Saturday, June 29, 2013


After I summarized Mises' lecture on interventionism, I was thinking of proceeding to inflation, which is the 4th lecture. But as I reread the 2nd lecture, I find it interesting. So I decided to go for it. 

The second lecture is about socialism. The first few pages contained a discussion about economic freedom. It was followed by an explanation of consumer sovereignty. Then the next few pages were devoted to the exposition of the use of state laws and the meaning of irreconcilable conflict of interest. The bulk of the last pages was spent in elaborating about central planning and the fundamental problem of the impossibility of calculation and planning under socialism.

Photo Source: How Socialism Works

Economic Freedom

Mises described economic freedom as a system and a process. As a system, "it is the market economy, it is the system in which the cooperation of individuals in the social division of labor is achieved by the market" (p. 17). As a process, "it is the way in which, by selling and buying, by producing and consuming, the individuals contribute to the total workings of society" (ibid.). 

Mises made some necessary qualifications in his understanding of economic freedom. I find three:

First, in relation to nature, he acknowledged that man is not free but has to follow the regularity of its laws. 

Second, he also denied perfect freedom from a metaphysical standard. 

Third, he confined his discussion of economic freedom in the context of society. Within this context, the various types of freedom are interconnected. Economic freedom therefore is vital and cannot be separated from other forms of freedom. He considered it illusory to think that people are really free without economic freedom.

He cited two examples: freedom of the press and personal freedom. 

For Mises, there is no sense in talking about freedom of the press if the government owns all printing presses and ultimately decides the ideas to be printed. In such situation, ideas that do not serve the interest of the state have no place. And this is the reality of the slavery of the press. 

Personal freedom also does not exist in socialist countries. Freedom to choose one's profession and residence is not allowed. It is the government who decides the suitable career for every individual and the specific places where people should live. 

Consumer Sovereignty

Mutual dependence or service is central in this concept of economic freedom. The belief that in the free market someone lords over without the support of the people is mistaken. If there is any sovereign in the free market, it is none other but the consumer. 

However, without thinking economically, consumer sovereignty is difficult to see. To confine one's perspective of sovereignty among the leaders of the business world is considered short-sighted. We need to pay attention not only on the things that we can immediately see, but also on things which cannot be perceived obviously. This is the timeless message of the great French economist Frederic Bastiat. 

"The fact is", said Mises, "under the capitalistic system, the ultimate bosses are the consumers. The sovereign is not the state, it is the people" (p. 21). And the proof of such sovereignty is the right to commit mistakes. Slaves do not have such right. 

The Use of State Laws

It is exactly the right to commit mistakes that the government wants to prevent for mistakes can harm people. The government wants to protect people from such harm by the use of legislation. The laws are the tools used by the government "to guard" its people from harming themselves.

People harm themselves by their mistaken consumption such as the use of liquors and cigarettes. So it is but proper for the government to restrict this activity. But once such idea is accepted, the question of limitation is difficult to decide. Man can also hurt himself by reading "revolutionary" books, watching unwholesome movies, and listening to bad music. Is the government action therefore justified in restricting these harmful activities?

There are other ways besides legislation to convince people to change their harmful activities. Mises identified ways like writing books and articles, delivering speeches, and preaching the Bible's message. Once legislation is used to coerce other people, that's equivalent to opening of the path to slavery. 

Irreconcilable Conflict of Interest

Karl Marx popularized the idea of irreconcilable conflict of interest between classes. Mises criticized Marx for the latter used the idea and applied it on capitalism, but all his examples were taken from the pre-capitalistic era. 

Mises described the society of such era as a "status society". In that society, the important emphasis in the birth of a person is not his nationality, but his membership in a particular social class. It is in such social context that Marx took his idea of irreconcilable conflict between classes and misapplied to capitalism. To appreciate the detailed picture of such society, let us read two paragraphs from Mises:

"In a status society a man was not, for example, born a Frenchman; he was born as a member of the French aristocracy or of the French bourgeoisie or of the French peasantry. In the greater part of the Middle Ages, he was simply a serf. And serfdom, in France, did not disappear completely until after the American Revolution. In other parts of Europe it disappeared even later" (p.24).
"But the worst form in which serfdom existed—and continued to exist even after the abolition of slavery—was in the British colonies abroad. The individual inherited his status from his parents, and he retained it throughout his life. He transferred it to his children. Every group had privileges and disadvantages. The highest groups had only privileges, the lowest groups only disadvantages. And there was no way a man could rid himself of the legal disadvantages placed upon him by his status other than by fighting a political struggle against the other classes. Under such conditions, you could say that there was an 'irreconcilable conflict of interests between the slave owners and the slaves,' because what the slaves wanted was to be rid of their slavery, of their quality of being slaves. This meant a loss, however, for the owners. Therefore, there is no question that there had to be this irreconcilable conflict of interests between the members of the various classes" (ibid.).

In the kind of society described above, aristocrats did not consider peasants as their fellow citizens. They regarded them as "rabble" (p. 25). They only recognized aristocrats of other countries as their equals. And the proof of such sharp division among social classes is that each social class had their own unique language and clothing. All European aristocrats used French, the bourgeoisie used another language, and the peasants used local dialects.

