[This article is excerpted from chapter 14 of The Austrian School of Economics: A History of Its Ideas, Ambassadors, and Institutions (2011).]
Council republics were established in Hungary and Bavaria according to the Russian Soviet model shortly after World War I. Violent revolts erupted in many places in Germany. Vienna, too, was dominated by this revolutionary atmosphere, which middle-class circles embraced with calculated opportunism. Ludwig von Mises, who at that time was a civil servant in the chamber of commerce of Lower Austria, recalled the following:
People were so convinced of the inevitability of Bolshevism that their main concern was securing a favorable place for themselves in the new order. … Bank directors and industrialists hoped to make good livings as managers under the Bolshevists. (Mises 1978/2009, pp. 14–15)
Otto Bauer was state secretary in the foreign department at this time, the leading Austro-Marxist, and later chairman of the nationalization commission. Mises knew him very well; they had attended Böhm-Bawerk’s economics seminar together. “At the time,” Mises wrote of the winter of 1918–1919 in his Memoirs,
I was successful in convincing the Bauers that the collapse of a Bolshevist experiment in Austria would be inevitable in a very short time, perhaps within days. … I knew what was at stake. Bolshevism would lead Vienna to starvation and terror within a few days. Plundering hordes would take to the streets and a second blood bath would destroy what was left of Viennese culture. After discussing these problems with the Bauers over the course of many evenings, I was finally able to persuade them of my view. (Ibid.)
In January of 1919, Bauer finally made the announcement in the 1Arbeiter-Zeitung that he wanted to carry out expropriations, with reimbursements in heavy industry and large-scale land holding. Organizational measures were to be taken in preparation for “nationalization” in other industries as well (cf. Bauer 1919).
The convincing Mises did in those memorable nighttime discussions was directed toward socialist political intentions that had the potential of endangering the short and unstable store of supplies available to the Viennese population even further. Of all the voluminous literature circulated during the subsequent debate on socialization — Schumpeter noted that even the most able were writing the most banal things (cf. Schumpeter 1922–1923, p. 307) — Mises was one of the few who kept his focus on the possible consequences of state intervention with sobriety and a sense of reality. The government-run “war and transitional economy” had provided numerous examples of the inevitable failure of central economic planning, and had also proven the “lesser economic productivity” of public enterprises (Mises 1919/1983/2000, pp. 220–221). Moreover, Mises realized early on that the interests of the Viennese Sozialisierungskommission (“Commission for Nationalization”) were by no means identical to the interests of the federal states (Mises 1920b).
In any case, these nightly talks put such a strain on his relationship with Bauer that Mises tended to believe Bauer had tried to have him removed from the teaching staff at the University of Vienna (cf. Mises 1978/2009, p. 15). Mises was indeed no longer considered for the position of tenured professor in Vienna when it became vacant in 1919. It was given instead to Othmar Spann (1878–1950), a former colleague of Bauer in the Wissenschaftliche Komitee für Kriegswirtschaft (“Academic Committee for War Economy”) in the royal-imperial Ministry of War.
During the course of the nationalization debate of 1919, Mises defended private property and the market economy with the argument of economic efficiency of supply. But he had to argue the position almost single-handedly, as many members of the Austrian School had been appointed to senior positions in the central “war and transition economy” offices, thereby joining the statist camp. It almost seemed as if they had — over the course of their careers — completely forgotten that the academic dispute with Marxism had at no university been so profound and productive as it had been in Vienna.
When the subjective theory of value had begun to take hold in the 1880s, other theories that competed with those of the Austrian School had also come to the fore, for example the labor theory of value. In Capital and Interest: A Critical History of Economical Theory (1884), Eugen von Böhm-Bawerk devoted a complete section to socialist notions (“The Exploitation Theory”) and subjected them to fastidious and detailed criticism. In 1885, Gustav Gross authored one of the first biographical sketches on Karl Marx. In the very same year he produced a separate biography: Karl Marx: Eine Studie (“Karl Marx: A Study”). Shortly thereafter he reviewed the second volume of Das Kapital (Capital). Hermann von Schullern zu Schrattenhofen’s first scholarly publication was Die Lehre von den Produktionsfaktoren in den sozialistischen Theorien (1885) (“Study of the Factors of Production in Socialist Theories”).
