November 9, 2014 will mark the 25th anniversary of the fall of the Berlin Wall. Other than hearing Scorpion’s Wind of Change in a loop, you will hear people remember how the fall of the Wall, along with the subsequent collapse of communism, came as a surprise to everyone.
That is, everyone… except for the economists/followers of the Austrian School of Economics. Not only was this school of thought the fiercest opponent to communism and government intervention in the economy of the past century, it was also the only one to have predicted the impossibility of the communist scheme.
It started with Carl Menger, considered to be the founder of the school. He, along with two other economists, discovered the “marginal utility” concept. For example, when you’re thirsty, getting that first glass of water makes you very happy. But the more water you drink, the less satisfied you become. And since some people might be thirstier than others, there can’t be an objective way of calculating people’s thirst.
In other words, there is no way of knowing objectively what people’s preferences are – also known as the subjective theory of value. This theory also applies to work; what determines a worker’s salary is not how much he produces but rather how much “value” he produces, i.e. how useful his work is to others. However much effort he may put in building a Model T car, there is little chance he will earn something from it as this car has been outdated for decades.
Marx was therefore very wrong in is economic theories, where he said that there was an objective way of knowing a worker’s right salary. This is how he invented his theory of workers being exploited because their "surplus value" was stolen.
A System that Can’t Even Work
However, beyond Marx’ mistakes about value, there’s one fundamental question no one ever asked: Can communism work? According to Marx, communism is an inevitable part of history, just like capitalism replaced feudalism when “the right time” arrived. And after World War II, communism was seen as a viable alternative to capitalism; it was even seen as a model for workers during the post-war boom.
Fortunately, Austrians weren’t fooled by this lack of defense for freedom. Ludwig Von Mises, one of the best economists of the 20th century, predicted the downfall of communism in…1921. First, he showed that Marxists have to use plenty of ad hominem attacks by calling their critics “sycophant of the bourgeois” in order to hide their lack of arguments in defense of their theory.
But more importantly, he showed the impossibility of central planning. Indeed, resources can only be allocated efficiently with a price system, which can only exist with private property. Supposing there is no inflation, prices tell us either about the scarcity or about the demand for a product.
For example, oil prices have been declining in the past few months. It either shows that people consume less of it because summer is over or because the Arab countries are producing “too much” for the actual world demand. This may explain why some Middle-Eastern countries are cutting back on production.
But with communism, where there is no private property, there is no way of knowing how efficiently resources are used. Do we produce enough shoes? Is this road built the right way? Should we plant corn or wheat? Without a price system, all these questions can’t find an answer.
Therefore, there is inevitable waste, as was the case in the USSR. For example, nail producers were rewarded by the weight of nails they produce. Unfortunately, their product was unusable since it was too large. With private property and profits, they would have known quickly that their product was terrible.
Mises’ most famous student, Nobel Prize winner Friedrich Hayek, also showed the dangers of communism and central planning. In his famous “Road to Serfdom”, he showed that governments trying to plan the economy inevitably end up as totalitarian regimes.
It can’t be otherwise; once the central authority has decided on the course to follow, it must make sure absolutely nothing deviates from it. From control of the press to control of scientific discoveries, everything has to be directed in order to (supposedly) achieve the plan. That explains why East Germany remained frozen in time; the planners had to make sure nothing “unwanted” showed up so people wouldn’t question their “wise” planning.
In short, the fall of communism was bound to happen, with or without Reagan’s Star Wars, and only the Austrian School of Economics was able to see it. Since Austrians see economics for what it really is – a study of human action rather than a complicated series of mostly useless mathematical formulae – they were able to see that the USSR would one day collapse. They even saw the housing bubble as early as 2001 since they knew that easy public money doesn’t lead to prosperity.
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