The Socialist Economy Is “Impossible” (“Unmöglich”)—Not Just Inefficient Or Less Innovative Or Conducted without Benefit of Decentralized Knowledge; Socialism Is the Abolition of Rational Economy

In “Economic Calculation in a Socialist Commonwealth,” Ludwig von Mises demonstrates, once and forever, that, under socialist central planning, there are no means of economic calculation and that, therefore, socialist economy itself is “impossible” (“unmöglich”)—not just inefficient or less innovative or conducted without benefit of decentralized knowledge, but really and truly and literally impossible. . . . 

A society without monetary calculation, that is, a socialist society, is therefore quite literally a society without an economy. Thus, contrary to what has become the conventional interpretation by friend and foe alike, Mises was not indulging in rhetorical hyperbole but drily stating a demonstrable conclusion of economic science when he declared in this article:

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. . . . Socialism is the abolition of rational economy.

--Joseph T. Salerno, postscript to Economic Calculation in the Socialist Commonwealth, by Ludwig von Mises (1990; repr., Auburn, AL: Mises Institute, 2012), 49, 53-54.

The Law of Marginal Utility Is a Statement About the Inverse (Opposite) Relationship Between the Total Amount Possessed of a Given Good and the Value Attached to a Single Unit of the Total Stock of That Good

The classic statement of the Law of Marginal Utility is by Boehm-Bawerk in the form of a parable about a small farmer who had planted enough seeds to harvest five sacks of grain. Boehm used this parable to illustrate the following principle: for any given good, there is an inverse (opposite) relationship between (a) the quantity (number of units) that we possess of the given good and (b) the subjective value or importance attached to any single unit of that good (called the "marginal utility"), provided other things (subjective preferences, personal income, etc.) remain the same. In other words, the Law of Marginal Utility is a statement about the inverse relationship between (a) the total amount possessed of a given good, on the one hand, and (b) the value attached to a single unit of the total stock of that good.

In a moment, this principle will be illustrated by means of Boehm's parable, but first we should add the two corollaries that follow from the Law of MU. The first is the Law of Diminishing MU, which runs as follows: The greater the quantity possessed of any given good, the lower is the subjective value attached to a unit of the given good (the MU), other things being the same. The second is the Law of Increasing MU: The smaller the quantity possessed, the higher the subjective value attached to a unit of the given good (the MU), other things being the same. The best way to see this is through Boehm's parable.

--Milton M. Shapiro, Foundations of the Market Price System (Lanham, MD: University Press of America, 1985), 90-91.

An Exchange Will Take Place When Two Commodity Units Are Placed in a Different Order on the Value-Scales of Two Different Persons

Acts of valuation are not susceptible of any kind of measurement. It is true that everybody is able to say whether a certain piece of bread seems more valuable to him than a certain piece of iron or less valuable than a certain piece of meat. And it is therefore true that everybody is in a position to draw up an immense list of comparative values;  a list which will hold good only for a given point of time, since it must assume a given combination of wants and commodities. If the individual’s circumstances change, then his scale of values changes also.

But subjective valuation, which is the pivot of all economic activity, only arranges commodities in order of their significance; it does not measure this significance. And economic activity has no other basis than the value-scales thus constructed by individuals. An exchange will take place when two commodity units are placed in a different order on the value-scales of two different persons. In a market, exchanges will continue until it is no longer possible for reciprocal surrender of commodities by any two individuals to result in their each acquiring commodities that stand higher on their value-scales than those surrendered. If an individual wishes to make an exchange on an economic basis, he has merely to consider the comparative significance in his own judgement of the quantities of commodities in question. Such an estimate of relative values in no way involves the idea of measurement. An estimate is a direct psychological judgement that is not dependent on any kind of intermediate or auxiliary process.

--Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson (Indianapolis: Liberty Fund, 1981), 52-53.

