 So what I want to talk about today, basically, is what I think is the most important article on economics ever written in the 20th century. And that is Ludwig von Mises's Economic Calculation in the Socialist Commonwealth. This is available downstairs in the bookstore. It was published initially in German in 1920. In this particular edition, there's a very notable epilogue that I suggest that you also read. It's by a guy with an Italian-sounding name, but it does draw out some of the implications of the article, and I think it's important. So I'm not exaggerating when I say that economic calculation in Socialist Commonwealth is one of the most important articles of the 20th century. And the reason is that Ludwig von Mises in this article did three things that, from the point of view of economic theory, are extremely important. First off, he completely destroyed the intellectual foundations of the case for socialism. We'll go through that. Secondly, it really also brought about a revolutionary breakthrough in our understanding of the importance of the price system in rationally allocating resources. So not only was it sort of a negative contribution to destroying socialism, but it was the beginning of an important breakthrough on how important monetary calculation, calculation of profits and losses and money prices, how important that is to economic efficiency and to the market economy in general. And third, what he did was he presented this theory of monetary calculation that sort of completed the revolution started by Karl Manger. The Austrian economists tended to talk about vast objective values. They had a price theory, but none of them really went to the point where they brought the entrepreneur in and show that the entrepreneur is sort of the pivot of the market economy. And what allows him or her to be such a thing is the fact that they can use prices to figure out the cost of production of any conceivable process of production. Anything you can think of producing right now, if you have the technical knowledge about how to produce it, the so-called production function that we talked about, there are prices out there right now of all the factors of production. Every single type of capital good, every single type and skill of labor, you could add up the cost of production of that production process and then compare it to anticipated future prices. That's where, of course, the essence of entrepreneurship is to figure out in light of what present prices are for, you know, for tablet computers, for oranges, for automobiles. You know what the present prices are, but the key skill of the entrepreneur is to figure out what they will be when his product comes onto the market. A month from now, two years from now, the case of automobiles, the planning process from the beginning to end is something like five years. It used to be seven years for American automobile companies and three years for Japanese automobile companies, but you are always producing for a future market. So not only do you have to know the present prices of automobiles, at least as a starting point, but you then have to forecast how supply and demand, how available resources and consumer values will change and bring about a change in prices in the future. So Mises sort of also developed that theory, at least the germs, the beginnings of that theory in this paper. Now before we get into Mises, let's talk a little bit about the debate on socialism before Mises because it's very, very interesting. It's an interesting story in intellectual history. Initially, the first socialists writing in the 1830s, 1840s, 1850s, and those who have studied history of economic thought may know them, they're called utopian socialists. The most famous of whom were Charles Fourier, a French person, a Frenchman, Henri Saint-Simon, also French, and then a Scott who came to the United States, Robert Owen. And they said a lot of embarrassing things, a lot of stupid things, a lot of things that could never exist in the real world. They were unified in their hatred of private property and competition, but they all had their own little scheme. Let me give you an example before I get into Marx and how Marx reacted to this. Marx and Engels were the founders of what they call scientific socialism. They were the ones who hated the utopian socialists. They hated them more than regular free market economists because they were such an embarrassment to the socialist movement. So one of these individuals, a very strange dude and a strange looking dude named Charles Fourier, they all had these crazy proposals in which they had exact quantities of how many people should live and what community and what everybody should do. So he came up with this idea of a fallen stare, which was based on the Roman phalanx, which of course is a military organization. It's a marching formation for Roman troops. And what he wanted to do there, what he said there was that there would be garden cities, they'd be modeled after a grand hotel. They would contain 15 to 1600 residents, no more or no less. Where did they come up with this stuff? How did they know this stuff was right? I mean, Marx was right. They were crazy. Each resident would be able to purchase accommodations, so he wasn't totally against private property. He was against the conflict of interest and competition. So you could have your private quarters according to your individual taste and income and you'd all be stockholders in the city. But there would be collective production, the dirty work would be shared. Everyone would have to take their meals in the common area. He even drew pictures of what it would look like. Everyone would look like this. They all had this thing at bugaboo about symmetry. It's perfectly symmetrical. He even had a model of it which looked like this, the fallen stare. So you can see on both sides there's a courtyard and everything. It was supposed to look like that. Well, I don't think he ever built one, but some of his American followers, including the newspaper man Horace Greeley, built one. It's about 12 miles from my house. This is what they actually turned out to look like. It's kind of scary. It's as scary as Fourier's picture. A particular dreary day, it looks like that. How did Marx react to all this? Oh, one other thing. Fourier also had a theory. His theory said that, well, there's eight stages of advancement of human society. He said that France was in the fifth stage