Economic Science originated in discussion of the money price of goods and services. Its first beginnings are to be found in inquiries about coinage, which developed into investigations of price movements. Money, money prices, and everything concerned with calculation in terms of money — these form the problems in the discussion of which the science of Economics emerged. Those attempts at economic inquiry, which are discernible in works on household management and the organization of production — particularly agricultural — did not develop further in this direction. They became merely the starting point for various departments of technology and natural science. And this was no accident. Only through the rationalization inherent in economic calculation based on the use of money could the human mind come to understand and trace the laws of its action.

The earlier economists did not ask themselves what the ‘economic’ and ‘economic activity’ really were. They had enough to do with the great tasks presented by the particular problems with which they were then concerned. They were not concerned with methodology. It was quite late before they began to grapple with the methods and ultimate aims of economics, and its place in the general system of knowledge. And then an obstacle was encountered which seemed to be insurmountable — the problem of defining the subject matter of economic activity.

All theoretical inquiries — those of the classical economists, equally with those of the moderns — start from the economic principle. Yet, as was necessarily soon perceived, this provides no basis for clearly defining the subject matter of economics. The economic principle is a general principle of rational action, and not a specific principle of such action as forms the subject of economic inquiry.1  The economic principle directs all rational action, all action capable of becoming the subject matter of a science. It seemed absolutely unserviceable for separating the ‘economic’ from the ‘non-economic’, so far as the traditional economic problems were concerned.2

But, on the other hand, it was equally impossible to divide up rational actions according to the immediate end to which they were directed, and to regard as the subject matter of economics only those actions which were directed to providing mankind with the commodities of the external world. Against such a procedure it is a decisive objection that, in the last analysis, the provision of material goods serves not only those ends which are usually termed economic, but also many other ends.

Such a division of the motives of rational action involves a dual conception of action — action from economic motives, on the one side, action from non-economic motives, on the other — which is absolutely irreconcilable with the necessary unity of will and action. A theory of rational action must conceive such action as unitary.

• 1It was left to the empiric-realistic school, with its terrible confusion of all concepts, to explain the economic principle as a specific of production under a money economy; e.g. Lexis, Allgemeine Volkswirtschaftslehre, Berlin and Leipzig 1910, p. 15.
• 2Amonn, Objekt und Grundbegriffe der theoretischen Nationalökonomie, 2nd Edition, Wien und Leipzig 1927, p. 185.

Action based on reason, action therefore which is only to be understood by reason, knows only one end, the greatest pleasure of the acting individual. The attainment of pleasure, the avoidance of pain — these are its intentions. By this, of course, we do not mean ‘pleasure’ and ‘pain’ in the sense in which these terms used to be used. In the terminology of the modern economist, pleasure is to be understood as embracing all those things which men hold to be desirable, all that they want and strive for. There can therefore be no longer any contrast between the ‘noble’ ethics of duty and the vulgar hedonistic ethics. The modern concept of pleasure, happiness, utility, satisfaction and the like includes all human ends, regardless of whether the motives of action are moral or immoral, noble or ignoble, altruistic or egotistical.1

In general men act only because they are not completely satisfied. Were they always to enjoy complete happiness, they would be without will, without desire, without action. In the land of the lotus-eaters there is no action. Action arises only from need, from dissatisfaction. It is purposeful striving towards something. Its ultimate end is always to get rid of a condition which is conceived to be deficient — to fulfil a need, to achieve satisfaction, to increase happiness. If men had all the external resources of nature so abundantly at their disposal that they were able to obtain complete satisfaction by action, then they could use them heedlessly. They would only have to consider their own powers and the limited time at their disposal. For, compared with the sum of their needs, they would still have only a limited strength and a limited life-time available. They would still have to economize time and labour. But to economy of materials they would be indifferent. In fact, however, materials are also limited, so that they too have to be used in such a way that the most urgent needs are satisfied first, with the least possible expenditure of materials for each satisfaction.

The spheres of rational action and economic action are therefore co-incident. All rational action is economic. All economic activity is rational action. All rational action is in the first place individual action. Only the individual thinks. Only the individual reasons. Only the individual acts. How society arises from the action of individuals will be shown in a later part of our discussion.

• 1J. S. Mill, Das Nützlichkeitsprinzip, translated by Wahrmund (Gesammelte Werke, Deutsche Ausgabe von Th. Gomperz, Vol. I, Leipzig 1869, pp. 125-200).

All human action, so far as it is rational, appears as the exchange of one condition for another. Men apply economic goods and personal time and labour in the direction which, under the given circumstances, promises the highest degree of satisfaction, and they forego the satisfaction of lesser needs so as to satisfy the more urgent needs. This is the essence of economic activity — the carrying out of acts of exchange.1, 2 

Every man who, in the course of economic activity, chooses between the satisfaction of two needs, only one of which can be satisfied, makes judgments of value. Such judgments concern firstly and directly the satisfactions themselves; it is only from these that they are reflected back upon goods. As a rule anyone in possession of his senses is able at once to evaluate goods which are ready for consumption. Under very simple conditions he should also have little difficulty in forming a judgment upon the relative significance to him of the factors of production. When, however, conditions are at all complicated, and the connection between things is harder to detect, we have to make more delicate computations if we are to evaluate such instruments. Isolated man can easily decide whether to extend his hunting or his cultivation. The processes of production he has to take into account are relatively short. The expenditure they demand and the product they afford can easily be perceived as a whole. But to choose whether we shall use a waterfall to produce electricity or extend coal-mining and better utilize the energy contained in coal, is quite another matter. Here the processes of production are so many and so long, the conditions necessary to the success of the undertaking so multitudinous, that we can never be content with vague ideas. To decide whether an undertaking is sound we must calculate carefully.

But computation demands units. And there can be no unit of the subjective use-value of commodities. Marginal utility provides no unit of value. The worth of two units of a given commodity is not twice as great as one — although it is necessarily greater or smaller than one. Judgments of value do not measure: they arrange, they grade.3  If he relies only on subjective valuation, even isolated man cannot arrive at a decision based on more or less exact computations in cases where the solution is not immediately evident. To aid his calculations he must assume substitution relations between commodities. As a rule he will not be able to reduce all to a common unit. But he may succeed in reducing all elements in the computation to such commodities as he can evaluate immediately, that is to say, to goods ready for consumption and the disutility of labour and then he is able to base his decision upon this evidence. It is obvious that even this is possible only in very simple cases. For complicated and long processes of production it would be quite out of the question.

In an exchange economy, the objective exchange value of commodities becomes the unit of calculation. This involves a threefold advantage. In the first place we are able to take as the basis of calculation the valuation of all individuals participating in trade. The subjective valuation of one individual is not directly comparable with the subjective valuation of others. It only becomes so as an exchange value arising from the interplay of the subjective valuations of all who take part in buying and selling. Secondly, calculations of this sort provide a control upon the appropriate use of the means of production. They enable those who desire to calculate the cost of complicated processes of production to see at once whether they are working as economically as others. If, under prevailing market prices, they cannot carry through the process at a profit, it is a clear proof that others are better able to turn to good account the instrumental goods in question. Finally, calculations based upon exchange values enable us to reduce values to a common unit. And since the higgling of the market establishes substitution relations between commodities, any commodity desired can be chosen for this purpose. In a money economy, money is the commodity chosen.

Money calculations have their limits. Money is neither a yardstick of value nor of prices. Money does not measure value. Nor are prices measured in money: they are amounts of money. And, although those who describe money as a ‘standard of deferred payments’ naively assume it to be so, as a commodity it is not stable in value. The relation between money and goods perpetually fluctuates not only on the ‘goods side’, but on the ‘money side’ also. As a rule, indeed, these fluctuations are not too violent. They do not too much impair the economic calculus, because under a state of continuous change of all economic conditions, this calculus takes in view only comparatively short periods, in which ‘sound money’ at least does not change its purchasing power to any very great extent.

The deficiencies of money calculations arise for the most part, not because they are made in terms of a general medium of exchange, money, but because they are based on exchange values rather than on subjective use-values. For this reason all elements of value which are not the subject of exchange elude such computations. If, for example, we are considering whether a hydraulic power-works would be profitable we cannot include in the computation the damage which will be done to the beauty of the waterfalls unless the fall in values due to a fall in tourist traffic is taken into account. Yet we must certainly take such considerations into account when deciding whether the undertaking shall be carried out.

Considerations such as these are often termed ‘non-economic’. And we may permit the expression for disputes about terminology gain nothing. But not all such considerations should be called irrational. The beauty of a place or of a building, the health of the race, the honour of individuals or nations, even if (because they are not dealt with on the market) they do not enter into exchange relations, are just as much motives of rational action, provided people think them significant, as those normally called economic. That they cannot enter into money calculations arises from the very nature of these calculations. But this does not in the least lessen the value of money calculations in ordinary economic matters. For all such moral goods are goods of the first order. We can value them directly; and therefore have no difficulty in taking them into account, even though they lie outside the sphere of money computations. That they elude such computations does not make it any more difficult to bear them in mind. If we know precisely how much we have to pay for beauty, health, honour, pride, and the like, nothing need hinder us from giving them due consideration. Sensitive people may be pained to have to choose between the ideal and the material. But that is not the fault of a money economy. It is in the nature of things. For even where we can make judgments of value without money computations we cannot avoid this choice. Both isolated man and socialist communities would have to do likewise, and truly sensitive natures will never find it painful. Called upon to choose between bread and honour, they will never be at a loss how to act. If honour cannot be eaten, eating can at least be foregone for honour. Only such as fear the agony of choice because they secretly know that they could not forego the material, will regard the necessity of choice as a profanation.

Money computations are only significant for purposes of ecomonic calculation. Here they are used in order that the disposal of commodities may conform to the criterion of economy. And such calculations take account of commodities only in the proportions in which, under given conditions, they exchange for money. Every extension of the sphere of money calculation is misleading. It is misleading when in historical researches, it is employed as a measure of past commodity values. It is misleading when it is employed to evaluate the capital or national income of nations. It is misleading when it is employed to estimate the value of things which are not exchangeable as, for instance, when people attempt to estimate the loss due to emigration or war.4  All these are dilettantisms — even when they are undertaken by the most competent economists.

But within these limits — and in practical life they are not overstepped — money calculation does all that we are entitled to ask of it. It provides a guide amid the bewildering throng of economic possibilities. It enables us to extend judgments of value which apply directly only to consumption goods — or at best to production goods of the lowest order — to all goods of higher orders. Without it, all production by lengthy and roundabout processes would be so many steps in the dark.

Two things are necessary if computations of value in terms of money are to take place. First, not only goods ready for consumption but also goods of higher orders must be exchangeable. If this were not so, a system of exchange relationships could not emerge. It is true that if an isolated man is ‘exchanging’ labour and flour for bread within his own house, the considerations he has to take into account are not different from those which would govern his actions if he were to exchange bread for clothes on the market. And it is, therefore, quite correct to regard all economic activity, even the economic activity of isolated man, as exchange. But no single man, be he the greatest genius ever born, has an intellect capable of deciding the relative importance of each one of an infinite number of goods of higher orders. No individual could so discriminate between the infinite number of alternative methods of production that he could make direct judgments of their relative value without auxiliary calculations. In societies based on the division of labour, the distribution of property rights effects a kind of mental division of labour, without which neither economy nor systematic production would be possible.

In the second place, there must be a general medium of exchange, a money, in use. And this must serve as an intermediary in the exchange of production goods equally with the rest. If this were not so, it would be impossible to reduce all exchange relationships to a common denominator.

Only under very simple conditions is it possible to dispense with money calculations. In the narrow circle of a closed household, where the father is able to supervise everything, he may be able to evaluate alterations in methods of production without having recourse to money reckoning. For, in such circumstances, production is carried on with relatively little capital. Few roundabout methods of production are employed. As a rule production is concerned with consumption goods, or goods of higher orders not too far removed from consumption goods. Division of labour is still in its earliest stages. The labourer carries through the production of a commodity from beginning to end. In an advanced society all this is changed. It is impossible to argue from the experience of primitive societies that under modern conditions we can dispense with money.

In the simple conditions of a closed household, it is possible to survey the whole process of production from beginning to end. It is possible to judge whether one particular process gives more consumption goods than another. But, in the incomparably more complicated conditions of our own day, this is no longer possible. True, a socialistic society could see that 1000 litres of wine were better than 800 litres. It could decide whether or not 1000 litres of wine were to be preferred to 500 litres of oil. Such a decision would involve no calculation. The will of some man would decide. But the real business of economic administration, the adaptation of means to ends only begins when such a decision is taken. And only economic calculation makes this adaptation possible. Without such assistance, in the bewildering chaos of alternative materials and processes the human mind would be at a complete loss. Whenever we had to decide between different processes or different centres of production, we would be entirely at sea.5

To suppose that a socialist community could substitute calculations in kind for calculations in terms of money is an illusion. In a community that does not practice exchange, calculations in kind can never cover more than consumption goods. They break down completely where goods of higher order are concerned. Once society abandons free pricing of production goods rational production becomes impossible. Every step that leads away from private ownership of the means of production and the use of money is a step away from rational economic activity.

It was possible to overlook all this because such Socialism as we know at first hand exists only, one might say, in socialistic oases in what, for the rest, is a system based upon free exchange and the use of money. To this extent, indeed, we may agree with the otherwise untenable socialist contention — it is only employed for propagandist purposes — that nationalized and municipalized undertakings within an otherwise capitalist system are not Socialism. For the existence of a surrounding system of free pricing supports such concerns in their business affairs to such an extent that in them the essential peculiarity of economic activity under Socialism does not come to light. In State and municipal undertakings it is still possible to carry out technical improvements, because it is possible to observe the effects of similar improvements in similar private undertakings at home and abroad. In such concerns it is still possible to ascertain the advantages of reorganization because they are surrounded by a society which is still based upon private ownership in the means of production and the use of money. It is still possible for them to keep books and make calculations which for similar concerns in a purely socialist environment would be entirely out of the question.

Without calculation, economic activity is impossible. Since under Socialism economic calculation is impossible, under Socialism there can be no economic activity in our sense of the word. In small and insignificant things rational action might still persist. But, for the most part, it would no longer be possible to speak of rational production. In the absence of criteria of rationality, production could not be consciously economical.

For some time possibly the accumulated tradition of thousands of years of economic freedom would preserve the art of economic administration from complete disintegration. Men would preserve the old processes not because they were rational, but because they were sanctified by tradition. In the meantime, however, changing conditions would make them irrational. They would become uneconomical as the result of changes brought about by the general decline of economic thought. It is true that production would no longer be ‘anarchical’. The command of a supreme authority would govern the business of supply. Instead of the economy of ‘anarchical’ production the senseless order of an irrational machine would be supreme. The wheels would go round, but to no effect.

Let us try to imagine the position of a socialist community. There will be hundreds and thousands of establishments in which work is going on. A minority of these will produce goods ready for use. The majority will produce capital goods and semi-manufactures. All these establishments will be closely connected. Each commodity produced will pass through a whole series of such establishments before it is ready for consumption. Yet in the incessant press of all these processes the economic administration will have no real sense of direction. It will have no means of ascertaining whether a given piece of work is really necessary, whether labour and material are not being wasted in completing it. How would it discover which of two processes was the more satisfactory? At best, it could compare the quantity of ultimate products. But only rarely could it compare the expenditure incurred in their production. It would know exactly — or it would imagine it knew — what it wanted to produce. It ought therefore to set about obtaining the desired results with the smallest possible expenditure. But to do this it would have to be able to make calculations. And such calculations must be calculations of value. They could not be merely ‘technical’, they could not be calculations of the objective use-value of goods and services. This is so obvious that it needs no further demonstration.

Under a system based upon private ownership in the means of production, the scale of values is the outcome of the actions of every independent member of society. Everyone plays a two-fold part in its establishment first as a consumer, secondly as producer. As consumer, he establishes the valuation of goods ready for consumption. As producer, he guides production-goods into those uses in which they yield the highest product. In this way all goods of higher orders also are graded in the way appropriate to them under the existing conditions of production and the demands of society. The interplay of these two processes ensures that the economic principle is observed in both consumption and production. And, in this way, arises the exactly graded system of prices which enables everyone to frame his demand on economic lines.

Under Socialism, all this must necessarily be lacking. The economic administration may indeed know exactly what commodities are needed most urgently. But this is only half the problem. The other half, the valuation of the means of production, it cannot solve. It can ascertain the value of the totality of such instruments. That is obviously equal to the value of the satisfactions they afford. If it calculates the loss that would be incurred by withdrawing them, it can also ascertain the value of single instruments of production. But it cannot assimilate them to a common price denominator, as can be done under a system of economic freedom and money prices.

It is not necessary that Socialism should dispense altogether with money. It is possible to conceive arrangements permitting the use of money for the exchange of consumers goods. But since the prices of the various factors of production (including labour) could not be expressed in money, money could play no part in economic calculations.6

Suppose, for instance, that the socialist commonwealth was contemplating a new railway line. Would a new railway line be a good thing? If so, which of many possible routes should it cover? Under a system of private ownership we could use money calculations to decide these questions. The new line would cheapen the transportation of certain articles, and, on this basis, we could estimate whether the reduction in transport charges would be great enough to counterweigh the expenditure which the building and running of the line would involve. Such a calculation could be made only in money. We could not do it by comparing various classes of expenditure and savings in kind. If it is out of the question to reduce to a common unit the quantities of various kinds of skilled and unskilled labour, iron, coal, building materials of different kinds, machinery and the other things which the building and upkeep of railways necessitate, then it is impossible to make them the subject of economic calculation. We can make systematic economic plans only when all the commodities which we have to take into account can be assimilated to money. True, money calculations are incomplete. True, they have profound deficiencies. But we have nothing better to put in their place. And under sound monetary conditions they suffice for practical purposes. If we abandon them, economic calculation becomes absolutely impossible.

This is not to say that the socialist community would be entirely at a loss. It would decide for or against the proposed undertaking and issue an edict. But, at best, such a decision would be based on vague valuations. It could not be based on exact calculations of value.

A stationary society could, indeed, dispense with these calculations. For there, economic operations merely repeat themselves. So that, if we assume that the socialist system of production were based upon the last state of the system of economic freedom which it superseded, and that no changes were to take place in the future, we could indeed conceive a rational and economic Socialism. But only in theory. A stationary economic system can never exist. Things are continually changing, and the stationary state, although necessary as an aid to speculation, is a theoretical assumption to which there is no counterpart in reality. And, quite apart from this, the maintenance of such a connection with the last state of the exchange economy would be out of the question, since the transition to Socialism with its equalization of incomes would necessarily transform the whole ‘set’ of consumption and production. And then we have a socialist community which must cross the whole ocean of possible and imaginable economic permutations without the compass of economic calculation.

All economic change, therefore, would involve operations the value of which could neither be predicted beforehand nor ascertained after they had taken place. Everything would be a leap in the dark. Socialism is the renunciation of rational economy.

• 1Schumpeter, Das Wesen und der Hauptinhalt der theoretischen Nationalokonomie, Leipzig 1908, pp. 50, 80.
• 2The following remarks reproduce parts of my essay Die Wirtschaftsrechnung im sozialistischen Gemeimvessen (Archiv fur Sozialwissenschaft, Vol. XLVII, pp. 86-121).
• 3Čuhel, Zur Lehre von den Bedürfnissen, Innsbruck 1907, p. 198.
• 4Wieser, Uber den Ursprung und die Hauptgesetze des wirtschaftlichen Wertet, Wien 1884, p. 185 et seq.
• 5Gottl-Ottlilienfeld, Wirtschaft und Technik (Grundriss der Sozialökonomik, II. Tübingen 1914), p. 216.
• 6Neurath too admitted this. (Durch die Kriegswirtschaft zur Naturalwirtschaft, München 1919, p. 216 et seq.) He asserts that every complete administrative economy (planned economy) is ultimately a natural economy (barter system). ‘To socialize therefore means to advance the natural economy.’ Neurath, however, did not recognize the insurmountable difficulties economic calculation would encounter in the socialist community.

The terms ‘Capitalism’ and ‘Capitalistic Production’ are political catchwords. They were invented by socialists, not to extend knowledge, but to carp, to criticize, to condemn. To-day, they have only to be uttered to conjure up a picture of the relentless exploitation of wage-slaves by the pitiless rich. They are scarcely ever used save to imply a disease in the body-politic. From a scientific point of view, they are so obscure and ambiguous that they have no value whatever. Their users agree only in this, that they indicate the characteristics of the modern economic system. But wherein these characteristics consist is always a matter of dispute. Their use, therefore, is entirely pernicious, and the proposal to extrude them altogether from economic terminology, and to leave them to the matadors of popular agitation, deserves serious consideration.1

If, nevertheless, we do desire to discover for them a precise application, we should start from the idea of capital calculations. And since we are concerned only with the analysis of actual economic phenomena, and not with economic theory — where ‘capital’ is often used in a sense specially extended for particular purposes — we must first ask what significance is attached to the term in business practice. There we find it used only for purposes of economic calculation. It serves to bring the original properties of a concern under one denomination, whether they consisted of money or were only expressed in money.2  The object of its computations is to enable us to ascertain how much the value of this property has altered in the course of business operations. The concept of capital is derived from economic calculation. Its true home is accountancy — the chief instrument of commercial rationality. Calculation in terms of money is an essential element of the concept of capital.3

If the term capitalism is used to designate an economic system in which production is governed by capital calculations, it acquires a special significance for defining economic activity. Understood thus, it is by no means misleading to speak of Capitalism and capitalistic methods of production, and expressions such as the capitalistic spirit and the anti-capitalistic disposition acquire a rigidly circumscribed connotation. Capitalism is better suited to be the antithesis of Socialism than Individualism, which is often used in this way. As a rule those who contrast Socialism with Individualism proceed on the tacit assumption that there is a contradiction between the interests of the individual and the interest of society, and that, while Socialism takes the public welfare as its object, individualism serves the interests of particular people. And since this is one of the gravest sociological fallacies we must avoid carefully any form of expression which might allow it secretly to creep in.

According to Passow, where the term Capitalism is used correctly, the association it is intended to convey is usually bound up with the development and spread of large scale undertakings.4  We may admit this — even if it is rather difficult to reconcile with the fact that people customarily speak of ‘Grosskapital’ and ‘Grosskapitalist’ and then of ‘Kleinkapitalisten’. But, if we recollect that only capital calculation made the growth of giant enterprise and undertakings possible, this does not in any way invalidate the definitions we propose.

• 1Passow, Kapitalismus, eine begrifflich-terminologische Studie, Jena 1918, p. 1 et seq. In the second Edition, published 1927, Passow expressed the opinion (p. 15, note 2), in view of the most recent literature, that the term ‘Capitalism’ might in time gradually lose the moral colouring.
• 2Karl Menger, Zur Theorie des Kapitals (S.A. aus den Jahrbüchern f. Nationalo- konomie und Statistik, Vol. XVII), p. 41.
• 3Passow, op. cit. (2nd Edition), p. 49 et seq.
• 4Passow, op. cit. (and Edition), p. 132 et. seq.

The common habit of economists of distinguishing between ‘economic’ or ‘purely economic’ and ‘non-economic’ action is just as unsatisfactory as the old distinction between ideal and material goods. For willing and acting are unitary. All ends conflict among themselves and it is this conflict which ranges them in one scale. Not only the satisfaction of wishes, desires and impulses that can be attained through interaction with the external world, but the satisfaction also of ideal needs must be judged by one criterion. In life we have to choose between the ‘ideal’ and the ‘material’. It is, therefore, just as essential to make the former subject to a unitary criterion of values as the latter. In choosing between bread and honour, faith and wealth, love and money, we submit both alternatives to one test.

It is, therefore, illegitimate to regard the ‘economic’ as a definite sphere of human action which can be sharply delimited from other spheres of action. Economic activity is rational activity. And since complete satisfaction is impossible, the sphere of economic activity is coterminous with the sphere of rational action. It consists firstly in valuation of ends, and then in the valuation of the means leading to these ends. All economic activity depends, therefore, upon the existence of ends. Ends dominate economy and alone give it meaning.

Since the economic principle applies to all human action, it is necessary to be very careful when distinguishing, within its sphere, between ‘purely economic’ and other kinds of action. Such a division is indeed indispensable for many scientific purposes. It singles out one particular end and contrasts it with all others. This end — at this point we need not discuss whether it is ultimate or not — is the attainment of the greatest possible product measured in money. It is, therefore, impossible to assign it a specially delimited sphere of action. It is true that for each individual it has such a delimited sphere, but this varies in extent according to the general outlook of the individual concerned. It is one thing for the man to whom honour is dear. It is another for him who sells his friend for gold. Neither the nature of the end nor the peculiarity of the means is what justifies the distinction, but merely the special nature of the methods employed. Only the fact that it uses exact calculation distinguishes ‘purely economic’ from other action.

The sphere of the ‘purely economic’ is nothing more and nothing less than the sphere of money calculation. The fact that in a certain field of action it enables us to compare means with minute exactitude down to the smallest detail means so much both for thought and action that we tend to invest this kind of action with special importance. It is easy to overlook the fact that such a distinction is only a distinction in the technique of thought and action and in no way a distinction in the ultimate end of action — which is unitary. The failure of all attempts to exhibit the ‘economic’ as a special department of the rational and within that to discover still another sharply defined department, the ‘purely economic’, is no fault of the analytical apparatus employed. There can be no doubt that great subtlety of analysis has been concentrated on this problem, and the fact that it has not been solved clearly indicates that the question is one to which no satisfactory answer can be given. The sphere of the ‘economic’ is plainly the same as the sphere of the rational: and the sphere of the ‘purely economic’ is nothing but the sphere in which money calculation is possible.

In the last resort the individual can acknowledge one end, and one end only: the attainment of the greatest satisfaction. This expression includes the satisfying of all kinds of human wants and desires, regardless whether they are ‘material’ or immaterial (moral). In the place of the word ‘satisfaction’ we could employ the word ‘happiness’, had we not to fear the misunderstandings, for which the controversy on Hedonism and Eudaemonism was responsible.

Satisfaction is Subjective. Modern social philosophy has emphasized this so sharply in contrast to former theories that there is a tendency to forget that the physiological structure of mankind and the unity of outlook and emotion arising from tradition create a farreaching similarity of views regarding wants and the means to satisfy them. It is precisely this similarity of views which makes society possible. Because they have common aims, men are able to live together. Against this fact that the majority of ends (and those the most important) are common to the great mass of mankind, the fact that some ends are only entertained by a few is of subordinate importance.

The customary division between economic and non-economic motives is, therefore, invalidated by the fact that on the one hand, the end of economic activity lies outside the range of economics, and on the other, that all rational activity is economic. Nevertheless, there is good justification for separating ‘purely economic’ activities (that is to say, activity susceptible of valuation in money) from all other forms of activity. For, as we have already seen, outside the sphere of money calculation there remain only intermediate ends which are capable of evaluation by immediate inspection: and once this sphere is left, it is necessary to have recourse to such judgments. It is the recognition of this necessity which provides the occasion for the distinction we have been discussing.

If, for example, a nation desires to make war, it is illegitimate to regard the desire as necessarily irrational because the motive for making war lies outside those customarily considered as ‘economic’ — as might be the case, e.g. with wars of religion. If the nation decides on the war with complete knowledge of all the facts because it judges that the end in view is more important than the sacrifice involved, and because it regards war as the most suitable means of obtaining it, then war cannot be regarded as irrational. It is not necessary at this point to decide whether this supposition is ever true or if it ever can be true. It is precisely this which has to be examined when one comes to choose between war and peace. And it is precisely with a view to introducing clarity into such an examination that the distinction we have been discussing has been introduced.

It is only necessary to remember how often wars or tariffs. are recommended as being ‘good business’ from the ‘economic’ point of view to realize how often this is forgotten. How much clearer would have been the political discussions of the last century if the distinction between the ‘purely economic’ and the ‘non-economic’ grounds of action had been kept in mind.

Under Socialism all the means of production are the property of the community. The community alone disposes of them and decides how to use them in production. The community produces, the products accrue to the community, and the community decides how those products are to be used.

Modern socialists, especially those of the Marxian persuasion, lay great emphasis on designating the socialist community as Society, and therefore on describing the transfer of the means of production to the control of the community as the ‘Socialization of the means of production’. In itself the expression is unobjectionable but in the connection in which it is used it is particularly designed to obscure one of the most important problems of Socialism.

The word ‘society’, with its corresponding adjective ‘social’, has three separate meanings. It implies, first, the abstract idea of social interrelationships, and secondly, the concrete conception of a union of the individuals themselves. Between these two sharply different meanings, a third has been interposed in ordinary speech: the abstract society is conceived as personified in such expressions as ‘human society’, ‘civil society’.

Now Marx uses the term with all these meanings. This would not matter as long as he made the distinction quite clear. But he does just the opposite. He interchanges them with a conjurer’s skill whenever it appears to suit him. When he talks of the social character of capitalistic production he is using social in its abstract sense. When he speaks of the society which suffers during crises he means the personified society of mankind. But when he speaks of the society which is to expropriate the expropriators and socialize the means of production he means an actual social union. And all the meanings are interchanged in the links of his argument whenever he has to prove the unprovable. The reason for all this is in order to avoid using the term State or its equivalent, since this word has an unpleasant sound to all those lovers of freedom and democracy, whose support the Marxian does not wish to alienate at the outset. A programme which would give the State the general responsibility and direction of all production has no prospect of acceptance in these circles. It follows that the Marxist must continually find a phraseology which disguises the essence of the programme, which succeeds in concealing the unbridgeable abyss dividing democracy and Socialism. It does not say much for the perception of men who lived in the decades immediately preceding the World War that they did not see through this sophistry.

The modern doctrine of the state understands by the word ‘State’ an authoritative unit, an apparatus of compulsion characterized not by its aims but by its form. But Marxism has arbitrarily limited the meaning of the word State, so that it does not include the Socialistic State. Only those states and forms of state organization are called the State which arouse the dislike of the socialist writers. For the future organization to which they aspire the term is rejected indignantly as dishonourable and degrading. It is called ‘Society’. In this way the Marxian social democracy could at one and the same time contemplate the destruction of the existing State machine, fiercely combat all anarchistic movements, and pursue a policy which led directly to an all powerful state.1

Now it does not matter in the least what particular name is given to the coercive apparatus of the socialistic community. If we use the word ‘State’ we have a term in common use, except in the quite uncritical Marxian literature, an expression which is generally understood and which evokes the idea it is intended to evoke. But there is no disadvantage in avoiding this term if we wish, since it arouses mixed feelings in many people, and in substituting the expression ‘community’. The choice of terminology is purely a matter of style, and has no practical importance.

What is important is the problem of the organization of this socialistic State or community. When dealing with the concrete expression of the will of the State, the English language provides a more subtle distinction by permitting us to use the term government instead of the term state. Nothing is better designed to avoid the mysticism which in this connection has been fostered by Marxian usages to the highest degree. For the Marxists talk glibly about expressing the will of society, without giving the slightest hint how ‘society’ can proceed to will and act. Yet of course the community can only act through organs which it has created.

Now it follows from the very conception of the socialistic community that the organ of control must be unitary. A socialist community can have only one ultimate organ of control which combines ajl economic and other governmental functions. Of course this organ can be subdivided and there can be subordinate offices to which definite instructions are transmitted. But the unitary expression of the common will, which is the essential object of the socialization of the means of production and of production, necessarily implies that all offices entrusted with the supervision of different affairs shall be subordinate to one office. This office must have supreme authority to resolve all variations from the common purpose and unify the executive aim. How it is constituted, and how the general will succeeds in expressing itself in and by it, is of minor importance in the investigation of our particular problem. It does not matter whether this organ is an absolute prince or an assembly of all citizens organized as a direct or indirect democracy. It does not matter how this organ conceives its will and expresses it. For our purpose we must consider this as accomplished and we need not spend any time over the question how it can be accomplished, whether it can be accomplished or whether Socialism is already doomed because it cannot be accomplished.

At the outset of our inquiry we must postulate that the socialistic community is without foreign relations. It embraces the whole world and its inhabitants. If we conceive it as limited, so that it comprises only a part of the world and the inhabitants therein, we must assume that it has no economic relations with the territories and peoples outside its boundaries. We are to discuss the problem of the isolated socialistic community. The implications of the contemporaneous existence of several socialistic communities will be dealt with when we have surveyed the problem in complete generality.

• 1See the critique of Kelsen, Staat und Gesellschaft, p. 11 et seq.

The theory of economic calculation shows 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 for an individual group to strike a separate balance and to sum up the results of its activity 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. Some mistakes are of course unavoidable in these calculations. They arise partly from the difficulty of allocating overhead costs. Other mistakes again arise from the necessity of calculating from insufficiently determined data, as, e.g. when in calculating the profitability of a certain process, depreciation of the machinery employed is determined by assuming a certain working life for the machine. But all such errors can be confined within certain narrow limits which do not upset the total result of the calculation. Whatever uncertainty remains is attributed to the uncertainty of future conditions inevitable in any imaginable state of affairs.

It seems natural then to ask why individual branches of production in 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.

Some may think that it is possible to permit exchange between the different groups of undertakings so as to establish a system of exchange relations (prices) and in this way create a basis for economic calculation in the socialistic community. Thus within a framework of a unitary economic system which does not recognize private property in the means of production, individual branches of industry with separate administration could be set up, subject of course, to the supreme economic authority, but able to transfer to each other goods and services for a consideration reckoned in a common medium of exchange. This roughly, is how people conceive the productive organization of socialistic industry when they speak nowadays of complete socialization and the like. But here again the decisive point is evaded. Exchange relations in productive goods can only be established on the basis of private property in the means of production. If the Coal Syndicate delivers coal to the Iron Syndicate a price can be fixed only if both syndicates own the means of production in the industry. But that would not be Socialism but Syndicalism.