The Basis of Modern Economics Is the Cognition That It Is Precisely the Disparity in the Value Attached to the Objects Exchanged That Results in Their Being Exchanged

An inveterate fallacy asserted that things and services exchanged are of equal value. Value was considered as objective, as an intrinsic quality inherent in things and not merely as the expression of various people’s eagerness to acquire them. People, it was assumed, first established the magnitude of value proper to goods and services by an act of measurement and then proceeded to barter them against quantities of goods and services of the same amount of value. This fallacy frustrated Aristotle’s approach to economic problems and, for almost two thousand years, the reasoning of all those for whom Aristotle’s opinions were authoritative. It seriously vitiated the marvelous achievements of the classical economists and rendered the writings of their epigones, especially those of Marx and the Marxian school, entirely futile. The basis of modern economics is the cognition that it is precisely the disparity in the value attached to the objects exchanged that results in their being exchanged. People buy and sell only because they appraise the things given up less than those received. Thus the notion of a measurement of value is vain. An act of exchange is neither preceded nor accompanied by any process which could be called a measuring of value. An individual may attach the same value to two things; but then no exchange can result. But if there is a diversity in valuation, all that can be asserted with regard to it is that one a is valued higher, that it is preferred to one b. Values and valuations are intensive quantities and not extensive quantities. They are not susceptible to mental grasp by the application of cardinal numbers.

--Ludwig von Mises, Human Action: A Treatise on Economics, ed. Bettina Bien Greaves (Indianapolis: Liberty Fund, 2007), 1:203-204.

Following Wieser's “Natural Value,” Businessmen, Like a Socialist Planning Board, Could Theoretically Do Without Money Prices and Perform Their Calculations Directly in Terms of Value

Wieser’s view was rooted in his theory of the relationship between value and prices. Recall that Wieser believed that economic value is subject to arithmetic operations, just as money prices are used in the calculations of businessmen. Thus, there is in this respect no fundamental difference between value and price. Prices are merely “objective exchange value”—they are “subjective exchange value” made visible. Businessmen could theoretically do without money prices and perform their calculations directly in terms of value and so could a socialist planning board. This is still a widely held view among economic laymen. Wieser’s achievement was to give a sophisticated presentation of this view and to develop it through the doctrine of his second book, with the telling title Der natürliche Werth (Natural Value).

--Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn, AL: Ludwig von Mises Institute, 2007), 158.

There Was No Such Thing As Value Calculation; There Was Only Price Calculation, Which Could Come into Existence Only Where the Means of Production Were Privately Owned

It is before this background that Mises’s socialist-calculation argument must be appreciated. Mises argued that there were no general principles of value calculation, because there was no such thing as value calculation in the first place. There was in fact only price calculation, and it could come into existence only at those times and places where the means of production were privately owned. It not only followed that the existence of economic calculation was a historically contingent event. It also followed that the specific categories of capitalism—capital, income, profit, loss, savings, etc.—could not be assumed to exist in other types of social organization.

--Jörg Guido Hülsmann, introduction to the third edition of Epistemological Problems of Economics, by Ludwig von Mises (Auburn, AL: Ludwig von Mises Institute, 2003), xxxiv.

Pantaleoni and Weinberger Accused Menger of Plagiarizing Gossen et al. But Menger Did Not Approve of Gossen, Rejecting His Purely Hedonistic Approach, the Application of Mathematics to Psychology, etc.

The new ideas of Menger, Jevons, and Walras were not grafted on the work already done by the early marginalists. The three discoverers were stimulated by some minor writers whom the historians of economic thought usually neglect. Some authors are suspicious of this overflow of discoveries and declare positively that at least Menger must have committed plagiarism.

Maffeo Pantaleoni and Otto Weinberger believed that Menger had read at least Gossen and Mangoldt before he published his discoveries and had concealed this knowledge from his readers. In the Hitotsubashi library, new facts have been discovered which make it unlikely that Menger had copied either author. Menger, indeed, had studied Julius (Gyula) Kautz, who is the earliest author who mentions Gossen (1858), and Menger underlined the two Gossen quotations. But it is still very doubtful that Menger had read Gossen before he finished his Principles. Menger had bought his copy of Gossen on May 8, 1886. The pages are marked in many places, and Menger always did this when he studied an author for the first time. Menger did not approve of Gossen, rejecting his purely hedonistic approach, his emphasis on labor, and the application of mathematics in the realm of psychology. It is not very probable, to say the least, that a writer would copy another author whose methods and findings he does not consider acceptable.