Marx failed to see the distinctions between the status society and the capitalist society. In the status society, the aristocrats could retain their status for hundreds of years regardless of their moral quality. In the capitalist society, social mobility is constant. Mises explained the meaning of this social mobility:

"This means that there are always people who are at the top of the social ladder, who are wealthy, who are politically important, but these people - these elites - are continually changing" (p.26).
"But in a capitalist society, there is continuous mobility - poor people becoming rich and the descendants of those rich people losing their wealth and becoming poor" (ibid.).
"Everyone is free to change his status. That is the difference between the status system and the capitalist system of economic freedom, in which everyone has only himself to blame if he does not reach the position he wants to reach" (p. 27).

Central Planning

In socialism, social mobility is once again closed. Reading this, makes me wonder whether socialism is simply a revival of status society or feudalism. Though the name may vary, but the similarity of economic reality between the pre-capitalistic era and socialism is indeed alarming. 

Today, a popular and acceptable name is used in behalf of socialism. Its name is central planning. 

In discussing this subject about central planning, Mises mentioned a popular book in his time written by a certain British lady who happened to be a member of the Upper House. The title of her book is "Plan or No Plan". In that book, Mises discerned that the author was advocating the kind of plan originally proposed by Lenin and Stalin. This type of plan covers the entire life of a nation and excludes the personal plans of the people. For Mises, the title of the book was misleading for the contrast actually was not between the existence and absence of national plan, but between two kinds of plan - central plan or personal plans. 

Impossibility of Calculation and Planning

One, if not the central weakness inherent in socialism is its inability for economic calculation and planning due to the absence of price system. Only the market can provide such system. And since socialism is basically an economic system that abolished the free market, it is actually running blind without the price system. Socialism is confronted with an economic dilemma. It hates the price system, but it cannot survive without it. So how do socialists respond to this dilemma?

Socialists hate the price system and at the same allow an appearance of the free market to exist. Notice how Mises described socialism's difficulty:

" 'All the evils in the world come from the fact that there are markets and market prices. We want to abolish the market and with it, of course, the market economy, and substitute for it a system without prices and without markets' " (p. 33). 
" ' We will not abolish the market altogether; we will pretend that a market exists; we will play market, like children who play school ' " (pp. 33-34).

After citing the unprincipled response of socialism to price system and free market, Mises confessed that the issue he was dealing with required exhaustive treatment that he could not do in just six lectures. He advised his readers to consult his other books particularly "Human Action" and also to read the book of a socialist Polish economist Oskar Lange to see the other side of the story. 

And then Mises anticipated an objection about the Russian experiment. The objection was still relevant during the writing of the present book under study for the Russian experiment was still active that time. But since the collapse of Russian experiment in 1989, Mises argument was vindicated. Nevertheless, according to Mises, the reason why the Russian experiment had survived for seven decades was because Russia used the price system in capitalist countries. 

Mises concluded his lecture on socialism by returning again to that idea of sovereignty that we mentioned earlier in this article. In free market, the people or the consumers are sovereign, whereas under socialism, that sovereignty is transfered to the state. Two quotations illustrate this difference. Under free market, you will read outside of a business establishment this expression of gratitude: " ' Thank you for your patronage. Please come again ' " (p. 36). Under socialism, the shopkeeper will tell you, " ' You have to be thankful to the great leader for giving you this ' " (ibid.). 

Concluding Remarks

President Noynoy Aguino popularized the expression, "Kayo ang boss ko!" Compared to the message of the three Mises' lectures I covered so far, it appears that the message of our President exalts the free market economy, where the people, the consumers are sovereign.

I mentioned under "Central Planning" my astonishment about the similarity between socialism and feudalism in closing the opportunity for social mobility. I do not know the extent of central planning in the country. I am not an economist. I am simply an informal student of economics wanting to understand how the world works and why we are in a situation that we have right now, both nationally and globally. I observe so far that in reading Mises, he remains relevant for our time. 

I tried to read other articles related to feudalism and socialism to interact with this lecture and I find two. I carefully read them and thinking of including their ideas into this article, but I find them confusing. I am referring to "The Return of Feudalism" and "We Already Tried Libertarianism - It Was Called Feudalism" 

I was directed by to the first article and by Tom Woods to the second article. I have difficulty assessing the economic position of the writer of the first article especially in relation to socialism. Even though he identified some similarities and distinctions between socialism and feudalism, he wrote in the latter part of his article that he preferred socialism than the present condition in the US. I am confused because he described the existing US condition as already socialist and getting worst and at the same time, has returned to feudalism of a bad type. 

The second article is more confusing. The writer, Mike Konczal relied on Samuel Freeman's paper, "Illiberal Libertarians: Why Libertarianism is Not a Liberal View". He took four points from Freeman and made use of them to critique libertarianism and argued that libertarianism is actually a revival of feudalism. 

As a whole, I find two conflicting claims. One claims that libertarianism is the other name for feudalism. The other argues that it is socialism, which carries the economic reality of feudalism. To choose between the two is not an easy task. It requires careful analysis of the basic principles and characteristics of feudalism, socialism, and libertarianism. 

If there is anything we have to be cautious of, I think we should be careful in accepting any association between two theoretical constructs on the basis of similarity of words. We should examine the meaning attached in those words and especially their impacts on both personal and economic freedom. 


Mises, Ludwig von. (1979). Economic Policy: Thoughts for Today and Tomorrow. Chicago: Regnery/Gateway, Inc.