Praxus

http://www.mises.org/efandi/ch26.asp

26
The Marxian Theory of Wage Rates

The most powerful force in the policies of our age is Karl Marx. The rulers of the many hundreds of millions of comrades in the Communist countries behind the Iron Curtain pretend to put into effect the teachings of Marx; they consider themselves as the executors of the testament of Marx. In the noncommunist countries there is more restraint in the appreciation of Marx's achievements, but still he is praised at all universities as one of the greatest intellectual leaders of mankind, as the giant who has demolished inveterate prejudices and errors and has radically reformed philosophy and the sciences of man. Little attention is paid to the few dissenters who do not join in the chorus of commendation of Marx. They are boycotted as reactionaries.

The most remarkable fact about this unprecedented prestige of an author is that even his most enthusiastic admirers do not read his main writings and are not familiar with their content. A few passages and sentences from his books, always the same, are quoted again and again in political speeches and pamphlets. But the voluminous books and the scores of articles and pamphlets turned out by Marx are, as can be easily shown, not perused even by politicians and authors who proudly call themselves Marxians. Many people buy or borrow from a library reprints of Marx's writings and start reading them. But, bored to death, they usually stop after a few pages, if they had not already stopped on the first page.

Doctrines of Marx

If people were familiar with the doctrines of Marx, they would never talk, as they often do, about socialism "according to the designs and precepts of Marx." For Marx neither devised the concept of socialism nor did he ever say anything about the organization and operation of a socialist commonwealth except that it would be a blissful realm of unlimited abundance in which everybody would get all he needed. The idea of socialism—the abolition of private control of the material means of production and of free enterprise and the exclusive management of all economic affairs by the government—had been fully elaborated by French and British authors before Marx embarked upon his career as an author and propagandist. There was nothing left to be added to it and Marx did not add anything. Nor did he ever attempt to refute what economists had already brought forward in his time to show the illusiveness and absurdity of the socialist schemes. He derided as vain utopianism any occupation with the problems of a socialist economic system. As he himself viewed his own contribution, it consisted in the discovery of the alleged fact that the coming of socialism was inevitable and that socialism, precisely because it is bound to come "with the inexorability of a law of nature" and was the final goal to which mankind's history must necessarily lead, would be the fulfillment of all human wishes and desires, a state of everlasting joy and happiness.

The writings of Marx, first of all the ponderous volumes of his main treatise, Das Kapital, do not deal with socialism. Rather they deal with the market economy, with capitalism. They depict capitalism as a system of unspeakable horrors and utmost detestableness in which the immense majority of people, the proletarians, are ruthlessly oppressed and exploited by a class of felonious capitalists. Everything in this nefarious system is hopelessly bad, and no reform, however well intentioned, can alleviate, still less remove, the abominable suffering of the proletarians. Nothing else can be said in favor of capitalism than that precisely on account of its monstrosity and atrocity it will one day, when the evils it produces become intolerable, result in the great social revolution that will generate the socialist millennium.

The "Iron Law" of Wages

The pith of Marx's economic teachings is his "law" of wages. This alleged law that is at the bottom of his entire criticism of the capitalistic system is, of course, not of Marxian make. It was devised by earlier authors, had long since been known under the label of the "iron law of wages" and had already been thoroughly refuted before Marx employed it as the foundation of his doctrine. Marx chose to ignore all that had been said to show the viciousness of the reasoning implied in this alleged law. He made some sarcastic remarks about the German translation of the English term "iron law," as suggested by his main rival for the leadership of the German socialist party, Ferdinand Lassalle (1825-1864). But he built his entire economic reasoning, all his prognostication of the future course of economic affairs and his whole political program upon the illusory basis of this fallacious theorem.

This so-called "iron law" declares that wage rates are determined by the cost of the means of subsistence required for the bare maintenance of the labor force. The wage earner cannot get more than is physiologically needed to preserve his capacity to work and to enable him to raise the number of children required to replace him when he dies. If wages rise above this level, the wage earners will rear more progeny and the competition of these additional seekers for employment will reduce wage rates again to what this doctrine considers the natural level. If, on the other hand, wages drop below this alleged natural level, the workers will not be able to feed the number of offspring needed to fill the ranks of the labor force. There will then develop a shortage of laborers and competition among the employers will bring wage rates back to the natural level.

From the point of view of this alleged "iron law" the fate of the wage earners under capitalism appears hopeless. They can never lift themselves above the level of bare subsistence. No reforms, no governmental minimum wage enactment's, no activities of labor unions can prove effectual against this iron law. Under capitalism, the proletarians are doomed to remain forever on the verge of starvation. All the advantages derived from the improvement of technological methods of production are pocketed exclusively by the capitalists. This is what the Marxian category of exploitation means. By right, Marx implies, all the products ought to benefit those who are producing them, the manual workers. The mere existence of the bourgeoisie is parasitic. While the proletarians suffer, the bourgeois exploit, feast and revel.

Capitalist Production

Now one has only to look around in order to detect that something must be entirely wrong with this description of capitalism's economic functioning. The great innovation brought about by the transformation of the precapitalistic mode of production into the capitalistic system, the historical event that is called the Industrial Revolution, was precisely the inauguration of a new principle of marketing. The processing industries of the good old days catered almost exclusively to the wants of the well-to-do. But what characterizes capitalism as such is that it is mass production for the satisfaction of the needs of the masses. The much greater part of all the products turned out by the factories is consumed, directly or indirectly, by the same people who are working in the factories. Big business is big precisely because it produces the goods asked for, and bought by, the masses. If you go into the household of the average common man of a capitalistic country, you will find products manufactured in the plants of big business. It is fantastic nonsense to assert that all the wage earner gets are the bare necessities to sustain himself and to rear enough children to fill the jobs in the factories. While businesses that produce for the masses grow big, those that are turning out luxury goods for the few never grow above the size of medium, or even small, businesses.

The essential shortcoming of the "iron law of wages" was that it denied to the wage earner his human character and dealt with him as if he were a non-human creature. In all non-human living beings the urge is inwrought to proliferate up to the limits drawn by the available supply of the means of subsistence. Nothing but the quantity of attainable nourishment checks the boundless multiplication of elephants and rodents, of bugs and germs. Their number keeps pace with the available aliments. But this biological law does not apply to man. Man aims also at other ends than those involving the physiological needs of his body. The "iron law" assumed that the wage earner, the common man, is no better than a rabbit, that he craves no other satisfactions than feeding and proliferation and does not know of any other employment for his earnings than the procurement of those animal satisfactions. It is obvious that this is the most absurd assumption ever made. What characterizes man as man and elevates him above the level of the animals is that he aims also at specifically human ends which we may call "higher ends." Man is not like other living beings that are driven exclusively by the appetites of their bellies and their sex glands. The wage earner is also a man, that is a moral and intellectual person. If he earns more than the absolutely required minimum, he spends it upon the satisfaction of his specifically human wants; he tries to render his life and that of his dependents more civilized.