For those socialist writers who accept the labour theory of value the problem is, of course, quite simple.

‘As soon,’ says Engels, ‘as Society has taken possession of the means of production and applies them to direct social production the labour of everyone, however different its specific use may be, will immediately become direct social labour. The amount of social labour inherent in any product does not require to be ascertained in any roundabout way: everyday experience will show how much of it on the average is necessary. Society can easily reckon how many hours of labour inhere in a steam engine, in a hectolitre of wheat of the last harvest, in a hundred square metres of cloth of a certain quality. Of course society will have to find out how much work is required for the manufacture of every article of consumption. It will have to base its plans on a consideration of the means of production at its disposal — and of course the labour force falls into this category. The utility of the different objects of consumption weighed against one another and against the labour necessary for their production will finally determine the plan. The people will decide everything quite easily without the intervention of the much-vaunted value.’1

It is not part of our business here to restate the critical arguments against the labour theory of value. They interest us at this point only in so far as they enable us to judge the possibility of making labour the basis of economic calculation in a socialistic community.

At first sight it would appear that calculations based on labour take into account the natural conditions of production, as well as conditions arising from the human element. The Marxian concept of the socially necessary labour time takes the law of diminishing returns into consideration in so far as it results from different natural conditions of production. If the demand for a commodity increases and less favourable natural conditions have to be exploited, then the average socially necessary time for the production of a unit also increases. If more favourable conditions of production are discovered then the necessary quantum of social labour declines.2  But this is not enough. Computation of changes in marginal labour costs only take account of natural conditions in so far as they influence labour costs. Beyond that, the ‘labour’ calculation breaks down. It leaves, for instance, the consumption of material factors of production entirely out of account. Suppose the socially necessary labour time for producing two commodities P and Q is ten hours, and that the production of a unit both of P and of Q requires material A, one unit of which is produced by one hour of socially necessary labour, and that the production of P involves two units of À and eight hours of labour, and of Q one unit of A and nine hours of labour. In a calculation based on labour time P and Q are equivalent, but in a calculation based on value P must be worth more than Q.. The former calculation is false. Only the latter corresponds to the essence and object of economic calculation. It is true that this surplus by which the value of P exceeds that of Q, this material substratum, ‘is furnished by nature without the help of man’,3  but provided it is present only in such quantities that it becomes an economic factor it must also in some form enter into economic calculation.

The second deficiency of the labour calculation theory is that it disregards differences in the quality of labour. For Marx all human labour is economically homogeneous, because it is always the ‘productive expenditure of human brain, muscles, nerves, hands, etc’ ‘Skilled labour is only intensified, or rather multiplied simple labour, so that a small quantity of skilled labour equals a larger quantity of simple labour. Experience shows that this resolution of skilled into simple constantly happens. A commodity may be the product of highly skilled labour, but its value equates it to the product of simple labour and represents only a certain quantity of simple labour.’4  Bohm-Bawerk was justified in describing this argument as a masterpiece of astounding naivety.5  In criticizing it one may conveniently leave undecided whether one can discover a unitary physiological measure of all human labour, physical as well as ‘mental’. For it is certain that between men themselves there are differences of capability and skill which result in differing qualities of the goods and services produced. What is ultimately decisive for the solution of the problem of the feasibility of using labour as a basis of economic calculation is the question whether one can assimilate different kinds of work to a common denominator without a valuation of the products by the consumer. It is clear that the argument which Marx brings to bear on this point has failed. Experience does indeed show that commodities enter into exchange regardless of the question whether they are the products of skilled or simple labour. But this would only prove that a definite quantity of simple labour is equal to a definite quantity of skilled labour if it were proved that labour is the source of exchange value. But not only is this unproven; it is exactly what Marx originally set out to prove. The fact that in exchange a substitute relation between simple and skilled labour has arisen in the form of wage rates — a point to which Marx does not here allude — is not in the least a proof of this homogeneity. This process of equating is a result of the working of the market, not its presupposition. Calculations based on labour cost rather than on monetary values would have to establish a purely arbitrary relation by which to resolve skilled into simple labour, and this would make them useless as an instrument for the economic organization of resources.

It was long thought that the labour theory of value provided a necessary ethical basis for the demand to socialize the means of production. We know now that this was an error. Although the majority of socialists have adopted this view and although even Marx with his professedly non-ethical standpoint could not shake it off, it is clear that, on the one hand, the political demands for the introduction of the socialistic method of production neither need nor receive support from the labour theory of value, and, on the other hand, that those who hold different views on the nature and causes of value can also have socialistic tendencies. But from another point of view, the labour theory of value is still an essential dogma for the advocates of the socialistic method of production. For socialistic production in a society based on division of labour seems practicable only if there is an objective recognizable unit of value which would enable economic calculations to be made in an exchangeless and moneyless community and labour seems the only thing to serve this purpose.

• 1Engels, Herrn Eugen Diihrings Umwälzung der Wissenschaft, p. 335 et seq.
• 2Marx, Das Kapital, Vol. I, p. 5 et seq.
• 3Ibid. p. 5 et seq.
• 4Ibid. p. 10 et seq.
• 5Böhm-Bawerk, Kapital und Kapitalzins, Vol. I, 3rd Edition, Innsbruck 1914, p. 531.

The problem of economic calculation is the fundamental problem of Socialism. That for decades people could write and talk about Socialism without touching this problem only shows how devastating were the effects of the Marxian prohibition on scientific scrutiny of the nature and working of a socialist economy.1

To prove that economic calculation would be impossible in the socialist community is to prove also that Socialism is impracticable. Everything brought forward in favour of Socialism during the last hundred years, in thousands of writings and speeches, all the blood which has been spilt by the supporters of Socialism, cannot make Socialism workable. The masses may long for it ever so ardently, innumerable revolutions and wars may be fought for it, still it will never be realized. Every attempt to carry it out will lead to syndicalism or, by some other route, to chaos, which will quickly dissolve the society, based upon the division of labour, into tiny autarkous groups.

The discovery of this fact is clearly most inconvenient for the socialist parties, and socialists of all kinds have poured out attempts to refute my arguments and to invent a system of economic calculation for Socialism. They have not been successful. They have not produced a single new argument which I have not already taken account of.2  Nothing has shaken the proof that under Socialism economic calculation is impossible.3

The attempt of the Russian Bolsheviks to transfer Socialism from a party programme into real life has not encountered the problem of economic calculation under Socialism, for the Soviet Republics exist within a world which forms money prices for all means of production. The rulers of the Soviet Republics base the calculations on which they make their decisions on these prices. Without the help of these prices their actions would be aimless and planless. Only so far as they refer to this price system, are they able to calculate and keep books and prepare their plans. Their position is the same as the position of the state and municipal Socialism of other countries: the problem of socialist economic calculation has not yet arisen for them. state and municiapal enterprises calculate with those prices of them. means of production and of consumption goods which are formed on the market. Therefore it would be precipitate to conclude from the fact that municipal and state enterprises exist, that socialist economic calculation is possible.

We know indeed that socialist enterprises in single branches of production are practicable only because of the help they get from their non-socialist environment. State and municipality can carry on their own enterprises because the taxes which capitalist enterprises pay, cover their losses. In a similar manner Russia, which left to herself would long ago have collapsed, has been supported by finance from capitalist countries. But incomparably more important than this material assistance, which the capitalist economy gives to socialist enterprises, is the mental assistance. Without the basis for calculation which Capitalism places at the disposal of Socialism, in the shape of market prices, socialist enterprises would never be carried on, even within single branches of production or individual countries.

Socialist writers may continue to publish books about the decay of Capitalism and the coming of the socialist millennium: they may paint the evils of Capitalism in lurid colours and contrast with them an enticing picture of the blessings of a socialist society; their writings may continue to impress the thoughtless — but all this cannot alter the fate of the socialist idea.4  The attempt to reform the world socialistically might destroy civilization. It would never set up a successful socialist community.

• 1We may point out here that as early as 1854 Gossen knew ‘that only through private property is the measure found for determining the quantity of each commodity which it would be best to produce under given conditions. Therefore, the central authority, proposed by the communists, for the distribution of the various tasks and their reward, would very soon find that it had taken on a job the solution of which far surpasses the abilities of individual men.’ (Gossen, Entwicklung der Gesetze des menschlichen Verkehrs, New Edition, Berlin 1889, p. 231.) Pareto (Cours d’Economie Politique, Vol. II, Lausanne 1897, p. 364 et seq.) and Barone (IL Ministro della Produzione nello Stato Coletivista in Giornale degli Economisti, Vol. XXXVII, 1908, p. 409 et seq.) did not penetrate to the core of the problem. Pierson clearly and completely recognized the problem in 1902. See his Das Wertproblem in der sozialistischen Gesellschaft (German translation by Hayek, Zeitschrift fiir Volkswirtschaft, New Series, Vol. IV, 1925, p. 607 et seq.) See now Hayek, Collectivist Economic Planning, London 1935.
• 2I have briefly discussed the most important of these replies in two short essays:– ‘Noue Beiträge zum Problem der sozialistischen Wirtschaftsrechnung’ (Archiv für Sozialwissenschaft, Vol. VI, pp. 488-500) and Neue Schriften zum Problem der sozialistischen Wirtschaftsrechnung’ (Ibid.. Vol. LX. pp. 187-90). See Appendix.
• 3In scientific literature there is no more doubt about this. See Max Weber, Wirtschaft und Gesellschaft (Grunriss der Sozialökonomik, Vol. III), Tubingen 1922, PP. 45-59; Adolf Weber, Allgemeine Volkswirtschaftslehre, 4th Edition, München und Leipzig 1932, Vol. II, p. 369 et seq; Brutzkus, Die Lehren des Marxismus im Lichte der russischen Revolution, Berlin 1928, p. 21 et seq; C. A. Verrijn Stuart, Winstbejag versus behoeftenbevrediging (Overdruk Economist, 76 Jaargang Aflevering 1), p. 18 et seq; Pohle-Halm, Kapitalismus und Sozialismus, 4th Edition, Berlin 1931, p. 237 et seq.
• 4Characteristic of this branch of literature is the recently published work of C. Landauer, Planwirtschaft und Verkehrsuirtschaft, Munchen und Leipzig 1931. Here the writer deals with the problem of economic calculation quite naively, at first by asserting that in a socialist society ‘the individual enterprises... could buy from each other, just as capitalist enterprises buy from each other’ (p. 114). A few pages on he explains that ‘besides this’ the socialist state will ‘have to set up a control accountancy in kind’; the state will be ‘the only one able to do this because in contrast to Capitalism it controls production itself (p. 122). Landauer cannot understand that — and why — one is not permitted to add and subtract figures of different denominations. Such a case is, of course, beyond help.

Some of the younger socialists believe that the socialist community could solve the problem of economic calculation by the creation of an artificial market for the means of production. They admit that it was an error on the part of the older socialists to have sought to realize Socialism through the suspension of the market and the abolition of pricing for goods of higher orders; they hold that it was an error to have seen in the suppression of the market and of the price system the essence of the socialistic ideal. And they contend that if it is not to degenerate into a meaningless chaos in which the whole of our civilization would disappear, the socialist community equally with the capitalistic community, must create a market in which all goods and services may be priced. On the basis of such arrangements, they think, the socialist community will be able to make its calculations as easily as the capitalist entrepreneurs.

Unfortunately the supporters of such proposals do not see (or perhaps will not see) that it is not possible to divorce the market and its functions in regard to the formation of prices from the working of a society which is based on private property in the means of production and in which, subject to the rules of such a society, the landlords, capitalists and entrepreneurs can dispose of their property as they think fit. For the motive force of the whole process which gives rise to market prices for the factors of production is the ceaseless search on the part of the capitalists and the entrepreneurs to maximize their profits by serving the consumers’ wishes. Without the striving of the entrepreneurs (including the shareholders) for profit, of the landlords for rent, of the capitalists for interest and the labourers for wages, the successful functioning of the whole mechanism is not to be thought of. It is only the prospect of profit which directs production into those channels in which the demands of the consumer are best satisfied at least cost. If the prospect of profit disappears the mechanism of the market loses its mainspring, for it is only this prospect which sets it in motion and maintains it in operation. The market is thus the focal point of the capitalist order of society; it is the essence of Capitalism. Only under Capitalism, therefore, is it possible; it cannot be ‘artificially’ imitated under Socialism.

The advocates of the artificial market, however, are of the opinion that an artificial market can be created by instructing the controllers of the different industrial units to act as if they were entrepreneurs in a capitalistic state. They argue that even under Capitalism the managers of joint stock companies work not for themselves but for the companies, that is to say, for the shareholders. Under Socialism, therefore, it would be possible for them to act in exactly the same way as before, with the same circumspection and devotion to duty. The only difference would be that under Socialism the product of the manager’s labours would go to the community rather than to the shareholders. In such a way, in contrast to all socialists who have written on the subject hitherto, especially the Marxians, they think it would be possible to construct a decentralized, as opposed to a centralized, Socialism.

In order to judge properly such proposals, it is necessary in the first place to realize that these controllers of individual industrial units would have to be appointed. Under Capitalism the managers of the joint stock companies are appointed either directly or indirectly by the shareholders. In so far as the shareholders give to the managers power to produce by the means of the company’s (i.e. the shareholders’) stock they are risking their own property or a part of their own property. The speculation (for it is necessarily a speculation) may succeed and bring profit; it may, however, misfire and bring about the loss of the whole or a part of the capital concerned. This committing of one’s own capital to a business whose outcome is uncertain and to men whose future ability is still a matter of conjecture whatever one may know of their past, is the essence of joint stock company enterprise.

Now it is a complete fallacy to suppose that the problem of economic calculation in a socialist community relates solely to matters which fall into the sphere of the daily business routine of managers of joint stock companies. It is clear that such a belief can only arise from exclusive concentration on the idea of a stationary economic system — a conception which no doubt is useful for the solution of many theoretical problems but which has no counterpart in fact and which, if exclusively regarded, can even be positively misleading. It is clear that under stationary conditions the problem of economic calculation does not really arise. When we think of the stationary society, we think of an economy in which all the factors of production are already used in such a way as, under the given conditions, to provide the maximum of the things which are demanded by consumers. That is to say, under stationary conditions there no longer exists a problem for economic calculation to solve. The essential function of economic calculation has by hypothesis already been performed. There is no need for an apparatus of calculation. To use a popular but not altogether satisfactory terminology we can say that the problem of economic calculation is of economic dynamics: it is no problem of economic statics.

The problem of economic calculation is a problem which arises in an economy which is perpetually subject to change, an economy which every day is confronted with new problems which have to be solved. Now in order to solve such problems it is above all necessary that capital should be withdrawn from particular lines of production, from particular undertakings and concerns and should be applied in other lines of production, in other undertakings and concerns. This is not a matter for the managers of joint stock companies, it is essentially a matter for the capitalists — the capitalists who buy and sell stocks and shares, who make loans and recover them, who make deposits in the banks and draw them out of the banks again, who speculate in all kinds of commodities. It is these operations of speculative capitalists which create those conditions of the money market, the stock exchanges and the wholesale markets which have to be taken for granted by the manager of the joint stock company, who, according to the socialist writers we are considering, is to be conceived as nothing but the reliable and conscientious servant of the company. It is the speculative capitalists who create the data to which he has to adjust his business and which therefore gives direction to his trading operations.

It follows therefore that it is a fundamental deficiency of all these socialistic constructions which invoke the ‘artificial market’ and artificial competition as a way out of the problem of economic calculation, that they rest on the belief that the market for factors of production is affected only by producers buying and selling commodities. It is not possible to eliminate from such markets the influence of the supply of capital from the capitalists and the demand for capital by the entrepreneurs, without destroying the mechanism itself.

Faced with this difficulty, the socialist is likely to propose that the socialist state as owner of all capital and all means of production should simply direct capital to those undertakings which promise the highest return. The available capital, he will contend, should go to those undertakings which offer the highest rate of profit. But such a state of affairs would simply mean that those managers who were less cautious and more optimistic would receive capital to enlarge their undertakings while more cautious and more sceptical managers would go away empty-handed. Under Capitalism, the capitalist decides to whom he will entrust his own capital. The beliefs of the managers of joint stock companies regarding the future prospects of their undertakings and the hopes of project-makers regarding the profitability of their plans are not in any way decisive. The mechanism of the money market and the capital market decides. This indeed is its main task: to serve the economic system as a whole, to judge the profitability of alternative openings and not blindly to follow what the managers of particular concerns, limited by the narrow horizon of their own undertakings, are tempted to propose.

To understand this completely, it is essential to realise that the capitalist does not just invest his capital in those undertakings which offer high interest or high profit; he attempts rather to strike a balance between his desire for profit and his estimate of the risk of loss. He must exercise foresight. If he does not do so then he suffers losses — losses that bring it about that his disposition over the factors of production is transferrred to the hands of others who know better how to weigh the risks and the prospects of business speculation.

Now if it is to remain socialistic, the socialist State cannot leave to other hands that disposition over capital which permits the enlargement of existing undertakings, the contraction of others and the bringing into being of undertakings that are completely new. And it is scarcely to be assumed that socialists of whatever persuasion would seriously propose that this function should be made over to some group of people who would ‘simply’ have the business of doing what capitalists and speculators do under capitalistic conditions, the only difference being that the product of their foresight should not belong to them but to the community. Proposals of this sort may well be made concerning the managers of joint stock companies. They can ever be extended to capitalists and speculators, for no socialist would dispute that the function which capitalists and speculators perform under Capitalism, namely directing the use of capital goods into that direction in which they best serve the demands of the consumer, is only performed because they are under the incentive to preserve their property and to make profits which increase it or at least allow them to live without diminishing their capital.

It follows therefore that the socialist community can do nothing but place the disposition over capital in the hands of the State or to be exact in the hands of the men who, as the governing authority, carry out the business of the State. And that signifies elimination of the market, which indeed is the fundamental aim of Socialism, for the guidance of economic activity by the market implies organization of production and a distribution of the product according to that disposition of the spending power of individual members of society which makes itself felt on the market; that is to say, it implies precisely that which it is the goal of Socialism to eliminate.

If the socialists attempt to belittle the significance of the problem of economic calculation in the Socialist community, on the ground that the forces of the market do not lead to ethically justifiable arrangements, they simply show that they do not understand the real nature of the problem. It is not a question of whether there shall be produced cannons or clothes, dwelling houses or churches, luxuries or subsistence. In any social order, even under Socialism, it can very easily be decided which kind and what number of consumption goods should be produced. No one has ever denied that. But once this decision has been made, there still remains the problem of ascertaining how the existing means of production can be used most effectively to produce these goods in question. In order to solve this problem it is necessary that there should be economic calculation. And economic calculation can only take place by means of money prices established in the market for production goods in a society resting on private property in the means of production. That is to say, there must exist money prices of land, raw materials, semimanufactures; that is to say, there must be money wages and interest rates.

Thus the alternative is still either Socialism or a market economy.

The economic activity of the socialist community is subject to the same external conditions as govern an economic system based on private property in the means of production or indeed any conceivable economic system. The economic principle applies to it in the same way as to any and to all economic systems: that is to say it recognizes an hierarchy of ends, and must therefore strive to achieve the more important before the less important. This is the essence of economic activity.

It is obvious that the production activities of the socialist community will involve not only labour but also material instruments of production. According to a very widespread custom, these material instruments of production are called capital. Capitalist production is that which adopts wise roundabout methods in contrast with a non-capitalistic production which goes directly to its end in a hand to mouth manner.1  If we adhere to this terminology, we must admit that the socialist community must also work with capital and will therefore produce capitalistically. Capital conceived as the intermediate products, which arise at the different stages of production by indirect methods, would not, at any rate at first2  be abolished by Socialism. It would merely be transferred from individual to common possession.

But if, as we have suggested above, we wish to understand by capitalistic production that economic system in which money-calculation is employed, so that we can summarize under the term capital a set of goods devoted to production and evaluated in terms of money, and can attempt to estimate the results of economic activity by the variations in the value of capital, then it is clear that socialist methods of production cannot be termed capitalistic. In quite another sense than the Marxians we can distinguish between socialistic and capitalistic methods of production, and between Socialism and Capitalism.

The characteristic feature of the capitalistic method of production, as it appears to socialists, is that the producer works to obtain a profit. Capitalistic production is production for profit, socialist production will be production for the satisfaction of needs. That capitalistic production aims at profit is quite true. But to achieve a profit, that is a result greater in value than the costs, must also be the aim of the socialist community. If economic activity is rationally directed, that is if it satisfies more urgent before less urgent needs, it has already achieved profits, since the cost, i.e. the value of the most important of the unsatisfied needs, is less than the result attained. In the capitalistic system profits can only be obtained if production meets a comparatively urgent demand. Whoever produces without attending to the relation between supply and demand fails to achieve the result at which he is aiming. To direct production towards profit simply means to direct it to satisfy other people’s demand: in this sense it may be contrasted with isolated man’s production for personal needs. But he also is working for profit in the sense used above. Between production for profit and production for needs there is no contrast.3

The contrasting of production for profit and production for needs is closely connected with the common practice of contrasting productivity and profitability or the ‘social’ and ‘private’ economic point of view. An economic action is said to be profitable if in the capitalist system it yields an excess of receipts over costs. An economic action is said to be productive when, seen from the point of view of a hypothetical socialist community, the yield exceeds the cost involved. Now in some cases productivity and profitability do not coincide. Some economic acts which are profitable are not productive and, vice versa, some are productive but not profitable. For those naively biased in favour of Socialism, as is the case even with most economists, this fact is sufficient to condemn the capitalistic order of society. Whatever a socialist community would do seems to them indisputably good and reasonable: that anything different can happen in a capitalistic society is, in their opinion, an abuse which cannot be tolerated. But an examination of the cases in which profitability and productivity are alleged not to coincide will show that this judgment is purely subjective, and that the scientific cloak with which it is invested is a sham.4

In the majority of cases in which it is usually assumed that there is a contrast between profitability and productivity no such contrast exists. This is true, for example, of profits from speculation. Speculation in the capitalist system performs a function which must be performed in any economic system however organized: it provides for the adjustment of supply and demand over time and space. The source of the profit of speculation is enhanced value which is independent of any particular form of economic organization. When the speculator purchases at a low price products which come on the market in comparatively large quantities and sells them at a higher price when the demand has again increased, his gains represent, from a business and from the economic point of view, an increase of value. That in a socialist order the community and not the individual would get this much grudged and maligned profit we do not deny. But that is not the significance of the problem in which we are interested. The point which concerns us here is that the alleged contrast between profitability and productivity does not exist in this case. Speculation performs an economic service which cannot conceivably be eliminated from any economic system. If it is eliminated, as socialists intend to do, then some other organization must take over its functions: the community itself must become a speculator. Without speculation there can be no economic activity reaching beyond the immediate present.

A contrast between profitability and productivity is sometimes supposed to be discovered by picking out a particular process and considering it by itself. People may perhaps characterize as unproductive certain features peculiar to the constitution of the capitalistic organization of industry, e.g. selling expenses, advertising costs and the like are characterized as unproductive. This is not legitimate. We must consider the result of the complete process, not the individual stages. We must not consider the constituent expenses without setting against them the result to which they contribute.5

• 1Böhm-Bawerk, Kapital und Kapitalzins, Vol. II, 3rd Edition, Innsbruck 1912, p. 21.
• 2The limitation comprised in the words ‘at first’ is not intended to mean that Socialism will later on, say after attaining a ‘higher stage of the communist society’, intentionally set about abolishing capital in the sense used here. Socialism can never plan the return to the life from hand to mouth. Rather do I want to point out here that Socialism must, by inner necessity, lead to the gradual consumption of capital.
• 3Pohle-Halm, Kapitalismus und Sozialismus, p. 12 et seq.
• 4On Monopoly see p. 385 et seq., and on ‘uneconomic’ consumption see p. 445 et seq.
• 5See pp. 160 et seq., 183 et seq.

The most ambitious attempt to contrast productivity and profitability derives from the examination of the relationship between gross product and net product. It is clear that every entrepreneur in the capitalist system aims at achieving the largest net product. But it is asserted that rightly considered the object of economic activity should be to achieve not the largest net product but the largest gross product.

This belief, however, is a fallacy based upon primitive speculations regarding valuation. But judged by its widespread acceptance even to-day it is a very popular fallacy. It is implicit when people say that a certain line of production is to be recommended because it employs a large number of workers, or when a particular improvement in production is opposed because it may deprive people of a living.

If the advocates of such views were logical they would have to admit that the gross product principle applies not only to labour but also to the material instruments of production. The entrepreneur carries production up to the point where it ceases to yield a net product. Let us assume that production beyond this point requires material instruments only and not labour. Is it in the interest of society that the entrepreneur should extend production so as to obtain a larger gross product? Would society do so if it had the control of production? Both questions must be answered with a decided NO. The fact that further production does not pay shows that the instruments of production could be applied to a more urgent purpose in the economic system. If, nevertheless, they are applied to the unprofitable line then they will be lacking in places where they are more urgently needed. This is true under both Capitalism and Socialism. Even a socialist community, supposing it acted rationally, would not push certain lines of production indefinitely and neglect others. Even a socialist community would discontinue a particular line of production when further production would not cover the expense, that is to say, at the point where further production would mean failure to satisfy a more urgent need elsewhere.

But what is true of the increased use of material instruments is true exactly in the same way of the increased use of labour. If labour is devoted to a particular line of production to the point where it only increases the gross product while the net product declines, it is being withheld from some other line where it could perform more valuable service. And here, again, the only result of neglecting the principle of net product is that more urgent wants remain unsatisfied whilst less urgent ones are met. It is this fact and no other which is made evident in the mechanism of the capitalist system by the decline in the net product. In a socialist community it would be the duty of the economic administration to see that similar misapplications of economic activity did not occur. Here, therefore, is no discrepancy between profitability and productivity. Even from the socialist standpoint, the largest possible net product and not the largest possible gross product must be the aim of economic activity.

Nevertheless, people continue to maintain the contrary, sometimes of production in general, sometimes of labour alone and sometimes of agricultural production. That capitalist activity is directed solely towards the attainment of the largest net product is adversely criticized and State intervention is called for to redress the alleged abuse.

This discussion has a lengthy ancestry. Adam Smith maintained that different lines of production should be regarded as more or less productive according to the greater or smaller amount of labour which they set in motion.1  For this he was adversely criticized by Ricardo who pointed out that the welfare of the people increased only through an enlargement of the net product and not of the gross product.2  For this Ricardo was severely attacked. Even J. B. Say misunderstood him and accused him of an utter disregard for the welfare of so many human beings.3  While Sismondi, who was fond of meeting economic arguments by sentimental declamations, thought he could dispose of the problem by a witticism: he said that a king who could produce net product by pressing a button would, according to Ricardo, make the nation superfluous.4  Bernhardi followed Sismondi on this point.5  Proudhon went as far as to epitomize the contrast between socialistic and private enterprise in the formula: that although society must strive for the largest gross product the aim of the entrepreneur is the largest net product.6  Marx avoids committing himself on this point, but he fills two chapters of the first book of Das Kapital with a sentimental exposition in which the transition from intensive to extensive agricultural methods is depicted in the darkest colour as, in the words of Sir Thomas More, a system ‘where sheep eat up men’, and manages in the course of this discussion to confuse the large expropriations achieved by the political power of the nobility, which characterized European agrarian history in the first centuries of modern times, with the changes in the methods of cultivation initiated later on by the landowners.7

Since then declamations on this scheme have formed the stock equipment of the controversial writings and speeches of the socialists. A German agricultural economist, Freiherr von der Goltz, has tried to prove that the attainment of the largest possible gross product is not only productive from the social point of view but is also profitable from the individual point of view. He thinks that a large gross product naturally presupposes a large net product, and to that extent the interests of the individuals whose main object is to achieve a large net product coincide with those of the State which desires a large gross product.8  But he can offer no proof of this.

Much more logical than these efforts to overcome the apparent contrast between social and private interests by ignoring obvious facts of agricultural accountancy, is the position taken up by followers of the romantic school of economic thought, particularly the German etatists, viz. that the agriculturist has the status of a civil servant, and is therefore obliged to work in the public interest. Since this is said to require the largest possible gross product it follows that the farmer, uninfluenced by commercial spirit, ideas or interests, and regardless of the disadvantages, which may be entailed, must devote himself to the attainment of this end.9  All these writers take it for granted that the interests of the community are served by the largest gross product. But they do not go out of their way to prove it. When they do try, they only argue from the point of view of Machtpolitik or Nationalpolitik. The State has an interest in a strong agricultural population since the agricultural population is conservative; agriculture supplies the largest number of soldiers; provision must be made for feeding the population in time of war and so on.

In contrast to this an attempt to justify the gross product principle by economic reasoning has been made by Landry. He will only admit that the effort to attain the greatest net product is socially advantageous in so far as the costs which no longer yield a profit arise from the use of material instruments of production. When the application of labour is involved he thinks quite otherwise. Then, from the economic point of view the application of labour costs nothing: social welfare is not thereby diminished. Wage economies which result in a diminution of the gross product are harmful.10  He arrives at this conclusion by assuming that the labour force thus released could find no employment elsewhere. But this is absolutely wrong. The need of society for labour is never satisfied as long as labour is not a ‘free good’. The released workers find other employment where they have to supply work more urgent from the economic point of view. If Landry were right it would have been better if all the labour-saving machinery had never existed, and the attitude of those workers who resist all technical innovations which economize labour and who destroy such machinery would be justified. There is no reason why there should be a distinction between the employment of material instruments and of labour. That, in view of the price of the material instruments and the price of their products, an increase of production in the same line is not profitable, is due to the fact that the material instruments are required in some other line to satisfy more urgent needs. But this is equally true of labour. Workers who are employed in unprofitably increasing the gross product are withheld from other lines of production in which they are more urgently required. That their wages are too high for an increase in production involving a larger gross product to be profitable, results indeed from the fact that the marginal productivity of labour in general is higher than in the particular line of production in question, where it is applied beyond the limits determined by the net product principle. There is no contrast whatever here between social and private interests: a socialist organization would not act differently from an entrepreneur in the capitalist organization.

Of course there are plenty of other arguments which can be adduced to show that adherence to the net product principle may be harmful. They are common to all nationalist-militarist thinking, and are the well-known arguments used to support every protectionist policy. A nation must be populous because its political and military standing in the world depends upon numbers. It must aim at economic self-sufficiency or at least it must produce its food at home and so on. In the end Landry has to fall back on such arguments to support his theory.11  To examine such arguments would be out of place in a discussion of the isolated socialist community.

But if the arguments we have examined are untrue it follows that the socialist community must adopt net product and not gross product as the guiding principle of economic activity. The socialist community equally with the capitalist society will also transform arable into grass land, if it is possible to put more productive land under the plough elsewhere. In spite of Sir Thomas More, ‘sheep will eat up men’ even in Utopia, and the rulers of the socialist community will act no differently from the Duchess of Sutherland, that ‘economically instructed person’, as Marx once jeeringly called her.12

The net product principle is true for every line of production. Agriculture is no exception. The dictum of Thaer, the German pioneer of modern agriculture, that the aim of the agriculturist must be a high net yield ‘even from the standpoint of the public welfare’ still holds good.13

• 1A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book II, Chap. V (London 1776, Vol. I, p. 437 et seq.).
• 2Ricardo, Principles of Political Economy and Taxation, Chap. XXVI (Works, edited MacCulloch, 2nd Edition, London 1852, p. 210 et seq.).
• 3Say, in his Notes to Constancio’s French Edition of Ricardo’s works, Vol. II, Paris 1819, p. 222 et seq.
• 4Sismondi, Nouveaux Principes d’Economie Politique, Paris 1819, Vol. II, p. 331 footnote.
• 5Bernhardi, Versuch einer Kritik der Gründe, die für grosses und kleines Grundeigen tum angeführt werden, Petersburg 1849, p. 367 et seq.; also Cronbach, Das landwirt schaftliche Betriebsproblem in der deutschen Nationalökonomie bis zur Mitte des 19. Jahrhunderts, Wien 1907, p. 292 et seq.
• 6‘La société recherche le plus grand produit brut, par conséquent la plus grande population possible, parce que pour elle produit brut et produit net sont identiques. Le monopole, au contraire, vise constamment au plus grand produit net, dût-il ne l’obtenir qu’au prix de l’extermination du genre humain.’ (Proudhon, Système des contradictions économiques ou philosophie de la misère, Paris 1846, Vol. I, p. 270.) In Proudhon’s language ‘Monopoly’ means the same as Private Property. (Ibid., Vol. I, p. 236; also Landry, L’utilité sociale de la propriété individuelle, Paris 1901, P. 76).
• 7Marx, Das Kapital, Vol. I, pp. 613-726. The arguments about ‘the theory of compensation for the workers displaced by machinery’ (ibid., pp. 403-12) are vain in view of the Marginal Utility Theory.
• 8Goltz, Agrarwesen und Agrarpolitik, 2nd Edition, Jena 1904, p. 53; also Waltz, Vom Reinertrag in der Landwirtschaft, Stuttgart and Berlin 1904, p. 27 et seq. Goltz contradicts himself in his arguments, for, to the assertion mentioned above, he adds immediately: ‘Nevertheless the amount remaining as net profit from the gross product after deducting costs varies considerably. On the average it is greater with extensive than with intensive cultivation.’
• 9See Waltz, op. cit. p. 19 et seq. on Adam Miiller, Bülow-Cummerow and Phillipp v. Arnim, and p. 30 et seq. on Rudolf Meyer and Adolf Wagner.
• 10Landry, L’utilité sociale de la propriété individuelle, pp. 109, 127 et seq.
• 11Landry, L’utilité sociale de la propriété individuelle, pp. 109, 127 et seq.
• 12Marx, Das Kapital, Vol. I, p. 695
• 13Quoted by Waltz, Vom Reinertrag in der Landwirtschaft, p. 29.

