11. A Treatise on Socialism

0:00Chapter 11 A Treatise on Socialism The publication of the essay on economic calculation in socialist commonwealths was the first instalment of an entire treatise on socialism that Mises had begun in 1919. This new work would contain a detailed discussion of the profound implications of the calculation problem, but it was far more than that, with penetrating observations on virtually all aspects of socialist practice Socialism Doctrine, Mises painted an encompassing and breathtakingly original picture of socialism. The production of his new opus occurred under the usual circumstances. On top of full-time work days and evening seminars, two years of writing after hours produced a 500-page manuscript, but it is safe to assume that his intellectual work during these two years was in creating a synthesis of the previous twenty years of reflection. All the discussions is with his friends and opponents. All silent meditations on books he had read and lectures he had listened to ever since he became interested in the problems of social theory found their

1:07way into Gemeinwirtschaft. In this way, at least, it was his greatest book to date. Like his other works, it was full of original insights. The present subject provided him with a greater variety of topics than, say, the nature of money and fiduciary media. Yet the subject was not too big to prevent him from writing a true treatise, dealing with virtually all aspects of the problem. Moreover, in contrast with his later treatise on economics, Human Action, 1949, he did not burden himself or his readers with lengthy discussions of fundamental epistemological and conceptual problems. The book was also notable in that Mises here used the only diagram he would ever display in one of his publications, depicting typical All shapes are the curve of the utility of labour as a function of labour-time. The result can only be called astounding. It establishes Mises' reputation as the greatest living mind in Austria. These were the words Felix Kaufmann used to describe Mises to his future wife Margit Sereni after they first met in 1925.

2:14And it was the book that turned an entire generation of young intellectuals away from Marxism and Tuat Classical Liberalism. Lionel Robbins, Friedrich August von Hayek, Wilhelm Röpke, Eric Wöglin and many others later testified that Gemeindwirtschaft had had a decisive impact on them in their formative years. Hayek compared Mises to Voltaire, Montesquieu, Ducville and John Stuart Mill. As one correspondent observed, the success could have been greater If Mises had managed to find a more striking title than the cumbersome die Gemeinwirtschaft, literally the Commonwealth or the Common Economy, Fritz G. Steiner wrote in a letter to Mises dated December 8th, 1930, It was always my opinion that its current title was the reason this brilliant book did not find the broad circulation it could have earned. Anglo-Saxon readers would have a less difficult time finding out what the book was all about when thirteen In the opening of part one, Mises analysed socialism not on its own merits but from a comparative point of view, contrasting it to the workings of a society organised according

3:29to classical liberal principles. Following in the tradition of Frederic Bastiat and other libertarian philosophers, Mises here emphasised the central role private property plays in and the Constitution of Free Societies. He also stressed the importance of contract and democracy for the peaceful resolution of conflicts, and made a brilliant application of these considerations to the case of the family or, as some would say today, gender relations. In the next four parts of the book, parts two through five, Mises elaborated four general theses. One, the promises of socialism were empty because its program for a central direction Production of production was a theoretical and practical impossibility. 2. There was no process of social evolution that necessarily led to socialist regimes. 3. None of the major ethical justifications of socialism suited up to rational scrutiny. And 4. The true character of socialism was not to improve the human condition but to worsen it, because socialist policies destroy the capital base of society.

4:36One of the most common charges against the classical liberal program of elevating the respect of private property into the first principle of human cooperation is that private property benefits the haves at the expense of the great mass of have-nots. As the word private insinuates, the have-nots are deprived of the benefits of the goods that are under Mises addresses this charge head-on in the opening pages of socialism by demonstrating the social function of private property. To have a good in the economic sense, Mises argues, means to enjoy the benefits derived from this good. There are benefits that can only be enjoyed by one person at a time. This is most notably the case with certain personal services Things such as haircuts, as well as with a great number of consumer goods, such as food stuffs, of which a given unit can only be consumed, that is, enjoyed, by one person.

5:39Things are somewhat different in the case of durable consumer goods, such as TV sets or sofas, which can be enjoyed by several people, though not always at the same time. But things are fundamentally different once we turn to production goods, such as factories, plantations, machine tools and so on. The benefits derived from these goods do not exclusively accrue to their owner, that is, to the person who controls them in a narrow legal sense. Rather, they accrue to the consumers of the final consumer goods that are produced with the help of those production goods. By the very nature of things, therefore, the benefits derived from factors of production cannot be limited to their legal owners. It is therefore not these legal owners who have them in the economic sense, the economic halves of production goods are older people who enjoy the consumer goods produced with their help. Now the crucial point is that this is truly independent of the prevalent social organisation. Consumers have the factors of production not

6:38only in a socialist system, in which they are the collective legal owners of those factors, but also in capitalism. Mises explained, To have production goods in the economic sense, that is, to make them serve one's own economic purpose, it is not necessary to have them physically in the way that one must have consumption goods, if one is to use them up or to use them lastingly. To drink coffee I do not need to own a coffee plantation in Brazil, an ocean steamer and a coffee roasting plant, though all these means of production must be used to bring a cup of coffee to my table, sufficient that others own these means of production and employ them for me. In the society which divides labour, no one is exclusive owner of the means of production, either of the material things or of the personal element, capacity to work. All means of production render services to everyone who buys or sells on the market. Hence, if we are disinclined

7:36here to speak of ownership as shared between consumers and owners of the means of production, We should have to regard consumers as the true owners in the natural sense, and describe those who are considered as the owners in the legal sense as administrators of other people's property. Ever wary of terminological innovations, Mises stressed that he would not henceforth refer to consumers as the true owners of the means of production, but use the accepted terminology according to which the owners of the means of production are those who have immediate legal control over them. But of course this terminological decision could not alter his findings. Mises had delivered the explanation of the fact recognized by all serious opponents of classical liberalism, from Marx to Philipowitz, that capitalism was not just a rip-off to benefit the happy few at the expense of the great majority.

