The Incomplete Revolution

The kernel of Mises's theory of calculation is this: while calculation in terms of money prices is the essential intellectual tool of entrepreneurs acting in a market economy, calculation in terms of “value” is impossible. A calculus can only be performed with multiples of an extended unit; for example, one can add one apple to another apple or one grain of silver to another grain of silver. In contrast, one cannot add a telephone to a piano concerto and still less can one add wittiness to silence. These things are incommensurable and therefore cannot be linked through mathematical operations. So it is with value. One cannot quantify the value of a thing because value is not extensive and therefore not measurable.

However, value can be qualitatively “imputed” from consumer goods to factors of production, in the sense of a value-dependency: those factors of production are valuable only because they serve to produce valuable consumer goods. But there is no such thing as quantitative value and thus no value calculation; there is only price calculation. In the 1940s, Mises expressed this idea with great clarity in his economic treatise, which summarized a lifetime of reflection on this problem:

One can add up prices expressed in terms of money, but not scales of preference [that is, value scales]. One cannot divide values or single out quotas of them. A value judgment never consists in anything other than preferring a to b.

The process of value imputation does not result in derivation of the value of the single productive agents from the value of their joint product. It does not bring about results which could serve as elements of economic calculation. It is only the market that, in establishing prices for each factor of production, creates the conditions required for economic calculation. Economic calculation always deals with prices, never with values.⁵¹

These insights opened up new perspectives on the social sciences and on the evolution of human societies. If compelled to single out the idea that best characterized Mises's overall contribution to human knowledge, one would have to name his general theory of economic calculation. The 1920 article on socialist calculation was the first step toward the elaboration of this theory.

Against virtually the entire profession of academic economists who, since the days of Adam Smith, had reasoned on the tacit premise that all human action can be based on some sort of economic calculus, Mises held that this possibility exists only in a market economy. Outside the market, there are only personal value judgments. Economic rationality is politically and historically contingent. The extensive and intensive division of labor, capital-intensive production, the rational allocation of factors of production—all the economic premises of human civilization—have existed only in those societies that protected private property rights in the means of production.

Yet when Mises published his original essay on economic calculation under socialism, he did not express himself as unambiguously as he would later. In 1920, it was clear to his readers that he thought that it was impossible to “measure” value; yet he seemed to conceive of value as a feeling.⁵² Many readers must have wondered why it should be impossible, in principle, to measure different degrees of the intensity of a feeling. And if emotional intensity might be measurable, why should it not be possible to calculate in terms of these values so-defined? Mises's own wording actually encouraged speculations of this sort. In the early 1920s, he did not stress that economic calculation “always deals with prices, never with values.” Quite to the contrary, in the very article in which he pointed out the problems of economic calculation in socialist regimes, he repeatedly characterized economic calculation as a “value calculation” or “calculation of value.”

To some extent, this confusion came out of the terminology. Mises used the word “value” in two distinct ways. The term wert has the same ambivalent meaning in German as its English translation “value”—it means value in the qualitative sense but can also mean an exchange ratio on the market. But beyond the issues of terminology, there was genuine, substantial confusion on Mises's part. For example, in his 1922 treatise on socialism (which was after all based on the 1920 essay) he wrote: “Under capitalism, capital and labor move until marginal utilities are everywhere equal.”⁵³ This statement cannot be reconciled with the impossibility of value calculation.

His younger readers, who were most familiar with Friedrich von Wieser's exposition of Austrian value theory, must have assumed that Mises and Wieser were in substantial agreement on value theory. After all, Mises did not contest the notion that economic calculation was essentially a value calculus. He merely pointed out that only in the market economy was there an arithmetic unit—price—that allowed for the calculated use of factors of production, whereas socialist regimes lacked such a unit.

Ironically, the only reviewer who recognized the critical difference between the Cuhel-Mises theory of value and the dominant Wieserian theory was Carl Landauer, a fanatical socialist, who loaded his two reviews of Socialism with personal invectives against the author. Landauer wrote:

With his basic thesis Mises enters into complete opposition to the main idea of the marginal utility school...: That economic calculation in terms of marginal utility is not a feature of any particular economic order, but can and must be applied in the communist order just as in the capitalist one.⁵⁴

The statements Mises made around 1920 in his writings and correspondence lead to the conclusion that he himself did not yet fully grasp the connection between his value theory and his theory of economic calculation. In none of these early writings could he bring himself to the categorical judgment that economic calculation “always deals with prices, never with values.” It is hardly surprising then that his readers and students missed the point as well. They mistook the 1920 essay for a clever technical challenge to the socialist leadership. They did not see (and possibly could not see) the depth of the issue. Mises had made the first step toward a revolutionary revision of economic science and political philosophy, but he was unable to communicate the full message. As a consequence, he lacked the necessary impact to turn the rising generation of Austrian economists away from Wieserian economics. Brilliant young men such as Hayek, Haberler, Machlup, Morgenstern, and other fourth generation Austrian economists were schooled in the notion that value calculation was an uncontested tenet of economic science.

When Mises recognized his pedagogical shortcomings and spelled out the epistemological implications of his value theory in a series of papers that were published in the late 1920s and early 1930s, it was already too late. Friedrich von Hayek had already begun to rethink and reformulate the socialist-calculation argument from a Wieserian point of view, which made the argument much weaker than it had been in Mises's hands. Characteristically, Hayek himself believed that he was merely clarifying the Misesian position. This confusion plagued the Austrian School for several decades, until the important differences between the Misesian and the Hayekian approaches were highlighted in the early 1990s.⁵⁵

Mises circa 1925