Sunday, March 24, 2013

Mises on Mixed Economies and Socialism: He is Incoherent

In a rather stunning passage, we get this statement in Human Action:
“The market economy must be strictly differentiated from the second thinkable—although not realizable—system of social cooperation under the division of labor: the system of social or governmental ownership of the means of production. This second system is commonly called socialism, communism, planned economy, or state capitalism. The market economy or capitalism, as it is usually called, and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialist. Production is directed by the market or by the decrees of a production tsar or a committee of production tsars.

If within a society based on private ownership by the means of production some of these means are publicly owned and operated—that is, owned and operated by the government or one of its agencies—this does not make for a mixed system which would combine socialism and capitalism. The fact that the state or municipalities own and operate some plants does not alter the characteristic features of the market economy. These publicly owned and operated enterprises are subject to the sovereignty of the market. They must fit themselves, as buyers of raw materials, equipment, and labor, and as sellers of goods and services, into the scheme of the market economy. They are subject to the laws of the market and thereby depend on the consumers who may or may not patronize them. They must strive for profits or, at least, to avoid losses. The government may cover losses of its plants or shops by drawing on public funds. But this neither eliminates nor mitigates the supremacy of the market; it merely shifts it to another sector. For the means for covering the losses must be raised by the imposition of taxes. But this taxation has its effects on the market and influences the economic structure according to the laws of the market. It is the operation of the market, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how they affect production and consumption. Thus the market, not a government bureau, determines the working of these publicly operated enterprises.

Nothing that is in any way connected with the operation of a market is in the praxeological or economic sense to be called socialism. The notion of socialism as conceived and defined by all socialists implies the absence of a market for factors of production and of prices of such factors.” (Mises 1998: 259-260).
Did you get that? There is no such thing as a mixed economy. I do not find this convincing, but its logical implications are interesting.

According to Mises, a market economy even with some degree of government owned and operated industry still does not make an economy “socialist.” What makes an economy “socialist” is the “absence of a market for factors of production and of prices of such factors.”

So what on earth were the mixed economies of the golden age of capitalism (1945 to 1973) with their Keynesian fiscal policies, financial regulation, and central banks? Mises published the first edition of Human Action in 1949 when he observed all around him the reality of Western mixed economies with nationalised industries and Keynesian fiscal policies. He must have looked in horror as this system produced unprecedented economic growth, low unemployment and economic stability. Was this his justification of why the system he saw around him was working and prospering?

Curiously, no. He appears to have declared most of the capitalist West “socialist” after 1945!

But the trouble is that Mises is simply astonishingly inconsistent and incoherent on this subject. Having defined “socialism” as an economy without markets “for factors of production and of prices of such factors,” Mises then tells us that Britain and other nations after 1945 were in fact socialist but for different reasons:
“Marching ever further on the way of interventionism, first Germany, then Great Britain and many other European countries have adopted central planning, the Hindenburg pattern of socialism. It is noteworthy that in Germany the deciding measures were not resorted to by the Nazis, but some time before Hitler seized power by Bruning, the Catholic Chancellor of the Weimar Republic, and in Great Britain not by the Labor Party but by the Tory Prime Minister Mr. Churchill. The fact has been purposely obscured by the great sensation made in Great Britain about the nationalization of the Bank of England, the coal mines, and other enterprises. However, these seizures were of subordinate importance only. Great Britain is to be called a socialist country not because certain enterprises have been formally expropriated and nationalized, but because all the economic activities of all citizens are subject to full control by the government and its agencies. The authorities direct the allocation of capital and of manpower to the various branches of business; they determine what should be produced and in what quality and quantity, and they assign to each consumer a definite ration. Supremacy in all economic matters is exclusively vested in the government. The people are reduced to the status of wards. To the businessmen, the former entrepreneurs, merely quasi-managerial functions are left. All that they are free to do is to carry into effect the entrepreneurial decisions of the authorities within a neatly delimited narrow field.” (Mises 1998: 855).
Something stinks in Human Action: it is basic standards of argument, consistency and factual accuracy.

First, factual accuracy. According to Mises, the UK after 1945 was a “socialist country,” because the government (allegedly) planned all investment and consumption! Now, while it is true that the UK even after 1945 did (for example) have rationing for some years, the idea that Britain was a total planned economy is so bizarrely factually incorrect that it boggles the mind.

