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Book Review: Socialism and War

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Socialism and War: Essays, Documents, Reviews, The Collected Works of F. A. Hayek, vol. 10
edited by Bruce Caldwell (Chicago: University of Chicago Press, 1997); 270 pages.

With the recent collapse of communism, it is almost hard to remember that just 50 years ago, government central planning was considered by many as the desirable and superior economic system of the future. As one example, in 1948, Charles E. Marriam, Distinguished Professor of Political Science at the University of Chicago, contributed a chapter to a book edited by Seymour E. Harris entitled Saving American Capitalism: A Liberal Economic Program. Professor Marriam’s theme was “the place of planning” in America’s future. In Professor Marriam’s view, planning was inevitable:

“Planning is coming. Of this there can be no doubt. The only question is whether it will be the democratic planning of a free society, or totalitarian in character…. The emerging [planned] order could be scientific in the highest sense, political and economic in the richest sense, moral and religious in the finest sense, and crowned with truth, liberty and justice.”

The editor of the volume, Seymour Harris, argued:

“We might learn much from the Russian system [of planning]…. With the [Russian] government determining the use of resources primarily, there is a tendency to put first things first – workers’ housing before luxurious hotels; bread before cake; essential clothing before luxuries; education before travel…. ”

This was the intellectual environment in which Ludwig von Mises and Friedrich A. Hayek made their case that economic ration-ality and prosperity were impossible under socialist central planning. These were the types of mindsets against which Hayek argued in The Road to Serfdom (1944), where he demonstrated that a comprehensively planned economy meant a government-commanded society in which all human freedoms would be threatened and ultimately lost.

The articles, essays, and reviews in Socialism and War, volume 10 in The Collected Works of F. A. Hayek, were written in the 1930s and 1940s. They contain Hayek’s most important pieces criticizing the assumptions and logic behind the socialist theory of central planning; the dangers to human freedom from government control of economic affairs; and the problems of government financing and economic planning during wartime.

In 1935, Hayek edited a volume entitled Collectivist Economic Planning. It contained Mises’s famous 1920 article showing that the elimination of private property, competition, and market prices under socialism would mean the end of all rational economic calculation for efficient use of resources in society. Also included were essays by N.G. Pierson, Georg Halm, and Enrico Barone. Hayek prepared a lengthy introductory essay and a concluding chapter bringing the debate over socialist planning up to date.

Socialism and War reprints these two pieces by Hayek. In the first one, Hayek summarized the history of the controversy concerning central planning in the German language, both before and after the First World War. In the second one, he explained that the defenders of socialism had failed to successfully respond to their critics. In particular, Hayek emphasized that socialists had in no way grappled with the essential problem of how the central planners would ever succeed in obtaining, integrating, and using all of the complex and dispersed knowledge that must be utilized if the means of production under government control are to be economically applied to maximize desired output. The private market economy solves this problem, he explained, by leaving each individual free in his own corner of the market to apply his own knowledge guided by market prices.

In 1936-37, the Polish socialist Oskar Lange published a two-part article, “On the Economic Theory of Socialism.” And in 1939, English socialist Henry D. Dickinson published a book entitled Economics of Socialism. Both of them admitted that a rational economic order could not function without a price system that expressed the relative costs of goods and means of production in alternative uses. But they argued that a socialist economy could incorporate a price system and decentralized decision-making by the managers of state-owned enterprises. The central planning bureau would serve as the general overseer of the allocation of resources and would set the prices used by state enterprise managers to ensure appropriate adjustments between supplies and demands.

In 1940, Hayek replied to this proposal for a form of “market socialism.” His essay “Socialist Calculation: the Competitive ‘Solution’” is the third essay in the volume. Hayek argued that while seeming to get around the criticisms made by Mises and others, in fact “market socialism” could never match the efficiency of a real private market economy and would still contain most of the essential problems raised by the critics of socialism.

First of all, any change in supply and demand conditions that required a shift in prices to reestablish equilibrium would have to wait to be made by the central planning bureau. The appropriate price adjustments would, therefore, always be lagging behind the changed circumstances. In a real market economy, on the other hand, the private participants are free to immediately modify their price bids and offers in response to any change in market conditions that impinges on their respective corners of the market.

More important, decisions would still have to be made concerning the allocation of resources among sectors of the economy. A choice would have to be made about the amount of new investment that would be undertaken in the economy – what kind of investment as well as in what industries to invest in. Someone would have to decide what types of innovations would be financially supported and introduced into the production processes of the society. Those decisions would not and could not be made by private owners of capital, since there would be no private owners of capital. The socialist central planners would have to make those decisions. And in making their decisions, they would lack the information and market signals that private competitive markets normally provide. The socialist central planners, therefore, would still be planning “in the dark.” Socialist central planning would still remain fundamentally “irrational,” even in this new world of “market socialism.”

In his 1939 monograph, “Freedom and the Economic System,” Hayek explained why socialism would mean not only economic chaos but political tyranny as well. If central planning were to be implemented, it would require the planning authority to impose a detailed and specific hierarchy of selected goals, with an equally detailed and specific determination of the use and allocation of all of the society’s resources – including labor – to attain them. The plan could be successfully undertaken only if everyone in the society were subordinated and dedicated to the fulfillment of the plan. Any dissent from either the collective ends being pursued or the results from implementing the plan would threaten the enthusiasm and energy the state had to expect and would need from everyone. The thoughts and actions of all would have to be controlled and directed by the state, because a totalitarian plan would require a totalitarian state to ensure the total submission of all to its accomplishment.

In September and October 1939, Hayek wrote “Pricing versus Rationing” and “The Economy of Capital,” articles in which he argued that even in war, Great Britain would be far more efficient and productive if it relied on market prices and competition to direct production than if it imposed price controls and central planning for the war effort.

The volume also includes Hayek’s critical evaluation of Keynes’s proposals for how Britain would pay for the war, as well as several reviews and articles analyzing various books advocating socialism and planning.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).