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by Peter Hume, columnist

Before 1920, the debate over socialism was how best to approach it. No one doubted that it could be done. The question was how to implement it.

Economic debate focused on the incentive problem — the “who will take out the garbage?” problem. If everyone is to be paid equally, then what would motivate people to do the hard, dirty jobs? These were the kinds of issues that discussion of socialist economics focused on.

In 1920, Ludwig von Mises published Economic Calculation in the Socialist Commonwealth. Mises showed that there was a much more fundamental problem.

The whole purpose of socialism was to replace capitalism — the private ownership of the means of production — with socialism — the public ownership of the means of production. But if there is no private ownership of capital goods, there will be no market for capital goods, because all the capital goods will have one owner: the “community” or state.

Since there will be no market for capital goods, therefore there will be no prices for capital goods.

Prices are used to calculate the most economical way of doing things. This is fundamental, because the purpose of all economising is to satisfy a given subjective want with the least waste of resources necessary to do it.

Under capitalism, if you’re trying to figure out whether to sow wheat to grow lambs, or sow barley to grow seed, or whether to repair your old tractor or buy a new one, you can compare money prices. Prices provide a lowest common denominator for quantities that cannot otherwise be compared, like comparing the productivity of cows to make milk, with the productivity of tractors to grow apples.

Under socialism, the central planning authority will be faced with an impossible task. It will not be able to compare prices, but only to compare quantities directly. Thus socialism is not an alternative economic system that could work for a modern economy using complex, roundabout methods of production. It abolishes rational economising above the level of barter, and can only result in planned chaos.

Both logic and history proved Mises right.