Money is the force that drives the economy of an open society.
It functions as a unit of account, a store of value, and as a medium of
exchange. While some utopian thinkers would argue that money is not a
necessity, one would be hard-pressed to imagine a cashless society that allocates
resources as efficiently as our own. Few civilizations throughout history have
thrived without some form of currency. An open market composed of an intricate
series of sales, purchases, investments, and exchanges would be impossible
without a stable form of currency. This post is a response to a recent article writtenby the Socialist Party of Britain and posted on Libcom.org that attempts to explain
why money is not necessary in a socialist economy. The author argues against
Ludwig von Mises’ essay Economic Calculation
in the Socialist Commonwealth, by claiming that economic calculations can
be made in a socialist society as in a capitalist society without the use of
money. I believe that the author of this article has misunderstood the point of
von Mises’ essay, and makes the very same
arguments that Mises was scrutinizing. Economic calculations could not be made
in a cashless society that meets everyone’s demand and where all resources are
used to the greatest efficiency. There are too many problems inherent in
allocating goods in a centrally planned economy, let alone in one lacking a
stable currency. A socialist economy could never rival the productiveness and
efficiency of an open market, but without money such an economy would be doomed
to failure. The article in question reveals a fundamental misunderstanding with
the use of the price system and with the purpose of money.
In a socialist economy like the one proposed by the article,
the means of production would not be privately owned, but would become the
property of the state. As such, it becomes the responsibility of the state to
distribute the goods they produce to the community. Rather than in a free
market, where the distribution of goods takes the form of an exchange between
the producers and the consumers, the distribution of goods in a socialist
economy resembles an internal transfer, seeing as though under socialism there
is no distinction between the two; the consumers are the producers. What Mises is arguing in his essay, is that such
an economy could never satisfy the demands of consumers since the central
planners would not have access to pricing information.[1]
Prices in an open market are based on supply and demand. What the author of
these articles does not grasp is how his utopian socialist state is going to
obtain information about supply and demand without some kind of pricing system.
He writes “Our answer is that the choice of which productive methods to employ,
like working out what consumer goods are needed, will be based on estimations
and calculations in kind.” What these calculations are exactly or what is being
calculated he does not make clear. Socialists demonstrate incredible
narrow-mindedness when they assume the government can somehow know and
accommodate the needs of every single person in the economy. In reality, the
series of exchanges and transactions that make up the economy are so many and
so complex that nobody, including myself, could ever hope to know what everyone
wants and it would be a painfully futile task to attempt to get information to
this effect. The needs and tastes of individuals are also always changing,
which only complicates matters. This is why I believe the author of that
article completely missed the point von Mises was trying to make. Central-planned
economies don’t work. There is no way that a government can somehow calculate the
ever-changing supply and demand in any given market, let alone without an
effective pricing system.
To demonstrate why central-planned economies are inefficient
even on a small scale, consider this thought experiment. Suppose you’ve been
given the task of making lunches for an entire school of a thousand students.
You have access to a huge selection of food that would allow you to make
whatever meals you wish, but you don’t have information about the preferences
of each student. Thus, it would be impossible to satisfy them all. Some
students inevitably would not like their lunches and would be forced to discard
or exchange them with others, creating wasted resources. A central planner would
never be able make lunches that optimize every student’s utility more any than
if the students were allowed to make their own lunches. How then, is the
government under socialism supposed to distribute goods to the entire
population, allocating them all efficiently? This thought experiment also
demonstrates that in an economy where goods are not allocated efficiently,
agents are forced to exchange their goods with others in order to maximize
utility. Even in a socialist country where currency is abolished, a medium of
exchange would naturally arise to satisfy these needs. We can see examples of
this throughout history. In American POW camps during World War Two, this
medium took the form of cigarettes.[2]
Prisoners would exchange their rations for cigarettes since they were light,
easy to carry in bundles, and could be smoked. Goods and services in these
camps were expressed in terms of cigarettes, just like goods in America are
expressed in dollars and cents. Using cigarettes, prisoners whose preferences
were not satisfied by rations they received could purchase goods they wanted
throughout the camp. I believe that if a state were to dismantle the entire
banking system and abolish money, then a commodity currency like cigarettes
would develop in its place. Money is more useful than barter for trading and to
propose that we could live effectively without a currency of any kind is
absurd.