--Emil Kauder, A History of Marginal Utility Theory (Princeton, NJ: Princeton University Press, 1965), 81-82.

Carl Menger Was Motivated to Establish a Causal Link Between the Subjective Values Underlying the Choices of Consumers and the Objective Market Prices Used in the Economic Calculations of Businessmen

While there is no dispute regarding Menger's role as creator of the defining principles of Austrian economics, there does exist some confusion regarding the precise nature of his contribution. It is not always fully recognized that Menger's endeavor to radically reconstruct the theory of price on the basis of the law of marginal utility was not inspired by a vague subjectivism in outlook. Rather, Menger was motivated by the specific and overarching aim of establishing a causal link between the subjective values underlying the choices of consumers and the objective market prices used in the economic calculations of businessmen. The classical economists had formulated a theory attempting to explain market prices as the outcome of the operation of the laws of supply and demand, but they were compelled to restrict their analysis to the monetary calculations and choices of businessmen while neglecting consumer choice for the lack of a satisfactory theory of value. Their theory of "calculated action" was correct as far as it went, and was used to telling effect in demolishing the protectionist and interventionist schemes of sixteenth- and seventeenth-century mercantilists and the statist fantasies of nineteenth-century Utopian socialists. Thus, Menger's ultimate goal was not to destroy classical economics, as has sometimes been suggested, but to complete and firm up the classical project by grounding the theory of price determination and monetary calculation in a general theory of human action.

--Joseph T. Salerno, “Carl Menger: The Founding of the Austrian School,” in The Great Austrian Economists, ed. Randall G. Holcombe (Auburn, AL: Ludwig von Mises Institute, 1999), 72-73.

Adam Smith's Classification (Value In Use vs. Value in Exchange) Caused Much of the Present Confusion When Using the Term “Value”

No term affords a better illustration of this than the word Value. It is deeply rooted in popular conception and in popular speech. Of all words used in economic theory, it has most need of exact definition, because there the theory of value occupies the chief place. Yet the history of economic science is strewn with the wrecks of theories of value.

Every one knows Thornton's story of how Sydney Smith retired from the Political Economy Club, because his chief motive for joining it had been to discover what Value was, while all he had discovered was that the rest of the Club knew as little about the matter as he did! Every one, too, has smiled at Mill's statement, made in 1848, that there was nothing in the laws of value which remained for him or for any future writer to clear up. And many felt sympathy with Jevons when he threw the term overboard altogether, declaring that neither writers nor readers could avoid the confusion so long as they used the word.

But although it might be possible, by a very strict attention to proof sheets, to keep the word out of a book, it would not be possible to keep it out of the economist's mouth, any more than it would be to banish it from ordinary speech. And—happily, as it seems to me—the recent writings of the Austrian school have shown that we may retain the old familiar word, and yet attain the exactitude of scientific nomenclature.

There is a time-honoured classification to which is due much of the present confusion. In the Wealth of Nations (Book i. chap, iv.), occurs the following passage:

 "The word Value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ' Value in use,' the other ' Value in exchange.' The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water : but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of goods may frequently be had in exchange for it."

--William Smart, An Introduction to the Theory of Value: On the Lines of Menger, Wieser, and Böhm-Bawerk, 4th ed. (1920; repr., London: Macmillan and Co., 1931), 1-3.

Wieser, Like Menger, Was Particularly Critical of the Walrasian System; Wieser Objected to the Use of Calculus in Economic Theory Because Economic Phenomena Are Necessarily Discontinuous and Discrete

The considered rejection of the mathematical method as sterile, i.e., as incapable of shedding light on the vital questions of economic processes, has been one of the continuing themes of the Austrian School. Böhm-Bawerk, in his monumental work on Capital and Interest, steers clear of any suggestion of functional interdependence between the elements of his theoretical system. He maintains a strictly cause-and-effect analysis. Wieser, like Menger, was particularly critical of the Walrasian system.

