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Socialism-in-practice was a nightmare, not Utopia: Ludwig von Mises’s critique of central planning and the fall of the Soviet Union

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Abstract

Thirty years ago, in 1991, the Soviet Union formally came to an end as a political entity on the map of the world. It marked the conclusion of the dream of a new socialist system based on comprehensive government central planning for a better society. Soviet socialist reality was a nightmare of tyranny, economic chaos, along with political privilege and favoritism, which left everyday life for those living in the great socialist experiment one of poverty, corruption and despair. The reason why the socialist experiment in central planning was such a failure can be understood in terms of another anniversary, that being one hundred years since the publication of Austrian economist, Ludwig von Mises’s, famous 1920 essay on “Economic Calculation in the Socialist Commonwealth.” Mises demonstrated why it was inevitable and inescapable that socialism would fail and breed its negative side effects, due to the abolition of the economic institutions of private property, markets, and prices, without which a rational economic order is “impossible.” I recount some of the realities and absurdities of Soviet socialist daily life and its end based my travels in the Soviet Union in its last years. This paper is based on the Presidential Address delivered at the 2020 Society for the Development of Austrian Economics Annual Meeting.

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Notes

  1. See, for example, (Malia, 1994, pp. 405–489), for an insightful history and analysis of Gorbachev’s six years in power, 1986–1991, and the successes and failures of his attempt to politically and economically reform the Soviet system into a “kinder and gentler” socialism. See, also, the highly perceptive account of the end years of the Soviet Union in (Remnick, 1993). Gorbachev was not blameless with “clean hands” in the use of violence to suppress dissent in the Soviet Union. In January of 1991, the authorities in Moscow, with Gorbachev’s approval, attempted to bring a halt to the call for restored national independence in the three Baltic states of Estonia, Latvia, and Lithuania. They had been annexed into the Soviet Union by Stalin in the summer of 1940 as part of his August 1939 pact with Hitler to divide up Eastern Europe between the two of them in the event of an outbreak of war. In the new more “open” atmosphere of Gorbachev’s own reforms, a large number of Estonians, Latvians, and Lithuanians began to insist upon the right of national self-determination and to be free and independent countries, once more. After months of intimidation and economic pressures in 1990 that failed to bring, especially, the Lithuanians to heel, the Soviet military tried to use force to break the will of these people. So, in the early morning hours of January 13, 1991, the Soviet armed forces were sent in to seize government buildings in the capital city of Vilnius under Lithuanian jurisdiction, occupy communications facilities, and arrest the dissident leaders. During the night and day that this was done, 13 Lithuanians were killed, three crushed by tanks. But the Soviet crackdown failed in the face of even greater public non-violent resistance by a huge proportion of the country’s population. I was in Vilnius at the time meeting with members of the Lithuanian parliament on how to privatize their state-owned economy, and witnessed these events on the streets of the city that night and after. These deaths were on Gorbachev’s hands. I recount the events and what I saw in (Ebeling, 2021).

  2. I have recounted those days in August of 1991 as I witnessed them in Moscow in (Ebeling, 2016c); and I have discussed the flawed and corrupted attempts to transition to a market economy in Russia in the 1990s in (Ebeling, 1994).

  3. On Mises’s writings and policy perspectives during his years working for the Vienna Chamber of Commerce, not as the grand economic theorist and sweeping social philosopher as many people familiar with his writings usually think of him, but as the detailed and fact-based policy analyst dealing with specific economic events of the Austria of his time between the two World Wars, see (Ebeling, 2012a). Mises, as I explain, implicitly developed policy options in terms of three different “horizons” of immediacy and political practicability. That is, those shortest-term policies to grapple with immediate crises, the intermediate institutional reforms to limit abuses and misuses of interventionist and “activist” monetary and fiscal policies, and, finally, the longer run institutional and policy changes most consistent with reforming society in the direction of a (classical) liberal social and economic order.