of advancement. The first stage was confusion, then savagery, then patriarchism, then barbarity. France was the stage above that. There'll be two more stages before you reach the final stage of utter bliss, which would last 8,000 years. Notice the exact... This is called Gnosticism, where no one else knows where they get this knowledge from, from within. It's somehow given to them by the gods or whomever. He also said, oh, after 8,000 years history would reverse itself and you go back through the stages. But he also said, he talked about all the earthly changes that would occur when we reached this stage of harmony. There'll be six new moons would replace the one in existence. There are still some followers today of Fourier. A halo showering gentle dew would circle the North Pole. The seas would turn to either lemonade or Kool-Aid. And all violent and repulsive beasts would be replaced by their opposites. So there would be anti-lions, anti-whales, anti-bears, anti-bugs, and anti-rats. And they would want to serve mankind. So he actually says anti-lions would offer themselves to be ridden by human beings. Anti-chickens would actually somehow roast themselves and fly right into your mouth. He has this stuff in there. The human lifespan would extend to 144 years. And this, of course, is what all guys who come up with these crazy schemes are all about. Much of what they're about. Same thing that rock bands are about. Five-sixths of the time of your 144 years would be devoted to the unrestrained pursuit of sexual love. So he's a frustrated guy, right? So he has to come up with this huge scheme that he imposes on everyone. All right, so that's Fourier. So total embarrassment. Marx is completely embarrassed. But what Marx did was one of the most brilliant ploys in intellectual history. Marx said anybody who claims to know anything about what the future of socialism would look like is completely unscientific. So all these guys are unscientific. Marx said that socialism will come about through stages of history which are driven by the laws of history which are no less permanent and universal and irreversible than the laws of the physical world. So he said we'd start in a golden era, which he called the Gens, where everybody lived together in peace. And then the second stage was a stage of classical slavery, Greece and Rome, which then was transmuted by the forces of production, by the changing sort of technology changed independently of human beings. So when technology changed it required a different social structure. So the social structure to Marx just was determined by the underlying physical forces of technology. So then the feudal system would come next, then commercial capitalism of the Middle Ages would replace the feudal system and then full blown industrial capitalism, which he hated with a purple passion, would be the next stage. But this would be better than the feudal system. Each stage is at a higher level. The one cool thing he said was that industrial capitalism saved the masses from a lifetime of rural idiocy. So he hated the agrarian form. But then, of course, capitalism would give way to socialism, which would eventually end in... Socialism would require some kind of a government of the proletariat until everybody was ready to have full communism, which he said would be an administration of things replacing the administration by men, which is actually the motto of the totally voluntary society, if you know what I'm talking about. As an anarcho-capitalist we would say, the administration of things, that is simply firms administering the fence against foreign aggression and domestic predators, would grow up and we would have businesses running everything. That's not what Marx meant though. But it's not a bad phrase that you get rid of the rule of men and just have the administration of things. Everybody would simply, in society I would look forward to, everybody would more or less administer his own property and in that way we would have defense services provided and road services and so on. But Marx meant something different. Pretty much everybody would just play and work when they felt like it in this final stage of communism. But you couldn't say more than that. Marx's huge three-volume work called Das Kapital was called Capital. It was all about capitalism. He never really wrote a word about socialism except to say a few words about the laws of history. So basically what did he do? He shut everybody up. He basically said if you tried to talk about what socialism would look like then you're unscientific and you're an idiot and you shouldn't be listened to. So the utopian socialist pretty much disappeared. Nobody wanted to appear to be unscientific. The other thing that occurred was the classical economists smashed the utopian socialists. Basically they said who would take out the garbage? Who would go down into the mines and do the unhealthy, very risky work? If everyone got paid the same as many of these socialists looked forward to then no one would do the dirty jobs. So we would have shortages of many things. So Marx saw how the classical economists answered the utopian socialists. So he wanted to shut everybody up and stop them talking about socialism. The utopian socialists like Fourier said things like well there'll be a new socialist man. We've lived 144 years and so on and so forth and everybody would want to do things for the collective. So the argument was about incentives. The classical economists said we wouldn't have incentives under socialism to do all the things that needed to be done. And the utopian socialists replied well that's not true because we would have a different kind of socialist man that would be willing to do the dirty work or share it or whatever. So that was the state of the debate. It was pretty unsophisticated. Marx saw that. He tried to stop the debate altogether and that's where Mises comes in. So Mises abstracted even from the incentive problem. Mises said look assume that everybody wants to be good socialists or whatever it is. The real problem is that there would be no way to know what to produce. It's a problem of prices. So his thesis which comes through in the article that I'm talking about is that the rational allocation of resources is impossible. I don't know how to use that word in German. I don't know how to pronounce it. Un moglich or something. Without ... if you're watching please text message me. So it's impossible