At the time Marx and Engels adopted this spurious "iron law" and asserted in the Communist Manifesto (1848) that the average wage is "that quantum of the means of nourishment (Lebensmittel) which is absolutely requisite (notwendig) to keep the laborer in bare existence as a laborer," judicious economists had already exposed the fallaciousness of this syllogism. But Marx did not heed their criticism. His whole economic doctrine set forth in his main treatise, Das Kapital, is based upon the "iron law." The falseness of this presumed law, the falseness of which has not been questioned by anybody for about a hundred years, cuts the ground from under all his economic reasoning. And it demolishes entirely the main demagogy of the Marxian system, the doctrine, that contends that the recipients of wages and salaries are exploited by the employers.

The Inevitability of Socialism

In the elaboration of his system of philosophy and economics Marx was blinded to such an extent by his passionate hatred of Western civilization that he did not become aware of the blatant contradictions in his own reasoning. One of the most essential dogmas of the Marxian message, perhaps its very core and substance, is the doctrine of the inevitability of the coming of socialism. In Das Kapital (1867), Marx proclaims that capitalism "begets, with the inexorability of a law of nature, its own negation," that is, it produces socialism. It is this prophecy that accounts for the obstinate fanaticism of the various communist and socialist factions of our age.

Marx tried to prove this cardinal dogma of his creed by the famous prognostication that capitalism generates necessarily and unavoidably, a progressive impoverishment of the masses of the wage earners. The more capitalism develops, he says, the more "grows the mass of misery, oppressions, slavery, degradation and exploitation." With "the progress of industry" the worker "sinks deeper and deeper," until finally, when his sufferings have become unbearable, the exploited masses revolt and establish the everlasting bliss of socialism.

It is well known that this prognostication of Marx was no less disproved by the facts of social evolution than all other Marxian prophecies. Since Marx wrote the lines quoted in 1848 and 1867, the standard of living of the wage earners has in all capitalistic countries improved in a way unprecedented and undreamt of.

But there is still something more to say about this piece of Marx's argumentation. It contradicts the whole Marxian theory of the determination of wage rates. As has been pointed out, this theory asserts that wage rates under capitalism are always and necessarily so low that for physiological reasons they cannot drop any further without wiping out the whole class of wage earners. How is it then possible that capitalism brings forth a progressing impoverishment of the wage earners? Marx in his prediction of the progressive impoverishment of the masses contradicted not only all the facts of historical experience. He also contradicted the essential teachings of his own theory based on the "iron law of wages," namely that capitalist wage rates are so low that they cannot drop any further without wiping out the workers.

The Marxian economic system, so much praised by hosts of self-styled intellectuals, is a hodgepodge of arbitrary statements conflicting with one another.

barrowaj

An excellent article. The criticism of the apparent paradox of the "iron law of wages" is a good one, but I can think of more criticisms of Marxism as well. However, the "iron law of wages" is not simply true, or as this article states, false. It is instead true on the condition that labor supply is extremely high. This is the case if you have too many people available, or if people who have some of their living expenses subsidized by their parents (ie. teenagers) are in the labor market as well.

ZFBoxcar

The history of the West, from the age of the Greek polis down to the present-day resistance to socialism, is essentially the history of the fight for liberty against the encroachments of the officeholders.

Praxus

Ludwig Von Mises on Socialism
http://www.mises.org/etexts/ecopol.asp#_Socialism

I am here in Buenos Aires as a guest of the Centro de Difusión Economía Libre.[1] What is economía libre? What does this system of economic freedom mean? The answer is simple: it is the market economy, it is the system in which the cooperation of individuals in the social division of labor is achieved by the market. This market is not a place; it is a process, it is the way in which, by selling and buying, by producing and consuming, the individuals contribute to the total workings of society.

In dealing with this system of economic organization-the market economy-we employ the term "economic freedom." Very often, people misunderstand what it means, believing that economic freedom is something quite apart from other freedoms, and that these other freedoms-which they hold to be more important-can be preserved even in the absence of economic freedom. The meaning of economic freedom is this: that the individual is in a position to choose the way in which he wants to integrate himself into the totality of society. The individual is able to choose his career, he is free to do what he wants to do.

This is of course not meant in any sense which so many people attach to the word freedom today; it is meant rather in the sense that, through economic freedom, man is freed from natural conditions. In nature, there is nothing that can be termed freedom, there is only the regularity of the laws of nature, which man must obey if he wants to attain something.

In using the term freedom as applied to human beings, we think only of freedom within society. Yet, today, social freedoms are considered by many people to be independent of one another. Those who call themselves "liberals" today are asking for policies which are precisely the opposite of those policies which the liberals of the nineteenth century advocated in their liberal programs. The so-called liberals of today have the very popular idea that freedom of speech, of thought of the press, freedom of religion, freedom from imprisonment without trial-that all these freedoms can be preserved in the absence of what is called economic freedom. They do not realize that, in a system where there is no market, where the government directs everything, all those other freedoms are illusory, even if they are made into laws and written up in constitutions.

Let us take one freedom, the freedom of the press. If the government owns all the printing presses, it will determine what is to be printed and what is not to be printed. And if the government owns all the printing presses and determines what shall or shall not be printed, then the possibility of printing any kind of opposing arguments against the ideas of the government becomes practically nonexistent. Freedom of the press disappears. And it is the same with all the other freedoms.

In a market economy, the individual has the freedom to choose whatever career he wishes to pursue, to choose his own way of integrating himself into society. But in a socialist system, that is not so: his career is decided by decree of the government. The government can order people whom it dislikes, whom it does not want to live in certain regions, to move into other regions and to other places. And the government is always in a position to justify and to explain such procedure by declaring that the governmental plan requires the presence of this eminent citizen five thousand miles away from the place in which he could be disagreeable to those in power.

It is true that the freedom a man may have in a market economy is not a perfect freedom from the metaphysical point of view. But there is no such thing as perfect freedom. Freedom means something only within the framework of society. The eighteenth-century authors of "natural law"-above all, Jean Jacques Rousseau-believed that once, in the remote past, men enjoyed something called "natural" freedom. But in that remote age, individuals were not free, they were at the mercy of everyone who was stronger than they were. The famous words of Rousseau: "Man is born free and everywhere he is in chains" may sound good, but man is in fact not born free. Man is born a very weak suckling. Without the protection of his parents, without the protection given to his parents by society, he would not be able to preserve his life.

Freedom in society means that a man depends as much upon other people as other people depend upon him. Society under the market economy, under the conditions of "economía libre," means a state of affairs in which everybody serves his fellow citizens and is served by them in return. People believe that there are in the market economy bosses who are independent of the good will and support of other people. They believe that the captains of industry, the businessmen, the entrepreneurs are the real bosses in the economic system. But this is an illusion. The real bosses in the economic system are the consumers. And if the consumers stop patronizing a branch of business, these businessmen are either forced to abandon their eminent position in the economic system or to adjust their actions to the wishes and to the orders of the consumers.

