Socialists Have Never Shown How They Could Increase the Standard of Living

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Ludwig von Mises
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[A selection from Nation, State, and Economy. Editor’s note: When Mises refers to “liberals” or “liberalism” he means the ideology of laissez-faire, sometimes now called “classical liberalism.”]

Marxism sees the coming of socialism as an inescapable necessity. Even if one were willing to grant the correctness of this opinion, one still would by no means be bound to embrace socialism. It may be that despite everything we cannot escape socialism, yet whoever considers it an evil must not wish it onward for that reason and seek to hasten its arrival; on the contrary, he would have the moral duty to do everything to postpone it as long as possible. No person can escape death; yet the recognition of this necessity certainly does not force us to bring about death as quickly as possible. Marxists would have to become socialists just as little as we must become suicides if they were convinced that socialism would be bound to bring about no improvement but rather a worsening of our social conditions.6

Socialists and liberals agree in seeing the ultimate goal of economic policy as attainment of a state of society assuring the greatest happiness for the greatest number. Welfare for all, the greatest possible welfare for the greatest possible number—that is the goal of both liberalism and of socialism, even though this may now and then be not only misunderstood but even disputed. Both reject all ascetic ideals that want to restrain people to frugality and preach renunciation and flight from life; both strive for social wealth. Only over the way of reaching this ultimate goal of economic policy do their views disagree. An economic order resting on private ownership of the means of production and according the greatest possible scope to the activity and free initiative of the individual assures to the liberal the attainment of the goal aspired to. The socialist, on the other hand, seeks to attain it by socialization of the means of production.

The older socialism and communism strove for equality of property and of income distribution. Inequality was said to be unjust; it contradicted divine laws and had to be abolished. To that liberals reply that fettering the free activity of the individual would harm the general interest. In the socialist society the distinction between rich and poor would fall away; no one would any longer possess more than another, but every individual would be poorer than even the poorest today, since the communistic system would work to impede production and progress. It may indeed be true that the liberal economic order permits great differences in income, but that in no way involves exploitation of the poor by richer people. What the rich have they have not taken away from the poor; their surplus could not be more or less redistributed to the poor in the socialist society, since in that society it would not be produced at all. The surplus produced in the liberal economic order beyond what could also be produced by a communistic economic order is not even entirely distributed to the possessors; a part of it even accrues to the propertyless, so that everyone, even the poorest, has an interest in the establishment and maintenance of a liberal economic order. Fighting erroneous socialist doctrines is therefore not a special interest of a single class but the cause of all; everyone would suffer under the limitation of production and of progress entailed by socialism. That one has more to lose, another less, is incidental in relation to the fact that all would be harmed and that the misery awaiting them is equally great.

That is the argument in favor of private ownership of the means of production that every socialism that does not set up ascetic ideals would have to refute. Marx did indeed perceive the necessity of this refutation. When he sees the driving factor of the social revolution in the fact that the relations of ownership change from forms of development of the productive forces into fetters on them,7 when he once in passing tries to offer a proof—which failed—that the capitalist manner of production impedes the development of productivity in a particular case,8 he does incidentally recognize the importance of this problem. But neither he nor his followers could attribute to it the significance it deserves for deciding the question of socialism or liberalism. They are hampered in doing so even by the entire orientation of their thinking around the materialist interpretation of history. Their determinism just cannot understand how one can be for or against socialism, since the communist society does form the inescapable necessity of the future. It is moreover settled for Marx, as a Hegelian, that this development toward socialism is also rational in the Hegelian sense and represents progress toward a higher stage. The idea that socialism could mean a catastrophe for civilization would necessarily have seemed completely incomprehensible to him.

Marxian socialism therefore had no incentive to consider the question whether or not socialism as an economic form was superior to liberalism. To it, it seemed settled that socialism alone signified welfare for all, while liberalism enriched a few but abandoned the great masses to misery. With the appearance of Marxism, therefore, controversy over the advantages of the two economic orders died away. Marxists do not enter into such discussions. Ex professo [avowedly] they have not even tried to refute the liberal arguments in favor of private ownership of the means of production, not to mention actually refuting them.

