Originally published: 1922
567 pages
Chapter 32


Ludwig von Mises

Socialism is a word and concept that is ubiquitous in First Principles. We have repeatedly proclaimed that understanding socialism is tantamount to understanding the welfare state. While that is true philosophically, it is not always so transparently true in the real world. Consequently, we return to square one, to ensure the correlation between the two is comprehensible.
     For several reasons, one of our intentions has also been to demonstrate that we cannot understand the twentieth century without understanding socialism. And although understanding the third or even the thirteenth century is not wholly essential to understanding the progress of humanity, for those of us in the twenty-first century it is more than necessary that we comprehend the twentieth. For the reader who has traveled this far in First Principles it must also be apparent that history has a pernicious habit of repeating itself. Thus we come back to socialism-as a fact and a factor and as the foundation of how liberal thinking got to where it did.
     The best, first, and most comprehensive exploration of socialism was produced when the concept was relatively old but its effects were finally becoming widespread. Ludwig von Mises published his investigation in 1922 and what he offers is still a masterful exposition of the topic.
     Unbridled capitalism and the Roaring Twenties were in full bloom in the U.S. when Ludwig von Mises wrote Socialism. But in his native Austria, the times were not good. His country suffered from a monumental World War I reparations debt, an economy that was struggling


to stay afloat, and a national psyche that hadn't truly learned any lessons during the Great War except the main one: Don't lose. New paradigms were on the rise and Austrians desperately sought them. Some of those ideas, in the view of Mises, were invalid on the drawing board and unquestionably dangerous in the marketplace.
     In trying to both explain and deconstruct socialism, Mises investigates the subject from every conceivable angle. His insights turn out to be accurate, for Mises understood how human nature plays its part in economics-even though his contemporary critics characterized his views as negative and myopic. The human condition is the sticking point that derails any scheme to make the world an instantly better place. Appealing solely to man's "finer" nature may be laudable in the parlor, but it's naive on the factory floor or Main Street. For Mises, failing to take into account mankind's primary operative and energizing quality-incentive-meant simply that failure was inevitable.
     The overall philosophy of social organization interested Mises to such a degree that in Socialism he delves into some of the arcana of generations and even centuries past. He goes so far as to explain how the philosophers Kant and Hegel prepared the way for the specific mindset that embraced socialism in the modern era. In the main, though, he endeavors to pick socialism apart piece by piece, because that was the rational thing to do. Mises basically takes the tenets and
methods of this political/economic theory to their logical conclusions, and when those conclusions betray themselves as insupportable either practically or philosophically, he declares, "Just so."
     The prime example of early twentieth-century socialistic fantasy was the conviction that human beings would willingly abandon the concept of private property in order to create a society based upon universal generosity-a hoped-for transformation expected to energize a new kind of economic system. However, when socially recognized property rights no longer motivated individual striving, and when ownership was abolished and rules were set in place for human action based on giving rather than earning, the social fabric became stretched beyond the limit of people's imagination and charity. The human condition rose up to overwhelm utopia.
     Socialism wears a mantle of moral superiority to capitalism because of its attempt at equality of result rather than of opportunity. It is founded on the idea that all men are equal, and as such ought to fare equally well. But, obviously, we are not equal (in talents, skills, energy, drive, intellect, or anything else) and we do not achieve in equal measure. 


