 Our second lecture this morning is going to be given by Dr. Joseph Cilerno. The title of his lecture is Calculation and Socialism. Joe? Thank you, Mark. Welcome again. As Mark said, my talks on Socialism. And I'm usually very enthusiastic about this talk. Yeah, especially because I want to make sure that I overshadow the next speaker. But the next speaker is Peter Klein. So I feel like I can a sleepwalk through this talk. I'll still be fine. Okay. I'm going to start by drawing your attention to what I think is the most important article in economics written in the 20th century. It's by Ludwig von Mises. And the name of it is Economic Calculation in a Socialist Commonwealth. It was published initially in 1920, and then it was republished as part of his 1922 book on Socialism. And it is in print, and it has been for the last 20 years or so by the Mises Institute, Economic Calculation in Socialist Commonwealth. And I highly recommend it. In particular, there's a very insightful article by a prominent contemporary Austrian. It's an epilogue to the book. So you might want to pay careful attention to that also. Initials are JTS. Okay. Why is this article so important? It's really important for three reasons. First of all, it did completely destroy the intellectual foundations for or of the case for social essential planning. But it also represented a revolutionary breakthrough in economic theory because I think Mises for the first time demonstrated the nature and necessity of the price system in allocating resources. We'll talk about the view of the price system prior to Mises in a moment. And finally, and this is a little bit more technical, but it completed Carl Menger's revolution in the sense that it finally showed how people's subjective values are translated into objective prices, and how these cardinal prices are then used for monetary calculation, that is to calculate profits and losses and to use as a guide to allocate resources to the most urgent consumer demands. So it shows how qualitative data like people's values and so on are translated into cardinal numbers that are useful for economic calculation. Okay. So let's start at the beginning. Initially there were a group of socialists in the early 19th century. They predated Carl Marx. They were known as the utopian socialists, and let me just give you some of their names. And all of them, they're the top three. Charles Fourier is French, Henri Saint-Simon also French, and Robert Owen I believe a Scottish industrialist. And what they did was to each come up with their own view of the ideal society. Fourier was particularly crazy. He actually wrote that under socialism, roasted chickens would fly through the air into men's mouths. I mean, he said that. The oceans would turn into lemonade and human beings would be able to ride lions. He also came up with a crazed plan to put everyone or to house everyone in communities, one huge house that would hold about 15 to 1600 people, based on the old Roman phalanx where the Roman army would march with a certain amount of people sort of in a square. He actually drew pictures of what the ideal house was. That was it. He designated certain rooms for common rooms, other rooms for sleeping quarters, the dining room and so on. He believed that sexual roles would completely disappear in this phalanx stair, it was called in French, phalanx stair. Though he didn't advocate free love like Henri Saint-Simon did. He still thought there was a place for the family. I recently found that these were never built in France where he wrote, but a few of his followers in the U.S. built them one county away from my house. Very, very inviting, right? You expect lurch from the Adams family to answer the door if you go trick-or-treating. Here's even a scarier picture of it. That's the phalanx stair, or I think in English it's phalanstery or something like that. All right, so all of this was incredibly embarrassing to the socialists. The classical economists, even though they hadn't developed a fully worked out theory of economic calculation, using supply and demand smashed these people intellectually and embarrassed them. But the classical economists basically, the problem that they pointed out was who takes out the garbage? Under socialism, where everyone gets treated equally, where everyone has equal shares, or at least shares of the output according to their needs, what incentive is there for someone to do the dirty, unhealthy jobs that people have a stigma? Who's going to be the garbage man doing to get up at 4 o'clock in the morning? Why should somebody do that rather than be the librarian? They prefer to be the librarian if everybody's getting equal amounts. So they pointed out that how would you give people the incentive to do those, or who would go down the mine shaft into a deep mine and risk lung disease and cavens and so on, when they weren't getting paid any more than someone else who was doing a job, let's say farming or something. So that was the response of the classical economists. Now the utopian socialists responded that it would, well, there'll be a new socialist man that will emerge under these new social arrangements, living in the fallen stair and so on, drinking lemonade out of the ocean. And these people would not care about their own self-interest, but they would care about furthering the interests of society. But both sides assumed that was an incentive problem that had to be solved. How to get people to do certain things that you wanted them to do? They never asked the question, what things do we want them to do? What things do we want them to produce? They never asked that question. Everyone assumed that if you could solve the incentive problem, then socialism would be just as productive as capitalism. Now Marx was a brilliant strategist, and what he did, and let me just go back to the second slide here, is to come up with an argument that anyone who talked about what the future social society would look like was unscientific, because he was embarrassed by the utopian socialists. So he used this rhetorical ploy. What he said was that socialism was coming with the inevitability of the laws of nature. There were laws of history that would bring about as a final stage of society socialism, or actually that's the next select, there would be a sort of full communism as a final stage. And there was no need to speculate on it because it was happening no matter what human beings fought or did. Just as feudalism, this is as the classical