One of the best-known propagators of communism was Lady Passfield, under her maiden name Beatrice Potter, and well-known also through her husband Sidney Webb. This lady was the daughter of a wealthy businessman and, when she was a young adult, she served as her father's secretary. In her memoirs she writes: "In the business of my father everybody had to obey the orders issued by my father, the boss. He alone had to give orders, but to him nobody gave any orders." This is a very short-sighted view. Orders were given to her father by the consumers, by the buyers. Unfortunately, she could not see these orders; she could not see what goes on in a market economy, because she was interested only in the orders given within her father's office or his factory.

In all economic problems, we must bear in mind the words of the great French economist Frédéric Bastiat, who titled one of his brilliant essays: "Ce qu'on voit et ce qu'on ne voit pas" ("That which is seen and that which is not seen"). In order to comprehend the operation of an economic system, we must deal not only with the things that can be seen, but we also have to give our attention to the things which cannot be perceived directly. For instance, an order issued by a boss to an office boy can be heard by everybody who is present in the room. What cannot be heard are the orders given to the boss by his customers.

The fact is that, under the capitalistic system, the ultimate bosses are the consumers. The sovereign is not the state, it is the people. And the proof that they are the sovereign is borne out by the fact that they have the right to be foolish. This is the privilege of the sovereign. He has the right to make mistakes, no one can prevent him from making them, but of course he has to pay for his mistakes. If we say the consumer is supreme or that the consumer is sovereign, we do not say that the consumer is free from faults, that the consumer is a man who always knows what would be best for him. The consumers very often buy things or consume things they ought not to buy or ought not to consume.

But the notion that a capitalist form of government can prevent people from hurting themselves by controlling their consumption is false. The idea of government as a paternal authority, as a guardian for everybody, is the idea of those who favor socialism. In the United States some years ago, the government tried what was called "a noble experiment." This noble experiment was a law making it illegal to buy or sell intoxicating beverages. It is certainly true that many people drink too much brandy and whiskey, and that they may hurt themselves by doing so. Some authorities in the United States are even opposed to smoking. Certainly there are many people who smoke too much and who smoke in spite of the fact that it would be better for them not to smoke. This raises a question which goes far beyond economic discussion: it shows what freedom really means.

Granted, that it is good to keep people from hurting themselves by drinking or smoking too much. But once you have admitted this, other people will say: Is the body everything? Is not the mind of man much more important? Is not the mind of man the real human endowment, the real human quality? If you give the government the right to determine the consumption of the human body, to determine whether one should smoke or not smoke, drink or not drink, there is no good reply you can give to people who say: "More important than the body is the mind and the soul, and man hurts himself much more by reading bad books, by listening to bad music and looking at bad movies. Therefore it is the duty of the government to prevent people from committing these faults."

And, as you know, for many hundreds of years governments and authorities believed that this really was their duty. Nor did this happen in far distant ages only; not long ago, there was a government in Germany that considered it a governmental duty to distinguish between good and bad paintings-which of course meant good and bad from the point of view of a man who, in his youth, had failed the entrance examination at the Academy of Art in Vienna; good and bad from the point of view of a picture-postcard painter, Adolf Hitler. And it became illegal for people to utter other views about art and paintings than his, the Supreme Führer's.

Once you begin to admit that it is the duty of the government to control your consumption of alcohol, what can you reply to those who say the control of books and ideas is much more important?

Freedom really means the freedom to make mistakes. This we have to realize. We may be highly critical with regard to the way in which our fellow citizens are spending their money and living their lives. We may believe that what they are doing is absolutely foolish and bad, but in a free society, there are many ways for people to air their opinions on how their fellow citizens should change their ways of life. They can write books; they can write articles; they can make speeches; they can even preach at street corners if they want-and they do this in many countries. But they must not try to police other people in order to prevent them from doing certain things simply because they themselves do not want these other people to have the freedom to do it.

This is the difference between slavery and freedom. The slave must do what his superior orders him to do, but the free citizen-and this is what freedom means-is in a position to choose his own way of life. Certainly this capitalistic system can be abused, and is abused, by some people. It is certainly possible to do things which ought not to be done. But if these things are approved by a majority of the people, a disapproving person always has a way to attempt to change the minds of his fellow citizens. He can try to persuade them, to convince them, but he may not try to force them by the use of power, of governmental police power.

In the market economy, everyone serves his fellow citizens by serving himself. This is what the liberal authors of the eighteenth century had in mind when they spoke of the harmony of the rightly understood interests of all groups and of all individuals of the population. And it was this doctrine of the harmony of interests which the socialists opposed. They spoke of an "irreconcilable conflict of interests" between various groups.

What does this mean? When Karl Marx-in the first chapter of the Communist Manifesto, that small pamphlet which inaugurated his socialist movement-claimed that there was an irreconcilable conflict between classes, he could not illustrate his thesis by any examples other than those drawn from the conditions of precapitalistic society. In precapitalistic ages, society was divided into hereditary status groups, which in India are called "castes." In a status society a man was not, for example, born a Frenchman; he was born as a member of the French aristocracy or of the French bourgeoisie or of the French peasantry. In the greater part of the Middle Ages, he was simply a serf. And serfdom, in France, did not disappear completely until after the American Revolution. In other parts of Europe it disappeared even later.

But the worst form in which serfdom existed-and continued to exist even after the abolition of slavery- was in the British colonies abroad. The individual inherited his status from his parents, and he retained it throughout his life. He transferred it to his children. Every group had privileges and disadvantages. The highest groups had only privileges, the lowest groups only disadvantages. And there was no way a man could rid himself of the legal disadvantages placed upon him by his status other than by fighting a political struggle against the other classes. Under such conditions, you could say that there was an "irreconcilable conflict of interests between the slave owners and the slaves," because what the slaves wanted was to be rid of their slavery, of their quality of being slaves. This meant a loss, however, for the owners. Therefore, there is no question that there had to be this irreconcilable conflict of interests between the members of the various classes.

One must not forget that in those ages-in which the status societies were predominant in Europe, as well as in the colonies which the Europeans later founded in America-people did not consider themselves to be connected in any special way with the other classes of their own nation; they felt much more at one with the members of their own class in other countries. A French aristocrat did not look upon lower class Frenchmen as his fellow citizens; they were the "rabble," which he did not like. He regarded only the aristocrats of other countries-those of Italy, England, and Germany, for instance, as his equals.

The most visible effect of this state of affairs was the fact that the aristocrats all over Europe used the same language. And this language was French, a language which was not understood, outside France, by other groups of the population. The middle classes-the bourgeoisie-had their own language, while the lower classes-the peasantry-used local dialects which very often were not understood by other groups of the population. The same was true with regard to the way people dressed. When you travelled in 1750 from one country to another, you found that the upper classes, the aristocrats, were usually dressed in the same way all over Europe, and you found that the lower classes dressed differently. When you met someone in the street, you could see immediately-from the way he dressed-to which class, to which status he belonged.