In the UK, the reality is that rationing for clothing and furniture was abolished in 1948 (before Human Action was published), and all other limited rationing by 1954. There was indeed some nationalisation of certain industries in the UK after 1945 (the “commanding heights”), but we have already seen above that Mises specifically denies that some limited nationalised industries can make a country socialist. Nor did the use of Keynesian fiscal policy involve planning of production or consumption. And most capital goods in the UK were privately owned, most production was private and conducted for profit, and to satisfy consumer preferences. Mises was utterly ignorant or delusional when he declared that in Britain “all the economic activities of all citizens are subject to full control by the government and its agencies.”

Second, let us turn to consistency of argument. The UK without any doubt had money prices and markets for factor inputs after 1945, so according to Mises’s fundamental criterion expressed above in the first passage from Human Action the UK cannot have been a socialist country.

Yet mysteriously Mises declares that it was a “socialist country,” blatantly contradicting himself. The whole inconsistency is made much worse by the strident statement in Human Action (on the page after my last quotation) that most of the post-1945 Western European countries were now also socialist too! (Mises 1998: 856). Yet there is no doubt that these nations (like the UK) also had money prices for factors of production. So how can they have been socialist? We have an astonishing contradiction here.

Moreover, if Western European nations really were socialist and lacked economic calculation, then a central element of Mises’s whole economic theory comes crashing down. Why didn’t the UK or “socialist” Western Europe collapse into chaos after 1945 if they were incapable of rational economic calculation?

Well, Mises does have an answer. We suddenly read in Human Action (Mises 1998: 856) that in fact Western Europe was still able to calculate, and these economies were still based on economic calculation — despite the fact that Mises declares them “socialist” and his definition of “socialism” is an economy that lacks economic calculation. The main reason (according to Mises) was that the market economy of the United States allowed Western Europe to engage in economic calculation, even though in reality (though it never filtered through to Mises’s brain) the economy of the United States was subject to almost the same degree of government intervention (apart from nationalised industry, which, as we have already seen, is irrelevant anyhow) as any Western European nation!

Finally, let us be charitable and assume that Mises was thinking of the UK during WWII when he wrote the passage above. In WWII, there was indeed a moderate command economy in Britain (as in the US, Canada, Australia and New Zealand) where a considerable amount of (mainly military) production was planned by the government. But even during the war money prices and markets for factor inputs still existed, so the UK cannot have been a socialist country even in these years. So, by Mises’s own logic, even Western wartime command economies cannot really have been “socialist” systems at all — even though those command economies really were the only real historical instance when the Western economies was run rather like planned, communist systems.

Just reading Human Action on these issues, it is astonishing to me that anyone can ever declare that Mises was the greatest economist who ever lived (as some Austrians actually do). On this subject, Mises was an ignorant and muddle-headed idiot, and it is not surprising that after 1945 he was ignored by serious economists.

I can just imagine economists reading these passages of Human Action and then throwing the book in the dustbin as they moved on to more important matters.


BIBLIOGRAPHY
Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar's Edition. Mises Institute, Auburn, Ala.

23 comments:

  1. Keynes wrote. Even Hayek wrote to some extent. Mises ranted and raved like a half-baked lunatic. Apparently he did this in person too. He was a pretty weird dude by all accounts.

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    1. Agreed!

      The more and more I read of Mises the more the appellation "half-baked lunatic" seems appropriate for him.

      cheers, Philip

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    2. His "Anti-Capitalist Mentality" has all the philosophical and psychological subtleties of a Rand novel. Example (recall when he is talking about "anti-capitalism" he basically means left-of-center politics and Keynesianism):

      "This search for a scapegoat is an attitude of people living under the social order which treats everybody according to his contribution to the well-being of his fellowmen and where thus everybody is the founder of his own fortune. In such a society each member whose ambitions have not been fully satisfied re­sents the fortune of all those who succeeded better. The fool re­leases these feelings in slander and defamation. The more so­phisticated do not indulge in personal calumny. They sublimate their hatred into a philosophy, the philosophy of anti-capitalism, in order to render inaudible the inner voice that tells them that their failure is entirely their own fault. Their fanaticism in de­fending their critique of capitalism is precisely due to the fact that they are fighting their own awareness of its falsity."

      That last sentence, of course, applies perfectly to Von Mises himself, but no matter. Well that's the "common man", what about the "intellectual"?

      "To understand the intellectual’s abhorrence of capitalism one must realize that in his mind this system is incarnated in a defi­nite number of compeers whose success he resents and whom he makes responsible for the frustration of his own far-flung ambi­tions. His passionate dislike of capitalism is a mere blind for his hatred of some successful “colleagues.”"