On logical grounds, treatment of the problem of income should properly come at the end of any investigation into the life of the socialist community. Production must take place before distribution is possible, therefore, logically, the former should be discussed before the latter. But the problem of distribution is so prominent a feature of Socialism as to suggest the earliest possible discussion of the question. For fundamentally, Socialism is nothing but a theory of ‘just’ distribution; the socialist movement is nothing but an attempt to achieve this ideal. All socialist schemes start from the problem of distribution and all come back to it. For Socialism the problem of distribution is the economic problem.

The problem of distribution is moreover peculiar to socialism. It arises only in a socialist economy. It is true, we are in the habit of speaking of distribution in an economic society based on private property, and economic theory deals with the problem of income and the determination of the prices of the factors of production under the heading ‘Distribution’. This terminology is traditional, and it is so firmly established that the substitution of another would be unthinkable. Nevertheless, it is misleading and does not indicate the nature of the theory which it is meant to describe. Under Capitalism incomes emerge as a result of market transactions which are indissolubly linked up with production. We do not first produce things and afterwards distribute them. When products are supplied for use and consumption, incomes for the greater part have already been determined, since they arise during the process of production and are indeed derived from it. Workers, landowners, and capitalists and a large number of the entrepreneurs contributing to production have already received their share before the product is ready for consumption. The prices which are obtained for the final product on the market decide only the income which a section of entrepreneurs obtain from the process of production. (The influence which these prices have on the income of other classes has already been exerted via the anticipations of the entrepreneurs.) As thus in the capitalistic order of society the aggregation of individual incomes to form a total social income is only a theoretical conception, the concept of distribution is only figurative. The reason that this expression has been adopted, instead of the simple and more suitable term formation of income, is that the founders of scientific economics, the Physiocrats and the English classical school, only gradually learned to free themselves from the etatistic outlook of mercantilism. Although precisely this analysis of income formation as a result of market transactions was their principal achievement, they adopted the practice — fortunately without any harm to the content of their teachings — of grouping the chapters dealing with the different kinds of income under the heading ‘distribution’.1

Only in the socialist community is there any distribution of consumable goods in the true sense of the word. If in considering capitalistic society we use the term distribution in any but a purely figurative sense then an analogy is being made between the determination of income in a socialist and in a capitalist community. The conception of any actual process of distribution of income must be kept out of any investigation of the mechanism of capitalist society.

• 1Cannan, A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848, 3rd Edition, London 1917, p. 183 et seq. Also p. 330 of this edition.

According to the fundamental idea of Socialism only goods which are ripe for consumption are eligible for distribution. Goods of a higher order remain the property of the community for purposes of further production; they must not be distributed. Goods of the first order, on the contrary, are without exception destined to be distributed: they constitute indeed the net social dividend. Since in considering the socialist society we cannot quite get rid of ideas which are only appropriate to the capitalist order, it is usual to say that the society will retain a part of the consumers’ goods for public consumption. We are really thinking of that part of consumption which in the capitalistic society is usually called public expenditure. Where the principle of private property is rigidly applied this public expenditure consists exclusively of the cost of maintaining the apparatus which assures the undisturbed course of things. The only task of the strictly Liberal state is to secure life and property against attacks both from external and internal foes. It is a producer of security, or, as Lassalle mockingly termed it, a night watchman’s state. In a socialist community there will be the corresponding task of securing the socialist order and the peaceful course of socialistic production. Whether the apparatus of coercion and violence which serves this purpose will still be known as the state or be called by some other name, and whether it will be legally given a separate status among the other functions incumbent upon the socialist community, is a matter of complete indifference to us. We have only to make it clear that all expenditure devoted to this end will appear in the socialist community as general costs of production. So far as they involve the use of labour for the purposes of distributing the social dividend, they must be reckoned in such a way that the workers employed get their share.

But public expenditure includes other outlays. Most states and municipalities provide their citizens with certain utilities in kind, sometimes gratuitously, sometimes at a charge which covers only a part of the expense. As a rule this happens in the case of single services which are yielded by durable commodities. Thus parks, art galleries, public libraries, places of worship, are made available for those who wish to use them. Similarly, roads and streets are accessible to everyone. Moreover, direct distribution of consumption goods takes place, as for example, when medicine and diet are given to the sick and educational apparatus to pupils; personal service is also supplied when medical treatment is given. All this is not Socialism, it is not production on the basis of common ownership of the means of production. Distribution, indeed, occurs here, but what is distributed is first collected by taxation from the citizens. Only so far as this distribution deals with products of state or municipal production can it be described as a piece of Socialism within the framework of an otherwise liberal order of society. We need not stop to inquire how far this branch of state and municipal activity is due to views which have been influenced by the socialist critics of capitalist society and how far it is due to the special nature of certain particularly durable consumption goods which yield almost unlimited service. For us it is only important that in the case of this public expenditure, even in an otherwise capitalistic society, a distribution in the actual sense of the word takes place.

Moreover, the socialist community will not make a physical distribution of all consumers’ goods. It is not likely to present a copy of every new book to every citizen, but rather to place the books in public reading rooms for the general use. It will do the same with its schools and teaching, its public gardens, playgrounds and assembly halls. The expenditure which all these arrangements necessitate is not deducted from the social dividend; on the contrary, it is a part of the social dividend.

This part of the social dividend exhibits this one peculiarity, that without prejudice to the principles which determine the distribution of consumable consumers’ goods and part of durable goods, special principles of distribution can be applied to it corresponding to the special nature of the services involved. The way in which art collections and scientific publications are made available for general use is quite independent of the rules which are otherwise applied to the distribution of goods of the first order.

The socialist community is characterized by the fact that in it there is no connection between production and distribution. The magnitude of the share which is assigned for the use of each citizen is quite independent of the value of the service he renders. It would be fundamentally impossible to base distribution on the imputation of value because it is an essential feature of socialistic methods of production that the shares of the different factors of production in the result cannot be ascertained; and any arithmetical test of the relations between effort and result is impossible.

It would therefore not be possible to base even a part of distribution on an economic calculation of the contribution of the different factors, e.g. by first granting the worker the full product of his labour which under the capitalist system he would receive in the form of wages, and then applying a special form of distribution in the case of the shares which are attributed to the material factors of production and to the work of the entrepreneur. On the whole socialists lack any clear conception of this fact. But a faint suspicion of them pervades the Marxian doctrine that under Socialism the categories wages, profit, and rent would be unthinkable.

There are four different principles upon which socialistic distribution can conceivably be based: equal distribution per head, distribution according to service rendered to the community, distribution according to needs, and distribution according to merit. These principles can be combined in different ways.

The principle of equal distribution derives from the old doctrine of natural law of the equality of all human beings. Rigidly applied it would prove absurd. It would permit no distinction between adults and children, between the sick and the healthy, between the industrious and the lazy, or between good and bad. It could be applied only in combination with the other three principles of distribution. It would at least be necessary to take into account the principle of distribution according to needs, so that shares might be graded according to age, sex, health and special occupational needs; it would be necessary to take into account the principle of distribution according to services rendered, so that distinction could be made between industrious and less industrious, and between good and bad workers; and finally, some account would have to be taken of merit, so as to make reward or punishment effective. But even if the principle of equal distribution is modified in these ways the difficulties of socialistic distribution are not removed. In fact, these difficulties cannot be overcome at all.

We have already shown the difficulties raised by applying the principle of distribution according to value of services rendered. In the capitalist system the economic subject receives an income corresponding to the value of his contribution to the general process of production. Services are rewarded according to their value. It is precisely this arrangement which Socialism wishes to change and to replace by one under which the shares attributed to the material factors of production and to the entrepreneur would be so distributed that no property owner and no entrepreneur would have a standing fundamentally different from that of the rest of the community. But this involves a complete divorce of distribution from economic imputation of value. It has nothing to do with the value of the individual’s service to the community. It could be brought into external relation with the service rendered only if the service of the individual were made the basis of distribution according to some external criteria. The most obvious criterion appears to be the number of hours worked. But the significance to the social dividend of any service rendered is not to be measured by the length of working time. For, in the first place, the value of the service differs according to its use in the economic scheme. The results will differ according to whether the service is used in the right place, that is to say, where it is most urgently required, or in the wrong place. In the socialist organization, however, the worker cannot be made ultimately responsible for this, but only those who assign him the work. Secondly, the value of the service varies according to the quality of the work and according to the particular capability of the worker; it varies according to his strength and his zeal. It is not difficult to find ethical reasons for equal payments to workers of unequal capabilities. Talent and genius are the gifts of God, and the individual is not responsible for them, as is often said. But this does not solve the problem whether it is expedient or practicable to pay all hours of labour the same price.

The third principle of distribution is according to needs. The formula of each according to his needs is an old slogan of the unsophisticated communist. It is occasionally backed up by referring to the fact that the Early Christians shared all goods in common.1  Others again regard it as practicable because it is supposed to form the basis of distribution within the family. No doubt it could be made universal if the disposition of the mother, who hungers gladly rather than that her children should go without, could be made universal. The advocates of the principle of distribution according to needs overlook this. They overlook much more besides. They overlook the fact that so long as any kind of economic effort is necessary only a part of our needs can be satisfied, and a part must remain unsatisfied. The principle of to each according to his needs remains meaningless so long as it is not defined to what extent each indivdual is allowed to satisfy his needs. The formula is illusory since everyone has to forego the complete satisfaction of all his needs.2  It could indeed be applied within narrow limits. The sick and suffering can be assigned special medicine, care, and attendance, better attention and special treatment for their special needs, without making this consideration for exceptional cases the general rule.

Similarly it is quite impossible to make the merit of the individual the general principle of distribution. Who is to decide on merits? Those in power have often had very strange views on the merits or demerits of their contemporaries. And the voice of the people is not the voice of God. Who would the people choose to-day as the best of their contemporaries? It is not unlikely that the choice would fall on a film star, or perhaps on a prize-fighter. To-day the English people would probably be inclined to call Shakespeare the greatest Englishman. Would his contemporaries have done so? And how would they esteem a second Shakespeare if he were among them to-day? Moreover, why should those be penalized in whose lap Nature has not placed the great gifts of talent and genius? Distribution according to the merits of the individual would open the door wide to mere caprice and leave the individual defenceless before the oppression of the majority. Conditions would be created which would make life unbearable.

As far as the economics of the problem are concerned it is a matter of indifference which principle or which combination of different principles is made a basis for distribution. Whatever principle is adopted the fact remains that each individual will receive an allocation from the community. The citizen will receive a bundle of claims which can be exchanged within a certain time for a definite amount of different goods. In this way he will procure his daily meals, fixed shelter, occasional pleasures, and from time to time new clothing. Whether the satisfaction of needs which he obtains in this way is great or small will depend upon the productivity of the efforts of the community.

• 1Acts of the Apostles, ii. 45.
• 2See Pecqueur’s criticism of this formula of distribution (Theorie nouvelle d’Economie sociale et politique, Paris 1842, p. 613 et seq.). Pecqueur shows himself superior to Marx, who unhesitatingly indulges in the illusion that ‘In a higher stage of the communist society... the narrow bourgeois legal horizon could be completely surpassed and society could write on its banners: From each according to his abilities, to each according to his needsl’ Marx, Zur Kritik des sozialdemokratischen Parteiprogramms von Gotha, p. 17.

It is not necessary that each individual should himself consume the whole share allotted to him. He can let some go to waste, give some away, or, as far as the commodity permits, put some aside for later consumption. Some, moreover, he can exchange. The beer drinker will readily forgo his share of non-alcoholic drink to obtain more beer. The abstainer will be prepared to forgo his claim to spirits if he can acquire other commodities instead. The aesthete will surrender a visit to the cinema for the sake of more opportunities to hear good music; the lowbrow will willingly exchange tickets to art galleries for more congenial pleasures. Everyone will be ready to exchange, but the exchange will be confined to consumers’ goods. Producers’ goods will be res extra commercium.

Such exchange, need not be confined to direct barter: it can also take place indirectly within certain narrow limits. The same reasons which have led to indirect exchange in other types of society will make it advantageous to those exchanging in the socialistic community. It follows that even here there will be opportunity for the use of a general medium of exchange — money.

The role of money in the socialist economy will be fundamentally the same as in a free economic system — that of a general facilitator of exchange. But the significance of this role will be quite different. In a society based on the collective ownership of the means of production, the significance of the role of money will be incomparably narrower than in a society based on private property in the means of production. For in the socialist commonwealth, exchange itself has a much narrower significance, since it is confined to consumers’ goods only. There cannot be money prices of producers’ goods since these do not enter into exchange. The accounting function which money exercises in production in a free economic order will no longer exist in a socialist community. Money calculations of value will be impossible.

Nevertheless the central administration of production and distribution cannot leave out of consideration the exchange relations which arise in this sort of traffic. Clearly it would have to take them into account if it desired to make different commodities mutually substitutable when assessing the distribution of the social dividend.

Thus if in the process of exchange the relation of one cigar to five cigarettes was established, the administration could not arbitrarily lay it down that one cigar equalled three cigarettes, so that it might be able on this basis to give one individual only cigars and another only cigarettes. If the tobacco allowance has not been equally distributed, partly in cigars and partly in cigarettes, that is to say, if some — either according to their wishes or by order of the government — received only cigars and others only cigarettes, the exchange relations already established could not be ignored. Otherwise all those who received cigarettes would be unfairly treated, compared with those receiving cigars, since the person who had received a cigar could exchange it for five cigarettes whilst he had obtained it as the equivalent of three cigarettes.

Alterations of exchange relationships in this traffic among the citizens would consequently compel the administration to make corresponding changes in the substitution ratios of the various commodities. Every such change will indicate that the relations between the various needs of the citizens and their satisfaction had altered, that people now wanted some commodities more than before, others less. The economic administration would presumably endeavour to adjust production to this change. It would endeavour to produce more of the more desired commodity and less of the less desired. But one thing, however, it would not be able to do: it would not be able to permit the individual citizens to redeem their tobacco tickets arbitrarily in cigars or cigarettes. If individuals were allowed free choice of cigars or cigarettes they might demand more cigars or more cigarettes than had been produced, or, on the other hand cigars or cigarettes might be left on hand at the distributing centres because no one demanded them.

The labour theory of value appears to offer a simple solution of this problem. For an hour of labour a citizen receives a token which entitles him to the product of one hour of labour, with a deduction to defray the general obligations of the community, e.g. support of the disabled, expenditure on cultural purposes. Allowing for this deduction to cover the expenditure borne by the community as a whole, every worker who has worked one hour will have the right to obtain products on which one hour of labour has been expended. Any one who is ready to pay by giving to the community his own working time corresponding to the working time used to produce them can draw from the supply centres consumers’ goods and services and apply them to his own use.

But such a principle of distribution would not work, since labour is not uniform or homogeneous. There are qualitative differences between the different forms of labour which, taken in conjunction with variations in the supply and demand of the resulting products, lead to different values. Ceteris paribus the supply of pictures cannot be increased without the quality of the work suffering. The worker who has supplied an hour of simple labour cannot be granted the right to consume the product of an hour of work of a higher quality: and it would be impossible in a socialist community to establish any connection between the importance of work done for the community and the share in the yield of communal production given for the work. Payment for 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 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 distinction between the various hours of work, according to the quality of the work rendered. But in both cases it must reserve the right to decide the particular distribution of the products.

Even if we abstract from differences in the quality of labour and its product and accept the possibility of determining how much labour inheres in any product, the community would never allow the individual who had rendered an hour of labour to consume the product of an hour’s labour. For all economic goods entail material costs apart from labour. A product for which more raw material is required must not be made equivalent to a product requiring less raw material.

Socialistic criticism of the capitalist system devotes much space to complaints about the high costs of what can be called the apparatus of distribution. They include under this the costs of all national and political institutions, including expenditure on military purposes and war. They also include the expense to society arising from free competition. All the expenditure on advertisement and the activities of persons involved in the competitive struggle such as agents, commercial travellers, etc., and the costs entailed by the efforts of firms to remain independent instead of amalgamating into larger units or joining cartels which make possible specialization and thereby the cheapening of production, are debited to the distributive process of the capitalist system. The socialistic society will, so the critics think, save enormously by putting an end to this waste.

The expectation that the socialist community will save that outlay which can properly be termed state expenditure is derived from the doctrine, peculiar to many anarchists and to Marxian socialists, that state compulsion would be superfluous in a society not based on private property in the means of production. They argue that in the socialist community ‘obedience to the simple fundamental rules governing any form of social life will very soon become of necessity a habit’, but this is backed up by a hint that ‘evasion of regulation and control enforced by the whole people will undoubtedly be enormously difficult’, and will incur ‘swift and severe punishment’, since ‘the armed workers’ would not be ‘sentimental intellectuals’ nor ‘let themselves be mocked’.1  All this is merely playing with words. Control, Arms, Punishment, are not these ‘a special repressive authority’, and thus according to Engel’s own words a ‘State’?2  Whether the compulsion is exercised by armed workers — who cannot work while they bear arms — or by the workers’ sons clad in police uniforms, will make no difference to the costs which the compulsion entails.

But the State is a coercive apparatus not only to its own inhabitants: it applies coercion externally. Only a state comprising the whole universe would need to exert no external coercion and then only because in that event there would be no foreign land, no foreigners and no foreign states. Liberalism, with its fundamental antagonism to warfare, wants to give the whole world some state form of organization. If this can be achieved it is inconceivable without a coercive apparatus. If all the armies of the individual states were abolished we could not dispense with a world apparatus of coercion, a world police to ensure world peace. Whether Socialism unites all states into a single one or whether it leaves them independent of each other, in any case it too will not be able to do without a coercive apparatus.

The socialist apparatus of coercion too will entail some expense. Whether this will be greater or less than the expense of the state apparatus of the capitalist society naturally we cannot say. We merely need to see that the social dividend will be reduced by the amount involved.

As for the wastes of distribution under Capitalism, little need be said. Since in capitalist society there is no distribution in the real sense of the word there are no costs of distribution. Trading expenses and similar costs cannot be called distribution costs, not only because they are not the costs of a distribution, which is a special process in itself, but also because the effects of the services devoted to these purposes extend far beyond the mere distribution of goods. Competition is not confined to distribution: that is only a part of its service. It serves equally the process of production, indeed it is essential for any organization of production which is to ensure high productivity. It is not enough therefore to compare these costs with the costs incurred by the apparatus of distribution and management in a socialist community. If socialist methods of production reduce productivity — and we shall speak of this later — it matters little that it saves the work of commercial travellers, brokers and advertisers.

• 1Lenin, Staat und Revolution, p. 96.
• 2Engels, Herrn Eugen Dührings Umwàlzung der Wissenschaft, p. 302.

To assume stationary economic conditions is a theoretical expedient and not an attempt to describe reality. We cannot dispense with this line of thought if we wish to understand the laws of economic change. In order to study movement we must first imagine a condition where it does not exist. The stationary condition is that point of equilibrium to which we conceive all forms of economic activity to be tending and which would actually be attained if new factors did not, in the meantime, create a new point of equilibrium. In the imaginary state of equilibrium all the units of the factors of production are employed in the most economic way, and there is no reason to contemplate any changes in their number or their disposition.

Even if it is impossible to imagine a living — that is to say a changing — socialist economic order, because economic activity without economic calculation seems inconceivable, it is quite easy to postulate a socialist economic order under stationary conditions. We need only avoid asking how this stationary condition is achieved. If we do this there is no difficulty in examining the statics of a socialist community. All socialist theories and Utopias have always had only the stationary condition in mind.

Socialist writers depict the socialist community as a land of heart’s desire. Fourier’s sickly fantasies go farthest in this direction. In Fourier’s state of the future all harmful beasts will have disappeared, and in their places will be animals which will assist man in his labours — or even do his work for him. An anti-beaver will see to the fishing; an anti-whale will move sailing ships in a calm; an antihippopotamus will tow the river boats. Instead of the lion there will be an anti-lion, a steed of wonderful swiftness, upon whose back the rider will sit as comfortably as in a well-sprung carriage. ‘It will be a pleasure to live in a world with such servants.’1  Godwin even thought that men might be immortal after property had been abolished.2  Kautsky tells us that under the socialist society ‘a new type of man will arise... a superman... an exalted man.’3  Trotsky provides even more detailed information: ‘Man will become incomparably stronger, wiser, finer. His body more harmonious, his movements more rhythmical, his voice more musical... The human average will rise to the level of an Aristotle, a Goethe, a Marx. Above these other heights new peaks will arise.’4  And writers of this sort of stuff are continually being reprinted and translated into other tongues, and made the subject of exhaustive historical theses!

Other socialist writers are more circumspect in their pronouncements but they proceed on essentially similar assumptions. Tacitly underlying Marxian theory is the nebulous idea that the natural factors of production are such that they need not be economized. Such a conclusion indeed follows inevitably from a system that reckons labour as the only element in costs, that does not accept the law of diminishing returns, rejects the Malthusian law of population and loses itself in obscure fantasies about the unlimited possibility of increasing productivity.5  We need not go further into these matters. It is sufficient to recognize that even in a socialist community the natural factors of production would be limited in quantity and would therefore have to be economized.

The second element which would have to be economized is labour. Even if we ignore differences in quality it is obvious that labour is available only to a limited extent: the individual can only perform a certain amount of labour. Even if labour were a pure pleasure it would have to be used economically, since human life is limited in time, and human energy is not inexhaustible. Even the man who lives at his leisure, untramelled by monetary considerations, has to dispose of his time, i.e. choose between different possible ways of spending it.

It is clear therefore, that in the world as we know it, human behaviour must be governed by economic considerations. For while our wants are unlimited, the goods of the first order bestowed by nature are scarce; and, with a given productivity of labour, goods of a higher order can serve to increase the satisfaction of needs only by increasing labour. Now, quite apart from the fact that labour cannot be increased beyond a certain point, an increase of labour is accompanied by increasing disutility.

Fourier and his school regard the disutility of labour as a result of perverse social arrangements. These alone in their view are to blame for the fact that in accepted usage the words ‘labour’ and ‘toil’ are synonymous. Labour in itself is not unpleasant. On the contrary, all men need to be active. Inactivity entails intolerable boredom. If labour is to be made attractive it must be carried on in healthy, clean workplaces; the joy of labour must be aroused by a happy feeling of union among the workers and cheerful competition between them. The chief cause of the repugnance which labour arouses is its continuity. Even pleasures pall if they last too long. Therefore the workers must be allowed to interchange their occupations at will; work will then be a pleasure and no longer create aversion.6

It is not difficult to expose the error contained in this argument, though it is accepted by socialists of all schools. Man feels the impulse to activity. Even if need did not drive him to work he would not always be content to roll in the grass and bask in the sun. Even young animals and children whose nourishment is provided by their parents kick their limbs, dance, jump and run so as to exercise powers yet unclaimed by labour. To be stirring is a physical and mental need. Thus, in general, purposeful labour gives satisfaction. Yet only up to a certain point; beyond this it is only toil. In the following diagram the line o x along which the product of labour is measured, marks the dividing line between the disutility of labour and the satisfaction the exercise of our powers affords, which may be called immediate satisfaction due to labour. The curve, a, b, c, p represents labour disutility and immediate labour satisfaction in relation to the product. When labour commences it is found disagreeable. After the first difficulties have been overcome and body and mind are better adapted, then the disagreeableness declines. At b neither disagreeableness nor satisfaction predominates. Between b and c direct satisfaction prevails. After c disagreeableness recommences. With other forms of labour the curve may run differently, as in o c1p1 or o p2. That depends on the nature of the work and the personality of the workers. It is different for navvies and for jockeys: it is different for dull and for energetic men.7

Why is labour continued when the disutility which its continuance occasions exceeds the direct satisfaction deriving from it? Because something else beside direct labour satisfaction comes into account, namely the satisfaction afforded by the product of the labour; we call this indirect labour satisfaction. Labour will be continued so long as the dissatisfaction which it arouses is counterbalanced by the pleasure derived from its product. Labour will only be discontinued at the point at which its continuation would give rise to more disutility than utility.

The methods by which Fourier wished to deprive labour of its unattractiveness were indeed based upon correct observations, but he greatly overrated the bearing of his argument. It is clear that the amount of work which affords direct labour satisfaction supplies such a small fraction of the needs which men consider imperative that they readily undergo the hardship of performing irksome work. But it is a mistake to assume that any significant change would take place if workers were allowed to change occupations at short intervals. For in the first place the product of labour would be reduced because of the diminished skill acquired by the individual as a result of diminished practice in each of his various occupations; also because every change over would cause loss of time, and labour would be expended in the shuffling. And in the second place only a very slight part of the excess of labour disutility over direct labour satisfaction is due to weariness with the particular job in hand. Hence the capacity to derive direct satisfaction from another form of labour is not what it would have been if the first job had not been performed. Clearly the greater part of the disutility is due to general fatigue of the organism and to a desire to be released from any further constraint. The man who has worked for hours at a desk will prefer to chop wood for an hour rather than spend another hour at the desk. But what made his labour unpleasant was not only the need for change but rather the length of the work. If the product is not to be diminished the length of the working day can be reduced only by increased productivity. The widespread opinion that there is labour which only tires the body and labour which only tires the mind is incorrect, as everyone can prove for himself. All labour affects the whole organism. We deceive ourselves on this point because in observing other forms of occupation we see only the direct labour satisfaction. The clerk envies the coachman, because he would like a little recreation in driving: but his envy would last only as long as the satisfaction exceeded the pain. Similarly hunting and fishing, mountain climbing, riding and driving are undertaken for sport. But sport is not work in the economic sense. It is the hard fact that men cannot subsist on the small amount of labour yielding direct labour satisfaction which compels them to suffer the irksomeness of toil, not the bad organization of labour.

It is obvious, that improvements in the conditions under which labour is performed may increase the product with unchanged irksomeness or lessen the irksomeness for the same product. But it would be impossible to improve these conditions more than actually occurs under capitalism without rising cost. That labour is less irksome when performed in company has been known from of old, and where it seems possible to let workers work together without reducing output, it is done.

There are, of course, exceptional natures that rise above the common level. The great creative genius who perpetuates himself in immortal works and deeds does not when working distinguish the pain from the pleasure. For such men creation is at once the greatest joy and the bitterest torment, an inner necessity. What they create has no value to them as a product: they create for the sake of creation, not for the result. The product costs them nothing because, when working, they forego nothing dearer to them than their work. And their product only costs society what they could have produced by other labour. In comparison to the value of the service this cost is nothing. Genius is truly a gift of God.

Now the life history of great men is familiar to all. Thus the social reformer is easily tempted to regard what he has heard of them as common attributes. We continually find people inclined to regard the mode of life of the genius as the typical way of living of a simple citizen of a socialist community. But not everyone is a Sophocles or a Shakespeare, and standing behind a lathe is not the same thing as writing Goethe’s poems or founding the Empire of Napoleon.

It is therefore easy to see the nature of the illusions entertained by Marxians with regard to the satisfactions and toil of the inhabitants of the socialist community. Here, as in everything else it has to say about the socialist community, Marxism moves along the lines set out by the Utopians. With express reference to Fourier’s and Owen’s ideas of restoring to work ‘the attractiveness lost through division of labour’, by arranging for each form of work to be performed for a short time only, Engels sees in Socialism an organization of production ‘in which productive labour will be not a means for enslaving but for liberating mankind, which will give every individual the opportunity to develop and to exercise all his capabilities, bodily and mentai, in all directions, and will transform a bane into a boon’.8  And Marx talks of ‘a higher phase of communist society after having done away with the slavish subjection of the individual under the division of labour, a society in which the contrast between mental and physical work has disappeared’ and ‘labour has become not only a means of life but the first need of life itself.’9  Max Adler promises that the socialist society will ‘at the very least’ not assign to anyone any work ‘which must cause him pain’.10  These statements distinguish themselves from the utterances of Fourier and his school only by the fact that there is nowhere any attempt to provide them with a basis of proof.

Fourier and his school, however, had another device, apart from changes of occupation, for rendering work more attractive: competition. Men would be capable of the highest achievement if inspired by un sentiment de rivalité joyeuse ou de noble émulation. Here for once they recognize the advantages of competition, which everywhere else they describe as pernicious. If the workers show a deficiency in achievement it will be sufficient to divide them into groups: immediately a fierce competition will blaze up between the groups, which will double the energy of the individual and suddenly arouse in all un acharnement passioné au travail.11

The observation that competition makes for greater accomplishment is of course correct enough, but it is superficial. Competition is not in itself a human passion. The efforts put forth by men in competition are not made for the sake of the competition but for the end attained thereby. The fight is waged not for its own sake, but for the prize which beckons the victor. But what prizes would spur to emulation the workers in a socialist community? Experience shows that titles and rewards of honour are not estimated too highly. Material goods to increase the satisfaction of wants could not be given as prizes since the principle of distribution would be independent of individual performance, and the increase per head through the increased effort of a single worker would be so insignificant that it would not count. The simple satisfaction from duty performed would not suffice: it is precisely because this incentive cannot be trusted that we seek others. And even if it were so, labour would still be irksome. It would not thereby become attractive in itself.

The Fourier school, as we have seen, regards it as the main point of their solution of the social problem that work will be made a joy instead of a toil.12  But unfortunately the means which it provides for this are quite impracticable. If Fourier had really been able to show the way to make work attractive he would have deserved the divine honours bestowed on him by his followers.13  But his much lauded doctrines are nothing but the fantasies of a man who was incapable of seeing clearly the world as it really is.

Even in a socialist community work will arouse feelings of pain and not of pleasure.14

• 1Fourier, Oeuvres complètes, Vol. IV, 2nd Edition, Paris 1841, p. 254 et seq.
• 2Godwin, Das Eigentum (Bahrfeld’s translation of that part of Political Justice which deals with the problem of property), Leipzig 1904, p. 73 et seq.
• 3Kautsky, Die soziale Revolution, 3rd Edition, Berlin 1911, II, p. 48.
• 4Trotsky, Literatur und Revolution, Wien 1924, p. 179.
• 5‘To-day all enterprises... are first and foremost a question of profitability... A socialist society knows no other question than of sufficient labour forces, and if it has these the work... is done.’ (Bebel, Die Frau und der Sozialismus, p. 308.) ‘Everywhere it is the social institution and the methods of production and distribution connected with these which produce want and misery, and not the number of people.’ (Ibid., p. 368.) ‘We suffer not from a lack but from a superfluity of foodstuffs, just as we have a superfluity of industrial products.’ (Ibid., p. 368, also Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, p. 305.) ‘We have... not too many but rather too few people’. (Ibid., p. 370.)
• 6Considerant, Exposition abrégée du Système Phalanstérien de Fourier, 4th Impression, 3rd Edition, Paris 1846, p. 29 et seq.
• 7Jevons, The Theory of Political Economy, 3rd Edition, London 1888, pp. 169, 172 et seq.
• 8Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, p. 317.
• 9Marx, Zur Kritik des sozialdemokratischen Parteiprogramms von Gotha, p. 17.
• 10Max Adler, Die Staatsauffassung des Marxismus, Wien 1922, p. 287.
• 11Considerant, Exposition abrégée du Système Phalanstérien de Fourier, p. 33.
• 12Considerant, Studien ùber einige Fundamentalprobleme der sozialen Zukunft (contained in Fourier’s System der sozialen Reform, translated by Kaatz, Leipzig 1906), p. 55 et seq. Fourier has the distinction of having introduced the fairies into social science. In his future state the children, organized in ‘Petites Hordes’, will perform what the adults do not do. To them will be entrusted, amongst other things, maintenance of the roads. ‘C’est à leur amour propre que l’Harmonie sera redevable d’avoir, par toute la terre, des chemins plus somptueux que les allées de nos parterres. Ils seront entretenus d’arbres et d’arbustes, même de fleurs, et arrosés au trottoir. Les petites Hordes courent frénétiquement au travail, qui est exécuté comme ocuvre pie, acte de charité envers Ia Phalange, service de Dieu et de l’Unité.’ By three o’clock in the morning they are up, cleaning the stables, attending to the cattle and horses, and working in the slaughter houses, where they take care that no animal is ever treated cruelly, killing always in the most humane manner. ‘Elles ont la haute police du regne animal.’ When their work is done they wash themselves, dress themselves, and appear triumphantly at the breakfast table. See Fourier, Oeuvres complétes, Vol. V, 2nd Edition, Paris 1841, pp. 141, 159.
• 13B. Fabre des Essarts, Odes Phalansteriennes, Montreuil-Sour-Bois 1900. Béranger and Victor Hugo also venerated Fourier. The first dedicated to him a poem, reprinted in Bebel (Charles Fourier, Stuttgart 1890, p. 294 et seq.).
• 14Socialist writers are still far from knowing this. Kautsky (Die soziale Revolution, II, p. 16 et seq.) considers that the main task of a proletarian regime is ‘to make work, which to-day is a burden, into a pleasure, so that people will enjoy working and the workers go joyfully to work’. He admits that ‘this is not such a simple matter’ and concludes that ‘it will hardly be possible to make work in factories and mines attractive quickly’. But he cannot naturally bring himself to abandon completely Socialism’s fundamental illusion.

If this is recognized, one of the main supports of socialist structure of thought collapses. It is therefore only too easy to understand why socialists try stubbornly to maintain that there is in man an innate impulse and striving to work, that work gives satisfaction per se and that only the unsatisfactory conditions under which work is performed in capitalist society could restrict this natural joy of labour and transform it into toil.1

In proof of this assertion they assiduously collect statements made by workers in modern factories on the pleasurability of the labour. They ask the workers leading questions and are extraordinarily satisfied when the answers are of the kind they want to hear. But because of their prepossession they omit to notice that between the actions and replies of those whom they cross-examine there is a contradiction which demands solution. If work gives satisfaction per se why is the worker paid? Why does he not reward the employer for the pleasure which the employer gives him by allowing him to work? Nowhere else are people paid for the pleasure given to them, and the fact that pleasures are rewarded ought at least to give pause for reflection. By common definition, labour cannot give satisfaction directly. We define labour as just that activity which does not give any direct pleasurable sensations, which is performed only because the produce of the labour yields indirectly pleasurable sensations sufficient to counterbalance the primary sensations of pain.2

The so-called ‘joy of labour’ which is generally adduced in support of the view that labour awakens feelings of satisfaction, not of pain, is attributable to three quite separate sensations.