In the view of individualists, private ownership of the means of production fulfills its social function by conveying the means of production into the hands of those who best understand how to use them. Every owner must use his means of production in such a way that they yield the greatest output, that is, the highest utility for society. If he does not do this, then this must lead to his economic failure, and the means of production shift over to the disposal of those who better understand how to use them. In that way the inappropriate or negligent application of means of production is avoided and their most effective utilization assured. For means of production that are not under the private ownership of individuals but rather are under social ownership, this is not true in the same way. What is missing here is the incentive of the owner’s self-interest. The utilization of equipment is therefore not as complete as in the private sector; with the same input the same output cannot therefore be achieved. The result of social production must therefore remain behind that of private production. Evidence of that has been supplied by public enterprises of the state and municipalities (so individualists further argue). It is demonstrated and well known that less is accomplished in these than in the private sector. The output of enterprises that had been quite profitable under private ownership sank at once after coming under state or municipal ownership. The public firm can nowhere maintain itself in free competition with the private firm; it is possible today only where it has a monopoly that excludes competition. Even that alone is evidence of its lesser economic productivity.

Only a few socialists of Marxist orientation have recognized the significance of this counterargument; otherwise they would have had to admit that this is a point on which everything depends. If the socialist mode of production will be able to achieve no additional output in comparison with private enterprise, if, on the contrary, it will produce less than the latter, then no improvement but rather a worsening of the lot of the worker is to be expected from it. All argumentation of the socialists would therefore have to concentrate on showing that socialism will succeed in raising production beyond the amount possible in the individualistic economic order.

Most Social Democratic writers are quite silent on this point; others touch on it only incidentally. Thus, [Karl] Kautsky names two methods that the future state will use for raising production. The first is the concentration of all production in the most efficient firms and the shutting down of all other, less high-ranking, firms.9 That this is a means of raising production cannot be disputed. But this method is in best operation precisely under the rule of free competition. Free competition pitilessly culls out all less-productive enterprises and firms. Precisely that it does so is again and again used as a reproach against it by the affected parties; precisely for that reason do the weaker enterprises demand state subsidies and special consideration in sales to public agencies, in short, limitation of free competition in every possible way. That the trusts organized on a private-enterprise basis work in the highest degree with these methods for achieving higher productivity must be admitted even by Kautsky, since he actually cites them as models for the social revolution. It is more than doubtful whether the socialist state will also feel the same urgency to carry out such improvements in production. Will it not continue a firm that is less profitable in order to avoid local disadvantages from its abandonment? The private entrepreneur ruthlessly abandons enterprises that no longer pay; he thereby makes it necessary for the workers to move, perhaps also to change their occupations. That is doubtless harmful above all for the persons affected, but an advantage for the whole, since it makes possible cheaper and better supply of the markets. Will the socialist state also do that? Will it not, precisely on the contrary, out of political considerations, try to avoid local discontent? In the Austrian state railroads, all reforms of this kind were wrecked because people sought to avoid the damage to particular localities that would have resulted from abandonment of superfluous administrative offices, workshops, and heating plants. Even the Army administration ran into parliamentary difficulties when, for military reasons, it wanted to withdraw the garrison from a locality.

The second method of raising production that Kautsky mentions, “savings of very many kinds,” he also, by his own admission, finds already realized by the trusts of today. He names, above all, savings in materials and equipment, transport costs, and advertising and publicity expenses.10 Now as far as savings of material and transport are concerned, experience shows that nowhere are operations carried on with so little thrift in this respect and nowhere with such waste of labor and materials of all kinds as in public service and public enterprises. Private enterprise, on the contrary, seeks, even in the owner’s own interest alone, to work as thriftily as possible.

