Monday, August 31, 2009

Mises, Human Action and Economic Calculation

Six decades ago Ludwig von Mises published his masterpiece, Human Action, and it grows in importance. I was unaware of the book’s existence and its timeless truths through my formative years, but one of Mises’ students, William Peterson, introduced it to me in 1980, and I forever will be grateful.

Because Human Action covers a vast amount of intellectual territory, I will deal only with economic calculation. If there is a Misesian term to which I return again and again, it is “economic calculation,” for that term explains why socialism is fated to fail – always.

Mises dealt with economic calculation at length in Socialism, which he published in the early 1920s, and he returns to the theme again in Human Action, and his points are well-taken. At the time he wrote these books, American, British, and European intellectuals had fallen in love with state-run centralized economic planning. People who should have known better had convinced themselves that the U.S.S.R. had created a paradise via central planning in which all people would prosper, or at least have all their needs met.

Most advocates of socialism believed that improvements in technology had made market economies obsolete, and that economic planners would match technology to scientific knowledge and, Voila!, a prosperous economy would rise from the mix. Mises knew better, and while the “great minds” of the time believed that Oskar Lange had “beaten” Mises in the famous “Socialist Calculation Debates” of the 1930s and 1940s, nonetheless it was Mises who prevailed in the end.

Mises noted that production of goods is not a technological activity, fundamentally speaking, but rather an activity that is economic in scope. He writes in Human Action:

…most means are not absolutely specific; most of them are fit for various purposes. The facts that there are different classes of means, that most of the means are better suited for the realization of some ends, less suited for the attainment of some other ends and absolutely useless for the production of a third group of ends, and that therefore the various means allow for various uses, set man the task of allocating them to those employments in which they can render the best service. Here computation in kind as applied by technology is of no avail. Technology operates with countable and measurable quantities of external things and effects; it knows causal relations between them, but it is foreign to their relevance to human wants and desires. (p. 207)

In other words, technology is a servant of economic activity, not its master. The decisions as to what should be produced, who should produce it, how it should be produced, and who receives the product are determined via a system of prices and private property. However, Mises added one more important point that often is lost in the discussion: economic calculation depends upon profits and losses.

Profits and losses, Mises noted, direct production by demonstrating where resources are most highly valued. If one can take a present-day example, it has been with the meltdown of financial markets on Wall Street. By bailing out firms that directed hundreds of billions of dollars into dead-end investments, the government has interfered with the allocation of capital and has forced markets to place higher “values” on inferior uses of resources, all because politicians have ordered these things.

As I recently pointed out, profits are the reward for entrepreneurs who have directed resources to their highest-valued uses, and a profit system not only is appropriate for medical care, but it is mandatory if we want high-quality care to be made available to as many people as possible. Profits are not an “added cost” to production and distribution of goods; they are a means by which entrepreneurs efficiently use resources.

Mises noted that profits and losses enable entrepreneurs to engage in the necessary economic calculation needed for an economy to meet the needs and wants of people. What he wrote 60 years ago is just as relevant today as it was then, even if policymakers are as deaf and blind today as they were in 1949.

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