slavery gave way to feudalism, which was a higher stage of the economy. Well then feudalism gave way to mercantile capitalism and then to industrial capitalism, which were progressively higher. And all of these, according to Marx, all of these stages of history contained within themselves the seeds of their own destruction. So capitalism would result eventually, the profit model would result in capital being accumulated, concentrated in the hands of fewer and fewer huge monopoly capitalists. And so there'd only be like 10 of them left in the world and then the workers would fire up a number of them and just take the stuff away. So capitalism created its own destruction and then socialism would emerge naturally. So once again, his whole point was to get everyone to shut up about what socialism would look like. Because he knew that there was really no way to sort of formulate a social society, to come up with a reasonable plan for social society. And his great work wasn't on socialism, it was named what? Who knows the name? Das Kapital was on capitalism and the problems with capitalism. He didn't say anything about socialism and what it would look like. There were very fleeting passages where he talks about socialism, but he had no plan for socialism. And his whole point was that anyone who tried to set out a plan for socialism was unscientific. Thus he called his brand of socialism scientific socialism. And he was the one who named the other socialists, the earlier socialists, utopian socialists. And he hated them more than he hated the capitalists. He was continually attacking those people. So now let's look at what Mises' argument was. It's actually pretty straightforward. And there were some earlier economists that got glimpses of what Mises' argument was. But it was really Mises who put the whole thing together. So here's what Mises basically said. First of all, he defined socialism as that system under which all of the material means of production, the non-human means of production, are owned by one agency. The central planning agency or the socialist state. All means of production are collectively owned. There can be private property in your own clothing, even in your own houses and gardens and so on. But all the things that were used in production outside of labor were owned collectively, owned by the state. And therefore the state had to make the decisions about how to allocate resources. What to produce, how to produce, where to produce, how many of the various different kinds of goods to produce and so on. So starting from that point, and by the way, there's a book by a German economist. It was written in the mid-19th century. His name was Albert Scheffler. And the book was called The Quintessence of Socialism. And he went through all the different socialist plans up to that point. And the one feature that he found in common was that they all wanted to abolish private property. So Mises was right in taking that as the hallmark of socialism. Abolition of private property in the means of production. So here's Mises' argument. His thesis was, the rational allocation of resources is impossible without economic calculation, calculating profits and losses, using actual market prices. That's his thesis. Now he argued, number one, socialism abolishes private property and capital goods and natural resources. They're all owned by the state. But if one group owns all of the resources, well then the next thing follows. If the socialist state is the sole owner of the material factors of production, they can no longer be exchanged. There are no markets for them. There's one owner. There's a monopoly owner. But if there's only one owner and there's no exchange, then there can never be any prices. And without prices, the socialist state can never figure out what the cost of production is. Even if they pay the workers with money and the workers buy the consumers goods with money and the consumers goods have prices, the steel, the iron, the agricultural produce, the raw materials and so on, none of those things have prices. Which means you can't compare prices and costs. Socialism will never know the costs. They'll never know whether they're giving up something of greater value when they produce an extra automobile. Should have they used those materials to produce five more bicycles or two more motorcycles or used the steel in a building, let's say a silo to hold grain. They don't know how to determine the best and most valued uses of all the resources that they own. So socialism is doomed to be chaos. A socialist economy literally is impossible in the sense that economy means economizing resources. Using them only because resources are scarce, using them only for the most valuable uses and renouncing those uses that are much less valuable. So socialism could never determine what's the most valuable use of steel, what's the most valuable use of all the gasoline we're producing and the various parts of it and so on. Okay, let me give you sort of an example. Well, let me point out one thing. So Mises points out that socialism then, because of the collective ownership of the means of production, abolishes the preconditions of economic calculation. You need private property in all stages of goods, not just consumer goods but including capital goods. So everything can be exchanged between private owners and therefore have prices. You need freedom to exchange all kinds of goods and services. If as in maybe in 18th century England where land couldn't be sold, how do you pass down to the oldest son, it's not enough so there was private property but you didn't have the freedom to exchange certain things, land in this case. And so it would lead to an inefficient use of land. You also need the freedom to exchange all kinds of goods and services, but there are no markets under socialism for capital goods and for the services of land and so on. And finally you need a sound money, a money whose value is independent of political influence. And under socialism you don't have that. You really don't have a money. Even if they pay workers that's just a voucher to buy consumer goods. It's not a full money against which all things can be exchanged. Everything in the whole structure of production, from land to all the different types of capital goods and raw materials and so on. So there is no general medium of exchange or money under socialism. So socialism destroys all three preconditions and therefore abolishes economic calculation. Now what does this