Everyone who, acting in economic life, chooses between the satisfaction of two wants of which only one can be satisfied, makes judgements of value. The judgements of value grasp, first and immediately, only the satisfaction of the want itself; from there they go back to the goods of the first order, and then further to the goods of the higher orders. As a rule, anyone in command of his senses is readily able to value the goods of the first order. Under simple conditions he also succeeds without difficulty in forming a judgement of the significance which the goods of higher order have for him. Where, however, the situation becomes somewhat more involved and the connections are harder to see through, finer deliberations are required in order to carry out the valuation of the means of production correctly – correctly, of course, only in the sense of the valuing subject, and not in an objective, somehow universally valid sense. It may not be hard for the farmer managing his affairs in isolation to reach a decision between enlarging his cattle-keeping and extending his hunting. The paths of production to be entered upon are here still comparatively short, and the expenditure they demand and the yield they promise can easily be surveyed. But it is quite otherwise when the choice is to be made, say, between harnessing a watercourse for the generation of electric power and extending coal-mining together with the creation of installations for the better utilization of the energy contained in coal. Here the ways of roundabout production are very many, and each single one of them is so long, here the conditions for the success of the undertakings to be set in motion are so manifold, that one can on no account let the matter rest with merely vague estimates, and exact calculations are required in order to form a judgement of the economic soundness of the procedure.
One can calculate only with units. There can, however, be no unit of the subjective use-value of goods. Marginal utility does not represent a unit of value, since, as is well known, the value of two units of a given stock is not twice as great as that of one unit, but must of necessity be greater. The judgement of value does not measure: it grades, it scales². Hence even the isolated economic agent of an economy without exchange, when he has to make a decision in cases where the judgement of value does not appear immediately evident, and has to build his judgement upon a more or less exact calculation, cannot operate with subjective use-value alone; he must construct relations of substitution between the goods, by means of which he can then calculate. As a rule he will not succeed in reducing everything to one unit. Yet as soon as he succeeds at all in reducing all the elements that have to enter into the calculation to such economic goods as can be grasped by an immediately evident judgement of value, that is, to goods of the first order and to the disutility of labour, he will be able to make do with this for his calculation. That this is possible only under quite simple conditions is evident enough. For more involved and longer processes of production it would by no means suffice.
In the exchange economy the objective exchange value of goods appears as the unit of economic calculation. This brings a threefold advantage. First, it makes it possible to build the calculation upon the valuation of all the economic agents taking part in exchange. The subjective use-value of the individual, as a purely individual phenomenon, is not directly comparable with the subjective use-value of other men. It becomes so only in exchange value, which arises from the interplay of the subjective valuations of all the economic agents taking part in exchange. Secondly, calculation in terms of exchange value provides a check upon the appropriate employment of goods. Whoever wishes to calculate a complicated process of production notices at once whether he is working more economically than others or not; if, having regard to the exchange relations prevailing on the market, he cannot carry the production through profitably, this is an indication that others understand better how to turn the goods of higher order in question to account. Finally, calculation in terms of exchange value makes it possible to reduce the values to one unit. For this purpose, since the goods can be substituted for one another according to the exchange relations of the market, any good whatever may be chosen. In the money economy it is money that is chosen.