The dispute with the socialists was soon to become a permanent fixture of the Austrian School. It is an irony of history that it was this school of thought that first introduced academic discourse about socialism into the seminar rooms and libraries of established economics departments. Criticism was aimed primarily at the labor theory of value, whose contradictions and shortcomings were thought to have been overcome once and for all with the subjective theory of value. The socialist theory did not represent progress, but rather regression (cf. Zuckerkandl 1889, p. 296). Fierce controversy between Böhm-Bawerk (1890 and 1892a), Dietzel (1890 and 1891), and even Zuckerkandl (1890), among others, brought competition between the two doctrines to a head. Dietzel held to the labor theory of value, and held fast to the view that the principle of marginal utility was, in the end, nothing more than the good old law of supply and demand (Dietzel 1890, p. 570).
Disputes with socialism soon went beyond the labor theory of value and brought the “socialist state” into question in many respects. Böhm-Bawerk, for example, regarded interest as an economic category wholly independent of the social system; interest would exist even in the “socialist state” (Böhm-Bawerk 1891/1930, pp. 365–71). Wieser criticized socialist writers for their inadequate teaching of value’s role in the socialist state. He came to the conclusion that “not for one day could the [socialist] economic state of the future be administered according to any such reading of value.” For Wieser, “in the socialist theory of value pretty nearly everything is wrong” (cf. Wieser 1889/1893, pp. 64–66). Johann von Komorzynski extended the analysis to political science: he distinguished between a “true,” “philanthropic socialism,” and a “delusory socialism” aimed purely at class interests (Komorzynski 1893).
After the posthumous editing of the third volume of Das Kapital (1895), two in-depth contributions of the Austrian School marked the temporary cessation of its critique of Marxism. In one perceptive essay, Komorzynski tried to prove that Marxist theories were “at the greatest possible odds with the real economic processes.” The contradiction stemmed “from the basic principle, not from the utopian thinking” (Komorzynski 1897, p. 243). In his famous Zum Abschluß des Marxschen Systems (1896) (Karl Marx and the Close of His System, 1949), Böhm-Bawerk summarized his previous critique and came to the conclusion — based on the well-known contradictions between the first two and the third volumes of Das Kapital — that the final Marxist theory “contains as many cardinal errors as there are points in the arguments.” They “bear evident traces of having been a subtle and artificial afterthought contrived to make a preconceived opinion seem the natural outcome of a prolonged investigation” (Böhm-Bawerk 1896/1949, p. 69). “The Marxian system,” according to Böhm-Bawerk,
has a past and a present, but no abiding future. … A clever dialectic may make a temporary impression on the human mind, but cannot make a lasting one. In the long run, facts and the secure linking causes and effects win the day.
Böhm-Bawerk foresaw, that the “belief in an authority, which has been rooted for thirty years” in Marxist apologetics “forms a bulwark against the incursion of critical knowledge” that “will slowly but surely be broken down.” And even then, “Socialism will certainly not be overthrown with the Marxian system — neither practical nor theoretical socialism” (ibid., p. 117).
By the end of the 1880s, the law faculty of the University of Vienna became a center of research into socialism. In his sensational work Das Recht auf den vollen Arbeitsertrag in geschichtlicher Darstellung (1886) (“A Historical View of The Right to Full Labor Revenue”), Anton Menger (1841–1906), one of Carl Menger’s brothers, professor of civil litigation law and the first socialist of the monarchy with a tenured professorship, made a case for the nationalization of the means of production. Carl Grünberg (1861–1940), a “scientific Marxist,” taught economics there starting in 1892, and was one among many of Mises’s teachers. In 1924 he was appointed to Frankfurt where he founded the Institut für Sozialforschung (“Institute for Social Research”) and edited the works of Marx.
