Table Of ContentSocialism, Economic Calculation and
Entrepreneurship
NEW THINKING IN POLITICAL ECONOMY
Series Editor: Peter J. Boettke, George Mason University, USA
New Thinking in Political Economy aims to encourage scholarship in the
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approach to the challenges confronting society in the new century.
Recent titles in the series include:
Institutional Competition
Edited by Andreas Bergh and Rolf Höijer
Political Failure by Agreement
Learning Liberalism and the Welfare State
Gerhard Wegner
The Neoliberal Revolution in Eastern Europe
Economic Ideas in the Transition from Communism
Paul Dragos Aligica and Anthony J. Evans
Employees and Entrepreneurship
Co-ordination and Spontaneity in Non-hierarchical Business Organizations
Ivan Pongracic, Jr
Media, Development, and Institutional Change
Christopher J. Coyne and Peter T. Leeson
The Economics of Ignorance and Coordination
Subjectivism and the Austrian School of Economics
Thierry Aimar
Socialism, Economic Calculation and Entrepreneurship
Jesús Huerta de Soto
The Political Economy of Hurricane Katrina and Community Rebound
Edited by Emily Chamlee-Wright and Virgil Henry Storr
Socialism, Economic
Calculation and
Entrepreneurship
Jesús Huerta de Soto
Professor of Political Economy, Universidad Rey Juan Carlos,
Spain
NEW THINKING IN POLITICAL ECONOMY
In Association with the Institute of Economic Aff airs
Edward Elgar
Cheltenham, UK • Northampton, MA, USA
© Jesús Huerta de Soto 2010
First published in Spanish as Socialismo, Cálculo Económico y Función
Empresarial in 1992 by Unión Editorial (second edition 2001, third edition 2005),
translated by Melinda Stroup.
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic,
mechanical or photocopying, recording, or otherwise without the prior
permission of the publisher.
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A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2009940751
Pdf file supplied to the IEA
ISBN 978 1 84980 064 8 (cased)
ISBN 978 1 84980 065 5 (paperback)
Printed and bound by MPG Books Group, UK
Contents
Foreword by Peter J. Boettke vii
Preface to the third edition ix
1 Introduction 1
1 Socialism and economic analysis 1
2 The debate on the impossibility of socialist economic
calculation 5
3 Other possible lines of research 8
4 Conclusion 13
2 Entrepreneurship 15
1 The defi nition of entrepreneurship 15
2 Characteristics of entrepreneurship 19
3 Entrepreneurship and the concept of socialism 35
3 Socialism 49
1 The defi nition of socialism 49
2 Socialism as an intellectual error 52
3 The impossibility of socialism from the standpoint
of society 54
4 The impossibility of socialism from the perspective of
the governing body 56
5 Why the development of computers makes the
impossibility of socialism even more certain 58
6 Other theoretical consequences of socialism 62
7 Diff erent types of socialism 77
8 Criticism of the alternative concepts of socialism 83
4 Ludwig von Mises and the start of the debate on economic
calculation 99
1 Background 99
2 The essential contribution of Ludwig von Mises 103
3 The functioning of socialism, according to Marx 108
4 Additional considerations on Mises’s contribution 112
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vi Socialism, economic calculation and entrepreneurship
5 The fi rst socialist proposals of a solution to the problem of
economic calculation 119
5 The unjustifi ed shift in the debate toward statics: the
arguments of formal similarity and the so- called
“mathematical solution” 134
1 The arguments of formal similarity 134
2 Analysis of the mathematical solution 139
3 The mathematical solution and its adverse consequences
for the debate 143
4 The “trial and error” method 146
5 The theoretical impossibility of planometrics 152
6 Oskar Lange and the “competitive solution” 173
1 Introductory considerations 173
2 Historical precedents for the competitive solution 175
3 The contribution of Oskar Lange: introductory
considerations 184
4 Oskar Lange and his classic model of “market socialism” 186
5 Critical analysis of Lange’s classic model 197
6 The third and fourth stages in Lange’s scientifi c life 214
7 Final considerations 233
1 Other market socialism theorists 233
2 Market socialism: the impossible squaring of the circle 247
3 Maurice H. Dobb and the complete suppression of
individual freedom 250
4 In what sense is socialism impossible? 254
5 Final conclusion 259
Bibliography 274
Index 301
Foreword
Peter J. Boettke
Jesús Huerta de Soto is one of the great contemporary champions of the
Austrian School of Economics. He has been a tireless advocate for the
methodological, analytical, and ideological importance of the writings of
Mises, Hayek, Rothbard, and Kirzner in his capacity as a book publisher
(and translator), professor, and researcher. I think it is safe to say that in
the Spanish speaking world, Professor de Soto is the leading representa-
tive of the Austrian school today. But we should be quick to add that due
to his heroic eff orts, a new generation of economists in Spain is emerging
that tackles important issues in economic theory and public policy from
an Austrian school perspective. It is all very exciting to watch from afar
how a man of intellectual and moral conviction can make such a diff erence
armed only with ideas and an educational and research vision.