mean? Let me give you an example. Let's say the socialist planner is deciding to ignore the handwritten stuff on the right side. Now socialist planner certainly knows how to produce various things. He has teams of scientists and engineers that he can consult and they have all the latest technical knowledge. Mises assume that. Mises also assume something that's probably not true or that definitely is not true, that the socialist planner knows all the different types of resources that he has at his disposal. He knows every ton of steel and exactly where they're located. And exactly the strength of each type of steel. And as well as everything else in the economy. So he has full knowledge of all these things. Well here's his problem. So he knows the production function, those things that he needs to use to produce an automobile. Or you could think of it as to produce a new batch of automobiles, 10,000 new automobiles. So he produced those 10,000 new automobiles or all the other things that he could produce with steel, machine time, labor, unskilled labor, engineering labor, the factory space and so on. But he knows that if he uses P tons of steel plus Q tons hours of machine time plus R hours of unskilled labor, plus a certain amount of engineering labor and a certain square feet of factory space, kilowatts of electricity and so on, he'll come out with one automobile. Or it could be 10,000 if you want, whatever. Okay, that's fine. Should he produce that automobile? What's the cost of producing that automobile? Even if consumers are willing to pay 100,000 rubles for it if it's in Soviet Union. Can you add up tons of steel, hours of machine time, square feet of factory space, kilowatts of electricity and get one unitary figure? Can you get one cardinal number? Of course not. He never knows his costs. So socialist production is chaotic. He doesn't know if by producing these 10,000 new automobiles, he's using all those different resources which could be used in almost an infinite number of other ways in other production processes throughout the economy. He doesn't know what the most valuable use of those resources are. Whether the next most valuable use of those resources is higher than the value of those 10,000 new cars. So he's always doomed to producing the wrong thing. He's like a man in the middle of a desert with no compass where everything looks the same. There's only one direction to go to save yourself, to get water, and there's literally almost an infinite number of directions to go if you slightly vary in the directions. And so he'll never ever be able to rationally allocate resources. Let me give you an example from the real world. I have a childhood friend who I grew up with who eventually married a cowboy, actually a real life cowboy from Montana. So she moved to Montana and it's a big ranch and they have cattle and so on, and they found oil on their land. So one day about 15 years ago she called me and she says, you know, we got a new house. And I said, great. I said, did you move? She says, no, no, no. She says, we had it shipped in. So, you know, I'm from New Jersey where everybody just builds the houses, you know, on site. So I said, what do you mean it was shipped in? She says, well, you know, out here the houses are built in modular sections in Nebraska in a huge factory. And then they're put on those double wide trucks and they're sent the pieces are sent to the site and then they're assembled. Now, why would that, why would that be? Well, because there's about 10 people in Montana and the cost of construction labor is extremely high. Okay. And in fact, why? Why? Because ranching and other sorts of activities and farming and so on have a much higher value for labor in Montana than does building homes. So what was done is that instead of using a labor intensive process, instead of using a lot of laborers and bring them to the spot where you're building the house, you use few laborers in a huge factory that's mechanized to build a house. It's actually cheaper that way. Okay. Now, could the socialist planner ever come up with that idea that, you know what? It pays to build a house a thousand miles away or I don't know my geography out there, I don't know how far Nebraska is from there. You know, a thousand miles away or 800 miles away. And then ship it, ship the house, a huge five bedroom house to Montana. Okay. Without prices you could never know this. There'd be no way to know this. And in fact, now you can look at the Q plus A. I mean, what you could do is produce automobiles like we did the turn of the century. At the turn of the century, we use a lot of labor. This was before mass production was introduced by Henry Ford in 1910 or so. A little bit later than that actually. But in any case, there were a lot of laborers. All the parts were made within, in a small blacksmith shop or small bicycle factory. And you know, they produce about six cars a month or something like that. With all the laborers each specializing in a certain piece and then putting them all together. Okay. So should they use, so there's many different ways to produce automobiles, right? From a completely robotic factory run by one guy who pushes a button on a computer that starts the process in the morning. Okay. So having a lot of capital and little labor to the old turn of the century way of producing cars with a lot of labor and very little machinery and so on. Or the intermediate ways that we have today. Okay. Though it's increasingly becoming more mechanized and there are fewer and fewer workers. If you look at, it's a plant, a Kia plant that's about 10, 15 miles from here. And it's huge. The plant is huge and there's very few cars in the parking lot because the labor force is so small. Because labor productivity is so high because of all the machinery there. Okay. Now why do we have all those machines and so few laborers? Because it's cheaper to build cars that way. Okay. At least in this situation. So to draw your attention to sort of to the bottom, does that mean capitalism is perfect in producing automobiles? No. We know it's not perfect, but they can calculate. So in other words, if there's an entrepreneur who believes that he could get $21,000 for a particular model car by building 10,000 of these models of this model. And he can easily find out if it's worth doing. From his own point of view and from the point of view of consumers as a whole. If he can get all of those resources and remember in a market economy, all resources are traded