Rothbard on Socialism in the U.S. and in the Soviet Union

0:00I wanted to, before I get started, I wanted to thank Professor Holtzman for having, giving me this opportunity. I have never been to the facility down here and it's just absolutely mind-boggling to me and I don't know if Lew was in here, but he deserves all gratitude by the Austrians because this is amazing, sort of awestruck in a lot of ways. I also want to thank the Mises Institute for bringing out Man Economy and State again in this new edition, which I think is a real moment of celebration for all of us. My paper today is on Rothbard on socialism and theory and practice. If anyone wants a copy of it, which I hope you will, this is my email address. Just email me and I'll send you an attachment.

0:51It's an amazing thing, what's happened in the world right now. I don't have to carry the papers with me, I just send them to you. So anyway, that's my email address.

1:05You'll let me know when I'm talking too long, right? Yeah, okay. All right, what's my basic thesis of this paper? The basic thesis of this paper is that Rothbard anticipated all, and I should underline, all the major subsequent developments in Austrian analysis of the problems of socialism and the developments in the field of comparative political economy for the examination of real existing socialism in the USSR. Basically, if it's not in Rothbard, it wasn't worth developing. And that's kind of an interesting conclusion for me because I haven't always returned back to this book.

1:52But when reading this, I realized how much of his analysis actually anticipated everything. And I'll emphasize this at the end of my talk. But what you also have to realize is that he wrote this primarily in the 1950s and 1960s, early 1960s, right? 1962 is the publication date, and none of the criticisms that he anticipates yet that we identify, those of us who read Sovietology, that we would identify, were ever penned at that time. So he got there first. It's a very sort of humbling experience. What do I mean by getting him there first? In theory, for example, Rothbard, well before any of the other re-interpreters of the Socialist Calculation Debate, reinterpret the socialist calculation debate to argue that the Austrians actually won, not lost.

2:41It's hard for us nowadays to remember, but the standard view in the 1970s, 1980s, was that the Austrians, you know, had this debate. They lost the debate, theoretical debate, and that's sort of it. You know, Langa defeated that. In fact, the argument, as I'll quote later on, is that Enrico Barone defeated Mises before Mises ever wrote. That's sort of the standard line that was promoted in the 1950s and held basically through the 1970s to the mid-1980s. Rothbard already anticipates the argument that Lavoie makes in 1985. But not only that, he has a whole analysis of the property rights system under socialism, and Real Existing Property Rights System, and why the idea of collective property is incoherent, which later becomes an argument that Yoram Barzell and other property rights economists promote it in the development of property rights economics following on Armin Altschin and Harold Demsets.

3:44But Rothbard actually has that in 1962, a decade to two decades before Barzell ever thinks about it. The second thing is, is in practice, Rothbard challenges the very idea that the Soviet economy is planned, all right. This becomes a sort of a major idea that Paul Craig Roberts develops in the 1970s and is later developed by other Sovietologists, so that we started talking about the administered economy rather than the planned economy. But Rothbard has the whole nature of the polycentric nature of planning down in practice and the idea of a special interest nature of Political Economy and Socialism. I should also put in here, he has the argument why the growth rates don't capture the essence of a Soviet economy.

4:33All right, so what do I go to sort of make my argument? I go through the textual evidence. On a side note, when I saw that this opportunity had come available, I wrote right away about this because I have, to whatever extent I've had any influence in this field, it's because I happen to be the person that is, Michael Ellerman, who's a leading Sovietologist, teaches at Cambridge one time, told me at a conference in Warsaw, he says, he says, I have to teach my students every semester why you're wrong, you know, it's me and Paul Craig Roberts because we challenge this idea of the socialist economy This is a rationally planned economy that instead there's all kinds of markets that are existing in this system.

5:18It's to anticipate what Rothbard said, it's a centrally prohibited economy. It's a prohibition economy like Mark Thornton's work. And this is the challenge to the idea of a top-down ideal planning system. And I knew Rothbard had this idea in here in his idea. He says, the extent of socialism, quoting from Man Economy and State, page 830, 831. The extent of socialism in the present-day world is at the same time underestimated in countries such as the United States and overestimated in Soviet Russia. It is underestimated because the expansion of government lending to private enterprises in the United States has generally been neglected. And we have seen that the lender, regardless of his legal status, is also an entrepreneur and part owner. The extent of socialism is overestimated because most writers ignore the fact that Russia, that Russia, socialist as she is, cannot have full socialism as long as she can still refer to the relatively free markets existing in other parts of the world.