8:27It was no accident that capitalism had incomparably improved the living conditions of the broad masses. It was in the very nature of capital accumulation that its ultimate benefits accrued to the community of consumers, that is, to all members of society. Some hundred and sixty years earlier, Adam Smith had analysed the economic impact of unequal land ownership in very similar terms. He argued that this inequality had a negligible impact on how the land was actually used. Land owners, he said, are led by an invisible hand to make nearly the same distribution of the necessaries of life which would have had been made had the earth been divided into equal portions among its inhabitants. The only question was whether socialistic schemes could enhance the living conditions of the working classes beyond what capitalism had in store for them, and Mises had already answered this question. In the light of his 1920 article on socialist calculation, the promise of greater productivity under socialism looked rather vacuous.

9:30The Utilitarian Case for Democracy Closer analysis revealed that private property and the factors of production was not just a privilege of the happy few capitalists but had a genuine social function. Mises brought the same perspective to bear on government and thus discovered an original rationale for democracy. This institution was not an end in itself, it fulfilled the social function that no other system of government could fulfill. Traditionally, the champions of democracy had defended this political form with the help of arguments rooted in ethics or natural law. All men are born equal, they claimed, and therefore all men should be equally involved in political decision-making, but this could only be realized in a democracy. Mises did not find this line of reasoning convincing. He believed it was rather obvious that all men were born unequal, and yet little patience with arguments based on claims about natural law, which he considered to be a fiction of the intellect.

10:26No agreement could ever be reached on the fiction. Rather, it was to be expected that everybody made up his own version of natural law to buttress his political agenda. Thus, natural law considerations were simply unfit to be applied in politics, because the very point of politics was, from Mises's perspective at any rate, to resolve conflicts. In socialism, it became obvious that Mises believed in Republican democracy nevertheless, but his rationale for endorsing it differed substantially from the traditional justification of democracy. For Mises, social institutions could be justified only to the extent that they improved the living conditions of the members of society. Accordingly, the starting point for his reflections was that these living conditions could be improved only through to improve living conditions as far as possible was therefore tantamount to encouraging the division of labour and to making it as productive as possible. This had been the guiding light in his analysis of the problems of economic calculation, which had led him to the conclusion

11:33that in capitalism the division of labour is more productive than in socialism because only in the former could it be based on economic calculation. In socialism, Mises stressed another implication of the same basic idea. Labour can only be divided among people who live in peace with one another. Violent conflicts necessarily disrupt social cooperation. They split society into parties that work against one another rather than for one another. They destroy scarce resources rather than producing more resources. The improvement of living conditions therefore requires choosing those political It's function is to make peace, to avoid violent revolutions.

12:20In non-democratic states, too, only a government which can count on the backing of public opinion is able to maintain itself in the long run. The strength of all government lies not in weapons, but in the spirit which puts the weapons at their disposal. Those in power, always necessarily a small minority against an enormous majority, can attain and maintain power only by making the spirit of the majority pliant to their rule. If there is a change, if those on who support the government depend lose the conviction that they must support this particular government, then the ground is undermined beneath it and it must sooner or later give way. Persons and systems in the government of non-democratic Economic states can be changed by violence alone. The system and the individuals that have lost the support of the people are swept away in the upheaval, and the new system and other individuals take their place. But any violent revolution costs blood and money.

13:18Lives are sacrificed, and destruction impedes economic activity. Democracy tries to prevent such material loss and the accompanying physical shock by guaranteeing accord between the will The Will of the State has expressed through the organs of the State and the will of the majority. This it achieves by making the organs of the State legally dependent on the will of the majority of the moment. In internal policy it realizes what pacifism seeks to realize in external policy. He notes that Marcellus of Padua seemed to have urged along similar lines in Defensel Parties. Today this line of argument is often attributed to Carl Popper, the open society and its enemies, but the young Popper is likely to have learned it, as did many other intellectuals of his time, from socialism. Notice that the premise of Mises' argument that governments cannot rule against the will of the majority has a long tradition in Western thought. Mises did not blindly advocate Quoting Max Weber, Mises said,

14:48The entire man, dilettante politicians, are of no use. And he also stressed that democracy must not be conceived as the unlimited rule of the general will. There is really no essential difference between the unlimited power of the democratic state and the unlimited power of the autocrat. The idea that carries away our demagogues and their supporters, the idea that the state can do whatever it wishes, and that nothing should resist the will of the sovereign people, has done more evil, perhaps, than decease our mania of degenerate Mises concluded that only within the framework of liberalism does democracy fulfil a social function. Democracy without liberalism is a hollow form. The great danger inherent in democracy is to turn the libertarian postulate of equality before the law into the postulate of economic equality. Here is a fertile field for the demagogue. Whoever stirs up the resentment of the poor against the rich can count on securing a big audience. Democracy creates Political Economy of the Family One of the most successful rhetorical ploys in defence of socialism is to present socialism

16:10Capitalism as going beyond liberalism in liberating the human being. Socialists such as Karl Marx and Friedrich Engels had praised capitalism for unfettering production, but capitalism had not gone far enough in abolishing the institutions that hampered the flowering of the human race. There was still private ownership in the means of production. Socialism would do away with this last bulwark of the exploitation of man by man. Only then would the reign of The Socialist feminists of the 18th and 19th century had used an analogous argument to make their case. They conceded that the condition of women had vastly improved in the course of the previous centuries, but it had not improved enough. Further progress was prevented through the institution of marriage, which enshrined male domination over the inherently and curtailed their productive powers. The solution was to outlaw marriage and to replace it with spontaneous and loose bonds between mates.