without economic calculation using actual market prices. So here's Mises' argument. First of all socialism abolishes private property and capital goods and natural resources. Socialists including Marx want a collective ownership of all the material factors of production. Not necessarily labor. They didn't want to enslave or they said they did not want to enslave the laborer. He would be willing to work for money but everything else would be collectively owned. Now what's the second step? If everything is owned by one group or individual or controlled by one group of individual the state is now the sole owner of all the material factors of production. They can no longer be exchanged. If one group owns all the steel mills, all the mines, all the types of machinery, all of the farms and farm equipment. If you own all of those things, if one group owns it, there can't be any exchange. And of course the next step, I mean it's an exceedingly simple argument but devastating. The next step is without exchange there can be no prices. And therefore without prices the state can't calculate the cost of production of the goods it produces. You never know your cost of production. Without cost of production you can never figure out profit or loss, what goods are more valuable, what resources are more valuable and what uses. And therefore strictly speaking a socialist economy is impossible. In the sense that there is no way to rationally allocate resources. There is no way to know what a resource should be producing and how much of any particular good should be produced, what technology to use, this is why the Soviet Union and its satellites economically collapsed. So what Mises said about the essence of socialism, and these are his words, very interesting. He said the essential mark of socialism is that one will alone acts. If there is one will, there are not many different people evaluating goods and exchanging goods. There can be no exchange. It is immaterial whose will it is, it could be the nicest guy in the world, it could be a group of very, very smart scientists and engineers, it doesn't matter. The main thing is that the employment of all factors of production is directed by one agency only. One will alone chooses, decides, directs, acts, gives orders. The distinctive mark of socialism is the oneness and indivisibility of the will directing all production activities within the whole social system. It's not a problem of knowledge. Very smart scientists and engineers writing you out all the production functions you need to produce all kinds of different goods. You would never know what goods to produce and how to produce them in the most economical fashion. I'm going to give you an example of that. So with that, Mises destroyed the argument for socialism. The argument that socialism could be in any way efficient. And Mises pointed out these are the preconditions of economic calculation. You have to have private property in all stages of goods, not just consumer goods. Socialism would allow your ownership of your own clothing, maybe ownership of your own means of transportation, a small garden outside your house, but everything else would be collectively owned. Secondly, not only do you need ownership, but you need to free and put exchange, all kinds of goods and services. Not just vegetables, not just clothing, but steel mills, steel software programs, and so on and so forth. Every single factor of production, every single input has to be exchanged and therefore have a price. And finally he says there has to be a sound money, a money whose value is independent of political influence. So in a system where you don't have a sound money, and that's a system that we have today in almost every country in the world, you're taking steps towards socialism because you're causing calculational chaos. The money doesn't truly unstable money or money that's inflationary doesn't give you a true accounting of costs and prices. So Mises concluded very simply, socialism destroys all three of these preconditions and therefore undermine socialist calculation and abolishes rational allocation of resources. Okay, now that's a lot of abstract talk. Let me give you an example, a couple of examples. Let's say you want to produce an automobile. The planner wants to produce an automobile. It's a production function for an automobile and he has all the information. Now there are many different ways to produce automobiles. You can use a lot of labor as was the case prior to the mass production of automobiles in the United States before 1914. You'd have six or seven craftsmen in a small blacksmith shop, you'd have a very small area, and they would produce all the parts themselves and then assemble the automobile and then sell it. So you had a lot of labor and few machines. After Henry Ford introduced the model of the meatpacking industry which had a moving production line, when he introduced the assembly line in 1914 all of that changed. You had a lot of equipment, you had a huge factory, a lot of machinery compared to labor. So there are many different ways in between to produce automobiles. There's a Kia plant that's 20 miles from here, there's like three cars in the parking lot, even though it's, you know, a plant goes off for a mile or something. So it'll run by robots. Some guys come in, push a few buttons on the computer in the beginning and the cars assemble. So you can use a lot of capital and very little labor. What's the best way to, how do you know what technology to use? How do you know how many cars to produce? So let's say that the socialist planner knows he needs to produce an automobile, he needs a certain amount of steel, so P tons of steel, add that to Q hours of labor and just forget the handwritten stuff for a moment. R hours of unskilled labor, I'm sorry, Q hours of machine time, S hours of engineering labor, T square feet of factory space, U kilowatt hours of electricity, V hours of managerial labor and you get one automobile. It doesn't matter what the numbers are, they're correct. Socialism never had a problem with technology. I mean, they sent a man into space before the United States did. They didn't have a problem with technology. They had a problem with knowing, with rarely allocating resources. So under socialism, should you produce that automobile? Or do those factors combined have higher values to consumers or to the planner himself in producing, some of them in producing