Market Anarchy

The heart of Mises’ argument against socialism is that central planning by the government destroys the essential tool — competitively formed market prices — by which people in a society make rational economic decisions.

A modem economy with an advanced system of division of labor, sophisticated technologies and a wide variety of capital equipment is just too complex for planners to successfully organize and oversee. There is just too much knowledge (and too many different types of knowledge) dispersed among too many people. The planner is unable to centralize all of the relevant and ever-changing information in a complex society. He is unable to arrange everything in the economy in just the right way in order to “get it right.”

Mises explained that in a market economy free of government intervention, this problem which the socialist planner faces is non-existent. The key, Mises said, is private property and individual freedom. In a system of division of labor, in which all of the transactions require the voluntary consent of buyers and sellers, self-interest is (as Adam Smith argued long ago) harnessed to the common good. No one can acquire what someone else possesses unless he, in turn, offers that person something he is willing to take in trade. Thus, improvement in each individual’s condition requires that he consider the wants and desires of his fellow men.

But in a far-flung, world-encompassing system of division of labor, in which potential trading partners are separated by time and space, how do people discover what they should produce in order to satisfy the consumer demands of others? And how do they produce efficiently, i.e., with the least economic waste?

Mises explained that the institution of private property made all of this possible. Ownership and voluntary exchange create opportunities for gains from trade. Competitive bids and offers for various goods and services generate market prices at which transactions are consummated. And these prices convey useful information to everyone in the market about what products are in demand in the rest of the world.

At the same time, private ownership of the means of production permits the acquisition and hire of resources and labor for the production of goods that consumers may desire to purchase. The competitive bids of entrepreneurs for the purchase of those means of production generate market prices for the necessary resources. These prices enable businessmen to evaluate the relative value and profitability of using means of production in alternative ways. They provide the means to determine which products to produce in the economically least costly manner.

Also, since money serves as the common medium through which A transactions are undertaken, the market value of all goods and services, and all means of production, are reduced to a common denominator for simplified comparison and evaluation — their money prices on the market.

This, Mises said, is what makes possible “economic calculation” in a market economy. Men are free to make their own choices. Market prices that arise out of those choices enable each individual to acquire and share information about what others desire in the market. The market provides the method by which people can make their own free decisions in an economically efficient manner. The entire process redounds to the benefit of society as a whole.

The problem with socialism, Mises insisted, is that it short-circuits the “economic calculation” process. And it does so by abolishing private ownership of the means of production and eliminating peaceful, voluntary exchange. With no legal right of ownership, there is neither ability nor incentive to buy and sell; with nothing to buy and sell, there are no bids and offers for commodities or resources; with no bids and offers, there are no consummated exchanges; with no consummated exchanges, there arise no market prices; and without market prices expressing the relative values of commodities and resources, there exists no rational way of knowing what they are actually worth to people; therefore, businessmen cannot know how they should economically and efficiently be used to satisfy the wants and desires of the consuming public.