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2020: The Centenary of the Most Important Breakthrough in the History of Economics

By Mark Hendrickson

January 2020

Mark Hendrickson is an economist who recently retired from the faculty of Grove City College, where he remains a fellow for economic and social policy at the Institute for Faith and Freedom. This essay was written and published in the Epoch Times.

In 1920, Austrian economist Ludwig von Mises published an essay, “Economic Calculation in the Socialist Commonwealth,” which he subsequently expanded into his 1922 600-page masterpiece, “Socialism: An Economic and Sociological Study.” Mises proved, with irrefutable logic, that socialism was inherently unviable. He didn’t merely argue that socialist experiments, such as in the newly formed Soviet Union, would not succeed, but demonstrated that they literally could not succeed in bringing prosperity to the masses.

Mises’ explanation of the impossibility of a socialist system to improve the economic wellbeing of a populace is this: With the state in charge of economic production, production is no longer oriented toward satisfying the most urgent needs and wants of the people. Consequently, state-decreed prices don’t reflect how much value the people attached to various goods. Instead of prices serving as useful traffic signals that allocate scarce resources according to supply and demand, and thereby direct and coordinate production rationally, prices under socialism are arbitrary and economically meaningless.

With prices totally divorced from value, it’s impossible for anyone, including government officials, to calculate profit and loss—i.e., to determine whether the existing wealth of society is being increased or diminished by current production processes. Consequently, socialist economic planners inevitably fly blind. Without intending to, they command the overproduction of goods that people don’t want, while failing to produce enough of what they do want.

The contrast with free markets is stark. In free markets, firms that excel in creating value for consumers earn profits (representing new wealth that has come into being) and are able to expand production. Conversely, firms that don’t serve consumers well, but consume scarce resources in uneconomic production, shut down. Under socialism, with no way to distinguish profitable, wealth-creating production from unprofitable, wealth destroying production, the government simply props up all firms indiscriminately. In doing so, the socialist leaders fulfill their promise to provide everyone with a job, but at a horrible cost: Without a mechanism—prices that communicate value—by which to calculate profit and loss, the socialist state inevitably supports and prolongs inefficient and uneconomic production.

That destroys wealth and inevitably makes the socialist society poorer.

It boggles the mind to contemplate how many human beings—literally billions of them—could have been spared the deprivations and depredations of socialist economic planning if only Mises’ explanation had been heeded. Now, a century later, with the historical evidence of socialism’s miserable failures in the USSR, Maoist China, Cuba, North Korea, Venezuela, et al. having grimly played out in accord with Mises’s explanation of economic law, it’s astonishing that any intelligent adult would favor socialism over private property and free markets.

Who is at fault for this tragic blindness? One can’t blame the man on the street for ignorance about the problem of economic calculation; Mises’s writings on socialism are pretty heavy going. But there’s no excuse for the economics profession remaining largely silent on this matter. It’s disheartening to see most economists veering off into all sorts of esoteric academic theories—many of them depressingly trivial—when they could sound an alarm to protect people from the economic harm that socialism inevitably inflicts.

The failure of today’s economists to alert people to a profound economic truth—the fatally flawed ideology of socialism— is a case of professional misfeasance, if not malpractice.

The best thing the economics profession could do in 2020 would be to make amends for past negligence and do a better job of making sure that more people understand the great economic breakthrough of 1920.

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