bicycles, others in producing a house? In other words, should we produce the automobile or should we produce more bicycles or more motorcycles or other things that people want? Let's say workout gyms, health clubs. Should we produce this factory, let's say, that produces automobiles or should we put up 500 health clubs which we could have used the resources for? They don't know because how can you add up the cost of production? Even if there was a price for cars, even if laborers were paid, which they were in the Soviet Union, and the price for cars were 100,000 rubles, what could you compare that to? Can you add up tons of steel, hours of machine time, square feet of space, kilowatt hours? There's no common denominator. There's no way of knowing your cost of production. If you don't know your cost of production, everything is chaotic. It's calculation chaos. In the U.S., you have an easy way of doing it. If the automobile sells for $21,000, remember, everything in the U.S. is exchanged. I mean, in a market economy, let's say, this isn't quite a full-market economy, or nowhere near a full-market economy, everything would have a price. And therefore, you know the prices which then go into forming your costs of production. You know the prices of all types of steel, of regular unskilled labor, of machine time. You can rent machines, you can buy machines, you know what the factory space rent is, and so on. So let's assume you added up to $18,000. You sell your automobile for $21,000. You've improved consumer welfare. You've taken resources that were worth $18,000 in producing other things because where does the prices for those things come from? You're bidding against other entrepreneurs in other industries, all of whom have know what the value of those things are in their industries. Okay? So at every moment in time, every moment right now, every minute, there is an ongoing price for steel. It's changing. There's an ongoing price-run-skilled labor, and so on and so forth. Any thinkable process of production can be calculated in terms of costs and compared to what you think the price is going to be in the future. There's a story I often tell when I talk about entrepreneurship about a woman, and I should have brought it in. Back in the early 1990s, she was an IBM worker. She was downsized. She had $40,000 for her pension. And she noticed that, actually it was before she left IBM, she noticed that when she was going to work in the morning, she had very long hair. She wanted to braid it in a very simple way. And she figured out that just taking a plastic hoop and a knitting needle, she could somehow, and she called it a curly queue I think, she could somehow very quickly braid her hair. So she started to produce these things. And initially she was selling them outside. She got a small television commercial made in a local area. And so she was selling them for something like $2, and she was, of course, a producer, $0.80. So she was making money. She had our cleaning lady helping her put them into a pack them into envelopes and send them out at night and so on. Then eventually she got onto QVC. And she sold $500,000 in a few minutes. They sold out. Well, she became a multi-millionaire. Because at the end she was selling them for $15, and she had her costs down to $0.10. Now what does that tell you? That these, this plastic and these knitting needles were being misallocated. They were producing things that had a lower value to consumers than this special mechanism or device for braiding her hair. And she became a millionaire. But anyway, you would never know that under socialism. How would anyone know that? How would anyone know that this is going to sell? Okay. I have an example of a friend of mine who I grew up with and she eventually married a cowboy, a real cowboy from Montana who had a ranch. She moved out there. And so we kept in touch. And so one day I was talking to her probably back in the 90s. She said, oh, we're getting a new house. I said, oh, you're moving? She said, no, no, no. We're getting a new house. I said, what are you talking about? She says, well, we're having it built in Nebraska and shipped on railcars and trucks to our place here on the ranch. And it's going to be put together here. So think about that because labor is extremely scarce in Nebraska and its highest value uses are working on ranches and farms and in tourism businesses and so on. With scarce labor, unlike in the Northeast where I come from, it doesn't pay to bring all the labor to one spot. We're in a densely populated state at May and build a house there. It pays to actually have it built in a more capital intensive way in a factory that's automated. And that's how our house was built in sections and then put together. Could a socialist planner figure that out? Of course not. But the entrepreneur that figured out how to build these modular houses in Nebraska and ship them to Montana and then have them assemble there with some labor, much less than you would need to build it from the ground up, that person knew about costs. And he had this crazy idea. But notice that, you know what? This crazy idea, I can actually get more money from selling the product than I have to pay out. That's all entrepreneurship is about. Does that mean that entrepreneurs don't make mistakes under capitalism? Of course they do. So for example, the cost of production of an SUV is $32,000. And when the price of gas started going up a few years ago, you had prices were $28,000. Well then that's a loss. That doesn't mean that he can't calculate. It just means that he didn't foresee the future correctly. He didn't foresee the future prices correctly. So it's not correct to say, well, you know, entrepreneurs make mistakes too and they make really big mistakes. GM lost $10 billion in 2007 and, I don't know, $13 billion in 2008. But that's no argument against capitalism. That's bad entrepreneurship. They have the means of calculating. The Soviet planners don't have the means of calculating or didn't have the means of calculating. So this is the problem. Now was Mises saying it was impossible to have any kind of an economy? Mises said no. In fact, you could have a very small household economy that runs on socialist lines. If you just have a few, go back to Robinson Crusoe or maybe Robinson Crusoe and a small family on an island. If you just have a few factors of production, his own labor and some of the natural resources on the island, it's