There is first the pleasure which can be obtained from the perversion of work. When the public official abuses his office, often while performing his function in a manner which is formally quite correct, so as to satisfy the instincts of power, or to give free rein to sadistic impulses, or to pander to erotic lusts (and in this one need not always think merely of things condemned by law or morals), the pleasures that follow are undoubtedly not pleasures of work but pleasures derived from certain accompanying circumstances. Similar considerations apply also to other kinds of work. Psycho-analytic literature has repeatedly pointed out how extensively matters of this sort influence the choice of occupation. In so far as these pleasures counterbalance the pain of labour they are reflected also in the rates of pay; the larger supply of labour in the occupations offering the greatest scope for this kind of perversion tending to lower the rate of pay. The worker pays for the ‘pleasure’ with an income lower than he otherwise could have earned.

By ‘joy of labour’ people mean also the satisfaction of completing a task. But this is pleasure in being free of work rather than pleasure in the work itself. Here we have a special kind of pleasure, which can be shown to exist everywhere, in having got rid of something difficult, unpleasant, painful, the pleasure of ‘I’ve done it’. Socialist Romanticism and romantic socialists praise the Middle Ages as a time when joy of labour was unrestricted. As a matter of fact we have no reliable information from medieval artisans, peasants, and their assistants about the ‘joy of labour’, but we may presume that their joy was in having performed their work and begun the hours of pleasure and repose. Medieval monks, who in the contemplative peace of their monasteries copied manuscripts, have bequeathed us remarks which are certainly more genuine and reliable than the assertions of our romantics. At the end of many a fine manuscript we read: Laus tibi sit Christe, quoniam liber explicit iste.3  Thus: Praise the Lord because the work is completed. Not because the work itself has given pleasure.

But we must not forget the third and most important source of the joy of labour — the satisfaction the worker feels because his work goes so well that through it he can earn a living for himself and his family. This joy of labour is clearly rooted in the pleasure of what we have called the indirect enjoyment of labour. The worker rejoices because in his ability to work and in his skill he sees the basis of his existence and of his social position. He rejoices because he has attained a position better than that of others. He rejoices because he sees in his ability to work the guarantee of future economic success. He is proud because he can do something ‘good’, that is, something society values and consequently pays for on the labour market. Nothing raises self-respect higher than this feeling, which indeed is often exaggerated to the ridiculous belief that one is indispensable. To the healthy man, however, it gives the strength to console himself for the unalterable fact that he is able to satisfy his wants only by toil and pain. As people say: he makes the best of a bad job.

Of the three sources of that which we may call the ‘joy of labour’ the first, arising from perversion of the true ends of the work, will undoubtedly exist in the socialist community. As under capitalist society it will naturally be restricted to a narrow circle. The other two sources of the joy of labour will presumably dry up completely. If the connection between the yield of labour and the income of the labourer is dissolved, as it must be in socialist society, the individual will always labour under the impression that proportionately too much work has been piled on him. The over-heated, neurasthenic dislike of work will develop which nowadays we can observe in practically all government offices and public enterprises. In such concerns where the pay depends upon rigid schedules, everyone thinks he is overburdened, that just he is being given too much to do and things which are too unpleasant — that his achievements are not duly appreciated and rewarded. Out of these feelings grows a sullen hate of work which stifles even the pleasure in completing it. The socialist community cannot count on the ‘joy of labour’.

• 1Veblen, The Instinct of Workmanship, New York 1922, p. 31 et seq.; De Man, Zur Psychologie des Sozialismus, p. 45 et seq.; De Man, Der Kampf um die Arbeitsfreude, Jena 1927, p. 149 et seq.
• 2We here disregard the above-mentioned pleasure in beginning work, in practice unimportant. See p. 166.
• 3Wattenbach, Das Schriftwesen in Mittelalter, 3rd Edition, Leipzig 1896, p. 500. Amongst the many similar sayings and verses quoted by Wattenbach is the still more drastic: Libro complete saltat scriptor pede leto.

It is the duty of the citizen of the socialist commonwealth to work for the community according to his powers and his ability: in return he has a claim against the community for a share in the social dividend. He who unjustifiably omits to perform his duty will be recalled to obedience by the usual methods of state coercion. The economic administration would exercise so great a power over individual citizens that it is inconceivable that anyone could permanently withstand it.

It is not sufficient however that citizens should arrive at their tasks punctually and spend the prescribed number of hours at their posts. They must really work while they are there.

In the capitalist system the worker receives the value of the product of his labour. The static or natural wage-rate tends to such a level that the worker receives the value of the product of his labour: i.e. all that is attributable to his work.1  The worker himself is therefore concerned that his productivity should be as great as possible. This does not apply to work done for piece rates only. The level of time rates is also dependent upon the marginal productivity of the particular kind of work concerned. The technical form of wage payment which is customary does not alter the level of wages in the long run. The wage rate has always a tendency to return to its static level, and time rates are no exception.

But even so work done for time wages gives us an opportunity of observing how work is carried on when the worker feels that he is not working for himself, because there is no connection between his output and his remuneration. Under time wages the more skilful worker has no inducement to do more than the minimum expected from every worker. Piece wages are an incentive to the maximum activity, time wages to the minimum. Under Capitalism the graduation of time wages for different kinds of work greatly mitigates these social effects of the system of payment by time. The worker has a motive in finding a position where the minimum work required is as great as he can perform, because the wage increases with the rise in the minimum requirements.

Only when we depart from the principle of graduating time wages according to the work required does the time wage begin to affect production adversely. This is particularly noticeable in the case of state and municipal employment. Here, in the last few decades, not only has the minimum required from the individual workers been continually reduced, but every incentive to better work — for example, different treatment of the various grades and rapid promotion of industrious and capable workers to better-paid posts — has been removed. The result of this policy has clearly vindicated the principle that the worker only puts forth his best efforts when he knows that he stands to gain by it.

Under Socialism the usual connection between work performed and its remuneration cannot exist. All attempts to ascertain what the work of the individual has produced and thereby to determine the wage rate, must fail because of the impossibility of calculating the productive contributions of the different factors of production. The socialist community could probably make distribution dependent upon certain external aspects of the work performed. But any such differentiation would be arbitrary. Let us suppose that the minimum requirement is determined for each branch of production. Let us suppose this is done on the basis of Robdertus’ proposal for a ‘normal working day’. For each industry there is laid down the time which a worker with average strength and effort can continue to work and the amount of work which an average worker of average skill and industry can perform in this time.2  We will completely ignore the technical difficulties in the way of deciding, in any particular concrete example the question whether this minimum has been achieved or not. Nevertheless it is obvious that any such general determination can only be quite arbitrary. The workers of the different industries would never be made to agree on this point. Everyone would maintain that he had been overtasked and would strive for a reduction of the amount set to him. Average quality of the worker, average skill, average strength, average effort, average industry — these are all vague conceptions that cannot be exactly determined.

Now it is evident that the minimum performance calculated for the worker of average quality, skill, and strength will be achieved only by a part — say one-half — of the workers. The others will do less. How can the authorities ascertain whether a performance below the minimum is due to laziness or incapacity? Either the unfettered decision of the administration must be allowed free play, or certain general criteria must be established. Doubtless, as a result, the amount of work performed would be continually reduced.

Under Capitalism everybody who takes an active part in business life is concerned that labour should be paid the whole product. The employer who dismisses a worker who is worth his wage harms himself. The foreman who discharges a good worker and retains a bad one, adversely affects the business results of the department under his charge, and thereby indirectly himself. Here we do not need formal criteria to limit the decisions of those who have to judge the work performed. Under Socialism such criteria would have to be established, because otherwise the powers entrusted to persons in charge could be arbitrarily misused. And so then the worker would have no further interest in the actual performance of work. He would only be concerned to do as much as is prescribed by the formal criteria in order to avoid punishment.

What kind of results will be achieved by workers who are not directly interested in the product of the work, can be learnt from the experience of a thousand years of slave labour. Officials and employees of state and municipal undertakings provide new examples. An attempt may be made to weaken the argumentative force of the first example by contending that these workers had no interest in the result of their labour because they did not share in the distribution; in the socialist community everyone would realize that he was working for himself and that would spur him on to the highest activity. But this is just the problem. If the worker exerts himself more at the work then he has so much the more labour disutility to overcome. But he will receive only an infinitesimal fraction of the result of his increased effort. The prospect of receiving a two thousand millionth part of the result of his increased effort will scarcely stimulate him to exert his powers any more than he needs.3

Socialist writers generally pass over these ticklish questions in silence or with a few inconsequential remarks. They only bring forward a few sententious phrases and nothing else.4  The new man of Socialism will be free from base self-seeking; he will be morally infinitely above the man of the frightful age of private property and from a profound knowledge of the coherency of things and from a noble perception of duty he will devote all his powers to the general welfare.

But closer examination shows that these arguments lead to only two conceivable alternatives: free obedience to the moral law with no compulsion save that of the individual conscience, or enforced service under a system of reward and punishment. Neither will achieve the end. The former supplies no sufficient incentive to persist in overcoming the disutility of labour even though it is publicly extolled on every possible occasion and proclaimed in all schools and churches; the latter can only lead to a formal performance of duty, never to performance with the expenditure of all one’s powers.

The writer who has occupied himself most thoroughly with this problem is John Stuart Mill. All subsequent arguments are derived from his. His ideas are to be encountered everywhere in the literature of the subject and in everyday political discussion; they have even become popular catchwords. Everyone is familiar with them even if he is totally unacquainted with the author.5  They have provided for decades one of the main props of the socialist idea, and have contributed more to its popularity than the hate-inspired and frequently contradictory arguments of socialist agitators.

One of the main objections, says Mill, that could be urged against the practicability of the socialist idea, is that each person would be incessantly occupied in evading his fair share of work. But those who urge this objection forget to how great an extent the same difficulty exists under the system under which nine-tenths of the business of society is now conducted. The objection supposes that honest and efficient labour is only to be had from those who are themselves individually to reap the benefit of their own exertions. But under the present system only a small fraction of all labour can do this. Time rates or fixed salaries are the prevailing forms of remuneration. Work is performed by people who have less personal interest in the execution of the task than the members of a socialist community, since, unlike the latter, they are not working for an enterprise in which they are partners. In the majority of cases they are not personally superintended and directed by people whose own interests are bound up with the results of the enterprise. For employees paid by time carry out even the supervisory, managing and technical work. It may be admitted that labour would be more productive in a system in which the whole or a large share of the product of extra exertion belongs to the labourer, but under the present system it is precisely this incentive which is lacking. Even if communistic labour might be less vigorous than that of a peasant proprietor, or a workman labouring on his own account, it would probably be more energetic than that of a labourer for hire, who has no personal interest in the matter at all. One can easily see the cause of Mill’s mistake. The last representative of the classical school of economists, he did not survive to see the transformation of economics by the subjective theory of value, and he did not know the connection between wage rates and the marginal productivity of labour. He does not perceive that the worker has an interest in doing his utmost because his income depends upon the value of the work which he performs. Without the light of modern economic thought he sees only on the surface and not into the heart of things. Doubtless the individual working for a 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 his labour. That Socialism cannot do this is the great difference between Socialism and Capitalism.

In the extreme case of obstinate perseverance in not performing a due share of work, the socialist community, Mill thinks, would have reserve powers which society now has at its disposal: it could submit the workers to the rules of a coercive institution. Dismissal, the only remedy at present, is no remedy when no other labourer who can be engaged does any better than his predecessor. The power to dismiss only enables an employer to obtain from his workman the customary amount of labour; but that customary labour may be of any degree of inefficiency.

The fallacy of this argument is plain. Mill does not realize that the wage rate is adjusted according to this customary amount of labour, and that the workers who wishes to earn more must do more. It may be admitted straight away that wherever the time wage prevails the individual worker is obliged to seek elsewhere for a job in which the customary amount of labour is greater because he has no chance of increasing his income by doing more work if he remains where he is. In the circumstances he must change over to piece work, take up another occupation, or even emigrate. In this way millions have emigrated from those European countries, where the customary amount of labour is low, to Western Europe or to the United States, where they have to work more but earn more. The inferior workers remain behind, and are content to work less for less wages.

If this is kept in mind it is also easy to understand the case of supervisory and managerial work performed by employees. Their activities, too, are paid according to the value of the service: they, too, must do as much as they can if they wish to obtain the highest possible income. They can and must be given authority in the name of the entrepreneur to take on and dismiss workers without any fear that they will abuse the power. They perform the social task incumbent upon them of securing that the worker obtains only as much wages as his work is worth, apart from any other consideration whatever.6  The system of economic calculation supplies a sufficient test of the efficacy of their work. This distinguishes their work from the kind of control which could be exercised under Socialism. They harm themselves if from revengeful motives they treat a worker worse than he deserves. (Naturally ‘deserves’ is not used here in any ethical sense.) This authority to dismiss workers and fix their wages which the employer possesses and deputes to subordinates, is considered by socialists to be dangerous in the hands of private individuals. But the socialists overlook the fact that the employer’s ability to exercise this power is limited, that he cannot dismiss and mistreat arbitrarily because the result would be harmful to himself. In endeavouring to purchase labour as cheaply as possible the employer is fulfilling one of his most important social tasks.

Mill admits that in the present state of society the neglect by the uneducated classes of labourers for hire of the duties which they engage to perform is flagrant. This, he thinks, can only be attributed to a low level of education. Under Socialism, with universal education, all citizens would undoubtedly fulfil their duty towards society as zealously as the majority of those members of the upper and middle classes who are in receipt of salaries, perform it to-day. It is clear that Mill’s thought repeatedly involves the same error. He does not see that in this case too, there is a correspondence between payment and performance. Finally he is compelled to admit that, there can be no doubt that remuneration by fixed salaries does not produce the maximum of zeal in any class of functionaries. To this extent, Mill says, objection could reasonably be made against the socialist organization of labour. It is, however, according to Mill, by no means certain that this inferiority will continue in a socialist community as is assumed by those whose imaginations are little used to range beyond the state of things with which they are familiar. It is not impossible that under Socialism the public spirit will be so general that disinterested devotion to the common welfare will take the place of self seeking. Here Mill lapses into the dreams of the Utopians and conceives it possible that public opinion will be powerful enough to incite the individual to increased zeal for labour, that ambition and self-conceit will be effective motives, and so on.

It need only be said that unfortunately we have no reason to assume that human nature will be any different under Socialism from what it is now. And nothing goes to prove that rewards in the shape of distinctions, material gifts, or even the honourable recognition of fellow citizens, will induce the workers to do more than the formal execution of the tasks allotted to them. Nothing can completely replace the motive to overcome the irksomeness of labour which is given by the opportunity to obtain the full value of that labour.

Many socialists of course think that this argument can be refuted by appeal to the labour which in the past has been performed without the incentive of a wage payment. They instance the case of the labours of scientists and artists, of the doctor who exhausts himself at the sickbed, the soldier who dies the death of a hero, the statesman who sacrifices all for his idea. But the artist and the scientist find their satisfaction in the work itself, and in the recognition which they hope to gain at some time, if only from posterity, even though material gains are not forthcoming. The doctor and the professional soldier are in the same position as many other workers whose work is associated with danger. The supply of workers for these professions reflects their lesser attractiveness, and the wage is adapted correspondingly. But if, in spite of the danger, a man enters the profession for sake of the higher remuneration and other advantages and honours, he cannot evade the dangers without the greatest prejudice to himself. The professional soldier who turned tail, the doctor who refused to treat an infectious case, would endanger their future careers to such an extent that they have virtually no choice in the matter. It cannot be denied that there are doctors who are concerned to do their utmost in cases where no one would detect remissness, and that there are professional soldiers who incur danger when no one would reproach them for avoiding it. But in these exceptional cases, as in the case of the staunch statesman who is ready to die for his principles, man raises himself, as is given to few to do, to the highest peak of manhood, to complete union of will and deed. In his exclusive devotion to a single purpose which sets aside all other desires, thoughts and feelings, removes the instinct of self-preservation and makes him indifferent to pain and suffering, such a man forgets the world, and nothing remains except the one thing to which he sacrifices himself and his life. Of such men it used to be said, according to the estimate set on their aims, that the spirit of the Lord moved them, or that they were possessed of the devil — so incomprehensible were their motives to the ordinary run of mankind.

It is certain that mankind would not have risen above the beasts if it had not had such leaders; but it is certain that mankind does not in the main consist of such men. The essential social problem is to make useful members of society out of the general masses.

Socialist writers have for a long time ceased to exercise their ingenuity on this insoluble problem. Kautsky can tell us nothing more than that habit and discipline will provide incentives to work in the future. ‘Capital has so accustomed the modern labourer to work day in and day out that he cannot endure to be without his work. There are even people who are so accustomed to work that they do not know what to do with their leisure time and are unhappy when they cannot work.’ Kautsky does not seem to fear that this habit could be shaken off more easily than other habits such as eating and sleeping but he is not prepared to rely on this incentive alone, and freely admits that ‘it is the weakest’. He therefore recommends discipline. Naturally not ‘military discipline’ nor ‘blind obedience to an authority imposed from above’, but ‘democratic discipline — the free subjection to elected leadership’. But then doubts arise and he endeavours to dispel them with the idea that under Socialism labour will be so attractive ‘that it will be a pleasure to work’, but finally admits that this will not be sufficient at first, and at last arrives at the conclusion that besides the attractiveness of the work some other incentive must be brought to bear, ‘that of the wages of labour’.7

Thus even Kautsky, after many limitations and considerations, arrives at this result, that the irksomeness of labour will only be overcome if the product of labour, and only the product of his own labour, accrues to the worker, in so far as he is not also an owner or an employer. But this is to deny the feasibility of socialistic organization of labour, since private property in the means of production cannot be abolished without abolishing at the same time the possibility of remunerating the labourer according to the product of his labour.

• 1Clark, Distribution of Wealth, New York 1907, p. 157 et seq.
• 2Rodbertus-Jagetzow, Briefe und sozialpolitische Aufsätze, edited by R. Meyer, Berlin (1881), p. 553 et seq. We shall not enter here into Rodbertus’ other proposals for the normal working day. They are throughout based on the untenable view Rodbertus has formed about the problem of value.
• 3Schâffle, Die Quintessenz des Sozialismus, 18th Edition, Gotha 1919, p. 30 et seq.
• 4Degenfeld-Schonburg, Die Motive des volkswirtschaftlichen Handelns und der deutsche Marxismus, Tübingen 1920, p. 80.
• 5J. S. Mill, Principles, p. 126 et seq. We cannot here examine how far Mill took over these ideas from others. Their wide diffusion they owe to the brilliant exposition in which Mill has presented them in his much read work.
• 6Competition between the entrepreneurs sees to it that wages do not fall below this level.
• 7Kautsky, Die soziale Revolution, II, p. 15 et seq.

The old ‘distributivist’ theories were based on the assumption that it only needed equal distribution for everyone to have if not riches, at least a comfortable existence. This seemed so obvious, that hardly any trouble was taken to prove it. At the beginning Socialism took over this assumption in its entirety, and expected that comfort for all would be achieved by an equal distribution of the social income. Only when the criticisms of their opponents drew their attention to the fact that equal distribution of the income obtained by the whole economic society would scarcely improve the conditions of the masses at all, did they set up the proposition that capitalist methods of production restrict the productivity of labour, and that Socialism would remove these limitations and multiply production to ensure for everyone a life in comfortable circumstances. Without troubling about the fact that they had not succeeded in disproving the assertion of the liberal school that productivity under Socialism would sink so low that want and poverty would be general, socialist writers began to promulgate fantastic assertions about the increase in productivity to be expected under Socialism.

Kautsky mentions two ways of achieving increased production by a transition from capitalistic to socialistic methods of production. One is the concentration of all production in the best concerns and the closing down of the less efficient.1  That this is a means of increasing production cannot be denied, but it is a means which operates most effectively under the regime of an exchange-economy. Competition ruthlessly eliminates all inferior productive undertakings and concerns. That it does so is a constant source of complaint from those involved, and because of it the weaker undertakings demand State subsidies, special consideration in public contracts, and in general restriction of freedom of competition in every possible way. Kautsky is forced to admit that trusts formed by private enterprise exploit these means to the utmost, so as to obtain higher productivity, and in fact he frankly regards them as the forerunners of the social revolution. It is more than questionable whether the socialist State would feel the same necessity to carry out similar improvements in production. Would it not continue an unprofitable undertaking rather than provoke local prejudice by its discontinuance? The private entrepreneur closes down without much ado undertakings that no longer pay; and in this way he compels the worker to change his locality and sometimes even his occupation. Undoubtedly this involves initial hardships for the people concerned, but it is to the general advantage, since it makes possible a cheaper and better provisioning of the market. Would the Socialist State do likewise? Would it not, on the contrary, be constrained for political reasons to avoid local discontent? On most state railways all reforms of this kind are frustrated by the attempt to avoid the harm to particular districts which would result from the elimination of superfluous branch offices, workshops, and power stations. Even the army administration has encountered parliamentary opposition when for military reasons it has been desired to withdraw a garrison from a particular place.

His second method of achieving increased production, viz., ‘economies of every description’, on his own admission, Kautsky already finds operating under the trust of to-day. He particularly mentions economies of materials, transport charges, advertisements and publicity costs.2  As far as economies in materials and transport are concerned, experience shows that nothing is operated with less economy and with more waste of labour and material of every kind than public services and undertakings. Private enterprise on the other hand naturally induces the owner to work with the greatest economy in his own interest.

Of course the Socialist state would save all advertising expenses, all the costs of commercial travellers and agents. But it is more than probable that it would employ many more persons in the service of the apparatus of distribution. Wartime experience has taught us how cumbrous and expensive the social apparatus of distribution can be. Were the costs of bread, flour, meat, sugar, and other cards really less than the costs of advertisement? Has the enormous personnel required to run a rationing system been cheaper than the expenditure on commercial travellers and agents?

Socialism would eliminate the small retailers. But in their place it must set up distributive centres which would not be cheaper. Co-operative stores do not employ less hands than the retail stores organized on modern lines, and many of them, because of their large expenses, could not compete with the latter if they were not granted privileges of exemption from taxation.

Speaking generally, it must be said that it is inadmissible to pick out special costs in capitalist society, and then at once to infer from the fact that they would disappear in a socialist society, that the productivity of the latter would surpass that of the former. It is necessary to compare the total costs and the total yields of both systems. The fact that the electromobile needs no petrol is no proof that it is cheaper to run than the petrol-driven car.

The weakness of Kautsky’s argument is evident, when he asserts that ‘by the application of these two methods a proletarian regime could raise production to such a high level that it would be possible to increase wages considerably and at the same time reduce the hours of labour’. Here he is making an assertion for which he offers no proof whatever.3

And it is no better with the other arguments that are often brought forward to prove the supposed higher productivity of a socialistic society. When for example people argue that under Socialism everyone capable of work will have to work, they are sadly mistaken as to the number of idlers under Capitalism.

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. But the problem of productivity cannot be dealt with only within the limits of a study of static conditions. Incomparably more important than the question whether the transition to Socialism would increase productivity is the question whether, given the existence of a socialistic order, it would be able further to increase production and to achieve economic progress. This leads us to the problem of dynamics.

• 1Kautsky, Die soziale Revolution, II, p. 21 et seq.
• 2Kautsky, Die soziale Revolution, II, p. 26.
• 3In the years of controlled economy we heard quite often of frozen potatoes, rotten fruit, spoiled vegetables. Did such things not happen formerly? Certainly. But they happened less often. The merchant whose fruit spoiled suffered monetary loss, and that made him careful in the future. If he did not take better care he was ruined at last. He ceased to direct production and was removed to a place in economic life where he could do no more harm. But it is otherwise with the goods which the state deals in. Here there is no individual interest behind the commodities. Here officials trade, whose responsibility is so divided that no one gets particularly excited about a small misfortune.

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 the anarchy of production’. The inner structure of a socialist community is best understood if we compare it with the inner structure of an army. Many socialists indeed prefer to speak of the ‘army of labour’. As in an army, so under Socialism, everything depends on the orders of the supreme authority. Everyone has a place to which he is appointed. Everyone has to remain in his place until he is moved to another. It follows that men become the mere pawns of official action. They rise only when they are promoted. They sink only when they are degraded. It would be waste of time to describe such conditions. They are the common knowledge of every citizen of a bureaucratic state.

It is obvious that, in a state of this sort, all appointments should be based upon personal capacity. Each position should be held by the individual best fitted to hold it — always provided that he is not required for more important work elsewhere. Such is the fundamental principle of all systematically ordered authoritarian organizations — of the Chinese Mandarinate equally with modern bureaucracies.

In giving effect to this principle the first problem that arises is the appointment of the supreme authority. There are two ways to the solution of this problem, the oligarchical-monarchical and the democratic, but there can be only one solution — the charismatic solution. The supreme rulers (or ruler) are chosen in virtue of the grace with which they are endowed by divine dispensation. They have superhuman powers and capacities lifting them above the other mortals. To resist them is not only to resist the powers that be; it is to defy the commandments of the Deity. Such is the basis of theocracies — of clerical aristocracies or realms of ‘the Lord’s anointed’. But it is equally the basis of the Bolshevist dictatorship in Russia. Summoned by history to the performance of their sublime task, the Bolsheviks pose as the representatives of humanity, as the tools of necessity, as the consummators of the great scheme of things. Resistance to them is the greatest of all crimes. But against their adversaries they may resort to any expedients. It is the old aristocratic-theocratic idea in a new form.

Democracy is the other method of solving the problem. Democracy places everything in the hands of the majority. At its head is a ruler, or rulers, chosen by a majority decision. But the basis of this is as charismatic as any other. Only in this case grace is regarded as being granted in equal proportions to all and sundry. Everyone is endowed with it. The voice of the people is the voice of God. This is to be seen especially clearly in Tommaso Campanella’s City of the Sun. The Regent chosen by the national assembly is also priest and his name is ‘Hoh’, that means: metaphysics.1  In authoritarian ideology, democracy is valued not for its social functions, but only as a means for the ascertainment of the absolute.2

According to charismatic theory, in appointing officials the supreme authority transmits to them the grace it possesses itself. An official appointment raises ordinary mortals above the level of the masses. They count for more than others. When on duty their status is especially enhanced. No doubt of their capacity, or of their fitness for office, is permissible. Office makes the man.

Apart from their polemical value, all these theories are purely formal. They do not tell us anything about how such appointments actually work. They are indifferent to origins. They do not inquire whether the dynasties and the aristocracies concerned attained to power by the chance of war. They give no idea of the mechanism of the party system which brings the leaders of a democracy to the helm. They tell nothing of the actual machinery for selecting officials.

But since only an omniscient ruler could do without them, special arrangements for the appointment of the officials must be made. Since the supreme authority cannot do everything, appointment to lesser positions at least must be left to subordinate authorities. To prevent this power from degenerating into mere licence, it must be hedged about by regulations. In this way selection comes to be based not on genuine capacity but on compliance with certain forms, the passing of certain examinations, attendance at certain schools, having spent a certain number of years in a subordinate position, and so on. Of the shortcomings of such methods there can be only one opinion. The successful conduct of business demands qualities quite other than those necessary for passing examinations — even if the examinations deal with subjects bearing on the work of the position in question. A man who has spent a certain time in a subordinate capacity is far from being, for that reason, fitted for a higher post. It is not true that one learns to command by first learning to obey. Age is no substitute for personal capacity. In short, the system is deficient, its only justification is that nothing better is Known to put in its place.

Attempts have recently been made to invoke the aid of experimental psychology and physiology, and many promise therefrom results of the highest importance to Socialism. There can be no doubt that under Socialism, something corresponding to medical examination for military service would have to be employed on a larger scale and with more refined methods. Those who feigned bodily deformities to escape difficult and uncongenial work would have to be examined, as would those who attempted work for which they were not properly developed. But the warmest advocates of such methods could scarcely pretend that they could do more than impose a very loose curb upon the grossest abuses of officialdom. For all those kinds of work demanding something more than mere muscular strength and a good development of particular senses they are not applicable at all.

• 1Georg Adler, Geschichte des Sozialismus und Komrnunismus, Leipzig 1899, p. 185 et seq.
• 2On the social-dynamic functions of democracy see p. 72 of this work.

Socialist society is a society of officials. The way of living prevailing in it, and the mode of thinking of its members, are determined by this fact. People who are always expecting promotion, people who had always a ‘chief’ on whom they depend, people who, because they receive a fixed salary, never understand the connection between production and their own consumption — the last ten years has witnessed the rise of this type everywhere in Europe. It is in Germany, however, where it is especially at home. The whole psychology of our time derives from it.

Socialism knows no freedom of choice in occupation. Everyone has to do what he is told to do and to go where he is sent. Anything else is unthinkable. We shall discuss later and in another connection how this will affect the productivity of labour. Here we have to discuss the position of art and science, literature and the press under such conditions.

Under Bolshevism in Russia and Hungary, the artists, scientists and writers, who were recognized as such by the selectors appointed for this purpose, were exempted from the general obligation to work and given a definite salary. All such as were not recognized remained subject to the general obligation to work and received no support for other activity. The press was nationalized.

This is the simplest solution of the problem, and one which harmonizes completely with the general structure of socialist society. Officialdom is extended to the sphere of the spirit. Those who do not please the holders of power are not allowed to paint or to sculpt or to conduct an orchestra. Their works are not printed or performed. And if the decision does not depend directly upon the free judgment of the economic administration but is referred to the advice of an expert council the case is not materially altered. On the contrary, expert councils, which are inevitably composed of the old and the established, must be admitted to be even less competent than laymen to assist the rise of young talent with different views and perhaps greater mastery than their own. Even if the choice were referred to the whole nation the rise of independent spirits setting themselves against traditional technique and accepted opinions would not be facilitated. Such methods can only foster a race of epigoni.

In Cabet’s Icaria, only such books which please the republic are to be minted (les ouvrages bréférés). Writings of Dre-socialistic times are to be examined by the Republic. Those which are partially useful are to be revised. Those which are regarded as dangerous or useless are to be burnt. The objection, that this would be to do what Omar did by burning the Alexandrian Library, Cabet held to be quite untenable. For, said he, ‘nous faisons en faveur de l’humanité ce que ces oppresseurs faisaient contre elle. Nous avons fait du feu pour brûler les méchants livres, tandis que des brigands ou des fanatiques allumaient les bûchers pour brûler d’innocents hérétiques’.1  From a point of view such as this, solution of the problem of toleration is impossible. Mere opportunists excepted, everyone is convinced of the rightness of his opinions. But, if such a conviction by itself were a justification for intolerance, then everyone would have a right to coerce and persecute everyone else of another way of thinking.2  In these circumstances, the demand for toleration can only be a prerogative of the weak. With power comes the exercise of intolerance. In such a case there must always be war and enmity between men. Peaceful co-operation is out of the question. It is because it desires peace that Liberalism demands toleration for all opinions.

Under Capitalism the artist and the scientist have many alternatives open to them. If they are rich they can follow their own inclinations. They can seek out rich patrons. They can work as public officials. They can attempt to live on the sale of their creative work. Each of these alternatives has its dangers, in particular the two latter. It may well be that he who gives new values to mankind, or who is capable of so giving, suffers want and poverty. But there is no way to prevent this effectively. The creative spirit innovates necessarily. It must press forward. It must destroy the old and set the new in its place. It could not conceivably be relieved of this burden. If it were it would cease to be a pioneer. Progress cannot be organized.3  It is not difficult to ensure that the genius who has completed his work shall be crowned with laurel; that his mortal remains shall be laid in a grave of honour and monuments erected to his memory. But it is impossible to smooth the way that he must tread if he is to fulfil his destiny. Society can do nothing to aid progress. If it does not load the individual with quite unbreakable chains, if it does not surround the prison in which it encloses him with quite un-surmountable walls, it has done all that can be expected of it. Genius will soon find a way to win its own freedom.

The nationalization 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 Soviet came into power. They sided with it because, not having been recognized hitherto, they entertained hopes of recognition from the new regime. The great question, however, is whether later innovators will be able to oust them from the position they have now gained.

In Bebel’s Utopia only physical labour is recognized by society. Art and science are relegated to leisure hours. In this way, thinks Bebel, the society of the future ‘will possess scientists and artists of all kinds in countless numbers’. These, according to their several inclinations, will pursue their studies and their arts in their spare time.4  Thus Bebel allows himself to be swayed by the manual labourer’s philistine resentment against all those who are not hewers of wood and drawers of water. All mental work he regards as mere dilettantism, as can be seen from the fact that he groups it with ‘social intercourse’.5  But nevertheless we must inquire whether under these conditions the mind would be able to create that freedom without which it cannot exist.

Obviously all artistic and scientific work which demands time, travel, technical education and great material expenditure, would be quite out of the question. But we will assume that it is possible to devote oneself to writing or to music, after the day’s work is done. We will assume further that such activities will not be hindered by malicious intervention on the part of the economic administration — by transferring unpopular authors to remote localities, for instance — so that with the aid perhaps of devoted friends, an author or a composer is able to save enough to pay the fee demanded by the state printing works for the publication of a small edition. In this way he may even succeed in bringing out a little independent periodical — perhaps even in procuring a theatrical production.6  But all this would have to overcome the overwhelming competition of the officially supported arts, and the economic administration could at any time suppress it. For we must not forget that as one could not ascertain the cost of printing, the economic administration would be free to decide the business conditions under which publication could take place. No censor, no emperor, no pope, has ever possessed the power to suppress intellectual freedom which would be possessed by a socialist community.