for money. So at any moment in time, any moment in time, all resources have prices. So no matter what sort of production process you want to undertake, you will always know what your cost of production. You'll simply add up the prices of the resources that you're using as inputs. Okay. And then if this is 18,000, you compare it to the 21,000, then you've taken resources that would have been used to produce goods that are only worth $18,000. And you're using them to produce goods that are worth 21,000. You are moving resources from lower value uses to higher value uses and you're rewarded by profits. On the other hand, in the case of SUVs and the higher price of automobiles, a higher price of gasoline that has occurred in the last few years. The cost of production may have been $32,000 and the prices of those SUVs that consumers are willing to pay was $28,000. Then you've lost money. Capitalist entrepreneurs can lose money. They do it all the time. The point is, they know they're making a mistake. They don't persist in making that mistake. Resources shift out of those areas where money is being lost. And they shift into areas where profits are being earned. So that's why we had a movement away from larger automobiles of late to smaller automobiles to serve on gas. And you can look at many different cases. So the socialist planner is in a different situation. Both are uncertain about the future, but the capitalist can estimate future consumer prices. He can make informed guesses because he knows what consumer prices were in the past. And he has ideas about how their demands will change in the future. And so he uses that past experience to estimate, we call it appraisement. Appraise to appraise a future price. Then he compares it to the actual cost of producing the good. If the costs are less, then he produces the good. It's greater than he decides not to produce the good. And so that's why socialism is really doomed to chaotic production and to eventually collapse. Let me just say one other thing here because some people have criticized Mises for this. Did Mises say that there could be no socialist economy under any circumstances? No, he was just talking about a situation in which you had a modern developed economy where you had developed technology where resources could be used to produce almost anything. Pretty much today anything can be turned into anything if you're willing to pay the cost. So basically, given all the resources we have in the US, there's really an infinite number of production processes that you could undertake. But your resources are limited, so you have to choose those production processes which are most valuable from the point of view of consumer. And that's why you need prices, not only of consumer goods but of producer goods. Now let me give you a simple example of where you could sort of make the correct decision in allocating resources and this also is an example of what illustrates why socialism can't. This is Robinson Crusoe and he has let's say 12 hours to work and then he gets exhausted so he has to sleep. So every day he has to allocate his resources. And now in Robinson Crusoe's economy there are very few scarce producers goods. Basically his labor is scarce. So let's say that he decides to allocate his labor in three hour increments. So he takes three hour units. So he says, well what most important to me is the two fish I could get from fishing for three hours. Second most important to me is picking wild mushrooms. I get three pounds of them. So I could make mushrooms with the fish and so on. And I could get a coconut so I could have the coconut milk and so on. That's the third best use of my three hours of labor. And I can also use three hours to pick a sack of berries so I can have dessert or something. So that would then use up his labor time. Now the question becomes he suddenly realizes that there are rabbits on the island so that he could add meat to his diet. Or that he can use an axe. He can create an axe so that he sees his materials to make an axe. So that would be easy for him to get the mushrooms or any other things that are in trees because he can cut them down or even build a house. The point is now, he says to himself, there are new opportunities. Should I use three hours to produce a rabbit or should I use three hours a day to produce an axe? He can easily answer that question because he can right away see that there's only one really scarce resource. That's his labor. What's the cost of producing a rabbit? The lowest valued use of his three hours. It's the sack of berries. If the rabbit has a higher value to him, then the sack of berries, then he'll produce it. Because in this case, now it's not money profit, it's psychic profit. In this case, the benefit he expects to get from the rabbit exceeds the benefit he expects to get from eating the berries. So the benefit we call the psychic revenue, that's the satisfaction you get. And the cost, we call the psychic cost. That's what you have to give up. That's the satisfaction you give up. If your benefit is greater than your cost, then you earn a psychic profit. You've given up something less valuable, the berries that you could have gotten for three hours, for something more valuable. So the point is when you have a complex economy with a very developed capital structure and highly advanced technology, you need prices. You can't directly value things. So this is called direct valuation. Under a complex economy with a huge capital structure, you need calculation, not valuation. There are so many resources out there. The central planning agency cannot arrange them in valuations because there's an infinite number of things that can be used to produce. There's an infinite number of ways that you can combine all the resources here in the U.S. if you were a Soviet Commissar that controlled the U.S. economy. So can Robinson Crusoe approximately maximize his utility or produce things that satisfy his most highly valued wants? Yes, he can. But that's not what is going on in an economy where there are many scarce resources, many different uses. So what did Mises say about socialism? He said, the essence of socialism, isn't that the socialist plan or lacks knowledge? He may know all about all the different resources. He may have teams of scientists and engineers giving him all of the latest theories that apply to production. It's this, it's not a lack of knowledge. Mises says the essential mark of socialism is that one will alone acts. It is immaterial, whose will it is? It could be a benevolent, it could be a saint, it could be Mother Teresa, or it could be an evil guy like Stalin. 