6:15In short, a single socialist country or block of countries, while inevitably experience enormous difficulties in waste and planning, can still buy and sell and refer to the world market and can therefore at least vaguely approximate some sort of rational pricing of producer goods by extrapolating from the market. The well-known ways and errors of this partial socialist planning are negligible compared to what would be experienced under total calculational chaos of the world socialist state. So I understood that that argument was a very strong argument in my own perspective about thinking, but I didn't realize how much Rothbard's writings on this issue had affected me. What did you call it, a virus? So I had this Rothbardian virus in me for ten years, like, that I didn't know about, that now I, you know, I took the blood test and I find out that I have it.

7:10And the first one is the development of the theoretical argument. The development of the theoretical argument, I think actually Joe and I should talk about this, I don't want to talk about this, but I actually think that Rothbard resolves the dispute between the calculation and knowledge debate before anyone ever engaged in it. Of course, the crucial issue is economic calculation, but the question is that the knowledge surrogates or inputs are not available to engage in the calculation. He develops this in the context of the theory of the firm and the limitations. He argues what happens if you try to vertically integrate a firm. This is where he develops the theory of why socialist calculation comes to a problem.

7:56He says this is on page 547. In that case, it would have no way of knowing which stage was being conducted properly and which not. This is when it can't refer to external markets, external pricing system, right? It would therefore have no way of knowing how to allocate factors to the various stages. There would be no way for it to estimate any implicit price or opportunity cost for the capital goods at that particular stage. Any estimate would be completely arbitrary and have no meaningful relation to economic conditions. All right? So the reason why we can't calculate is because we don't have knowledge. Okay? Why don't we have the knowledge? Because we don't have private property rights in those markets. No markets exist because there's no private property rights in those goods.

8:46549, just to anticipate. This is a lengthy quote. I apologize for lengthening this quote, but I think it's important, because he nails exactly the point that, to whatever extent, it's a good point that Vaughan, Morrell or LeVoy later make. He says, a curious legend has become quite popular among writers on the socialist side of the debate over economic calculation. This runs as follows. Mises, in his original article, asserted theoretically that there could be no economic calculation under socialism. Baroni proved mathematically that this is false and that calculation is possible. Hayek and Robbins conceded the validity of this proof, but then asserted that calculation would not be practical. The inference is that the argument of Mises had been disposed of and that all socialism needs is a few practical devices, perhaps calculating machines or economic advisers to permit calculation and the counting of equations.

9:42Rothbard characteristically points out, this legend is almost completely wrong from the start. Let me reread that, right? This legend that Hayek had made this concession is almost completely wrong from the start. In the first place, the dichotomy between theoretical and practical is a false one. In economics, all arguments are theoretical. And since economics discusses the real world, these theoretical arguments are by their nature practical ones as well. The false dichotomy disposed of, the true nature of Baroni's proof becomes apparent. I said something that a little Jaeger thing here. Proof becomes apparent. It is not so much theoretical as irrelevant. The proof by listing of mathematical equations is no proof at all.

10:27It applies at best only to the evenly rotating economy. Obviously, our whole discussion of the calculation of problem applies to the real world and into it only. There can be no calculation problem in the ERE because no calculation there is necessary. Obviously, there is no need to calculate profits and losses where all future data are known from the beginning and where there are no profits and losses. In the ERE, the best allocation of resources proceeds automatically. For Barone to demonstrate that the calculation difficulty does not exist in the ERE is not a solution. It is simply a mathematical belaboring of the obvious. The difficulty of calculation applies to the real world. OK. So Lavoie's book is titled Rivalry and Central Planning.

11:13The whole idea behind that is if you take the entrepreneurial rivalrous view, non-ERE view, The problems of calculation and whatnot come to the forefront of the analysis. If you assume by hypothesis that the equations are known and given, then the problem disappears. So it's exactly as Mises says, Lange and those guys had a solution by hypothesis. They didn't argue for what it is they needed to prove. Rothbard has this, you know, 23 years, right, before LaVoie's book ever comes out, 18 years The other point which I think is essential and it relates to an internal debate that we've been having at GMU, this is directed at my infant cerebral, you know, Ed Stringham, this comes from Rothbard pointing out that there is no such thing as collective ownership and Reality.

