Is Socialism Possible?--Che Guevara vs. Ludwig von Mises

Legend has it that shortly after the revolution in Cuba, Fidel and the victorious guerillas were trying to figure out who was going to run the banking system. Fidel asked, "Is anyone here an economist?" Only Che Guevara raised his hand, so he was given the job. Later one of his puzzled comrades confided to Che, "I didn't know you were an economist." Che, looking surprised, answered, "Oh, I thought he said 'communist'."

But the fact is that Che was well schooled in Marxist economics and thought deeply about the problems of building socialism. The 1989 book by Carlos Tablada, "Che Guevara: Economics and Politics in the Transition to Socialism" outlines Che's viewpoint. But are Che's ideas valid, or is socialism an unworkable system? A powerful defender of the latter position is Ludwig Von Mises. Most socialists have never heard of Von Mises. Those who have generally dismiss him as a champion of free market policies and mentor of Friedrich Hayek, the godfather of Reaganomics. But von Mises' 1922 book, "Socialism", is as timely as the collapse of the socialist bloc; Von Mises accurately predicted many of the failures of the former socialist camp.

Von Mises gets to the essence of the debate--he argues that people are interested in "well-being and happiness" and that "The discussion always returns to the same point, the fundamental question whether the socialist order of society promises a higher productivity than capitalism." (quotes are from the 1951 Yale University Press edition) Writing at a time of overwhelming support for social democracy and/or communism in Germany, Von Mises states, "The world inclines to Socialism because the great majority of the people want it. They want it because they believe that Socialism will guarantee a higher standard of welfare. The loss of this conviction would signify the end of Socialism." So what is his case?

THE CALCULATION PROBLEM

Von Mises grants that "socialism is one of the most ambitious creations of the human spirit," but quickly goes on to argue that the essential flaw of socialism is that, without markets, "socialism lacks the ability to calculate [prices] and therefore to proceed rationally". "No individual could so discriminate between the infinite number of alternative methods of production that he could make direct judgements of their relative value without auxiliary calculations. . . .Money calculation provides a guide amid the bewildering throng of economic possibilities." "With the best will in the world" socialism will be helpless, he argues. "The problem is not deciding what to produce--any socialist society can do that. The problem is to decide how to use the existing means of production most effectively to produce the desired goods. This requires economic calculation."

Marxists generally respond that prices should simply be set to equal costs. But Von Mises contends that rational price calculations should not be set equal to costs but must be based on "the subjective valuations of individuals and imputed to the producer's goods by the active co-operation of all those active in production and trade." In other words, the price is not really verified until someone buys the product. Or, in Marxist terms, the problem is one of calculating the socially NECESSARY labor time.

The spectacle of a Soviet shoe factory that produced thousands of worthless shoes that piled up on shelves unsold comes to mind here.

Also, prices are not a fixed entity. Capitalists constantly adjust prices via sales, customer discounts, special offers, etc. Because of constant market adjustments, "Only in an imaginary state of equilibrium do prices and costs coincide."

Furthermore, even the calculation of costs is no simple matter because it is necessary to know the price of capital goods to accurately calculate costs. But, Von Mises argues that under socialism, "There cannot be money prices of producers goods since these do not enter into exchange."

Von Mises main point is that the fundamental flaw of socialism is its inability to calculate prices due to a lack of market mechanisms. But he also points to other negative consequences of the lack of markets. The three most important are the issues of motivation, freedom, and innovation.

MOTIVATION

Problems of motivation are partly caused by the calculation problem--i.e. besides causing general confusion and inefficiency, the inability to accurately calculate prices undermines motivation and morale since "under socialism the usual connection between work performed and its remuneration cannot exist [because the value of the commodities produced cannot be ascertained]. . . . Wages are arbitrary; everyone maintains that they are overtasked."

Motivation is also stifled by a lack of material incentives according to von Mises. A system of moral incentives,rewards and punishments without capitalism's competitive drive only leads to a "formal performance of duties," he contends. "Nothing goes to prove that rewards in the shape of distinctions, material gifts, or even the honourable recognition of fellow citizens will induce the workers to do more than the formal execution of the tasks allotted to them." FREEDOM Von Mises argues that freedom is inevitably stifled under socialism. Like the issue of motivation, the issue of freedom is connected to the calculation problem. Lacking a market to decide "what" and "how much" is produced and "for whom" production is geared, decisions will be made arbitrarily rather than rationally according to Von Mises.

Even if the calculation problem were solved, the issue of freedom remains. Since socialism proceeds according to a plan rather than market forces, the problem is deciding who will make the plan. This is no small task given the millions of commodities produced and the infinite ways they may be made. Yet someone must make these decisions, and the decisions determine where people work, how much they are paid, what they produce, what they consume, what their working conditions are--an enormous responsibility.

