Triumph

By the beginning of 1922, Mises had finished the manuscript of his treatise on socialism and was looking for a good academic publisher.³⁶ Duncker & Humblot in Munich declined because of the difficult inflationary situation that had begun to wreck the German economy, making the publication of a 500-page scientific treatise a major risk. Mohr in Tübingen was interested but asked Mises to cut 20 percent of the manuscript. Mises kept looking. In February, he signed a contract with Gustav Fischer in Jena.

Their contract had made only vague stipulations about the adjustment of Mises's royalties to the ongoing inflation.³⁷ When prices rose dramatically between the conclusion of the negotiations in February and the completion of the production process in July, Mises was very happy that Fischer raised the honorarium on a courtesy basis by 50 percent.³⁸ Thus Fischer turned out to be a good choice and remained Mises's book publisher throughout the 1920s.

The book turned out to be a great success. One decisive factor in its sweeping victory was the growing sense among German economists that the reigning Historicism and the Kathedersozialisten had done far more harm than good. Already before the war, there were signs of decline in German socialist orthodoxy.³⁹ The defeat in World War I accelerated the fall, and a wider academic audience became receptive to alternative paradigms. In this situation, Mises's main thesis was confirmed and endorsed by two great authorities in German social science: Max Weber and Heinrich Herkner.

In his Wirtschaft und Gesellschaft (Economy and Society), published posthumously in 1922, Weber argued along the same lines as Mises in his 1920 article, that a socialist planning board could not base its allocation of resources on economic calculation.⁴⁰ Contrasting capitalist money-price calculation with “calculations in kind” that authors like Otto Neurath⁴¹ had proposed, Weber observed that

the comparison of different kinds of processes of production, with the use of different kinds of raw materials and different ways of treating them, is carried out today by making a calculation of comparative profitability on terms of money costs. For accounting in kind, on the other hand, there are formidable problems involved here which are incapable of objective solution.

Weber's ensuing discussion showed that he had fully grasped the nature of the problem, its concrete manifestation, and its capitalist solution:

an enterprise is always faced with the question as to whether any of its parts is operating irrationally: that is, unprofitably, and if so, why. It is a question of determining which components of its real physical expenditures (that is, of the “costs” in terms of capital accounting) could be saved and, above all, could more rationally be used elsewhere. This can be determined with relative ease in an ex-post calculation of the relation between accounting “costs” and “receipts” in money terms, the former including in particular the interest charge allocated to that account. But it is exceedingly difficult to do this entirely in terms of an in-kind calculation, and indeed it can be accomplished at all only in very simple cases. This, one may believe, is not a matter of circumstances which could overcome by technical improvements in the methods of calculation, but of fundamental limitations, which make really exact accounting in terms of calculations in kind impossible in principle.

Even the introduction of non-monetary systems of remuneration could not overcome the problem of eradicating irrationalities, because these measures would be unsuitable to identify irrationalities in the first place.

The essential question is that of how it is possible to discover at what point in the organization it would be profitable to employ such measures because there existed at that point certain elements of irrationality. It is in finding out these points that accounting in kind encounters difficulties which an ex-post calculation in money terms does not have to contend with.

Weber then went on to point out the crucial fact preventing the application of schemes for calculation in kind, namely, that only money imputation works; utility-imputation is a chimera:

The fundamental limitations of accounting in kind as the basis of calculation in enterprise—of a type which would include the heterocephalous and heteronomous units of production in a planned economy—are to be found in the problem of imputation, which in such a system cannot take the simple form of an ex-post calculation of profit or loss on the books, but rather that very controversial form which it has in the theory of marginal utility. In order to make possible a rational utilization of the means of production, a system of in-kind accounting would have to determine “value”-indicators of some kind for the individual capital goods which could take over the role of the “prices” used in book valuation in modern business accounting. But it is not at all clear how such indicators could be established, and in particular, verified; whether, for instance, they should vary from one production unit to the next (on the basis of economic location), or whether they should be uniform for the entire economy, on the basis of “social utility,” that is, of (present and future) consumption requirements?

Weber warned against the misconception that this problem was of a merely technical nature—one that could eventually be overcome once enough human resources were invested in finding a solution:

Nothing is gained by assuming that, if only the problem of a non-monetary economy were seriously enough attacked, a suitable accounting method would be discovered or invented. The problem is fundamental to any kind of complete socialization. We cannot speak of a rational “planned economy” so long as in this decisive respect we have no instrument for elaborating a rational “plan.”

