I have discussed the origin of Mises’s 1920 article “Economic Calculation in the Socialist Commonwealth” here. That article provided the theoretical framework to understand why socialist economic planning is inherently irrational.
Today, a century later, it remains unknown in academic economics. It is not taught in graduate school programs that train economists. It never has been. From the day it was published, it was widely ignored, although not by Mises’s friend Max Weber. It was not just ignored. In the late 1930s, it was attacked by a young Polish Communist economist, Oskar Lange. His attack served as a tombstone for Mises’s article in the thinking of the few economists who had ever heard of it. It was not translated into English until 1935, when it appeared in a collection of essays edited by F.A. Hayek, Collectivist Economic Planning.
This academic skepticism included Robert Heilbroner. It mattered greatly that he ignored it. He wrote the bestselling history of economic thought The Worldly Philosophers: The Lives, Times and Ideas of the Great Economic Thinkers (1953). This book has been used not only in upper-division economics courses, but also in upper-division history courses. For those academics in the social sciences who read a book on economic thought, this is the book they read. The book has sold almost 4 million copies. As a book on economic theory, this is second only to the textbook written by Paul Samuelson in 1948, Economics. Not once did Heilbroner mention Mises. But he devoted a chapter to Karl Marx.
As Mark Skousen wrote in The Freeman in the December issue of 1999, the year of the final edition of The Worldly Philosophers, it was not just Mises that Heilbroner ignored. It was also Milton Friedman and Hayek. “Heilbroner’s resolve is a tragic reminder of the one-sided way economics was taught a generation ago: Give Adam Smith his due, and then spend the rest of the time patronizing Keynes, Marx, Veblen, and the socialists. Meanwhile, the Chicago school, the Austrians, the supply-siders, the public-choice school, and other free-market proponents are poured down an Orwellian memory hole.”
Yet in a bizarre turn of events, Heilbroner did have a kind of religious experience. In 1990, he recanted concerning the central issue of his life: his faith in the efficiency of socialism. In doing so, he singled out Mises as the critic who recognized the inherent weakness of socialism.
Such public recantations are always rare. When one happens, it is usually triggered by an external event that calls into question a true believer’s faith. The event in Heilbroner’s life was the visible collapse of the economy of the Soviet Union after 1985. He failed to mention the other major event: the decade of economic growth of China’s economy that began in 1979, the first full year of Deng’s lifting of Communist controls over Chinese agriculture.
On September 10, 1990, Heilbroner’s article was published in the New Yorker: “After Communism.” It was published in the Reflections department.
This article was not published by an academic economics journal. The New Yorker has always been a slick magazine aimed at the literati. Its title indicates its audience: culturally aware people living in New York City or who would like to if they could afford it. It has always been politically liberal, but not radical. Its positioning has always been this: clever, sophisticated, and lots of cartoons amusing to sophisticated readers. “Ignore us, and you’ll be left out of the in crowd that counts.” It is intellectual in the way that Hayek defined intellectual in his classic essay “The Intellectuals and Socialism.” He called an intellectual a professional dealer in secondhand ideas.
He began with a statement that was representative only of narrowly focused socialists who spent their careers dealing with other socialists.
When I went to college, half a century ago, socialism seemed within easy grasp. Mainly, it would require the nationalization of the Fortune list of the 500 leading industrial corporations, which would thereafter be administered by a Central Planning Board. In so far as we students (and many of our professors) were quite certain that the interlocking directorates of these companies already constituted such a board, the transition did not seem daunting. Communism was a more distant prospect, but not unimaginably distant.
The statement was absurd. In 1940, there were hardly any socialists teaching in economics departments in the United States. There were virtually no communists. That was also true in the half century that separated him from his career as a college student. He graduated from Harvard University, never a hotbed of socialism. Beginning in 1950, he taught at the New School of Social Research in New York City. This was (and is) one of the oddest universities in America. It has long been leftist. He was appointed Norman Thomas Professor of history in 1971. Norman Thomas was repeatedly the Socialist Party’s candidate for president in the first half of the century.
He understood in 1990 that socialism was in its final stages institutionally. He called socialism a great tragedy of the twentieth century. The collapse of the Soviet economy and the economies of Eastern Europe he referred to as a “calamitous finale.” What was far more calamitous about the Soviet Union were the approximately 20 million people who died under Stalin’s purges and government-created famines. He might also have mentioned the 45 million Chinese who died under Mao. He went on: “Moreover, I suspect that its economic failure may haunt socialism longer than the pathologies of Communism” (p. 91). That was how he dismissed 100 million needless deaths in the historically incomparable tyrannies created by communism, as estimated in The Black Book of Communism (1997).
Then he got to the heart of the matter from an analytical standpoint.
