Mises Argument Against Socialism
Mises Argument Against SocialismLudwigVonMises stated that socialism cannot support a modern economy in his book Socialism (http://www.mises.org/books/socialism.pdf) because of the economic calculation problem. Because a socialist economy cannot compute efficient methods for converting resources into goods, any socialist society is likely not to be any more advanced than feudal societies of the middle ages.
Unfortunately, von Mises' argument is questionable. To start with, it should destroy private monopolies as thoroughly as public ones, and yet those are well-known to exist.
According to Mises (one is free to argue), in a capitalist system, private monopolies can only exist in limited circumstances involving the intersection of property rights and mining operations. It is irrelevant to his argument regarding the effectiveness of socialism, however.
When markets aren't monopolistic, they're almost always oligopolistic, so one wonders exactly how limited these circumstances are. Mises' argument does a very bad job corresponding to actual economies, where things like government operation and price controls are not especially rare.
The necessary and sufficient conditions for competitive markets are (1) suppliers are not forcefully (legally or otherwise) prevented from entering or leaving the market and (2) consumers are not forcefully (legally or otherwise) prevented from entering or leaving the market. The number of actual suppliers in the market is irrelevant to a well functioning market and thus, whether the market is "oligopolistic" is irrelevant.
Furthermore, Mises' arguments in Socialism are precisely against government operation and price controls. If you want an excellent introduction on the effects of price controls (in their various forms), I recommend anything by Bastiat, Rothbard's Making Economic Sense or Hazlitt's Economics in One Lesson.
But again, none of this has any relation to Mises' damning critique of socialism in Socialism. No one has successfully refuted his argument that prices as determined through free market interactions is the only mechanism to solve the economic calculation problem (sometimes referred to as the supplier production problem). No central planning body can have the enough information to effectively plan any economy more complex than the feudal economies of the Middle Ages. Therefore, it is reasonable to assume that a socialist society would quickly (within a few generations), fall back to a level of civilization rivaling that of 11th century England.
But this is precisely where the economic calculation argument fails. It assumes that the only alternative to market prices is a command economy. But the existence of a command economy and central or society wide planning obscures and precludes completely what is the decisive counter-argument to the ECA namely a social arrangement involving the following features
1) Calculation in kind (Otto von Neurath) 2) A decentralised self regulating system of stock control linking up, or mediating, supply and demand 3) The law of the minimum (Justus von Liebig) whereby you economise most on those factors that are scarcest thus allowing you to chose between alternative bundles of factors in terms of which can realise the greatest output of a given good i.e. has the least restrictive "limiting factor" 4) A hierarchy of production goals (priorities) to determine which end use gets priority where there is "competition" over a scarce factor
These four inter-related features govern completely the allocation of resources in an anarcho-socialist society and at the same time ensure - almost one might say , willy nilly - that such resouces are alklocated in an efficient rational way on the basis of society's prioruities and in a way that avoids outcomes that are most restrictive in terms of output as determined by the limiting factor and that opts for more plentiful alternatives as revealed via the self regulating system of stock control (Robin Cox www.worldincommon.org)
Obviously people have counter-arguments, because not all economists accept his position. The test is in real examples, for which most people annoyingly seem to start and end with the Soviet Union. Unfortunately, here the bets are hedged by the complexity thing. Of course a well-working centrally planned economy would be simple - all prices would be set by the central government. Does that mean it couldn't support modern industry and such? How complex are the centrally planned economies of today, and how stable are they compared to the economies of comparable capitalist countries? If the calculation problem is not solved exactly, are there in fact dire consequences? This is the sort of information that needs to be looked at, since economics is a science, not just philosophy.