Professor de Soto’s Socialismo, cálculo económico y función empresarial
has gone through three editions, this is the fi rst edition in the English lan-
guage. As Professor de Soto reports, the book has been enthusiastically
read by undergraduate and graduate students throughout the Spanish
speaking economics community. And rightfully so, as the issue of eco-
nomic calculation is fundamental both to understanding why the market
economy works to realize the gains from trade and captures the gains
from innovation, while socialism fails to realize its aims, suff ers from
endemic waste, and delivers the people living under it to a life of economic
deprivation and political tyranny.
Simply put, the entrepreneurial market process based on private prop-
erty can engage in economic calculation while socialist planning run by
bureaucratic rules cannot.
As Professor Kirzner has pointed out in discussing economic pro-
cesses, we must distinguish between the underlying variables of given
tastes, technology and resource availability, and the market induced vari-
ables of prices and profi t/loss statements. It is the entrepreneurial market
process that reveals a systemic tendency within the market economy for
the induced variables to refl ect the underlying variables. Of course, in the
real day-t o-d ay market underlying conditions are constantly changing so
vii
viii Socialism, economic calculation and entrepreneurship
that the induced variables at any one point in time never perfectly refl ect
the underlying variable, but any deviation represents opportunities for
pure profi t that will alert economic participants to the necessary adjust-
ments. Markets work through continuous adjustments guided by relative
prices and the lure of pure profi t and the penalty of loss. Markets are
self- correcting. This point is all the more important to understand and
emphasize given the current policy debates world-w ide over the Great
Recession of 2008.
Government ownership and government planning, on the other hand,
is unable to mimic the entrepreneurial market process. Without private
property in the means of production, Mises pointed out, there would be no
market for the means of production. Without a market for the means of
production, there would be no exchange ratios established on the market.
Without the exchange ratios of the market, there are no relative prices
refl ecting relative scarcities. And without the market prices refl ecting rela-
tive scarcities, economic planners will not be able to engage in rational
economic calculation. That is, they will not be able to determine whether it
is more economically rational to engage in project A versus project B.
Economic calculation is essential to an economic system because
it assures that scarce resources will systematically tend toward being
employed in the least cost methods of production with the purpose of
satisfying the greatest consumer demand. The economic problem any
economic system faces is not just to allocate scarce resources among
competing ends. In other words, the economic problem doesn’t stop
when a choice has been made to pursue A rather than B, but actually just
begins. The economic system must fi nd some way to sort out among the
numerous technologically feasible ways to pursue A, the most economical
way to pursue A. Rational economic calculation is the means by which
this sorting takes place. Eliminate the ability to engage in rational eco-
nomic calculation, and you eliminate the ability to solve the fundamental
economic problem of how, what and for whom.
Absent an economic answer to these questions, socialism (both in its
comprehensive and piecemeal forms) tends to try to answer these ques-
tions with politics. Political criteria substitute for economic, with the result
being economic deprivation and political tyranny. To use Hayekian lan-
guage, the knowledge problems of socialist planning produce the power
problems of socialist governance. The Road to Serfdom is thus explained.
Jesús Huerta de Soto’s Socialism, Economic Calculation and Entrepreneur-
ship is a welcomed addition to the literature in Austrian economics.
Capitalism, with its reliance on entrepreneurial appraisement and the dis-
cipline of profi t and loss provided by a private property market economy,
achieves what socialism cannot.
Preface to the third edition
It gives me great pleasure to present this third edition of my book,
Socialismo, cálculo económico y función empresarial, to Spanish-s peaking
readers and students. Four years ago, I made several observations in the
preface to the second edition, and today these continue to apply and thus
should be taken into account.
Also, in the interim between editions, two important milestones have
passed. First, the English version of the book, entitled Socialism, Economic
Calculation and Entrepreneurship, has been completed, and soon it will be
published in England and the United States. Second, an ever-i ncreasing
number of researchers, students and professors, in both Spain and the rest
of the world, have begun to show an interest in delving into the dynamic
conception of competition and market processes, and in applying it to the
theory of the impossibility of socialism and economic interventionism.
This growing interest has necessitated the establishment of a scientifi c
journal which, under the title, Market Processes: European Journal of
Political Economy,* draws together and provides a medium for the publi-
1
cation of research, especially that of the new generations of scholars who
form part of what is today viewed on an international scale as the booming
and highly productive Austrian school of economics. These scholars are
developing a paradigm capable of replacing the one which has prevailed
thus far, and which has already entered into a phase of severe crisis,
decline and disintegration.
I must acknowledge the great enthusiasm and university spirit shown,
year after year, by the students who use this work as a textbook in my
undergraduate classes. Together with my doctoral students and assistants
as Chair of Political Economy, which I teach at the Universidad Rey Juan
Carlos in Madrid, they provide the greatest incentive and support for
me to continue advancing in Spain the research program of the Austrian
school of economics. Finally, I dedicate this book to Israel M. Kirzner.
Jesús Huerta de Soto
Formentor, August 22, 2005
* Procesos de Mercado: Revista Europea de Economía Política. Interested readers can
request the diff erent published numbers of the journal at [email protected]; see also
www.jesushuertadesoto.com.
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