17:14The exact analogy in the two arguments could not fail to attract Mises's attention just as he had shown that the socialist case against the institution of private property was fallacious, so he now proceeded in socialism to denounce the fallacies of the feminist case against the Institution of Marriage. He showed that the historical progress in the condition of women had resulted from advances of the contractual principle, which is based on the recognition of private property rights and from the elimination of violence against the property rights of women. Men could dominate women only so long as they owned their wives, person and property. At the time of his writing, this was still the case in various Western countries. For For example, in an early case of social engineering, the French god Napoleon paired and shrined male dominance into the law by making the husband the sole legal owner of all family assets. The female right to vote had been introduced in Austria only in 1918. The dates

18:16for other countries, Germany 1919, Canada 1920, Great Britain 1928, France 1946, Italy 40, 1946, Japan, 1947, Switzerland, 1971. When women came to be recognised as legitimate property owners, the economic basis for that domination was destroyed. It followed that feminism was but a branch of liberalism to the extent that it advocated liberty within the confines of private property and full legal equality between men and women. These These claims were indeed the rational basis for the development of individual personality. Woman's struggle to preserve her personality in marriage is part of that struggle for personal integrity which characterises the rationalist society of the economic order based on private ownership of the means of production. It is not exclusively to the interest of woman that she should succeed in this struggle. To contrast the interests of men and women, as extreme Feminism feminists try to do is very foolish. All mankind would suffer if woman should fail to develop her ego, and be unable to unite with man as equal, free-born companions and

19:30comrades. On another page we find, So far as feminism seeks to adjust the legal position of woman to that of man, so far as it seeks to offer her legal and economic freedom to to develop and act in accordance with their inclinations, desires and economic circumstances. So far it is nothing more than a branch of the great liberal movement, which advocates peaceful and free evolution. When going beyond this, it attacks the institutions of social life under the impression that it will thus be unable to remove the natural barriers. It is a spiritual child of socialism. But socialist feminists got it wrong. They called The case against private property was untenable because private property fulfilled a social function that no other institution could. But what was the social function of marriage?

20:32There had to be such a function. After all, there was no legal obligation for women to To get married, they chose to marry. Therefore they could easily avoid the fate that, according to the feminists, marriage would entail for them. But why did women choose to marry? He argued that marriage served specific female needs, and that it served them better than any alternative social arrangement. These specific needs were rooted in the fact that Clearly, Mises would not do well in the court of current left-wing feminist opinion. However, the opinions he professed in socialism were not the idiosyncrasies of a resentful chauvinist.

21:20Rather, they were a cautiously worded version of the most widely accepted theory of gender The General Theory of Men and Women that Otto Weininger had construed at the turn of the century based on a comprehensive review of the scientific data available at the time. Weininger distinguished between a male principle M and a female principle F that were present in different proportions in each individual. Women were of course dominated by the F principle, said Weininger. The state of sexual arousal is for the woman merely the highest increase of her total being. The latter is always and quite sexual. F is completely immersed in her sex life, in the sphere of intercourse and reproduction, that is, in the relation to man and child. Her existence is completely filled up with these things, while M is not merely sexual. Thus, whereas F is totally fulfilled and taken by sexuality, M knows Fight and Play, Social Ability and Galaga, Discussion and Science, Business and Politics, Religion and Art, F is nothing but sexuality, M is sexual and also something above.

22:33In chapter 12, Weininger goes on to argue that the only vital positive interest of women is in sexual intercourse. Only because women are also essentially passive and receptive, They tend to adopt male values such as chastity and interest in art and science. Thus it comes to an inner conflict between their true sexual nature and the values that they officially endorse. The natural reaction is hysteria, about which Weininger has not much to say except that Boyer and Freud study it with a promising new method. This is why women had a tendency to choose marriage, and by that same decision they renounced the achievements It may be that a woman is able to choose between renouncing either the most profound womanly joy, the joy of motherhood, or the more masculine development of her personality in action and endeavour. It may be that she has no such choice. It may be that in suppressing her The truth about this, the fact remains that when she becomes a mother, with or without

23:54marriage, she is prevented from leading her life as freely and independently as man. Extraordinarily gifted women may achieve fine things in spite of motherhood, but because the functions of of Sex have the first claim upon woman, genius and the greatest achievements have been denied her. Mises was one of the few men in a leadership position who actively promoted young female intellectuals. Lene Liese, Marianne Herzfeld and others wrote their doctoral dissertations under his supervision. Liese, Herzfeld, Ilse Mintz, Martha Stephanie Braun, Elisabeth de Fruzzi and others were regular members of When Mises rejected the claims of radical Social Feminism. It was not because he lacked sympathy with his female associates, or because he was driven by some vicious desire to keep women in their place, rather it was intellectual integrity that led him to insist on his views about gender relations, views that even in his circle were likely to be resented by ambitious women such as M. S. Barne. As Mises saw it, these were the facts, and it was pointless to argue around them. The difference between

25:29Human sexual character and sexual destiny can no more be decreed away than other inequalities of mankind. It is not marriage which keeps woman inwardly unfree, but the fact that her sexual character demands surrender to a man, and that her love for husband and children consumes her best energies. There is no human law to prevent the woman who looks for happiness in a career from renouncing love and marriage, but those who do not renounce them are not Implications of the Calculation Problem The discussion of gender relations closed the first part of the book. In part two Mises turned to examining socialism on its own terms. After the exposition of the socialist calculation argument he reprinted the 1920 article. He set out to discuss its further implications.

26:44Paymentful work would be quite arbitrary, for the methods of calculating value used in a free economic society based on private ownership of the means of production would would be inaccessible to it, since, as we have seen, such imputation is impossible in a socialistic society. Economic facts would clearly limit the power of society to reward the labourer arbitrarily. In the long run, the wage total can in no circumstances exceed the income of society. Within this limit, however, the community is free to act. It can decide to pay all work equally, regardless of quality. It can just as easily make a In practice this meant that the individual members were defenceless against arbitrary decisions taken by the community or rather, as it was in practice, by those in charge of the central decisions. The directors of the socialist commonwealth would decide about about the allocation of all factors of production. This implied not only that they decide how each stretch of land should be used, but also how to allocate human resources. The directors

28:02would be in a position to give orders to individuals and families, telling them where to move and live and when to move on. They would do this not out of bad faith or personal abuse of power, but because it was in the very nature of socialism. Common ownership of all the The Socialist Community is a great authoritarian association in which orders are issued and obeyed. This is what is implied by the words planned economy and the abolition of anarchy of production. The inner structure of a socialist community is best understood if we compare with the inner structure of an army. Socialism could not alter the fact that the individual mind was free but the mind cannot express itself if all physical means of expression are under the control of the authorities. No censor, no emperor, no pope has ever possessed the power to suppress intellectual freedom which would be possessed by a socialist community.