I agree that the ultimate test of a theory is the real world and I'd be happy to entertain examples of a complex, non-agrarian (e.g. industrial or post-industrial) socialist economy. To my knowledge there are a few: the Soviet Union, Cuba, perhaps Liberia and South Africa (the latter because the diamond mines are effectively state controlled). I don't understand why "all bets are hedged" on the Soviet Union due to the "complexity thing". To me, that simply proves Mises' point: The complexity of such a modern economy makes central planning impossible. I'd love to hear your comparison of those economies to even pseudo-capitalist economics such as the United States, Britain, Poland, Costa Rica, etc. -- MarkAddleman
The problem is that the Soviet Union is a single example, one where any number of other factors may have been responsible for its downfall. It amazes me that while historians insist on complex multi-factor explanations for nearly every general trend, economists have been more than happy to accept a single-factor explanation for one of the dominant patterns in our century. China, Cuba, Serbia, and the like have all followed different patterns. Unfortunately, examples are hard to come by thanks to the complexity requirement (what I meant by hedged bets). Outside of western Europe and northern North America, how many countries qualify? If those are the only samples allowed, I don't think we can make many conclusions.
Yes, I know growth is a form of instability, and capitalist economies tend to go through booms and busts. Let's say in this case the condition is that the bust isn't so horrible the society falls apart, as it tends to do in third world countries.
Boom and busts occur because of government interference in the normal functioning of markets. The best references for this is probably Rothbard's America's Great Depression (http://www.mises.org/rothbard/agd.pdf) and A History of Money and Banking in the United States (http://www.mises.org/rothbard/historyofmoney.pdf).
Neither does intellectual exercise on the "virtues" of the free market idiocy, as spelt out elsewhere. In most countries comparable to the socialist ones, the same problems exist. Yes, the very wealthiest and most advanced countries in the world have managed to outperform all the others, though even they neglect to provide food for a variable portion of their population. I don't think that's a very interesting comparison. Compare Cuba to Haiti, and it doesn't look so bad. Meanwhile, it may be noted that price controls are a very old and functioning institution in simple societies.
If you don't figure out the intricate reasons that doesn't mean that the correlation does not exist, as shown by overwhelming empirical evidence. Theories cannot trump realities. -- AnonymousDonor
Fair enough. But Mises' argument is just a theory, and so can't prove anything if it has theoretical problems, agreed?
The issue is not one of planning by a few companies versus planning by a central government. The fundamental issue is whether prices are set through a market mechanism or through fiat. If your argument is that a few companies which do not have any current competition (i.e. an oligopoly) set prices in basically the same mannger as a central government, then you misunderstand mechanisms by which markets work. The seeds of the counter argument are set in your own statement "a few companies which do not have any current competition." As has been demonstrated many times, the mere threat of competition will keep olipolostic firms from pricing above a purely competitive market clearing price. Therefore, so long as a few companies do not have any "current" competition, but fear the entrance of new competitors, the market will function in a competitive manner. -- MarkAddleman
Where's the evidence of this? Here in Alberta, power deregulation immediately drove the price up by five times. The companies clearly didn't need this sort of income, or they would have gone bankrupt before. I suppose it could be argued that there was no threat of competition, but in this case, I wonder if any economies have ever even approximated the description you give.
The deeper argument is that when an economy is centrally planned, no producer has the benefit of a market price to determine the efficient use of resources. Even if an oligopoly could exist in the manner you seem to conceive it, it would necessary live in a sea of prices directing its output to the general benefit of consumers. When the market pricing mechanism is removed by a central pricing authority, no firm, oligopoly or not, has information as to the general preferences of consumers and therefore cannot direct resources to fulfilling their material needs. -- MarkAddleman
Moved to WhereDoPricesComeFrom
In any case, I am not interested in slogging through a thorough comparison of price controls and free markets. The question here is, is Mises' argument valid? I don't see how it can be. If it relies on as many particulars about how competition works as are being insisted here, it really doesn't include any current economies, and I don't believe there are no complex societies in today's world. Otherwise, the criticisms given above apply. If socialism doesn't work, which I think depends heavily on what exactly you include under those terms, simple failure of price controls isn't the reason.
MarkAddleman wrote: As has been demonstrated many times, the mere threat of competition will keep olipolostic firms from pricing above a purely competitive market clearing price.