Ultimately in Von Mises view the economy will be directed from the top. Since a socialist leader's "vision must include everything which is of significance to the community," he ends up with the power of a "deity." Von Mises asks if such a situation is desirable, "even though he [the socialist leader] were the wisest and best of them all." And of course history has shown that socialist leaders such as Stalin, Ceaucescu, and Pol Pot were far from wise or good.

According to Von Mises the alternative to dictatorship, benevolent or otherwise, is bureaucracy--leaving all decisions to innumerable sub-committees, democratically elected or not. He describes a socialist administration as "a countless multitude of office holders, each zealously bent on preserving his position, yet at the same time anxiously endeavoring to throw all responsibility of action onto somebody else." This description is based on Von Mises' experience with German social democracy of the 1920s, but it also captures the Soviet system under Brezhnev.

Von Mises contends that there is "no alternative to profit-seeking private business than bureaucratic management. . . or everyone making themselves passive tools of a leader." In the appendix to the 1951 edition of his book he contends, "Stalin was right in maintaining his regime was the embodiment of socialist principles. Trotsky was right in asserting that Stalin's regime had made Russia a hell."

INNOVATION

A fourth flaw of socialism according to Von Mises is its inability to innovate. The issue of innovation is similar to motivation, but more a matter of response to change, development of new products, processes, ways of doing things. The calculation problem once again looms large in Von Mises' critique. Von Mises argues, "Under stationary conditions the problem of economic calculation does not really arise." But, he contends, socialism is paralyzed in the face of change--to "plan for future action and determine the result of past action." The problem "deals with such questions as dissolving, extending, transforming, and limiting existing undertakings and establishing new undertakings--matters which can never be decided by the workers of one industry." Making such decisions on a rational basis is difficult with calculation and impossible without calculation.

IS CAPITALISM ANY BETTER?

Note that the thrust of von Mises case is not to refute Marx's critique of capitalism. His most strident criticism of Marx is for his failure to identify the inherent contradictions in building socialism. "Marx and Engels unscrupulously adopted the anarchistic doctrine of the abolition of all state authority regardless of the fact that Socialism would not mean the abolition, but rather the unrestricted expansion of the power of the state."

To be sure Von Mises does extol the benefits of capitalism. He defends: profit seeking--e.g. "to direct production for profit simply means to direct it to satisfy people's demands." speculation--"speculation provides for the adjustment of supply and demand over time and space. If it is eliminated the community itself must become a speculator." a free market--which he describes as no mysterious anarchic force, but "only the will of every individual to satisfy his own ends," adding "The market is a democracy in which every penny gives a right to vote." getting rich--"If I am doing better, what can it harm me if others are doing better still?"

But he concedes, "To recognize the social utility of private property one must first be convinced of the perniciousness of every other system."--hardly an unqualified endorsement. He also completely glosses over the reality of capitalism in the third world where oligarchies enforce extreme poverty at the point of a gun--not at all in keeping with Von Mises vision of a free competitive capitalist economy. Perhaps related to this, though, he does note, "However great an evil Socialism might be, it would be less harmful than private monopoly."

History has lent tremendous weight to Von Mises' critique of socialism. Recently KPFA Soviet affairs analyst Bill Mandel has concluded, after observing the Soviet Union from a pro-socialist viewpoint for over 50 years, that Von Mises was right. Writing in the KPFA Folio (October, 1991) Mandel argues, "What Marx failed to see was that the relatively democratic procedure of the market, stimulating hundreds of thousands (or millions) of owners to produce cheaper or better goods, would have to be replaced by the bureaucratic decisions of government planners, inevitably far fewer in number and therefore less democratic."

CUBA'S RESPONSE

So where does all this leave those of us who are convinced that capitalism is threatening human, if not all, life on earth? Is Von Mises' case airtight? Is there any hope for a humane world? This is where Che Guevara enters the picture. Che is the inspiration for Cuba's model of socialism. What can we learn from him and the Cubans?

Socialism in Cuba has dramatically improved the standard of living in Cuba today, in spite of over 30 years of U.S. efforts to blockade the island and undermine the revolution overtly and covertly. Books such as "Cuba for Beginners", "No Free Lunch," and "In the Fist of the Revolution" describe Cuba's achievements clearly.

In spite of their accomplishments the Cubans will readily admit that the Soviet model of building socialism was a failure. They learned this from their own experience of trying to copy it. Fidel even stated that the Soviet model could potentially lead to something "worse that capitalism." [from Granma newspaper in 1991, I remember reading this but I can't find the exact issue] "The socialism that died, was not ours," is one Cuban slogan.

