The Real Character of the Centrally Planned Economy

Socialism attempted to replace billions of individual decisions made by sovereign consumers in the market with “rational economic planning” by a few vested with the power to determine the who, what, how, and when of production and consumption.

The real character of the so-called centrally planned economy is well illustrated by a quip I heard several years ago by Soviet economist Nikolai Fedorenko. He said that a fully balanced, checked, and detailed economic plan for the next year would be ready, with the help of computers, in 30,000 years. There are millions of product variants; there are hundreds of thousands of enterprises; it is necessary to make billions of decisions on inputs and outputs; the plans must relate to labor force, material supplies, wages, costs, prices, “planned profits,” investments, transportation, storage, and distribution. These decisions originate from different parts of the planning hierarchy. They are, as a rule, inconsistent and contradictory to each other because they reflect the conflicting interests of different strata of bureaucracy. Because the next year’s plan must be ready by next year, and not in 29,999 years, it is inevitably neither balanced nor rational. And Mises proved that without private property in the means of production, even with 30,000 years of computer time, they still couldn’t make socialism work.

--Yuri N. Maltsev, foreword to Economic Calculation in the Socialist Commonwealth, by Ludwig von Mises (1990; repr., Auburn, AL: Ludwig von Mises Institute, 2012), viii-ix.

The Centrality of the “Capital Problem” in Questions about the Market’s Ability to Coordinate Economic Activities over Time

A decade after the London lectures the more complete exposition took form as The Pure Theory of Capital (1941). In this book Hayek fleshed out the earlier formulations and emphasized the centrality of the “capital problem” in questions about the market’s ability to coordinate economic activities over time. The “pure” in the title meant “preliminary to the introduction of monetary considerations.”

--Roger W. Garrison, Time and Money: The Macroeconomics of Capital Structure, Foundations of the Market Economy (London: Routledge, 2002), 11.

Hayek's Contribution to the Development of Capital Theory: Hayekian Triangles

F. A. Hayek’s contribution to the development of capital theory is commonly regarded as his most fundamental and path-breaking achievement. His early attention to “Intertemporal Price Equilibrium and Movements in the Value of Money” provided both the basis and inspiration for many subsequent contributions. The widely recognized but rarely understood Hayekian triangle, introduced in his 1931 lectures at the University of London, were subsequently published as Prices and Production. The triangle, described in the second lecture, is a heuristic device that gives analytical legs to a theory of business cycles first offered by Ludwig von Mises. Triangles of different shapes provide a convenient but highly stylized way of describing changes in the intertemporal pattern of the economy’s capital structure.

--Roger W. Garrison, Time and Money: The Macroeconomics of Capital Structure, Foundations of the Market Economy (London: Routledge, 2002), 10.

If Keynes Focused on the Short-Run and the Classical Economists Focused on the Long-Run, then Hayek Focused on Their Coupling

If Keynes focused on the short-run picture, and the classical economists focused on the long-run picture, then the Austrian economists, and particularly Friedrich A. Hayek, focused on the “real coupling” between the two pictures. The Hayekian coupling took the form of capital theory – the theory of a time-consuming, multi-stage capital structure envisioned by Carl Menger and developed by Eugen von Böhm-Bawerk. Decades before macroeconomics emerged as a recognized subdiscipline, Böhm-Bawerk had molded the fundamental Mengerian insight into a macroeconomic theory to account for the distribution of income among the factors of production. Dating from the late 1920s, Hayek, following a lead provided by Ludwig von Mises, infused the theory with monetary considerations. He showed that credit policy pursued by a central monetary authority can be a source of economy-wide distortions in the intertemporal allocation of resources and hence an important cause of business cycles.

--Roger W. Garrison, Time and Money: The Macroeconomics of Capital Structure, Foundations of the Market Economy (London: Routledge, 2002), 4.