Monetary calculation has its limits. Money is not a measure of value, nor a measure of price. Value, after all, is not measured in money. Nor are prices measured in money: they consist in money. Money, as an economic good, is not 'stable in value', as people naively tend to assume when employing it as standard of deferred payments. The exchange relation subsisting between goods and money is subject to constant, though as a rule not over-violent, fluctuations, which originate not only on the side of the other economic goods but also on the side of money. This, to be sure, disturbs the calculation of value least of all, since such calculation, in view of the never-resting changes in the other economic conditions, customarily takes only short periods into view – periods in which 'good' money, at least, is as a rule subject only to minor fluctuations of the exchange relations originating on its side. The inadequacy of the monetary calculation of value stems in the main not from the fact that the calculation is conducted in a generally used medium of exchange, in money, but from the fact that it is exchange value at all that is taken as the basis of the calculation, and not subjective use-value. All those value-determining factors that stand outside exchange can therefore not enter into the calculation. Whoever calculates the profitability of developing a water power cannot enter into this calculation the beauty of the waterfall, which would have to suffer from the installation, unless he takes into account, say, the decline in tourist traffic and the like, which does have its exchange value in trade. And yet here is a circumstance which is also taken into consideration in the question whether or not the construction should be carried out. These factors are customarily described as 'extra-economic'. That may be so. There is no need to quarrel over terminologies. But the considerations which lead to their being taken into account as well must not be called irrational. The beauty of a region or of a building, the health, happiness and contentment of men, the honour of individuals or of whole peoples are, if men recognize them as significant, just as much motives of rational action as those which are economic in the proper sense of the word, even where they do not appear substitutable in exchange and therefore enter into no exchange relation. That monetary calculation cannot grasp them lies in its very nature; but this cannot diminish the significance of monetary calculation for what we do and leave undone in economic life. For all those ideal goods are goods of the first order; they can be grasped directly by our judgement of value, and it therefore presents no difficulty to take them into account, even though they must remain outside monetary calculation. That monetary calculation does not take account of them does not make it harder to heed them in life; rather, it makes it easier. If we know exactly what beauty, health, honour and pride cost us, nothing can hinder us from giving them due consideration. It may seem painful to a sensitive soul to have to weigh ideal goods against material ones. But that is not the fault of monetary calculation; it lies in the nature of things. Even where judgements of value are made directly, without calculation of value or money, the choice between material and ideal satisfaction cannot be evaded. The isolated economic agent, too, and the socialist society as well, must choose between 'ideal' and 'material' goods. Noble natures will never find it painful when they have to choose between honour and, say, food. They will know how they have to act in such cases. Even though honour cannot be eaten, one can nevertheless forgo eating for the sake of honour. Only those who wish to be spared the torment of such a choice, because they could not bring themselves to renounce material enjoyments for the sake of ideal advantages, see in the choice itself already a profanation of the true values.
Monetary calculation has meaning only in the conduct of economic affairs. Here it is employed to bring the disposal of economic goods into accordance with the rules of economy. Economic goods enter into it only in those quantities which are exchanged against money. Every extension of the field of application of monetary calculation leads to blunders. Monetary calculation fails when one seeks to use it in historical investigations into the development of economic conditions as a measure of the world of goods; it fails when one seeks by its aid to estimate national wealth and national income, when one wishes to calculate with it the value of goods which stand outside exchange transactions, as, for instance, when one strives to reckon in money the losses of human life through emigration or through wars³. These are dilettantish games, though they may at times be pursued by very discerning economists.
Yet within these limits, which it never oversteps in economic life, monetary calculation performs all that we must demand of economic calculation. It gives us a guide through the overwhelming abundance of economic possibilities. It permits us to extend the judgement of value, which attaches with immediate evidence only to goods ready for consumption and, at best, to the productive goods of the lowest orders of goods, to all goods of higher order. It makes value calculable, and thereby first gives us the foundations for all economic dealing with goods of higher order. If we did not have it, then all production by far-reaching processes, then all the longer capitalist processes of roundabout production, would be a groping in the dark.
There are two conditions which make value calculation in money possible. First, not only the goods of the first order but also the goods of higher order, in so far as they are to be embraced by it, must stand in exchange transactions. If they did not stand in exchange, the formation of exchange ratios would not come about. It is true that the considerations which the isolated householder must make when he wishes, within his own house, to exchange labour and flour for bread by way of production are no different from those which he makes when he wishes to exchange bread for clothes on the market, and one is therefore in a certain sense right in describing every economic action, including the production of the isolated householder, as exchange⁴. Yet the mind of one man alone, even were it the most brilliant, is too weak to grasp the importance of each single one of the infinitely many goods of higher order. No individual can master the infinite abundance of different possibilities of production so completely as to be capable of forming immediately evident judgements of value without auxiliary calculation. The distribution among many individuals of the power of disposal over the economic goods of the social economy, which operates with division of labour, effects a kind of intellectual division of labour, without which neither calculation of production nor economy would be possible.
