145
Boris Kustodiev’s The Bolshevik
reflected the idealistic policies of the
Russian Revolution. Within four years
they had floundered and were replaced
by the New Economic Policy.in the modern economy is so
complex that the information
provided by market prices—which
is generated through the rivalry
of many producers focused on
making profits—is essential to
planning. We need prices and
profits to establish where demand
lies and guide investment. His
ideas started a debate between
capitalism and socialism, called
the “socialist calculation“ or
“systems debate.”
Imagine planning a railway
between two cities. Which route
should it take, and should it even be
built at all? These decisions require
a comparison of benefits and costs.
The benefits are savings in the
transport expenses of many different
users. The costs include labor hours,
iron, coal, machinery, and so on. It is
essential to use a common unit to
make this calculation: money, the
value of which is based on market
prices. Yet, under socialism, genuine
money prices for these items no
longer exist—the state has to make
them up. Von Mises said that this
was not as much of a problem for
consumer goods. It is not difficult
to decide, based on consumer
tastes, whether to devote land to
producing 1,000 gallons of wine or
500 gallons of oil. Nor is it a
problem for simple production, as in
a family firm. One person can easily
make a mental calculation as to
whether to spend the day building
a bench, making a pot, picking
fruit, or building a wall. However,
complex production requires formal
economic calculation. Without such
help, von Mises claimed, the human
mind “would simply stand
perplexed before the problems
of management and location.”Market prices
In addition to using money prices
as a common unit with which to
evaluate projects, economic
calculation under capitalism has
two other advantages. First, marketSee also: Free market economics 54–61 ■ Marxist economics 100–05 ■ Economic liberalism 172–77 ■
Markets and social outcomes 210–13 ■ The social market economy 222–23 ■ Shortages in planned economies 232–33
INDUSTRIAL AND ECONOMIC REVOLUTIONS
prices automatically reflect the
valuations of everyone involved in
trade. Second, market prices reflect
production techniques that are both
technologically and economically
feasible. Rivalry among producers
means only the most profitable
production techniques are selected.
Von Mises argued that genuine
market prices rely on the existence
of money, which must be used at all
stages—for buying and selling the
goods involved in production, and
for buying and selling them in
consumption. Money is used in a
more limited way in the socialist
system: for paying wages and
buying consumer goods. But money
is no longer needed at the state-
owned production end of the
economy, just as it is not needed ❯❯In the socialist
commonwealth, every
economic change becomes
an undertaking whose success
can be neither appraised in
advance nor
later retrospectively
determined. There is
only groping in the dark.
Ludwig von Mises