The origins of neoliberalism: Ludwig von Mises

The origins of neoliberalism: Ludwig von Mises

Born in 1881, Ludwig von Mises was an Austrian-American economist, well-known for his essay “Economic Calculation in the Socialist Commonwealth”. In this, Mises provides a damning critique of the socialist model in economics in place at the time of writing and challenged socialists to explain how the pricing system would actually work in practice. In a purely socialist state, there is no private ownership of production meaning that all decisions are made by a central planning authority i.e. a government. However, as no prices for capital goods can be obtained in a socialist economy if the government owns the means of production, the government have no market prices to guide them.  Therefore, what can socialist governments use in place of market prices?

Mises argues that without market prices to guide production, no rational economic calculation is possible, meaning that the rational economic planning of socialism leads to economic chaos and mass inefficiency and this thesis demolished the foundations for the case for central planning and rendered socialist economics redundant.

However, Mises’s essay is not just limited to condemning the impracticality of socialist economy.  In Joseph Salerno’s postscript, writes how the essay “provides the rationale for the price system, purely free markets, the security of private property against all encroachments, and sound money”(1) and indeed, Mises points out the nature and necessity of the price system, particularly in terms of value.  According to Mises, each member of society in an economic system of private ownership must participate in two ways; as a consumer and as a producer. As a consumer, the person must establish a scale of valuation for goods ready for use in consumption, and as a producer the person puts goods of a higher order, i.e. capital goods, into such use which produces the greatest return. Thus, all capital goods are valued in accordance with the immediate state of social conditions of production and of social needs, and through these two processes of valuation, a price will be reached.

Consequences of Mises’s essay?

One of the outcomes of “Economic Calculation in the Socialist Commonwealth” is that it triggered the debate of economic calculation which lasted for decades.  The economic calculation problem is a critique of using economic planning, the resource allocating mechanism used in socialist economies, as a substitute for market-based allocation, and is one of the dominant aspects in Mises’s essay.  The essay has also been viewed by some as the cornerstone of classical liberal economics due to its rejection of socialist economics and approval of the price system and free markets, which follows the principles of economic liberalism. Furthermore, Mises’ theory on rational economic calculation influenced many economists, in particular Friedrich Hayek, a student of Mises, who then went on to further develop the economic calculation problem.

In addition, Mises’s theory continues to be relevant, even today, in understanding why government economic intervention does not always achieve results which are beneficial to society.