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. What does that mean? What's he getting at? If you have one will that controls all of those things, there cannot be what? Exchange, prices, markets, and economic calculation. You can never know whether you're producing the right things or not. Let me just sum up some of the conclusions or implications of Mises' argument. First, he means it when he says that the socialist economy is impossible. It's literally impossible. It's impossible in the sense, and we'll get to some of the criticisms of this, but it's impossible in the sense that the socialist planner can never know if he's rationally allocating resources. And rational allocation means choosing to produce something that is more valuable rather than less valuable. He cannot do that. In fact, as Mises says, socialist planning is an oxymoron, and he uses the word plan chaos. It's plan chaos. Only when individual entrepreneurs plan do you have an orderly, rational system. Because even though they're decentralized, they can all plan using the same price system, so all their plans are coordinated. Let me just give you an example of Soviet planning. There was a famine in the Soviet Union, the USSR, and the Soviet Union had some of the best farmland in the world. I mean, it had the Ukraine, which is the bread basket of Europe, and so on. And yet there was famine. But what you found was there were a lot of tractors, but they were rusting in the field because there wasn't enough gasoline produced. And you had all these silos that were built, but they didn't have wheat in them. But there was wheat. The wheat was there, and it was rotting because there was no gasoline to run the tractors, which were rusting to harvest the grain. You didn't have enough workers and so on because they were producing the steel that would have produced more tractors, which you don't need because they're not running anyway. So the whole point is that it's a machine that just turns mindlessly and produces garbage, basically. So all those figures that economists talked about how by 2000, Paul Samuelson, the famous neoclassical economist, wrote as late as maybe 1988 or 1987, an edition of his famous book, Principles of Economics. He said that by this past decade, the Soviet Union would have converged in their rate of growth to the U.S. And he was using statistics that were compiled by the CIA, who was always wrong about everything. They didn't see 9-11 coming. They completely overestimated the Soviets' military capability, their economic strength. So instead of almost being equal with us, their economy is about 20% of what ours is. But Austrians had said that all along. Austrians had said the Soviet Union is going to collapse of its own weight. Now, how did the Soviet Union actually operate? They operated according to something called gross output planning. They tried to have a coordinated plan. And the agency, the economic plan agency, was called Ghost Plan. Now, gross output planning meant that you would assign each industry a certain amount of output. And then within the industries, there were different firms. So the plant managers would be assigned different amounts of that quota to meet. So for example, if you were producing nails, let's say they specified your target in tons. Now, if you met your target or if you exceeded your target, you got a vacation on the Black Sea. But if you fell short of your target, you got a free trip to the gulag. So they had incentives in place to get them to do stuff. Now, of course, it was a system of mutual lying, right? You want them to set your target as low as possible. So you tell them, well, you lie to them and you tell them that we can't produce more than X amount. And they know you're lying, so they say, well, you have to produce Y amount. Well, you know that they're going to make you produce more than you tell them, so you lower it even more. So it's a system of mutual lying about things, okay? But so let's say they set your target in tons of nails. Well, it turns out that in the 1980s, there were a lot of buildings that had no, that were built, a lot of structures, including houses, that had no roofs, roots, okay? Why didn't they have any roofs? Because roofing nails are very small, okay? And if you specify the output in terms of tons of nails, then it's in their interest, because it's easier to produce big nails than it is to produce a lot of small nails. It's cheaper, okay, in terms of using resources, it's easier to meet your target. So they produced all big nails, and there was a shortage of small nails, okay? The same thing was true of women's clothing. They were all in large and extra large sizes. So they look like they're walking around in these huge, you know, bags. And that's why American jeans were selling for hundreds of dollars on Soviet black markets there at the end, okay? Because people wanted some sort of style, okay? So there were no children's shoes, although they were all large shoes because they were specified in terms of amounts of leather that you use to produce shoes and so on. So there was a cartoon Improvda that looked like this, okay? Okay, this is a train. That's a nail. The guy with the big hats, the commas are, you know, those big furry hats at the bottom, and then that's the plant manager saying, well, comrade, I met my output plan for nails this year, okay? Obviously, he met it in terms of tons, right? It was huge, okay? Also, in a speech in 1956 or, yeah, I think it was 56, 57, Khrushchev started all of a sudden berating the land producers, the chandelier producers, because it turns out that some of the comrades had been killed and injured by chandeliers just pulling down whole ceilings and crashing onto people and tables. Why? Because they were specified in the number of pounds of chandeliers you turned out, okay? So they're building really heavy chandeliers that were pulling down ceilings. I mean, you'd laugh, but I mean, this stuff went on regularly, okay? Because there's no prices, okay? Obviously, why do we have small nails being produced today even though they're more costly to produce per unit weight? People are, because as, if they're in short supply, the prices jump up above their cost of production. People shift resources into it. In other words, you can calculate, okay? A few other things I wanted to mention. Okay. Now, one