I. Socialism and Central Planning

When government ownership or control extends to the entire productive system, then the economic system is called socialism. Socialism, in short, is the violent abolition of the market, the compulsory monopolization of the entire productive sphere by the State. There are two and only two ways that any economy can be organized. One is by freedom and voluntary choice—the way of the market. The other is by force and dictation—the way of the State. To those ignorant of economics, it may seem that the way of the market is only anarchic confusion and chaos, while the way of the State constitutes genuine organization and “central planning.” On the contrary, we have seen in this book what an amazing and flexible mechanism the market is for satisfying the wants of all individuals. State operation or intervention is, on the other hand, far less efficient and creates many disruptive and cumulative problems of its own. Moreover, a socialist State, deprived of the real market and its determination of prices for producers’ goods, cannot calculate and can therefore run a productive system only in chaotic fashion. The economics of socialism—a whole branch of economics of its own—can only be touched upon here; suffice it to say that Mises’ demonstration of the impossibility of economic calculation under socialism has never been successfully refuted.70

Here we might mention just a few points on the economics of socialism. One, since ownership is, de facto, the control of a resource, a Nazi, Fascist, or other “centrally planned” system is as much “socialism” as a Communist regime that officially nationalizes property.71 Secondly, the extent of socialism in the present-day world is at the same time underestimated in countries such as the United States and overestimated in Soviet Russia. It is underestimated because the expansion of government lending to private enterprise in the United States has been generally neglected, and we have seen that the lender, regardless of his legal status, is also an entrepreneur and part owner. The extent of socialism is overestimated because most writers ignore the fact that Russia, socialist as she is, cannot have full socialism as long as she can still refer to the relatively free markets existing in other parts of the world. In short, a single socialist country or bloc of countries, while inevitably experiencing enormous difficulties and wastes in planning, can still buy and sell and refer to the world market and can therefore at least vaguely approximate some sort of rational pricing of producers’ goods by extrapolating from that market.72 The well-known wastes and errors of this partial socialist planning are negligible compared to what would be experienced under the total calculational chaos of a world socialist state.

Another neglected factor diminishing the extent of planning in socialist countries is “black market” activities, particularly in commodities (candy, cigarettes, drugs, stockings, etc.) that are easy to conceal. Even in bulkier commodities, falsification of records and extensive graft may bring some sort of limited market—a market violating all the socialist plans—into existence.73

Moreover, it should be noted that a centrally “planned” economy is a centrally prohibited economy. The concept of “social engineering” is a deceptive metaphor, since in the social realm, it is largely people who are being planned, rather than the inanimate machinery of engineering blueprints. And since every individual is by nature, if not always by law, a self-owner and self-starter—i.e., a self-energizer, this means that central orders, backed up, as they must be under socialism, by force and violence, effectively prohibit all the individuals from doing what they want most or what they believe themselves to be best fitted to do. If the Central Planning Board, in short, orders X and Y to Pinsk to work as truck drivers, this means that X and Y are effectively and coercively prohibited from doing what they would have done voluntarily: perhaps X would have gone to Leningrad to be a longshoreman, and perhaps Y would have stayed around to tinker in his workshop and invent a new and highly useful device.

The latter point brings us to another grave defect of central planning: inventions, innovations, technological developments, by their very nature, by definition, cannot be predicted in advance and therefore cannot be centrally and bureaucratically planned. Not only does no one know what will be invented when; no one knows who will do the inventing. Clearly, a centrally prohibited economy, irrational and inefficient enough for given ends and given means and techniques at any point of time, is all the more incompetent if a flow of inventions and new development are desired in society. Bureaucracy, incompetent enough to plan a stationary system, is vastly more incompetent at planning a progressive one.74

NEW PARAGRAPH

Virtually the central theme of Hayek’s Constitution of Liberty is the importance of freedom for innovations and progress, in the widest sense.

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• 70See the literature referred to in chapter 10, above, on the economics of socialism. Also John Jewkes, Ordeal by Planning (New York: Macmillan & Co., 1948). For application to Soviet practice, see Boris Brutzkus, Economic Planning in Soviet Russia (London: Routledge, 1935) and such recent material as G.F. Ray, “Industrial Planning in Hungary,” Scottish Journal of Political Economy, June, 1960; E. Stuart Kirby, “Economic Planning and Policy in Communist China,” International Affairs, April, 1958; P.J.D. Wiles, “Changing Economic Thought in Poland,” Oxford Economic Papers, June, 1957; Alec Nove, “The Politics of Economic Rationality,” Social Research, Summer, 1958; and especially, Nove, “The Problem of ‘Success Indicators’ in Soviet Industry,” Economica, February, 1958. See below on socialist planning in connection with growth and underdevelopment.
• 71A chief difference is that a formal Communist-style expropriation makes it far more difficult to desocialize later.
• 72The first one to point this out was Ludwig von Mises, in his Human Action, pp. 698–99. It is particularly interesting to find an empirical confirmation in Wiles, dealing with Communist planning:
  What actually happens is that “world prices,” i.e., capitalist world prices, are used in all intra-[Soviet] bloc trade. 
  They are translated into rubles ... and entered into bilateral clearing accounts. To the question, “What would you do if there were no capitalist world?” came only the answer “We’ll cross that bridge when we come to it.” In the case of electricity the bridge is already under their feet; there has been great difficulty in pricing it since there is no world market. (Wiles, “Changing Economic Thought in Poland,” pp. 202–03) On the difficulties encountered by the Soviet bloc in using world market prices, see especially Horst Mendershausen, “The Terms of Soviet-Satellite Trade: A Broadened Analysis,” Review of Economics and Statistics, May, 1960, pp. 152–63.
• 73For an interesting account of the recent growth of organized private enterprises in Soviet Russia, illegal but protected by local graft, see Edward Crankshaw, “Breaking the Law in a Police State: Regimentation Can’t Curb Russians’ Anarchic Spirit,” New York Herald-Tribune, August 17, 1960.
• 74Recent researches have shown the fallacy of the common view that modern inventions and applied technological developments can take place only in very large-scale, even centrally planned, laboratories. See particularly the brilliant work of John Jewkes, David Sawers, and Richard Stillerman, The Sources of Invention (London: Macmillan & Co., 1958). Also see John R. Baker, Science and the Planned State (New York: Macmillan & Co., 1945). For a useful summary of recent literature in this field, see Richard R. Nelson, “The Economics of Invention: A Survey of the Literature,” The Journal of Business, April, 1959, pp. 101–27. Soviet science has, of course, been able to copy the technical achievements of the West; yet, on the inefficiencies of Soviet science, see Baker, Science and the Planned State, and Baker, Science and the Sputniks (London: Society for Freedom in Science, December, 1958). Of interest on the inherent inefficiencies of governmental military research is the Hoover Commission Task Force Report: Subcommittee of the Commission on Organization of the Executive Branch of Government, Research Activities in the Department of Defense and Defense-Related Agencies (Washington, D.C.: April, 1955). On atomic energy and government, see, in addition to Jewkes, Sawers, and Stillerman, Alfred Bornemann, “Atomic Energy and Enterprise Economics,” Land Economics, August, 1954.
• 75Two of the arguments for government activity most favored by economists are the “collective goods” and “external benefit” arguments. For a critique, see Appendix B below.