easy to figure out the values of those things because you can only produce a few goods. So let's say that he can allocate his labor in three-hour units. And so let's say he works 12 hours a day. So his most important one is two fish, the second most important one is three pounds of wild mushrooms which he cooked with the fish, eight coconuts and one sack of berries. So he's doing that. Those 12 hours are allocated to his most important wants. He knows the opportunity cost. Let's say he finds out that there's a rabbit on the island, the rabbit's on the island running around and he likes rabbits too. I don't, I think it's disgusting and I wouldn't think of killing a little bunny rabbit. Let's assume he has no such qualms. Think about it. He can figure out his cost of production. Let's say it takes three hours to catch a rabbit. Well, in fact, if the rabbit is worth more than one sack of berries, then its value is higher than the cost. The cost of three hours of labor is the marginal utility of the product, of the least value product that it can produce. That's the marginal utility of labor. It's equal to the value attached to the least. So on the other hand, if rabbit stew is lower than the berries, he says, well, it costs me too much. I have to give up berries which I value more than rabbits stew. But on the other hand, he can know directly, if he likes the rabbit second or third, he would certainly give up the sack of berries because now the benefit is higher than the cost. So in your daily lives, when you're deciding whether to make tuna fish sandwich or a ham sandwich or maybe not to eat and just go to your health club for that hour, you can rank those things directly. You don't need prices for that. So what Mises basically said is, yeah, we're not saying that people can allocate goods in very simple production processes. But once you have an industrial economy with millions of different types of factors of production, no human mind can figure out all the values of those factors of production given that they can be combined in almost an infinite number of combinations to produce an infinite number of different kinds of goods in quality and quantities. That's the problem you would face. If you right now, the commons are of the United States all prices were wiped out, you owned everything about the whole world or let's say throughout the US and were cut off from the rest of the world, what would you produce? Well, you could say I would give orders to produce the same things and do it in the same way that we're doing now. But as we'll see, Mises pointed out that that's, of course, an economy without change. People's technology changes, people's taste change and so on. That's not a solution. So let me just talk a little bit about some of the problems that the socialists... Oh, actually, before I do that, before I give you some examples, what I'm talking about is called the social appraisement process. Let's just look down here a little bit. Okay, so it means that everybody's minds are involved in setting the prices of the factors of production. The consumers, the entrepreneurs, and the factor owners. So here's what happens in general. So the entrepreneur is right at the center of the whole process. Everyone see that? The entrepreneur has to do two things. First, he has to anticipate what the future prices of goods are going to be. Some goods aren't even in existence. The iPad wasn't in existence before 2010. So in some cases you have to figure out prices for goods that are not even in existence. Or the first cell phone. Or the first electronic calculator that Texas Instruments, I believe, started out with in 1970 or 71. You have to figure out what prices people will pay. In some cases you can depend on present prices, at least as a starting point. But in other cases, a wholly new good, you're going to have to do an act of entrepreneurial imagination to figure out what the price is going to be. And not tomorrow, two years or three years down the road. It took a while to plan to bring the iPad out. Based on that, you and all the other entrepreneurs in the U.S. have to take a second step. Based on the anticipated future consumer prices, you have to begin to bid for labor and land resources and capital goods. In doing that, everybody bidding against one another, you then put a value on the means of production. A value in terms of cardinal numbers that can be added up, subtracted, multiplied. That is money prices. And those money prices reflect what? They reflect the subjective values that consumers have and that are determined the prices of consumer goods. So the market economy is marvelous or miraculous in that it takes qualitative information. It takes subjective information and transforms it into objective prices which can be added, subtracted, used to compare. So when you destroy that mechanism, everything becomes chaos. And that's what happens to the Soviet Union. So let me just mention a few stories about the Soviet Union. Some of the incidents that occurred. Okay, so there's a great famine in the USSR which you may have heard about, which occurred in 1980s. But the Soviet Union has a lot of arable land. It's a very productive, technically productive agricultural sector. And yet people were starving in the midst of all this. And yet there was grain in the fields. There were rusty tractors though that were sitting in the fields because they didn't have enough diesel fuel and because there weren't sufficient workers to run them because they were there producing more tractors that were going to rust in the fields. So the resources were misallocated. People were starving in the midst of plenty. No one was harvesting the wheat. Another example is that when houses were built in the Soviet Union, many of them, people noticed, didn't have roofs on them. They didn't have any roofs. And the reason was that there weren't enough small building nails which are used in roofing. The reason why there wasn't was because the Soviet Union had a particular system of trying to allocate resources, whole gross output planning. And the agency was a ghost plan. And basically what that was was they would tell each industry. There would be a commissar of an industry and then under that industry there would be a number of different firms with different managers. And they tell them we need so many tons of building nails. And they would give them an output plan that they had to meet, a target. If