The second condition is that a medium of exchange in general use, a money, is employed, one which plays its mediating role also in the exchange of production goods. Were this not the case, it would not be possible to reduce all exchange ratios to a common denominator.
Only under simple conditions can the economy manage without monetary calculation. In the narrow confines of the closed household economy, where the father of the family is able to survey the whole economic process, the significance of changes in the method of production can be estimated more or less exactly even without the support it affords the mind. The production process here unfolds with comparatively little application of capital. It takes few capitalist paths of roundabout production; what is produced is, as a rule, consumption goods or goods of higher order not too far removed from consumption goods. The division of labour is still in its very first beginnings; one and the same worker performs the work of an entire production process from its beginning to the completion of the good ready for consumption. All this is different in developed social production. It will not do to seek, in the experiences of a long-superseded age of simple production, an argument for the possibility of managing economic activity without monetary calculation.
For in the simple conditions of the closed household economy one can survey the whole path from the beginning of the production process to its completion and can always judge whether one or another procedure yields more goods ready for consumption. This is no longer possible in the incomparably intricate conditions of our economy. It will be clear without further ado, even to the socialist society, that 1000 hl of wine are better than 800 hl, and it can decide without further ado whether it prefers 1000 hl of wine to 500 hl of oil or not. To establish this, no calculation is needed; here the will of the acting economic subjects decides. But once this decision has been taken, the real task of the rational conduct of economic affairs only begins: to place the means economically at the service of the ends. That can be done only with the aid of economic calculation. The human mind cannot find its way in the bewildering abundance of intermediate products and possibilities of production if this support is lacking. It would stand perplexed before all questions of procedure and of location⁵.
It is an illusion to believe that monetary calculation in the socialist economy could be replaced by calculation in kind. Calculation in kind, in an economy without exchange, can never embrace more than the goods ready for consumption; it fails completely with all goods of higher order. As soon as the free formation of money prices for the goods of higher order is given up, rational production has been made altogether impossible. Every step that leads us away from private ownership of the means of production and from the use of money also leads us away from rational economy.
This could be overlooked, because all that we already see realized of socialism around us consists only of socialist oases in an economy with monetary exchange which, to a certain degree, is after all still free. In one sense one may agree with the socialists' claim, otherwise untenable and advanced only for agitational reasons, that the nationalization and municipalization of enterprises does not yet constitute a piece of socialism: namely, in that these enterprises are supported in their management by the surrounding economic organism of free exchange to such an extent that the essential peculiarity of socialist economy could not come to light in them at all. In state and municipal enterprises technical improvements are carried out because their effect can be observed in similar private enterprises at home and abroad, and because the private industry which produces the appliances for these improvements gives the impetus for their introduction. In these enterprises the advantages of reorganizations can be ascertained because they are surrounded on all sides by a society resting on private ownership of the means of production and on monetary exchange, so that they are able to calculate and to keep books, which socialist enterprises in a purely socialist environment could not do.
Without economic calculation, no economy. In the socialist commonwealth, since the carrying out of economic calculation is impossible, there can be no economy at all in our sense. In small matters and in incidental particulars, action may continue to be rational. But in general one could no longer speak of rational production. There would be no means of recognizing what is rational, and so production could not be consciously directed towards economy. What that means, quite apart from the consequences for the provision of men with goods, is clear. The rationality of action is driven from the field in which its proper domain lies. Will there then still be any rationality of action at all, indeed any rationality and logic in thinking at all? Historically, human rationalism has grown out of the economy. Will it be able to maintain itself at all once it has been driven out from there?
For a time, the memory of the experiences gathered in the course of millennia of free economy may indeed be capable of holding up the complete decay of the art of economy. The old kinds of procedure will be retained, not because they are rational, but because they appear hallowed by tradition. They will meanwhile have become irrational, because they no longer correspond to the new conditions. Through the general regression of economic thinking they will undergo changes which will make them uneconomical. Provision will no longer proceed anarchically, it is true. Over all actions serving the satisfaction of needs the command of a supreme authority will preside. Yet in place of the economy of the anarchic mode of production there will have stepped the senseless conduct of an apparatus devoid of reason. The wheels will turn, yet they will run idle.