29:08This may seem obvious to us now but in 1922 this assertion seemed to be contradicted by by recent events in Russia, where a new artistic avant-garde had risen under the Soviet regime, Mises remained unshaken. The nationalisation of intellectual life, which must be attempted under socialism, must make all intellectual progress impossible. It is possible to deceive oneself about this because in Russia new kinds of art have become the fashion, but the authors of these innovations were already working when the Soviets came into power. They sided Subsequent events proved his point. Long before the Soviet Empire collapsed in 1989, the artistic and intellectual institutions in the countries of Eastern Europe had enshrined the avant-garde of the 1920s and 1930s into eternal standards of truth and beauty, just as the writings of Marx and Engels were treated as holy writ. The Bolshoi Ballet in Moscow dutifully continued the revolutionary tradition, and the Berliner Ensemble faithfully replicated the plays of Bertolt Brecht in the same way they had always been played.

30:31Mises also restated the more conventional arguments concerning work and motivation, starting from the distinction between immediate satisfaction derived from labour, the satisfaction derived from the work itself, and indirect satisfaction, remuneration. Mises contested the assumption that the establishment of a socialist regime would by itself turn whatever work had to be performed into a pure joy. Absurd as it was, this assumption was pervasive among socialists. Mises observed that in a socialist regime the individual worker would would reap but a fraction of the return of his labours. There was therefore a strong incentive for each member of a socialist society to avoid hard work. So far as can be judged, there is no convincing reason for supposing that labour under socialism would be more productive than under capitalism. On the contrary, it can be asserted that under a system which provides no incentive to the worker to overcome the irksomeness of labour and to strive his utmost, the productivity of labour must, inevitably, decline.

31:36Mises argued that this problem went beyond the supply of labour. It also affected the supply of capital. The decision to save one's income increases the capital available for productive ventures. As in the case of all capital goods, the benefits derived from saving do not accrue primarily to the capitalist himself, but to the consumers. In modern parlance, Banking is a public good, but where is the incentive to save in a socialist regime? To maintain and accumulate capital involves costs. It involves sacrificing present satisfactions in order that greater satisfactions may be obtained in the future. Under capitalism the sacrifice has to be made by the possessors of the means of production, and those who, by limiting consumption, are on the way to being possessors of the means of production.

32:28The advantage which they thereby procure for the future does indeed not entirely accrue to them. They are obliged to share it with those whose incomes are derived from work, since other things being equal, the accumulation of capital increases the marginal productivity of labour, and therewith wages. But the fact that, in the main, the gain of not living beyond their means, that is, not consuming capital, and saving, that is, increasing capital, does pay them is a sufficient stimulus to incite them to maintain and extend it, and this stimulus is the stronger, the more completely their immediate needs are satisfied. For the less urgent are those present needs, which are not satisfied when provision is made for the future, the easier it is to make the sacrifice. Under capitalism, the maintenance and accumulation of capital is one of the functions of the unequal distribution of property and income.

33:22and the moral hazard, the other nemesis of socialism. Having dealt with the consequences that in one way or another resulted from the inability of a socialist management to calculate the contributions of the various factors of production, Mises pointed out that there was another equally insurmountable obstacle for the realisation of the socialist scheme. It is impossible to find a form of organisation which makes the economic action of the individual independent of the cooperation of other citizens without leaving it open to all the risks of mere gambling. In other words, socialism makes subordinate decision-makers irresponsible. By socialising the costs of individual action, socialism induces moral hazard at every level of society. All members of a socialist society know that most of the negative consequences of their behaviour fall on others. Everyone has an incentive to behave more recklessly be then in a strict private property system where costs are borne by individual actors, it is impossible to solve the problem with payment schemes to provide incentives for

34:27suitable behaviour. The problem is not nearly so much the question of the manager's share in the profit as of his share in the losses which arise through his conduct of business, except in a purely moral sense the property-less manager of a public undertaking can be made In capitalism, the individual responsibility of each property owner for his property is is a strong force that harmonises its actions with those of all other members of society.

35:18In contrast, a characteristic feature of socialism is to sever the link between an action and its consequences. Under such conditions, individual actions are necessarily out of step with what is required for the system to perform well. This not only concerned questions of business management but also private decisions about the number and timing of offspring. In socialist Systems, individuals had no incentive to harmonise the number of births with the limitations of the means of subsistence. Mises concluded, Without coercive regulation of the growth of population, a socialist community is inconceivable. This too turned out to be a prophetic statement. The People's Republic of China found it necessary to limit births with the help of the death penalty. There is only one remedy The imposition of strict rules for subordinate behaviour. To safeguard the economic system against the recklessness of irresponsible underlings, the central authorities would have to deprive them of all autonomous power of decision-making to give detailed prescriptions for the actions of subordinates, and reserve for itself the right of decision-making in

36:27all cases not covered by the rules. In short, socialism requires an all-encompassing bureaucratic The Feeble and Compromising John Stuart Mill Mises devoted particular attention to the discussion of time wages. According to a widespread opinion, the economic theory of time wages had refuted the standard charge against the socialists, namely that their schemes would suffer from incentives problems that were absent under capitalism. On this issue, the socialists had found an unexpected ally in John Stuart Mill, long regarded as the patron saint of of Classical Liberalism. In his elegant prose, Mill had stressed that capitalism too suffered from an incentive problem as soon as wages were paid for labour time, time wages, rather than for the work performed, peace work. Mises noticed that Mill's arguments have provided for decades one of the main prompts of the socialist idea and have contributed more to its popularity than the hate-inspired and frequently contradictory arguments of socialist The English economist had not taken account of the fact that time wages are different

37:47for different kinds of work. Therefore, workers under capitalism still do have an incentive to overcome the irksomeness of labour. Doubtless the individual working for a time Time Wage has no interest in doing more than will keep his job, but if he can do more, if his knowledge, capability and strength permit. He seeks for a post where more is wanted and where he can thus increase his income. It may be that he fails to do this out of laziness, but this is not the fault of the system. The system does all that it can to incite everyone to the utmost diligence, since it ensures to everyone the fruits of The discussion of Mill's mistake on a question of labour economics was Mises's first blow against the hallowed reputation of Mill. He had come to the conclusion that Mill's reputation had done much damage to the intellectual appeal of the case for political liberalism. Five years after the publication of socialism, Mises set the record straight. John Stuart