12:15You know, I thought I was a genius for coming up with this idea of the split between de facto and de jure and all this stuff like that. It's right in Rothbard. And he says here about the important feature of ownership. He's talking about collective ownership. He says this is in his criticism of public ownership. The important feature of ownership is not legal formality, but actual rule. And under government ownership, it is the government officialdom that controls and directs, and therefore owns the property. But while government officials possess ownership in terms of control rights, this is me speaking, I'll come back to quoting again, they do not possess full cash flow rights, and the rights they do possess are not secure in the long run.

13:00Hence, this is quoting Rothbard again, government officials will tend to regard themselves as only transitory owners of public resources, In short, except in the case of a private property of a hereditary monarch, by the way, anticipates everything that Hoppe had to say, or for that matter, Mancer Olson. In short, except in the case of a private property hereditary monarch, government officials own only the current use of the resource, but not their capital value. And if a resource itself cannot be owned, but only its current use, this will rapidly ensure the uneconomic exhaustion of the resource. So the tragedy of the commons, you know, problem comes in, okay? So this sets up the whole property rights analysis of socialism, which becomes dominant in the 1990s with work by Andre Schleifer and other people.

13:50Practice, let me, you know, don't belabor the obvious here. Rothbard points out the existence of black markets, okay? And why black markets enable the system to muddle through. So, Rothbard, what I'm trying to say is Rothbard demonstrates the $64 million question, which is socialism is so bad, how could it have lasted for 70 years, right? And the argument here is like, you know, do the Austrians commit two bites of the apple? Kind of logical fallacy. You know, socialism is terrible, but damn it, Soviet Union socialist, right? Or socialism is impossible, the Soviet Union socialist. You can't really have that sort of argument. That would be two bites of an apple, all right? What the Austrians are actually arguing is that socialist economy is impossible, but real existing quote-unquote socialism, which isn't really socialism, because socialism is impossible, models through, through various different other things, which have to do with world prices, black markets, that even under this system, it's going to confront the problems of innovation and growth,

14:50So it's not going to be able to expand over time. Page 835, he talks about the whole idea of conspicuous production. Basically, why did the Soviet Union have these big growth rates? Because they measured the value of the inputs, not the value of the output. Rothbard nails them on this. Well before G. Warren Nutter ever took pen to paper on this issue. G. Warren Nutter, if you remember what he was writing in the 1950s, it was about the extent of monopoly enterprise in the US. He was Friedman's student. Friedman put him on the idea of the challenge that the natural idea of advanced capitalism was to become more and more monopolistic. So Warren Nutter originally demonstrated that that wasn't the case. Over time, the extent of monopoly enterprise in the U.S. actually declined.

15:35That's his Ph.D. thesis. It's not until the mid-1960s that G. Warren Nutter writes his stuff on the Soviet Union and challenges the growth rates of the Soviet Union. has it well in advance, again. And a key thing which I think is extremely important is Rothbard points out how when you have conspicuous production, this translates into the real world into a malinvestment. And so actually what you have in the Soviet Union is a giant business cycle. All right, giant business cycle. I'm rushing through that. I apologize if you can ask me, challenge me, criticize me, Alright, so then what I go on is I argue that, like, let's look at the implications of this issue, alright, and implications of Rothbard's analysis.

16:23And what I want to suggest in here is that Rothbard's analysis of, you know, here, it's become obligatory for economists to make two comments, alright, actually three, three comments. Here they go. Defining economic moments of the 20th century are the Great Depression and the collapse of communism. Second statement. We economists didn't know that socialism would fail. Third one. We don't know what to do because it's the first time in human history we've moved from a centrally planned economy to a market economy. The problem with this is, you know, the second argument that people didn't know that socialism would collapse.

17:12Well, that's not quite right. It's just that they didn't listen to the economist who said it would collapse. And three, does the past have a useful economics for the future? And it seems to me Rothbard's analysis points out the idea that simply what we're trying The point I'm trying to do in the former Soviet Union, okay, is engage in a kind of a depression, you know, the kind of same policies that you would adopt coming out of a severe depression in say the U.S. or any other economy. It's not a different system. That's the point of the quote. The differences in the system are in degree, not in fundamental kind, because the difference in kind is ruled out as a theoretical possibility. The socialist system was, is a mercantilist system, similar to like mercantilist system in France, Bob Eaklin's work, okay?