of the criticisms of Mises's argument was, he's got to be wrong because the Soviet Union lasted for, you know, 80 years, whatever it was, okay? How could that be? Okay, if Mises was right, how could the Soviet Union last for all that time? Okay? Granted, it may have been, may not have been super efficient, but the economy ran. There was a, there's a socialist economy. Well, Mises met that argument in advance in 1920. And what he said was that the Soviet Union is not a true socialist country because it's set in a world where there are capitalist prices. And he compared it to the post office. He says the reason why the post office isn't totally inefficient, though we know they're very, very inefficient, right, is because there are prices that it can at least look at to allocate resources. Okay? Even though they don't have an incentive because they don't earn profits, they can at least adopt the new technology or the lower cost technology as it comes about and so on. So Mises says that Soviet Union was like an island of chaos in the middle of a sea of capitalist prices. So the capitalist prices influenced their ideas about how to use resources. Now, they weren't prices of their particular inputs, which had different scarcity values, but they could at least use those prices. And indeed they did. In fact, in the 50s, China was sending away for seers catalogs to figure out how to price certain things. And one of the jokes was that Soviet economists would tell to their Western counterparts when they met at various meetings what was, you know, Khrushchev had said, by the way, in the UN, in the UN famously took a show off and banged it on the table and said, we will bury you, meaning we will bury you economically. So Soviet economists would say, we're going to bury you economically, but we're going to leave Hong Kong and allow them to be free so we can watch the prices and at least have some idea of prices. Also, Soviet Union was a big and international trade. So, you know, it traded diamonds and electricity and other natural resources, so it used prices to price those things. So it did have some prices. Also, there was a very sophisticated system of black markets in which not only were Beatles records sold and jeans and so on. And Soviet Union actually, the authorities looked the other way. But also, there was a system of inter-firm bribes, the firms would, black markets rather, the firms would pay each other, they would have these brokers that would trade, you know, one firm didn't have enough wood to meet its target, it would trade some of its steel for the wood to another firm. So there was a system of what was called BLOT, the LAT, which was sort of mutual bribery, okay, and black markets and so on. And there was bribery too, you know, you would bribe certain people to get you these resources. But at least they had a price, okay, which is important. Now, there was a true example of complete socialism that was called war communism. It lasts from about 1917 to 1921, there they abolished all prices. They didn't do any accounting whatsoever. They just tried to just follow up a plan without using prices. And that lasted for four or five years, as I said, it was called war communism. And at the end, goods had become so scarce that people had first begun to break up their furniture and burn it to keep warm during the winter. And then they began breaking up parts of their houses and burning them. And eventually the city's emptied out and people just went to the countryside enroving bands looking for things to eat, just foraging. Okay, so true socialism leads to basically what might be called a scavenger economy or a predatory economy where you just go to the countryside and just look for things. Okay, you're just foraging for food and so on. So socialism carried to its logical conclusion causes the complete destruction of the social division of labor. People cooperate together. They just move together in small bands or tribes and there is no division of labor, no exchange or anything. And that was Paul Pot, a Cambodian dictator. He hated cities because they were a capitalist invention, so he moved everybody out to the countryside and millions and millions died. Okay, let me talk a little bit about something that's called the intellectual division of labor. I just want to quickly talk about that. Mises says you need an intellectual division of labor. In other words, everybody, all of us, cooperate in generating prices. In your roles as workers, you cooperate by being on one side of the labor market. Walter Block probably talked about the labor market and selling your labor. And you make a judgment that this amount of money has a higher value than your labor and you accept that salary or wage and then you trade your labor. And in doing that, in your intellectual comparison of labor and money, you generate together with the employer labor prices. On the other hand, as consumers, by valuing different things on your value scale and again paying money for them or not buying them, you help in the creation of a system of prices. So at any moment in time, there's a mighty structure of prices that anyone can use in determining what to produce. You can't use them for calculation. It's a huge creation of many minds. One mind cannot create a price structure because one mind can't play at exchange. That's just a child's game. It's like playing Monopoly. So basically, here's what happens. So you have, I should put, consumers on the top and they have these wants and value scales and the entrepreneur is in the middle. And based on the prices he sees today, he looks and tries to determine what prices people will pay in a year or two years or three years if he's building a new car. It might take four or five years. So he estimates the prices. On the basis of those prices, he then turns around and bids resources at the bottom, trades with laborers and landowners and owners of raw materials and so on. And that establishes resource prices. He then compares his estimated future price of consumer goods with the resource prices and he decides what to produce, what not to produce, what technology to use, how many workers to hire, all of those complex decisions. And that is called the social appraisement process. One mind cannot put prices on every single resource, meaningful prices in an economy. Everybody's mind interacting in the intellectual division of labor can create a system where entrepreneurs bid for resources based on consumer, anticipated consumer desires