The English Currency School and the Monetary Explanation of the Trade Cycle

The monetary explanation of the trade cycle is not entirely new. The English "Currency School" has already tried to explain the boom by the extension of credit resulting from the issue of bank notes without metallic backing. Nevertheless, this school did not see that bank accounts which could be drawn upon at any time by means of checks, that is to say; current accounts, play exactly the same role in the extension of credit as bank notes. Consequently the expansion of credit can result not only from the excessive issue of bank notes but also from the opening of excessive current accounts. It is because it misunderstood this truth that the Currency School believed that it would suffice, in order to prevent the recurrence of economic crises, to enact legislation restricting the issue of bank notes without metallic backing, while leaving the expansion of credit by means of current accounts unregulated. Peel's Bank Act of 1844, and similar laws in other countries, did not accomplish their intended effect. From this it was wrongly concluded that the English School's attempt to explain the trade cycle in monetary terms had been refuted by the facts.

--Ludwig von Mises, "The 'Austrian' Theory of the Trade Cycle," in The Austrian Theory of the Trade Cycle and Other Essays, ed. Richard M. Ebeling (Auburn, AL: Ludwig von Mises Institute, 1996), 25-26.

Keynesians Tell Us That Keynes's Immortal Achievement Consists in the Refutation of Say's Law of Markets

Lord Keynes's main contribution did not lie in the development of new ideas but "in escaping from the old ones," as he himself declared at the end of the Preface to his "General Theory." The Keynesians tell us that his immortal achievement consists in the entire refutation of what has come to be known as Say's Law of Markets. The rejection of this law, they declare, is the gist of all Keynes's teachings; all other propositions of his doctrine follow with logical necessity from this fundamental insight and must collapse if the futility of his attack on Say's Law can be demonstrated.

--Ludwig von Mises, Planning for Freedom: And Twelve Other Essays and Addresses, 3rd ed. (South Holland, IL: Libertarian Press, 1974), 64.

Mises Excoriates the Marxian "Anarchy of Production" Myth

The Marxian critique censures the capitalistic social order for the anarchy and planlessness of its production methods. Allegedly, every entrepreneur produces blindly, guided only by his desire for profit, without any concern as to whether his action satisfies a need. Thus, for Marxists, it is not surprising if severe disturbances appear again and again in the form of periodical economic crises. They maintain it would be futile to fight against all this with capitalism. It is their contention that only socialism will provide the remedy by replacing the anarchistic profit economy with a planned economic system aimed at the satisfaction of needs.

The word “anarchy,” therefore, is associated with the concept of intolerable conditions. Marxian theorists delight in using such expressions. Marxian theory needs the implications such expressions give to arouse the emotional sympathies and antipathies that are likely to hinder critical analysis. The “anarchy of production” slogan has performed this service to perfection. Whole generations have permitted it to confuse them.

--Ludwig von Mises, The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression, ed. Percy L. Greaves Jr., trans. Bettina Bien Greaves and Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), 155-156.

Lord Keynes, Professor Hansen, and Professor Lerner Want to Abolish Interest and Return Us to the Dark Ages

The modern champions of the “easy money” policy take pride in calling themselves unorthodox and slander their adversaries as orthodox, old-fashioned and reactionary. One of the most eloquent spokesmen of what is called functional finance, Professor Abba Lerner, pretends that in judging fiscal measures he and his friends resort to what “is known as the method of science as opposed to scholasticism.” The truth is that Lord Keynes, Professor Alvin H. Hansen and Professor Lerner, in their passionate denunciation of interest, are guided by the essence of Medieval Scholasticism’s economic doctrine, the disapprobation of interest. While emphatically asserting that a return to the nineteenth century’s economic policies is out of the question, they are zealously advocating a revival of the methods of the Dark Ages and of the orthodoxy of old canons.

--Ludwig von Mises, The Causes of the Economic Crisis: And Other Essays Before and After the Great Depression, ed. Percy L. Greaves Jr., trans. Bettina Bien Greaves and Percy L. Greaves Jr. (Auburn, AL: Ludwig von Mises Institute, 2006), 193.

The Currency School Versus the Banking School: A Debate Over the Rules Governing Money Supply Fluctuations

The sound money doctrine reached the peak of its influence in the mid-nineteenth century after another great debate in Great Britain between the “currency” school and the “banking” school. Supporters of the “currency principle” favored a monetary system in which the money supply of a nation varied rigidly with the quantity of metallic money (gold or silver) in the possession of its residents and on deposit at its banks. Their banking school opponents upheld the “banking principle,” according to which the national money supply would be adjusted by the banking system to accommodate the ever fluctuating “needs of trade.”