Anton Menger, Carl Grünberg, and later even Böhm-Bawerk came to attract the young socialist elite: Max and Friedrich Adler, Otto Bauer, Karl Renner, Julius Tandler, Emil Lederer, Robert Danneberg, Julius Deutsch, and Rudolf Hilferding. From Hilferding’s pen came the first Marxist anticritique directed at Böhm-Bawerk (cf. Rosner 1994). And his Das Finanzkapital (1910) (Finance Capital, 1981) was a remarkable outcome of the culture of the seminar. In it he comments on the role of banks and their symbiosis with the state, seemingly anticipating the monetary and business-cycle theory of the Austrian School, which was skeptical of both (cf. Streissler 2000b). On the eve of World War I, the continuing exchange of ideas between these talented young people nurtured in Böhm-Bawerk the belief that the labor theory of value had “lost ground in theoretical circles in all countries … in recent times” (Böhm-Bawerk 1890/1959, p. 249n.21).
Theoretical arguments that had evolved over the years did not play much of a role in the postwar debate on nationalization at first. In fact, ideas about the organization of the economy and economic policy were prevalent. But it soon appeared that the ideas of nationalization functionaries had been openly inadequate. Many nationalized business establishments fell upon economic hard times (cf. Weissel 1976, pp. 299–320). Entrepreneurs proved reluctant to invest when expropriations were announced, and amazingly enough, Otto Bauer seemed surprised at this reaction (cf. Bauer 1923, pp. 163, 173). In the federal states, state claims made the process of nationalization stall or fail altogether. But most notable was the threat of starvation in Vienna: in 1919, 150,000 of 186,000 school children were undernourished or severely undernourished. This was an indirect consequence of a controlled war economy that had led to a quadrupling of fallow land (cf. Bauer 1923, pp. 118–119). Schumpeter, who in 1919 had had to resign as finance minister over the question of nationalization, took stock two years later:
Though it has political appeal, nationalization accompanied by a comfortable lifestyle and a simultaneously abundant provision of goods — and the childish ideal of bedding oneself in existing affluence — is just nonsense. Nationalization which is not nonsense is politically possible today, but only so long as no one attempts it in earnest. (Schumpeter 1922–1923, p. 308)
Just when the politics of nationalization were beginning to lose momentum, Mises gained recognition for his spectacular essay, Die Wirtschaftsrechnung im sozialistischen Gemeinwesen (1920a) (Economic Calculation in the Socialist Commonwealth, 1935). It was expanded substantially two years later and published as the book, Die Gemeinwirtschaft: Untersuchungen über den Sozialismus (1922) (Socialism: An Economic and Sociological Analysis, 1936). Mises made the point that “rational” economic management, i.e., resource-conserving production and distribution of goods, which takes consumer preferences into account, can only be guaranteed with a free price system — the free exchange of goods and freedom to implement all possible uses of the goods — and that with central planning these goals can never be achieved. If the means of production are not privately owned, then efficient business leadership and the consequent satisfying of consumer interests cannot be ensured.
The core problem, according to Mises, is that
in the socialistic community economic calculation would be impossible. In any large undertaking the individual works or departments are partly independent in their accounts. They can reckon the cost of materials and labour, and it is possible at any time … to sum up the results of [their] activit[ies] in figures. In this way it is possible to ascertain with what success each separate branch has been operated and thereby to make decisions concerning the reorganization, limitations or extension of existing branches or the establishment of new ones. … It seems natural then to ask why … a socialistic community should not make separate accounts in the same manner. But this is impossible. Separate accounts for a single branch of one and the same undertaking are possible only when prices for all kinds of goods and services are established in the market and furnish a basis of reckoning. Where there is no market there is no price system, and where there is no price system there can be no economic calculation. (Mises 1922/1936/1951, p. 131)
Socialism, therefore, is not able to calculate. This is the main assertion of Mises’s argument, otherwise known as the “calculation problem.” There would be “neither discernible profits nor discernible losses … ; success and failure remain unrecognized in the dark. … A socialist management would be like a man forced to spend his life blindfolded” (Mises 1944/1983, p. 31).