Thus, socialism is a dream not compatible with either human nature or mankind's circumstances. In actuality, nothing other than our inherent inequality, as harnessed by our social genius to benefit from our differences, is the foundation of progress.
     Karl Marx, whose work was in vogue at the time Mises was writing Socialism (primarily as a result of the political success of the Russian Revolution of 1917), had insisted that the struggle between capitalism and socialism-and ultimately communism-was a class struggle, not just an economic or philosophical one. Mises dissects and then dismisses the Marxist theory of class struggle by pointing out that the evolution of economic success "comes on waves of knowledge, experience, and trial and error," none of which is intentionally the work or idea of one class or another. As importantly, those who do improve human society through invention, imagination, or insight often start at the lower end of the economic ladder, but do not remain there for long. It is invariably their own incentive that drives their efforts, not the fact that they first appear at one level or another on the social scale.
     Economics is the study of property (in its largest sense) and property's relationship with and among people. Mises explains that economics is not a philosophy although it contains philosophical considerations; it is an observational science. As he perceives the limits of socialism's importance, Mises understands that socialism captures the minds of the masses, not because it actually tends to their interests, but because the masses are led to think it does. Ultimately, reality steps in to make one look at his neighbor and remember that that person is not entitled to anything in particular. Human beings are built to compete and discern and they naturally look askance at any system of equal rewards. This is an essential feature of human nature and, on a more practical scale, human progress.
     The fundamental appeal of socialism (and of its ugly stepsisters Nazism, fascism, and communism) was the aforementioned idea of equality of result. The rallying cry of the socialist movement to the workers (the proletariat) was to not let the owner-class (the bourgeoisie) take away the yield of their work. At its root, the idea was for each worker to keep the entire product of his labor, because anything less would mean that someone had engaged in a form of thievery, or slavery, and received something that was not earned. Socialism does not recognize either intangible labor-planning, management, organization and efficiency, invention, leadership, deploying capital, developing a reputation for integrity, etc.-or such non-labor factors of production as land, capital,


supplies, and materials. In a socialistic scheme, everything that was not labor (narrowly construed),
was to be supplied by the state. All intellectual components were considered valueless and easily achievable by the state, run by bureaucrats. The latter is a group for which Mises has the utmost unhidden contempt. The paucity of logic and the denial of human value and instincts (positive and negative) in socialism's plan are transparent in Mises exposition.
     For Mises, there is no escaping the reality that owners (capitalists/bourgeoisie) must serve non-owners (workers/proletariat), or there will be nothing created for either the owners to sell or the workers to buy-nothing for either to labor toward. That is not to say that owners or workers get their interrelationships right every time; progress is achieved by trial and error.
     Wholesale abandonment of the capitalist social/economic system would only become tenable if the system were to fail utterly-not if some segments of it were merely found to be flawed or if some individuals were to skew the system for their own ends. There is a symbiosis between the owners and workers on all levels because each owner and every worker has a social and economic investment in the whole system. Henry Ford (who knew that he had to pay his employees enough so that they could buy the products they built) got it right; Karl Marx, who thought Henry Ford was entitled to nothing, did not.
     Socialists purport to deal rationally with the complex modern workplace where the division of labor is not just necessary, but fundamental. They elect to solve the dilemma of how to reward the worker (who produces only part of any product or crop or service) by declaring both that the state owns everything on behalf of the workers and that the state will decide reward and distribution issues. The statist solution could be fine if everyone were to agree on two matters: the state's determinations as to who should do what and the workers' acceptance of who should get what. Human nature is an insurmountable roadblock in both instances.
     The patent absurdity of ignoring much that production requires-the intellectual and entrepreneurial inputs, the inventive/imaginative genius, the capital investment, and the skill of management-was Mises's field of play. He describes socialist redistribution schemes as quaint (i.e., possible in an agrarian society) but nonsensical and useless in a complex industrial and service environment. The division of labor (the foundation of economic and concomitant social progress) was marginalized in socialist schemes. Yet, the division of labor, whereby