and demands and therefore turn around and trade for those resources, bring about a whole price structure. So that's, I think, one of the most important things that come out of this, that you need everyone. Everyone is involved in generating prices, not just the entrepreneurs. All right, now let's talk about some of the socialist responses to Mises. Mises' arguments. Okay, I thought I had one more. I wanted to show you one more. Okay, basically there was a naive socialist response that occurred in the 1920s, mainly among German speaking economists. And then there was a more sophisticated response on the part of the socialist to Mises' arguments. The naive socialists had a number of responses. The first one was, and this was by a fanatical Marxist named Otto Neurath, who was also in the same seminar as von Mises was back in Vienna, at the University of Vienna, in Bombavirk's seminar, who was Mises' teacher. And Mises says he had a big mouth then, and unfortunately the seminar leader, Bombavirk, never shut him up. But I mean, this is unbelievable. He said, well, look, socialist would calculate. We'll just use the natural units. We'll just use the tons of steel and so on. This guy didn't know the elementary laws of arithmetic. He can't add up apples and oranges moron. Mises just dismisses this. It's ridiculous. So he called it in-kind calculation. What does that mean? I mean, how do you add a ton of steel with an hour of labor of a nuclear physicist? What's the figure that comes out of that? What's the sum? So Mises just smashed that. Then there was some Marxist said, well, you know what? We can calculate in terms of labor hours. But Mises pointed out that, look, labor hours are heterogeneous. How do you compare the labor of, let's say, a cashier at Walmart to the labor of a software engineer to the labor of a rocket scientist to the labor engineer? There's no way to do that. They're all heterogeneous. There's many different kinds of labor. You can't even compare the labor in the same profession. I mean, how do you compare Kobe Bryant's labor to the 12th guy on the bench? There's no way to do it. So Mises pointed that out. He also pointed out even if you did add up labor hours, you're leaving out capital goods. In other words, labor is more productive that works with more capital goods. So you're not measuring in the capital goods. So you'll be misallocating resources. And of course land also is being left out of account. Land and capital goods are being left out of account completely. Land and capital goods have to be economized, not just labor. All right. So that was his second response or the response to the second naive argument. The third was a little bit more sophisticated. It said, you know what? On the day that socialism begins, we'll have everybody come to work at the same place, keep all the same managers, and we'll tell them, just do what you did yesterday. And then day after that, do what you did the day before. We'll just do the same stuff. And we'll be as efficient as capitalism. Well, as Mises points out, the whole point is there's continual change in the real world. Consumer wants are continually changing. Technology is continually changing. The whole point is not to do the same thing as you did yesterday, because the computer would have never been invented obviously, right? And the personal computer would have never been invented. There were many entrepreneurs, for example, of the president, his name is Watson, of IBM in the early 80s. They had a technology for the personal computer late 70s, early 80s, but they really didn't use it. They licensed it, because the president said, well, this will always be a toy, a household toy. At most, you'll do some of your household accounting on it, but it'll never be widely used for personal computer and business. And of course, Stephen Jobs didn't agree with that there in his garage and came up with personal computers and they began to sell. So you have to do different things. You have to take risks. Doing the same thing every day would only be efficient if what was true. If consumer wants never change, if technology never advanced, if resources never ran out and new ones were never discovered, okay? But as time went on and things changed more and more, this would be a completely chaotic system if you kept doing the same things and yet all the data of the whole economic system had changed. People's wants had changed and so on, okay? So Mises pointed out, that's only true in a static economy where nothing ever changes and there's no such thing as a static economy. That's only a tool of thought that economists use, okay? It doesn't exist in the real world. Now there were more sophisticated arguments against socialism. They were brought by neoclassically trained economists, some of whom were more Marxist, but they were trained in Great Britain and the US, okay? And the first one was, well, we use the trial and error method. Entrepreneurs use the trial and error method and they find the right prices, okay? They don't always have the right prices. They don't always have the right products. Well, we'll do the same thing. Well, Mises points out, if you're going to use the trial and error method, there has to be some way of identifying what you're looking for, okay? So if a man loses his wallet, some here, one of you lose your wallet, some where here in the institute, you use the trial and error method to find it. You backtrack as well as you can and you start looking in different places, okay? And so you try one place, it's not there, it's an error. You go to the next place. But the point is when you finally come to the place where the wallet is, there's something about it that you can identify. You can identify that wallet as yours, okay? What Mises points out is under socialism, you'll never know what the right prices are. You'll never know when you found the right prices. There is no identifying mark on the right prices because there is no market. There has to be a market, okay? When there's a market, then we know the prices are the right prices. They reflect the value scales of consumers, the preferences of laborers, entrepreneurs' expectations about future prices. It reflects all of these subjective states, okay? So that was first, so Mises pretty much answered that. Then the next was the market socialism, what Mises calls the quasi market. And I don't want to go into too much detail about this, but I'll quickly say what the socialists came up with was the following. They