The Economics Book

144

T

he German philosopher
Karl Marx described
socialist economic
organization in his great work
Capital in 1867 (pp.100–05). A
socialist economy, he argued,
required state ownership of the
means of production (such as
factories). Competition was
wasteful. Marx proposed running
society as if it were one enormous
factory and believed that capitalism
would lead inevitably to revolution.
Economists took Marx’s ideas
seriously. When Italian economist
Vilfredo Pareto (p.131) used

mathematics to demonstrate how

free market competition produces

efficient outcomes, he also

suggested that these could be

achieved by a central planner under

socialism. His compatriot, the

economist Enrico Barone, took this

notion further in The Ministry of

Production in a Collectivist State

(1908). Just a few years later,

Europe was engulfed by World

War I, which many saw as a

catastrophic failure of the old order.

The Russian Revolution of 1917

provided an example of a socialist

takeover of the economy, and the

CENTRAL PLANNING

war’s defeated powers—Germany,

Austria, and Hungary—saw

socialist parties take power.

Free market economists seemed

unable to offer theoretical counter-

arguments to socialism. But then in

1920, Austrian economist Ludwig

von Mises raised a fundamental

objection, claiming that planning

under socialism was impossible.

Calculating with money

Von Mises’ 1920 article Economic

Calculation in the Socialist

Commonwealth carried a simple

challenge. He said that production

Socialism is the abolition of rational economy.

Modern production is

complex and varied.

Only prices and profits

can efficiently guide investment.

Without private ownership

and rivalry there is little

information or incentive

for efficient production.

Under socialism the state

owns the means of production.

IN CONTEXT

FOCUS

Economic systems

KEY THINKER

Ludwig von Mises

(1881–1973)

BEFORE

1867 Karl Marx sees scientific

socialism as organized like

an immense factory.

1908 Italian economist

Enrico Barone argues that

efficiency can be achieved

in a socialist state.

AFTER

1929 US economist Fred

Taylor says that mathematical

trial and error can achieve

equilibrium under socialism.

1934–35 Economists Lionel

Robbins and Friedrich Hayek

emphasize the practical

problems with socialism—

such as the scale of

computation required and

the absence of risk taking.