It is difficult to imagine how different these conditions were from present-day conditions. When I come from the United States to Argentina and I see a man on the street, I cannot know what his status is. I only assume that he is a citizen of Argentina and that he is not a member of some legally restricted group. This is one thing that capitalism has brought about. Of course, there are also differences within capitalism. There are differences in wealth, differences which Marxians mistakenly consider to be equivalent to the old differences that existed between men in the status society.

The differences within a capitalist society are not the same as those in a socialist society. In the Middle Ages-and in many countries even much later-a family could be an aristocrat family and possess great wealth, it could be a family of dukes for hundreds and hundreds of years, whatever its qualities, its talents, its character or morals. But, under modern capitalistic conditions, there is what has been technically described by sociologists as "social mobility." The operating principle of this social mobility, according to the Italian sociologist and economist Vilfredo Pareto, is "la circulation des élites" (the circulation of the elites). This means that there are always people who are at the top of the social ladder, who are wealthy, who are politically important, but these people-these elites-are continually changing.

This is perfectly true in a capitalist society. It was not true for a precapitalistic status society. The families who were considered the great aristocratic families of Europe are still the same families today or, let us say, they are the descendants of families that were foremost in Europe, 800 or 1000 or more years ago. The Capetians of Bourbon-who for a very long time ruled here in Argentina-were a royal house as early as the tenth century. These kings ruled the territory which is known now as the Ile-de-France, extending their reign from generation to generation. But in a capitalist society, there is continuous mobility-poor people becoming rich and the descendants of those rich people losing their wealth and becoming poor.

Today I saw in a bookshop in one of the central streets of Buenos Aires the biography of a businessman who was so eminent, so important, so characteristic of big business in the nineteenth century in Europe that, even in this country, far away from Europe, the bookshop carried copies of his biography. I happen to know the grandson of this man. He has the same name his grandfather had, and he still has a right to wear the title of nobility which his grandfather-who started as a blacksmith-had received eighty years ago. Today this grandson is a poor photographer in New York City.

Other people, who were poor at the time this photographer's grandfather became one of Europe's biggest industrialists, are today captains of industry. Everyone is free to change his status. That is the difference between the status system and the capitalist system of economic freedom, in which everyone has only himself to blame if he does not reach the position he wants to reach.

The most famous industrialist of the twentieth century up to now is Henry Ford. He started with a few hundred dollars which he had borrowed from his friends, and within a very short time he developed one of the most important big business firms of the world. And one can discover hundreds of such cases every day.

Every day, the New York Times prints long notices of people who have died. If you read these biographies, you may come across the name of an eminent businessman, who started out as a seller of newspapers at street corners in New York. Or he started as an office boy, and at his death he was the president of the same banking firm where he started on the lowest rung of the ladder. Of course, not all people can attain these positions. Not all people want to attain them. There are people who are more interested in other problems and, for these people, other ways are open today which were not open in the days of feudal society, in the ages of the status society.

The socialist system, however, forbids this fundamental freedom to choose one's own career. Under socialist conditions, there is only one economic authority, and it has the right to determine all matters concerning production.

One of the characteristic features of our day is that people use many names for the same thing. One synonym for socialism and communism is "planning." If people speak of "planning" they mean, of course, central planning, which means one plan made by the government-one plan that prevents planning by anyone except the government.

A British lady, who also is a member of the Upper House, wrote a book entitled Plan or No Plan, a book which was quite popular around the world. What does the title of her book mean? When she says "plan," she means only the type of plan envisioned by Lenin and Stalin and their successors, the type which governs all the activities of all the people of a nation. Thus, this lady means a central plan which excludes all the personal plans that individuals may have. Her title Plan or No Plan is therefore an illusion, a deception; the alternative is not a central plan or no plan, it is the total plan of a central governmental authority or freedom for individuals to make their own plans, to do their own planning. The individual plans his life, every day, changing his daily plans whenever he will.

The free man plans daily for his needs; he says, for example: "Yesterday I planned to work all my life in Córdoba." Now he learns about better conditions in Buenos Aires and changes his plans, saying: "Instead of working in Córdoba, I want to go to Buenos Aires." And that is what freedom means. It may be that he is mistaken, it may be that his going to Buenos Aires will turn out to have been a mistake. Conditions may have been better for him in Córdoba, but he himself made his plans.

Under government planning, he is like a soldier in an army. The soldier in the army does not have the right to choose his garrison, to choose the place where he will serve. He has to obey orders. And the socialist system-as Karl Marx, Lenin, and all socialist leaders knew and admitted-is the transfer of army rule to the whole production system. Marx spoke of "industrial armies," and Lenin called for "the organization of everything-the postoffice, the factory, and other industries, according to the model of the army.

Therefore, in the socialist system everything depends on the wisdom, the talents, and the gifts of those people who form the supreme authority. That which the supreme dictator-or his committee-does not know, is not taken into account. But the knowledge which mankind has accumulated in its long history is not acquired by everyone; we have accumulated such an enormous amount of scientific and technical knowledge over the centuries that it is humanly impossible for one individual to know all these things, even though he be a most gifted man.

And people are different, they are unequal. They always will be. There are some people who are more gifted in one subject and less in another one. And there are people who have the gift to find new paths, to change the trend of knowledge. In capitalist societies, technological progress and economic progress are gained through such people. If a man has an idea, he will try to find a few people who are clever enough to realize the value of his idea. Some capitalists, who dare to look into the future, who realize the possible consequences of such an idea, will start to put it to work. Other people, at first, may say: "They are fools"; but they will stop saying so when they discover that this enterprise, which they called foolish, is flourishing, and that people are happy to buy its products.

Under the Marxian system, on the other hand, the supreme government body must first be convinced of the value of such an idea before it can be pursued and developed. This can be a very difficult thing to do, for only the group of people at the head-or the supreme dictator himself-has the power to make decisions. And if these people-because of laziness or old age, or because they are not very bright and learned-are unable to grasp the importance of the new idea, then the new project will not be undertaken.

We can think of examples from military history. Napoleon was certainly a genius in military affairs; he had one serious problem, however, and his inability to solve that problem culminated, finally, in his defeat and exile to the loneliness of St. Helena. Napoleon's problem was: "How to conquer England?" In order to do that, he needed a navy to cross the English Channel, and there were people who told him they had a way to accomplish that crossing, people who-in an age of sailing ships- had come up with the new idea of steam ships. But Napoleon did not understand their proposal.

Then there was Germany's Generalstab, the famous German general staff. Before the First World War, it was universally considered to be unsurpassed in military wisdom. A similar reputation was held by the staff of General Foch in France. But neither the Germans nor the French-who, under the leadership of General Foch, later defeated the Germans-realized the importance of aviation for military purposes., The German general staff said: "Aviation is merely for pleasure, flying is good for idle people. From a military point of view, only the Zeppelins are important" and the French general staff was of the same opinion.