38:53Mill mirrors an epigone of classical liberalism and, especially in his later years, under the influence of his wife full of feeble compromises, he slips slowly into socialism and is the originator of the thoughtless confounding of liberal and socialist ideas that led to the decline of English liberalism and to the undermining of the living standards of the English people. Nevertheless, or perhaps because of this, one must become acquainted with Mill's Principle Writings The Law of Association After his analysis of the workings of socialist societies, Mises turned to the doctrine of the inevitability of socialism. Karl Marx and his followers had claimed that social evolution led with the necessity of natural law to the establishment of socialism. The driving forces in this process were a. the dialectics of class struggle and b. the tendency One might think that addressing this Marxist claim was a waste of Mises's time since he had already shown that socialism was inferior to capitalism, but Mises did not think so, even though socialism was demonstrably inferior to capitalism. There might still be a tendency

40:14for Society to Evolve Toward Socialism. The question therefore required a separate treatment. One of the centrepieces of Marxist sociology was the theory of class struggle according to which social evolution results from the necessarily conflicting interests of different social classes. History was one long drama featuring the interactions of antagonistic groups. The groups themselves varied over time – kings against nobility, nobility In socialism, Mises delivered an in-depth critique of the concept of class struggle, which had been adopted in a modified form by many thinkers outside the Marxist camp, including the champions of Aryan supremacy. Mises did not contest the fact that violent conflict had played a large role in the process of social evolution. Rather, he took issue with the notion that Violence had played a constructive role. Mises argued that, by its very nature, violence could not have played the role that the advocates of the concept of class struggle ascribed to it. Class struggle could not explain the emergence and growth of human society. At best, it could

41:28explain how the members of a given association behaved vis-à-vis other given associations. The dynamics of social evolution would remain a mystery, without a sound theory of cooperative Association. So why do people cooperate at all? Generalising a discovery that David Ricardo had famously made in this special case of foreign trade, Mises gave a simple answer. Human beings associate with one another because the division of labour is more physically productive than the atomistic production of isolated individuals. The theory of the international division of labour is one of the most important contributions of Classical Political Economy. It shows that, as long as, for any reasons, movements of capital and labour between countries are prevented, it is the comparative, not the absolute, costs of production which govern the geographical division of labour. When the same principle is applied to the personal division of labour, it is found that the individual enjoys an advantage in co-operating not only with people superior to himself in this or that capacity, but also with those who are inferior to himself in every relevant way.

42:39He goes on to illustrate the principle. If, through his superiority to B, A needs 3 hours labour for the production of 1 unit of commodity P compared with B's 5, and for the production of commodity Q, 2 hours, against B's 4, then A will gain if he confines his labour If each gives 60 hours to producing both P and Q, the result of A's labour is 20 P plus 30 Q of B's 12 P and 15 Q, and for both together 32 P and 45 Q. If, however, A confines himself to producing Q alone, he produces 60 units in 120 hours, whilst B, if he confines sends himself to producing p, produces in the same time 24 units. The result of the activity is then 24p plus 60q, which as p has for a, a substitution value of 3 divided by 2q and for b, 1 of 5 divided by 4q signifies a larger production than 32p plus 45q.

43:50Ricardo had barely mentioned what was later called the theory of comparative cost advantages, Relegating the Crucial Passage to a Mere Footnote in Chapter 7 of his Principles. Later economists realised that this principle applied not only to the particular case of foreign trade, but also to the general case of exchange between individuals. Thus is covered all form of the vision of labour. It explained why human association was worthwhile not only for the inferior worker The advantages are mutual, even if not necessarily symmetrical. This explains why children, handicapped and very old persons could be welcome in the division of labour, even though they might be inferior in all practical respects to their associates. It explained why the members of industrial nations, such as the United States or Japan, could benefit from the cooperation and of the residence of other countries in which capital was much more scarce and unit costs therefore higher. In short, the principle that the division of labour between two persons A and B is beneficial even in the hard case that A is superior to B in all respects is

45:06a true law of association. Mises used this expression only in his later treatises on economics. He spoke of the Ricardian der Gesellschaftungsgesetze and of the Ricardian Law of Association. But the generalisation of Ricardo's discovery had occurred already in socialism. Mises had independently discovered a general law of human action. More than any other economist, he highlighted its far-reaching implications. The law applies under virtually all circumstances because it presupposes only that the susceptible associate be different in talent or location which is almost always the case. Historically, division of labour originates in two facts of nature – the inequality of human abilities and the variety of the external conditions of human life on the earth. These two facts are really one – the diversity of nature, which does not repeat itself, but creates the universe in infinite, inexhaustible variety.

46:09This led to a surprising conclusion – the very differences in which the theory of class The greater productivity of work under the division of labour is a unifying influence. It leads men to regard each other as comrades in a joint struggle for welfare rather than as competitors in a struggle for existence. It makes friends out of enemies, peace out of war, society out of individuals. The fact that social differences harbour great potentials for mutual gains through cooperation had, of course, momentous policy implications.

47:02In the light of this fact, it was clear that government should regulate the economy as This runs directly counter to the notion that government should level the playing field on the market both domestically and in international trade. The law of association sustained the case for unilateralism. Many years later, Mises stated in private correspondence,

47:54After presenting the law of association, Mises returned to answering his initial question about Social Dynamics. Does social evolution necessarily lead to an ever greater expansion of the division of labour? He examined whether the Darwinian principle of natural selection would answer this question and found that societies based on a more extensive and intensive division of labour have more prospect of preserving their members from misery and poverty. They are also better equipped to defend themselves from the enemy. This fact by itself does not not provide a satisfying answer, it merely pushes back the question. Why do some societies cultivate a higher division of labour? Quoting the French sociologist Isoulé, Mises answers that the reason is a purely intellectual one. It is the social spirit, the spirit of social cooperation which forms, develops and upholds societies. Once it is lost, the society falls apart again. The death of a nation is social retrogression, the decline from the division of Labour to Self-Sufficiency. The social organism disintegrates into the cells from

