10. A Copernican Shift

THEIR ASCENSION TO POWER at the ballot box had taken the socialists by complete surprise. They were suddenly in charge and had to act. But it turned out that they had no idea how to put their ambitious program of “socializing the economy” into practice.¹ The socialist literature of the previous fifty years had never dealt with the question of how “society” (that is, in practice, the socialist government) should manage the economy. Such questions were deemed to be unscientific because the advent of socialism would come by inexorable law of nature. Marx, Engels, Tawney, Laski, and all other socialist intellectuals until the early 1920s were convinced that socialism would eventually just “be there” full-blown and ready to be admired. In the words of a writer highly sympathetic to their cause:

They have not sufficiently considered the economic conditions that must be satisfied if a socialist state is to equal or to improve upon the standard of life provided by capitalism. Nor have they given adequate attention, from the technical point of view, to the economic advantages and disadvantages of socialism as compared with capitalism. Yet unless they have some understanding of the economics of a socialist state, and unless they are able to present its case on economic grounds... they can hardly hope to persuade the mass of men to believe in the state which they advocate.²

By 1919 the socialist movement had swept the political scene in Germany and Austria, but none of its leaders had given any thought to this problem. The greatest champion of wartime central planning, Walther Rathenau (1867–1922), was fully convinced that the central direction of the economy should rest with the state, that is in practice, in his own hands. He celebrated war socialism and made the case for omnipotent government in times of peace. His writings in the period of 1917–1919 in particular were the literary equivalent of carpet bombing and shaped the ideals of the coming generation, F.A. Hayek among them.³ Other statists had championed the same approach.⁴ In the aftermath of the war, then, there seemed suddenly to be a radical socialist mass movement that expected immediate action. There were short-lived communist governments in Hungary and Bavaria that by and large continued and amplified wartime central planning. Mises's old nemesis Otto Neurath became a leading member of the Bavarian government and published success stories of his experience and plans for a new society.⁵ In the few months until the late summer of 1919, the gates were wide open for complete communism, but the socialist leaders—Karl Kautsky, Otto Bauer, and Max Adler—had no plan for how to satisfy this popular demand.

One thing was clear. In distinct contrast to Rathenau, the Vienna socialists (the Austro-Marxists) were not at ease with the notion that central planning meant omnipotent government. They wanted the central plan, but the planning was somehow supposed to be done by all of society, not just a technocratic elite. In January 1919, Otto Bauer published a series of articles that he reprinted in a booklet with the title Der Weg zum Sozialismus (The Road to Socialism).⁶ Bauer advocated the piecemeal expropriation of industrial firms along syndicalist lines: the assets of the firms should henceforth be managed by the workers, or by committees composed of workers, consumers, and civil servants. But neither Bauer nor any of the other intellectual leaders of the socialist movement had given any thought to the effectiveness of their scheme. None of them had cared to compare the performance of socialist and capitalist economies.⁷ This turned out to be the crucial strategic weakness of their ideal.

In the fall of 1919 the situation in Austria was miserable, particularly in Vienna. Food was scarce, rooms were cold, and the lights were dim or out. Mises had suffered from flu for a couple of weeks. His desk was full and he did not want to work. Yet it was during this time that he completed one of the greatest economics articles ever written.

He had promised Lederer that he would write a series of articles for Weber's Archiv für Sozialwissenschaften und Sozialpolik, where Lederer was about to succeed Werner Sombart as the executive editor. On November 14, 1919, Mises told him the title of the first of these pieces: “Economic Calculation in the Socialist Commonwealth.”⁸ This was to be the centerpiece of the general treatise he was working on, which would contain a systematic and comprehensive critique of all varieties of socialist schemes. He must have begun this project soon after finishing Nation, State, and Economy and it would take him two more years to complete the manuscript.

The timing was important: Friedrich von Wieser was close to retirement and although Mises was far from convinced he had much chance of following Wieser in Menger's old position, it was not unreasonable to hope that an impressive book publication shortly before the appointment could tip the balance in his favor.

For various reasons, however, he might have thought it useful to publish the central argument beforehand in a separate work. One was the hope of having an immediate impact on Austrian policies. But there was also a pedagogic rationale for the early publication of the chapter on economic calculation. Mises intended to prove that pure socialism was an economic impossibility and this proof relied on a consideration that had so far escaped the notice of economists. In fact, his proof squarely contradicted one of the most cherished doctrines of the dominant Wieserian paradigm—Wieser's theory of imputation. The advance publication of the calculation chapter would give his readers time to absorb the central thesis of his larger treatise on socialism.

To prepare himself for the likely criticisms he would encounter from the economic establishment and other interested parties, Mises made use of his seminars to discuss the fundamental problems of the theory of distribution, and more particularly of imputation theory. A short lecture by the mathematical economist Dr. Ernst Seidler opened the first three sessions of the university seminar in October 1919. These were entirely dedicated to the problem of imputation. It is likely that Mises confronted his students at this point with his new ideas.

Unfortunately no records of the meetings have survived. The discussions must have touched on the more subtle problems of economic theory, problems beyond the grasp of most of the students. This was probably Mises's motivation for starting a separate smaller group limited to more advanced members.