  4. Shortly after our return from Moscow with those copies of Mises’s “lost papers,” Liberty Fund of Indianapolis approached Hillsdale College and me with the offer to pay for the translating and to do the publishing of a large selection of the items from Mises’s recovered papers, with the additional kind offer for me to serve as the editor of the project and to oversee the translations from German and a number of other languages into English. Three volumes were, finally, published under the general title, Selected Writings of Ludwig von Mises, see (Ebeling, 2000, 2002, 2012b). For each of the three volumes, I prepared fairly detailed introductions explaining the history and context of the times, events, places, and personalities behind the essays, articles, and policy papers contained in that volume. Liberty Fund has conveniently published the three introductions as one document online, see (Ebeling, 2013). For other related essays, articles and lectures by Ludwig von Mises from before, during and after the Second World War, see, also (Ebeling, 1990).

  5. Mises was already targeted as an “enemy” of the Soviet Union in the middle of the 1920s, when an article appeared in the August 15, 1925 issue of the Soviet journal, Bolshevik, accusing Mises of being a “theorist of fascism.” Mises’s “sin” was to argue in an article on “Anti-Marxism” (von Mises, 1925, pp. 71–95) that if a German “national socialism” was ever to come to power in Germany and wanted to start a new war as revenge against the peace terms of the Treaty of Versailles, a natural ally for such a war in Eastern Europe would be the Soviet Union, since Soviet Marxism and a German national socialism would not be ideologically that far apart. For Mises to suggest that the Soviet Union would ever be in an alliance with “fascism” was beyond the pale; though, of course, what Mises anticipated in 1925 was the Nazi-Soviet Non-Aggression Pact of August 1939, with its secret protocol on the division of Eastern Europe between Hitler and Stalin in the event of a war breaking out. A translation of the article in Bolshevik may be found as an appendix in (Ebeling, 2002, pp. 381–392). See, also, (Ebeling, 2020b).

  6. It is worth noting that some of these limits and problems in a socialist society were discussed by Carl Menger, the founder of the Austrian School of Economics, in his tutorial lectures for the Austrian crown prince, Rudolf ([1876] 1994, pp. 49–51). One work very much on the mark in describing the socialist future to come is to be found in Gustave Le Bon’s The Psychology of Socialism (1899, pp. 406 & 408): “The immediate fate of the nation which shall first see the triumph of socialism may be traced in a few lines. The people will of course commence by despoiling and then shooting a few thousands of employers, capitalists, and members of the wealthy class; in a word, all the exploiters of labor. Intelligence will be replaced by mediocrity. The equality of servitude will be established everywhere... It will be hell, a terrible hell... The State, having successively absorbed all the branches of production, ‘will be obliged,’ as Signor Molinari remarks, ‘to subject a portion of the nation to forced labor for the lowest living wage; in a word, to establish slavery’... Servitude, misery, and Caesarism are the fatal precipices to which all the roads of the Socialist lead.” Le Bon was only too conservative on the number of victims in the drive to make such a socialist future. R. J. Rummel, a noted political scientist who spent a good portion of his scholarly life determining the number of deaths at the hands of government in the twentieth century, estimated the human cost in murdered victims in the Soviet Union, alone, were, between 1917 and 1986, around 62 million unarmed, innocent men, women, and children (Rummel, 1990). On the modus operandi of virtually every Soviet-type socialist regime in imposing the planned and command society once in control, see (Conquest, 1984, 2000).

  7. I have discussed several of these nineteenth and early twentieth century economists who directly discussed the problems and impossibilities of economic calculation and coordination without market prices in a socialist system of central planning before Mises in a chapter on, “Economic Calculation Under Socialism: Ludwig von Mises and His Predecessors,” in (Ebeling, 2003, pp. 101–135). I have also discussed Paul Leroy-Beaulieu’s contributions on these themes in (Ebeling, 2018).

  8. One finds in a variety of passages in Mises’s writings from the 1920s, the seeds of F. A. Hayek’s later emphasis on the division of knowledge in society and the coordinating role of the price system. See (Ebeling, 2014, pp. 148–149).