17:58Or, for example, the mercantilist system in the U.S. or any other system in which you're trying to transition from. In which these transitory owners, you're trying to eliminate the officiadum and instead give the ownership rights to those. So you want to give control rights and cash flow rights to those who currently have only control rights, okay? And you want to sort of develop the system into a private property based system, alright, and allow for the reallocations of capital. I was in Romania last year, alright, one of the things that they came up to me and said, can you explain to us, in Bucharest, it's a vibrant sort of, you know, place, Misesians, by the way, in Bucharest, first public lecture I gave, which had nothing to do with Austrian economics. Kid raised his hand at the end and said, well, what would Murray Rothbard say about public goods?

18:47It was like, this is in Bucharest? You know, so it's like, anyway. Though they have a little strange thing going on too, because they want to combine Austrian economics with the Orthodox Church as a movement. I don't know if it's the strategy movement I would pick. But they're very enthusiastic, they're great, and I think the world of them. But there's a region in Romania, 100% unemployment. I'm not kidding you, 100% unemployment. and Employment. Well, what's the reason for this? It just doesn't take rocket science. They won't allow people to reallocate the capital, and they don't allow people to move to get new jobs. And they pay the workers two-thirds of their previous salary. And then they say, how come nothing's happening there? It's like, you know, right?

19:33There's no reallocation. So what's the Rothbardian response to that? It's in America's Great Depression, right? Don't hold up wages, allow capital to be reallocated. It's basically shock therapy, well before Jeffrey Sachs ever went anywhere, right? Murray Rothbard was an advocate of shock therapy. All right, so let me just conclude with these theoretical, you know, positions that I think are important here. One of the reasons why Rothbard's analysis I think stands out as so advanced to the reader and so fresh, I mean, one of the things you've got to keep in mind is the current revisions are new editions of Man Economy and State, have never been revised. What you're reading is the book as it was published in 1962. It's not like he rewrote it. So it's not like he's taken into account the new developments. This is what he wrote in 1962, which means he wrote it in the 1950s. So when you think about the context of the 1950s, the lone wolf nature

20:31of Rothbard's analysis, both of the theoretical and of the applied problems of socialism stand have come out as even more gigantic in their contribution. It's absolutely phenomenal. All the stuff, Schleifer's work on rent-seeking in the Soviet economy, is there. All the stuff by Alchin and all those guys on property rights and the analysis of property rights system is there. All the stuff by Kirzner and Lavoie and all those guys on the reinterpretation of the calculations, it's there. There's nothing that was done later that was any good that Rothbard didn't already have. And the key issue, this is relevant to Mark, the key issue is Rothbard has a notion of a centrally prohibited economy. He refers to it as, it can't be called a centrally planned economy, it's a centrally prohibition economy.

21:20So then what do you have to do? You have to go to his sections on prohibition. And not to, certainly not to take anything away from, I think, very solid work that you did on prohibition. But he has all the stuff in there about the per-eutin potency, I mean, all the way down the line. It's a shortage economy, so corn eyes trumped by Rothbard. I mean, everything that is there, if you look at the analysis, Rothbard has it two decades before any of these other guys come. So I think the analysis is amazing. And the main advancement here is that, to keep in mind the following thing, is what did we have with the planning debate empirically? empirically. What happened, is my last point, is that we either went into mathematical models, Samuelson, Bergsson, social welfare function, right, following on Lange, Lerner and Taylor, okay, or you went into growth economics, let's estimate the growth rates, and what was missing in the Soviet context is the microanalytics of planning. How actually does this system work? And it's only since the system collapsed and we get access to the data about how the system

22:24The Soviet system, he arrived in the 1950s, okay, and so he provides the framework for us for understanding the microanalytics of planning, and if we understand the property rights system and the problems that the planning system had, and why it, quote unquote, planning system has, we understand where it is that the reforms have to come from. See, the reforms have to come from the system itself. The biggest problem with the transition economics has been that we've misidentified the start state and ill-defined the state that we're going towards. So in the path from here to there, we didn't know what the here was, and we didn't have a very strong idea of what the there was that we were going.

23:10Rothbard identifies the here and now, and make no bones about it, he understood where there should be, right? All right, so as a result, the implications for transition economics are extremely important, it seems to me, from this book. And I can't thank the Mises Institute enough for bringing the book back out again. And I hope everyone reads it afresh and goes from there. Okay? Thank you.