we become more specialized and thereby create more wealth, was the foremost tool that had allowed society to progress both economically and intellectually. This was Adam Smith's theme, if not mantra, in Wealth of Nations (Chapter 12).
     By the middle of the nineteenth century, the effects of the industrial revolution caused socialists to renounce the redistribution of all a society's wealth since that was impractical. How do you "redistribute" a buggy factory and still make it work? In its place was put community ownership of the means of production, with the equal distribution of its fruits. Absent the personal incentive that only private ownership of property offered, however, common possession required intellectual, philosophical, and physical coercion of human beings. To Mises, that alone made socialism not just flawed, but indefensible. Although he does not use the word "incentive" often, his view of social order implicated incentives as the indispensable prompting necessary to elicit both the regular and the extraordinary efforts that energize a society. If society distributes all production in equal portions, yet takes away in unequal measure from those who achieve economy, or sacrifice for the future, or think creatively or wisely, or work harder, and longer, why would anyone make that extra effort? Conversely, if the system accepts less from those who don't bring a fair share to the table, why would those who do work hard continue to do so? Socialism brings material and intellectual
impoverishment to those under its thumb. It is a sentimental notion, unsupported by any rational argument, and advocated with transparent sophistry, which clearly irritates Mises.
     Without much attempt at humility, socialism's apologists set themselves up as morally superior. Their invective of greed and self-interest hurled at capitalists was and is unrelenting and equally unproven. Mises eloquently defends capitalism, private property, and the division of labor, showing they are not only not morally bankrupt, as the socialist dogmatists insist, but that these economic elements form the genuinely moral foundation of a symbiotic relationship between owners, owner/workers, and workers. Mises dissects socialism, revealing that far from being morally superior it is intellectually vacuous.
     Today, understanding how socialism and equalitarianism became ascendant during the middle of the twentieth century remains important. Pernicious and larcenous portions of the socialist agenda are ever present-as exemplified in the welfare state run amuck in many nations. Twenty-first-century equalitarianism doesn't attempt to create parity by nationalizing the means of production. Instead, the welfare


stepchild of socialist thought takes away the fruits of capitalism through inventive means of taxation-often implemented at confiscatory levels-and redistributes them legislatively in the form of "entitlements." The creation of some "entitlements" gives rise to many more, so that the population eventually becomes accustomed to being entitled to many things-and obligated for few. The works of Mises retain their importance precisely because they allow readers to appreciate the many ways whereby socialist thinking hides its goals; e.g., by mendaciously seeking equality of results behind a fašade of "politically correct" opportunism. In other words, the goals and methods of socialism are still worth studying, for the logic, agenda, and many of the methods of today's politically correct equalitarianism are identical with those of socialism's philosophy.
     Modern day state-sponsored and state-run welfarism exudes the same overt moral superiority and internal moral bankruptcy of its ancestor. On a practical level there is an often unspoken partnership between the liberal mindset and the legislative and bureaucratic frame of reference; and an equally unspoken disconnect between those same bureaucrats and responsible legislation that recognizes and relates to a rational view of human nature. A bureaucracy can overcome the best intentions of any legislature, or can arrogate those intentions well beyond what was expected by the lawmakers, and institute paternalistic policies not readily amenable to reversal. For these reasons the vocal and pointed efforts of conservative political action in the second half of the twentieth century became necessary but ultimately only partially successful.
     Ludwig von Mises preceded Barry Goldwater by fifty years and Ronald Reagan by seventy, but the cry for vigilance by the standard bearers of conservative thought was no more heartfelt, or more necessary, in their era than it was when Mises exposed the bankruptcy of socialist theory and practice in the early decades of the twentieth century. Neither the field of play nor the rules have changed much in the ensuing one hundred years. Reading the early views of Mises on the overall vacuity of socialistic thinking and on the necessity of rationally assessing human activity in order to logically create human institutions helps us keep in focus that our obligations as a society take precedence over misdirected, idealistic notions.



Although Mises does not directly define any of the terms he uses context usually makes their meaning reasonably clear. Nonetheless, a distinct understanding of certain concepts will prove valuable. Some of the terms Mises employs, though in vogue in the early part of the twentieth century and therefore part of his vocabulary, have long since gone out of popular usage. The words that have been defined for the reader appear after the synopsis of The Theory of Money and Credit (Chapter 34).

About the Author
Ludwig von Mises was a product of antipathy to nineteenth-century European economic dogma; he became a prime creator of twentieth-century economic science. Born in 1881 in Austria, educated in Vienna, and chased to Geneva, Switzerland by the Nazis in the 1930s, he finally settled in the U.S. in 1940. His battles were never ending. Even in the United States, his views were so widely disputed by the ultimately discredited Keynesians that he could not secure regular employment. He eventually landed a job at New York University, but his salary was paid by outside interests not the school, and he never became a regular member of the faculty. During his career he wrote twenty-five books and hundreds of scholarly articles; his students changed economic thinking and policy in the twentieth century, literally around the world. Mises died in New York City in 1973.

Available through:
Liberty Fund, Inc.
Suite 300
8335 Allison Pointe Trail
Indianapolis, IN 46250-1687
(800) 955-8335


Back to Top