Quotation of the Day…

by Don Boudreaux on December 5, 2021

in Complexity & Emergence, Prices, The Profit Motive

… is from page 8 of Bruce Caldwell’s Introduction to the 1997 collection of some of F.A. Hayek’s essays and papers (Bruce Caldwell, ed.), Socialism and War (footnote deleted; link added):

[Ludwig von] Mises’s reasoning was straightforward. In a market economy, entrepreneurs choose from among innumerable possible combinations of factors of production in an attempt to find the combination that minimizes their expected costs. They do this in an attempt to maximize their profits, which is the difference between revenues and costs. This self-interested search for the best combination helps to guide resources to their highest-valued uses, an outcome beneficial to society as a whole. Because of the multiplicity of production-goods and the fact that production takes place through time (during which all manner of changes on both the demand  and the supply side of the market might occur), the task is not an easy one. Entrepreneurs are aided in their deliberations by the money prices attached to the factors which reflect their relative scarcity. But in the socialist state no such prices would exist. Socialist managers would not have recourse to price signals to tell them which factors are relatively scarce and which are relatively plentiful: they would be left “groping in the dark”. The results were plain to see: “Where there is no free market, there is no pricing mechanism; without a pricing mechanism, there is no economic calculation.

DBx: Yes. And note that problems begin to arise the moment the pricing system is obstructed, as is done with tariffs and subsidies. With few such obstructions, the problems are few; these remain hidden by the enormous dynamism and prosperity produced by the largely free market. But the greater the number and severity are the obstructions of the pricing system, the greater are the problems.

The problems are most extreme, of course, when the obstructions of the pricing system are most extreme – for example, in full-on socialism. But the Mises-Hayek criticism of socialism, although initially aimed at the many advocates of full-on socialism (who were numerous in the first half of the 20th century), does not become applicable only when the discussion is of full-on socialism. The Mises-Hayek criticism of socialism is more general: it is a criticism of government obstruction of the pricing system – a demonstration of the marvels of the pricing system and of how it elicits and makes use of dispersed knowledge, and a corresponding explanation of the problems that inevitably arise whenever that system is obstructed.

Advocates of industrial policy cannot legitimately declare that the Mises-Hayek criticism of socialism is irrelevant to their schemes. That criticism is, in fact, highly relevant – and devastating.

[Pictured above is Ludwig von Mises.]

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