Let one picture to oneself the situation of the socialist commonwealth. There are hundreds and thousands of workshops in which work is carried on. The fewest of them produce goods ready for use; in the majority, means of production and semi-finished products are made. All these establishments stand in connection with one another. Through them, one after another, every economic good passes until it is ready for consumption. In the restless bustle of this process, however, the economic administration lacks any means of finding its bearings. It cannot establish whether the workpiece is not being needlessly held up on the path it has to traverse, whether labour and material are not being wasted on its completion. What possibility would it have of learning whether this or that method of production is the more advantageous? At best it can compare the quality and quantity of the final result of production that is ready for consumption, but only in the rarest cases will it be in a position to compare the expenditure incurred in production. It knows exactly what ends its conduct of economic affairs should strive for, or believes it knows, and it should act accordingly, that is, it should attain the ends striven for with the least expenditure. To find the cheapest way, it must calculate. This calculation can naturally only be a value calculation; it is immediately clear and needs no further substantiation that it cannot be technical, that it cannot be built upon the objective use-value (utility value) of goods and services.
In the economic order resting on private ownership of the means of production, value calculation is carried out by all the independent members of society. Everyone takes part in its formation in a twofold way, once as consumer, and again as producer. As consumer he establishes the order of rank of the goods ready for use and consumption; as producer he draws the goods of higher order into that employment in which they promise to yield the highest return. In this way all goods of higher order, too, receive the rank that belongs to them according to the momentary state of the social conditions of production and of social needs. Through the interplay of these two processes of valuation, care is taken that the economic principle attains dominance everywhere, in consumption as well as in production. There develops that finely graduated system of prices which permits everyone at any moment to bring his own requirements into accord with the calculus of economy.
All this is necessarily absent in the socialist commonwealth. The economic administration may know exactly which goods it needs most urgently. But with that it has found only the one part of what is required for economic calculation. The other part, the valuation of the means of production, it must do without. The value that belongs to the totality of the means of production it can establish; this is obviously equal to the value that belongs to the totality of the needs satisfied by them. It can also calculate how great the value of a single means of production is, by reckoning the significance of the loss in the satisfaction of needs which would arise through its removal. Yet it cannot reduce this value to a uniform expression in price, as the free economy can, in which all prices can be reduced to a common expression in money.
In the socialist economy, which admittedly need not eliminate money entirely, but which does make it impossible to express the prices of the means of production (including labour) in money, money can play no part in economic calculation⁶.
Consider the construction of a new railway line. Should it be built at all, and if so, which of several conceivable routes should be built? In the free economy of exchange and money the calculation can be drawn up in money. The new line will cheapen the transport of certain consignments of goods, and one can now calculate whether this reduction in cost is great enough to exceed the expenditure which the construction and operation of the new line require. That can be calculated only in money. One cannot reach the goal here by setting the various kinds of expenditure in kind against the savings in kind. If there is no possibility of reducing to a common expression hours of labour of various qualities, iron, coal, building materials of every kind, machines and the other things which the construction and operation of railways require, then the calculation cannot be carried out. The economic selection of the route is possible only if one is able to reduce all the goods that come into consideration to money. Certainly, monetary calculation has its imperfections and its grave defects, but we have nothing better to put in its place; for the practical purposes of life, the monetary calculation of a sound monetary system is, after all, sufficient. If we renounce it, every economic calculation becomes utterly impossible.
The socialist community will, of course, know how to help itself. It will settle the matter by fiat and decide for or against the planned construction. Yet this decision will at best be made on the basis of vague estimates; it will never be built on the foundation of an exact calculation of value.