you didn't meet it, you went to Siberia. If you did meet it, you got a big bonus. So of course the whole system became what? A system of mutual lying. Because you don't want to go to Siberia and you didn't want the bonus. So you always underestimated as a manager how much you could produce. Now the people at ghost plan knew you were lying. So they would always give you a bigger target. Because they're figuring you're lying and so the next year you'd actually try to make it lower. So it would be a mutual lying back and forth. But even given that, even if they weren't lying, the easiest way to produce building nails, if they're specified in terms of tons, is to simply what? Produce huge nails. So one of the famous cartoons during the Soviet era, and I can't find it online, but I remember seeing it. So you have, this is the commissar, he's got that big fur hat on. This is the manager of the plant. This is a huge screw that's on this huge train. And he says, well comrade, I've met my target for this year. So you had all these huge nails which weren't good for roofing, but you needed roofing nails. Now under a capitalist system, you had a market, of course, if there was a scarcity of the smaller nails, the price would go up and it'd be big profits and you'd shift from producing larger to smaller. There was another incident in which Khrushchev, the Soviet prime minister in the 50s and into the early 60s, he made, there used to be Soviet watchers. They would watch what was said at any of these meetings. And at one meeting he referred to the fact that many comrades were being killed by chandeliers falling from the ceilings of their dashes, their luxury vacation homes. Well the thing was the chandelier industry was given a weight target to me. So the chandeliers were really heavy. They had lead in them and stuff. They're falling from it, pulling the ceilings down and crushing people and stuff. Khrushchev didn't like that. Women's clothing, there was a thriving black market and women's clothing, tight jeans and so on. Because everything looked like a huge burlap sack. Because again it was yards of output that they were trying to, you know, that they would judge the industry by yards of clothing produced. Now they could change that, but it's still difficult to give a quality target. Very difficult and to tell them how much of each to do so that you got all of these sorts of problems under socialism. Now let me just mention this objection to Mises. Socialists said, look, it's ridiculous. So in the 40s and 50s, they said, look, the Soviet Union has been in existence since 1917. You know, even to the 70s and 80s, they said Mises was wrong. I mean, because socialism wasn't impossible. Or yes, maybe it's inefficient, it's not impossible, though. But Mises had said in the very first article, he said, if you just have socialism in one country, it's like having a postal office in the middle of profit making business. Yeah, the postal office is inefficient, right? I mean, it's bad service. You hate it, but it still gets a job done in some sense because it can copy prices and technologies from outside the government sector. So what Mises said was, that's what the Soviet Union is like. And the Soviet Union, in fact, did act in that way. They're steel prices. They're electricity prices. They use Western prices. Prices for labor, maybe even in some cases. But those prices didn't reflect the exact same scarcity conditions in the Soviet Union. They were drawn from other parts of the world. So they weren't the correct prices. So you still had shortages and so on, and you had increasing inefficiency, okay? There was a joke that Soviet economists, when they would meet their Western colleagues, would tell the Western colleagues in the 50s. And this was after the incident in the Soviet Union, I'm sorry, in the United Nations, when Khrushchev, the Prime Minister, was banging his shoe, you may have heard of this, he banged his shoe on the table and said, we will bury you pointing to the West, represented to the West. He meant economically, okay? So the Soviet economists would say to the Western economists, yes, we will bury you, but we'll leave Hong Kong so we can see some prices. We'll leave it like a little island. And then there's all these stories about communist China secretly sending away for seers catalogs just to get prices for stuff, okay? So you had all these kinds of weird things. Also the Soviet Union engaged in foreign trade, okay? They sold energy products, coal and so on. So they had prices there. Also each firm would have a quasi-legal guy who would go to the other firms, because some firms had more resources than they could use, more wood, another firm would have too many nails. So they would border. So there would be border prices that was called BLOT. It was like sort of a bribery system where you would bribe another firm to give you what you needed in exchange to give him or her what he or she needed. Okay, so the Soviet Union was kept alive by Western prices and bribes and so on, but that's still not economic calculation in the free market sense. So eventually it had to break down, okay? It was interesting that the CIA statistics at the time it broke down said that the Soviet Union was doing tremendously well and they weren't. And Paul Samuelson, the great neoclassical economist in addition in the late 1980s, I should have put this up, but showed that by early 2000, 2001 or 2002, the Soviet economy would surpass the American economy in productivity, okay? You know, these guys actually believe this nonsense because they didn't understand Austrian economics. They didn't understand the function of the price system. They never read, it means it's a basic article. Or if they did, they didn't understand it. Now, there was a period of true communism which broke down pretty quickly. That was called war communism. From 1970 to 1921 when the Red Army was fighting the White Army, the Royalists who wanted to get rid of communism, they tried to run the economy without any reference to prices of any kind. And everything broke down. The cities pretty much emptied out. There were no more goods left in the cities. At the end, people were breaking up with very expensive heirlooms, furniture and so on, and burning them just to keep warm. And then when they ran out of food in the cities, they went to the countryside and they were just scavenging for food in the countryside. Which tells us that socialism