  9. In the 1930s and 1940s, the argument was made by various socialists that Mises was “clearly” wrong when he asserted the “impossibility” of socialism because (a) there was “obviously” a functioning socialist economy in the Soviet Union, and therefore could not be impossible, otherwise, the U.S.S.R would not be existing; and (b) Mises’s critique was also “clearly” wrong because prices could be employed in a planned economy with a form of “market socialism.” First, Mises never said that it was impossible for a socialist society to exist, merely that to the extent that it showed any degree of rational economic functionality it was due to the ability of Soviet central planners to use prices existing in “surrounding” market-based societies as “shadow prices” to use, however imperfectly, as surrogates for non-existing real prices within the planned economy (See, Ebeling, 2010, pp. 27–28, and the references to Mises’s writings on this in footnote 22 on pp. 34–35). Second, by “impossible” or “impracticable,” Mises meant that a fully centrally planned economy could never equal and exceed the productive and economically rational efficiency of a functioning competitive market economy, indeed, would operate far, far worse. As F.A. Hayek observed, “What play has not been made with occasional passages in the work of the greatest scientific critic of socialism, Ludwig von Mises, in which he described socialism as ‘impossible’; Mises obviously meant that the proposed methods of socialism could not achieve what they were supposed to do! We can, of course, try any course of action, but what is questioned is whether any such course of action will produce the effects claimed to follow from it.” (Hayek, 1976, p. 297). Third, the socialist argument that central planners could, also, use prices for purposes of economic calculation, was, as Hayek emphasized in his own critique of market socialism, an admission that the critics of socialist central planning had been right all along: “It seems that, on this point, the criticisms of the earlier socialist schemes have been so successful that the defenders, with few exceptions, have felt compelled to appropriate the argument of their critics [about the need for prices for rational economic calculation], and have been forced to construct entirely new schemes of which nobody thought before.” (Hayek, 1940, p. 119). Fourth, in fact, Mises in the 1920s had already anticipated and answered some of the arguments being made in the German scholarly literature about various forms of price-using market socialism, showing what he considered to be their essential and fundamental flaws (von Mises, 1922, pp. 473–478; and, von Mises, 1923, pp. 351–366; and von Mises 1928, pp. 367–371.); and as Hayek did in his own critical analyses of the proposals for market socialism offered in the 1930s (Hayek, 1940, pp. 117–140, 1982, pp. 53–61; Ebeling, 2015b). Finally, the schemes for “market socialism” as they were offered in the 1930s and 1940s implicitly presumed Walrasian and Paretian systems of general equilibrium under which the “objective” economic facts of all supply and demand conditions were knowable and “operational” for purposes of working out necessary market-clearing conditions in and across sectors of the economy for a “mechanical” adjustment and setting of centrally planned prices through a “trial and error.” But both Mises and Hayek emphasized again and again that it is the unknowability of the “real” supply and demand conditions in all their specificity and continuous changeability – and especially, in terms of the subjective values and appraisements of the social participants in a changing world of imperfect knowledge – that means that there is no workable alternative to the decentralized, competitive, price-guiding market economy to discover those underlying circumstances for successful tendencies in the direction of interpersonal coordination of all those working and living within the system of division of labor (von Mises, 1920, pp. 105–107; 1922, pp. 122; 1938, pp. 27–32; 1949, pp. 704–715; Hayek, 1945, pp. 93–104; 1948, 105–116; 1968, pp. 304–313; Hoff, 1949, pp. 202–257; Tamedly, 1969, pp. 128–149; Lavoie, 1985a, b).

  10. One can say that not only was Paul Samuelson’s forecast of Soviet GDP off the mark, but his presumption that there would even be a Soviet Union in the year 2000 ended up being a bit faulty!

  11. The 1970s and 1980s saw a variety of accounts of daily Soviet life in their personal, social, economic and political aspects written by foreign correspondents who had had tours of duty reporting from Moscow and around the Soviet Union. Most especially, they give often detailed and frequently humorous accounts of the absurdities and corruptions and tragedies of the government central planning system and its functioning from the state manufacturing enterprises and the collective farms to the “special” retail stores with their favoritisms and privileges accessed and enjoyed by the Communist Party elite and the bureaucrats that made up the Nomenklatura – the personal in positions of authority throughout central planning networks across the Soviet system. Through the eyes and observations of these foreign correspondents, the interested reader and, especially, an economist is able to understand and appreciate the reality of the logical unworkability and “irrationality” of central planning within a society denied market-based prices and private enterprise competition, all about which Ludwig von Mises had “theorized” in the 1920s, 1930s, and 1940s. Among the better and most useful of such accounts, in my view, are (Binyon, 1983; Kaiser, 1976; Klose, 1984; Shane, 1994; Shipler, 1983; Smith, 1976; Willis, 1985). Among the older literature by foreign correspondents that spent long periods of time reporting from Moscow during the 1920s and 1930s, the two best reporters were, again, in my opinion (Chamberlin, 1931, 1934a, b, 1936, 1937, 1943; Lyons, 1934, 1935a, b, c, 1936, 1937).