49:23which it began. Man remains, but society dies. He emphasised, There is no evidence that social evolution must move steadily upwards in a straight line. Social standstill and social retrogression are historical facts which we cannot ignore. World history is the graveyard of dead civilisations, and in India and Eastern Asia we see large-scale examples of civilization at a standstill. Mises argued that the social spirit received a decisive boost from classical liberalism, which developed a sophisticated theory of the division of labour and highlighted the social function of private property. In later works, most notably in Theory and History, 1957, Mises elaborates on the role of ideas in social evolution, presenting them as the ultimate cause of social dynamics, but he Monopoly Theory Having dealt with the theory of class struggle, Mises turned to exhibit B in the Marxist case for the historical inevitability of socialism, monopoly theory. To do so, he examined not only the Marxist doctrine that capitalism produces ever more economic concentration, but also the emerging neoclassical theory of monopoly

50:39the prices, which had been widely used as an indictment of the market economy and as a prima facie justification for government intervention in the form of antitrust policies. Beginning with the Marxist tenants, Mises observed that the available statistical material contradicted the Marxist contention that there was a higher concentration of capital in private hands. Schumpeter just recently had endorsed this theory. On the other hand, it was clear that industrial production was increasingly organised in large plants. The Marxist case seemed to rely on a conflation of very different types of concentration. Mises therefore set out to distinguish and analyse three types of concentration – production plants, establishments, enterprises and individual fortunes. He showed that there is indeed a marked tendency toward the concentration of plants, but stressed that this was merely and offshoot of the division of labour. Larger plants can serve larger markets. For similar reasons, there might also be concentrations of enterprises, but, Mises emphasised, there was no concentration of individual fortunes, especially of fortunes derived from profitable

51:51industrial enterprise. The main reason was that, contrary to widespread assumption, capital investment does not guarantee profits. It is an essentially risky venture that thrives This analysis reconciled the observations on which the persuasiveness of the Marxist case relied, concentration of plants and enterprises, with the statistical evidence against any marked concentration of individual fortunes. Ever larger plans were owned by ever larger groups of stock owners and bondholders. The beneficial concentration in industry, which allowed for production at ever lower unit costs, did not necessarily go in hand with the concentration of wealth. This result was directly in line with the position that Max Weber and Friedrich Naumann had defended before the First World War, when in the meetings of the Verein für Sozialpolitik, they confronted the champions of antitrust policies.

53:02Economic concentration could be a very beneficial phenomenon. It might even be necessary to provide for the needs of a growing population. By 1922 Weber and Naumann had died. Now Mises's discussion of economic concentration and socialism made him the most prominent advocate of their cause. Mises would defend his position against antitrust policies for the rest of his life, often isolated in his stance, most notably when, as an octogenarian, he made the case for concentration in the debates of the Mont-Pleurin Society in the 1960s. During the 1920s he confronted the antitrust movement in Austria in his double capacity as a writer and as a secretary of the Vienna Commer, in which Austria's big industrialists and bankers had a forum. He opposed the promotion of the handicrafts by subsidies, not because he disliked like small firms or because he ignored their virtues but because the case for these subsidies was untenable from any larger social point of view. The handicrafts had difficulties because they could not compete against big industry, but it was wrong to jump from this

54:07fact to the conclusion that the competition from the big firms was unfair. Quite apart from the corruption that plagued the implementation of antitrust policies, Mittelstandspolitik, these policies often proved to be disastrous in practice because they benefited the more or inefficient chops at the expense of the better ones without improving their overall situation vis-à-vis the big industry. There was no critical study accounting for these practical failures. Mises obtained information from Hofrad Persendiner, a civil servant charged with the implementation of industrial policy. He tried to persuade him to put these experiences into print. Could economic concentration on a free market ever be harmful? Mises answered This question in the affirmative distinguishing two types of harmful monopoly as distinct from beneficial concentration. The first type of monopoly was given when one market participant provided a service that was indispensable, unique and without substitute, but this case seemed to be a mere theoretical possibility. To which concrete goods would it apply? To air and water? These were certainly indispensable goods, but in most cases they were not economic

55:17Goods at All. Mises argued that this form of monopoly was indeed exceedingly rare. Perhaps the nearest approach to such a monopoly was the power to administer grace to believers, exercised by the medieval church. Excommunication and interdict were no less terrible than death from thirst or suffocation. In a socialist community the state as organised society would form such a monopoly. All economic goods would be united in its hands and it would therefore Mises turned to the second type of monopoly, which was an offspring of the theory of prices. The case of price monopoly was given when a seller could restrict his production to increase his price and obtain higher total selling proceeds because the demand for his product was sufficiently inelastic.

56:12Of course this could work only in the absence of competitors, because any competitors in the field would expand their production and bit down the price as soon as our would-be monopolist set out to restrict his production. But Mises emphasised that, besides the absence of competition, a second condition had to be given, namely a relative inelasticity of demand. These circumstances brought about an anomaly on the market, whereas under competitive The one and only peculiarity of monopoly is that, assuming a certain shape for the demand curve, the maximum net profit lies at a higher price than would have been the case in competition between sellers.

57:06Monopoly under such conditions has three results. The market price is higher, the profit is greater, both the quantity sold and the consumption are smaller than they would have been under free competition. However, this argument was vulnerable to the objection that the restriction of production in one firm or industry must not be equated with a reduced overall production in society. When the price monopolist restricted his production, he automatically freed up factors of production that, henceforth, could could be used to produce other goods and services. The reduced supply of the monopoly good thus entails a larger supply of some other good, and if this is so, then what is wrong with price monopoly? Where is the harm? Price monopoly is certainly detrimental to the interests of the consumers of the monopoly good, but it benefits the producers and consumers of other goods. Can purely factual analysis strike a balance between these conflicting individual He very clearly saw that against the smaller production of the monopolised goods, one must

58:13set the increased production of other goods, yet he introduced another consideration. But these other goods, of course, are less important goods, which would not have been produced and consumed if the more pressing demands for a larger quantity of the monopolised commodity could have been satisfied. The difference between the value of these goods and the higher The sheer value of the quantity of the monopolised commodity not produced represents the loss of welfare which the monopoly has inflicted on the national economy. Here private profit and social productivity are at variance. A socialist society under such circumstances would act differently from a capitalist society. No other writer had ever come far enough to see the problem. Before 1922, the most elaborate exposition of the theory of monopoly price Mises could be found in the work of John Bates Clarke, who was much admired among Viennese theoreticians. Clarke had claimed that monopoly weakens free competition and that private monopoly was worse than public monopoly. Many years later, Mises said about the significance