In the 1930’s, when I was studying economics, a few economists had already expressed doubts about the feasibility of centrally planned socialism. One of them was Ludwig von Mises, an Austrian of extremely conservative views, who had written of the impossibility of socialism, arguing that no Central Planning Board could ever gather the enormous amount of information needed to create a workable economic system. That did not seem a particularly cogent reason to reflect socialism, given the irrationalism and incoherence of capitalism during the Great Depression. Our skepticism was fortified when Oscar [sic] Lange, a brilliant young Polish economist (who would become the first postwar Polish Ambassador to the United States), wrote two dazzling articles showing that a Board would not need all the information that Mises said it couldn’t collect. All that such a Board would have to do, Lange wrote, was watch the levels of inventories in its warehouses: if inventories rose, the obvious thing to do was to lower prices, so that the goods would move out more rapidly; and if inventories were too rapidly depleted, to raise prices in order to discourage sales. Fifty years ago, it was felt that Lange had decisively won the argument for socialist planning. Lange himself recognized the problem of running a centralized system is not really that of fulfilling the right price levels to coordinate the economy. “The real danger of socialism,” he wrote in italics, “is that of a bureaucratization of economic life.” But he took away the sting by adding, without italics, “Unfortunately, we do not see how the same, or even greater, danger can be averted under monopolistic capitalism.”
Lange has never been known for his brief comments on socialist bureaucracy. He is known, if at all, only for his supposed refutation of Mises, whose article and his 1922 book, Socialism, have remained unread by most economists.
Lange was a Communist—not a mere Marxist, but a committed Communist. He proved this in 1945. As soon as Stalin locked down Poland, Lange surrendered his American citizenship and returned to Poland. He became a member of the Central Committee of the Polish United Workers’ Party. He remained a faithful apparatchik for the rest of his life.
He was hired by the University of Chicago as an economics professor in 1938. The timing was revealing. His attacks on Mises were published in a pair of articles in 1936 and 1937. Then, in 1938, they were reprinted in a book: On the Economic Theory of Socialism. Perfect timing! He got the job. (Eight years later, the department of economics refused to hire Hayek, who was the most famous anti-Keynesian economist in the world and who was the author of The Road to Serfdom, published by the University of Chicago Press in 1944.)
Lange became an American citizen in 1943. The next year, Stalin asked President Roosevelt to allow him to come to the USSR to consult with Stalin. Roosevelt approved. Wikipedia provides this information.
Lange returned to the United States at the end of May and met, at Roosevelt’s request, with Prime Minister Stanisław Mikołajczyk of the government-in-exile, who was on a visit in Washington. Lange stressed how reasonable Stalin was prepared to be (Stalin told him of the Soviet desire to preserve independent Poland under a coalition government), and asked the State Department to put pressure on the exiled Polish leadership to reach an understanding with the Soviet leader.
Towards the end of World War II, Lange broke with the Polish government-in-exile and transferred his support to the Lublin Committee (PKWN) sponsored by the Soviet Union. Lange served as a go-between for Roosevelt and Stalin during the Yalta Conference discussions on post-war Poland.
After the war ended in 1945, Lange returned to Poland. He then renounced his American citizenship and went back to the US in the same year as the Polish People’s Republic’s first ambassador to the United States. In 1946, Lange also served as Poland’s delegate to the United Nations Security Council. From 1947 he lived in Poland.
This was the economist whose attack on Mises has been accepted as definitive by the entire economics profession. This opinion has not changed.
Then Heilbroner added this: “It turns out, of course, that Mises was right. The Soviet system has long been dogged by a method of pricing that produced grotesque misallocations of effort” (p. 92).
It was nice that he wrote these words. But Heilbronner failed to present the central argument that Mises had offered. Mises was not talking about the technical difficulty of setting prices. He was making a far more fundamental point. He argued that no central planning bureau could know the economic value of any scarce resource. Why not? Because there is no price system under socialism that is based on the private ownership of the means of production. There is therefore no way for central planners to know which goods and services are most important for the state to produce. There is no hierarchical scale of value that is based on supply and demand—a world in which property-owning individuals place their monetary bids to buy and sell. The problem of socialism is not the technical problem of allocation facing a planning board. It is also not that planners lack sufficient technical data. Rather, the central problem is this: assessing economic value through prices. The planners do not know what anything is worth.
Mises pointed out that the more comprehensive the central planning, the more that the planners must resort to copying prices registered in free market economies. But this is impossible under universal socialism. The greater the extent of socialist planning, the more irrational the economy must become.
Heilbroner went on to discuss some classic examples of misallocated capital in Soviet production. These were always easy to discover. Economic literature in the United States was always filled with these amusing horror stories. I wrote about a few of them in my appendix on Soviet economic planning in my book Marx’s Religion of Revolution (1968).