• 1 Cabet, Voyage en Icarie, Paris 1848, p. 127.
• 2Luther urged the Princes of his party not to tolerate the monastic system and the Mass. According to him it would be irrelevant to answer that, as the Emperor Charles was convinced that the Papist doctrine was true, he would act justly, from his point of view, in destroying the Lutheran teachings as heresy. For we know ‘that he is not certain of this, nor can he be certain, because we know that he eirs and fights against the Gospels. For it is not our duty to believe that he is certain, because he goes without God’s Word and we go with God’s Word; rather it is his duty to recognize God’s Word and to advance it, like us, with ail his power.’ Dr. Martin Luther’s Briefe, Sendsschreiben und Bedenken, edited by de Wette, Part IV, Berlin 1827, p. 93 et seq.; Paulus, Protestantismus und Toleranz im 16 Jahrhundert, Freiburg 1911, p. 23.
• 3‘It is misleading to say: Progress should be organized. What is really productive cannot be put into forms made in advance; it flourishes only in unrestricted freedom. The followers may then organize themselves, which is also called “forming a school”.’ (Spranger, Begabung und Studium, Leipzig 1917, p. 8.) See also Mill, On Liberty, 3rd Edition, London 1864, p. 114 et seq.
• 4Bebel, Die Frau und der Sozialismus, p. 284.
• 5How Bebel pictured to himself life in a socialist community is shown by the following: ‘Here she (Woman) is active under the same conditions as the man. At one moment a practical worker in some industry she is in the next hour educator, teacher, nurse; in the third part of the day she exercises some art or cultivates a science; and in the fourth part she fulfils some administrative function. She enjoys studies, pleasures and amusement with her like or with men, just as she wishes and as the opportunity offers. In love choice she is free and unfettered like the man. She woos or lets herself be wooed, etc.’ (Bebel, op. cit., p. 243).
• 6This corresponds to Bellamy’s ideas. (Ein Rückblick, translated by Hoops in Meyers Volksbücher, p. 130 et seq.)

It is customary to describe the position of the individual under Socialism by saying that he would be unfree, that the socialist community would be a ‘prison state’. This expression contains a judgment of value which, as such, lies outside the sphere of scientific thought. Science cannot decide whether freedom is a good or an evil or a mere matter of indifference. It can only inquire wherein freedom consists and where freedom resides.

Freedom is a sociological concept. It is meaningless to apply it to conditions outside society: as can be well seen from the confusions prevailing everywhere in the celebrated free-will controversy. The life of man depends upon natural conditions that he has no power to alter. He lives and dies under these conditions and, because they are not subject to his will, he must subordinate himself to them. Everything he does is subject to them. If he throws a stone it follows a course conditioned by nature. If he eats and drinks the processes within his body are similarly determined. We attempt to exhibit this dependence of the process of events upon definite and permanent functional relationship, by the idea of the conformity of all natural occurrences to unerring and unchangeable laws. These laws dominate man’s life; he is completely circumscribed by them. His will and his actions are only conceivable as taking place within their limits. Against nature and within nature there is no freedom.

Social life, too, is a part of nature and, within it, unalterable laws of nature hold their sway. Action, and the results of action, are conditioned by these laws. If, with the origin of action in will, and its working out in societies, we associate an idea of freedom, this is not because we conceive that such action takes place independently of natural laws: the meaning of this concept of freedom is quite different.

It is not here a question of the problem of internal freedom. It is the problem of external freedom with which we are concerned. The former is a problem of the origin of willing, the latter of the working out of action. Every man is dependent upon the attitude of his fellow men. He is affected by their actions in a multitude of ways. If he has to suffer them to treat him as if he had no will of his own, if he cannot prevent them from riding rough-shod over his wishes, he must feel a one-sided dependence upon them and will say that he is unfree. If he is weaker, he must accommodate himself to coercion by them.

Under the social relations that arise from co-operation in common work this one-sided dependence becomes reciprocal. In so far as each individual acts as a member of society he is obliged to adapt himself to the will of his fellows. In this way no one depends more upon others than others depend upon him. This is what we understand by external freedom. It is a disposition of individuals within the framework of social necessity involving, on the one side, limitation of the freedom of the individual in relation to others, and, on the other, limitation of the freedom of others in relation to him.

An example should make this clear. Under Capitalism the employer appears to have great power over the employee. Whether he engages a man, how he employs him, what wages he gives him, whether he dismisses him — all depend upon his decision. But this freedom on his part and the corresponding unfreedom of the other are only apparent. The conduct of the employer to the employee is part of a social process. If he does not deal with the employee in a manner appropriate to the social valuation of the employee’s service, then there arise consequences which he himself has to bear. He can, indeed, deal badly with the employee, but he himself must pay the costs of his arbitrary behaviour. To this extent therefore the employee is dependent upon him. But this dependence is not greater that the dependence of each one of us upon our neighbour. For even in a state where the laws are enforced everybody of course who is willing to bear the consequences of his action, is free to break our windows or do us bodily harm.

Strictly speaking, of course, on this view there can be no social action which is entirely arbitrary. Even the oriental despot, who to all appearances is free to do what he likes with the life of the enemy he captures, must consider the results of his action. But there are differences of degree in the way in which the costs of arbitrary action are related to the satisfactions arising therefrom. No laws can afford us protection against the assaults of men whose enmity is such that they are willing to bear all the consequences of their action. But if the laws are sufficiently severe to ensure that, as a general rule, our peace is not disturbed, then we feel ourselves independent of the evil intentions of our fellows, at any rate to a certain extent. The historical relaxation of the penal laws is to be attributed, not to an amelioration of morals, or to decadence on the part of legislators, but simply to the fact that so far as men have learnt to check resentment by considering the consequences of action it has been possible to abate the severity of punishments without weakening their deterrent power. To-day the menace of a short term of imprisonment is more effective protection against crimes against the person than the gallows were at one time.

There is no place for the arbitrary, where exact money reckoning enables us completely to calculate action. If we allow ourselves to be carried away by the current laments over the stony-heartedness of an age which reckons everything in terms of shillings and pence, we overlook that it is precisely this linking up of action with considerations of money profit which is society’s most effective means of limiting arbitrary action. It is precisely arrangements of this kind which makes the consumer on the one hand, the employer, the capitalist, the landowner and the worker on the other — in short, all concerned in producing for demands other than their own — dependent upon social co-operation. Only complete failure to understand this reciprocity of relationship can lead anyone to ask whether the debtor is dependent on the creditor, or the creditor on the debtor. In fact, each is dependent on the other, and the relationship between buyer and seller, employer and employee, is of the same nature. It is customary to complain that, nowadays, personal considerations are banished from business life and that money rules everything. But what really is here complained of is simply that, in that department of activity which we call purely economic, whims and favours are banished and only those considerations are valid which social co-operation demands.

This, then, is freedom in the external life of man — that he is independent of the arbitrary power of his fellows. Such freedom is no natural right. It did not exist under primitive conditions. It arose in the process of social development and its final completion is the work of mature Capitalism. The man of pre-capitalistic days was subject to a ‘gracious lord’ whose favour he had to acquire. Capitalism recognizes no such relation. It no longer divides society into despotic rulers and rightless serfs. All relations are material and impersonal, calculable and capable of substitution. With capitalistic money calculations freedom descends from the sphere of dreams to reality.

When men have gained freedom in purely economic relationships they begin to desire it elsewhere. Hand in hand with the development of Capitalism, therefore, go attempts to expel from the State all arbitrariness and all personal dependence. To obtain legal recognition of the subjective rights of citizens, to limit the arbitrary action of officials to the narrowest possible field — this is the aim and object of the liberal movement. It demands not grace but rights. And it recognizes from the outset that there is no other way of realizing this demand than by the most rigid suppressing of the powers of the State over the individual. Freedom, in its view, is freedom from the State.

For the State — the coercive apparatus worked by the persons forming the government — is scathless to freedom only when its actions have to conform to certain clear, unequivocal, universal norms, or when they obey the principles governing all work for profit. The former is the case when it functions judicially; for the judge is bound by laws allowing small play for personal opinion. The latter is the case when under Capitalism the State functions as an entrepreneur working under the same conditions and subject to the same principles as other entrepreneurs working for a profit. What it does beyond this can neither be determined by law or in any other way limited sufficiently to guard against arbitrary action. The individual then has no defence against the decision of officials. He cannot calculate what consequences his actions will have because he cannot tell how they will be regarded by those on whom he depends. This is the negation of freedom.

It is customary to regard the problem of external freedom as a problem of the greater or less dependence of the individual upon society.1  But political freedom is not the whole of freedom. In order that a man may be free it is not sufficient that he may do anything unharmful to others without hindrance from the government or from the repressive power of custom. He must also be in the position to act without fearing unforeseen social consequences. Only Capitalism guarantees this freedom by explicitly referring all reciprocal relations to the cold impersonal principle of exchange do ut des.

Socialists usually attempt to refute the argument for freedom by contending that under Capitalism only the possessor is free. The proletarian is unfree because he must work for his livelihood. It is impossible to imagine a cruder conception of freedom. That man must work, because his desire to consume is greater than that of the beasts of the field, is part of the nature of things. That the possessor is able to live without conforming to this rule is a gain derived from the existence of society which injures no one — not even the possession-less. And the possessionless themselves benefit from the existence of society, in that co-operation makes labour more productive. Socialism could only lessen the dependence of the individual upon natural conditions by increasing this productivity. If it cannot do that, if on the contrary it diminishes productivity, then it will diminish freedom.

• 1Similarly formulated by J. S. Mill, On Liberty, p. 7.

The idea of a stationary state is an aid to theoretical speculation. In the world of reality there is no stationary state, for the conditions under which economic activity takes place are subject to perpetual alterations which it is beyond human capacity to limit.

The influences which maintain this perpetual change in the economic system can be grouped into six great classes. First and foremost come changes in external Nature. Under this heading must be classified not only all those changes in climate and other specifically natural conditions which take place independent of human actions, but also changes arising from operations carried out within these conditions, such as exhaustion of the soil, or consumption of standing timber, or mineral deposits. Secondly come changes in the quantity and quality of the population, then changes in the quantity and quality of capital goods, then changes in the technique of production, then changes in the organization of labour, and finally changes in demand.1

Of all these causes of change the first is the most fundamentally important. For the sake of argument let us assume that a socialist community might be able so to regulate the growth of population and demand for commodities as to avert danger to the economic equilibrium from these factors. Were that so there are other causes of change that could be avoided. But the socialist community would never be able to influence the natural conditions of economic activity. Nature does not adapt itself to man. Man must adapt himself to Nature. Even the socialist community will have to reckon with changes in external nature; it will have to take account of the consequences of elemental disturbances. It will have to take account of the fact that the natural powers and resources at its disposal are not inexhaustible. Disturbances from without will intrude on its peaceful running. No more than Capitalism will it be able to remain stationary.

For the naive socialist there is quite enough in the world to make everybody happy and contented. The dearth of goods is only the result of a perverse social order which, on the one hand limits the extension of productive powers, and on the other, by unequal distribution, lets too much go to the rich and thus too little to the poor.1

The Malthusian Law of Population and the Law of Diminishing Returns put an end to these illusions. Ceteis Paribus the increase of population beyond a certain point is not accompanied by a proportional increase of wealth: if this point is passed, production per head diminishes. The question whether at any given time production has reached this point is a question of fact which must not be confused with the question of general principle.

In the light of this knowledge, socialists have adopted various attitudes. Some have simply rejected it. During the whole of the nineteenth century scarcely any author was so vigorously attacked as Malthus. The writings of Marx, Engels, Dühring, and many others, bristle with abuse of ‘parson’ Malthus.2  But they do not refute him. To-day, discussion of the Laws of Population may be regarded as closed. The Law of Diminishing Returns is not contested nowadays; it is therefore not necessary to deal with those authors who either deny the doctrine or ignore it.

Other socialists imagine that it is possible to undermine such considerations by pointing to the unprecedented increase in productivity which will take place once the means of production are socialized. It is not necessary at this point to discuss whether in fact such an increase would take place; for even granted that it would, this would not alter the fact that at any given time there is a definite optimal size of population beyond which any increase in numbers must diminish production per head. If it is desired to deny the effectiveness of the Laws of Population and Diminishing Returns under Socialism, then it must be proved that every child born into the world beyond the existing optimum will at the same time bring with it so great an increase of productivity that production per head will not be diminished by its coming.

A third group of writers content themselves with the reflection that with the spread of civilization and rational living, with the increase of wealth and the desire for a higher standard of life, the growth of population is slackening. But this is to overlook the fact that the birth-rate does not fall because the standard of life is higher but only because of ‘moral restraint’, and that the incentive to the individual to refrain from procreation disappears the moment it is possible to have a family without economic sacrifice because the children are maintained by society, This is fundamentally the same error that entrapped Godwin when he thought that there was ‘a principle in human society’ which kept the population permanently within the limits set by the means of subsistence. Malthus exhibited the nature of this mysterious ‘principle’.3

Without coercive regulation of the growth of population, a socialist community is inconceivable. A socialist community must be in a position to prevent the size of the population from mounting above or falling below certain definite limits. It must attempt to maintain the population always at that optimal number which allows the maximum production per head. Equally with any other order of society it must regard both under- and over-population as an evil. And since in it those motives, which in a society based on private ownership of the means of production harmonize the number of births with the limitations of the means of subsistence, would not exist, it will be obliged to regulate the matter itself. How it will accomplish this need not be here discussed. Nor is it relevant to our purpose to inquire whether its measures will serve eugenic or ethnological ideas. But it is certain that even if a socialist community may bring ‘free love’, it can in no way bring free birth. The right to existence of every person born can be said to exist only when undesirable births can be prevented. In the socialist community as in any other, there will be those for whom ‘at the great banquet of Nature no place has been laid’ and to whom the order must be given to withdraw themselves as soon as may be. No indignation that these words of Malthus may arouse can alter this fact.

• 1Bebel, Die Frau und der Sozialismus, p. 340. Bebel quotes therewith the well-known verse of Heine.
• 2Heinrich Soetbeer, the Stellung der Sozialisten zur Malthusschen Bevölkerungslehre, Berlin 1886, p. 33 et seq.; 52 et seq.; 85 et seq.
• 3Malthus, An Essay on the Principle of Population, 5th Edition, Vol. II, p. 245 et seq.

It follows from the principles which the socialist community must necessarily observe in the distribution of consumption goods, that alterations of demand cannot be allowed free play. If economic calculation and therewith even an approximate ascertainment of the costs of production were possible, then within the limits of the total consumption-units assigned to him, each individual citizen could be allowed to demand what he liked, each would choose what was agreeable to him. It would indeed be possible that as a result of malicious intent on the part of the directors of production certain commodities might be priced higher than they need be. Either they might be made to bear too high a proportion of overhead costs, or they might be made dearer by uneconomic methods of production, and the citizens who suffered would have no defence, except political agitation, against the government. So long as they remained in a minority they themselves would not be able either to rectify the accounts or to improve the methods of production. But at any rate the fact that at least the greater number of the factors concerned could be measured and that, as a result of this, the whole question could be relatively clearly put, would be some support for their point of view.

Since, under Socialism, no such calculations are possible, all such questions of demand must necessarily be left to the government. The citizens as a whole will have the same influence on them as on other acts of government. The individual will exercise this influence only in so far as he contributes to the general will. The minority will have to bow to the will of the majority. The system of proportional representation, which by its very nature is suitable only for elections and can never be used for decisions with regard to particular acts, will not protect them.

The general will, i.e. the will of those who happen to be in power, will take over those functions which in a free economic system are discharged by demand. Not individuals but the government would decide which needs are the most urgent and must therefore be satisfied first.

For this reason demand will be much more uniform, much less changeable than under Capitalism. The forces which under Capitalism are continually bringing about alterations in demand will be lacking under Socialism. How will innovations, ideas deviating from those traditionally accepted, obtain recognition? How will innovators succeed in getting inert masses out of the rut? Will the majority be willing to forsake the well beloved customs of their forefathers for something better, which is yet unknown to them? Under Capitalism where each individual within the limits of his means can decide what he is to consume, it is sufficient for one individual, or a few, to be brought to recognize that the new methods satisfy their needs better than the old. Others will gradually follow their example and this progressive adoption of new modes of satisfaction is especially facilitated by the fact that incomes are not equal. The rich adopt novelties and become accustomed to their use. This sets a fashion which others imitate. Once the richer classes have adopted a certain way of living, producers have an incentive to improve the methods of manufacture so that soon it is possible for the poorer classes to follow suit. Thus luxury furthers progress. Innovation ‘is the whim of an élite before it becomes a need of the public. The luxury of to-day is the necessity of to-morrow’.1  Luxury is the roadmaker of progress: it develops latent needs and makes people discontented. In so far as they think consistently, moralists who condemn luxury must recommend the comparatively desireless existence of the wild life roaming in the woods as the ultimate ideal of civilized life.

• 1Tarde, Die Sozialen Gesetze, German translation by Jammer, Leipzig 1908, p. 99. Also the numerous examples in Roscher, Ansichten der Volkswirtschaft vom geschichtlichen Standpunkt, 3rd Edition, Leipzig 1878, Vol. I, p. 112 et seq.

The capital goods employed in production are sooner or later used up. This is true, not only of those goods which constitute circulating capital, but also of those which constitute fixed capital. Those, too, sooner or later are consumed in production. In order that capital may be maintained in the same proportions, or that it may be increased, constant effort is necessary on the part of those who supervise production. Care must be taken that the capital goods used up in the process of production are replaced; and, beyond that, that new capital is created. Capital does not reproduce itself.

In a completely stationary economic system, this operation demands no particular foresight. Where everything remains unchanged, it is not very difficult to ascertain what becomes used up, and what must therefore be put aside to replace it. Under changing conditions, it is quite otherwise. Here the direction of production and the different processes involved are continually changing. Here it is not enough to replace the used-up plant and the semi-manufactured products consumed in similar qualities and quantities: others — better or at least better corresponding to the new conditions of demand — have to take their place; or the replacement of capital goods used in one branch of production has to be restricted in order that another branch of production may be extended or commenced. In order to carry out such complicated operations, it is necessary to calculate. Without economic calculations capital calculations are impossible. Thus in the face of one of the most fundamental problems of economic activity, the socialist community — which has no means of economic calculation — must be quite helpless. With the best will in the world it will be quite unable to carry out the operations necessary to bring production and consumption into such a balance, that value of capital is at least maintained and only what is obtained over and above this is consumed.

But apart from this, in itself, quite unsurmountable difficulty, the carrying out of a rational economic policy in a socialist community would encounter other difficulties.

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 that has to be made is 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. The 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 (i.e. not consuming capital), and saving (i.e. 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. Under Socialism the maintenance and accumulation of capital are tasks for the organized community — the State. The utility of a rational policy is the same here as under Capitalism. The advantages will be the same for all members of the community: the costs will be the same also. Decisions upon matters of capital policy will be made by the community — immediately by the economic administration, ultimately by all the citizens. They will have to decide whether more production goods or more consumption goods, shall be produced — whether methods of production which are shorter but which yield a smaller product, or whether methods of production which are longer but which yield a greater product shall be employed. It is impossible to say how these majority decisions will work out. It would be senseless to conjecture. The conditions under which decisions will have to be made are different from what they are under Capitalism. Under Capitalism the decision whether saving shall take place is the concern of the thrifty and the well-to-do. Under Socialism it is the concern of everybody, without distinction — therefore also of the idler and the spendthrift. Moreover, it must be remembered that here the incentive which provides a higher standard of life in return for saving will not be present. The door would therefore be open to demagogues. The opposition will always be ready to prove that more could be assigned to immediate satisfactions, and the government will not be disinclined to maintain itself longer in power by lavish spending. Après nous le déluge is an old maxim of government.

Experience of the capital policy of public bodies does not inspire much hope of the thriftiness of future socialist governments. In general, new capital is created only when the necessary sums have been raised by loans — that is from the savings of private citizens. It is very seldom that capital is accumulated out of taxes or special public income. On the other hand, numerous examples can be adduced of cases in which the means of production owned by public bodies have depreciated in value, because in order that present costs may be relieved as much as possible, insufficient care has been taken for the maintenance of capital.

It is true that the governments of the socialist or half-socialist communities existing to-day are anxious to restrict consumption for the sake of an expenditure which is generally considered as investment and formation of new capital. Both the Soviet Government in Russia and the Nazi Government in Germany are spending great sums for the construction of works of a military character and for the construction of industrial plants whose purpose it is to make the country independent of foreign imports. A part of the capital wanted for this purpose has been provided by foreign loans; but the greater part has been provided by a restriction both of home consumption and of investment of such a type which could serve for the production of consumption goods wanted by the people. Whether we may consider this policy as a policy of saving and forming new capital, or not, depends on the way in which we judge a policy whose aim it is to increase a country’s military equipment and to make its economic system independent of foreign imports. The fact alone that consumption is restricted for the sake of constructing big plants of different kinds is not evidence that new capital is created. These plants will have to prove in the future whether they will contribute to the better supply of commodities wanted for the improvement of the economic situation of the country.

It should be already sufficiently clear from what has been said, that under Socialism, as under any other system, there could be no perfectly stationary state. Not only incessant changes in the natural conditions of production would make this impossible; quite apart from these, incessant dynamic forces would be at work, in changes in the size of the population, in the demand for commodities, and in the quantity of capital goods. One cannot conceive these factors eliminated from the economic system. It is thus unnecessary to inquire whether these changes would also involve changes in the organization of labour and the technical processes of production. For, once the economic system ceases to be in perfect equilibrium it is a matter of indifference whether actual innovations are thought of and put into practice. Once everything is in a state of flux, everything which happens is an innovation. Even when the old is repeated, it is an innovation because, under new conditions, it will have different effects. It is an innovation in its consequences.

But this is not in the least to say that the socialist system will be a progressive system. Economic change and economic progress are by no means one and the same thing. that an economic system is not stationary is no proof that it is progressing. Economic change is necessitated by the fact of changes in the conditions under which economic activity takes place. When conditions change the economic system must change also. Economic progress, however, consists only in change which takes place in a quite definite direction, towards the goal of all economic activity, e.g. the greatest possible wealth. (This conception of progress is quite free from implications of subjective judgment.) When more, or the same number of people are better provided for, then the economic system is progressive. That the difficulties of measuring value make it impossible to measure progress exactly, and that it is by no means certain that it makes men ‘happier’, are matters which do not concern us here.

Progress can take place in many ways. Organization can be improved. The technique of production can be made more efficient, the quantity of capital can be increased. In short, many paths lead to this goal.1  Would socialist society be able to follow them?

We may assume that it would entrust the most suitable people to direct production. But, however talented they were, how would they be able to act rationally if they were unable to reckon, to make calculations? On this difficulty alone Socialism must surely founder.

• 1On the difficulties a socialist economy must put in the way of the invention and, even more, of the realization of technical improvements, see Dietzel, Technischer Fort-schritt und Freiheit der Wirtschaft, Bonn and Leipzig 1922, p. 47 et seq.

In any economic system which is in process of change all economic activity is based upon an uncertain future. It is therefore bound up with risk. It is essentially speculation.

The great majority of people, not knowing how to speculate successfully, and socialist writers of all shades of opinion, speak very ill of speculation. The Iiterateur and the bureaucrat, both alien to an atmosphere of business activity, are filled with envy and rage when they think of fortunate speculators and successful entrepreneurs. To their resentment we owe the efforts of many writers on economics to discover subtle distinctions between speculation on the one hand and ‘legitimate trade’, ‘value creating production’, etc., on the other.1  In reality all economic activity outside the stationary state is speculation. Between the work of the humble artisan who promises to deliver a pair of shoes within a week at a fixed price, and the sinking of a coal mine based upon conjectures with regard to the disposal of its products years hence, there is only a difference of degree. Even those who invest in gilt-edged fixed-interest-bearing securities speculate — quite apart from the risk of the debtor’s inability to pay. They buy money for future delivery—just as speculators in cotton buy cotton for future delivery. Economic activity is necessarily speculative because it is based upon an uncertain future. Speculation is the link that binds isolated economic action to the economic activity of society as a whole.

It is customary to attribute the notoriously low productivity of government undertakings to the fact that the persons employed are not sufficiently interested in the success of their labours. If once it were possible to lift each citizen to such a plane that he could realize the connection between his own efforts and the social income, part of which belongs to him, if once his character could be so strengthened that he would remain steadfast in the face of all temptations to idle, then government undertakings would not be less productive than those of the private entrepreneur. The problem of socialization appears thus to be a problem of ethics. To make Socialism possible it is only necessary to raise men sufficiently above the state of ignorance and immorality to which they have been degraded during the terrible epoch of Capitalism. Until this plane has been reached bonuses and so on must be employed to make men more diligent.

It has already been shown that, under Socialism, the lack of an adequate stimulus to the individual to overcome the disutility of labour must have the effect of lowering productivity. This difficulty would arise even in a stationary state. Under dynamic conditions there arises another, the difficulty of speculation.

In an economic system based upon private ownership of the means of production, the speculator is interested in the result of his speculation in the highest possible degree. If it succeeds, then, in the first instance, it is his gain. If it fails, then, he is the first to feel the loss. The speculator works for the community, but he himself feels the success or failure of his action proportionately more than the community. As profit or loss, they appear much greater in proportion to his means than to the total resources of society. The more successfully he speculates the more means of production are at his disposal, the greater becomes his influence on the business of society. The less successfully he speculates the smaller becomes his property, the less becomes his influence in business. If he loses everything by speculation he disappears from the ranks of those who are called to the direction of economic affairs.

Under Socialism it is quite different. Here the leader of industry is interested in profit and loss only in so far as he participates in them as a citizen — one among millions. On his actions depends the fate of all. He can lead the nation to riches. He can just as well lead it to poverty and want. His genius can bring prosperity to the race. His incapacity, or his indifference, can bring it to destruction and decay. In his hands lie happiness and misery as in the hands of a god. And he must indeed be god-like to accomplish what he has to do. His vision must include everything which is of significance to the community. His judgment must be unfailing; he must be able rightly to weigh the conditions of distant parts and future centuries. That Socialism would be immediately practicable if an omnipotent and omniscient Deity were personally to descend to take in hand the government of human affairs, is incontestable. But so long as this event cannot definitely be counted upon, it is not to be expected that men will be ready freely to grant such a position to any one out of their midst. One of the fundamental facts of all social life, which all reformers must take into account, is that men have their own thoughts and their own wills. It is not to be supposed that they would suddenly, of their own free will, make themselves for all time the passive tools of anyone out of their midst — even though he were the wisest and best of them all.

But so long as the possibility of a single individual permanently planning the direction of affairs is excluded, it is necessary to fall back upon the majority decisions of committees, general assemblies and, in the last resort, the whole enfranchised population. But therewith arises the danger on which all collectivist undertakings inevitably come to grief— the crippling of initiative and the sense of responsibility. Innovations are not introduced because the majority of the members of the governing body cannot be induced to consent to them.

Things would not be made any better by the fact that the impossibility of leaving all decisions to a single man, or a single committee, would lead to the creation of innumerable sub-committees by which decisions would be taken. All such sub-committees would only be delegates of the one supreme authority which, as an economic system working according to a unitary plan, is implied by the very nature of Socialism. They would necessarily be bound by the instructions of the supreme authority and this, in itself, would breed irresponsibility.

We all know the appearance of the apparatus of socialist administration: a countless multitude of office holders, each zealously bent on preserving his position and preventing anybody from intruding on his sphere of activity — yet at the same time anxiously endeavouring to throw all responsibility of action on to somebody else.

For all its officiousness, such a bureaucracy offers a classic example of human indolence. Nothing stirs when no external stimulus is present. In the nationalized concerns, existing within a society based for the most part on private ownership of the means of production, all stimulus to improvements in process comes from those entrepreneurs who as contractors for semi-manufactured articles and machines hope to make a profit by them. The heads of the concern itself seldom, if ever, make innovations. They content themselves with imitating what goes on in similar privately-owned undertakings. But where all concerns are socialized there will be hardly any talk of reforms and improvements.

• 1See the pertinent criticism of these efforts which are evidence of good intentions rather than of scientific sharpness of thought, in Michaelis, Volkswirtschaftliche Schriften, Berlin 1873, p. 3 et seq., and by Petritsch, Zur Lehre von der Uberwälzung der Steuern mit besonderer Beziehung auf den Börsenverkehr, Graz 1903, p. 28 et seq. Of Adolf Wagner, Petritsch says that ‘although he likes to call economic life an “organism” and wants to have it considered as such, and although he always stresses the interest of the community against that of individuals, yet in concrete economic problems he does not get beyond the individuals and their more or less moral aims, and wilfully overlooks the organic connection between these and other economic phenomena. Thus he ends where, strictly speaking, should be the starting point, not the end, of every economic investigation’ (p. 59). The same is true of all writers who have thundered against speculation.

One of the current fallacies of socialism is that joint stock companies are a preliminary stage of the socialist undertaking. The heads of joint stock companies — it is argued — are not owners of the means of production, and yet the undertakings flourish under their direction. If, in place of the shareholders, society should assume the function of ownership, things would not be altered. The directors would not work worse for society than they would for the shareholders.

This notion that in the joint stock company the entrepreneur-function is solely the shareholder’s, and that all the organs of the company are active only as the shareholders’ employees, pervades also legal theory, and it has been attempted to make it the basis of Company Law. It is responsible for the fact that the business idea, which underlies the creation of the joint stock company, has been falsified, and that up to to-day people have been unable to find for the joint stock company a legal form which would enable it to work without friction, and that the company system everywhere suffers from grave abuses.

In fact there have never and nowhere been prosperous joint stock companies corresponding to the ideal etatistic jurists have created. Success has always been attained only by those companies whose directors have predominant personal interest in the prosperity of the company. The vital force and the effectiveness of the joint stock company lie in a partnership between the company’s real managers — who generally have power to dispose over part, if not the majority of the share-capital — and the other shareholders. Only where these directors have the same interest in the prosperity of the undertaking as every owner, only where their interests coincide with the shareholder’s interests, is the business carried on in the interests of the joint stock company. Where the directors have interests other than those of a part, or of the majority, or of all of the shareholders, business is carried on against the company’s interests. For in all joint stock companies that do not wither in bureaucracy, those who really are in power always manage business in their own interests, whether this coincides with the shareholders’ interests or not. It is an unavoidable presupposition of the prosperity of the companies, that those in power shall receive a large part of the profits of the enterprise and that they shall be primarily affected by the misfortunes of the enterprise. In all flourishing joint stock companies, such men, immaterial of what their legal status is, wield the decisive influence. The type of man to whom joint stock companies owe their success is not the type of general manager who resembles the public official in his ways of thought, himself often an ex-public servant whose most important qualification is good connection with those in political power. It is the manager who is interested himself through his shares, it is the promoter and the founder — these are responsible for prosperity.

Socialist-etatistic theory of course will not admit this. It endeavours to force the joint stock company into a legal form in which it must languish. It refuses to see in those who guide the company anything except officials, for the etatist wants to think of the whole world as inhabited only by officials. It is allied with the organized employees and workers in their resentment-ridden fight against the high sums paid to the management, believing that the profits of the business arise of themselves and are reduced by whatever is paid to the men in charge. Finally, it turns also against the shareholder. The latest German doctrine does not want, ‘in view of the evolution of the concept of fair play’, to let the shareholder’s self-interest decide, but rather ‘the interest and well-being of the enterprise, itself, namely its own economic, legal and sociological value, independent of transient majorities of transient shareholders’. It wants to create for the administration of the companies a position of power, which should make them independent of the will of those who have put up the majority of the share-capital.1

That ‘altruistic motives’ or the like are ever decisive in the administration of successful joint stock companies is a fable. Such attempts to model Company Law after the illusory ideal of etatistic politicians, have not succeeded in making the joint stock company a piece of the illusory ‘functional economy’; they have however damaged the joint stock company form of enterprise.

• 1See the criticism of these theories and movements in Passow, Der Strukturwandel der Aktiengesellschaft im Lichte der Wirtschaftsenquete, Jena 1930, p. 1 et seq.

The preceding investigations have shown the difficulties confronting the establishment of a socialist order of society. In a socialist community the possibility of economic calculations is lacking: it is therefore impossible to ascertain the cost and result of an economic operation or to make the result of the calculation the test of the operation. This in itself would be sufficient to make Socialism impracticable. But, quite apart from that, another insurmountable obstacle stands in its way. It is impossible to find a form of organization which makes the economic action of the individual independent of the co-operation of other citizens without leaving it open to all the risks of mere gambling. These are the two problems, and without their solution the realization of Socialism appears impracticable unless in a completely stationary state.

Too little attention has hitherto been given to these fundamental questions. The first has generally been almost ignored. The reason for this is that people have not been able to get rid of the idea that labour time can afford an efficient measure of value. But even many of those who recognize that the labour theory of value is untenable continue to believe that value can be measured. The frequent attempts which have been made to discover a standard of value prove this. To understand the problem of economic calculation it was necessary to recognize the true character of the exchange relations expressed in the prices of the market.

The existence of this important problem could be revealed only by the methods of the modern subjective theory of value. In actual practice although the tendency has been all in the direction of Socialism, the problem has not become so urgent as to attract general attention.

It is quite otherwise with the second problem. The more communal enterprise extends, the more attention is drawn to the bad business results of nationalized and municipalized undertakings. It is impossible to miss the cause of the difficulty: a child could see where something was lacking. So that it cannot be said that this problem has not been tackled. But the way in which it has been tackled has been deplorably inadequate. Its organic connection with the essential nature of socialist enterprise has been regarded as merely a question of better selection of persons. It has not been realized that even exceptionally gifted men of high character cannot solve the problems created by socialist control of industry.

