By Andrew Lepore | United States
In 1920, an article first appeared In the German Archive for social sciences which decimated the socialist economic model and laid the foundation for the Austrian price theory. Economist Ludwig Von Mises’s article, “Economic Calculation in the Socialist Commonwealth”, demonstrates the impossibility of a successful socialist economy. For this reason, it is one of the world’s most important economic articles.
At the time Mises published it, those in academia were debating the problem with incentive under socialism. The incentive to work as much as others, to work your hardest, to provide the best services, to do the jobs nobody wants to do, etc. Scholars and left-wing economists were attempting to solve the problem of incentive under socialism, and once they did so, they thought, they would have a system just as productive as capitalism.
By publishing this article, Mises answered their question by proving it is an impossible problem to solve. Mises demonstrated that the incentive which drives economic actions, both on the supply and demand side, comes from monetary reward. The cost-benefit analysis of the individual ultimately is how a person decides what they will do and how much they will work.
Similarly with what a person decides to buy, an individual will use their capital to purchase the object of most value to them at the least opportunity cost, or the least amount of money spent. The medium for all of this; for how we represent economic calculation that takes place in the market, how we determine profits and losses, and how we measure the cost and compare it to benefit, is through prices.
Prices emerge when there are many private owners of the means of production competing in the marketplace to convince consumers to spend their hard-earned capital on their product or service. Or in other words, prices emerge when many companies compete for the business of many customers by convincing them they can get the best product at the lowest cost ( The lowest opportunity cost for the greatest benefit, economic calculation).
Mises proved that socialism wouldn’t work because It cannot distinguish more or less valuable uses of resources. Nevertheless, with leftists being as hard headed as they are, the debate over the socialist calculation problem still rages on.
I recommend to all readers who want a deeper economic understanding of the failure after failure of government programs. It’s a short read, yet is full of information. It will arm you with economic facts to counter argument for statist programs, both on the left and the right.
“The significance of Mises’s 1920 article extends far beyond its devastating demonstration of the impossibility of socialist economy and society. It provides the rationale for the price system, purely free markets, the security of private property against all encroachments, and sound money. Its thesis will continue to be relevant as long as economists and policy-makers want to understand why even minor government economic interventions consistently fail to achieve socially beneficial results. “Economic Calculation in the Socialist Commonwealth” surely ranks among the most important economic articles written this century.” – Joe Salerno