 00:57:02.620
is this. While calculation in terms of money prices is the essential intellectual tool

595
00:57:02.620 --> 00:57:09.300
of entrepreneurs acting in a market economy, calculation in terms of value is impossible.

596
00:57:09.300 --> 00:57:14.960
A calculus can only be performed with multiples of an extended unit. For example, one can

597
00:57:14.960 --> 00:57:20.320
can add one apple to another apple, or one grain of silver to another grain of silver.

598
00:57:20.320 --> 00:57:26.040
In contrast, one cannot add a telephone to a piano concerto, and still less can one add

599
00:57:26.040 --> 00:57:33.080
wittiness to silence. These things are incommensurable, and therefore cannot be linked through mathematical

600
00:57:33.080 --> 00:57:39.840
operations. So it is with value. One cannot quantify the value of a thing, because value

601
00:57:39.840 --> 00:57:47.040
Value is not extensive and therefore not measurable. However, value can be qualitatively imputed

602
00:57:47.040 --> 00:57:53.040
from consumer goods to factors of production in the sense of a value dependency. Those

603
00:57:53.040 --> 00:57:59.180
factors of production are valuable only because they serve to produce valuable consumer goods.

604
00:57:59.180 --> 00:58:04.960
But there is no such thing as quantitative value and thus no value calculation. There

605
00:58:04.960 --> 00:58:11.040
There is only price calculation. In the 1940s Mises expressed this idea with great clarity

606
00:58:11.040 --> 00:58:16.460
in his economic treatise, which summarised a lifetime of reflection on this problem.

607
00:58:16.460 --> 00:58:20.960
One can add up prices expressed in terms of money, but not scales of preference, that

608
00:58:20.960 --> 00:58:27.600
is, value scales. One cannot divide values or single out quotas of them. A value judgement

609
00:58:27.600 --> 00:58:34.380
never consists in anything other than preferring A to B. The process of value imputation does

610
00:58:34.380 --> 00:58:38.980
does not result in derivation of the value of the single productive agents from the value

611
00:58:38.980 --> 00:58:43.860
of their joint product. It does not bring about results which could serve as elements

612
00:58:43.860 --> 00:58:48.940
of economic calculation. It is only the market that, in establishing prices for each factor

613
00:58:48.940 --> 00:58:54.580
of production, creates the conditions required for economic calculation.

614
00:58:54.580 --> 00:59:01.220
Economic calculation always deals with prices, never with values. A few years later he wrote,

615
00:59:01.220 --> 00:59:07.380
Value is not intrinsic, it is not in things and conditions, but in the valuing subject.

616
00:59:07.380 --> 00:59:12.940
It is impossible to ascribe value to one thing or state of affairs only. Valuation invariably

617
00:59:12.940 --> 00:59:18.820
compares one thing or condition with another thing or condition. It grades various states

618
00:59:18.820 --> 00:59:25.480
of the external world. It contrasts one thing or state, whether real or imagined, with another

619
00:59:25.480 --> 00:59:30.980
thing or state, whether real or imagined, and arranges both in a scale of what the author

620
00:59:30.980 --> 00:59:36.500
Whether of the judgment likes better and what less. These insights opened up new perspectives

621
00:59:36.500 --> 00:59:41.780
on the social sciences and on the evolution of human societies. If compelled to single

622
00:59:41.780 --> 00:59:47.420
out the idea that best characterised Mises' overall contribution to human knowledge, one

623
00:59:47.420 --> 00:59:53.660
would have to name his general theory of economic calculation. The 1920 article on socialist

624
00:59:53.660 --> 00:59:59.300
calculation was the first step toward the elaboration of this theory.

625
00:59:59.300 --> 01:00:04.460
Just virtually the entire profession of academic economists, who since the days of Adam Smith

626
01:00:04.460 --> 01:00:08.620
had reasoned on the tacit premise that all human action can be based on some sort of

627
01:00:08.620 --> 01:00:15.340
economic calculus. Mises held that this possibility exists only in a market economy. Outside the

628
01:00:15.340 --> 01:00:21.820
market there are only personal value judgements. Economic rationality is politically and historically

629
01:00:21.820 --> 01:00:28.500
contingent. The extensive and intensive division of labour, capital-intensive production, the

630
01:00:28.500 --> 01:00:33.500
rational allocation of factors of production, all the economic premises of human civilisation

631
01:00:33.500 --> 01:00:38.180
have existed only in those societies that protected private property rights in the means

632
01:00:38.180 --> 01:00:43.620
of production. Yet when Mises published his original essay on economic calculation under

633
01:00:43.620 --> 01:00:50.580
socialism he did not express himself as unambiguously as he would later. In 1920 it was clear to

634
01:00:50.580 --> 01:00:55.620
his readers that he thought that it was impossible to measure value, yet he seemed to conceive

635
01:00:55.620 --> 01:01:07.420
As a value cannot be measured. It is, however, possible to compare it with other similar

636
01:01:07.420 --> 01:01:13.460
feelings. Significantly, in the second edition of 1924, Mises adopted a non-psychological

637
01:01:13.460 --> 01:01:18.860
theory of value conceiving a value as an act rather than a feeling. He deleted the above

638
01:01:18.860 --> 01:01:23.980
sentence from his book and replaced it with the following. Acts of valuation are not susceptible

639
01:01:23.980 --> 01:01:46.700
Mises' own wording actually encouraged speculations of this sort. In the early 1920s, he did

640
01:01:46.700 --> 01:01:52.020
not stress that economic calculation always deals with prices, never with values. Quite

641
01:01:52.020 --> 01:01:56.520
But to the contrary, in the very article in which he pointed out the problems of economic

642
01:01:56.520 --> 01:02:02.420
calculation in socialist regimes, he repeatedly characterised economic calculation as a value

643
01:02:02.420 --> 01:02:06.660
calculation or calculation of value.