59:16of his contribution, All those who have dealt with the monopoly problem have emphasized that the limitation of the total consumption of the monopoly good reduces the welfare of the person's concern. Now, in that passage of Gemeinwirtschaft, I deal with the extension of production that eventually must result from the liberation of non-specific factors of production formerly bound up in the production of the monopoly good. I explain that this extension of production can only concern less important goods, of course from the point of view of the consumers. They are less important because they would not have been produced and consumed if the more pressing demands for a larger quantity of the monopolised commodity could have been satisfied. There is no proof for the welfare-reducing effect of monopoly prices other than the one I propose. Mises's devotion to the facts, as he perceived them, was greater than his political incarnations. Certainly he would have been happy to find that the market process always caters to consumers in the best possible way, but he did not find this to be the case,

1:00:17and he insisted on what he did find. Mises would uphold his argument even when his American and disciple Murray Rothbard many years later reformulated monopoly theory in a way that completely exculpated the free market. While Mises conceded the theoretical possibility of monopoly prices, he stressed that in practice virtually all cases of monopoly were artificial creations of government intervention. In Das Finanzkapital, Rudolf Hilferding had made very similar observations in his influential book. However, the Austro-Marxist theoretician Friedrich Hayek argued that state monopolies were an outgrowth of capitalism. Mises was therefore unable to endorse Hilferding's analysis and preferred to recommend a study by the Freiburg professor Robert Liefmann, which detailed how the German government had created monopolies in the recent past. On a free market, monopoly is unlikely to occur in any field other than primary production. Mining, in the widest sense of the word, is and their true domain. But even in this case, monopoly prices are not as harmful as they appear under monopoly theory because the restricted exploitation of minds means that irreplaceable

1:01:30natural resources are used with greater thrift. Christian Ethics vs. The Market Having completed the analysis of the factual questions on socialism, Mises turned to a critique of the ethical doctrines that had served to justify socialist schemes. Here he devoted particular attention to Christianity and examined the question of how much it supported a free society and how much it would tend to justify violations of private property. Mises began by noting that of all the great monotheistic religions, Christianity alone was a living faith. Its doctrine covered all dimensions of human existence. It not only addressed the narrowly spiritual questions of Man. It also dealt with his ethical concerns, that is, his social and political relationships with other human beings. This could not be otherwise, Mises argued, lest religion force its adherents to look for an answer elsewhere. This would mean losing its hold on its adherents and its power over the spirit. Without social ethics, religion would be dead. Thus Mises joined hands with the champions of the notion that Christianity was a living faith, not

1:02:41in spite of its meddling with politics, but rather because of its political dimension. The same point had been made, though from a completely different point of view in Carl Schmitt's Politische Theologie. A great critic of classical liberal legal doctrines, Schmitt attacked the notion that modern juridical scholarship had done away with the theological foundation of politics. Ottmar Spunn, too, was a Catholic intellectual of the old school who believed with Pius IX that all things had to be remade in Christ. In Mises' own circle of friends, Erich Voegelin was most interested in these questions. But in 1922, the acknowledgement of Christianity's social and political dimension was more than a point of doctrine. The advice of Jesuits, Catholic bishops and Protestant pastors had a noticeable impact on daily life. The concrete embodiment of political Christianity with which Mises had long been acquainted was the Christian Socialist Movement, which had merged in the 1860s in the Austrian Alps and other rural areas predominantly inhabited by Catholic Germans. The movement arose as a reaction to the liberal reforms of the 1850s and 1860s,

1:03:54which had enabled efficient factory production, in conjunction with bank credit and railways, to displace the old handicraft-based modes of production. With amazing speed, this transformation had undermined the social positions of the old elites, landed nobility and clergy, who were increasingly challenged and displaced by industrial upstarts who were often Jewish. Christian socialism was a product of old elite intellectuals seeking to discredit these changes by contesting the legitimacy of liberalism and capitalism. President Egbert Belcredi, Freiherr von Vogelsang and Rudolf Mayer called for the re-establishment of medieval guilds, for credit organisations under state control, for factory laws, for the protection of national labour through tariffs and through social insurance schemes.

1:04:45This was how Mises experienced political Christianity first hand. In Chapter 29 of Socialism he gave a theoretical interpretation of this experience. Was Christian Socialism actually Mises answered this question affirmatively. Christ, he said, had left his disciples no rules whatever that could be of any use for building a society on earth because he believed the Kingdom of God was imminent. The expectation of God's own reorganisation when the time came and the exclusive transfer of all action and thought to the future Kingdom of God made Jesus' teaching utterly negative. He rejects everything that exists without offering anything to Replace it. He arrives at dissolving all existing social ties. The disciple shall not merely be indifferent to supporting himself, shall not merely refrain from work and dispossess himself of all goods, but he shall hate father and mother and wife and children and brethren and sister, yea, and his own life. Jesus is able to tolerate the worldly laws of the Roman Empire, and the prescriptions of the Jewish law because he is indifferent to them, despising

1:05:57them as things important only within the narrow limits of time and not because he acknowledges their value. His zeal in destroying social ties knows no limits. The motive force behind the purity and power of his complete negation is a static inspiration and enthusiastic hope Hope of a New World. Hence his passionate attack upon everything that exists. Everything may be destroyed because God in his omnipotence will rebuild the future order. No need to scrutinise whether anything can be carried over from the old to the new order because this new order will arise without human aid. It demands, therefore, from its adherents, no system of ethics, no particular conduct in any positive direction. Faith and hope The very fact that Christ's teachings were utterly unconcerned with the material conditions on earth, Mises argued, explains the great flexibility with which Christianity has adapted to a great variety of political systems throughout the ages. Again this thesis parallels a contemporary work by the anti-liberal Carl Schmitt, Römischer Katholizismus und Politischer Form. Schmitt

1:07:22however did not believe that Christ's teachings were utterly otherworldly. He held that the Catholic Church survived because she always enjoyed the margin of liberty necessary to accomplish her mission. But is the otherworldliness of the teachings of Christ really a sufficient and proof for the contention that these teachings are at odds with political liberty. Mises thought so, moving on to Exhibit B in the case against Christianity. Not only was it impossible to find a single passage in the New Testament that could be read as upholding private property, but Jesus Christ also topped this sin of omission with a sin of commission. One thing of course is clear and no skilful interpretation can obscure it. Jesus' words are full of resentment against the rich, and the apostles are no meeker in this respect.