  12. These trials and tribulations of the ordinary Soviet consumer were part of everyday life from the start. Eugene Lyons explained back in the 1930s why it was that in the Soviet Union, “The Customer is Always Wrong” (1935b, p. 302–303, 308): “The habit of gratitude for permission to purchase, moreover, is by this time so deeply engrained that the Soviet citizen behaves with the meekness of a poor relation getting a hand-out, rather than the hauteur of a customer conferring his patronage on a shop. The customer is always wrong, in Russia today. It is the shop, the sales clerk, the distributing trust, that has the upper hand. The customer waits patiently in line for hours. Humbly, gratefully, he accepts inferior goods, shoddy garments, wormy vegetables, badly made shoes... Under these circumstances, naturally, the sales clerk has developed a sense of superiority, an arrogance, without parallel in the outside world. He makes no secret of the evident fact that in selling you something he is conferring a major favor. Anyone who ventures to choose or cavil about quality gets short shrift... [The stores] are the property, in the final instance, of the all-powerful, ever-present, inescapable Soviet State. Officials set prices arbitrarily, maneuver available supplies in accordance with political exigencies, shut and open doors to the populous on orders from above, decide (in terms of ultimate effects) who shall eat and who shall starve, who shall be clothed and who shall freeze.”.

  13. Everything in the Soviet Union required and involved “connections.” Since prices did not allocate goods, and profits did not determine the production and distribution of outputs, everything became dependent on who you knew and what they might do for you in exchange for something you could do for them to get around the “supply-chains” of government planned production and distribution. This created a two-layered network of “friends” in Soviet society. On the other hand, there were those friends who one had known for years, often going back to having attended the same schools since childhood, and with whom one shared and commiserated about the trials and frustrations of everyday life, both great and small. Among this circle, trust and loyalty were paramount if any discussions veered in the direction of Party politics, the daily irritations with corruption, abuses of power, dislikes with “the system,” and the sharing of “illegal” literature by both Russian and foreign authors. It was necessary to feel absolutely confident that they would not betray you, just as you were expected to not betray them. Failure to do so meant being informed upon, being arrested, interrogated, threatened with or suffering torture, and being sent off to a camp or shot as an “enemy of the people.” The second layer of “friends” were those relationships that were cultivated not because you had ordinary things in common, either everyday life or similar interests in sports, literature, movies or “forbidden” politics. No, you needed to be on “good terms” with them because without it you might not be able to get a pair of shoes for your child, or be able to get tickets to a concert hall performance, or tell you who and how to contact someone who worked in a hospital so you or a family member might get needed medical treatment, at a “price,” of course, in cash or in-kind. It was always necessary to know to whom and by how much you should be “grateful” if they might assist you with some “problem” you were having. Soviet socialism created the need for people to live their lives in suspicion of others; to cultivate the art of a hypocritically false sincerity of a concern for and interest in others so you could have access to things that otherwise would remain out of your reach without their “friendship”; and to always live outside the formalities of Soviet socialist law, since life was impossible to live without buying and selling on the pervasive black market, meaning that much of what a person did in daily life just to “get by” made them a “criminal” in some way in the eyes of the Soviet state.

  14. On the ideology and psychology of the Soviet system and its making of the “new socialist man,” see (Heller, 1988; Smith, 1987).

  15. I have discussed a variety of these new schemes for government control and centralized planning in the name of “saving” the environment, and the new case for corporate social responsibility in (Ebeling, 2015a, b, 2019ab, c, d, 2020c, d).

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Ebeling, R.M. Socialism-in-practice was a nightmare, not Utopia: Ludwig von Mises’s critique of central planning and the fall of the Soviet Union. Rev Austrian Econ 34, 431–448 (2021). https://doi.org/10.1007/s11138-021-00545-w

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