can work for small hordes of predators. That's where it can work. I mean, this is right, right? I mean, he said small groups can value. You don't need calculation for small groups, okay? Yeah, we value stealing those three cows to the risk of the labor involved and the risk involved, something like that. But you can't run an industrial economy. That was Mises' point. It was never falsified. All right, so now let's just talk a little bit about some of the early socialist responses and then the later ones to Mises, okay? Okay, so the earlier ones came from German economists. This didn't get into the English language, Mises' argument until the 1930s. So then through the 1920s, he was being attacked by German economists and they gave four arguments. Very naive, one might say stupid. One was, well, we can calculate in kind. Adon Neurot, who was a big socialist, made the argument that we can, why do we need money for accounting? We can add up apples and oranges. I mean, he didn't know basic arithmetic, okay? And he was actually taken seriously and still is, okay? So that's ridiculous. Calculating in kind that is entering how many hours of this kind of labor, how many acres of land, how much, how many square feet of factory space you're using. That's not a basis for accounting. There's no common denominator, okay? So Mises already answered that in his original article. Some of the Marxists said, well, you know, we can calculate with labor hours, okay? Labor hours are homogeneous, right? They're common. We can use them as a common denominator. But there Mises pointed out that first of all, labor itself is heterogeneous, okay? So for example, is someone like LeBron James, is two hours of his time on the basketball court equal to the 12th man on the bench, even within the same industry. You have, they're heterogeneous hours. How do you compare them? He's the quality of his skills or much higher the quality of some guy who's been in the league for 12 years and plays two minutes a game. But then of course, what about comparing that of a brain surgeon to a cashier at McDonald's? They're not the same, okay? So they're heterogeneous. They're not like one unit of money compared to another unit of money. Mises also pointed out in that case, how do you value the capital goods and the land? You're only valuing the labor by adding the labor hours up, but land and capital goods are scarce, right? And thirdly, even if you have two laborers that are exactly the same, guess what? A laborer working on a tractor with the same skills as another guy working with a horse drawn plow, who's going to produce more wheat or more hay in a day? How a tractor? So in other words, even with the same labor skill, you still need to figure out what the capital is worth that he's using, okay? So Mises smashed that argument. Again, that was really in his first article. Then the point I brought up before, assume a stationary economy. Okay, so some socialists would say, look, what we're going to do is the same thing that you've been doing. We're going to give socialism. What we'll do is we'll get rid of competition, but we'll keep the firms and so on. We'll tell everybody to run the firm exactly as you did yesterday, the last day on the capitalism. We'll keep the same managers, same workers, and the same jobs. We'll do better than capitalism. We'll just stop advertising because that's wasteful. We'll stop some of the wasteful practices of capitalism. We'll produce more, okay? We'll just do the same things capitalism can do. But of course, that's absurd, right? Because then those aren't real people. That's an anthill. You just do the same things over and over again. In the real world, people's taste change, technology changes, progresses, some resources are depleted, new resources are found, natural resources are found. You need continual changes in prices that give profits and losses. Let's say you have less oil and gas, so you now need to produce different kinds of vehicles. Your capital goods are wearing out and people's values are changing, so you have to decide this train is worn out. Should I produce another train, just like I did a few years ago in the capitalism, or should I produce more airplanes with those resources? Or vice versa, if jet fuel becomes very high. Should I put in a high-speed train? You can't answer that with a stationary economy. Once you introduce change that you have in the real world, this becomes nonsensical. And then calculation using utility. Somehow figure out how much satisfaction individuals get from different goods. But as I said, what the hell is a utile? How can you figure out, how can you figure out a quantity of utility? It's an intensive magnitude. It's not extensive. You can't see it in the real world. The objective world. Subjective world is also real, right? Subjective world, someone says, that's all subjective. It's the subjective world that runs the objective world. It's our expectations, plans, and values that run the objective world. But yet, we need an index, a common denominator in the objective world to reflect our values, and those are prices, and that's what you don't have here. You can't just deal with utility. So that's pretty much, he smashed all of those arguments. They were stupid anyway. They were not much more sophisticated criticisms of Mises by British economists who were trained in economics. They were neoclassical economists. And there were some Americans involved. And the first was the trial and error method. And basically what these economists said was, you know, what we could do is we could, we can take certain prices. We'll have the ghost plan set the prices. And then, one and two are very similar. So basically, both of those, they basically say, we'll set arbitrary prices, set up the firms, and then we'll set a certain price for a tablet computer, a certain price for automobiles. And on the other hand, we'll set price for the inputs arbitrarily. Now, the prices will be wrong, and there'll be shortages and surpluses. And if there's a surplus, we know that the price has to be lowered. So we're trying, we have a trial and error. And if there's a shortage, we know that the price of the good has to be raised. And now, that was one. The other was, well, we could have a mathematical solution. If we, we'll get information about everybody's value scales, how everybody values different things. We'll get information about all the practical information. We can combine