Mises did not allow for the argument made by many “bourgeois” economists: that socialism could not be realized because humans were still too underdeveloped in a moral sense. According to Mises, socialism would be bound to fail, not because of morality, “but because the problems, that a socialist order would have to solve, present insuperable intellectual difficulties. The impracticability of Socialism is the result of intellectual, not moral, incapacity” (Mises 1922/1936/1951, p. 451).
Mises’s brilliant and overpoweringly logical analysis was not new. Its main features were already part of an inventory belonging to the early marginal-utility theoreticians — but this was little acknowledged. Hermann Heinrich Gossen (1810–1858) had already established that only in a society based on private property could the economy be “adequately” and “most expediently managed”: “The central agency assigned by the communists to allocate various jobs,” Gossen said, would “learn very soon it had set itself a task whose solution was beyond the ability of human individuals” (Gossen 1854/1987, p. 231).
In terms of the earlier Austrian School, Friedrich von Wieser had already placed clear emphasis on the necessity of economic calculation (cf. Wieser 1884, pp. 166–67, 178). He was one of the first economists to recognize the relevance of the informational nature of “value” in an economy: “Value,” Wieser stated, “is the form in which utility is calculated” (Wieser 1889/1893, p. 34), and “thus value comes to be the controlling power in economic life” (ibid., p. 36).
Apart from a few sporadic contributions in the foreign literature (cf. Schneider 1992, p. 112), the problem of economic calculation in socialism was scarcely considered until 1919 — not even by socialist economists. Erwin Weissel (1930–2005), the Viennese economist and historiographer of the Austro-Marxist debate on socialization, even claimed that “one wanted to ignore the problem” (Weissel 1976, p. 235). At the height of the socialization debate in spring 1919, Menger student and business attorney Markus Ettinger warned that “only market price … [could be] a reliable regulator of demand” and for the “in- and outflow of capital and labor from one area of production to another” (Ettinger 1919, p. 10).
It is interesting that Max Weber (1864–1920), who was in close contact with Mises during his stay in Vienna in 1919, also characterized “money calculation” in a book manuscript, unpublished at the time of his death, as a “specific device of the purposive-rational procurement economy” (Weber 1921/1972, p. 45).
Mises’s fundamental critique received international recognition into the 1920s. The notion that central planning without a price system would automatically be inefficient was seldom denied. But in the early 1930s, economists in the English-speaking world began responding with models for a socialist calculation — in answer to Mises — that included the idea of “competition socialism.” It prevailed and survived in socialist circles until the 1980s (cf. Socher 1986, pp. 180–94). The idea was that planners could adequately simulate market development with “trial-and-error loops” in between individual planning periods; subsequent calculations could then be made.
Both Mises and Hayek responded in detail and Hayek presented a concise summary of the complete debate in 1935 (Hayek 1935). He first and foremost centered on the hubristic notion of being able to plan economic and social systems comprehensively: socialism in all its right- and left-wing varieties was “an ideology born out of the desire to achieve complete control over the social order, and the belief that it is in our power to determine deliberately in any manner we like, every aspect of this social order” (Hayek 1973/1976/1979, vol. 2, p. 53). In contrast to Mises, Hayek emphasized the indispensable information function of market-induced prices: “that a market system has a greater knowledge of facts than any single individual or even any organization is the decisive reason why the market economy out performs any other economic system” (Hayek 1969a, p. 11). Amid heated debate, the Austrians were hardly aware of the fact that Hayek and Mises were pursuing two ultimately different paradigms (cf. Salerno 1993, pp. 116–117).