As far as most socialists are concerned, recognition of these problems is obstructed, not only by their rigid adherence to the labour theory of value but also by their whole conception of economic activity. They fail to realize that industry must be constantly changing: their conception of the socialist community is always static. As long as they are criticizing the capitalist order they deal throughout with the phenomena of a progressive economy and they paint in glaring colours the friction caused by economic change. But they seem to regard all change and not only the friction caused by it, as a peculiar attribute of the capitalist order. In the happy kingdom of the future everything will develop without movement or friction.

We can see this best if we think of the picture of the entrepreneur which is generally drawn by socialists. In such a picture the entrepreneur is characterized only by the special way he derives his income. Clearly any analysis of the capitalist order must take as its central point not capital nor the capitalists but the entrepreneur. But Socialism, including Marxian Socialism, sees in the entrepreneur someone alien to the process of production, someone whose whole work consists in the appropriation of surplus value. It will be sufficient to expropriate these parasites to bring about a socialist society. The recollection of the liberation of the peasants and the abolition of slavery hovers vaguely in Marx’s mind and even more so in the minds of many other socialists. But they fail to see that the position of the feudal lord was quite different from that of the entrepreneur. The feudal lord had no influence on production. He stood outside the process of production: only when it was finished did he step in with a claim to a share in the yield. But in so far as the lord of the manor and the slave owner were also leaders of production they retained their position even after the abolition of serfdom and slavery. The fact that henceforward they had to give the workers the value of their labour did not change their economic function. But the entrepreneur fulfils a task which must be performed even in a socialist community. This the Socialist does not see; or at least refuses to see.

Socialism’s misunderstanding of the entrepreneur degenerates into idiosyncrasy whenever the word speculator is mentioned. Even Marx, unmindful of the good resolutions which animated him, proceeds entirely along ‘petty bourgeois’ lines in this connection and his school has even surpassed him. All socialists overlook the fact that even in a socialist community every economic operation must be based on an uncertain future, and that its economic consequence remains uncertain even if it is technically successful. They see in the uncertainty which leads to speculation a consequence of the anarchy of production, whilst in fact it is a necessary result of changing economic conditions.

The great mass of people are incapable of realizing that in economic life nothing is permanent except change. They regard the existing state of affairs as eternal; as it has been so shall it always be. But even if they were in a position to envision the πάυτα ‘ρεῑ they would be baffled by the problems to be solved. To see and to act in advance, to follow new ways, is always the concern only of the few, the leaders. Socialism is the economic policy of the crowd, of the masses, remote from insight into the nature of economic activity. Socialist theory is the precipitate of their views on economic matters — it is created and supported by those who find economic life alien, and do not comprehend it.

Among socialists only Saint Simon realized to some extent the position of the entrepreneurs in the capitalistic economy. As a result he is often denied the name of Socialist. The others completely fail to realize that the functions of entrepreneurs in the capitalist order must be performed in a socialist community also. This is reflected most clearly in the writings of Lenin. According to him the work performed in a capitalist order by those whom he refused to designate as ‘working’ can be boiled down to ‘Auditing of Production and Distribution’ and ‘keeping the records of labour and products’. This could easily be attended to by the armed workers, ‘by the whole of the armed people’.1  Lenin quite rightly separates these functions of the ‘capitalists and clerks’ from the work of the technically trained higher personnel, not however missing the opportunity to take a side thrust at scientifically trained people by giving expression to that contempt for all highly skilled work which is characteristic of Marxian proletarian snobbishness. ‘This recording, this exercise of audit,’ he says, ‘Capitalism has simplified to the utmost and has reduced to extremely simple operations of superintendence and book-entry within the grasp of anyone able to read and write. To control these operations a knowledge of elementary arithmetic and the drawing of correct receipts is sufficient.’2  It is therefore possible straisrhtwav to enable all members of society to do these things for themselves.3  This is all, absolutely all that Lenin had to say on this problem; and no socialist has a word more to say. They have no greater perception of the essentials of economic life than the errand boy, whose only idea of the work of the entrepreneur is that he covers pieces of paper with letters and figures.

It was for this reason that it was quite impossible for Lenin to realize the causes of the failure of his policy. In his life and his reading he remained so far removed from the facts of economic life that he was as great a stranger to the work of the bourgeoisie as a Hottentot to the work of an explorer taking geographical measurements. When he saw that his work could proceed no further on the original lines he decided to rely no longer on references to ‘armed workers’ in order to compel the ‘bourgeois’ experts to co-operate: instead they were to receive ‘high remuneration’ for ‘a short transition period’ so that they could set the socialist order going and thus render themselves superfluous. He even thought it possible that this would take place within a year.4

Those socialists who do not think of the socialist community as the strongly centralized organization conceived by their more clearheaded brethren and which alone is logically conceivable, believe that the difficulties confronting the management of industry can be solved by democratic institutions inside undertakings. They believe that individual industries could be allowed to conduct their operations with a certain degree of independence without endangering the uniformity and the correct co-ordination of industry. If every enterprise were placed under the control of a workers’ committee, no further difficulties could exist. In all this there is a whole crop of fallacies and errors. The problem of economic management with which we are here concerned lies much less in the work of individual industries than in harmonizing the work of individual concerns in the whole economic system. It deals with such questions as dissolving, extending, transforming and limiting existing undertakings and establishing new undertakings — matters which can never be decided by the workers of one industry. The problems of conducting an industry stretch far beyond the individual concern.

State and municipal Socialism have supplied enough unfavourable experience to compel the closest attention to the problem of economic control. But etatists in general have treated this problem no less inadequately than those who have dealt with it in Bolshevik Russia. General opinion seems to regard the main evil of communal undertakings to be due to the fact that they are not run on ‘business’ lines. Now rightly understood this catchword could lead to a correct view on the problem. Communal enterprise does indeed lack the spirit of the business man, and the very problem for Socialism here is to create something to put in its place. But the catchword is not understood in this way at all. It is an offspring of the bureaucratic mind: that is to say it comes from people for whom all human activity represents the fulfilment of formal official and professional duties. Officialdom classifies activity according to the capacity for undertaking it formally acquired by means of examinations and a certain period of service. ‘Training’ and ‘length of service’ are the only things which the official brings to the ‘job’. If the work of a body of officials appears unsatisfactory, there can be only one explanation: the officials have not had the right training, and future appointments must be made differently. It is therefore proposed that a different training should be required of future candidates. If only the officials of the communal undertaking came with a business training, the undertaking would be more business-like. But for the official who cannot enter into the spirit of capitalist industry this means nothing more than certain external manifestations of business technique: prompter replies to inquiries, the adoption of certain technical office appliances, which have not yet been sufficiently introduced into the departments, such as typewriters, copying machines, etc., the reduction of unnecessary duplication, and other things. In this way ‘the business spirit’ penetrates into the offices of communal enterprise. And people are greatly surprised when these men trained on these lines, also fail, fail even worse than the much-maligned civil servants, who in fact, show themselves superior at least in formal schooling.

It is not difficult to expose the fallacies inherent in such notions. The attributes of the business man cannot be divorced from the position of the entrepreneur in the capitalist order. ‘Business’ is not in itself a quality innate in a person; only the qualities of mind and character essential to a business man can be inborn. Still less is it an accomplishment which can be acquired by study. though the knowledge and the accomplishments needed by a business man can be taught and learned. A man does not become a business man by passing some years in commercial training or in a commercial institute, nor by a knowledge of book-keeping and the jargon of commerce, nor by a skill in languages and typing and shorthand. These are things which the clerk requires. But the clerk is not a business man, even though in ordinary speech he may be called a ‘trained business man’.

When these obvious truths became clear in the end the experiment was tried of making entrepreneurs, who had worked successfully for many years, the managers of public enterprises. The result was lamentable. They did no better than the others; furthermore they lacked the sense for formal routine which distinguishes the life-long official. The reason was obvious. An entrepreneur deprived of his characteristic role in economic life ceases to be a business man. However much experience and routine he may bring to his new task he will still only be an official in it.

It is just as useless to attempt to solve the problem by new methods of remuneration. It is thought that if the managers of public enterprises were better paid, competition for these posts would arise and make it possible to select the best men. Many go even further and believe that the difficulties will be overcome by granting the managers a share in the profits. It is significant that these proposals have hardly ever been put in practice, although they appear quite practicable as long as public undertakings exist alongside private enterprises, and as long as the possibility of economic calculation permits the ascertainment of the result achieved by the public enterprise which is not the case under pure Socialism. But 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 answerable only for a comparatively small part of the losses. To make a man materially interested in profits and hardly concerned in losses simply encourages a lack of seriousness. This is the experience, not only of public undertakings but also of all private enterprises, which have granted to comparatively poor employees in managerial posts rights to a percentage of the profits.

It is an evasion of the problem to put one’s faith in the hope that the moral purification of mankind, which the socialists expect to occur when their aims are realized, will of itself make everything perfectly right. Whether Socialism will or will not have the moral effect expected from it may here be conveniently left undecided. But the problems with which we are concerned do not arise from the moral shortcomings of humanity. They are problems of the logic of will and action which must arise at all times and in all places.

• 1Lenin, Staat und Revolution, p. 94
• 2Ibid., p. 95.
• 3Ibid., p. 96.
• 4Lenin, Die nächsten Aufgaben der Sowjetmacht, Berlin 1918, p. 16 et seq.

But let us disregard the fact that up to now all socialist efforts have been baffled by these problems, and let us attempt to trace out the lines on which the solution ought to be sought. Only by making such an attempt can we throw any light on the question whether such a solution is possible in the framework of a socialist order of society.

The first step which would be necessary would be to form sections inside the socialist community to which the management of definite branches of business would be entrusted. As long as the industry of a socialist community is directed by one single authority which makes all arrangements and bears all the responsibility, a solution of the problems is inconceivable, because all the other workers are only acting instruments without independent delimited spheres of operation and consequently without any special responsibility. What we must aim at is precisely the possibility not only of supervising and controlling the whole process, but of considering and judging separately the subsidiary processes which take place within a narrower sphere.

In this respect at least, our procedure runs parallel to all past attempts to solve our problem. It is clear to everyone that the desired aim can be achieved only if responsibility is built up from below. We must therefore start from a single industry or from a single branch of industry. It is quite immaterial which unit is taken as a convenient basis. It makes no difference whether the unit with which we start is large or small since the same principle which we have once used for our division can be again used when it is necessary to divide too large a unit. Much more important than the question where and how often the division shall be made is the question how in spite of the division of industry into parts we can preserve that unity of cooperation without which a social economy is impossible.

We imagine then the economic order of the socialist community to be divided into any number of parts each of which is put in the charge of a particular manager. Every manager of a section is charged with the full responsibility for his operations. This means that the profit or a very considerable part of the profit accrues to him; on the other hand the burden of losses falls upon him, insomuch as the means of production which he squanders through bad measures will not be replaced by society. If he squanders all the means of production under his care he ceases to be manager of a section and is reduced to the ranks of the masses.

If this personal responsibility of the section manager is not to be a mere sham, then his operations must be clearly marked off from that of other managers. Everything he receives from other section managers in the form of raw materials or partly manufactured goods for further working or for use as instruments in his section and all the work which he gets performed in his section will be debited to him; everything he delivers to other sections or for consumption will be credited to him. It is necessary, however, that he should be left free choice to decide what machines, raw materials, partly manufactured goods, and labour forces he will employ in his section and what he will produce in it. If he is not given this freedom he cannot be burdened with any responsibility. For it would not be his fault if at the command of the supreme controlling authority he had produced something for which, under existing conditions, there was no corresponding demand, or if his section was handicapped because it received its material from other sections in an unsuitable condition, or, what comes to the same thing, at too high a charge. In the first event, the failure of his section would be attributable to the dispositions of the supreme control, in the latter to the failures of the sections which produced the material. But on the other hand the community must also be free to claim the same rights which it allows to the section manager. This means that it takes the products which he has produced only according to its requirements, and only if it can obtain them at the lowest rate of charge, and it charges him with the labour, which it supplies to him at the highest rate it is in a position to obtain: that is to say it supplies the labour to the highest bidder.

Society as a production community now falls into three groups. The supreme direction forms one. Its function is merely to supervise the orderly course of the process of production as a whole, the execution of which is completely detailed to the section managers. The third group is the citizens who are not in the service of the supreme administration and are not section managers. Between the two groups stand the section managers as a special group: they have received from the community once and for all at the beginning of the regime an allotment of the means of production for which they have had to pay nothing, and they continue to receive from it the labour force of the members of the third group, who are assigned to the highest bidders amongst them. The central administration which has to credit each member of the third group with everything it has received from the section managers for his labour power, or, in case it employs him directly in its own sphere of operation, with everything which it might have received from the section managers for his labour power, will then distribute the consumption goods to the highest bidders amongst the citizens of all three groups. The proceeds will be credited to the section managers who have delivered the products.

By such an arrangement of the community, the section manager can be made fully responsible for his doings. The sphere for which he bears responsibility is sharply delimited from that for which others bear the responsibility. Here we are no longer faced with the total result of the economic activity of the whole industrial community in which the contribution of one individual cannot be distinguished from that of another. The ‘productive contribution’ of each individual section manager is open to separate judgment, as is also that of each individual citizen in the three groups.

It is clear that the section managers must be permitted to change, extend or contract their section according to the prevailing course of demand on the part of the citizens as indicated in the market for consumption goods. They must therefore be in a position to sell those means of production in their section which are more urgently required in other sections, to these other sections: and they ought to demand as much for them as they can obtain under the existing conditions....

But we need not carry the analysis further. For what are we confronted with but the capitalist order of society — the only form of economy in which strict application of the principle of the personal responsibility of every individual citizen is possible. Capitalism is that form of social economy in which all the deficiencies of the socialist system described above are made good. Capitalism is the only conceivable form of social economy which is appropriate to the fulfilment of the demands which society makes of any economic organization.

Early Socialism is marked by its predilection for a return to the simpler modes of production of primitive times. Its ideal is the self-sufficing village, or, at most, the self-sufficing province — a town around which a number of villages are grouped. Being averse to all trade and commerce, its protagonists regard foreign trade as something entirely evil which must be abolished. Foreign Trade introduces superfluous commodities into the country. Since it was once possible to do without them, it is obvious that they are unnecessary, and that only the extreme ease with which they can be procured is responsible for the unnecessary expenditure upon them. Foreign Trade undermines morality and introduces foreign ideas and customs. In Utopia the stoic ideal of self-mastery was transmuted into the economic ideal of self-sufficiency. Plutarch found it an admirable thing in Lycurgusan Sparta — as romantically conceived in his day — that no merchant ship ever entered her harbours.1

This attachment to the ideal of economic self-sufficiency, and their complete incapacity to understand the nature of trade and commerce, led the Utopians to overlook the problem of the territorial limits of the ideal state. Whether the borders of fairyland are to be wider or narrower in extent does not enter into their considerations. In the tiniest village there is space enough to realize their plans. In this way it was possible to think of realizing Utopia tentatively in small instalments. Owen founded the New Harmony community in Indiana. Cabet founded a small Icaria in Texas. Considerant founded a model phalanstery in the same state. ‘Duodecimo editions of the New Jerusalem,’ jeers the communist manifesto.

It was only gradually that socialists came to perceive that the self-sufficiency of a small area could provide no foundation for Socialism. Thompson, a disciple of Owen, remarked that the realization of equality among the members of one community was far from signifying the realization of equality between the members of different communities. Under the influence of this discovery, he turned to centralized Socialism.2  St. Simon and his school were thorough centralizers. Pecqueur’s schemes of reform claimed to be national and universal.3

Thus emerges a problem peculiar to Socialism. Can Socialism exist within limited areas of the earth’s surface? Or is it necessary that the entire inhabited world should constitute a unitary socialistic community?

• 1Poehlmann, Geschichte der sozialen Frage und des Sozialismus in der antiken Welt, Vol. I, p. 110 et seq.; 123 et seq.
• 2Tugan-Baranowsky, Der moderne Sozialismus in seiner geschichtlichen Entwicklung, Dresden 1908, p. 136.
• 3Pecqueur, Théorie nouvelle d’Economic sociale et politique, p. 699.

For the marxian, there can be only one solution of this problem — the oecumenical solution.

Marxism, indeed, proceeds from the assumption that by an inner necessity, Capitalism has already set its mark upon the whole world. Even to-day Capitalism is not limited to a single nation or to a small group of nations. Even to-day it is international and cosmopolitan. ‘Instead of the old local and national isolation and self-sufficiency, world trade has developed and the interdependence of nations.’ The cheapness of their commodities is the ‘heavy artillery’ of the bourgeoisie. With the aid of this it compels all nations, on pain of extinction, to adopt bourgeois methods of production. ‘It forces them to adopt so-called civilization, i.e. to become bourgeois. In a word, it creates a world after its own image.’ And this is true not only of material but also of intellectual production. ‘The intellectual productions of one nation become the common property of all. National narrowness and exclusiveness become daily more impossible, and out of the many national and local literatures a world literature arises.’1

It follows, therefore, from the logic of the materialist interpretation of history that Socialism too can be no national, but only an international phenomenon. It is a phase not merely in the history of a single nation, but in the history of the whole human race. In the logic of Marxism the question whether this or that nation is ‘ripe’ for Socialism cannot even be asked. Capitalism makes the world ripe for Socialism, not a single nation or a single industry. The expropriators, through whose expropriation the last step towards Socialism must be taken, must not be conceived save as major capitalists whose capital is invested throughout the whole world. For the marxian, therefore, the socialistic experiments of the ‘Utopians’ are just as senseless as Bismarck’s facetious proposal to introduce Socialism experimentally into one of the Polish districts of the Prussian State.2  Socialism is an historical process. It cannot be tested in a retort or anticipated in miniature. For the marxian, therefore, the problem of the autarky of a socialist community cannot even arise. The only socialist community he can conceive comprehends the entire human race and the entire surface of the globe. For him the economic administration of the world must be unitary.

Later marxians have, indeed, recognized that, at any rate for a time, the existence of many independent socialist communities side by side must be anticipated.3  But, once this is conceded one must go further and also take into account the possibility of one or more socialist communities existing within a world which, for the most part, is still capitalistic.

• 1Marx-Engels, Das Kommunistische Manifest, p. 26.
• 2Bismark’s speech in the German Reichstag, on February 19, 1878 (Fürst Bismarcks Reden, edited by Stein, Vol. III, p. 34).
• 3Bauer, Die Nationälitdtenfrage und die Sozialdemokratie, Wien 1907, p. 519.

When Marx and, with him, the majority of recent writers on Socialism consider Socialism only as realized in a unitary world state, they overlook powerful forces that work against economic unification.

The levity with which they dispose of all these problems may not unreasonably be attributed to what, as we shall see, was an entirely unjustifiable acceptance of an attitude with regard to the future political organization of the world, which was prevalent at the time when Marxism was taking form. At that time, liberals held that all regional and national divisions could be regarded as political atavisms. The liberal doctrine of free trade and protection had been propounded — irrefutable for all time. It had been shown that all limitations on trade were to the disadvantage of all concerned: and, arguing from this, it had been attempted with success to limit the functions of the state to the production of security. For Liberalism the problem of the frontiers of the state does not arise. If the functions of the state are limited to the protection of life and property against murder and theft, it is no longer of any account to whom this or that land belongs. Whether the state extended over a wider or a narrower territory, seemed a matter of indifference to an age which was shattering tariff barriers and assimilating the legal and administrative systems of single states to a common form. In the middle of the nineteenth century, optimistic liberals could regard the idea of a League of Nations, a true world-state, as practicable in the not too far distant future.

The liberals did not sufficiently consider that greatest of hindrances to the development of universal free trade — the problem of races and nationalities. But the socialists overlooked completely that this constituted an infinitely greater hindrance to the development of a socialistic society. Their incapacity to go beyond Ricardo in all matters of economics, and their complete failure to understand all questions of nationalism, made it impossible for them even to conceive this problem.

If trade were completely free, production would only take place under the most suitable conditions. Raw materials would be produced in those parts which, taking everything into account, would yield the highest product. Manufacture would be localized where the transport charges, including those necessary to place the commodities in the hands of the ultimate consumer, were at a minimum. As labour settles around the centres of production, the geographical distribution of population would necessarily adapt itself to the natural conditions of production.

Natural conditions, however, are unchanging only in a stationary economic system. The forces of change are continually transforming them. In a changing economy men migrate continually from the places where conditions are less favourable to places where they are more favourable for production. Under Capitalism the stress of competition tends to direct labour and capital to the most suitable places. In a closed socialist community the same result would have to be achieved by administrative decree. In both cases the principle would be the same: men would have to go where the conditions of life were most favourable.1

These migrations have the closest bearing upon the condition of the different nations. They cause citizens of one nation, the natural conditions of which are less favourable, to move into the territory of other nations more favourably endowed. If the conditions under which migration takes place are such that the immigrants are assimilated to their new surroundings then the nation from which they came is, to that extent, weakened in numbers. If they are such that the immigrants preserve their nationality in their new home — still more if they assimilate the original inhabitants — then the nation receiving them will find immigration a menace to its national position.

To be a member of a national minority involves multitudinous political disadvantages.2  The wider the functions of the political authority the more burdensome are these disadvantages. They are smallest in the state which is founded upon purely liberal principles. They are greatest in the state which is founded upon Socialism. The more they are felt, the greater become the efforts of each nation to protect its members from the fate of belonging to a national minority. To wax in numbers, to be a majority in rich and extensive territories these become highly desirable political aims. But this is nothing but Imperialism.3  In the last decades of the nineteenth century, and the first decades of the twentieth, the favourite weapons of Imperialism were commercial weapons—protective tariffs, prohibitions of imports, premiums on exports, freight discriminations, and the like. Less attention was paid to the use of another powerful imperialistic weapon — limitations on emigration and immigration. This is becoming more significant now. The ultima ratio of imperialism is, however, war. Beside war, all other weapons that it may use appear merely insufficient auxiliaries.

Nothing justifies us in assuming that under Socialism the disadvantages of belonging to a national minority would be diminished. On the contrary. The more the individual depended on the State — the more importance political decisions had for the life of the individual — the more would the national minority feel the political impotence to which it was condemned.

But when we are considering migration under Socialism we need not give special attention to the friction which would arise therefrom between nations. For under Socialism there must arise, even between members of one and the same nation, points of difference which make the division of the surface of the earth — which is a matter of indifference to Liberalism —a problem of cardinal importance.

• 1See my Nation, Stoat und Wirtschaft, Wien 1919, p. 45 et seq., and Liberalismus, Jena 1927, p. 93 et seq.
• 2Nation, Staat und Wirtschaft, p. 37 et seq.
• 3Ibid, p. 63 et seq.;Liberalismus, p. 107 et seq.

Under Capitalism, capital and labour move until marginal utilities are everywhere equal. Equilibrium is attained when the marginal productivity of all capital and labour is the same.

Let us leave the movement of capital on one side and consider first the movement of labour. The migrating workers depress the marginal productivity of labour wherever they betake themselves. The fact that wages, their income, sink, directly damages the workers who were employed in centres of migration before the incursion of new workers took place. They regard the ‘immigrants’ as the enemy of high wages. Their particular interest would be served by a prohibition of ‘immigration’. It becomes a cardinal point of the particularist policy of all such particular groups of workers to keep newcomers out.

It has been the task of Liberalism to show who bear the costs of such a policy. The first to be injured are the workers in the less favourably situated centres of production, who, on account of the lower marginal productivity of their labour in those centres, have to content themselves with lower wages. At the same time, the owners of the more favourably situated means of production suffer through not being able to obtain the product which they might obtain could they employ a larger number of workers. But this is not the end of the matter. A system which protects the immediate interests of particular groups limits productivity in general and, in the end, injures everybody — even those whom it began by favouring, How protection finally affects the individual, whether he gains or loses, compared with what he would have got under complete freedom of trade, depends on the degrees of protection to him and to others. Although, under protection, the total produce is lower than it would have been under free trade, so that the average income is necessarily lower, it is still quite possible that certain individuals may do better than they would under free trade. The greater the protection afforded to particular interests, the greater the damage to the community as a whole, and to that extent the smaller the probability that single individuals gain thereby more than they lose.

As soon as it is possible to forward private interests in this way and to obtain special privileges, a struggle for pre-eminence breaks out among those interested. Each tries to get the better of the other. Each tries to get more privileges so as to reap the greater private gain. The idea of perfectly equal protection for all is the fantasy of an ill-thought out theory. For, if all particular interests were equally protected, nobody would reap any advantage: the only result would be that all would feel the disadvantage of the curtailment of productivity equally. Only the hope of obtaining for himself a degree of protection, which will benefit him as compared with the less protected, makes protection attractive to the individual. It is always demanded by those who have the power to acquire and preserve especial privileges for themselves.

In exposing the effects of protection, Liberalism broke the aggressive power of particular interests. It now became obvious that, at best, only a few could gain absolutely by protection and privileges and that the great majority must inevitably lose. This demonstration deprived such systems of the support of the masses. Privilege fell because it lost popularity.

In order to rehabilitate protection, it was necessary to destroy Liberalism. This was attempted by a double attack: an attack from the point of view of nationalism, and an attack from the point of view of those special interests of the middle and working classes which were menaced by Capitalism. The one served to mature the movement towards territorial exclusiveness, the other the growth of special privileges for such employers and workmen as are not equal to the stress of competition. Once Liberalism has been completely vanquished, however, and no longer menaces the protective system, there remains nothing to oppose the extension of particular privilege. It was long thought that territorial protection was limited to national areas, that the re-imposition of internal tariffs, limitation of internal migration, and so on, was no longer conceivable. And this is certainly true so long as any regard at all is preserved for Liberalism. But, during the war, even this was abandoned in Germany and Austria, and there sprang up overnight all kinds of regional barriers. In order to secure a lower cost of living for their own population, the districts producing a surplus of agricultural produce cut themselves off from the districts that could support their population only by importing foodstuffs. The cities and industrial areas limited immigration in order to counteract the rise in the price of foodstuffs and rents. Regional particularism broke up that unity of economic area on which national neo-merchantilism had based all its plans.

Even granting that Socialism is at all practicable, the development of a unitary world socialism would encounter grave difficulties. It is quite possible that the workers in particular districts, or particular concerns, or particular factories, would take the view that the instruments of production which happened to lie within their area were their own property, and that no outsider was entitled to profit by them. In such a case World Socialism would split up into numerous self-independent socialist communities — if, indeed, it did not become completely syndicalized. For Syndicalism is nothing less than the principle of decentralization consistently applied.

A Socialist community, which did not include the whole of mankind, would have no reason to remain isolated from the rest of the world. It is true, that it might be disquieting for the rulers of such a state that foreign ideas would come over the frontiers with foreign products. They might fear for the permanence of their system, if their subjects were able to compare their position with that of foreigners who were not citizens of a socialist community. But these are political considerations, and do not apply if the foreign states are also socialistic. Moreover, a statesman who is convinced of the desirability of Socialism must expect that intercourse with foreigners will make them also socialists: he will not fear lest it undermine the socialism of his own compatriots.

The theory of Free Trade shows how the closing of the frontiers of a socialist community against the import of foreign commodities would injure its inhabitants. Capital and labour would have to be applied under relatively unfavourable conditions yielding a lower product than otherwise would have been obtained. An extreme example will make this clear. At the expense of an enormous outlay of capital and labour a socialist Germany could grow coffee in greenhouses. But it would obviously be more advantageous to procure it from Brazil in exchange for products for whose production conditions in Germany were more favourable.1

• 1It is superfluous to dispute with the autarky plans, which have been most zealously argued by the naive litterateurs of the ‘Tat’ circle (Fried, Das Ende des Kapitalismus, Jena 1931). Autarky would probably depress the standard of life of the German people incomparably more than could the Reparations burden multiplied a hundred-fold.

Such considerations indicate the principles on which a socialist community would have to base its commercial policy. In so far as it aspired to let its actions be guided purely by economic considerations it would have to aim at securing just what under complete freedom of trade would be secured by the unrestricted play of economic forces. The socialist community would limit its activities to the production of those commodities it could produce under comparatively more favourable conditions than existed abroad, and it would exploit each single line of production only so far as this relative advantage justified. It would procure all other commodities from abroad by way of exchange.

This fundamental principle holds good whether or not trade with abroad is carried out by recourse to a general medium of exchange — by recourse to money — or not. In foreign trade, just as in internal trade — there is no difference between them — no rational production could proceed without money reckoning and the formation of prices for the means of production. On this point, we have nothing to add to what we have said already.. But here we wish to consider a socialist community, existing in a world not otherwise socialistic. This community could estimate and compute in money in exactly the same way as a state railway, or a city waterworks, existing in a society otherwise based upon private ownership of the means of production.

No one can regard what his neighbour does as a matter of mere indifference. Everyone is interested in raising the productivity of labour by the widest division of labour possible under given circumstances. I too am injured if some people maintain a state of economic self-sufficiency: for, if they were to relax their isolation, the division of labour could be made even more comprehensive. If the means of production are in the hands of relatively inefficient agents, the damage is universal.

Under Capitalism the profit-seeking of individual entrepreneurs harmonizes the interests of the individual with those of the community. On the one hand, the entrepreneur is always seeking for new markets, and underselling with cheaper and better wares the dearer and inferior products of less rationally organized production. On the other, he is always seeking cheaper and more productive sources of raw materials and opening up more favourable sites for production. This is the true nature of that expansive tendency of Capitalism, which neo-marxian propaganda so completely misrepresents as the ‘Verwertungsstreben des Kapitals’, and so amazingly involves into an explanation of modern Imperialism.

The old colonial policy of Europe was mercantilistic, militaristic, and imperialistic. With the defeat of mercantilism by liberal ideas, the character of colonial policy completely changed. Of the old colonial powers, Spain, Portugal and France had lost the greater part of their former possessions. England, who had become the greatest of the colonial powers, managed her possessions according to the principles of free trade theory. It was not cant for English free traders to speak of England’s vocation to elevate backward people to a state of civilization. England has shown by acts that she has regarded her position in India, in the Crown Colonies, and in the Protectorates, as a general mandatory of European civilization. It is not hypocrisy when English liberals speak of England’s rule in the colonies as being not less useful for the inhabitants and for the rest of the world than it is for England. The mere fact that England preserved Free Trade in India shows that she conceived her colonial policy in a spirit quite different from that of the states who entered, or re-entered the sphere of colonial policy in the last decades of the nineteenth century — France, Germany, the United States, Japan, Belgium and Italy. The wars waged by England during the era of Liberalism to extend her colonial empire and to open up territories which refused to admit foreign trade, laid the foundations of the modern world economy.1  To measure the true significance of these wars one has only to imagine what would have happened if India and China and their hinterland had remained closed to world commerce. Not only each Chinese and each Hindu, but also each European and each American, would be considerably worse off. Were England to lose India to-day, and were that great land, so richly endowed by nature, to sink into anarchy, so that it no longer offered a market for international trade — or no longer offered so large a market — it would be an economic catastrophe of the first order.

Liberalism aims to open all doors closed to trade. But it no way desires to compel people to buy or to sell. Its antagonism is confined to those governments which, by imposing prohibition and other limitations on trade, exclude their subjects from the advantages of taking part in world commerce, and thereby impair the standard of life of all mankind. The Liberal policy has nothing in common with Imperialism. On the contrary, it is designed to overthrow Imperialism and expel it from the sphere of international trade.

A socialist community would have to do the same. It, too, would not be able to allow areas lavishly endowed by nature to be permanently Shut off from international trade, nor Whole nations to refrain from exchange. But here Socialism would encounter a problem which can only be solved under Capitalism — the problem of ownership of capital abroad.

Under Capitalism, as Free Traders would have it, frontiers would be without significance. Trade would flow over them unhindered. They would prohibit neither the movement of the most suitable producers towards immobile means of production, nor the investment of mobile means of production in the most suitable places. Ownership of the means of production would be independent of citizenship. Foreign investment would be as easy as investment at home.

Under Socialism the situation would be different. It would be impossible for a socialist community to possess means of production lying outside its own borders. It could not invest capital abroad even if it would yield a higher product there. A socialist Europe must remain helpless, while a socialist India exploits its resources inefficiently, and thereby brings fewer goods to the world market than it would otherwise have done. New supplies of capital must be utilized under less favourable conditions in Europe, while in India, for want of new capital, more favourable conditions of production are not fully exploited. Thus independent socialist communities existing side by side and exchanging commodities only, would achieve a nonsensical position. Quite apart from other considerations the very fact of their independence would lead to a state of affairs under which productivity would necessarily diminish.

These difficulties could not be overcome so long as independent socialist communities existed side by side. They could only be surmounted by the amalgamation of the separate communities into a unitary socialist state comprehending the whole world.

• 1In judging the English policy for opening up China, people constantly put in the foreground the fact that it was the opium trade which gave the direct, immediate occasion for the outbreak of war complications. But in the wars which the English and French waged against China between 1839 and 1860 the stake was the general freedom of trade and not only the freedom of the opium trade. That from the Free Trade point of view no barriers ought to be put in the way even of the trade in poisons, and that everyone shouid abstain by his own impulse from enjoyments harmful to his organism, is not so base and mean as socialist and anglophobe writers tend to represent. Rosa Luxemburg (Die Akkumulation des Kapitals, Berlin 1913, p. 363 et seq.) reproaches the English and French that it was no heroic act to defeat with European weapons the Chinese, who were provided only with out of date arms. Ought the French and English also to have taken the field only with ancient guns and spears?

The essence of Socialism is this: All the means of production are in the exclusive control of the organized community. This and this alone is Socialism. All other definitions are misleading.