Later, during the period between World War I and World War II, there was a general in the United States who was convinced that aviation would be very important in the next war. But all other experts in the United States were against him. He could not convince them. If you have to convince a group of people who are not directly dependent on the solution of a problem, you will never succeed. This is true also of noneconomic problems.

There have been painters, poets, writers, composers, who complained that the public did not acknowledge their work and caused them to remain poor. The public may certainly have had poor judgment, but when these artists said: "The government ought to support great artists, painters, and writers," they were very much in the wrong. Whom should the government entrust with the task of deciding whether a newcomer is really a great painter or not? It would have to rely on the judgment of the critics, and the professors of the history of art who are always looking back into the past yet who very rarely have shown the talent to discover new genius. This is the great difference between a system of "planning" and a system in which everyone can plan and act for himself.

It is true, of course, that great painters and great writers have often had to endure great hardships. They might have succeeded in their art, but not always in getting money. Van Gogh was certainly a great painter. He had to suffer unbearable hardship and, finally, when he was thirty-seven years old, he committed suicide. In all his life he sold only one painting and the buyer of it was his cousin. Apart from this one sale, he lived from the money of his brother, who was not an artist nor a painter. But van Gogh's brother understood a painter's needs. Today you cannot buy a van Gogh for less than hundred or two hundred thousand dollars.

Under a socialist system, van Gogh's fate might have been different. Some government official would have asked some well-known painters (whom van Gogh certainly would not have regarded as artists at all) whether this young man, half or completely crazy, was really a painter worthy to be supported. And they without a doubt, would have answered: "No, he is not a painter; he is not an artist; he is just a man who wastes paint;" and they would have sent him into a milk factory or into a home for the insane. Therefore all this enthusiasm in favor of socialism by the rising generation of painters, poets, musicians, journalists, actors, is based on an illusion. I mention this because these groups are among the most fanatical supporters of the socialist idea.

When it comes to choosing between socialism and capitalism as an economic system, the problem is somewhat different. The authors of socialism never suspected that modern industry, and all the operations of modern business, are based on calculation. Engineers are by no means the only ones who make plans on the basis of calculations, businessmen also must do so. And businessmen's calculations are all based on the fact that, in the market economy, the money prices of goods inform not only the consumer, they also provide vital information to businessmen about the factors of production, the main function of the market being not merely to determine the cost of the last part of the process of production and transfer of goods to the hands of the consumer, but the cost of those steps leading up to it. The whole market system is bound up with the fact that there is a mentally calculated division of labor between the various businessmen who vie with each other in bidding for the factors of production-the raw materials, the machines, the instruments-and for the human factor of production, the wages paid to labor. This sort of calculation by the businessman cannot be accomplished in the absence of prices supplied by the market.

At the very instant you abolish the market-which is what the socialists would like to do-you render useless all the computations and calculations of the engineers and technologists. The technologists can give you a great number of projects which, from the point of view of the natural sciences, are equally feasible, but it takes the market-based calculations of the businessman to make clear which of those projects is the most advantageous, from the economic point of view.

The problem with which I am dealing here is the fundamental issue of capitalistic economic calculation as opposed to socialism. The fact is that economic calculation, and therefore all technological planning, is possible only if there are money prices, not only for consumer goods but also for the factors of production. This means there has to be a market for raw materials, for all half-finished goods, for all tools and machines, and for all kinds of human labor and human services.

When this fact was discovered, the socialists did not know how to respond. For 150 years they had said: "All the evils in the world come from the fact that there are markets and market prices. We want to abolish the market and with it, of course, the market economy, and substitute for it a system without prices and without markets." They wanted to abolish what Marx called the "commodity character" of commodities and of labor.

When faced with this new problem, the authors of socialism, having no answer, finally said: "We will not abolish the market altogether; we will pretend that a market exists; we will play market like children who play school." But everyone knows that when children play school, they do not learn anything. It is just an exercise, a game, and you can "play" at many things.

This is a very difficult and complicated problem and in order to deal with it in full one needs a little more time than I have here. I have explained it in detail in my writings. In six lectures I cannot enter into an analysis of all its aspects. Therefore, I want to advise you, if you are interested in the fundamental problem of the impossibility of calculation and planning under socialism, read my book Human Action, which is available in an excellent Spanish translation.

But read other books, too, like the book of the Norwegian economist Trygve Hoff, who wrote on economic calculation. And if you do not want to be one-sided, I recommend that you read the highly-regarded socialist book on this subject by the eminent Polish economist Oskar Lange, who at one time was a professor at an American university, then became a Polish ambassador, and later returned to Poland.

You will probably ask me: "What about Russia? How do the Russians handle this question?" This changes the problem. The Russians operate their socialistic system within a world in which there are prices for all the factors of production, for all raw materials, for everything. They can therefore employ, for their planning, the foreign prices of the world market. And because there are certain differences between conditions in Russia and those in United States, the result is very often that the Russians consider something to be justified and advisable-from their economic point of view-that the Americans would not consider economically justifiable at all.

The "Soviet experiment," as it was called, does not prove anything. It does not tell us anything about the fundamental problem of socialism, the problem of calculation. But are we entitled to speak of it as an experiment? I do not believe there is such a thing as a scientific experiment in the field of human action and economics. You cannot make laboratory experiments in the field of human action because a scientific experiment requires that you do the same thing under various conditions, or that you maintain the same conditions, changing perhaps only one factor. For instance, if you inject into a cancerous animal some experimental medication, the result may be that the cancer will disappear. You can test this with various animals of the same kind which suffer from the same malignancy. If you treat some of them with the new method and do not treat the rest, then you can compare the result. You cannot do this within the field of human action. There are no laboratory experiments in human action.

The so-called Soviet "experiment" merely shows that the standard of living is incomparably lower in Soviet Russia than it is in the country that is considered, by the whole world, as the paragon of capitalism: the United States.

Of course, if you tell this to a socialist, he will say: "Things are wonderful in Russia." And you tell him: "They may be wonderful, but the average standard of living is much lower." Then he will answer: "Yes, but remember how terrible it was for the Russians under the tsars and how terrible a war we had to fight."

I do not want to enter into discussion of whether this is or is not a correct explanation, but if you deny that the conditions are the same, you deny that it was an experiment. You must then say this (which would be much more correct): "Socialism in Russia has not brought about an improvement in the conditions of the average man which can be compared with the improvement of conditions, during the same period, in the United States."

