“The market economy must be strictly differentiated from the second thinkable—although not realizable—system of social cooperation under the division of labor: the system of social or governmental ownership of the means of production. This second system is commonly called socialism, communism, planned economy, or state capitalism. The market economy or capitalism, as it is usually called, and the socialist economy preclude one another. There is no mixture of the two systems possible or thinkable; there is no such thing as a mixed economy, a system that would be in part capitalistic and in part socialist. Production is directed by the market or by the decrees of a production tsar or a committee of production tsars.Did you get that? There is no such thing as a mixed economy. I do not find this convincing, but its logical implications are interesting.
If within a society based on private ownership by the means of production some of these means are publicly owned and operated—that is, owned and operated by the government or one of its agencies—this does not make for a mixed system which would combine socialism and capitalism. The fact that the state or municipalities own and operate some plants does not alter the characteristic features of the market economy. These publicly owned and operated enterprises are subject to the sovereignty of the market. They must fit themselves, as buyers of raw materials, equipment, and labor, and as sellers of goods and services, into the scheme of the market economy. They are subject to the laws of the market and thereby depend on the consumers who may or may not patronize them. They must strive for profits or, at least, to avoid losses. The government may cover losses of its plants or shops by drawing on public funds. But this neither eliminates nor mitigates the supremacy of the market; it merely shifts it to another sector. For the means for covering the losses must be raised by the imposition of taxes. But this taxation has its effects on the market and influences the economic structure according to the laws of the market. It is the operation of the market, and not the government collecting the taxes, that decides upon whom the incidence of the taxes falls and how they affect production and consumption. Thus the market, not a government bureau, determines the working of these publicly operated enterprises.
Nothing that is in any way connected with the operation of a market is in the praxeological or economic sense to be called socialism. The notion of socialism as conceived and defined by all socialists implies the absence of a market for factors of production and of prices of such factors.” (Mises 1998: 259-260).
According to Mises, a market economy even with some degree of government owned and operated industry still does not make an economy “socialist.” What makes an economy “socialist” is the “absence of a market for factors of production and of prices of such factors.”
So what on earth were the mixed economies of the golden age of capitalism (1945 to 1973) with their Keynesian fiscal policies, financial regulation, and central banks? Mises published the first edition of Human Action in 1949 when he observed all around him the reality of Western mixed economies with nationalised industries and Keynesian fiscal policies. He must have looked in horror as this system produced unprecedented economic growth, low unemployment and economic stability. Was this his justification of why the system he saw around him was working and prospering?
Curiously, no. He appears to have declared most of the capitalist West “socialist” after 1945!
But the trouble is that Mises is simply astonishingly inconsistent and incoherent on this subject. Having defined “socialism” as an economy without markets “for factors of production and of prices of such factors,” Mises then tells us that Britain and other nations after 1945 were in fact socialist but for different reasons:
“Marching ever further on the way of interventionism, first Germany, then Great Britain and many other European countries have adopted central planning, the Hindenburg pattern of socialism. It is noteworthy that in Germany the deciding measures were not resorted to by the Nazis, but some time before Hitler seized power by Bruning, the Catholic Chancellor of the Weimar Republic, and in Great Britain not by the Labor Party but by the Tory Prime Minister Mr. Churchill. The fact has been purposely obscured by the great sensation made in Great Britain about the nationalization of the Bank of England, the coal mines, and other enterprises. However, these seizures were of subordinate importance only. Great Britain is to be called a socialist country not because certain enterprises have been formally expropriated and nationalized, but because all the economic activities of all citizens are subject to full control by the government and its agencies. The authorities direct the allocation of capital and of manpower to the various branches of business; they determine what should be produced and in what quality and quantity, and they assign to each consumer a definite ration. Supremacy in all economic matters is exclusively vested in the government. The people are reduced to the status of wards. To the businessmen, the former entrepreneurs, merely quasi-managerial functions are left. All that they are free to do is to carry into effect the entrepreneurial decisions of the authorities within a neatly delimited narrow field.” (Mises 1998: 855).Something stinks in Human Action: it is basic standards of argument, consistency and factual accuracy.
First, factual accuracy. According to Mises, the UK after 1945 was a “socialist country,” because the government (allegedly) planned all investment and consumption! Now, while it is true that the UK even after 1945 did (for example) have rationing for some years, the idea that Britain was a total planned economy is so bizarrely factually incorrect that it boggles the mind.
In the UK, the reality is that rationing for clothing and furniture was abolished in 1948 (before Human Action was published), and all other limited rationing by 1954. There was indeed some nationalisation of certain industries in the UK after 1945 (the “commanding heights”), but we have already seen above that Mises specifically denies that some limited nationalised industries can make a country socialist. Nor did the use of Keynesian fiscal policy involve planning of production or consumption. And most capital goods in the UK were privately owned, most production was private and conducted for profit, and to satisfy consumer preferences. Mises was utterly ignorant or delusional when he declared that in Britain “all the economic activities of all citizens are subject to full control by the government and its agencies.”
Second, let us turn to consistency of argument. The UK without any doubt had money prices and markets for factor inputs after 1945, so according to Mises’s fundamental criterion expressed above in the first passage from Human Action the UK cannot have been a socialist country.
Yet mysteriously Mises declares that it was a “socialist country,” blatantly contradicting himself. The whole inconsistency is made much worse by the strident statement in Human Action (on the page after my last quotation) that most of the post-1945 Western European countries were now also socialist too! (Mises 1998: 856). Yet there is no doubt that these nations (like the UK) also had money prices for factors of production. So how can they have been socialist? We have an astonishing contradiction here.
Moreover, if Western European nations really were socialist and lacked economic calculation, then a central element of Mises’s whole economic theory comes crashing down. Why didn’t the UK or “socialist” Western Europe collapse into chaos after 1945 if they were incapable of rational economic calculation?
Well, Mises does have an answer. We suddenly read in Human Action (Mises 1998: 856) that in fact Western Europe was still able to calculate, and these economies were still based on economic calculation — despite the fact that Mises declares them “socialist” and his definition of “socialism” is an economy that lacks economic calculation. The main reason (according to Mises) was that the market economy of the United States allowed Western Europe to engage in economic calculation, even though in reality (though it never filtered through to Mises’s brain) the economy of the United States was subject to almost the same degree of government intervention (apart from nationalised industry, which, as we have already seen, is irrelevant anyhow) as any Western European nation!
Finally, let us be charitable and assume that Mises was thinking of the UK during WWII when he wrote the passage above. In WWII, there was indeed a moderate command economy in Britain (as in the US, Canada, Australia and New Zealand) where a considerable amount of (mainly military) production was planned by the government. But even during the war money prices and markets for factor inputs still existed, so the UK cannot have been a socialist country even in these years. So, by Mises’s own logic, even Western wartime command economies cannot really have been “socialist” systems at all — even though those command economies really were the only real historical instance when the Western economies was run rather like planned, communist systems.
Just reading Human Action on these issues, it is astonishing to me that anyone can ever declare that Mises was the greatest economist who ever lived (as some Austrians actually do). On this subject, Mises was an ignorant and muddle-headed idiot, and it is not surprising that after 1945 he was ignored by serious economists.
I can just imagine economists reading these passages of Human Action and then throwing the book in the dustbin as they moved on to more important matters.
Mises, L. 1998. Human Action: A Treatise on Economics. The Scholar's Edition. Mises Institute, Auburn, Ala.