It is possible to believe that Socialism can only be brought about under quite definite political and cultural conditions. Such a belief however is no justification for confining the term to one particular form of Socialism and withholding it from all other conceivable ways of realizing the socialist ideal. Marxian socialists have been very zealous in commending their own particular brand of Socialism as the only true Socialism and in insisting that all other socialist ideals and methods of realizing Socialism have nothing to do with genuine Socialism. Politically this attitude of the socialists has been extremely astute. It would have greatly increased the difficulties of their campaign if they had been prepared to admit that their ideal had anything in common with the ideals advocated by the leaders of other parties. They would never have rallied millions of discontented Germans to their banners if they had openly admitted that their aims were not fundamentally different from those of the governing classes of the Prussian state. If a marxian had been asked before October 1917 in what way his Socialism differed from the Socialism of other movements, especially from that of the Conservatives, he would have replied that under Marxian Socialism, Democracy and Socialism were indissolubly united, and moreover that Marxian Socialism was a stateless Socialism because it intended to abolish the State.

We have seen already how much these arguments are worth, and as a matter of fact, since the victory of the Bolsheviks, they have rapidly disappeared from the list of Marxian commonplaces. At any rate the conceptions of democracy and statelessness which the Marxians hold to-day are quite different from those which they held previously.

But the Marxians might have answered the question another way. They might have said that their Socialism was revolutionary, as opposed to the reactionary and conservative Socialism of others. Such an answer leads much sooner to a recognition of the difference between Marxian social democracy and other socialist movements. For to a Marxian, revolution does not merely signify a forcible alteration of the existing state of affairs, but, as befits his peculiar fatalism, a process which brings mankind nearer the fulfilment of its destiny.1  For him the impending social revolution which will bring about Socialism is the last step to eternal salvation. Revolutionaries are those whom history has chosen to be the instruments for the realization of its plan. The revolutionary spirit is the sacred fire which has descended upon them and enables them to accomplish this great work. In this sense the Marxian socialist regards it as the most notable characteristic of his party that it is a revolutionary party. In this sense he regards all other parties as a single, uniform, reactionary mass because they are opposed to his methods of achieving ultimate bliss.

It is obvious that all this has nothing to do with the sociological concept of the socialist community. It is certainly a remarkable thing that a group of persons should claim to be the only people elected to bring us to salvation; but when these persons know of no other road to salvation than one which many others have believed in, the assertion that they exclusively are ordained for the task is not sufficient to differentiate their aim fundamentally from that of others.

• 1On the other meanings which the term Revolution has for the Marxists see above, p. 81 et seq.

To understand the concept of State Socialism it is not sufficient to explain the term etymologically. The history of the word reflects only the fact that State Socialism was the Socialism professed by the authorities of the Prussian and other German states. Because they identified themselves with the State and with the form taken by the State and with the idea of the State generally, it suggested calling the Socialism which they adopted State Socialism. The more Marxian teaching about the class character of the State and the decay of the State obscured the fundamental idea of the State, the easier it became to use the term.

Marxian Socialism was vitally concerned in making a distinction between nationalization and socialization of the means of production. The slogans of the social democratic party would never have become popular if they had represented nationalization of the means of production as the ultimate aim of socialist change. For the state known to the people among whom Marxism found its widest acceptance was not such as to inspire much hope from its incursions into economic activity. The German, Austrian and Russian disciples of Marxism lived in open feud with the powers which to them represented the State. In addition they had the opportunity of gauging the results of nationalization and municipalization; and, with the best will in the world, they could not overlook the great shortcomings of state and municipal enterprise. It was quite impossible to arouse enthusiasm for a programme aiming at nationalization. A party of opposition was bound above all things to attack the hated authoritarian state; only in this way could it win over the discontented. From this need of political agitation arose the marxian doctrine of the withering away of the state. The liberals had demanded the limitation of the authority of the state and the transfer of government to the representatives of the people; they had demanded the free state. Marx and Engels tried to outbid them by unscrupulously adopting the anarchistic doctrine of the abolition of all state authority regardless of the fact that Socialism would not mean the abolition, but rather the unrestricted expansion of the power of the state.

Equally untenable and absurd as the doctrine of the withering away of the state under Socialism is the academic distinction between nationalization and socialization which is closely bound up with it. The Marxians themselves are so conscious of the weakness of their line of argument that they usually avoid discussing this point and confine themselves to talking of the socialization of the means of production, without any further elaboration of the idea, so as to create the impression that socialization is something different from the nationalization with which everybody is acquainted. When they cannot avoid discussing this ticklish point they are obliged to admit that the nationalization of undertakings is a ‘preliminary stage in the acquisition of all productive powers by society itself1  or ‘the natural jumping-off point in the process leading to the socialist community’.2

Thus Engels finally contents himself with entering a caveat against accepting without further ado ‘every’ form of nationalization as socialistic. He would not in the first place describe as ‘steps towards Socialism’, nationalization carried out for purposes of state finance, such as might be adopted ‘chiefly to provide new sources of revenue independent of Parliamentary sanction’. Nevertheless for these reasons nationalization would also mean, in the marxian language, that in one branch of production, the appropriation of surplus value by the capitalist was abolished. The same is true of nationalization carried out for political or military reasons which Engels also refused to accept as socialistic. He regards it as the criterion of socialistic nationalization that the means of production and trade taken over ‘should have actually out-grown the direction by joint stock companies, so that nationalization has become economically inevitable’. This necessity arises first in the case of ‘the large scale communications: posts, telegraphs and railways’.3  But it is precisely the largest railways in the world — the North American — and the most important telegraphs lines — the deep sea cables — that have not been nationalized, whilst small unimportant lines in the etatistic countries have long been nationalized. The nationalization of the postal service moreover was primarily for political reasons and that of the railways for military ones. Can it be said that these nationalizations were ‘economically inevitable?’ And what on earth does ‘economically inevitable’ mean?

Kautsky, too, contents himself with rejecting the view ‘that every nationalization of an economic function or of an economic enterprise is a step towards Socialism and that this can be brought about by a general nationalization of the whole economic machine without the need for a fundamental change in the nature of the State’.4  But no one has ever disputed that the fundamental nature of the State would be greatly changed if it were transformed into a socialist community through the nationalization of the whole economic apparatus. Thus Kautsky is unable to say anything more than that ‘as long as the possessing classes are the governing classes’ complete nationalization is impossible. It will be achieved when ‘the workers become the governing classes in the state’. Only when the proletariat has seized political power will it ‘transform the state into a great fundamentally self-sufficient economic society’.5  The main question — the question which alone needs an answer — whether complete nationalization carried out by another party than the socialist one would also constitute Socialism, Kautsky carefully avoids.

There is, of course, a fundamental distinction of the highest importance between the nationalization or municipalization of individual undertakings which are publicly or communally run in a society otherwise maintaining the principle of private property in the means of production, and the complete socialization which tolerates no private ownerships by individuals in the means of production alongside that of the socialist community. As long as only a few undertakings are run by the State, prices for the means of production will be established in the market, and it is thus still possible for State undertakings to make calculations. How far the conduct of the undertakings would be based on the results of these calculations is another question; but the very fact that to a certain extent the results of operations can be quantitatively ascertained provides the business administration of such undertakings with a gauge which would not be available to the administration of a purely socialist community. The way in which State undertakings are run may justifiably be called bad business but it is still business. In a socialist community, as we have seen, economy in the strict sense of the word, cannot exist.6

Nationalization of all the means of production involves complete Socialism. Nationalization of some of the means of production is a step towards complete Socialism. Whether we are to remain satisfied with the first step or whether we desire to proceed further does not alter its fundamental character. In the same way, if we wish to transfer all undertakings to the ownership of the organized community we cannot do otherwise than nationalize every single undertaking, simultaneously or successively.

The obscurity thrown by Marxism on the idea of socialization was strikingly illustrated in Germany and Austria when the social-democrats came into power in November 1918. A new and hitherto almost unheard slogan became popular overnight: Socialization (Sozialisierung) was the solution. This was merely the paraphrasing of the German word Vergesellschaftung into a fine-sounding foreign word. The idea that Sozialisierung was nothing more than nationalization or municipalization could not occur to anybody; anyone who maintained this was simply believed to know nothing about it, since it was thought that between the two things yawned an abysmal gap. The Socialization Commissions set up soon after the social-democrats acquired power were set the problem of defining Sozialisierung in such a way that, ostensibly at least, it could be distinguished from the nationalization and municipalization of the previous regime.

The first report issued by the German commission dealt with the socialization of the coal industry, and in rejecting the idea of achieving this by the nationalization of the coal mines and the coal trade it emphasized in a striking manner the shortcomings of a national coal industry. But nothing was said as to how socialization differed actually from nationalization. The report professed the opinion that ‘an isolated nationalization of the coal industry cannot be considered as socialization while capitalist enterprise continues in other branches of production: it would only mean the replacement of one employer by another’. But it left open the question whether an isolated ‘socialization’ such as it intended and proposed could mean anything else under the same conditions.7  It would have been understandable if the commission had gone on to say that in order to fulfil the happy results of a socialist order of society it was not sufficient to nationalize one branch of production, and had recommended that the State should take over all undertakings at one blow, as the Bolsheviks in Russia and Hungary had done and as the Spartacists in Germany wanted to do. But it did not do this. On the contrary, it elaborated proposals for socialization which advocated the isolated nationalization of various branches of production, beginning with coal production and distribution. That the commission avoided using the term nationalization makes no difference. It was mere juristic hair-splitting when the commission proposed that the owners of the socialized German coal industry should not be the German State but a ‘German public coal trust’ and when it went on to assert that this ownership should be conceived ‘only in a formal juristic sense’, but that ‘the material position of the private employer and thereby the possibility of exploiting workers and consumers’ is denied to this public trust,8  the commission was using the emptiest of gutter catchwords. Indeed the whole report is nothing but a collection of all the popular fallacies about the evils of the capitalist system. The only way in which the coal industry, socialized in accordance with the proposals of the majority, would differ from other public undertakings is the composition of its directorate. At the head of the coal mines there should be no single official but a committee constituted in a certain way. Parturiunt montes, nascetur ridiculus mus!

State Socialism, therefore, is not distinguished by the fact that the State is the pivot of the communal organization, since Socialism is quite inconceivable otherwise. If we wish to understand its nature we must not look to the term itself. This would take us no further than would an attempt to grasp the concept of metaphysics from an examination of the meaning of the parts that make up the word. We must ask ourselves what ideas have been associated with the expression by those who are generally regarded as the followers of the state socialistic movements, that is, the out-and-out etatists.

Etatistic Socialism is distinguished from other socialist systems in two ways. In contradistinction to many other socialist movements which contemplate the greatest possible measure of equality in the distribution of the social income between individuals, Etatistic Socialism makes the basis of distribution the merit and rank of the individual. It is obviously superfluous to point out that judgment of merit is purely subjective and cannot in any way be tested from a scientific view of human relations. Etatism has quite definite views about the ethical value of individual classes in the community. It is imbued with a high esteem for the monarchy, the nobility, big landowners, the clergy, professional soldiers, especially the officer class, and officials. With certain reservations it also allots a privileged position to savants and to artists. Peasants and small tradesmen are in a special class and below them come the manual labourers. At the bottom are the unreliable elements which are discontented with the sphere of action and the income allotted to them by the etatist plan and strive to improve their material position. The etatist mentally arranges a hierarchy of the members composing his future state. The more noble will have more power, more honours and more income than the less noble. What is noble and what is ignoble will be decided above all by tradition. To the etatist the worst feature of the capitalist system is that it does not assign income according to his valuation of merit. That a milk dealer or a manufacturer of trouser buttons should draw a larger income than the sprig of a noble family, than a privy councillor or a lieutenant, strikes him as intolerable. In order to remedy this state of affairs the capitalist system must be replaced by the etatistic.

This attempt on the part of the etatists to maintain the traditional social order of rank and the ethical valuation of different classes, in no way contemplates transferring all property in the means of production to the formal ownership of the State. This indeed, in the etatistic view, would be a complete subversion of all historical rights. Only the large undertakings would be nationalized, and even then an exception would be made in favour of large scale agriculture, especially inherited family property. In agriculture and in small and medium-sized industries private property is to continue in name at least. In the same way the free professions will be allowed scope, with certain limitations. But all enterprises must become essentially state undertakings. The agriculturist will retain the name and title of owner, but he will be forbidden ‘egoistically to look merely to mercantile profit’; he has the ‘duty to execute the aims of the State’.9  For agriculture, according to the etatist, is a public office. ‘The agriculturist is a state official and must cultivate for the needs of the State according to his best knowledge and conscience, or according to state orders. If he gets his interest and sufficient to maintain himself he has everything he is entitled to demand.’10  The same applies to the artisan and the trader. For the independent entrepreneur with free control over the means of production there is as little room in State Socialism as in any other Socialism. The authorities control prices and decide what and how much shall be produced and in what way. There will be no speculation for ‘excessive’ profit. Officials will see to it that no one draws more than the appropriate ‘fair income’, that is to say an income ensuring him a standard of life appropriate to his rank. Any excess will be ‘taxed away’.

Marxian writers are also of the opinion that to bring Socialism about, small undertakings need not necessarily be transferred directly to public ownership. Indeed they have regarded this as quite impossible; the only way in which socialization can be carried out for these small undertakings is to leave them in the formal possession of their owners and simply subject them to the all-embracing supervision of the State. Kautsky himself says that ‘no socialist worthy of serious consideration has ever demanded that peasants should be expropriated, let alone their property confiscated.11  Neither does Kautsky propose to socialize small producers by expropriating their property.12  The peasant and the craftsman will be fitted into the machinery of the socialist community in such a way that their production and the valuation of their products will be regulated by the economic administration whilst nominally the property will remain theirs. The abolition of the free market will transform them from independent owners and entrepreneurs into functionaries of the socialist community, distinguished from other citizens only by the form of the remuneration.13  It cannot therefore be regarded as a peculiarity of the etatistic socialist scheme that in this way remnants of private property in the means of production formally persist. The only characteristic peculiarity is the extent to which this method of arranging the social conditions of production is applied. It has already been said that etatism in general proposes in the same way to leave the large landowners — with the exception perhaps of the latifundia owners — in formal possession of their property. What is still more important is that it proceeds upon the assumption that the greater part of the population will find work in agriculture and small concerns, and that comparatively few will enter the direct service of the State as employees in large undertakings. Not only is etatism opposed to orthodox Marxists, as represented by Kautsky, through its theory that small scale agriculture is not less productive than large scale agriculture, but it is also of the opinion that in industry too, small scale undertakings have a great scope for operation at the side of the large concerns. This is the second peculiarity which distinguishes State Socialism from other socialist systems, especially social-democracy.

It is perhaps unnecessary further to elaborate the picture of the ideal State drawn by the state socialists. Over a large part of Europe it has been for decades the tacit ideal of millions, and everyone knows it even if no one has clearly defined it. It is the Socialism of the peaceful loyal civil servant, of the land-owner, the peasant, the small producer and of countless workers and employees. It is the Socialism of the professors, the famous ‘socialists of the chair’ — the Katheder Sozialismus — it is the Socialism of artists, poets, writers in an epoch of the history of art plainly bearing all the signs of decay. It is the Socialism supported by the churches of all denominations. It is the Socialism of Caesarism and of Imperialism, the ideal of the so-called ‘social monarchy’. It is this that the policy of most European states, especially the German states, envisaged as the distant goal of man’s endeavours. It is the social ideal of the age which prepared the Great War and perished with it.

A Socialism which allots the shares of individuals in the social dividend according to merit and rank can be conceived only in the form of State Socialism. The hierarchy on which it bases its distribution is the only one popular enough not to arouse overwhelming opposition. Although it is less able to withstand rationalist criticism than many others that might be suggested, nevertheless it has the sanction of age. In so far as State Socialism attempts to perpetuate this hierarchy and to prevent any change in the scale of social relationships, the description ‘conservative socialism’, sometimes applied to it, is justified.14  In fact it is imbued more than any other form of Socialism with ideas that credit the possibility of complete crystallization and changelessness of economic conditions: its followers regard every economic innovation as superfluous and even harmful. And corresponding to this attitude is the method by which Etatism wishes to attain its ends. If Marxian Socialism is the social ideal of those who expect nothing except through a radical subversion of the existing order by bloody revolutions, State Socialism is the ideal of those who call in the police at the slightest sign of trouble. Marxism relies upon the infallible judgment of a proletariat filled with the revolutionary spirit, Etatism upon the infallibility of the reigning authority. They both agree in belief in a political absolutism which does not admit the possibility of error.

In contrast to State Socialism, Municipal Socialism presents no special form of the socialist ideal. The municipalization of undertakings is not regarded as a general principle on which to base a new arrangement of economic life. It would affect only undertakings with a market limited in space. In a rigorous system of State Socialism the municipal undertakings would be subordinated to the chief economic administration and would be no freer to develop than the agricultural and industrial undertakings nominally remaining in private hands.

• 1Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, p. 299.
• 2Kautsky, Das Erfurter Programm, 12th Edition, Stuttgart 1914, p. 129.
• 3Engels, Herrn Eugen Dührings Umwälzung der Wissenschaft, p. 298 et seq.
• 4Kautsky, Das Erfurter Programm, p. 129.
• 5Kautsky, Das Erfurter Programm, p. 129.
• 6See above p. 119 et seq.
• 7Bericht der Sozialisierungskommission über die Frage der Sozialisierung des Kohlenbergbaues vom 31 Juli 1920, with appendix: Vorläufiger Bericht vom 15 Februar 1919, 2nd Edition, Berlin 1920, p. 32 et seq.
• 8Bericht der Sozialisierungskommission über die Frage der Sozialisierung des Kohlenbergbaues vom 31 Juli, 1920, with appendix: Vorläufiger Bericht vom 15 Februar 1919, 2nd Edition, Berlin 1920, p. 37.
• 9Philipp v. Arnim, Ideen zu einer vollständigen landwirtschaftlichen Buchhaltung, 1805, p. vi (quoted by Waltz, Vom Reinertrag in der landwirtschafi, p. 20).
• 10Philipp v. Arnim, Ideen zu einer vollstandigen landwirtschaftlichen Buchhaltung, 1805, p. 2 (quoted in Waltz, op. cit., p. 21). See also Lenz, Agrarlehre und Agrarpolitik der deutschen Romantik, Berlin 1912, p. 84. See similar remarks of Prince Alois Liechtenstein, a leader of the Austrian Christian Socialists, quoted in Nitti, heSocialisms catholique, p. 370 et seq.
• 11Kautsky, Die Soziale Revolution, II, p. 33.
• 12Ibid. p. 35.
• 13Bourguin, Die Sozialistischen Systeme, p. 62 et seq.
• 14Andler (Les Origines du Socialisme d’Etat en Allemagne, and Edition, Paris 1911, p. 2) specially stresses this character of state Socialism.

Military Socialism is the Socialism of a state in which all institutions are designed for the prosecution of war. It is a State Socialism in which the scale of values for determining social status and the income of citizens is based exclusively or preferably on the position held in the fighting forces. The higher the military rank the greater the social value and the claim on the national dividend.

The military state, that is the state of the fighting man in which everything is subordinated to war purposes, cannot admit private ownership in the means of production. Standing preparedness for war is impossible if aims other than war influence the life of individuals. All warrior castes whose members have been supported by the assignment of manorial rights or of grants of land, or even by industries based on a supply of unfree labour, have in time lost their warlike nature. The feudal lord became absorbed in economic activity and acquired other interests than waging war and reaping military honours. All over the world the feudal system demilitarized the warrior. The knights were succeeded by the junkers. Ownership turns the fighting man into the economic man. Only the exclusion of private property can maintain the military character of the State. Only the warrior who has no other occupation apart from war than preparation for war, is always ready for war. Men occupied in affairs may wage wars of defence but not long wars of conquest.

The military state is a state of bandits. It prefers to live on booty and tribute. Compared with this source of income the product of economic activity plays only a subordinate role; often it is completely lacking. And if booty and tribute accrue from abroad it is clear that they cannot go direct to individuals but only to the common treasury, which can distribute them only according to military rank. The army which alone assures the continuance of this source of income would not tolerate any other method of distribution. And this suggests that the same principle of distribution should be applied to the products of home production, which similarly accrue to citizens as the tribute and yield of serfdom.

In this way the communism of the Hellenic pirates of Lipara and all other robber states can be explained.1  It is the ‘communism of robbers and freebooters’,2  arising from the application of military ideas to all social relationships. Caesar relates of the Suebi, whom he calls gens longe bellicosissima Germanorum omnium, that they sent warriors over the borders every year for plunder. Those who remained behind carried on economic activity for those in the field; in the following year the roles were exchanged. There was no land in the exclusive ownership of individuals.3  Only by each sharing in the product of the military and economic activity carried on with a common purpose and subject to a common danger, can the warrior state make every citizen a soldier and every soldier a citizen. Once it allows some to remain soldiers and others to remain citizens working with their own property the two callings will soon stand out in contrast. Either the warriors must subjugate the citizens and in that case it would be doubtful if they could set out on plundering expeditions leaving an oppressed population at home —or the citizens will succeed in gaining the upper hand. In the latter event the warriors will be reduced to mercenaries and forbidden to set out in search of plunder because, as a standing danger, they cannot be allowed to grow too powerful. In either case the state must lose its purely military character. Therefore any weakening of ‘communistic’ institutions involves a weakening of the military nature of the state, and the warrior society is slowly transformed into an industrial one.4

The forces driving a military state to Socialism could be clearly observed in the Great War. The longer the war lasted and the more the states of Europe were transformed into armed camps, the more politically untenable seemed the distinction beween the fighting man, who had to endure the hardships and danger of the war, and the man who remained at home to profit from the war boom. The burden was distributed too unequally. If the distinction had been allowed to persist and the war had continued longer the countries would infallibly have been split into two factions and the armies would have finally turned their weapons against their own kinsmen. The Socialism of conscript armies demands for its complement the Socialism of conscript labour at home.

The fact that they cannot preserve their military character without a communistic organization does not strengthen the warrior states in the war. Communism is for them an evil which they must accept; it produces a weakness by which they eventually perish. Germany in the first years of the war trod the path to Socialism because the military etatistic spirit, which was responsible for the policy leading to the war, drove it towards State Socialism. Towards the end of the war socialization was more and more energetically carried out because, for the reasons just stated, it was necessary to make conditions at home similar to those at the front. State Socialism did not alleviate the situation in Germany, however, but worsened it; it did not stimulate production but restricted it; it did not improve the provisioning of the army and those at home but made it worse.5  And needless to say it was the fault of the etatistic spirit that in the tremendous convulsions of the war and the subsequent revolution not one strong individual arose from the German people.

The lesser productivity of communistic methods of economic activity is a disadvantage to the communistic warrior state when it comes into clash with the richer and therefore better armed and provisioned members of nations which acknowledge the principle of private property. The destruction of initiative in the individual, unavoidable under Socialism, deprives it in the decisive hour of battle of leaders who can show the way to victory, and subordinates who can carry out their instructions. The great military communist state of the Incas6  was easily overthrown by a handful of Spaniards.

If the enemy against which the warrior state has to fight is to be found at home then we can speak of a communism of overlords. ‘Casino communism’ was the name given by Max Weber to the social arrangements of the Dorians in Sparta because of their habits of eating together.7  If the ruling caste, instead of adopting communistic institutions assigns land together with its inhabitants to the ownership of individuals sooner or later it will be ethnically absorbed by the conquered. It becomes tranformed into a land-owning nobility, which eventually draws even the conquered into military service. In this way the state loses the character based upon the waging of war. This development took place in the kingdoms of the Langobards, the West Goths and the Franks and in all the regions where the Normans appeared as conquerors.

• 1On Lipara see Poehlmann, Geschichte der sozialen Frage und des Sozialismus in der antiken welt, Vol. I, p. 44 et seq.
• 2Max Weber, Der Streit urn dun Charakter der altgermanischen Sozialverfassung in der deutschen Literatur des letzten Jahrzehnts (Jahrbücher fur Nationalökonomie und Statistik, Vol. XXVIII, 1904, p. 445).
• 3Caesar, De bello Gallico, IV, 1.
• 4Herbert Spencer, Die Prinzipien der Soziologie, translated by Vetter, Vol. II, Stuttgart 1899, p. 710 et seq.
• 5See my Nation, Staat und Wirtschaft, p. 115 et seq.; 143 et seq.
• 6Wiener (Essai sur les institutions politiques, religieuses, économiques et societies de l’Empire des Incas, Paris 1874, pp. 64, 90 et seq) attributes Pizarro’s easy conquest of Peru to the fact that communism had unnerved the people.
• 7Max Weber, Der Streit urn der Charakter der altgermanischen Sozialverfassung in der deutschen Literatur des letzten Jahrzehnts (Jahrbücher für Nationalökonomie und Statistik, Vol. XXVIII, 1904), p. 445.

A theocratic organization of the state demands either a self-sufficing family economy or the socialist organization of industry. It is incompatible with an economic order which allows the individual free play to develop his powers. Simple faith and economic rationalism cannot dwell together. It is unthinkable that priests should govern entrepreneurs.

Christian Socialism, as it has taken root in the last few decades among countless followers of all Christian churches, is merely a variety of State Socialism. State Socialism and Christian Socialism are so entangled that it is difficult to draw any clear line between them, or to say of individual socialists whether they belong to the one or the other. Even more than etatism, Christian Socialism is governed by the idea that the economic system would be perfectly stationary if the desire for profit and personal gain by men directing their efforts solely to the satisfaction of material interests did not disturb its smooth course. The advantage of progressive improvements in methods of production is admitted, if only with limitations; but the Christian socialist does not clearly understand that it is just these innovations which disturb the peaceful course of the economic system. In so far as this is recognized, the existing state of affairs is preferred to any further progress. Agriculture and handicraft, with perhaps small shopkeeping, are the only admissible occupations. Trade and speculation are superfluous, injurious, and evil. Factories and large scale industries are a wicked invention of the ‘Jewish spirit’; they produce only bad goods which are foisted on buyers by the large stores and by other monstrosities of modern trade to the detriment of purchasers. It is the duty of legislation to suppress these excesses of the business spirit and to restore to handicraft the place in production from which it has been displaced by the machinations of big capital.1  Large transport undertakings that cannot be abolished should be nationalized.

The basic idea of Christian Socialism that runs through all the teachings of its representatives is purely stationary in outlook. In the economic system which they have in mind there is no entrepreneur, no speculation, and no ‘inordinate’ profit. The prices and wages demanded and given are ‘just’. Everyone is satisfied with his lot because dissatisfaction would signify rebellion against divine and human laws. For those incapable of work Christian charity will provide. This ideal it is asserted was achieved in medieval times. Only unbelief could have driven mankind out of this paradise. If it is to be regained mankind must first find the way back to the Church. Enlightenment and liberal thought have created all the evil which afflicts the world to-day.

The protagonists of Christian social reform as a rule do not regard their ideal Society of Christian Socialism as in any way socialistic. But this is simply self-deception. Christian Socialism appears to be conservative because it desires to maintain the existing order of property, or more properly it appears reactionary because it wishes to restore and then maintain an order of property that prervailed in the past. It is also true that it combats with great energy the plans of socialists of other persuasions for a radical abolition of private property, and in contradistinction to them asserts that not Socialism but social reform is its aim. But Conservatism can only be achieved by Socialism. Where private property in the means of production exists not only in name but in fact, income cannot be distributed according to an historically determined or an any other way permanently established order. Where private property exists, only market prices can determine the formation of income. To the degree in which this is realized, the Christian social reformer is step by step driven to Socialism, which for him can be only State Socialism. He must see that otherwise there cannot be that complete adherence to the traditional state of affairs which his ideal demands. He sees that fixed prices and wages cannot be maintained, unless deviations from them are menaced by threats of punishment from a supreme authority. He must also realize that wages and prices cannot be arbitrarily determined according to the ideas of a world improver, because every deviation from market prices destroys the equilibrium of economic life. He must therefore progressively move from a demand for price regulation to a demand for a supreme control over production and distribution. It is the same path that practical etatism has followed. At the end in both cases, is a rigid Socialism which leaves private property only in name, and in fact transfers all control over the means of production to the State.

Only a part of the Christian socialist movement has openly subscribed to this radical programme. The others have shunned an open declaration. They have anxiously avoided drawing the logical conclusions of their premises. They give one to understand that they are combating only the excrescences and abuses of the capitalist order; they protest that they have not the slightest desire to abolish private property; and they constantly emphasize their opposition to Marxian Socialism. But they characteristically perceive that this opposition mainly consists in differences of opinion as to the way in which the best state of society can be attained. They are not revolutionary and expect everything from an increasing realization that reform is necessary. For the rest they constantly proclaim that they do not wish to attack private property. But what they would retain is only the name of private property. If the control of private property is transferred to the State the property owner is only an official, a deputy of the economic administration.

It can be seen at once how the Christian Socialism of to-day corresponds to the economic ideal of the medieval Scholastics. The starting point, the demand for ‘just’ wages and prices, that is, for a definite historically attained distribution of income, is common to both. Only the realization that this is impossible if the economic system retains private property in the means of production, forces the modern Christian reform movement towards Socialism. In order to achieve their demands, they must advocate measures which, even if formally retaining private property, lead to the complete socialization of society.

It will be shown later that this modern Christian Socialism has nothing to do with the suppositious but often cited Communism of the Early Christians. The socialist idea is new to the Church. This is not altered by the fact that the most recent development of Christian social theory has led the Church2  to recognize the fundamental rightfulness of private property in the means of production, whereas the early Church teaching, in view of the command of the gospels condemning all economic activity, had avoided unconditionally accepting even the name of private property. For we must understand what the Church has done in recognizing the rightfulness of private property, only as opposition to the efforts of the socialists to overthrow the existing order forcibly. In reality the Church desires nothing but State Socialism of a particular colour.

The nature of socialistic methods of production is independent of the concrete methods involved in the attempt to realize it. Every attempt at Socialism, however brought about, must founder on the impracticability of setting up a purely socialistic economy. For that reason, and not because of deficiencies in the moral character of mankind, Socialism must fail.

It may be granted, that the moral qualities required of the members of a socialist community could best be fostered by the Church. The spirit which must prevail in a socialist community is most akin to that of a religious community. But to overcome the difficulties in the way of establishing a socialist community would require a change in human nature or in the laws of the nature by which we are surrounded, and even faith cannot bring this to pass.

• 1See the criticism of the economic policy of the Austrian Christian-Socialist Party in Sigmund Mayer, Die Aufhebung des Befähigungsnachweises in Osterrach, Leipzig 1894, especially p. 124 et seq.
• 2In the above text we have always spoken only of the Church in general, without considering the differences between the various denominations. This is quite admissible. The evolution towards Socialism is common to all denominations. In Catholicism, Leo XIII’s encyclical, ‘Rerum Novarum’, of 1891, has recognized the origin of private property in Natural Law; but simultaneously the Church laid down a series of fundamental ethical principles for the distribution of incomes, which could be put into practice only under State Socialism. On this basis stands also Pius XI’s encyclical, ‘Quadragesimo anno’ of 1931. In German Protestantism the Christian Socialist idea is so tied up with State Socialism that the two can hardly be distinguished.

The so-called planned economy (Planwirtschaft) is a more recent variety of Socialism.

Every attempt to realize Socialism comes up quickly against insurmountable difficulties. This is what happened to Prussian State Socialism. The failure of nationalization was so striking that it could not be overlooked. Conditions in government undertakings were not such as to encourage further steps along the road to state and municipal control. The blame for this was thrown upon the officials. It had been a mistake to exclude the ‘business man’. In some way or other the abilities of the entrepreneur must be brought to the service of Socialism. From this notion came the arrangement of ‘mixed’ enterprise. Instead of complete nationalization or municipalization we have the private undertaking in which the state or municipality is interested. In this way, on the one side, regard is paid to the demand of those who think it is not right that the state and municipalities should not share in the yield of undertakings carried on under their august sway. (Of course the State might get and gets its share more effectively by taxation without exposing the public finances to the possibility of loss.) On the other hand it is thought by this system to bring all the active powers of the entrepreneur into the service of the common enterprise — a gross error. For as soon as representatives of the government take part in administration all the hindrances which cripple the initiative of public officials come into play. The ‘mixed’ form of undertaking makes it possible to exempt employees and workers from the regulations applying to public officials and thereby to mitigate slightly the harmful effects which the official spirit exerts upon the profitability of undertakings. The mixed undertakings have certainly turned out better on the whole than the purely governmental undertakings. But this no more shows that Socialism is practicable than do the good results occasionally shown by individual public undertakings. That it is possible under certain favourable circumstances to carry on a public enterprise with some success in the midst of an economic society otherwise based on private property in the means of production does not prove that a complete socialization of society is practicable.

During the Great War the authorities in Germany and Austria tried, under war Socialism, to leave to the entrepreneurs the direction of nationalized undertakings. The haste with which socialist measures were adopted under very difficult war conditions and the fact that at the outset no one had any clear idea of the fundamental implications of the new policy, nor of the lengths to which it was to be carried, left no other means open. The direction of individual branches of production was made over to compulsory associations of employers, who were put under government supervision. Price regulation on the one hand and drastic taxation of profits on the other hand were to ensure that the employer was no more than an employee sharing the yield.1  The system worked very badly. Nevertheless it was necessary to adhere to it, unless all attempts at Socialism were to be abandoned, because no one knew anything better to put in its place. The memorandum of the German Economic Ministry (May 7th, 1919), drawn up by Wissell and Moellendorff, states in plain words, that there was nothing else for a socialist government to do but to maintain the system known during the war as ‘war economy’. ‘A socialist government’ it says ‘cannot ignore the fact that, because of a few abuses, public opinion is being poisoned by interested criticisms against a systematic planned economy; it may improve the planned system; it may reorganize the old bureaucracy; it may even in the form of self-government make over the responsibility to the people concerned in the business; but it must proclaim itself an adherent of the compulsory planned economy: that is to say an adherent of the most unpopular concepts of duty and coercion.’2

Planned economy is a scheme of a socialist community that attempts to solve in a particular way the insoluble problem of the responsibility of the acting organ. Not only is the idea on which this attempt is based deficient, but the solution itself is only a sham, and that the creators and supporters of this scheme should overlook this, is particularly characteristic of the mental attitude of officialdom. The self-government granted to individual areas and to individual branches of production is important only in minor matters, for the centre of gravity of economic activity lies in the adjustment between individual areas and individual branches of production. This adjustment can only proceed uniformly; if this is not provided for, the whole plan would have to be regarded as syndicalist. In fact Wissel and Moellendorff envisage a State Economic Council which has ‘supreme control of the German economic system in co-operation with the highest competent organs of the State.’3  In essence, therefore, the whole proposal comes to nothing more than that responsibility for the economic administration is to be shared between the ministers and a second authority.