He then discussed the problem of top-down central planning. It is like a military campaign, he said. The central planners know the products and services that ought to be produced. Then they must design plans to get everything produced in a rational way. But there are just too many individual pieces. The pieces are like a jigsaw puzzle. How can the central planners make the pieces of the puzzle fit? “That would be an extraordinarily difficult task even if the map of desired output were unchanged from year to year, but, of course, it is not: the chief planners change their objectives, and new technologies or labor shortages or bad weather were simply mistakes get in the way” (p. 93).
His description of the planning process is ethically perverse. When he speaks of pieces of a jigsaw puzzle, he is talking about human beings. The world is not a jigsaw puzzle. Pieces of the puzzle do not fit in advance. When we’re talking about the production of food, we are also talking about the consumption of food. We are talking about human liberty. But that was not how Heilbroner discussed the problem of central planning. That was not how socialists discussed it.
In any case, this economy-as-a-puzzle imagery was not how Mises discussed socialism in 1920. He argued that the central planners do not know what to produce. There is no jigsaw puzzle to put together. Information is constantly changing, and this information involves both supply and demand. Central planners cannot possibly have access to the information they need to do the planning. They don’t know what anything is worth. It is not just that they cannot fit millions of pieces together. It is that they don’t know what to produce or why.
Then he went on to tell more stories of disrupted plans and shortages.
From what we know now about how anarchic the planning process was, the wonder is not that the Soviet economy has given out but that it went on for as long as it did. It seemed to have done so by resort of inspired, or simply bizarre, improvisations that compensated for the underlying disorganization. (p. 95)
Why did it take him half a century to figure this out? This economic chaos had always prevailed in the USSR. Reports on Soviet planning from the 1920s until the 1980s revealed this chaos. This was nothing new in 1990. It had long been in the academic literature. He had never acknowledged any of this. There was no trace of this constant economic failure in his earlier writings. It did not affect his commitment to socialism in the slightest.
Naum Jasny understood the Soviet economy better than most scholars in the mid-twentieth century. He wrote the following in his book Soviet Industrialization, 1928–1952 (1961). The Soviet leaders used economic output to suppress the population. They used the money to build up the military.
The Bolsheviks came on the scene as fighters for socialism and against exploitation, for a great improvement in the well-being of everybody. What they achieved was a great increase in the rate of exploitation, reducing the people’s share of the national income to an extent nobody had believed possible. This strangulation of consumption put such large funds in the hands of the state as to permit extensive industrialization and even greater militarization, despite loss and waste of every kind caused by wars, internal strife, mismanagement, and so on.
If one looks for figures as evidence of this revolution, there are probably no better ones than these: While the total personal income (calculated at constant prices) of the expanded population increased by about one-third from 1928 to 1952, the real value of the funds in the hands of the state for investment, military and other expenses, grew almost eight-fold. This transformation must be considered a financial, economic, and social revolution. (pp. 1–2)
I quoted this passage in 1968. But a majority of economists who claimed to have expertise in the Soviet economy did not paint a picture like this. They covered it up.
Heilbroner wrote as if the Soviet economy had begun to come apart only in the second half of the 1980s. He was not alone in this assessment. Paul Samuelson, the most influential of all academic economists in the second half of the twentieth century, was far more blind. He wrote in the 1989 edition of his textbook Economics that the Soviet Union was proof of the efficiency of central planning. Mark Skousen has traced Samuelson’s comments on the USSR in the various editions.
In very early editions, Samuelson expressed skepticism of socialist central planning: “Our mixed free enterprise system…with all its faults, has given the world a century of progress such as an actual socialized order—might find it impossible to equal” (1:604; 4:782). But with the fifth edition (1961), although expressing some skepticism statistics, he stated that economists “seem to agree that her recent growth rates have been considerably greater than ours as a percentage per year,” though less than West Germany, Japan, Italy and France. (5:829). The fifth through eleventh editions showed a graph indicating the gap between the United States and the USSR narrowing and possibly even disappearing (for example, 5:830). The twelfth edition replaced the graph with a table declaring that between 1928 and 1983, the Soviet Union had grown at a remarkable 4.9 percent annual growth rate, higher than did the United States, the United Kingdom, or even Germany and Japan (12:776). By the thirteenth edition (1989), Samuelson and Nordhaus declared, “the Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive” (13:837).
Two years later, the USSR went out of business.
THE END OF THE GRAND EXPERIMENT
Heilbroner wrote that he did not think that Gorbachev’s perestroika economic reform program was likely to succeed (p. 96). He was correct. Gorbachev publicly announced the dissolution of the Soviet Union on December 25, 1991. At the time that Heilbroner wrote this, the USSR had fifteen months to go.