Apparently Weber and Mises had developed substantially the same ideas in complete independence from one another.⁴² It is likely, however, that Mises provided the initial inspiration for Weber, in their many hours of conversation during Weber's visit to the University of Vienna in the summer semester of 1918. Both men were among the faculty of a course for army officers that dealt with various fundamental political problems. In one of the sessions, Weber delivered a lecture on the general problems of socialism. It was subsequently published with his approval from stenographical notes.⁴³ It is significant that Weber does not even hint at the issue of economic calculation in this lecture.

Max Weber

Be that as it may, the important fact is that when Weber died at the age of 56 on June 14, 1920, he and Mises agreed on the socialist-calculation question, and when Weber's magnum opus was eventually published in 1922, it weighed in with the full authority of its author on the side of Mises, causing great consternation among mainstream economists in Germany, who were still steeped in the kathedersocialist tradition. As if to reinforce Weber and Mises, Vladimir Lenin—leader of the world's model of socialism—announced a partial retreat on the economic front: Soviet Russia would begin a New Economic Policy, bringing greater freedom for trade and commerce. Attempts to abolish money and markets had produced precisely the chaos that Mises argued was inevitable under full socialism.

But the real knockout for academic socialism in Germany came at the hands of its own vicar. Heinrich Herkner had succeeded Schmoller in his position at the University of Berlin and as the president of the Verein für Socialpolitik. For practical purposes, this meant he had become Schmoller's heir as head of the Historical School and of the German social-policy movement. In September 1922, at the Verein's fiftieth jubilee meeting in Eisenach, it became obvious that Herkner had to be counted among those who abhorred the excesses of historicism and academic socialism. He called for more moderation, which meant in practical terms a reconsideration of the tenets of classical economics. Herkner stated that even the great Schmoller had confided to him shortly before his death that he was concerned about the inability of the younger generation “to think in terms of free trade.” This inability, Herkner argued, had led to exaggerated views about the power of the state relative to the operation of economic law, and the nefarious consequences could be seen.⁴⁴

These views had already become acceptable. Herkner's speech was received with great applause. In the following year, in a widely read paper on “the changed implications of economic science for social policy,” Herkner argued that the labor unions had severely hampered economic reconstruction after the war. This concerned in particular their resistance to longer working hours and to any limitations on their power to strike. They were the prime movers behind the political forces that subjected the German economy to an ever more complex web of regulations. Historically astute economists had apprehensions about the ultimate result of this movement: either some perverse guild oligarchy, or a mercantilist police state. As a natural reaction to such excesses there would be excesses in the opposite direction. The influence of the dreaded Manchester School would rebound. Then Herkner singled out Mises's Socialism as the single most important work of this liberal resurgence, endorsing virtually all criticisms that Mises had leveled against socialism. Herkner urged his colleagues to thoroughly examine the ideas of these new theoretical economists, stating:

We encounter by far the most important performance of this line of research in the brilliantly written and inspired work by the Vienna economist Ludwig Mises, Die Gemeinwirtschaft. With full command of the most recent scientific achievements, and partly on the basis of new points of view, the author quite devastatingly criticizes all variants of socialism and everything that he considers to be socialism.⁴⁵

This took Mises's Socialism from the limited exposure of the ivory tower and made it infamous throughout the socialist movement. The unheard-of concessions and even praise for one of the hated “theorists” caused outrage in the labor unions and angry reassessments of Herkner's position in official socialist circles.⁴⁶ Yet Herkner's authority also forced the German mainstream economists to reevaluate their cherished scientific and political tenets. The influential Heinrich Pesch recognized Mises as the head of the new Manchesterism. He explained:

Because of his clever and original critique of socialism, Mises has met with regard and approval even among those authors who, in distinct contrast to him, advocate the legal protection of children and women, and [compulsory] workers' insurance.⁴⁷

Many of these authors now began to see that the unsuccessful application of socialist schemes in the postwar period had nothing to do with a lack of psychological or ideological preparedness on the part of the population; it sprang from the inner deficiencies of those schemes themselves—flaws highlighted in the works of Mises and Weber. More and more scholars came to renounce their former socialist ideals. This process came to be known as the “crisis of social policy.”⁴⁸ How much Mises and his works stood at the center of this “crisis” can be inferred from the fact that by October 1924, more than 20 monographs and papers had been published on the sole subject of economic calculation.⁴⁹

Some thirty-five years later, Mises evaluated the impact of his socialist-calculation argument and found it had shifted the terms of subsequent debate. He observed that

all arguments advanced in favor of the great reform collapsed. From that time on socialists no longer based their hopes upon the power of their arguments but upon the resentment, envy, and hatred of the masses. Today even the adepts of “scientific” socialism rely exclusively upon these emotional factors. The basis of contemporary socialism and interventionism is judgments of value. Socialism is praised as the only fair variety of society's economic organization.⁵⁰