Marx Bristled at the Charge, Evidently a Tired Old Cliché by 1871, that Communism Was Impossible

In 1920 an Austrian economist named Ludwig von Mises published a short article in which he claimed that socialism was not a practical possibility (Mises 1920). Two years later this article was incorporated in a book (Mises 1922) which became widely read and much debated on the European continent. At that time socialism still appeared to be in the ascendant. Its recent disappointments in Germany, Austria, and Hungary seemed temporary setbacks, and the construction of a completely new economic order was triumphantly under way in, of all places, Russia. To many observers of socialism, friendly, apprehensive, or hostile, its eventual triumph appeared inescapable. Yet Mises contended that, however powerful the socialist movement might become, and no matter how many people wanted socialism, howsoever ardently, they would always be powerless to bring socialism into being, because socialism was inherently unfeasible.

There was nothing new in the assertion that socialism could not work in practice. Malthus’s 1798 Essay on the Principle of Population was written primarily to show that Godwin’s socialism (a form of agrarian anarchocommunism) was impossible. A passage in Marx’s Civil War in France shows him bristling at the charge, evidently a tired old cliché by 1871, that “communism” was “impossible.” What was new to Mises’s readers was his specific argument for the impossibility of socialism. Most earlier arguments had rested either on an appeal to human nature (especially the alleged need for appropriate material incentives) or on the Malthusian population theory. Arguments from human nature or motivation suffer from weaknesses which render them rather ineffective, and the Malthusian argument, though it was extraordinarily effective for a century, was eventually recognized to be unsound. Mises’s argument against the practical feasibility of what he calls “socialism” does not hinge upon questions of motivation, but rather claims that, with the best will in the world, humans are not able to operate a society on ‘socialist’ lines, because modern industry cannot be successfully guided or administered without the information provided by market prices of factors of production. Mises claims that even where there’s a will, there’s no way. It is part of Mises’s definition of socialism that factors of production are not exchanged on the market, so that under socialism there cannot be market prices of factors of production. Whether this really is integral to socialism is one of the questions I consider later. Mises’s argument, known as the Wirtschaftsrechnung or ‘economic calculation’ argument, had been proposed by several earlier writers, but little notice was taken, and no serious debate ensued until 1920.

—David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), e-book.

Although Millions of Pencils Are Manufactured Every Day, No One Knows How to Make Them; This “Intellectual Division of Labor,” as Mises Calls It, Is Present in Virtually All Market Exchange

How can the combination of fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess? (Hayek 1948)

In an amusing little piece, written as if in the first person by an ordinary lead pencil, Read (1958) captures one of the fundamental qualities of modern production. Although millions of pencils are manufactured every day, strictly speaking no one knows how to make them. Many thousands of different people know partial aspects of how to make little bits of them. Thus, the graphite miner doesn't know much about the making of the wooden stem or of the eraser, and the miners of zinc and copper (for the brass ferrule) are largely ignorant of the production of factice (for the eraser) by reacting rape seed oil with sulfur chloride. All the millions of people engaged in the production of a given line of pencils, people who for the most part don't meet, don't know each other, and are not aware of each other's existence, effectively co-operate in producing pencils.

This “intellectual division of labor,” as Mises calls it, is present in virtually all market exchange. A community of pastoralists makes contact with a fishing community. Meat, milk, and horns are exchanged for fish. Both pastoralists and fishers benefit by the trade. The pastoralists are benefiting from the art of fishing, of which they are ignorant, and the fishers benefit from the art of herding cattle, of which they are ignorant.

--David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), Kobo e-book.

There Is As Much Sense in Saying That Capital Exploits Labor As in Saying That Labor Exploits Capital, or That Electricity Exploits Roofing Tiles

One of the many fateful consequences of marginal productivity is that it sweeps away such theories as Marx's which see interest as consisting of 'unpaid labor.' Under competitive market conditions, a worker tends to be paid what his labor contributes to output, no more and no less. The same goes for the owner of a machine or a piece of real estate. The analysis demonstrates the symmetry of all types of inputs: there is as much sense in saying that capital exploits labor as in saying that labor exploits capital, or that electricity exploits roof tiles. Of course, this does not touch the ethical arguments of socialists who acknowledge that non-labor factors make a determinate contribution to output, analytically separable from labor's contribution, yet still contend that it is illegitimate for anyone to own capital or land and reap the payment for their services. But that is not the position of Marx, nor of many other socialists. They specifically contend that, given a resource-owner's right to the product of the resource he contributes to production, positive net incomes to non-labor resource-owners are entirely created by owners of labor resources. It certainly clarifies the discussion to recognize that this position is untenable.

--David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), Kobo e-book.

Eminent Dutch Economist Nikolaas G. Pierson Wrote the First Exposition of the Economic Calculation Problem

Nikolaas G. Pierson was the most eminent Dutch economist of his day, and a sometime Prime Minister of Holland. His paper on ‘The Problem of Value in the Socialist Community’ was a direct reply to Kautsky’s celebrated speech at Delft in 1902, which Pierson had attended. Pierson’s paper, the first really clear exposition of the economic calculation problem, had very little influence until the 1920s, partly because it appeared in Dutch, and partly because its unassuming tone, its modest air of pointing out a few difficulties that would confront socialism, no doubt concealed from all but the most attentive readers the possibility that these difficulties might be intractable. The true significance of the piece was probably further obscured by the fact that Pierson begins it (after a somewhat rambling introduction) by concentrating on the problem of how a socialist nation-state would conduct its foreign trade. There were still Marxists who denied that there could be such a thing as a socialist nation-state, or that there could be ‘foreign trade’ under socialism, but Pierson takes Kautsky’s recent concessions as his point of departure. A further contribution to the piece’s obscurity is that Pierson’s textbook on economics (1912) briefly discusses socialism but makes no mention of the economic calculation problem.

--David Ramsay Steele, From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation (La Salle, IL: Open Court Publishing, 1992), e-book.