История Идеи

History of an Idea

Or, How An Argument Against the Workability of Authoritarian Socialism Became An Argument Against the Workability of Authoritarian Capitalism

By Roderick T. Long (Originally posted 2 October 2008 for the Art of the Possible blog)

In 1920, Ludwig von Mises published an argument against the workability of “socialism” (by which he meant state ownership of the means of production), an argument subsequently elaborated by himself and his student Friedrich Hayek.

The idea in a nutshell: the value of a producers’ good depends on the value of the consumers’ goods to which it contributes. Hence in deciding among alternative production methods, the most efficient choice is the one that economises on those producers’ goods that are needed for the most highly valued consumer’s goods.

But there’s a difference between technical efficiency and economic efficiency. (The following way of explaining the difference is indebted to David Ramsay Steele’s From Marx to Mises.)

Suppose we’re comparing two ways of making widgets; method A uses three grams of rubber per widget produced while method B uses four grams of rubber per widget produced (with everything else being the same). In that case method A is clearly more efficient than method B; that’s a case of technical efficiency, because we can figure out which is more efficient just by looking at quantities expended without concerning ourselves with any economic concepts like demand.

But now compare method C, which uses three grams of rubber and four grams of steel per widget, with method D, which uses four grams of rubber and three of steel (with all else remaining the same). In this case neither C nor D is more technically efficient than the other. To figure out which is more economicallyefficient, we have to figure out the comparative value of rubber vs. steel – i.e., which forgoes a more highly demanded alternative use, a gram of steel or a gram of rubber? As per Mises and Hayek, that’s something there’s no clear way to figure out except through market competition and a price system, whereby consumer valuations of first-order goods get translated, by means of prices, into varying demand for their factors of production (as reflected in, say, a higher price for steel than for rubber, thus prompting producers to economise on steel). State ownership of the means of production means no market in, and thus no prices for, producers’ goods, and so no way to transmit this information.