The socialist state will, of course, save all advertising expenses and all costs for traveling salesmen and for agents. Yet it is more than doubtful whether it will not employ many more persons in the service of the social apparatus of distribution. We have already had the experience in the war that the socialist apparatus of distribution can be quite ponderous and costly. Or are the costs of the bread, flour, meat, sugar, and other tickets really smaller than the costs of advertisements? Is the large staff that is necessary for the issue and administration of these rationing devices cheaper than the expenditure on traveling salesmen and agents?

Socialism will abolish small retail shops. But it will have to replace them with goods-delivery stations, which will not be cheaper. Even consumer cooperatives, after all, have no fewer employees than retail trade organized in a modern way employs; and precisely because of their higher expenses, they often could not stand the competition with merchants if they were not given tax advantages.

We see on what weak ground Kautsky’s argumentation stands here. When he now asserts that “by application of these two methods a proletarian regime can raise production at once to so high a level that it becomes possible to raise wages considerably and at the same time reduce hours of work,” well, this is an assertion for which no proof has so far been provided.11

The social functions of private ownership of the means of production are not yet exhausted in assuring the highest attainable productivity of labor. Economic progress rests on the continuing accumulation of capital. That was never disputed either by liberals or by socialists. The socialists who have concerned themselves somewhat more closely with the problem of the organization of the socialist society also do not neglect, then, always to mention that in the socialist state the accumulation of capital, which today is undertaken by private parties, will be society’s responsibility.

In the individualistic society the individual accumulates, not society. Capital accumulation takes place by saving; the saver has the incentive of receiving income from the saved capital as the reward of saving. In the communist society, society as such will receive the income that today flows to the capitalists alone; it will then distribute this income equally to all members or otherwise use it for the good of the whole. Will that alone be a sufficient incentive for saving? To be able to answer this question, one must imagine that the society of the socialist state will be faced every day with the choice whether it should devote itself more to the production of consumer goods or more to that of capital goods, whether it should choose productive processes that do indeed take a shorter time but correspondingly yield less output or choose ones that take more time but then also bring greater output. The liberal thinks that the socialist society will always decide for the shorter production period, that it will prefer to produce consumer goods instead of capital goods, that it will consume the means of production that it will have taken over as heir of the liberal society or at best maintain them but in no case increase them. That, however, would mean that socialism will bring stagnation, if not the decline of our whole economic civilization, and misery and need for all. That the state and the cities have already pursued investment policy on a large scale is no disproof of this assertion, since they pursued this activity entirely with the means of the liberal system. The means were raised by loans, that is, they were provided by private parties who expected from them an increase in their capital incomes. If in the future, however, the socialist society should face the question whether it will feed, clothe, and house its members better or whether it will save on all these things in order to build railroads and canals, to open mines, to undertake agricultural improvements for the coming generations, then it will decide for the former, even on psychological and political grounds alone.

A third objection to socialism is the famous argument of Malthus. Population is said to have a tendency to grow faster than the means of subsistence. In the social order resting on private ownership, a limitation of the increase in population is posed by the fact that each person is able to raise only a limited number of children. In the socialist society this impediment to population increase will fall away, since no longer the individual but rather the society will have to take care of raising the new generation. Then, however, such a growth of population would soon occur that need and misery for all would be bound to appear.12

Those are the objections to the socialist society with which everyone would have to come to grips before he took the side of socialism.

It is no refutation at all of the objections raised against socialism that the socialists seek to stigmatize everyone who is not of their opinion with the label “bourgeois economist” as representative of a class whose special interests run counter to the general interest. That the interests of the possessors run counter to those of the whole would indeed first have to be proved; that is precisely what the entire controversy revolves around.