In the United States you hear of something new, of some improvement, almost every week. These are improvements that business has generated, because thousands and thousands of business people are trying day and night to find some new product which satisfies the consumer better or is less expensive to produce, or better and less expensive than the existing products. They do not do this out of altruism, they do it because they want to make money. And the effect is that you have an improvement in the standard of living in the United States which is almost miraculous, when compared with the conditions that existed fifty or a hundred years ago. But in Soviet Russia, where you do not have such a system, you do not have a comparable improvement. So those people who tell us that we ought to adopt the Soviet system are badly mistaken.

There is something else that should be mentioned. The American consumer, the individual, is both a buyer and a boss. When you leave a store in America, you may find a sign saying: "Thank you for your patronage. Please come again." But when you go into a shop in a totalitarian country-be it in present-day Russia, or in Germany as it was under the regime of Hitler-the shopkeeper tells you: "You have to be thankful to the great leader for giving you this."

In socialist countries, it is not the seller who has to be grateful, it is the buyer. The citizen is not the boss; the boss is the Central Committee, the Central Office. Those socialist committees and leaders and dictators are supreme, and the people simply have to obey them.

Praxus

Nathaniel Brandon on Monopolies.

http://www.nathanielbranden.com/ess/ton01.html


One of the worst fallacies in the field of economics — propagated by Karl Marx and accepted by almost everyone today, including many businessmen — is that the development of monopolies is an inescapable and intrinsic result of the operation of a free, unregulated economy. In fact, the exact opposite is true. It is a free market that makes monopolies impossible.

It is imperative that one be clear and specific in one's understanding of the meaning of "monopoly." When people speak in an economic or political context, of the dangers and evils of monopoly, what they mean is a coercive monopoly — that is; exclusive control of a given field of production which is closed to and exempt from competition, so that those controlling the field are able to set arbitrary production policies and charge arbitrary prices, independent of the market, immune from the law of supply and demand. Such a monopoly, it is important to note, entails more than the absence of competition; it entails the impossibility of competition. That is a coercive monopoly's characteristic attribute-and is essential to any condemnation of such a monopoly.

In the whole history of capitalism, no one has been able to establish a coercive monopoly by means of competition on a free market. There is only one way to forbid entry into a given field of production: by law. Every single coercive monopoly that exists or ever has existed — in the United States, in Europe or anywhere else in the world — was created and made possible only by an act of government: by special franchises, licenses, subsidies, by legislative actions which granted special privileges (not obtainable on a free market) to a man or a group of men, and forbade all others to enter that particular field.

A coercive monopoly is not the result of laissez-faire; it can result only from the abrogation of laissez-faire and from the introduction of the opposite principle — the principle of statism.

In this country, a utility company is a coercive monopoly: the government grants it a franchise for an exclusive territory, and no one else is allowed to engage in that service in that territory; a would-be competitor, attempting to sell electric power, would be stopped by law. A telephone company is a coercive monopoly. As recently as World War II, the government ordered the two then existing telegraph companies, Western Union and Postal Telegraph, to merge into one monopoly.

One of the best illustrations of the fact that a coercive monopoly requires the abrogation of the principle of laissez-faire is given by Ayn Rand in her "Notes on the History of American Free Enterprise." She writes:

"The Central Pacific — which was built by the 'Big Four' of California, on federal subsides — was the railroad which was guilty of all the evils popularly held against railroads. For almost thirty years, the Central Pacific controlled California, held a monopoly and permitted no competitor to enter the state. It charged disastrous rates, changed them every year, and took the entire profit of any California farmer or shipper who had no other railroad to turn to. How was this made possible? It was done through the power of the California legislature. The Big Four controlled the legislature and held the state closed to competitors by legal restrictions — such as, for instance, a legislative act which gave the Big Four exclusive control of the entire coast line of California and forbade any other railroad to enter any port. During these thirty years, many attempts were made by private interests to start competing railroads in California and break the monopoly of the Central Pacific. These attempts were defeated — not by methods of free trade and free competition, but by legislative action.

"This thirty-year monopoly of the Big Four and the practices in which they engaged are always quoted as an example of the evils of big business and Free Enterprise. Yet the Big Four were not free enterprises; they were not businessmen who had achieved power by means of unregulated trade. They were typical representatives of what is now called 'a mixed economy.' They achieved power by legislative interference into business; none of their abuses would have been possible in a free, unregulated economy."

In the comparatively free days of American capitalism, in the late-nineteenth-early-twentieth century, there were many attempts to "corner the market" on various commodities (such as cotton and wheat, to mention two famous examples) — then close the field to competition and gather huge profits by selling at exorbitant prices. All such attempts failed. The men who tried it were compelled to give up — or go bankrupt. They were defeated, not by legislative action — but by the action of the free market.

The question is often asked: What if a large, rich company kept buying out its smaller competitors or kept forcing them out of business by means of undercutting prices and selling at a loss — would it not be able to gain control of a given field and then start charging high prices and be free to stagnate with no fear of competition? The answer is: No, it would not be able to do it. If a company assumed heavy losses in order to drive out competitors then began to charge high prices to regain what it had lost, this would serve as an incentive for new competitors to enter the field and take advantage of the high profitability, without any losses to recoup. The new competitors would force prices down to the market level. The large company would have either to abandon its attempt to establish monopoly prices — or else go bankrupt fighting off the competitors its own polices would attract.

It is a matter of historical fact that no "price war" has ever succeeded in establishing a monopoly or in maintaining prices above the market level, outside the law of supply and demand. ("Price wars" have, however, acted as spurs to the economic efficiency of competing companies — and have thereby resulted in enormous benefits to the public, in terms of better products at lower prices.)

What is frequently forgotten by people, in considering an issue of this kind, is the crucial role of the capital market in a free economy. As Alan Greenspan observes in his article "Bad History" (Barron's, February 5, 1962): "If entry [into a given field of production] is not impeded by Government regulations, franchises or subsidies, the ultimate regulator of competition in a free economy is the capital market. So long as capital is free to flow, it will tend to seek those areas of maximum rate of return." Investors are constantly seeking the most profitable uses of their capital. If, therefore, some field of production is seen to be highly profitable (particularly when the profitability is due to high prices rather than to low costs), businessmen and investors necessarily will be attracted to that field; and, as the supply of the product in question is increased relative to the demand for it, prices fall accordingly. "The capital market" writes Mr. Greenspan, "acts as a regulator of prices, not necessarily of profits. It leaves any individual producer free to earn as much as he can by lowering his costs and by increasing his efficiency relative to others. Thus, it constitutes the mechanism which generates greater incentives to increased productivity, thereby leading to a rising standard of living."

The free market does not permit inefficiency or stagnation — with economic impunity — in any field of production. Consider, for instance, a well-known incident in the history of the American automobile industry. There was a period when Henry Ford's Model-T held an enormous part of the automobile market. But when Ford's company attempted to stagnate and to resist stylistic changes — "You can have any color of the Model-T you want, so long as it's black" — General Motors, with its more attractively styled Chevrolet, cut into a major segment of Ford's market. And the Ford Company was compelled to change its policies in order to compete. One will find examples of this principle in the history of virtually every industry.

