This article was downloaded by: [George Mason University] On: 29 April 2009 Access details: Access Details: [subscription number 906610333] Publisher Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK Critical Review Publication details, including instructions for authors and subscription information: http://www.informaworld.com/smpp/title~content=t778142998 Is socialism really “impossible”? Bryan Caplan a a Department of Economics and Center for Study of Public Choice, George Mason University, Fairfax, VA Online Publication Date: 01 January 2004 To cite this Article Caplan, Bryan(2004)'Is socialism really “impossible”?',Critical Review,16:1,33 — 52 To link to this Article: DOI: 10.1080/08913810408443598 URL: http://dx.doi.org/10.1080/08913810408443598 PLEASE SCROLL DOWN FOR ARTICLE Full terms and conditions of use: http://www.informaworld.com/terms-and-conditions-of-access.pdf This article may be used for research, teaching and private study purposes. Any substantial or systematic reproduction, re-distribution, re-selling, loan or sub-licensing, systematic supply or distribution in any form to anyone is expressly forbidden. The publisher does not give any warranty express or implied or make any representation that the contents will be complete or accurate or up to date. The accuracy of any instructions, formulae and drug doses should be independently verified with primary sources. The publisher shall not be liable for any loss, actions, claims, proceedings, demand or costs or damages whatsoever or howsoever caused arising directly or indirectly in connection with or arising out of the use of this material. Bryan Caplan IS SOCIALISM REALLY "IMPOSSIBLE"? ABSTRACT: In the 1920s, Austrian-school economists began to argue that in a fully socialized economy, free of competitively generated prices, central planners would have no way to calculate which methods of production would be the most economical. They claimed that this "economic calculation problem" showed that socialism is "impossible." Although many believe that the Aus- trian position was later vindicated by the collapse of the Soviet bloc, the Aus- trian school's own methodology disallows such a conclusion. And historical ev- idence suggests that poor incentives—not lack of economic calculation—were the main source of the economic defects of "really existing socialism." " This isn't Mission Difficult, Mr. Hunt. It's Mission Impossible." —Anthony Hopkins in Mission: Impossible 2 There are many technologically feasible ways to make a given prod- uct. How can we tell which of these is the most economically efficient? Downloaded By: [George Mason University] At: 02:22 29 April 2009 In the private sector, the standard practice is to make an educated guess about which technique is cheapest. Insofar as a government bu- reau wants to "act like a business," it can make the same guess, based on the same mathematics: calculating the anticipated costs of various Critical Review 16 (2004), no. I. ISSN 0891-3811. www.criticalreview.com Bryan Caplan, Department of Economics and Center for Study of Public Choice, George Mason University, Fairfax, VA 22030, [email protected], (703) 993-2324, thanks Scott Beaulier for research assistance; Tyler Cowen, Ed Stringham, Andrew Farrant, Scott Beaulier, Robin Hanson, Peter Leeson, Ben Powell, Eric Crampton, and Jeffrey Friedman for comments and discussion; the Mercatus Center for financial support; and especially Peter Boettke for years of stimulating debate. 33 34 Critical Review Vol. 16, No. 1 techniques by adding up the market prices of their inputs. Facing a dozen different ways to build a highway connecting New York and Los Angeles, a transportation czar could run the price numbers and select the least expensive one. Could the leader of a world socialist state do the same?1 Asking this question brought the Austrian economist Ludwig von Mises to international attention in 1920, all the more so because his answer, published in Max Weber's Archiufiir Sozialwissenschaft und Sozialpolitik, was categorically in the negative. If the state owns all of the capital goods, Mises reasoned, there will be no market for capital goods. With no market for capital goods, there will be no capital-goods prices. And without prices, there will be no numbers to run so as to determine the cheapest way to do things. Without this necessary numerical guidance, Mises concluded that socialism was literally "impossible." Soviet theoretician Nikolai Bukharin soon dubbed Mises "one of the most learned critics of communism."2 But enthusiasm for com- munism was reaching its peak during this period, so it is no surprise that Mises's immediate converts were few. His contemporaries granted that he had asked an important question, but they rejected his answer. However, as the failures of Soviet-type economies mounted, some began to wonder if Mises had not been right all along. Intellectual in- terest in what Mises called "economic calculation under socialism" revived in the 1980s and has now become one of the standard