The liberal doctrine starts with the fact that the economic order resting on private ownership of the means of production removes the opposition between private and social interest because each individual’s pursuit of his rightly understood self-interest assures the highest attainable degree of general welfare. Socialism wants to establish a social order in which the self-interest of the individual, selfishness, is excluded, a society in which everyone has to serve the common good directly. It would now be the task of the socialists to show in what manner this goal could be reached. Even the socialist cannot call into question the existence of a primary and direct opposition between the special interests of the individual and those of the whole, and he must also admit that a labor order can be based just as little on the categorical imperative alone as on the compulsory force of penal law. Up to now, however, no socialist has ever made even the mere attempt to show how this gap between special interest and general welfare could be bridged over. The opponents of socialism, however, along with Schäffle, consider precisely that question to be “the decisive but up to now entirely undecided point on which in the long run everything would depend, on which victory or defeat of socialism, reform or destruction of civilization by it, would be dependent from the economic side.”13

Marxian socialism calls the older socialism utopian because it tries to construct the elements of a new society out of one’s head and because it seeks ways and means of implementing the contrived social plan. In contrast, Marxism is supposed to be scientific communism. It discovers the elements of the new society in the laws of development of capitalist society, but it constructs no future state. It recognizes that the proletariat, because of its conditions of life, can do nothing else than finally overcome every class opposition and thereby realize socialism; however, it does not seek philanthropists, as the utopians do, who would be ready to make the world happy by the introduction of socialism. If one wants to see the distinction between science and utopia in that, then Marxian socialism rightly claims its name. One could, however, make the distinction in another sense also. If one calls utopian all those social theories which, in outlining the future social system, start with the view that after introduction of the new social order people will be guided by essentially different motives than in our present conditions,14 then the socialist ideal of Marxism is also a utopia.15 Its continued existence presupposes men who are in no position to pursue any special interest against the general interest.16 Again and again, when this objection is made to him, the socialist refers to the fact that both today and in every earlier stage of society very much work, and often precisely the most highly qualified work, was indeed performed for its own sake and for the community and not for the direct advantage of the worker. He points to the indefatigable effort of the researcher, to the sacrifice of the physician, to the conduct of the warrior in the field. In recent years one could hear again and again that the great deeds performed by soldiers in the field were to be explained only by pure devotion to the cause and by a high sense of sacrifice, or at worst, perhaps, by striving for distinction, but never by striving for private gain. This argumentation overlooks the fundamental distinction that exists, however, between economic work of the usual kind and those special performances. The artist and the researcher find their satisfaction in the pleasure that the work in itself affords them and in the recognition that they hope to reap at some time, even if perhaps only from posterity, even in the case when material success should be lacking. The physician in the area of pestilence and the soldier in the field repress not only their economic interests but also their drive for self-preservation; even that alone shows that there can be no question of a regular state of affairs but only of a transitory, exceptional state from which no far-reaching conclusions can be drawn.

The treatment that socialism allots to the problem of self-interest points clearly to its origin. Socialism comes from the circles of intellectuals; at its cradle stand poets and thinkers, writers and men of letters. It does not deny its derivation from those strata that even on professional grounds alone have to concern themselves with ideals. It is an ideal of noneconomic people. Therefore, it is not much more striking that writers and men of letters of every kind were always represented among its adherents in large numbers and that it could always count on fundamental agreement among officials.

The view characteristic of officials comes clearly to light in the treatment of the problem of socialization. From the bureaucratic point of view, it involves only questions of management and administrative technique that can easily be solved if only one allows the officials more freedom of action. Then socialization could be carried out without danger of “eliminating free initiative and individual readiness to bear responsibility on which the successes of private business management rest.”17 Actually, free initiative of individuals cannot exist in the socialized economy. It is a fateful error to believe it possible, by some sort of organizational measures, to leave scope for free initiative even in the socialized enterprise. Its absence does not hinge on defects of organization; it is grounded in the essence of the socialized enterprise. Free initiative means taking risks in order to win; it means putting up stakes in a game that can bring gain or loss. All economic activity is composed of such risky undertakings. Every act of production, every purchase by the trader and by the producer, every delay in selling, is such a risky undertaking. Still more so is undertaking every sizable investment or change in the enterprise, not to mention the investment of new capital. Capitalists and entrepreneurs must take chances; they cannot do otherwise, since they have no possibility of maintaining their property without such risk-bearing.