Where's the evidence of this? Here in Alberta, power deregulation immediately drove the price up by five times. The companies clearly didn't need this sort of income, or they would have gone bankrupt before. I suppose it could be argued that there was no threat of competition, but in this case, I wonder if any economies have ever even approximated the description you give.
I'm not familiar with the Alberta power deregulation example. In most cases in the UnitedStates, power market deregulation is not really deregulation at all, but a sham to alter the regulatory landscape (http://search.cato.org/query.html?col=allcato&qc=allcato&pw=100%25&rf=0&qt=electricity+deregulation). Since I can't speak to the specifics of your example, I'll assume that the deregulation was true and that free market conditions existed afterwards (i.e. supplies were free to enter or leave the market and consumers were free to enter or leave the market and do business with any supplier they chose).
It's a mistake to assume that direct free market price of a good will always be lower than a regulated price. In fact, this would hardly ever be the case. In democratic societies, the reason the regulation was allowed to proceed in the first place was that consumers were promised lower direct costs for the good in question. Of course, the firms producing the good would still have to make their full costs of production, so the difference would clearly have to be made up for somehow. Normally, this is done through two mechanisms: Subsidies and legal limitations on competition.
If the deregulation allowed suppliers to enter the market without restriction, then my first guess would be that the producing firms lost funding from the government and they had to make up for it by raising prices. More likely, there was some kind of protection scheme for existing suppliers to phase-in supplier competition over several years. This would give the existing suppliers a great deal market power that would be unconstrained by either fear of competition or gov't price controls.
Probably. But as I said before: if these sorts of problems always occur, if there is rarely if ever the sort of free competition you insist is necessary for market prices to function, how can the argument that they are necessary possibly be valid?
Market prices are necessary to ensure that resources are allocated to resolve consumers' material wants and needs. To the degree that market prices are adjusted due to fiat, consumers' material demands will not be met. We're discussing a matter of degree here. In a purely capitalist society, there are no government restrictions on suppliers nor consumers and all consumers' materials needs will be met by the market in one form or another. In a purely socialist economy where prices are set by a central planning body, almost no consumer needs will be met. Clearly there is plenty of room between these two poles. Market prices are too powerful to be completely ruined by the entrance of some government interference. However, they are not supremely powerful, particularly if they are not allowed to exist in the first place.
Again, Mises' claim is that socialism cannot provide for consumers' material demands beyond that of a simple agrarian society because a device that carries the information about the relative urgency of their needs to producers does not exist. A central planning committee has no means by which to receive and prioritize peoples' needs and it cannot match those needs with the relative resource costs of meeting them.
No socialism proponent has ever provided a mechanism to address this fundamental problem without introducing some degree of market prices. Once market prices are introduced, the only question left is to what degree should market prices be allowed to proliferate through the entire economy. Then, questions of producer power versus pure competition become relevant.
-- MarkAddleman
That's not convincing. I'm not sure this fundamental problem is in fact fundamental, because there are plenty of examples of prices being set without a properly competitive market. You can say that they still work because of market elements, but that needs much more support. The manorial system of the Middle Ages, after all, had market elements but it would be odd to claim they were the primary reason it worked. There should be some sort of corelation between how stable a system is and to what extent it has free market elements and lacks central planning. Since approaches to both extremes have been failures historically, it's really odd to claim one is supporting and the other not. Mises' argument, by itself, simply makes too many assumptions to apply properly to the real world. True, most economic models are only first-order approximations, and work on that level. But they're explaining how things happen, not whether they can, and are not especially notable on the latter scale. Finally, I might repeat that not everyone agrees with Mises - it is one of several models, not something generally accepted about how economies behave.
Of course it's not convincing. It's an odious lie. Market prices aren't an effective means of communicating consumers' needs to producers. This has been proved again and again by recessions, depressions and market bubbles. And socialists have proposed vastly superior communications mechanisms which have proven themselves in the field. And to call these alternatives "prices" is an outright lie.
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