reasons offered for the failure of the "really existing" socialism of the Soviet bloc and Maoist China. Unsurprisingly, much of the "socialist calculation" literature exam- Downloaded By: [George Mason University] At: 02:22 29 April 2009 ines whether it is in fact true that socialism precludes economic calcu- lation (Mises 1981 and 1966; Hayek 1935; Lange and Taylor 1938; Lavoie 1985; Steele 1992; Caldwell 1997). Another strand of scholar- ship investigates why socialism might preclude economic calculation. Does such calculation, as Mises's student F. A. Hayek emphasized, hinge on dispersed knowledge; or, as Mises seemed to affirm, would a central authority with full access to an economy's decentralized infor- mation remain unable to calculate (Salerno i993;Boettke 2001; Cald- well 1997)? My concern is different. At the outset, I concede that full-blown socialism would spell the end of economic calculation. What con- cerns me is the Austrians' further claim that their economic calcula- Caplan • Impossible Socialism? 35 tion argument has a privileged position in the extended family of an- tisocialist economic arguments; that it is, in Mises's words, "the deci- sive objection that economics raises against the possibility of a social- ist society" (1996, 75)—or, to take Peter J. Boettke's formulation, that the socialist calculation argument is "the Austrian contribution to po- litical economy" (Boettke 1998,131).3 Why should this special place be assigned to it? Presumably the reason is that, as Mises emphatically insisted, the problem of eco- nomic calculation renders socialism "impossible." Other critics of so- cialism, however strident, rarely (if ever) concluded that socialism lit- erally cannot be. If Mises were correct, it would be easy to see why his objection stands head and shoulders above the rest. My thesis is that Mises, and the Austrian-school economists who have echoed his argument, lack any sound reasons for the extreme claim that socialism is "impossible." Indeed, it is a short jump from a pair of Mises's other claims to the opposite conclusion. These claims are his rejection of quantitative laws in economics, and his observa- tions about "calculation in kind," which rule the "impossibility" con- clusion out of court. The "Impossibility" of Socialism In his Socialism ([1922] 1981), Mises carefully and sympathetically surveys earlier economists' objections to socialism. He gives collec- tive credit to the "liberal school's" conclusion that "productivity under Socialism would sink so low that want and poverty would be general" (ibid., 159). Mises also gives individual credit to a number Downloaded By: [George Mason University] At: 02:22 29 April 2009 of earlier critics of socialism. Against the socialist claim that intrinsic motivation (the joy of work) could supplant extrinsic motivation (wages), Mises cites Jevons on the increasing marginal disutility of labor (ibid., 145), and appeals to Clark's marginal-productivity analysis (ibid., 152). In absolute terms, Mises (1966, 680) thinks his forebears' intellec- tual contribution is impressive. As he puts it, "the weight of [the lib- eral] objection raised to the socialist plans is so overwhelming that no judicious man could hesitate to choose capitalism." This sets the bar high; to do better, Mises apparently requires an objection over- whelming enough to convince some of the injudicious. No small task. 36 Critical Review Vol. 16, No. 1 Nevertheless, Mises feels up to the challenge. He begins by lucidly exploring the role of economic calculation under capitalism. With that groundwork laid, it is rather easy for him to show that govern- ment ownership of the means of production renders such calculation impossible. To repeat: if the state owns all the capital goods, there will be no market for capital goods; with no market for capital goods, no capital-goods prices; with no prices, no numbers to crunch to deter- mine the cheapest way to do things. So far, I have no objections. Mises makes a sound and original point. The hitch is that Mises (1981, 116) claims to have accomplished far more. He quickly tells us that "the problem of economic calculation is the fundamental problem of socialism." Then he goes even farther: "To prove that economic calculation would be impossible in the socialist community is to prove also that Socialism is impracticable" (ibid., 117). Not impractini/, but impractkafc/e. If that leaves any doubt in the reader's mind, Mises (1981, 118) finally declares that "the attempt to re- form the world socialistically might destroy civilization. It would never set up a successful socialist community." If all this is correct, Mises's contribution to the critique of socialism is indeed vast.4 This is precisely how Mises sees it. As he puts it in Human Action (1966,679—80): If no other objections could be raised to the socialist plans than that socialism will lower the standard of living of all or at least of the im- mense majority, it would be impossible for praxeology to pronounce a final judgment.