      Look, I don't mind a harsh tone or even a bit of teasing when it comes to the substance of the ideas -- I do it, Keynes did it. But Von Mises is just weird. He doesn't pull it off properly. The entire book is a rant based on the supposed jealousy of the supporters of what was the then dominant ideology toward the capitalist and the "successful" (yes, irony noted) who Mises identifies with (yes, irony noted).

      Imagine if you started writing posts saying that the neoliberal mindset had its roots in "jealousy" and that everyone who subscribed to neoclassical economics was doing so because they were jealous of, I don't know, Post-Keynesians' abilities to make fairly accurate economic predictions or the way social democratic economies are generally more stable. First of all, that would be the most self-absorbed argument on the planet. Secondly, after just a few paragraphs most readers would (rightly) begin to suspect that it was in fact you that was the jealous one because the neoliberals have the power and the whole exercise was just one of projection. Well, that's what Mises' book reads like. It really isn't far off Rand.

      Friedman who, for all his scholarly faults, was not a ranter, once said that he got the impression that Mises was the way he was because he had been persecuted all his life. That's a more subtle psychological observation than Mises could ever have made.

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    3. Jan:
      "Inside and outside England, from Macaulay
      to Mises, from Spencer to Sumner, there was not a militant liberal who did not express his conviction that popular democracy was a danger to capitalism.
      The experience of the labor issue was repeated on the currency issue. Here also the 1920's
      were foreshadowed by the logo's. Bentham was the first to recognize that inflation and deflation
      were interventions with the right of property: the former a tax on, the latter an interference with, business.Bankers who opposed the introduction of the
      gold standard, like Atwood of Birmingham, found themselves on the same side with socialists, like Owen. Miseswas still reiterating that labor and money were no more a concern of the government than any other commodity on the market.
      Mises maintained "that as long as unemployment benefit is
      paid, unemployment must exist" (Liberalisms, 1927, P- 74);
      and that
      "assistance to the unemployed has proved to be one of the most effective weapons of destruction" (Socialism, 1927, p. 484)...

      Herbert Spencer, in the second half of the nineteenth century, could, without
      more than a cursory acquaintance with economics, equate the principle of the division of labor with barter and exchange, and another fifty years later, Ludwig von Mises and Walter Lippmann could repeat this same fallacy. By that time there was no need for argument. A host of writers on political economy, social history, political philosophy, and general sociology had followed in Smith's wake and established his paradigm of the bartering savage as an axiom of their respective sciences.Division of labor, a phenomenon as
      old as society, springs from differences inherent in the facts of sex, geography, and individual
      endowment; and the alleged propensity of man to barter, truck, and exchange is almost entirely apocryphal. While history and ethnography know of various kinds of economies, most of them comprising the institution of markets, they know of no economy prior to our own, even
      approximately controlled and regulated by markets. This will become abundantly clear from a bird'seye view of the history of economic systems and of markets, presented separately. The role played by markets in the internal economy of the various countries, it will appear, was insignificant up to recent times, and the change-over to an economy dominated by the market pattern will stand out all the more clearly...
      A hundred years' peace had created an insurmountable wall
      of illusions which hid the facts. The writers of that period excelled in lack of realism. The nationstate was deemed a parochial prejudice by A. J. Toynbee, sovereignty a ridiculous illusion by
      Ludwig von Mises, war a mistaken calculation in business by Norman Angell. Awareness of the
      essential nature of the problems of politics sank to an unprecedented low point.
      Free trade which, in 1846, had been fought and won on the Corn Laws, was eighty years later
      fought over again and this time lost on the same issue. The problem of autarchy haunted market economy from the start. Accordingly, economic liberals exorcised the specter of war and naively
      based their case on the assumption of an indestructible market economy. It went unnoticed that their arguments merely showed how great was the peril of a people which relied for its safety on an institution as frail as the self-regulating market"

      from THE GREAT TRANSFORMATION
      the political and economic origins of our time
      KARL POLANYI

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    4. Jan: Fully agreed!This is simply nothing more than a fanatic crank,with some oudated ideas he catched up in Vienna in early 2000 century and as i understand don´t even do justice!I mean i hardly think that a Böhm-Bawerk had done such stupid conclusion´s about," the non existent mixed economies"!!! Ludwig von Mises had not passed throw a simple undergraduate course with such idiotic ideas even in 1949 ! And when it comes to Hayek,i can´t say he was so much better in my eyes! His "Road to Serfdom" and other ravings against Nazi Germany for exampel, expouse such a deep ignorance about what it was all about and what upset him most is that it exercised
      some sort of planning!!About the evilness of that system he had not much more to say about it then the ultimate horrors of planning!And to by that draw the conclusion that The U.K and US was on the same road to some Nazi or Gulag version of "Serfdom" because of it´s moderate after war time planning,it tells me at least , we are not dealing with a very bright man!Or maybee more likely a purely political propagandist.Maybee he did rise some question´s about "information problem in economics" and did some contributs here and there,but to be true, it was other that did that long before and did it better,but passed, without any great notice.I think it is sad those cranks is rised to some cult status among some groups today!