The static economy can manage without economic calculation. Here, in economic matters, the same thing is for ever repeated, and if we assume that the first establishment of the static socialist economy takes place on the basis of the final results of the free economy, then we could at best conceive of a socialist production directed in an economically rational manner. But that is possible only in thought. Quite apart from the fact that a static economy can never exist in real life, since the data are for ever changing – so that the static condition of economic activity is only a mental assumption, necessary though it is for our thinking and for the development of our knowledge of economic matters, to which no state in life corresponds – we must after all assume that the transition to socialism would, merely in consequence of the equalization of differences in income and of the shifts in consumption, and hence also in production, conditioned by it, alter all the data in such a way that any linking-up with the final state of the free economy is impossible. But then we have before us a socialist economic order which sails about on the ocean of possible and conceivable economic combinations without the compass of economic calculation.
Every economic change thus becomes in the socialist commonwealth an undertaking whose success can neither be appraised in advance nor ascertained later in retrospect. Everything here gropes in the dark. Socialism is the abolition of the rationality of the economy.
In every larger enterprise the individual works or departments are to a certain degree independent in their accounting. They charge one another for materials and labour, and it is possible at any time to draw up a special balance for each individual group and to ascertain by calculation the economic results of its activity. One is thus able to establish with what success each individual department has worked, and accordingly to reach decisions about the reorganization, curtailment, closure or extension of existing groups and the setting-up of new ones. Certain errors are, it is true, unavoidable in such calculations. They stem in part from the difficulties that arise in apportioning overhead costs. Other errors again arise from the necessity of calculating, in some respects, with data that cannot be exactly ascertained, for example when, in determining the profitability of a process, the amortization of the machines employed is calculated on the assumption of a certain duration of their serviceability. Yet all errors of this kind can be kept within certain narrow limits, so that they do not disturb the overall result of the calculation. Whatever uncertainty remains is to be set down to the account of the uncertainty of future conditions, which is necessarily present in the dynamic state of the national economy.
It now seems an obvious step to attempt, in an analogous manner, independent accounting for the individual groups of production in the socialist commonwealth as well. But this is altogether impossible. For that independent accounting of the individual branches of one and the same enterprise rests exclusively on the fact that it is precisely in market dealings that market prices are formed for all kinds of goods and labour employed, prices which can be taken as the basis of calculation. Where free market dealings are absent, there is no formation of prices; without the formation of prices there is no economic calculation.
One might perhaps think of permitting exchange between the individual groups of enterprises, so as to arrive in this way at the formation of exchange ratios (prices) and thus to create a basis for economic calculation in the socialist commonwealth as well. Within the framework of the unitary economy, which knows no private ownership of the means of production, the individual labour groups are constituted as holders of independent powers of disposal which, while they have to conduct themselves according to the instructions of the supreme economic administration, nevertheless transfer material goods and services to one another only against a payment which would have to be made in a general medium of exchange. It is roughly thus that the organization of the socialist conduct of production is probably imagined when people today speak of full socialization and the like. But once again there is no getting around the decisive point. Exchange ratios of production goods can be formed only on the basis of private ownership of the means of production. If the 'Coal Community' delivers coal to the 'Iron Community', no price can be formed unless both communities are owners of the means of production of their works. But that would be not socialization but workers' capitalism and syndicalism.
For the socialist theorist who takes his stand on the labour theory of value, the matter is, of course, quite simple. 'As soon as society takes possession of the means of production and employs them for production in direct socialization, the labour of each individual, however different its specifically useful character may be, becomes from the outset and directly social labour. The quantity of social labour contained in a product then does not first need to be ascertained by a roundabout route; daily experience shows directly how much of it is necessary on average. Society can simply calculate how many hours of labour are contained in a steam engine, in a hectolitre of wheat of the last harvest, in a hundred square metres of cloth of a certain quality. ... It is true that even then society will have to know how much labour each article of use requires for its production. It will have to arrange the plan of production according to the means of production, among which the labour forces in particular are also to be counted. The useful effects of the various articles of use, weighed against one another and against the quantities of labour necessary for their production, will in the end determine the plan. People settle everything very simply without the intervention of the much-famed "value"'⁷.
It is not our task here to bring forward once more the critical objections to the labour theory of value. They can interest us in this connection only in so far as they bear on the assessment of the applicability of labour to the value calculation of a socialist commonwealth.