Now if one considers the only kind of monopoly that can exist under capitalism, a non-coercive monopoly, one will perceive that its prices and production polices are not independent of the wider market in which it operates but are fully bound by the law of supply and demand; that there is no particular reason for or value in retailing the designation of "monopoly" when one uses it in a non-coercive sense; and that there are no rational grounds on which to condemn such "monopolies."

For instance, if a small town has only one drug store, which is barely able to survive, the owner might be described as enjoying a "monopoly" — except that no one would think of using the term in this context. There is no economic need or market for a second drug store. There is not enough trade to support it. But if that town grew, its one drug store would have no way, no power, to prevent other drug stores from being opened.

It is often though that the field of mining is particularly vulnerable to the establishment of monopolies, since the materials extracted from the earth existed in limited quantity and since, it is believed, some firm might gain control of all the sources of some raw material. Well, observe that International Nickel of Canada produces more than two-thirds of the world's nickel — yet it does not charge monopoly prices. It prices its product as though it had a great many competitors — and the truth is that it does have a great many competitors. Nickel (in the form of alloy and stainless steels) is competing with aluminum and a variety of other materials. The seldom-recognized principle involved is this: no single product, commodity or material is or can be indispensable to an economy regardless of price. A commodity can be only relatively preferable to other commodities. For example, when the price of bituminous coal rose (which was due to John L. Lewis' forcing an economically unjustified wage raise), this was instrumental in bringing about a large-scale conversion to the use of oil and gas in many industries. The free market is its own protector.

Now if a company were able to gain and hold a non-coercive monopoly, if it were able to win all the customers in a given field, not by special government-granted privileges, but by sheer productive efficiency — by its ability to keep its costs low and/or to offer a better product than any competitor could — there would be no grounds on which to condemn such a monopoly. On the contrary, the company that achieved it would deserve the highest praise and esteem.

The history of the Aluminum Company of America prior to World War II is a case in point. Seeking constantly to expand its market, Alcoa kept its prices as low as possible; this policy required enormous productive efficiency and cost cutting. Alcoa was the only producer of primary aluminum and, as such, was a monopoly; but it was not a coercive monopoly; nothing prevented other companies from attempting to compete with it, except the fact that they could not match its productive efficiency. The pricing policies of Alcoa were entirely subject to the law of supply and demand: aluminum had to compete with steel, with copper, with cement, and with many other construction materials; and had Alcoa attempted to raise its prices — this would have served as an engraved invitation to competitors toe enter Alcoa's own field.

No one can morally claim the right to compete in a given field, if he cannot match the productive efficiency of those with whom he hopes to compete. There is no reason why people should buy inferior products at higher prices in order to maintain less efficient companies in business. Under capitalism, any man or company that can surpass competitors is free to do so. It is in this manner that the free market rewards ability and works for the benefit of everyone-except those who seek the undeserved.

A bromide commonly cited in this connection by opponents of capitalism is that of the old corner grocer who is thrown out of business by the big chain store. What is the clear implication of their protest? It is that the people who live in the neighborhood of the old grocer have to continue buying from him, even though a chain store could give them better service at lower prices and thereby let them save money. Thus, both the owners of the chain store and the people in the neighborhood are to be penalized — in order to protect the stagnation of the old grocer. By what right? If that grocer is unable to compete with the chain store, then properly, he has no choice but to move elsewhere or go into another line of business or seek employment from the chain store. Capitalism, by its nature, entails a constant process of motion, of growth, of progress; no one has a vested right to a position if others can do better than he can.

When people denounce the free market as "cruel," the fact they are decrying is that the market is ruled by a single moral principle: justice. And that is the root of their hatred for capitalism.

There is only one kind of monopoly that man may rightfully condemn — the only kind for which the designation of "monopoly" is economically significant: a coercive monopoly. (Observe that in the non-coercive meaning of the term, every man may be described as a "monopolist" — since he is the exclusive owner of his effort and product. But it is not this that is denounced as evil — except by socialists.)

In the issue of monopolies, as in so many other issues, capitalism is commonly blamed for the evils perpetrated by its destroyers: it is not free trade on a free market that creates coercive monopolies, but government legislation, government action, government controls. If men are concerned about the evils of monopolies, let them identify the actual villain in the picture and the actual cause of the evils: government intervention into the economy. Let them recognize that there is only one way to destroy monopolies: by the separation of State and Economics — that is, by instituting the principle that the government may not abridge the freedom of production and trade.

barrowaj

Von Mises has many good points about the shortcomings of socialism, however, he conveniently glosses over the shortcomings of capitalism.

He is also inaccurate in his portrayal of the Soviet Union. The central planning and socialist system there produced the highest rate of economic growth known for any civilization, ever. Granted, this growth fizzled out after 1975 due to inefficiency, and the economic growth was not accompanied by a proportionate increase in living standard. However, the increase in the standard of living was significant, as life expectancy and infant mortality improved greatly. Its also foolish to compare US capitalism with Soviet socialism as well. A more accurate comparison would be between Russian socialism in 1989 and Russian capitalism in the present day. When you make that comparison you find that GDP (and coordinately GDP per capita) is way down, poverty and unemployment are up, and life expectancy and infant mortality are worse. Are people better off? Some people definitely are, but the majority are probably not.

Praxus

The first and most obvious problem with what you are saying, was that you stated Russia is today a Capitalist nation. This is completly false, they are now a semi-socialist state which has the power to usurp property rights on a whim. Also of course it is IMPOSSIBLE to measure the GDP of a Socialist state. Any numbers that the Soviet Government made up were utter non-sense.

This also ignores the fact that Russia prior to the Communist Revolution was more of a Feudel Society then it was Capitalist.

Praxus

Economic Calculation in the Socialist Commonwealth
1. The Distribution of Consumption Goods in the Socialist Commonwealth
http://www.mises.org/econcalc/Ch1.asp

Under socialism all the means of production are the property of the community. It is the community alone which can dispose of them and which determines their use in production. It goes without saying that the community will only be in a position to employ its powers of disposal through the setting up of a special body for the purpose. The structure of this body and the question of how it will articulate and represent the communal will is for us of subsidiary importance. One may assume that this last will depend upon the choice of personnel, and in cases where the power is not vested in a dictatorship, upon the majority vote of the members of the corporation.

The owner of production goods, who has manufactured consumption goods and thus becomes their owner, now has the choice of either consuming them himself or of having them consumed by others. But where the community becomes the owner of consumption goods, which it has acquired in production, such a choice will no longer obtain. It cannot itself consume; it has perforce to allow others to do so. Who is to do the consuming and what is to be consumed by each is the crux of the problem of socialist distribution.