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  2. I think it's fair to say that Mises' first definition is OK in the sense that it is valid, but his subsequent rhetoric lets him down.

    However, by his definition the USSR quite possibly qualifies as capitalist.

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    1. Yes, that is right, but Mises is utterly incoherent and guilty of incredible stupidity.

      E.g.,

      Mises might argue: "Socialism is impossible".

      Critic: But the Soviet Union exists and has an economy that increases real output and real per capita output, and has created a great deal of heavy industry. Hell, they outproduced Nazi Germany and beat most of the Germany army!

      Mises: Well, that is because they have rational economic calculation because they can rely on prices in Western nations!

      Critic: What the ...?? I thought you said Western Europe is already "socialist"?

      Mises: I mean the US.

      Critic: But the US has virtually the SAME degree of government intervention and interference in markets as any Western European nation! (And even though the US does not have nationalised industry in the way some Western European nations do -- like the UK - you have already said nationalised industries do not make a country socialist.) According to the logic of your argument all major countries -- even the US -- are socialist?

      So how can the highly interventionist, socialist US be providing price signals to the socialist Soviet Union?

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    2. "However, by his definition the USSR quite possibly qualifies as capitalist"

      Well it was, or at least it wasn't socialist in the Misesan sense. Mises was wrong to acknowledge it as such. He was taken in by the USSR's rhetoric along with everyone else.

      David Ramsay Steele's article - The Failure of Bolshevism & Its Aftermath is good on this subject.

      http://mises.org/journals/jls/5_1/5_1_6.pdf

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  3. Another great problem of Mises is that he had only cursory understanding of how real centrally planned economies worked. My impression is that he imagined them not unlike Barone's Ministry of Production.

    Actually, Soviet Union, for example,
    1) Had prices on all things, including the capital equipment.
    2) Featured a robust private sector in the period between aprox. 1922-1956, which included even some heavy industry and defense contractors.
    3) Never tried to plan the economy in its entirety.
    4) Had a government-owned banking sector.

    Actually, the last thing is the most important one. It allowed the system the flexibility in how prices were set; it was never necessary to hit the 'right' price for some good because the government could extend credit at will to anybody and support the enterprises that experienced losses. Despite that factories and artels bought and sold goods for rubles, the money flows actually symbolized 'donor-acceptor' relationships between the institutions. That allowed the govenment to 'fine-tune' the economy and to counteract the influence of factors like deflation (a huge problem in the 1930's).

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    1. Do you have any references to the literature on prices in the Soviet Union?



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    2. I know that R. W. Davies was a British historian of repute who researched the economic system of USSR, but I've only read his works with his student Oleg Khlevnyuk that were written in Russian. Khlevnyuk himself suggests the following works:

      Davies R.W. Crisis and Progress in the Soviet Economy. 1931-1933 (The industrialisation of Soviet Russia). London: Macmillan, 1996. - 612 pp.
      Carr E. H., Davies R. W. Foundations of a Planned Economy, 1926 - 1929. L., 1969. Vol. 1.
      The Socialist Оffensive: The Collectivisation of Soviet Agriculture, 1929 - 1930. L. , 1980; The Soviet Collective Farm, 1929 - 1930. L., 1980; The Soviet Economy in Turmoil, 1929 - 1930. L., 1989.

      Other than that, I'm not that well-versed on the English literature on the economic history of USSR, sadly.

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    3. Thanks for these citations, Roman P. Will have look at them as soon as time permits.

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    4. Thank you for the list of sources. Do you have a specific book/essay/article on the economic reasons for the collapse of the USSR? Every time I try to do research on it, I get the typical line of "planned economies are inefficient/doomed to fail/utopian/don't work" but I'm not even sure that is true.

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    5. I'm sorry, but I don't have anything specific (and written in English) about the fall of USSR. I am not a professional historian, after all. But I want you to consider the idea that economic troubles were not responsible for the fall of USSR.

      Why not? Well, 80's were not a good time for USSR, especially with the plummeting oil prices, but no matter how hard the conditions were, there was no trouble sustaining the population. If you want my opinion why USSR disintegrated, it was a combination of demoralized population, opportunistic bureaucracy and - I write it at danger of sounding like a loon - a conspiracy in the highest levels of power. And the rising nationalism in Caucasus and Baltic republics contributed, of course.

