FREEDOM vs. PLANNING by Richard Ebeling
6 min readSep 15, 2019
Freedom vs. Planning
Richard Ebeling
A s the 20th century began, the most widely held vision
of the future was socialist: capitalism would be replaced
by central planning and the state would own all the means
of production.
The 20th century is ending with the socialist ideal in com-
plete disarray. The heads of socialist governments everywhere
declare that economic progress requires individual initiative
and private enterprise. They admit that only competition
and a market price system can bring economic coordination
to a complex system of division of labor.
All of this was anticipated by Ludwig von Mises almost 70
years ago in his famous 1920 article, “Economic Calculation
in the Socialist Commonwealth” and in his monumental trea-
tise, Socialism: An Economic and Sociological Analysis (1922).
Mises conclusively demonstrated that without market-
generated prices, expressed in terms of a common medium of
exchange, it is impossible to use society’s scarce resources in a
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rational manner. A central planner might know the techno-
logical potentials of the resources at his disposal, but he has
no way to know what economic values to assign to those re-
sources. He cannot know how to allocate resources among
alternative lines of production, and thus cannot rationally
service consumers’ demands. This insight means that our
choice of economic systems can only be between free-market
capitalism and “planned chaos.” “There is no third solution,
no middle way,” says Mises.
It is clear that socialism has lost the war on the battlefield
of ideas. But free-market capitalism has not yet won. Both in
the United States and around the world, policy-makers pro-
mote the “mixed economy,” a hodgepodge of competition
and state control. Intellectuals on both the collectivist left
and the conservative right have enshrined the idea of state
intervention.
Capitalism delivers the goods, they say, but the distribu-
tion of these goods is “unfair.” The profit motive is a powerful
engine for individual initiative and creativity, but too often
the commodities produced are “socially undesirable” and exist
only at the expense of the good society. And while competi-
tion is desirable to keep producers on their toes, too much of a
good thing can be bad. Thus government needs to protect
competitors from “unfair” competition, domestic and foreign.
Free market replies to every one of these arguments for
state intervention can be found in the writings of Ludwig
von Mises: in Liberalism! 1927), Critique of Interventionism
(1929), Human Action (1949), Planning for Freedom (1952), The
Anti-capitalist Mentality (1956), and Economic Policy (1979).
What about the argument that capitalism “unfairly” dis-
tributes the goods produced by it? Mises demonstrates that
the argument is based on a false conception of the free-
market process. Production and distribution are two sides of
the same coin. Production requires the combined use of vari-
ous factors of production, and labor is one of those resources.
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Each resource is offered a price, through entrepreneurial
judgments, for its service equal to its relative value as a con-
tribution to the production of commodities. Each factor of
production contracts for the services it will render before
there is a product available for sale.
The entrepreneur develops expectations about what con-
sumers would be willing to pay in the future for the product
being considered, and offers wages to laborers and payment
for services of other resources.
But who are the consumers? Ultimately, they are the very
same laborers and resource owners whom the entrepreneur is
considering hiring. It is thus the laborers and resource own-
ers, in their roles as consumers, who determine what their
own relative income shares will be. They do so through their
decisions about what they wish to buy and what prices they
are willing to pay for them.
Thus, if some groups of workers believe they are “unfairly”
paid, they have no one to accuse but themselves and the
other laborers. They have failed to spend a greater percent-
age of their income on the particular products that the work-
ers produce.
“Producers” and “consumers” are really the same people.
And because this is always true in the free market, the sec-
ond charge against free-market capitalism, that it produces
“socially undesirable” products, also fails.
First, as Mises forcefully argued, there is no dichotomy be-
tween “society” and the individuals comprising it. Nothing
happens to or for “society” that doesn’t originate with the in-
dividuals whose actions create societal relationships.
Second, in the free market, competition makes the entre-
preneur the servant and not the master of the economic proc-
ess. The entrepreneur must ultimately supply what individuals
in their role as consumers demand. An entrepreneur who fails
to do this will be driven from business and other entrepre-
neurs more sensitive to consumer wishes will replace him.
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Finally, when people say that some product is “socially
undesirable,” they really mean that people in society are de-
manding things of which they disapprove. But rather than
attempt to use reason to persuade others to change their buy-
ing preferences, they want to use government to coerce them
into abstinence. To answer this, Mises argued that freedom is
indivisible. Once it is admitted that government has the right
to infringe on the peaceful and personal preferences of indi-
viduals in one area, state interference cannot logically be ex-
cluded from other spheres. At the end of this road is the to-
talitarian state (see Liberalism , pp. 52-57).
In Human Action, Mises showed that free markets mean
social cooperation, not social conflict. It is through this proc-
ess of competition that we know who, among the various
suppliers, can most successfully satisfy consumers’ demands at
the least cost and, therefore, at the lowest price. And through
this process each individual finds his most efficient and
profitable place in the social system of the division of labor.
He who asks for state protection from the rigors of compe-
tition, Mises explains, is asking for special privilege at the ex-
pense of the other members of society. He is demanding special
regulations, tariffs, or subsidies in order to receive a higher
relative income than what others in the free-market economy
are willing to pay him for his products or services.
If the government grants the special privilege, the results
are disruptive of the peaceful free market process of economic
change and progress. When other members of society begin
to obtain government privileges and protections, the cumula-
tive effect is declining production, less innovation, higher
prices, and a lower standard of living for the members of the
whole society.
Mises’s most important contribution to understanding
the fallacies of state intervention is his demonstration that
“the Middle-of-the-Road Leads to Socialism.” All govern-
ment interventions and regulations are inherently destabiliz-
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ing and disruptive. And the logical consequences of one set
of interventions is that the government will extend its con-
trols to more and more sectors of the economy to “repair”
the damage created by the first set of controls.
If, for example, the government imposes price controls in
one part of the economy, the controls will distort the existing
free-market relationships between prices and the costs of pro-
duction. If the controlled price is set below the costs of produc-
tion, sellers in that part of the economy will no longer be able
to produce the same amount of the product as before. If the
government wants high production levels, it must extend the
price controls to the prices of the factors that go into making
that product. But those factors of production have, in turn,
been produced with other resources whose prices will also
have to be controlled.
The interdependency of all prices and all markets in a sys-
tem of division of labor means that if the government decides
to control one part of the economy, it must end up controlling
all of it. Finally, when the controls and regulations pervade
every portion of the economy, the free market is completely
supplanted by the state, and socialism replaces capitalism
through piecemeal interventionism. In short, as Mises says,
“the middle-of-the-road policy is not an economic system
that can last. It is a method for the realization of socialism by
installments.”
But what would logically happen if government remains on
the interventionist road is different from what must happen.
Mises repeatedly observed that the Western world was
moving toward collectivism. But he also emphasized that
“the trend can be reversed as was the case with many other
trends in history.” In the realm of human action no choices
are “inevitable.” History is made by men, and men are ulti-
mately guided by ideas.
A victory for free-market capitalism is possible. Just as
theory and experience refuted the case for socialism, the same
can happen to state intervention and the “mixed economy.”
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In fact, in terms of practical results, state intervention is
already defunct. But people must be shown how to read the
signs left behind by a controlled, taxed, and welfarist “mixed
economy.” People must understand why it happened and
what it demonstrates, that if we want peace, prosperity, and
liberty, there is no alternative to free-market capitalism.
Thanks to Ludwig von Mises, we have the arguments and
insights to lead us in the battle of ideas.