Anyone who has means of production at his disposal without being their owner has neither the risk of loss nor the chance of gain, as an owner does. The official or functionary need not fear loss, and for that reason he cannot be allowed to act freely and unrestrictedly like the owner. He must be restricted in some manner. If he could manage without restrictions, then he simply would be the owner. It is playing with words to want to impose readiness to bear individual responsibility on the nonowner. The owner does not have readiness to bear responsibility; he just does bear responsibility because he feels the consequences of his actions. The functionary may have ever so much readiness to bear responsibility; yet he never can bear responsibility other than morally. Yet the more moral responsibility one imposes on him, the more one cramps his initiative. The problem of socialization cannot be solved by civil-service instructions and reforms of organization.

• 6. Cf. Hilferding, Das Finanzkapital (Vienna:] 91 0), p. X.
• 7. Cf. Marx, Zur Kritik der politischen Ökonomie, edited by Kautsky (Stuttgart: 1897), P. xi.
• 8. Cf. Marx, Das Kapital, vol. 3, first part, third edition (Hamburg: 1911), pp. 242 ff.
• 9. Cf. Kautsky, Die soziale Revolution, third edition (Berlin: 1911), II, pp. 21 ff.
• 10. Die soziale Revolution, p. 26.
• 11. One has heard often enough in recent years of frozen potatoes, rotten fruit, and spoiled vegetables. Did not things like that happen earlier? Of course, but to a much smaller extent. The dealer whose fruit spoiled suffered losses of wealth that made him more careful in the future; if he did not pay better attention, then this was finally bound to lead to his economic disappearance. He left the management of production and was shifted to a position in economic life where he was no longer able to do harm. It is otherwise in dealings with state-traded articles. Here no self-interest stands behind the goods; here officials manage whose responsibility is so divided that no one particularly concerns himself about a small misfortune.
• 12. While the socialists have scarcely deigned to reply to the two first arguments mentioned, they have concerned themselves more exhaustively with the Malthusian law, without, to be sure, in the view of the liberals, refuting the conclusions that follow from it.
• 13. Cf. Schäffle, Die Quintessenz des Sozialismus, 18th edition (Gotha: 1919), p. 30.
• 14. Cf. Anton Menger, Das Recht auf den vollen Arbeitsertrag, fourth edition (Stuttgart: 1910), pp. 105 ff.
• 15. In another sense than is usual, of course, one can distinguish between scientific and philanthropic socialism. Those socialists who are concerned in their prograins to start with economic lines of thinking and take the necessity of production into account can be called scientific socialists, in contrast with those who know how to bring forth only ethical and moral discussions and set up only a program for distribution but not for production also. Marx clearly noted the defects of merely philanthropic socialism when, after moving to London, he proceeded to study the economic theorists. The result of this study was the doctrine presented in Das Kapital. Later Marxists, however, have badly neglected this side of Marxism. They are much more politicians and philosophers than economists. One of the chief defects of the economic side of the Marxian system is its connection with classical economics, which corresponded to the state of economic science at that time. Today socialism would have to seek a scientific support in modern economics, in the theory of marginal utility. Cf. Joseph Schumpeter, “Das Grundprinzip der Verteilungslehre,” Archiv für Sozialwissenschaft und Sozialpolitik, vol. 42, 1916/1917, P. 88.
• 16. How easily the Marxists disregard this argument can be seen in Kautsky: “If socialism is a social necessity, then if it came into conflict with human nature, it would be the latter that would get the worse of the matter and not socialism.” Preface to Atlanticus [Ballod], Produktion und Konsum im Sozialstatt (Stuttgart: 1898), p. xiv.
• 17. Cf. Bericht der Sozialisierungskommission über die Sozialisierung der Kohle [Report of the Socialization Commission on the Socialization of Coal), Frankfurter Zeitung, 12 March 1919.

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