this information into a whole huge system of equations of supply and demand, and then we can, when we solve these equations, we'll get these shadow prices and we'll get these quantities. We'll get the exact price and quantity that capitalism would get. In fact, there'll be more accurate because they're mathematical and so on and so forth. Now, there was a couple of people who were involved in this were British economists who learned, who was educated in England. And then there was Abba Lerner, a British economist who actually was a Hayekian for a while. And then an American economist named Fred Taylor. So Hayek responded and so did another British economist who worked with Hayek, Lord Robbins. They basically said two things. First of all, regarding a mathematical solution, by the time you collect, if you can collect all that information, it's dispersed, by the time you collect all of that information, it'll be already outdated. And back in the 30s, when they were responding, there isn't a computer powerful enough. They really just had mechanical things. They didn't have electronic computers. It takes such a long time to solve these equations by hand that there would be no way that it would be an efficient solution. But notice they're admitting that you could get some kind of a solution. It wouldn't be efficient, but it would be possible. And then with the mathematical solution, I'm sorry, with the market socialism, Hayek said, well, okay, you could sort of do this. You can change the prices if there are surpluses or shortages. But the market does it at every minute or every hour. How frequently can planners change prices throughout the whole economy every month, every two months? So the prices aren't going to be the right prices that you're using. And also it's going to be very difficult to get all the dispersed information that you need to change these prices. To make a long story short, he once again admitted it's possibility, right? But said it would be extremely inefficient. Now Mises had a different, I'll go through this quickly, a very different response to all this stuff. First, the mathematical solution. Mises said, if today there's socialism and the planner knows everybody's value scales or even substitutes his own, decides what he thinks is best for people and gets all the engineers and scientists into the same room to give him all the information about production functions, that is technology. And he has people out there who tell him all of the different kinds and numbers, quantities of the factors of production, he still couldn't get the right answer. Even if he put it in a computer, even if he had modern day computers and solved it, okay? The reason is, when you stop capitalism and you go into socialism, you have all these capital goods that were produced 20 years ago, 40 years ago, airplanes, last for 20, 40 years. When they wear out, since things keep changing, okay, tastes keep changing and technology keeps changing, should you replace it with the exact same airplane? Well, you can only know whether you should or not with profits and losses. And a system of equations doesn't give you any profits and losses. It gives you exact prices and quantities in equilibrium, that is, meaning in an economy that's completely static. So, no matter, you can change the amount of labor, you can change the amount of land, whatever it is, you'll never get prices and costs, okay, which means you'll never get profit and losses. So what Mises says, it's not, you can't jump to the efficient state, okay, you're here, it takes years and years and years to change all of the resources, to change all the different kinds of capital goods you have. Because you're always making mistakes, entrepreneurs are always making mistakes about them. So, he said, and even if you knew what the end product was, you still have all of this stuff that you have to use now, okay? Even if you know that you should have many more airplanes and fewer trains today, you still have a lot of trains and fewer airplanes, how do you change them over time most efficiently so that you use resources in the most cost-efficient way, all right? You don't know that without profits and losses. And in this system, there are no profits and losses, okay, with the mathematical solution. And then finally, market socialism, Mises made a great point here. He said, okay, this looks on the economy as run by managers. Each manager is told to look on the prices as given. They can't change prices, they just have to react to the prices, prices of their products, prices of the factors of production. And then they have to compute their costs and sell it at that price if it's profitable. But the point is capitalism is much more than that. Capitalism is much more than on an everyday basis having managers make decisions about what to produce. Capitalism is about destroying some firms that are inefficient or entire industries, getting rid of the typewriter industry, getting rid of the, let's say, eventually the non-smartphone industry, getting rid of back in the old days, getting rid of all the horses and loggies that are being built and shifting the whole industry into automobiles. Once you admit that, then it's the people that control the stock market and other financial intermediaries where money is invested. You just can't give rules to managers. That means it's called that playing market. People are just playing games. Those aren't real prices. The people that really control production are the investor entrepreneurs. So, no socialist has ever said that we should still have a stock market, we should still have private banks. That's what you would need. Under socialism you would have one huge company, one huge collective, controlling the capital. Deciding which firm to be bigger, which firms to be smaller. They themselves don't have any prices to react to. So the point is you need all the prices on the stock market, on the financial markets, bond market and so on. You don't get that under market socialism. They just believe as well these managers they see these prices and we'll just tell them to react, keep the costs low and to produce goods right up to the point where the last good produced is equal to its marginal cost. So Mises destroyed even the most sophisticated arguments. Now he did that later on in his book Human Action. The most sophisticated arguments weren't dealt with in the original article. But I will stop there. Thank you.