A look at Ludwig von Mises' Economic Calculation in the Socialist Commonwealth

Ludwig von Mises' Economic Calculation in the Socialist Commonwealth by Alex Liebman

With the fall of the Berlin wall in 1990, and the subsequent fall of the Soviet Union and Eastern European puppet states, the foresight of Luvig Von Mises' "Economic Calculation in the Socialist Commonwealth" still stuns economists to this day. It was an article written in 1920, after the time of the October Revolution in Russia in 1917, and the November Revolution in Germany in 1918, when the likelihood of socialism spreading across the world seemed very real. His work is a critique of the economy under a socialist state, and looks into issues concerning the socialist state, such as the exchange system under a socialist economy; whether workers will be better off under a socialist system; how central planning will be undertaken; and the problems of nationalised industries. He comes to the conclusion that a socialist economic system is nonviable, and will fail in the long-run with a stagnant economy. Although his work is very important in criticising far-left Socialism such as Marxism, or Marxist-Leninism, it in is ineffective at criticising other strands of Socialism such as Social Democracy, or Democratic Socialism, as his criticism of Socialism is too broad, and does not look into the issues which effect every strand of the broad ideology.

Mises' explains that under the exchange system of a socialist economy consumption is determined by a coupon system, which restricts consumers to certain goods, but consumers may exchange these coupons for coupons for another product. However, he argues "Production goods in a socialist
commonwealth are exclusively communal", so a limited "principle of exchange can thus operate". He argues money may be used as  medium of exchange, but under certain forms of socialist economies it may not be used. He argues this system will narrow the productive capacity of the economy "since the material available for exchange will be narrower, inasmuch as it will be confined to consumption goods", as all forms of capital goods will be brought under public ownership and will not be permitted to be owned by the ordinary public. The argument helps to explain some of the reasons why he believes such a state of affairs will lead to stagnation, however, it does not take into account the possibility that if all forms of production are brought under public ownership, and the resources of the entire community are utilised, it may be the case that the productive potential of the economy would increase, and not narrow.


He then goes on to explain the condition of workers under a socialist system. He argues that workers wages will be determined by the labour theory of value, so workers would receive the income obtained by the production of a good for every hour of work put in. However, the state would deduct from the income of the worker the amount needed for the "the community as a whole (such) as maintenance of the unfit, education, etc". Mises' asserts that due to communal obligations "each worker who had worked a full hour would be entitled only to obtain such amount of the product as really answered to half an hour’s work". This assertion similarly does not take into account the many different ideologies that encompass the broad term Socialism, for instance, in a Marxist society all workers would be paid equal amounts, so deductions would be taken from their wages to pay for the welfare of disadvantaged members of the community, which may mean that workers wages are below the amount that they earn for society, however in a Social Democratic, or Democratic Socialist society, workers will receive differing wages dependent on the work they do for the community, but to ensure they only receive the income that they have earned for the community, a progressive tax system will be created, and the income from this can be used to pay for care for those who are disadvantage in the community.

Mises' finally discusses the problems of a central planned economy and nationalised production. Mises' states that in a centrally planned with no money, economic calculation cannot take place, as money creates a way of calculating value, and "Without economic calculation there can be no economy. Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be—in our sense of the term—no economy whatsoever." Therefore he argues that a central planned economy will lead to economic disaster. In nationalised industries or services, Mises' argues "The motive force disappears" as it is the "shareholder, whom it is the aim of all nationalization and municipalization to exclude.", which means that the business no longer strives for
profit, which means the business no longer has as much profit to invest in future increases in production, and any attempt to reform the bureaucratic system will fail as it is "The entrepreneur’s
commercial attitude and activity arises from his position in the economic process" which is lost when he is got rid of. Therefore, in the long-term the business stagnates and if many businesses in the economy are nationalised, the economy stagnates. Although, it could be the case that the idea of profit maximisation is still proposed by the government, and the manager still strives to increase profits, but instead of these profits being given as dividends for shareholders, they are instead reinvested into the company, which would lead to even greater production than before the business was nationalised. In addition, this assertion that Socialism necessarily means nationalisation does not take into account strands of Socialism, such as Social Democracy, where many proponents of it do not believe in nationalisation, for instance a former Labour Chancellor of the Exchequer, in 1924, and 1929-1931, stated in The Daily Herald, a Labour supporting newspaper, on 15 October 1928, "I would like to see the word 'nationalization' banned from the socialist vocabulary."

In all, Mises' view on the Socialist economic system helpfully explains the main issues of a Marxist form of this system with a restrictive exchange system; underpaid workers; and a poorly managed, stagnating economy such as that which occurred in the long-term in the Soviet Union by the time of Brezhnev. However, Mises' ideas do not accept how a Socialist system may improve a country's economy, such as, despite the appalling atrocities of Lenin's and Stalin's time, the New Economic Policy from 1921, and Five Year Plans from 1928, did lead to the Soviet Union rapidly expanding from a backward agricultural economy to a modern industrial economy. In addition his theories do not accept the broad definition of Socialism which encompasses many different ideologies, which means his criticisms do not effectively criticise ideologies, such as Social Democracy, or Democratic Socialism, which are not as radical as far-left Marxism.