644
01:02:06.660 --> 01:02:10.940
To some extent, this confusion came out of the terminology. Mises used the word value

645
01:02:10.940 --> 01:02:16.860
in two distinct ways. The term viat has the same ambivalent meaning in German as its English

646
01:02:16.860 --> 01:02:22.540
Translation Value. It means value in a qualitative sense, but can also mean an exchange ratio

647
01:02:22.540 --> 01:02:28.540
on the market. But beyond the issue of terminology, there was genuine, substantial confusion on

648
01:02:28.540 --> 01:02:34.660
Mises's part. For example, in his 1922 treatise on socialism, which was, after all, based

649
01:02:34.660 --> 01:02:42.260
on the 1920 essay, he wrote, under capitalism, capital and labour move until marginal utilities

650
01:02:42.260 --> 01:02:47.940
These are everywhere equal. This statement cannot be reconciled with the impossibility

651
01:02:47.940 --> 01:02:52.500
of value calculation. His younger readers, who were most familiar with Friedrich von

652
01:02:52.500 --> 01:02:58.280
Mises' exposition of Austrian value theory, must have assumed that Mises and Mises were

653
01:02:58.280 --> 01:03:02.900
in substantial agreement on value theory. After all, Mises did not contest the notion

654
01:03:02.900 --> 01:03:07.900
that economic calculation was essentially a value calculus. He merely pointed out that

655
01:03:07.900 --> 01:03:12.460
that only in the market economy was there an arithmetic unit price that allowed for the

656
01:03:12.460 --> 01:03:18.780
calculated use of factors of production, whereas socialist regimes lacked such a unit. Ironically,

657
01:03:18.780 --> 01:03:23.340
the only reviewer who recognised the critical difference between a cool Mises theory of

658
01:03:23.340 --> 01:03:30.500
value and the dominant Miserian theory was Carl Landauer, a fanatical socialist who loaded

659
01:03:30.500 --> 01:03:36.100
his two reviews of socialism with personal invectives against the author. Landauer wrote,

660
01:03:36.100 --> 01:03:55.100
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.

661
01:03:55.100 --> 01:04:01.940
The statements Mises made around 1920 in his writings and correspondence lead to the conclusion

662
01:04:01.940 --> 01:04:06.800
that he himself did not yet fully grasp the connection between his value theory and his

663
01:04:06.800 --> 01:04:12.100
theory of economic calculation. In none of these early writings could he bring himself

664
01:04:12.100 --> 01:04:17.060
to the categorical judgement that economic calculation always deals with prices, never

665
01:04:17.060 --> 01:04:22.300
with values. It is hardly surprising, then, that his readers and students missed the point

666
01:04:22.300 --> 01:04:27.900
as well. They mistook the 1920 essay for a clever technical challenge to the socialist

667
01:04:27.900 --> 01:04:35.060
leadership. They did not see, and possibly could not see, the depth of the issue. Mises

668
01:04:35.060 --> 01:04:41.060
had made the first step toward a revolutionary revision of economic science and political

669
01:04:41.060 --> 01:04:47.220
philosophy, but he was unable to communicate the full message. As a consequence, he lacked

670
01:04:47.220 --> 01:04:52.980
and the necessary impact to turn the rising generation of Austrian economists away from

671
01:04:52.980 --> 01:05:00.180
Viserion economics. Brilliant young men such as Hayek, Haberler, Machlup, Morgenstern and

672
01:05:00.180 --> 01:05:05.540
other fourth generation Austrian economists were schooled in the notion that value calculation

673
01:05:05.540 --> 01:05:13.060
was an uncontested tenet of economic science. When Mises recognised his pedagogical shortcomings

674
01:05:13.060 --> 01:05:18.160
and spelled out the epistemological implications of his value theory in a series of papers

675
01:05:18.160 --> 01:05:24.100
that were published in the late 1920s and early 1930s. It was already too late.

676
01:05:24.100 --> 01:05:28.880
Friedrich von Hayek had already begun to rethink and reformulate the socialist calculation

677
01:05:28.880 --> 01:05:33.400
argument from a Miserian point of view, which made the argument much weaker than it had

678
01:05:33.400 --> 01:05:38.180
been in Mises's hands. Characteristically, Hayek himself believed that he was merely

679
01:05:38.180 --> 01:05:44.620
Clarifying the Misesian Position. This confusion plagued the Austrian School for several decades

680
01:05:44.620 --> 01:05:49.060
until the important differences between the Misesian and the Hayekian approaches were

681
01:05:49.060 --> 01:05:51.340
highlighted in the early 1990s.