The Socialism of the planned economy is distinguished from the State Socialism of the Prussian State under the Hohenzollerns chiefly by the fact that the privileged position in business control and in the distribution of income, which the latter allotted to the Junkers and the bureaucrats, is here assigned to the ci-devant entrepreneur. This is an innovation dictated by the change in the political situation resulting from the catastrophe which has overwhelmed the Crown, the nobility, the bureaucracy and the officer class; apart from this it is without significance for the problem of Socialism.

In the last few years, a new word has been found for that which was covered by the expression ‘planned economy’: State Capitalism, and no doubt in the future many more proposals for the salvaging of Socialism will be brought forward. We shall learn many new names for the same old thing. But the thing, not its names, is what matters, and all schemes of this sort will not alter the nature of Socialism.

• 1On War-Socialism and its consequences, see my Nation, Staat und Wirtschaft, p. 140 et seq.
• 2Denkschrift des Reichswirtschaftsministeriums, reprinted in Wissell, op. cit. p. 106.
• 3Denkschrift des Reichewirtschaftsministeriums, reprinted in Wissell, p. 116.

In the first years after the World War, people in England and on the Continent looked on Guild Socialism as the panacea. It has long since been forgotten. Nevertheless, we must not pass it over in silence, when discussing socialist projects; for it represents the one contribution to modern socialist plans made by the Anglo-Saxons, in economic matters the most advanced of peoples. Guild Socialism is another attempt to surmount the insoluble problem of a socialist direction of industry. It did not need the failure of state socialistic activities to open the eyes of the English people, preserved by the long reign of liberal ideas from that over-valuation of the State which has been prevalent in modern Germany. Socialism in England has never been able to overcome the mistrust of the government’s capacity to regulate all human affairs for the best. The English have always recognized the great problem which other Europeans before 1914 had scarcely grasped.

In Guild Socialism three different things must be distinguished. It establishes the necessity for replacing the capitalist system by a socialist one; this thoroughly eclectic theory need not worry us further. It also provides a way by which Socialism may be realized; this is only important for us inasmuch as it could very easily lead to Syndicalism instead of Socialism. Finally it draws up the programme of a future socialist order of society. It is with this that we are concerned.

The aim of Guild Socialism is the socialization of the means of production. We are therefore justified in calling it socialism. Its unique feature is the particular structure which it gives to the administrative organization of the future socialist state. Production is to be controlled by the workers in individual branches of productions They elect foremen, managers and other business leaders, and they regulate directly and indirectly the conditions of labour and order the methods and aims of production.1  The Guilds as organizations of the producers in the individual branches of industry, face the State as the organization of the consumers. The State has the right to tax the Guilds, and is thus able to regulate their price — and wages-policy.2

Guild Socialism greatly deceives itself if it believes that in this way it could create a socialist order of society which would not endanger the freedom of the individual and would avoid all those evils of centralized Socialism which the English detest as Prussianism.3  Even in a guild socialist society the whole control of production belongs to the State. The State alone sets the aim of production and determines what must be done in order to achieve this aim. Directly or indirectly through its taxation policy, it determines the conditions of labour, moves capital and labour from one branch of industry to another, makes adjustments and acts as intermediary between the guilds themselves and between producers and consumers. These tasks falling to the State are the only important ones and they constitute the essence of economic control.4  What is left to the individual guilds, and, inside them, to the local unions and individual concerns is the execution of work assigned to them by the State. The whole system is an attempt to translate the political constitution of the English State into the sphere of production; its model is the relation in which local governments stands to central government. Guild Socialism expressly describes itself as economic Federalism. But in the political constitution of a liberal state it is not difficult to concede a certain independence to local government. The necessary co-ordination of the parts within the whole is sufficiently ensured by the compulsion enforced on every territorial unit to manage its affairs in accordance with the laws. But in the case of production this is far from sufficient. Society cannot leave it to the workers themselves in individual branches of production to determine the amount and the quality of the labour they perform and how the material means of production thereby involved shall be applied.5  If the workers of a guild work less zealously or use the means of production wastefully, this is a matter which concerns not only them but the whole society. The State entrusted with the direction of production cannot therefore refrain from occupying itself with the internal affairs of the guild. If it is not allowed to exercise direct control by appointing managers and works directors, then in some other way — perhaps by the means which lie at hand in the right of taxation, or the influence it has over the distribution of consumption goods — it must endeavour to reduce the independence of the guilds to a meaningless facade. It is the foremen who are in daily and hourly contact with the individual worker to direct and supervise his work who are hated most by the worker. Social reformers, who take over naively the sentiments of the workers, may believe it possible to replace these organs of control by trustworthy men chosen by the workers themselves. This is not quite as absurd as the belief of the anarchists that everyone would be prepared without compulsion to observe the rules indispensable for communal life; but it is not much better. Social production is a unity in which every part must perform exactly its function in the framework of the whole. It cannot be left to the discretion of the part to determine how it will accommodate itself to the general scheme. If the freely chosen foreman does not display the same zeal and energy in his supervisory work as one not chosen by the workers, the productivity of labour will fall.

Guild Socialism therefore does not abolish any of the difficulties in the way of establishing a socialist order of society. It makes Socialism more acceptable to the English spirit by replacing the word nationalization, which sounds disagreeable in English ears, by the catchword ‘Self-Government in Industry’. But in essence it does not offer anything different from what continental socialists recommend to-day, namely, the proposal to leave the direction of production to committees of the workers and employees engaged in production, and of consumers. We have already seen that this brings us no nearer to solving the problem of Socialism.

Guild Socialism owes much of its popularity to the syndicalistic elements which many of its adherents believe are to be found in it. Guild Socialism as its literary representatives conceive it, is doubtless not syndicalistic. But the way in which it proposes to attain its end might very easily lead to Syndicalism. If, to begin with, national guilds were established in certain important branches of production which would have to work in an otherwise capitalist system, this would mean the syndicalization of individual branches of industry. As everywhere else, so here too, what appears to be the road to Socialism can in fact easily prove to be really the path to Syndicalism.

• 1‘Guildsmen are opposed to private ownership of industry, and strongly in favour of public ownership. Of course, this does not mean that they desire to see industry bureaucratically administered by State departments. They aim at the control of industry by National Guilds including the whole personnel of the industry. But they do not desire the ownership of any industry by the workers employed in it. Their aim is to establish industrial democracy by placing the administration in the hands of the workers, but at the same time to eliminate profit by placing the ownership in the hands of the public. Thus the workers in a Guild will not be working for profit: the prices of their commodities and, indirectly at least, the level of their remuneration will be subject to a considerable measure of public control. The Guild system is one of industrial partnership between the workers and the public, and is thereby sharply distinguished from the proposals described as “Syndicalist” ... The governing idea of National Guilds is that of industrial self-government and democracy. Guildsmen hold that democratic principles are fully as applicable to industry as to politics.’ (Cole, Chaos and Order in Industry, London 1930, p. 58 et seq.)
• 2Cole, Self-Government in Industry, 5th Edition, London 1920, p. 235 et seq.; also Schuster, Zum englischen Gildensozialismus (Jahrbücher für Nationalökonomie und Statistik, Vol. CXV) p. 487 et seq.
• 3Cole, Self-Government in Industry, p. 255.
• 4‘A moment’s consideration will show that it is one thing to lay drains, another to decide where drains are to be laid; it is one thing to make bread, another to decide how much bread is to be made; it is one thing to build houses, another to decide where the houses are to be built. This list of opposites can be lengthened indefinitely, and no amount of democratic fervour will destroy them. Faced with these facts, the Guild Socialist says that there is need for local and central authorities whose business it shall be to watch over that important part of life that lies outside production. A builder may think it advisable to be for ever building, but the same man lives in some locality and has a right to say whether this purely industrial point of view shall have absolutely free play. Everyone, in fact, is not a producer but also a citizen.’-G. D. H. Cole and W. Mellon The Meaning of Industrial Freedom, London 1918, p. 30.
• 5Tawney (The Acquisitive Society, London 1921, p. 122) considers that the advantage of the Guild System for the worker is that it puts an end to ‘the odious and degrading system under which he is thrown aside like unused material whenever his services do not happen to be required’. But just this reveals the gravest defect of the system recommended. If one needs no more building because relatively sufficient buildings exist, yet must build so as to occupy the workers in the building trades who are unwilling to change over to other branches of production that suffer from a comparative scarcity of labour, the position is uneconomic and wasteful. The very fact that Capitalism forces men to change their occupations is its advantage from the standpoint of the General Best, even though it may directly disadvantage the special interests of small groups.

In recent decades few have managed to remain uninfluenced by the success of the socialist criticism of the capitalist social order. Even those who did not want to capitulate to Socialism, have tried in many ways to act according to its criticism of private ownership in the means of production. Thus they have originated systems, ill-thought-out, eclectic in theory and weak in politics, which attempted to reconcile the contradictions. They were soon forgotten. Only one of these systems has spread — the system which calls itself Solidarism. This is at home above all in France; it has been called, not unjustly, the official social philosophy of the Third Republic. Outside of France, the term ‘Solidarism’ is less well known, but the theories which make Solidarism are everywhere the social-political creed of all those religiously or conservatively inclined who have not joined Christian or State Socialism. Solidarism is distinguished neither by the depth of its theory, nor the number of its adherents. That which gives it a certain importance is its influence on many of the best and finest men and women of our times.

Solidarism starts by saying that the interests of all members of society harmonize. Private ownership in the means of production is a social institution the maintenance of which is to the interest of all, not merely of the owners; everyone would be harmed were it replaced by a common ownership endangering the productivity of social labour. So far, Solidarism goes hand in hand with Liberalism. Then, however, their ways separate. For solidarist theory believes that the principle of social solidarity is not realized simply by a social order based on private ownership in the means of production. It denies — without, however, arguing this more closely or bringing to light ideas not put forward before by the socialists, especially the non-marxists — that merely acting for one’s own property-interests within a legal order guaranteeing liberty and property ensures an interaction of the individual economic actions corresponding to the ends of social co-operation. Men in society, by the very nature of social cooperation, within which alone they can exist, are reciprocally interested in the well-being of their fellow men; their interests are ‘solidary,’ and they ought therefore to act with ‘solidarity’. But mere private ownership in the means of production has not achieved solidarity in the society dividing labour. To do so special, provisions must be made. The more etatistically inclined wing of Solidarism wants to bring about ‘solidary’ action by State action: laws shall impose obligations on the possessors in favour of the poorer people and in favour of the public welfare. The more ecclesiastically inclined wing of Solidarism wants to achieve the same thing by appeals to the conscience; not by State laws, but by moral prescriptions: Christian love will make the individual fulfil his social duties.

The representatives of Solidarism have laid down their social-philosophic views in brilliantly written essays, which reveal all the splendour of the French spirit. No one has been better able to paint in beautiful words the mutual dependence of men in society. At the head of them all is Sully Prudhomme. In his famous sonnet he shows the poet on awaking from a bad dream in which he has seen himself, as division of labour has ceased and no one will work for him, seal, abandonné de tout le genre humain. This leads him to the knowledge:

          ‘... qu’au siècle ou nous sommes
Nul ne peut se vanter de se passer des hommes;
Et depuis ce jour-là, je les ai tous aimés,’

They have also known well how to state their case firmly, either by theological1  or juristic arguments.2  But all this must not blind us to the inner weakness of the theory. Solidarist theory is a foggy eclecticism. It demands no special discussion. It interests us here much less than its social ideal, which claims ‘to avoid the faults of the individualist and socialist systems, to maintain that which is right in both’.3

Solidarism proposes to leave the private ownership in the means of production. But it places above the owner an authority — indifferent whether Law and its creator, the State, or conscience and its counsellor, the Church — which is to see that the owner uses his property correctly. The authority shall prevent the individual from exploiting ‘unrestrainedly’ his position in the economic process; certain restrictions are to be imposed on property. Thus State or Church, law or conscience, become the decisive factor in society. Property is put under their norms, it ceases to be the basic and ultimate element in the social order. It continues to exist only as far as Law or Ethics allow, that is to say, ownership is abolished, since the owner, in administering his property, must follow principles other than those imposed on him by his property interests. To say that, under all circumstances, the owner is bound to follow the prescription of Law and Ethics, and that no legal order recognizes ownership except within limits drawn by the norms, is by no means a reply. For if these norms aim only at free ownership and to prevent the owner from being disturbed in his right to keep his property as long as it does not pass to others on the basis of contracts he has made, then these norms contain merely recognition of private ownership in the means of production. Solidarism, however, does not regard these norms as alone sufficient to bring together fruitfully the labour of members of society. Solidarism wants to put other norms above them. These other norms thus become society’s fundamental law. No longer private property but legal and moral prescription of a special kind, are society’s fundamental law. Solidarism replaces ownership by a ‘Higher Law’; in other words, it abolishes it.

Of course, the solidarists do not really want to go as far. They want, they say, only to limit property, but to maintain it in principle. But when one has gone so far as to set up for property limits other than those resulting from its own nature, one has already abolished property. If the owner may do with his property only that which is prescribed to him, what directs the national economic activity is not property but that prescribing power.

Solidarism desires, for instance, to regulate competition; it shall not be allowed to lead to ‘the decay of the middle-class’ or to the ‘oppression of the weak’.4  This merely means that a given condition of social production is to be preserved, even though it would vanish under private property. The owner is told what and how and how much he shall produce and at what conditions and to whom he shall sell. He thus ceases to be owner; he becomes a privileged member of a planned economy, an official drawing a special income.

Who shall decide in every single case, how far Law or Ethics go in limiting the owner’s rights? Only the Law or Ethics itself.

Were Solidarism itself clear about the consequences of its postulates, it would certainly have to be called a variety of Socialism. But it is far from clear. It believes itself fundamentally different from State Socialism,5  and the majority of its supporters would be horrified, were they to recognize what their ideal really was. Therefore its social ideal may still be counted one of the pseudo-socialist systems. But it must be realized that what separates it from Socialism is one single step. Only the mental atmosphere of France, generally more favourable to Liberalism and Capitalism, has prevented the French Solidarists and the Jesuit Pesch, an economist under French influence, from overstepping decisively the boundary between Solidarism and Socialism. Many, however, who still call themselves solidarists, must be counted complete etatists. Charles Gide, for example, is one of these.

• 1Here one must name before all the Jesuit Pesch (Lehrbuch der Nationalökonomie, Vol. I, and Edition, Freiburg 1914, pp. 392-438). In France there is a conflict between catholic and freethinking solidarists — about the relation of the Church to the State and to society, rather than about the real principles of social theory and pohcy — which makes Church circles suspicious of the term ‘solidarism’. See Haussonville, Assistance publique et bienfaisance privée (Revue des Deux Mondes, Vol. CLXII, 1900, pp. 773-808); Bouglé, Le Solidarisme, Paris 1907, p. 8 ff.
• 2Bourgeois, Solidarité, 6th Edition, Paris 1907, p. 115 et seq.; Waha, Die Nationalökonomie in Frankreich, Stuttgart 1910, p. 432 et seq.
• 3Pesch, op. cit., Vol. I, p. 420.
• 4Pesch, op. cit., Vol. I, p. 42a.
• 5Ibid., p. 420.

Precapitalist movements for the reform of property generally culminate in the demand for equality in wealth. All shall be equally rich; no one shall possess more or less than the others. This equality is to be achieved by redividing the land and to be made lasting by prohibiting sale or mortgage of land. Clearly, this is not Socialism, though it is sometimes called agrarian-Socialism.

Socialism does not want to divide the means of production at all, and wants to do more than merely expropriate; it wants to produce on the basis of common ownership of the means of production. All such proposals therefore, which aim only to expropriate the means of production are not to be regarded as Socialism; at best, they can be only proposals for a way to Socialism.

If, for example, they proposed a maximum amount to which one and the same person may own private property, they could be regarded as Socialism only if they intend to make the wealth thus accruing to the State the basis of socialist production. We should then have before us a proposal for socialization. It is not difficult to see that this proposal is not expedient. Whether the amount of the means of production which could thus be socialized is a greater or smaller one will depend on the extent to which private fortunes are still permitted. If this is fixed low, the proposed system is little different from immediate socialization. If it is fixed high, the action against private property will not do much to socialize the means of production. But anyway a whole series of unintended consequences must occur. For just the most energetic and active entrepreneurs will be prematurely excluded from economic activity, whilst those rich men whose fortunes approach the limit will be tempted to extravagant ways of living. The limitation of individual fortunes may be expected to slow down the formation of capital.

Similar considerations apply to proposals, which one hears in various quarters, to abolish the right of inheritance. To abolish inheritance and the right to make donations intended to circumvent the prohibition, would not bring about complete Socialism, though it would, in a generation, transfer to society a considerable part of all means of production. But it would, above all, slow down the formation of new capital, and a part of the existing capital would be consumed.

One school of well-meaning writers and entrepreneurs recommends profit-sharing with wage earners. Profits shall no longer accrue exclusively to the entrepreneur; they shall be divided between the entrepreneurs and the workers. A share in the profits of the undertakings shall supplement the wages of the workers. Engel expects from this no less than ‘a settlement, satisfying both parties, of the raging fight, and thus, too, a solution of the social question.’1  Most protagonists of the profit-sharing system attach no less importance to it.

The proposals to transfer to the worker a part of the entrepreneur’s profits proceed from the idea that, under Capitalism, the entrepreneur deprives the worker of a part of that which he could really claim. The basis for the idea is the obscure concept of an inalienable right to the ‘full’ product of labour, the exploitation theory in its popular, most naive, form, here expressed more or less openly. To its advocates the social question appears as a fight for the entrepreneur’s profit. The socialists want to give this to the workers; the entrepreneurs claim it for themselves. Somebody comes along and recommends that the fight be ended by a compromise: each party shall have part of his claim. Both will thus fare well: the entrepreneurs, because their claim is obviously unjust, the workers because they get, without fighting, a considerable increase of income. This train of thought, which treats the problem of the social organization of labour as a problem of rights, and tries to settle a historical dispute as if it were a quarrel between two tradesmen, by splitting the difference, is so wrong that there is no purpose in going into it more closely. Either private ownership in the means of production is a necessary institution of human society or it is not. If it is not, one can or must abolish it, and there is no reason to stop half-way out of regard for the entrepreneur’s personal interests. If, however, private property is necessary, it needs no other justification for existing, and there is no reason why, by partially abolishing it, its social effectiveness should be weakened.

The friends of profit-sharing think it would spur the worker on to a more zealous fulfilment of his duties than can be expected from a worker not interested in the yield of the undertaking. Here too, they err. Where the efficiency of labour has not been diminished by all kinds of socialist destructionist sabotage, where the worker can be dismissed without difficulty and his wages adjusted to his achievements without regard to collective agreements, no other spur is necessary to make him industrious. There, in such conditions, the worker works fully conscious of the fact that his wages depend on what he does. But where these factors are lacking, the prospect of getting a fraction of the net profit of the undertaking would not induce him to do more than just as much as is formally necessary. Though of a different order of magnitude, it is the same problem we have already considered in examining the inducements in a socialist community to overcome the disutility of labour. Of the product of the extra labour, the burden of which the worker alone has to carry, he receives a fraction not sufficiently large to reward the extra effort.

If the workers’ profit-sharing is carried out individually, so that each worker participates in the profits of just that undertaking he happens to be working for, there are created without any evident reason, differences in income which fulfil no economic function, appear to be utterly unjustified, and which all must feel unjust. ‘It is inadmissible that the turner in one works should earn twenty marks and receive ten marks more as a share of profits, while a turner in a competing works, where business is worse, perhaps worse directed, gets only twenty marks. This means either that a ‘rent’ is created and perhaps that jobs connected with this ‘rent’ are sold or that the worker tells his entrepreneur: ‘I don’t care from what fund you pay the thirty marks; if my colleague receives it from the competition I demand it too.’2  Individual profit-sharing must lead straight to Syndicalism, even if it is a Syndicalism where the entrepreneur still keeps part of the entrepreneur’s profit.

However, another way could be tried. Not the individual workers participate in the profits, but all the citizens; a part of the profits of all undertakings is distributed to all without distinction. This is already realized in taxation. Long before the war, joint stock companies in Austria had to surrender to the State and to other tax-levying authorities from twenty to forty per cent of their net profits; in the first years of the peace this grew from sixty to ninety per cent and more. The ‘mixed’ public enterprise is the attempt to find a form for the community’s participation, which makes the community share the management of the concern, in return for which it has to share in the providing of capital. Here, too, there is no reason why one should be content with half abolishing private property, if society could abolish the institution completely without injuring the productivity of labour. If, however, to abolish private property is disadvantageous, then the half abolition is disadvantageous too. The half-measure may, in fact, be hardly less destructive than the clean sweep. Advocates usually say that the ‘mixed’ undertaking leaves scope for the entrepreneur. However, as we have already shown, state or municipal activity hampers the freedom of the entrepreneur’s decisions. An undertaking forced to collaborate with civil servants is not able to utilize the means of production in such ways as profit making demands.3

• 1Engel, Der Arbeitsvertrag und die Arbeitsgesellschaft (in ‘Arbeiterfreund’, 5 Jahrg., 1867, pp. 129-154). A survey of the German literature on profit sharing is given in the memorandum of the German ‘Statistisches Reichsamt’: Untersuchungen und Vorschläge zur Beteiligung der Arbeiter an dem Etrage wirtschaftlicher Unternehmungen, published as a supplement to the Reichs-Arbeitsblatt of March 3, 1920.
• 2See the arguments of Vogelstein at the Regensburg session of the Verein für Sozialpolitik (Schriften des Vereins für Sozialpolitik, Vol. CLIX, p. 132).
• 3See above, p. 256.

As political tactics Syndicalism presents a particular method of attack by organized labour for the attainment of their political ends. This end may also be the establishment of the true Socialism, that is to say, the socialization of the means of production. But the term Syndicalism is also used in a second sense, in which it means a sociopolitical aim of a special kind. In that sense Syndicalism is to be understood as a movement whose object is to bring about a state of society in which the workers are the owners of the means of production. We are concerned here with Syndicalism only as an aim; with Syndicalism as a movement, as political tactics, we need not deal.

Syndicalism as an aim and Syndicalism as political tactics do not always go hand in hand. Many groups which have adopted the syndicalist ‘direct action’ as the basis of their proceedings are striving for a genuinely socialist community. On the other hand the attempt to realize Syndicalism as an end can be carried on by methods other than those of violence recommended by Sorel.

In the minds of the great bulk of workers who call themselves socialists or communists, Syndicalism presents itself, at least as vividly as Socialism, as the aim of the great revolution. The ‘petty bourgeois’ ideas which Marx thought to overcome are very widespread — even in the ranks of the marxian socialists. The great mass desire not the genuine Socialism, that is, centralized Socialism but Syndicalism. The worker wishes to be the lord of the means of production which are employed in his particular undertaking. The social movement round about us shows more clearly every day that this and nothing else is what the worker desires. In contradistinction to Socialism which is the result of armchair study, syndicalist ideas spring direct from the mind of the ordinary man, who is always hostile to ‘unearned’ income obtained by someone else. Syndicalism like Socialism aims at the abolition of the separation of worker from the means of production, only it proceeds by another method. Not all the workers will become the owners of all the means of production; those in a particular industry or undertaking or the workers engaged in a complete branch of production will obtain the means of production employed in it. The railways to the railway men, the mines to the miners, the factories to the factory hands — this is the slogan.

We must ignore every freak scheme for enacting Syndicalist ideas and take a thoroughly consistent application of the main principle to the whole economic order as the starting point of our examination. This is not difficult. Every measure which takes the ownership of all the means of production from the entrepreneurs, capitalists, and landlords without transferring it to the whole of the citizens of the economic area, is to be regarded as Syndicalism. It makes no difference in this case, whether in such a society more or less of these associations are formed. It is unimportant whether all branches of production are constituted as separate bodies or only single undertakings, just as they happen to have evolved historically, or single factories or even single workshops. In essence the scheme is hardly affected if the lines drawn through the society are more or less, horizontal or vertical. The only decisive point is that the citizen of such a community is the owner of a share of certain means of production and the non-owner of other means of production, and that in some cases, for example, when he is unable to work, he may own no property at all. The question whether the workers’ incomes will, or will not, be noticeably increased, is unimportant here. Most workers have absolutely fantastic ideas about the increase of wealth they could expect under syndicalist arrangements of property. They believe that just the mere distribution of the share which landlords, capitalists and entrepreneurs draw under capitalist industry must considerably increase the income of each of them. Apart from this they expect an important increase in the product of industry, because they, who regard themselves as particularly expert, will themselves conduct the enterprise, and because every worker will be personally interested in the prosperity of the undertaking. The worker will no longer work for a stranger but for himself. The liberal thinks quite differently about all this. He points out that the distribution of rent and profit incomes among the workers would bring them an insignificant increase in incomes. Above all he maintains that enterprises which are no longer directed by the self-interest of entrepreneurs working on their own account but by labour leaders unfitted for the task will yield less, so that the workers will not only earn no more than under a free economy, but considerably less.

If syndicalist reform merely handed over to the workers the ownership of the means of production and left the system of property of the capitalist order otherwise unchanged, the result would be no more than a primitive redistribution of wealth. The redistribution of goods with the object of restoring the equality of property and wealth is at the back of the mind of the ordinary man whenever he thinks of reforming social conditions, and it forms the basis for all popular proposals for socialization. This is not incomprehensible in the case of land workers, to whom the object of all ambition is to acquire a homestead and a piece of land large enough to support him and his family; in the village, redistribution, the popular solution of the social problem, is quite conceivable. In industry, in mining, in communications, in trade and in banking where a physical redistribution of the means of production is quite inconceivable, we get instead a desire for the division of the property rights while preserving the unity of the industry or enterprise. To divide in this simple way would be, at best, a method of abolishing for the moment the inequality in the distribution of income and poverty. But after a short time, some would have squandered their shares, and others would have enriched themselves by acquiring the shares of the less economically efficient. Consequently there would have to be constant redistributions, which would simply serve to reward frivolity and waste — in short every form of uneconomic behaviour. There will be no stimulus to economy if the industrious and thrifty are constantly compelled to hand over the fruits of their industry and thrift to the lazy and extravagant.

Yet even this result — the temporary achievement of equality of income and property — could not be accomplished by syndicalization. For syndicalization is by no means the same for all workers. The value of the means of production in different branches of production is not proportional to the number of workers employed. It is unnecessary to elaborate the fact that there are products which involve more of the productive factor, labour, and less of the productive factor, Nature. Even a division of the means of production at the historical commencement of all human production would have led to inequality; much more so if these means are syndicalized at a highly progressive stage of capital accumulation in which not only natural factors of production but produced means of production are divided. The values of the shares falling to individual workers in a redistribution of this kind would be very different: some would obtain more, others less, and as a result some would draw a larger income from property — unearned income — than others. Syndicalization is in no way a means of achieving equality of incomes. It abolishes the existing inequality of incomes and property and replaces it by another. It may be that this syndicalistic inequality is regarded as more just than that of the capitalistic order — but on this point science can give no judgment.

If syndicalist reform is to mean more than the mere redistribution of productive goods, then it cannot allow the property arrangements of Capitalism to persist in regard to the means of production. It must withdraw productive goods from the market. Individual citizens must not dispose of the shares in the means of production which are allotted to them; for under Syndicalism these are bound up with the person of the owner in a much closer way than is the case in the liberal society. How, in different circumstances, they may be separated from the person can be regulated in various ways.

The naive logic of the advocates of Syndicalism assumes without any further ado a completely stationary condition of society, and pays no attention to the problem, how the system will adapt itself to changes of economic conditions. If we assume that no changes occur in the methods of production, in the relations of supply and demand, in technique, or in population, then everything seems to be quite in order. Each worker has only one child, and departs out of this world at the moment his successor and sole heir becomes capable of work; the son promptly steps into his place. We can perhaps assume that a change of occupation, a transfer from one branch of production to another or from one independent undertaking to another by a voluntary simultaneous exchange of positions and of shares in the means of production will be permitted. But for the rest the syndicalist state of society necessarily assumes a strictly imposed caste system and the complete end of all changes in industry and, therefore, in life. The mere death of a childless citizen disturbs it and opens up problems which are quite insoluble within the logic of the system.

In the syndicalist society the income of a citizen is made up of the yield from his portion of property and of the wages from his labour. If the shares in the property in the means of production can be freely inherited, then in a very short time differences in property holding will arise even if no changes occur among the living. Even if at the beginning of the syndicalist era the separation of the worker from the means of production is overcome, so that every citizen is an entrepreneur as well as a worker in his undertaking, it may so happen that later on citizens who do not belong to a particular undertaking inherit shares in it. This would very quickly drive the syndicalist society to a separation of labour and property, without the advantages of the capitalist order of society.1

Every economic change immediately creates problems on which Syndicalism would inevitably be wrecked. If changes in the direction and extent of demand or in the technique of production cause changes in the organization of the industry, which require the transfer of workers from one concern to another or from one branch of production to another, the question immediately arises what is to be done with the shares of these workers in the means of production. Should the workers and their heirs keep the shares in those industries to which they happened to belong at the actual time of syndicalization and enter the new industries as simple workers earning wages, without being allowed to draw any part of the property income? Or should they lose their share on leaving an industry and in return receive a share per head equal to that possessed by the workers already occupied in the new industry? Either solution would quickly violate the principle of Syndicalism. If, in addition, men were permitted to dispose of their shares, conditions would gradually return to the state prevailing before the reform. But if the worker on his departure from an industry loses his share and on entering another industry acquires a share in that, those workers who stood to lose by the change would, naturally, oppose energetically every change in production. The introduction of a process making for greater productivity of labour would be resisted if it displaced workers or might displace them. On the other hand the workers in an undertaking or branch of industry would oppose any development by the introduction of new workers if it threatened to reduce their income from property. In short, Syndicalism would make every change in production practically impossible. Where it existed there could be no question of economic progress.

As an aim Syndicalism is so absurd, that speaking generally, it has not found any advocates who dared to write openly and clearly in its favour. Those who have dealt with it under the name of copartnership have never thought out its problems. Syndicalism has never been anything else than the ideal of plundering hordes.

• 1It is misleading, therefore, to call Syndicalism ‘workers’ Capitalism’, as I too have done in Nation, Staat und Wirtschaft, p. 164.

Natural ownership of the means of production is divisible. In capitalist society, it generally is divided.1  But the power to dispose which belongs to him who directs production and which alone we call ownership, is indivisible and illimitable. It may belong to several people jointly, but cannot be divided in the sense that the power of disposing itself can be decomposed into separate rights of command. The power to dispose of the use of a commodity in production can only be unitary; that this could in any way be dissolved into elements is unthinkable. Ownership in the natural sense cannot be limited; wherever one speaks of limitation, one means either a curtailment of a too-widely drawn juristic definition or recognition of the fact that ownership in the natural sense belongs concretely to someone other than the person whom the law recognizes as owner.

All attempts to abolish by a compromise the contrast between common property and private ownership in the means of production are therefore mistaken. Ownership is always where the power to dispose resides.2  Therefore State Socialism and planned economies, which want to maintain private property in name and in law, but in fact, because they subordinate the power of disposing to State orders, want to socialize property, are socialist systems in the full sense. Private property exists only where the individual can deal with his private ownership in the means of production in the way he considers most advantageous. That in doing so he serves other members of society, because in the society based on division of labour everyone is the servant of all and all the masters of each, in no way alters the fact that he himself looks for the way in which he can best perform this service.

It is not possible to compromise, either, by putting part of the means of production at the disposal of society and leaving the remainder to individuals. Such systems simply stand unconnected, side by side, and operate fully only within the space they occupy. Such mixture of the social principles of organization must be considered senseless by everyone. No one can believe that the principle which he holds to be right should not be carried through to the end. Nor can anyone assert that one or the other of the systems proves the better only for certain groups of the means of production. Where people seem to be asserting this, they are really asserting that we must demand the one system at least for a group of the means of production or that it should be given at most for a group. Compromise is always only a momentary lull in the fight between the two principles, not the result of a logical thinking-out of the problem. Regarded from the stand-point of each side, half-measures are a temporary halt on the way to complete success.

The best known and most respected of the systems of compromise believes indeed that it can recommend half-measures as a permanent institution. The land-reformers want to socialize the natural factors of production, but for the rest to leave private ownership in the means of production. They hereby proceed from the assumption, regarded as self-evident, that common property in the means of production gives a higher yield than private property. Because they regard land as the most important means of production, they wish to transfer it to society. With the breakdown of the thesis that public ownership could achieve better results than private ownership, the idea of land reform also falls to the ground. Whoever regards land as the most important means of production must certainly advocate the private ownership of land, if he considers private ownership the superior economic form.

• 1See above, p. 40 et seq.
• 2On interventionism see my ‘Kritik des Interventionismus’, ibid., p. 1 et seq.