The article later goes on to criticize the pricing system by
claiming that the cost of an item only takes into consideration the labour and
time it took to produce it. He argues, “To make this the only consideration
that counts (as is imposed by the economic laws of capitalism) is an absurd
aberration.”
The author of this article is clearly mistaken about several
things. Capitalism does not impose laws on anyone. Capitalism is merely a
system wherein individuals are free to make their own choices and where
property laws are enforced by the government. As far as the price system goes,
to suggest that only labour and time are considered in the cost of a good is
the true absurd aberration. Supply and demand are determined by a variety of
factors, including labour costs, but goods can have value for many other
reasons including aesthetic or historical significance, taste, popularity,
scarcity, or other seemingly arbitrary factors. The extraordinary value of a
coin collection, an antique armoire, or a Vermeer painting is not derived from
the labour and time they took to produce, but rather from the scarcity of these
goods compared to how much they are demanded. How is a socialist state going to
allocate works of art without some unit of account with which to assign them
value? It appears that art collecting is to be abolished along with money in
this supposed socialist utopia. The purpose of money is as a unit of account,
that is, it assigns values to objects based on their demand and supply, which
in turn are determined by any number of things. Money allows for the trade of
value for value. Money ensures that every good that is produced is traded to
someone who wants it for the appropriate value in dollars and cents. It
reflects a poor understanding of the economy to assume that somehow the
government will know how to allocate its resources efficiently without even a
basic unit of account. Therefore, any suggestion that a socialist economy can
provide for everyone’s needs better than a market economy is absolute rubbish.
Under Socialism, Vermeer's The Astronomer is worth 9 million cigarettes
Another ridiculous claim made by the article is that under
socialism, producers would not take into account monetary or market values, but
rather “human values”. I believe what the author means by this is that goods
will only be produced in accordance with their need in society rather than to
make a profit. This kind of mentality, well-meaning and idealistic as it may
be, does not correspond to how the world really works. I feel the following
quote by Adam Smith has relevancy here: “It is not from the benevolence of the
butcher, the brewer or the baker that we expect our dinner, but from their
regard to their own interest.” In order to create a given product, it requires
technical ingenuity, time, effort, resources, imagination, and market
knowledge. In a market economy, firms are willing to invest all that effort
because if the product they create is successful, it will confer a benefit in
the form of profit. Threats of competition also ensure that producers make the
best goods possible, utilizing their time and resources to the greatest
efficiency to satisfy the greatest demand. Under a socialist economy however,
there is no threat of competition and no opportunity to make a profit off
anything, so where is the motivation under socialism to satisfy these “human
needs” to the best of its ability? To engineer some product for the masses,
using the fewest resources possible, and without the accountability incurred by
competition, it seems that any good produced under socialism would inevitably
be of lesser quality that its equivalent in a market society. If you compare
the technology of Soviet Russia to that of the United States, this becomes
evident. The state of the Soviet automobile industry was so poor, that in the
1960s, Soviet leadership turned to the Western powers to help them produce a
proper car.[3]
The infamous Lada, a product of communist ingenuity, was a car so unreliable
that if you purchased one brand new, it still required extensive repairs in
order to be made roadworthy.[4]
The Lada also had horrible fuel economy and they became an object of ridicule
anywhere outside Soviet Russia. If the socialist’s way of satisfying “human
needs” is to have its people driving around in obsolete deathtraps, then I will
take my chances in a market economy.
How do you double the value of a Lada?
Fill up the gas tank.
Any economy with a stable currency can provide for the needs
of its people better than a cashless socialist hell. For all the high-minded
rhetoric espoused throughout the Libcom.org article, little of it amounts to
more than idealistic navel-gazing. Money allows for individuals to exchange
their labour for an equivalent value of goods and services. It ensures that
workers are properly compensated and that all resources are allocated
efficiently. Socialists and utopian thinkers are hard-pressed to demonstrate
how a world without money could ever function. Money gives the individual freedom to make his
own choices. Supply and demand, more so
than any amount of socialist rhetoric, reflects the true needs of the people,
and this is why I believe socialists despise money. Ultimately, money
represents the responsibility the individual has over his own life and his
freedom of choice, ideals that do not fit the socialist’s vision of man as a
form of sacrificial livestock—to be herded and organized by the whim of a
central planner. No state or central
planner, regardless of the means at their disposal, can never accommodate these
needs better than an open market.