1:08:14The rich man is condemned because he is rich, the beggar praised because he is poor. The only reason why Jesus does not declare war against the rich and preach revenge on them is that God has said, Revenge is mine. Up to the time of modern socialism no movement against private poverty, which has arisen in the Christian world, has failed to seek The Redeemer's words bore evil seed. More harm has been done and more blood shed on account of them than by the persecution of heretics and the burning of witches. One can only imagine how these passages must have endeared Mises to his Christian readers.

1:09:04But not only the Christian faithful will wonder if he had a proper understanding of political Christianity. It is clear that the Gospel of Christ had been abused many times in history. There is no doctrine that has been spared to this fate, not even the doctrines of Adam Smith and David Ricardo. But Mises' claims seem to be more than extravagant. They also also raised a puzzle. How is it that Western civilization arose under the dominion of Christian doctrine, which seemed to be so steadfastly opposed to anything that makes society possible? Up to 1922, according to Mises's own admission, Christianity was a vibrant faith, and it had been so during the very centuries that witnessed the development of the West. How was this possible? Mises answered that these cultural achievements were the work of the Church, of Christianity and that the social ethics of Jesus have no part in this cultural development.

1:09:58This evidence leads to the negation of the question asked above. Whether it might not be possible to reconcile Christianity with a free social order based on private ownership and the means of production, a living Christianity cannot exist side by side with and within capitalism. For unknown reasons, the published English translation sounds less categorical In face of all this evidence it would seem that only a negative answer can be made to the question asked above, whether it might not be possible to reconcile Christianity with a free social order based on private ownership in the means of production. A living Christianity cannot, it seems, exist side by side with capitalism. Liberalism and Christianity were foes by their very nature, engaged in a struggle of life or death. Either Christianity would maintain the upper hand or liberalism would crowd it out, no compromise was possible. Ten years later Mises had changed his mind. In the second edition of socialism, he added two paragraphs that gave a much milder and reconciling tone

1:11:02to the conclusion. Mises now claimed that Christianity and liberalism might not be quite as antagonistic as he had at first assumed. They could flourish together, provided there was a new synthesis. But there may be an alternative. No one can foresee with certainty how Church and Christianity may change in the future. Papacy and Catholicism now face problems incomparably more difficult than all those they have had to solve for over a thousand years. The Worldwide Universal Church is threatened in its very being by chauvinist nationalism. By refinement of political art it has succeeded in maintaining the principle of Catholicism through all the and the turmoil of national wars, but it must realise more clearly every day that its continuance is incompatible with nationalist ideas. Unless it is prepared to succumb and make way for national churches, it must drive out nationalism by an ideology which makes it possible for nations to live and work together in peace. But in so doing, the Church would find itself inevitably committed to liberalism, no other doctrine would serve. If the Roman Church

1:12:10It is not known what changed his mind. It is possible Mises had second thoughts on Christianity and Liberalism as a consequence of his activity as a counselor to Monsignor Injatz-Zeipel, who according to many Catholic witnesses had a saintly character. He also came to realize that other scholars worked to bridge the gap that he saw between capitalism and Catholicism. Thus, he would eventually characterize the influential Jesuit Au von Nell Breuning as one of the few German economists who in the interwar period advocated economic freedom.

1:13:06Mises had Nell Boining sent a copy of the Tax Foundation's handbook Fiscal Facts 453. Socialism is Destructionism Mises' analysis of socialism left nothing intact of the grandiose edifice that Marx and many other generations of socialist writers had worked to build. The Bolshevist reaction was predictable. He was presented as a theoretician of fascism, but then what was the true significance of socialism? The answer seemed by now to to be apparent. In fact, socialism is not in the least what it pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilisation have created. It does not build. It destroys. For destruction is the essence of it. It produces nothing. It only consumes what the social order based on private ownership and the means of production has created. Since a socialist order of society The work of destruction had been underway for a long time. Intellectuals and artists had been at the forefront of this movement. One can say without exaggeration that nothing

1:14:29has been prepared so thoroughly and from all sides for decades than the general collapse Here Mises sounds not unlike Carl Ludwig Haller, one of the great 19th century European reactionary thinkers who claimed that the egalitarian spirit of destruction characterised the Jacobin liberal movement and the French Revolution. Haller argued that egalitarian programs are always were smashed on the hard rock of natural social inequalities. Rather than abandoning their impossible goal, the egalitarian set out to transform the world according to their scheme.

1:15:14They led a war against all forms of authority and all social institutions that sprang from them, scholarship, church, priesthood, nobility, government, family, parents. But because this war merely destroyed the specific social bonds that resulted from inequalities and not the The factual existence of these inequalities, the Jacobins destroyed society. Anticipating Mises, he observed, If not everything had collapsed, if we could salvage some fragments of society, this is only thanks to the material impossibility of executing the Jacobin program, to the sometimes blatant nonsense, and the happy inconsistency of human beings, even in evil things. Mises and Holler certainly agreed on the fact of egalitarian destructionism.

1:16:01But Mises did not join Haller in condemning all institutional innovation after the French Revolution. Neither did he join English professor F. J. C. Hernshaw in representing socialism as systematised robbery. Bringing the notion of robbery into play was much too moralistic for Mises's taste. The point was a technical one. Socialism was just impossible. Commenting Working on Hernshaw, Mises wrote to a correspondent at the London School of Economics, I entirely agree with you that it is quite wrong to consider socialism as robbery. The socialist system would be just as honest and fair as the capitalist one, if a social order based on common ownership of the means of production was feasible.

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