Wieser raised the objection to the use of calculus in economic theory that economic phenomena are necessarily discontinuous and discrete. The Austrians, with their focus on the way in which agents perceive and act in the real world, have always been careful to formulate their marginalism in terms of discrete units and discontinuous points rather than infinitesimal units and smooth curves. Menger emphasized discontinuities at many places in the Grundstätze. Wieser was especially explicit about the discreteness of changes in marginal utility scales, and in developing the theory of imputation assumed a discontinuity among inputs. Böhm-Bawerk analyzed supply and demand in terms of discontinuous schedule, and used for illustration a market for a particularly indivisible commodity, horses. The discreteness of changes in marginal utility scales in Wieser and Böhm-Bawerk is directly due to their subjectivist concern only with changes that could actually be felt by the valuing individual, Schumpeter thus missed the intent of the Austrian theorists again when he suggested that differential calculus is necessary in order to “formulate their reasoning correctly.”

--Lawrence H. White, The Methodology of the Austrian School Economists, online ed. (Auburn, AL: Ludwig von Mises Institute, 2003), 10.

No One Familiar with the Primary Literature Can Doubt that Carl Menger's Treatment of the Structure of Wants in Relation to Evaluation Was More Profound and More Penetrating Than That of Walras and That of Jevons

Carl Menger clearly stands apart from the other two reputed founders of the modern marginal utility theory. Menger, of course, deserves to be celebrated no less than his two famous contemporaries as the discoverer of a method of incorporating utility and scarcity into a novel, pathbreaking explanation of value. In fact, so impressive was Menger’s performance that Stigler judges Menger’s theory “greatly superior to that of Jevons”  and Georgescu-Roegen deplores the placing of Menger “by almost every historian on a lower level than either Walras or Jevons.” Von Hayek goes so far as to hold that Menger’s Grundsätze der Volkswirschaftslehre [Principles of Economics] “provided a much more thorough account of the relations between utility, value and price, than is found in any of the works of Jevons and Walras.” No one familiar with the primary literature can doubt for a moment that Menger’s treatment of the structure of wants in relation to evaluation was more profound and more penetrating not only than that of Walras who evinced no particular interest in such questions, but also than that of Jevons to whom the theory was, however, conceived on the analogy of a mechanical balance of physical forces, whereas Menger’s theory was adorned with only one mechanical metaphor and that in the course of an argument purporting to prove that it is a mistake to regard “the magnitude of price as the essential feature of exchange.”

--William Jaffé, “Menger, Jevons and Walras De-Homogenized,” Economic Inquiry 14, no. 4 (December 1976): 518-519.

Richard Cantillon Used the Term “Intrinsic Value” Correctly (in Accordance with Its Most Commonly Understood Meaning, Circa 1730) to Signify “Opportunity Cost”

The claim here is that Richard Cantillon discovered the concept of opportunity cost one hundred and forty years earlier than its conventional dating. This finding is surprising given Cantillonʼs use of the term intrinsic value and his well-known search for a par value between land and labor. Even more shocking for modern readers of Cantillon is that he used the phrase intrinsic value to designate opportunity cost. Not only did Cantillon have the “flavor” of opportunity cost, as some have suggested, but he used it to construct key applications of economic analysis and integrated it into his theoretical understanding of cost and choice.