He also said that Eastern Europe was also unlikely to avoid some kind of development of a market economy. This thought depressed him. He did not think it was possible to combine socialism with the free market.
The same Ludwig von Mises who doubted whether a Central Planning Board could bring into being a coherent economy wrote that socialists want people “to play market as children play war, railroad, or school.” His words raise the question of whether a market system can in fact operate vigorously unless it played for keeps, which is to say for rewards and punishments that far outweigh medals for good behavior. (pp. 96–97)
Then he admitted defeat. “In all likelihood, then, the direction in which things are headed is some version of capitalism, whatever its title may be” (p. 97). He offered this hope: “the public realm is the guardian of the whole.” Capitalism cannot escape some government planning (p. 98). But this was not much hope.
For all these reasons, I am not very sanguine about the prospect that socialism will continue as an important form of economic organization now that Communism is finished. This statement will come as wry momentary to those who remember that Marx defined socialism as the stage that precedes Communism. But the collapse of the planned economies has forced us to rethink the meaning of socialism. As a similar religious vision of a transformed humanity, it has been dealt devastating blows in the 20th century. As a blueprint for a rationally planned society, it is in tatters. What, then, is left? (p. 98)
What, indeed? He offered two suggestions. First, he invoked a version of the welfare state along the lines of Sweden. He also mentioned the Netherlands, France, Japan, and Italy. But these countries were not socialist. They were Keynesian. They still are.
He did not expect what he called “a thoroughgoing decommercialization of life.” He did not expect “a far-reaching democratization of the workplace or an equitable reorganization of the world economic system.”
Then what did he expect? This: central planning for the sake of ecology. “The ecological crisis toward which we are moving in a quickening pace has occasioned much scientific comment but surprisingly little economic attention. If there is any single problem that will have to be faced by any socioeconomic order over the coming decades [it] is the problem of making our economic peace with the demands of the environment” (p. 99).
In the final column of his article, he hailed the ecological movement. “Such awesomely large and frightening problems make unavoidable a realization that socialism as a social order designed to ward off ecological disaster will of necessity be a less agreeable undertaking than socialism as a design for the benefit of our grandchildren in the absence of such an overriding challenge” (p. 100).
He assured his readers that most scientists say that we are facing ecological crises on an escalating level. He ended his article with this. It began with the word “if.” That word should always trigger this mental response: “maybe not.” But it rarely does.
If that is the case, as most scientists now believe, the paramount concern of all nations and all economic systems of a calm, with increasing urgency, a mode of life that assures survival—perhaps eventually a rich level of survival, but survival nonetheless. From this perspective, the long Vista after communism leads through capitalism into a still unexplored world that must be safely obtained and settled before it can be named. (p. 100)
Heilbroner made Mises’s position far clearer a year later in his book An Inquiry into the Human Prospect Looked at Again from the 1990s. He wrote of Mises and Hayek:
Their diagnosis was based on the inability of a planned system to generate the information needed to bring into being, or to maintain in being, a properly interlocking economic system. This information is automatically generated by a market mechanism that every day “informs” its individual participants whether their activities are wanted by other participants or not, but no substitute for this information network, or for the motivation to put the information to work, exists in a system in which a cumbersome bureaucracy tries to play the role of a competitive marketplace. (p. 114)
This got Mises’s position exactly right. It took him half a century to figure this out.
He mentioned none of this in 1999 in the final edition of his history of economic thought. He dropped his late-career discovery down the academic memory hole. He could not bring himself to acknowledge the existence of Mises and Hayek to the readers of his mass-market textbook. In this, he never changed for almost half a century.
We should take him seriously. He did not know what this future society will be called. He did not want to call it capitalism, but he could not bring himself to call it socialism.
He knew that socialism had failed in the Soviet Union and Eastern Europe. He did not mention Communist China. He did not mention a decade of unprecedented economic growth that Deng’s abandoning of communism and socialist planning enabled China to attain. He also did not answer Mises’s argument that socialism is inherently irrational. He did not describe the argument in the terms that Mises had presented: private property, competitive bidding in capital markets, and the inability of central planners to know what should be produced in the first place, let alone how to design a plan and then implement it rationally.
The 1920 article by Mises is as unknown today by graduate students in economics as it was in 1990, 1950, or 1930. But at least one man in the socialist camp admitted to the New York literati that Mises was right. It is a shame that he failed to mention this to the readers of the final edition of The Worldly Philosophers. “Mises? Never heard of him. Be sure to read my chapter on Marx.” You can buy a copy used on Amazon for about $2, plus shipping. That is the free market at work.