Mises’s massive attack on the utopia of an economically efficient socialism did not evoke much in the way of a direct counterreaction (cf. Mises 1923). Because the instigators of nationalization were aiming only at partial socialization, they were able to “get out of a tight spot” (Weissel 1976, p. 234) by pointing to organizational issues. The counter attack came only after two years, when Helene Bauer (1871–1942) diagnosed the “bankruptcy of the marginal theory of value” in the party organ of the Socialist Party (Bankerott der Grenzwerttheorie, 1924). Using revolutionary rhetoric and warlike language, she insinuated that the marginal-utility theory served a frightened bourgeoisie as a bulwark, and was used as the predominant theory to agitate against Marxism at the university level (Bauer 1924, pp. 106–107). But Bauer touched the Achilles’s heel of the marginal-utility theories on one point: she called their imputation theory inadequate (ibid., p. 112). The denunciatory intention of depicting the marginal-utility theory as an ideology of the “bourgeois” owner class was particularly obvious in Russian theoretical economist and philosopher Nicolai Ivanovich Bukharin’s (1888–1938) Economic Theory of the Leisure Class (1919/1927). Bukharin’s personal attacks on Böhm-Bawerk occasioned an unemotional counter criticism (Köppel 1930).
Ludwig von Mises was an especially easy target for this kind of appraisal on the part of socialist authors. Mises held the conviction that liberalism was the only idea that could effectively oppose socialism (cf. Mises 1927/1962/1985, p. 50). Liberalism, said Mises, is “applied economics” (ibid., p. 195); in another work from the previous year he had even stated that “classical liberalism was victorious with economics and through it” (Mises 1926, p. 269; and Mises 1929/1977, p. 22).
The theory of marginal utility nevertheless found some support in Germany in the 1920s — even from socialist writers or others with socialist leanings (cf. Kurz 1994, p. 56). While preparing for the Dresden convention of the Verein für Socialpolitik in 1932, Mises repeated his junction of modern economics and liberalism (cf. Mises 1931, p. 283) and was promptly criticized, even by advocates of the subjective theory of value (Weiss 1933/1993, pp. 51–52). Despite the polarization, a young participant of the Dresden convention, the postdoctoral graduate, attorney, and political scientist Hans Zeisl (1905–1992; in the United States he named himself Hans Zeisel) — sports correspondent of the socialist Arbeiter-Zeitung and until 1938 contributor to the now classical Marienthal-Studie2 — attempted the first synthesis in Marxismus und subjektive Theorie (1931) (“Marxism and the Subjective Theory of Value”).
According to Zeisl, the notion of value had developed into a concept of “human elective action.” The “goods concept” had “given way” to the “relational concept of possible uses” (Zeisl 1931/1993, pp. 180–81). The so-called laws of the subjective theory of value were of a “statistical nature” and received their cognitive value “when they are applied to empirically discerned demand systems” (ibid., p. 191). If one were to replace demand systems with “demand with purchasing power,” one would immediately recognize that demand is allocated “according to class.” The “crucial Marxist line of thought — that the level of wages and interest rates, etc., are dependent on ‘class structure’ — could be precisely articulated in the subjectivist theory of value” (ibid., pp. 192–193).
Subsequent changes in the political arena rendered any continued development of this interesting synthesis of praxeological thinking and the Marxist theory of distribution impossible.
- 1. The “‘Workers’ Newspaper” was started in 1889 and functioned as the main organ of the Austrian Socialist Party until 1989; it was bannend from 1934–1945; it ceased publication as an independet newspaper in 1991.
- 2. Edited and authored by Marie Jahoda, Paul Lazarsfeld, and Hans Zeisel. Translated into English as Marienthal: The Sociography of an Unemployed Community (London: Tavistock Publishing, 1971).