At first sight labour calculation appears also to take into account the natural conditions of production, those lying outside man. In the concept of socially necessary average labour time the law of diminishing returns is already taken into account in so far as it takes effect owing to the diversity of the natural conditions of production. If the demand for a commodity rises and poorer natural conditions of production must therefore be drawn upon for exploitation, then the social labour time required on average for producing one unit rises as well. If it proves possible to discover more favourable natural conditions of production, the socially required quantity of labour falls⁸. This taking into account of the natural conditions of production, however, extends only precisely as far as it finds expression in changes in the socially necessary quantity of labour. Beyond that, labour calculation breaks down. It leaves the consumption of material factors of production entirely out of account. Let the socially necessary labour time required for producing each of the two commodities P and Q be 10 hours. Suppose that for producing one unit of P as well as one unit of Q, besides labour, the material a is also to be employed, one unit of which is produced by one hour of socially necessary labour; and indeed the production of P requires two units of a and 9 hours of labour besides, the production of Q one unit of a and 9 hours of labour besides. In labour calculation P and Q appear as equivalents; in value calculation P would have to be valued more highly than Q. The former is false; the latter alone corresponds to the essence and purpose of calculation. It is true that this surplus by which value calculation places P above Q, this material substratum, 'is present by nature without the assistance of man'⁹. Yet if it is present only in such quantity that it becomes an object of economizing, it must also enter in some form into the calculation of value.
The second defect of labour calculation is its disregard of the differing quality of labour. For Marx all human labour is economically of the same kind, because it is always 'productive expenditure of human brain, muscle, nerve, hand, etc.'. 'Complicated labour counts only as simple labour raised to a higher power, or rather multiplied, so that a smaller quantity of complicated labour is equal to a larger quantity of simple labour. That this reduction constantly takes place is shown by experience. A commodity may be the product of the most complicated labour; its value equates it to the product of simple labour and therefore itself represents only a definite quantity of simple labour'¹⁰. Böhm-Bawerk is not wrong when he calls this argumentation 'a theoretical conjuring trick of astounding naivety'¹¹. For the purpose of judging Marx's assertion we may properly leave undecided the question whether it is possible to find a uniform physiological measure of all human labour, of the physical as well as of the so-called mental kind. For it is certain that among men themselves there exist differences of abilities and skills which bring it about that the products and performances of labour are of differing quality. What must be decisive for settling the question whether labour calculation is usable as economic calculation is whether it is possible to bring different kinds of labour to a common denominator without the intermediate link of the valuation of their products by the economizing subjects. The proof which Marx seeks to furnish for this has failed. Experience does indeed show that commodities are placed in exchange ratios without regard to whether they are products of simple or of complicated labour. Yet this would be a proof that definite quantities of simple labour are directly equated with definite quantities of complicated labour only if it were settled that labour is the source of exchange value. But this is not only not settled; it is precisely what Marx, with that very argument, first sets out to prove.
That in exchange dealings a substitution ratio between simple and complicated labour has developed in the wage rate – something to which Marx does not allude in that passage – is just as little a proof of this homogeneity. This equating is, after all, a result of market dealings, not their presupposition. Labour calculation would have to fix an arbitrary ratio for the substitution of complicated labour by simple labour, and this rules out its usability for the conduct of economic affairs.
It was long believed that the labour theory of value was necessary to socialism in order to provide an ethical foundation for the demand for the socialization of the means of production. We know today that this is an error. Even though the majority of its socialist adherents have used it in this way, and even though Marx himself, although he took a fundamentally different standpoint, was unable to keep himself entirely free of this blunder, it is nevertheless clear that, on the one hand, the political demand for the introduction of the socialist mode of production neither requires support from the labour theory of value nor can receive any support from this doctrine, and that, on the other hand, those who hold a different view of the nature and origin of economic value can also be socialists in conviction. Yet in another sense than is usually meant, the labour theory of value is an inner necessity for those who advocate the socialist mode of production. Socialist production on a large scale could appear rationally practicable only if there were an objectively recognizable magnitude of value that would make economic calculation possible even in an economy without exchange and without money. As such, however, only labour could conceivably come into consideration.