--Joseph T. Salerno, introduction to Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), xii. 

Mises's Analysis of Inflation: An Integration of Marginal Utility Theory with Menger’s Cash-Balance Approach to the Demand for Money

Mises’s pathbreaking analysis of inflation developed out of his integration of Austrian marginal utility theory with Carl Menger’s cash-balance approach to the demand for money and the monetary process analysis originated by eighteenth- and nineteenth-century economists such as Richard Cantillon, David Hume, and J.E. Cairnes.... In contrast to his analysis of the inflation adjustment process, which has gained substantial recognition, Mises’s innovative approach to expectations has garnered little if any attention, even from Austrian-oriented economists.
--Joseph T. Salerno, Money: Sound and Unsound (Auburn, AL: Ludwig von Mises Institute, 2010), 199n.

There Are Two Broadly Opposed Sets of Explanations for Changes in British Colonial Currency Policies

There are two broadly opposed sets of explanations for changes in British colonial currency policies. The first and the largest body of literature of which Fieldhouse (1981) is a leading exponent, suggests a natural ‘stages’ sequence of progressive monetary development akin to W.W Rostow’s model of stages of economic development beginning with a primitive society and ending with a mature developed modern economy. Firmly rooted within neoclassical economic theory, this literature explains the colonial monetary history as one of modernization of primitive and inferior currency systems, with every successive currency being better able to satisfy the basic functions of money, leading to greater monetary integration of colonies with the metropolitan economy and world trade.

A second set of explanations sees colonial currency policies as manifestations of imperialist control of colonial economies, safeguarding the interests of the colonizing power rather than that of the colony. De Cecco (1974) and Nabudere (1981) are two good exponents of this view. Within this approach may also be situated much of the academic criticisms of the currency board system and the negative impacts on colonial welfare, that emerged during World War II and in the decade after.

--Wadan Narsey, British Imperialism and the Making of Colonial Currency Systems, Palgrave Studies in the History of Finance (Houndmills, UK: Palgrave Macmillan, 2016), 6-7.

Monetary Imperialism and the Gold-Exchange Standard

The leap into political imperialism by the United States in the late 1890s was accompanied by economic imperialism, and one key to economic imperialism was monetary imperialism. In brief, the developed Western countries by this time were on the gold standard, while most of the Third World nations were on the silver standard. For the past several decades, the value of silver in relation to gold had been steadily falling, due to (1) an increasing world supply of silver relative to gold, and (2) the subsequent shift of many Western nations from silver or bimetallism to gold, thereby lowering the world’s demand for silver as a monetary metal.

The fall of silver value meant monetary depreciation and inflation in the Third World, and it would have been a reasonable policy to shift from a silver-coin to a gold-coin standard. But the new imperialists among U.S. bankers, economists, and politicians were far less interested in the welfare of Third World countries than in foisting a monetary imperialism upon them.... what the new imperialists set out to do was to pressure or coerce Third World countries to adopt, not a genuine gold-coin standard, but a newly conceived “gold-exchange” or dollar standard.

--Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 218-219.

Hayek Found Keynes Ignorant of Capital Theory and Real-Interest Theory

F.A. Hayek subjected J.M. Keynes’s early Treatise on Money (now relatively forgotten amid the glow of his later General Theory) to a sound and searching critique, much of which applies to the later volume. Thus, Hayek pointed out that Keynes simply assumed that zero aggregate profit was just sufficient to maintain capital, whereas profits in the lower stages combined with equal losses in the higher stages would reduce the capital structure; Keynes ignored the various stages of production; ignored changes in capital value and neglected the identity between entrepreneurs and capitalists; took replacement of the capital structure for granted; neglected price differentials in the stages of production as the source of interest; and did not realize that, ultimately, the question faced by businessmen is not whether to invest in consumer goods or capital goods, but whether to invest in capital goods that will yield consumer goods at a nearer or later date. In general, Hayek found Keynes ignorant of capital theory and real-interest theory, particularly that of Böhm-Bawerk, a criticism borne out in Keynes’s remarks on Mises’s theory of interest.

--Murray N. Rothbard, America's Great Depression, 5th ed. (Auburn, AL: Ludwig von Mises Institute, 2000), 37n.