said, you know what? First of all, by the way, right here they've retreated because they've admitted you need what? Prices, and you need a market. Especially when the market socialists, you need a market, okay? So they wanted to construct the market that still had one will, one volition, one person acting. And so they thought they were very clever. They said, we'll get the plant managers to treat prices as parametric. All that means is whatever prices the planner sets, you have to calculate with those prices. You can't look behind them, you have to calculate with them, okay? So they're given to you. So the planner will then set prices for steel and everything else. They might be wrong. And then you'll also set prices for consumer goods. Now, if the prices, if there's a shortage of steel at those prices, what does that mean? Well, it means that it should increase the price, so then it'll increase the price. If there's a surplus, it'll decrease the price, okay? And eventually they'll find the right price. But there's a lot of things wrong with this. Now, and the other thing they said was the plant managers or the firm managers weren't to aim at profits. They were simply to produce goods up to the point where the last unit produced at a marginal cost based on these fake prices that was equal to the fake consumer price, okay? So, and then that would be efficient, right? You're producing all those goods or all the units for which consumers have a higher value. The price is higher than the cost of that unit, okay? And then they would also minimize their average cost, okay? They move to the point where they're producing at the lowest possible per unit cost. But as we just pointed out, this is children playing at market, okay? Because you have to set up rules. How frequently do you change the prices? Do you change them every day? The market changes them every minute, okay? We're capable of doing that, certainly on the stock market, okay? Of course you can't. You can't figure out, you can't get all the price data to the guy at the center within a few days, you know? So you change them once a month. If you do that, then the prices really don't reflect the current data, okay? But then, of course, the most important thing is Mises says that's really not the market at all. The market is not a managerial economy. It's an entrepreneurial economy. In order to have a functioning market, you have to have stock market, bond market, commodities markets, where you have speculation and so on, where people are trading titles to capital goods, okay? Because the managers themselves that we see in firms are not making their independent decisions. Their decisions are constrained by the owners, the stockholders, even if there are many stockholders, okay? By the trades on the stock market, it's raising or lowering the value of their stocks and giving them indications that they're doing the right thing or not doing the right thing, okay? So there is, the socialists had no plan for reinstituting a stock market, okay, or bond market or anything like that, okay? But they did then say, well, okay, we'll have an investment bank. We'll have an investment bank and we'll allow the firm owners to bid interest rates for investment funds so that we can expand. Because the whole point of capitalism is to destroy firms that are inefficient and allow new firms that are efficient or existing firms that are efficient to expand, okay? So you want to complete a gale of creative destruction, as Joseph Schumpeter called it, okay? That's what competition is. It destroys the inefficient and it bolsters and stimulates the efficient. So how could that exist under this? So they claim, well, we'll have an investment bank. Well, make a long story short. What's the stop people from bidding, you know, 15%, 20%? In other words, you would have these guys, they're not using, their own funds aren't at risk. The manager's funds aren't at risk. So they would be bidding very high interest rates to get funding. So it wouldn't necessarily be the ones that had the most efficient production plan. It would be those people that were, you know, the most willing to take risks in some sense. Because, again, as Mises points out, the entrepreneur doesn't just expose his wealth, he exposes his very destiny. Because if your production plan crashes and burns, not only are you going to lose wealth, but you're not going to be able to get credit from other capitalists in the future to go on working as an entrepreneur. So entrepreneurs that fail are returned to the ranks of the laborers, okay? So basically Mises' response was, this is just playing market. If you're going to set up a set of rules, those rules are going to determine the prices. The central planner has to set up a set of rules to prevent this overbidding for funds, to prevent things going on in the firms themselves that they don't like and so on. And once they set the rules, those rules then generate another system of fake prices. So there's millions of systems of fake prices depending on the rules that are set up by the central planners. In other words, you cannot remove the burden from the one will. It's still one will acting and making up prices. Mises says it's as efficient as picking prices out of a hat to have market socialism. And last but not least, and I won't go into this much detail, I'll just mention it. There's a mathematical solution in which you could model the economy of the system of simultaneous equations and solving them by getting the data, let's say you could get the data, and Hayek pointed out it was very difficult. You can get all of what people knew and it's not all in statistical form. They know how to do certain things. You can't convey that in the form of statistics. But let's assume you get everything to them and they then put them into the equations. What Mises pointed out would be those equations would just spit out the answers of the things you have today. But those aren't the right prices because the equations will give you the prices. Because they're in the form of supply and demand equation. The point is though, you don't want today's prices or you don't want prices dependent on what's happening today. Entrepreneurs always have to look forward because things are continually changing. And you can never get those prices because you don't know what the data are in the future. You don't know how things are going to change in the future. So I'll stop here. Bottom line Mises did prove I think that socialism was impossible.