      The main problem of USSR was that it was a country by and for the poor people. By the 60's it solved its main problems, aka how to feed people and how to defend them from the armies of enemies. But as people's wealth began to grow, USSR wasn't as successful in fulfilling their rising demand in the luxury goods. It could the population with cars - but the cars didn't compare with the Western analogues. The same with home electronics, dress, entertainment and so on. Some of this demand was satisfied by the goods of the countries of the Eastern Europe, but they still were a valuable deficit. Hence, the demoralization of Soviet people who were not happy with how little goods they could get.

      But the main reason for the collapse of USSR were the interests of the republican leaders and CPSU's bosses. I.e. they were political, not economical.

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    6. The USSR 2) Featured a robust private sector in the period between aprox. 1922-1956, which included even some heavy industry and defense contractors.

      I've read a few books on Soviet history, and none of them mention any private heavy industry or defence contractors still existing after the first Five Year Plan, let alone up to 1956!

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    7. Obviously, the collapse of the Soviet Union was a complex process, and in addition to the economic problems that became more serious after the early 1970s, the collapse of support for the communist ideology amongst the elite itself, and the rise of ethnic nationalism must he considered as important.

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    8. I suspect 1956 is a typo for 1926 or 1936, and the reference is to NEP.

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    9. Ken,

      It sorta depends on how you define 'private'; the Soviet private sector consisted of two types of firms: cooperative consumer societies (not very common, though ironically praised by Lenin: they bought and sold food and other stuff, acting like intermediaries to the members) and (manufacturing) artels. Artels were essentially co-partnerships of workers, they operated very much like Western firms and were largely independent from the government. Just how independent they were varied over time, but for example in 1941 the government decree set a price on the raw materials artels bought from the government organizations, but allowed them to sell their product for a profit, given that the price of their production would not exceed 113% of the government-produced production. What they did with profits was an internal affair.

      'Heavy industry' was perhaps an overstatement on my part, though I know that the artel "Jupiter" from Gatchina produced manufacturing machines after the war and was all in all a pretty big factory. During the war artels produced machine guns, artillery shells and other equipment. By the 1950 artels produced only about 6% of GDP, but they produced a lot of stuff that the ordinary citizens bought in stores: from food to the CRT TV sets. Artel's marks on the details of military uniforms of the period are commonplace. Artels even owned a number of research intitutes and test labs.

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    10. Freshly Squeezed CynicMarch 26, 2013 at 2:24 PM

      Lord Keynes:

      Have you read Alexander Nove at all? He was one of the pre-eminent economic historians of the USSR, I think "An Economic History of the USSR 1917-1991" is worth a look at. I'd also love to see how you react to the "Economics of Feasible Socialism".

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    11. "Another great problem of Mises is that he had only cursory understanding of how real centrally planned economies worked. My impression is that he imagined them not unlike Barone's Ministry of Production"

      Mises certainly gave Russia more credit then it deserved. As Russia's "real central planning" as your four points demonstrate was not central planning at all.

      It may seem trivial but it is important because both Marxist & non Marxist planning advocates claims to superiority over capitalism relied on the elimination of the inefficiencies of productive "anarchy" of competition by conscious organisation. Because there is still a lot of obfuscation between the ideal of central or comprehensive planning & the polycentric economies that completely failed to live up to that ideal. (That we popularly call the Warsaw Pact states “communist” is a darkly humorous result of cold war propaganda from both east & west)

      Mises in defining socialism as direct social control (through whatever organ) of production was just Mises taking his opponents at face value, & a “cursory understanding of how real centrally planned economies worked” was not really relevant to the high level of abstract theory he was working at. After all what does the actual functioning of the economic system of the USSR have to say about the viability of a moneyless, priceless, several property-less comprehensibly planned economy?

      As for how the actual Russian system worked, my university textbook Comparative Economics in a Transforming World Economy by Barkley Rosser has a chapter on it “The Former Soviet Union: The Myth and Reality of the Command Economy”. PDF URL bellow for those interested.

      http://en.bookfi.org/book/695874

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  4. Insofar as Hayek realized that he did not have an analysis of the mixed economy, he was superior to Mises on this point. Some time ago, I quoted Hayek referring to the mixed economy as "interventionist chaos".

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  5. Dear Lord Keynes - forgive the non sequitur aspect of this comment - but I wanted to forward you something in case of interest - is there an email address I can use, or should I pop a link in a comment to one of your posts? Many thanks. Wotan. (weareallwotan.wordpress.com)

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