To sustain this claim, it will be shown that Cantillon used opportunity cost in three major applications in his Essai sur la nature du commerce en général (hereafter, the Essai), including one that corresponds to the classic textbook illustration of opportunity cost. Cantillon provided an illustration of the role that opportunity cost plays in the value of land similar to that provided by Mill in 1848. In another application, Cantillon incorporated opportunity cost into his demolition of the mercantilistsʼ views on money and interest and into his own defense of usury. The evidence shows that Cantillon had in fact used the term intrinsic value correctly (i.e., in accordance with its most commonly understood meaning, circa 1730) to signify opportunity cost. Furthermore, textual evidence demonstrates that his conception is consistent with all the tenets of our modern understanding of opportunity cost. Cantillonʼs life was one of many mysteries and his economics has presented many puzzles, but one of the central theoretical puzzles is solved here—Cantillon was the first to discover the concept of opportunity cost.

--Mark Thornton, “Richard Cantillon and the Discovery of Opportunity Cost,” History of Political Economy 39, no. 1 (Spring 2007): 98.

Wieser's Theory of Capital and Interest Is Mostly Still Unappreciated in the Literature; Instead, There Has Been Extensive Analysis of the Theory Provided by Böhm-Bawerk and Refined by Wicksell

It has been said of Wieser that he ‘occupies a position of indisputable importance in the history of economics’ and that he ‘presented one of the best theories of capital which had emerged’ in his time (Stigler 1941:158, 177). Yet Wieser’s ([1889] 1930) theory of capital and interest (which is later enunciated and extended in Wieser 1891; [1914] 1927) is mostly still unappreciated in the literature. Instead, there has been extensive analysis of the putative apotheosis of ‘Austrian’ capital and interest theory provided originally by Böhm-Bawerk in 1888 and later refined by Wicksell (e.g. Kregel 1976:28–33; Blaug 1978:498–569; Brems 1988; Negishi 1985; Niehans 1990). As well, Streissler (1972: 434–6) concentrated exclusively on those elements in Böhm-Bawerk’s capital and interest theory that possibly displeased Menger. To anticipate one of our conclusions in this chapter, Streissler omitted to give an account of Menger’s attitude to Wieser’s formulations of the capital and interest problem, and we suspect, from the evidence presented here, that Menger would have sympathized with many of Wieser’s ideas.

Accordingly, in this chapter we give special consideration to Wieser’s much-neglected capital and interest theory in order to assess its origins and composition, and ultimately to estimate the extent of Wieser’s departure from the Menger tradition. We compare, as and where the detail of our exposition demands, Wieser’s theory of capital and interest with other contemporary Austrian and non-Austrian treatments of that subject. Our attention will also be focused on the relations between Wieser’s theory and the broad directions given by Menger for the construction of an adequate theory of capital and interest . . . As far as interest theory was concerned, Menger’s ideas were very much inchoate. Among the other founding Austrians, Wieser offered an alternative to Böhm-Bawerk’s contribution on this subject.

--A. M. Endres, Neoclassical Microeconomic Theory: The Founding Austrian Version, Routledge Foundations of the Market Economy (London: Taylor and Francis e-Library, 2002), 180.

Socialism, Like Other Forms of Ressentiment, Is a Manifestation of the Will to Power of the “Least and Dumbest” Members of Society

Nietzsche’s critique of socialism can be divided into two major lines of argument. The first line is grounded in Nietzsche’s identification of socialism as a Rousseauian perfectionist political theory. For Nietzsche, Rousseau and socialist thought represent forms of idealism that ought to be met with “suspicion and malice” because they promise what they cannot deliver and even if they could, their ideals are undesirable (WP [Will to Power] 80). The primary source of their error lies in a flawed theory of human nature and an unjustified hope in the transformative power of institutions.

The second line of critique that Nietzsche offers is grounded in his identification of socialism as a political theory born of resentment and a desire for revenge. In Nietzsche’s view, socialism is “an attack of sickness” brought about by “underprivileged” human beings who blame “society” for their “lack of power and self-confidence” (WP 125 and 373). In other words, socialism, like other forms of ressentiment, is a manifestation of the will to power of the “least and dumbest” members of society (WP 125).

--Nicholas Buccola, “'The Tyranny of the Least and the Dumbest': Nietzsche's Critique of Socialism,” Quarterly Journal of Ideology 31, no. 3-4 (2009): 15.