socialism is unworkable as a universal economic system, because a socialist society would not be able to make rational calculations in economic matters. The economic calculation which we use in the capitalistic economy is based on market prices, which are formed in the market for all goods and services, consequently for producers’ goods and for labor services as well. Only money prices make it possible to bring costs which originate through the expenditure of various goods and different qualities of labor to a common denominator so they may be compared with prices which were realized or which can be realized on the market. Thus it is possible to establish, in definite figures, the probable effect of a planned action and to know the actual effect of actions carried out in the past. In a socialist economy which does not have prices for producers’ goods—there being no market for the means of production because they are all owned by the state—the opportunity to make such calculations would not exist.
Let us assume, for instance, that the government of a socialist country would want to build a house. The house may be built of brick or wood, stone, concrete, or steel. Each of these ways offers, as seen from the point of view of the evaluating government, various advantages, requires different expenditures of labor and materials, and requires a different production period. On which method will the government decide? It cannot reduce the different expenditures of labor and materials of various kinds to a common denominator and, therefore, cannot compare them. It cannot make either the construction period or the use period play a calculable part in its considerations. Therefore it cannot compare expenditures and benefits, costs and returns. It does not know whether or not its decisions concerning its use of the factors of production are rational from the standpoint of its own valuation of consumers’ goods.
Around the middle of the [nineteenth] century, for example, the suggestion might have been presented to such a government to restrict sheep-rearing considerably in Europe and to find a new location for it in Australia. Or the suggestion might have been made to replace horse power with steam power. What means did the government have at its disposal to ascertain whether these and other innovations were advantageous from an economic standpoint?
Yes, say the socialists, but capitalistic calculation is not infallible either; the capitalist too may err. Certainly, this has happened before and will happen again, because all economic activity looks toward the future, and the future is always unknown. All plans become futile when the expectations with regard to future developments are not fulfilled. But this objection is beside the point. Today, we calculate from the standpoint of our present knowledge and from the standpoint of our present expectations about the future. The problem does not lie in the fact that the government may err because it may misjudge the future, but rather in its inability to make calculations even from the standpoint of its present valuations and expectations. If, for instance, a government proceeds with the erection of tuberculosis hospitals it may discover later, when a simpler and more efficient means of combating the disease is found, that it invested capital and labor unwisely. But the crux of the problem is: How can the government know today how to build such hospitals in the most economical way?
Some railways would not have been built around 1900 if one could have foreseen, at that time, the development of motor traffic and aviation. But the entrepreneur who built railways then knew which among the construction alternatives he had to choose from the standpoint of his valuations and expectations at that time, and on the basis of market prices reflecting entrepreneurial evaluations of prospective demand. But this is exactly what the government of a socialist community will not know. It will be like the captain of a ship trying to sail the high seas without the resources of science or art of navigation.
We have presupposed that the government has decided to undertake a certain project. But even to arrive at this decision requires economic calculation. The decision in favor of building a power plant can only be made when it is established that this project would not divert means of production from more urgent uses. How shall this be ascertained without calculation?
4. The Capitalist State and the Socialist State
In a market economy the state concerns itself with the protection of the life, health, and private property of its citizens against force or fraud. The state insures the smooth working of the market economy by the weight of its coercive power. It refrains, however, from any interference with the freedom of action of the people engaged in production and distribution so long as such actions do not involve the use of force or fraud against the life, health, safety, or property of others. This very fact characterizes such a community as a market economy or a capitalist economy.
If liberals,3 i.e., classical liberals, oppose governmental interference in the economic sphere they do so because they feel certain that the market economy is the only efficient and workable system of social cooperation. They are convinced that no other system would be in a position to bring more welfare and happiness to the people. The English and French liberals and the fathers of the U.S. Constitution insisted upon the protection of private property, not to further the selfish interests of one class, but rather for the protection of the whole people and because they saw the welfare of the nation and of each individual most secure in the system of a market economy.
It is, therefore, naive to say that the true liberal advocates of private property are enemies of the state because they want to see the realm of governmental activity limited. They are not enemies of the state but opponents of both socialism and interventionism because they believe in the superior efficacy of the market economy. They want a strong and well-administered state because they assign to it an important task: the protection of the system of a market economy.
Even more naive were the Prussian metaphysicians when they maintained that the program of the adherents of a market economy was negative. To these supporters of Prussian totalitarianism everything seemed negative that stood in the way of their desire to create more governmental jobs. The program of the advocates of a market economy is negative only in the sense in which every program is negative: It excludes all other programs. Because the true liberals are positively for private ownership of the means of production and for a market economy they are necessarily against socialism and interventionism.
Under socialism all economic matters are the responsibility of the state. The government gives orders in all lines of production just as in the army or in the navy. There is no sphere of private activity; everything is directed by the government. The individual is like the inmate of an orphanage or of a penitentiary. He has to do the work which he is ordered to do and he can consume only what has been allotted to him by the government. He can read only those books and papers printed by the government printing office and he can travel only if the government grants him the means for doing so. He has to assume the occupation which the government has chosen for him and he has to change his occupation and his domicile when the government commands. In this sense, we may say that the citizens of a socialist community are not free.4
Under the system of a hampered market economy or interventionism both government and entrepreneurs are distinctly separate factors functioning in the economic sphere. The dualism of market and authority exists also in the system of a hampered market exchange. In contrast to the system of a pure market economy, however, the authority does not confine itself to the prevention of disturbances of market exchange. The government itself interferes by isolated interventions in the workings of the market; it orders and it forbids.
The intervention is an isolated order by the authority in command of the social power apparatus; it forces the entrepreneur and the owner of the means of production to use these means in a way different from what they would do under the pressure of the market. The order may be by command or interdiction. Command and interdiction need not ostensibly emanate from the government.