It is characteristic of socialism that the distribution of consumption goods must be independent of the question of production and of its economic conditions. It is irreconcilable with the nature of the communal ownership of production goods that it should rely even for a part of its distribution upon the economic imputation of the yield to the particular factors of production. It is logically absurd to speak of the worker's enjoying the "full yield" of his work, and then to subject to a separate distribution the shares of the material factors of production. For, as we shall show, it lies in the very nature of socialist production that the shares of the particular factors of production in the national dividend cannot be ascertained, and that it is impossible in fact to gauge the relationship between expenditure and income.

What basis will be chosen for the distribution of consumption goods among the individual comrades is for us a consideration of more or less secondary importance. Whether they will be apportioned according to individual needs, so that he gets most who needs most, or whether the superior man is to receive more than the inferior, or whether a strictly equal distribution is envisaged as the ideal, or whether service to the State is to be the criterion, is immaterial to the fact that, in any event, the portions will be meted out by the State.

Let us assume the simple proposition that distribution will be determined upon the principle that the State treats all its members alike; it is not difficult to conceive of a number of peculiarities such as age, sex, health, occupation, etc., according to which what each receives will be graded. Each comrade receives a bundle of coupons, redeemable within a certain period against a definite quantity of certain specified goods. And so he can eat several times a day, find permanent lodgings, occasional amusements and a new suit every now and again. Whether such provision for these needs is ample or not, will depend on the productivity of social labor.

Moreover, it is not necessary that every man should consume the whole of his portion. He may let some of it perish without consuming it; he may give it away in presents; he many even in so far as the nature of the goods permit, hoard it for future use. He can, however, also exchange some of them. The beer tippler will gladly dispose of non-alcoholic drinks allotted to him, if he can get more beer in exchange, whilst the teetotaler will be ready to give up his portion of drink if he can get other goods for it. The art lover will be willing to dispose of his cinema tickets in order the more often to hear good music; the Philistine will be quite prepared to give up the tickets which admit him to art exhibitions in return for opportunities for pleasure he more readily understands. They will all welcome exchanges. But the material of these exchanges will always be consumption goods. Production goods in a socialist commonwealth are exclusively communal; they are an inalienable property of the community, and thus res extra commercium.

The principle of exchange can thus operate freely in a socialist state within the narrow limits permitted. It need not always develop in the form of direct exchanges. The same grounds which have always existed for the building-up of indirect exchange will continue in a socialist state, to place advantages in the way of those who indulge in it. It follows that the socialist state will thus also afford room for the use of a universal medium of exchange--that is, of money. Its role will be fundamentally the same in a socialist as in a competitive society; in both it serves as the universal medium of exchange. Yet the significance of money in a society where the means of production are State controlled will be different from that which attaches to it in one where they are privately owned. It will be, in fact, incomparably narrower, since the material available for exchange will be narrower, inasmuch as it will be confined to consumption goods. Moreover, just because no production good will ever become the object of exchange, it will be impossible to determine its monetary value. Money could never fill in a socialist state the role it fills in a competitive society in determining the value of production goods. Calculation in terms of money will here be impossible.

The relationships which result from this system of exchange between comrades cannot be disregarded by those responsible for the administration and distribution of products. They must take these relationships as their basis, when they seek to distribute goods per head in accordance with their exchange value. If, for instance 1 cigar becomes equal to 5 cigarettes, it will be impossible for the administration to fix the arbitrary value of 1 cigar = 3 cigarettes as a basis for the equal distribution of cigars and cigarettes respectively. If the tobacco coupons are not to be redeemed uniformly for each individual, partly against cigars, partly against cigarettes, and if some receive only cigars and others only cigarettes, either because that is their wish or because the coupon office cannot do anything else at the moment, the market conditions of exchange would then have to be observed. Otherwise everybody getting cigarettes would suffer as against those getting cigars. For the man who gets one cigar can exchange it for five cigarettes, and he is only marked down with three cigarettes.

Variations in exchange relations in the dealings between comrades will therefore entail corresponding variations in the administrations' estimates of the representative character of the different consumption-goods. Every such variation shows that a gap has appeared between the particular needs of comrades and their satisfactions because in fact, some one commodity is more strongly desired than another.

The administration will indeed take pains to bear this point in mind also as regards production. Articles in greater demand will have to be produced in greater quantities while production of those which are less demanded will have to suffer a curtailment. Such control may be possible, but one thing it will not be free to do; it must not leave it to the individual comrade to ask the value of his tobacco ticket either in cigars or cigarettes at will. If the comrade were to have the right of choice, then it might well be that the demand for cigars and cigarettes would exceed the supply, or vice versa, that cigars or cigarettes pile up in the distributing offices because no one will take them.

If one adopts the standpoint of the labor theory of value, the problem freely admits of a simple solution. The comrade is then marked up for every hour's work put in, and this entitles him to receive the product of one hour's labor, less the amount deducted for meeting such obligations of the community as a whole as maintenance of the unfit, education, etc.

Taking the amount deducted for covering communal expenses as one half of the labor product, each worker who had worked a full hour would be entitled only to obtain such amount of the product as really answered to half an hour's work. Accordingly, anybody who is in a position to offer twice the labor time taken in manufacturing an article, could take it from the market and transfer to his own use or consumption . For the clarification of our problem it will be better to assume that the State does not in fact deduct anything from the workers towards meeting its obligations, but instead imposes an income tax on its working members. In that way every hour of work put in would carry with it the right of taking for oneself such amount of goods as entailed an hour's work.

Yet such a manner of regulating distribution would be unworkable, since labor is not a uniform and homogeneous quantity. Between various types of labor there is necessarily a qualitative difference, which leads to a different valuation according to the difference in the conditions of demand for and supply of their products. For instance, the supply of pictures cannot be increased ceteris paribus, without damage to the quality of the product. Yet one cannot allow the laborer who had put in an hour of the most simple type of labor to be entitled to the product of an hour's higher type of labor. Hence, it becomes utterly impossible in any socialist community to posit a connection between the significance to the community of any type of labor and the apportionment of the yield of the communal process of production. The remuneration of labor cannot but proceed upon an arbitrary basis; it cannot be based upon the economic valuation of the yield as in a competitive state of society, where the means of production are in private hands, since--as we have seen--any such valuation is impossible in a socialist community. Economic realities impose clear limits to the community's power of fixing the remuneration of labor on an arbitrary basis: in no circumstances can the sum expended on wages exceed the income for any length of time.

Within these limits it can do as it will. It can rule forthwith that all labor is to be reckoned of equal worth, so that every hour of work, whatever its quality, entails the same reward; it can equally well make a distinction in regard to the quality of work done. Yet in both cases it must reserve the power to control the particular distribution of the labor product. It will never be able to arrange that he who has put in an hour's labor shall also have the right to consume the product of an hour's labor, even leaving aside the question of differences in the quality of the labor and the products, and assuming moreover that it would be possible to gauge the amount of labor represented by any given article. For, over and above the actual labor, the production of all economic goods entails also the cost of materials. An article in which more raw material is used can never be reckoned of equal value with one in which less is used.