Starting in 1985, the Cubans opted away from the increasing market reforms advocated by Gorbachev and Eastern European economists. For a study of the market socialist path, see the book "From Marx to Markets", by Wlodzimierz Brus and Kazimierz Laski. This book traces the evolution of market reforms step by step from markets in consumer goods, to capital goods, to a labor market, to entrepreneurial market rewards, and ultimately to private property. They conclude that a regulated capitalist economy along Keynesian lines is the best that can be hoped for via government intervention.

But the Cubans are taking a different route, which they call the rectification program. Cuba's (and Che's) position is a straightforward defense of central planning, but with stress on mass participation. (The following quotes are from Carlos Tablada's book cited earlier.) Tablada states, "A society that allows itself to be guided by spontaneous consumer desires will systematically reduce its resources, diverting them from their main purposes in order to use them to satisfy needs that reproduce themselves and multiply with each passing minute."

How do the Cubans fare in the face of Von Mises' critique, and how do they respond to his points?

CALCULATION

Che is well aware of the calculation problem. He stresses that the problem of how to attain "a balance in the supply and demand of goods. . . and a true reflection of costs in prices. . . is one of the most serious problems confronting the socialist economy." Unfortunately he does not offer a complete solution.

Che's proposal is to use three price indicators--costs projected in the plan, actual costs of production, and world market prices. He says, "prices would never be detached from their corresponding world market levels", a process which requires that eventually "a world socialist pricing system is achieved that is more logical than the one now used." Clearly the chances for such a system are now much more remote than they were when Che was writing in the 1960s. Che also readily concedes that his price scheme "does not mean, even remotely, that we have now come up with surefire criteria for evaluating new investments."

Che's solution was anticipated by Von Mises. He argued in 1922 that the Soviet Union had the benefit of using world market prices as a frame of reference, a luxury a world-wide socialist system would not have.

Another point that Cuba shares with the early years of the Soviet revolution is that the economy is relatively simple compared to the complexity of modern capitalism. William Mandel recounts that "In the 30s, Stalin would personally phone every night each of the score of the larges mines and factories in the country, and ask how many tons of coal, pig iron, and steel, how many tractors and how many trucks have been produced that day."

This is comparable to the situation in Cuba criticized by Sergio Roca in the 1992 book, "Cuba in Transition" edited by Sandor Halebsky and John Kirk. Roca states, "Fidel Castro has taken the economy in hand" with weekly meetings with construction brigades and developing strategies for irrigation or other public works. This sort of intimate involvement by a country's leader in day to day affairs cannot work in a complex industrial society with millions of constantly changing commodities and occupations.

So Ludwig Von Mises prevails in this key round of the debate. But where does that leave socialism in Cuba? Having the advantage of using world prices, is Cuba able to avoid the problems of stifled motivation, freedom, and innovation?

Only the most blind zealots of the right or the left would deny that Cuba has both problems and accomplishments in each of these areas. Let's take them in order:

MOTIVATION Che Guevara emphatically denied that material incentives are the primary motive force for human beings. Surprisingly, his view is shared by most management consultants in the U.S. Motives like peer affiliation, achievement, and the ability to make a difference as an individual outweigh pure monetary rewards for most people according to current management theory. Even Von Mises admits, "Called upon to choose between bread and honour, [people of character] will never be at a loss how to act."

The question of motivation is widely discussed in Che's writings and in Cuba. The Cubans blame much of the absenteeism and lack of motivation that they have encountered in the course of the revolution on the Soviet model which mechanically relied on fulfilling quotas.

Of course if people's basic needs for food, clothing, and shelter are not met, non-material incentives are of no use. And if the work people do is not fulfilling a clear social need, demoralization is inevitable.

To make sure the economy is efficient and productive Che argues for careful cost accounting and monitoring of performance. Tablada's book dispels any notion that Che's vision did not include strict accountability to objective and realistic standards by each worker and production brigade.

Che also stressed the importance of voluntary work to overcome the backwardness of Cuba's economy. Today microbrigades, operating on voluntary overtime, are a key element in Cuba's housing construction program as well as in the construction of child care and community centers. The drive to become self sufficient in food in the wake of Eastern European socialism's collapse has also relied on voluntary efforts. Young people see a two week stay in agricultural camp with their friends as a sort of vacation from their families and a chance to work together all day and party all night. Students must keep up their grades to be given a chance to go to the agricultural camp and are sorely disappointed if they are not able to participate.

Whether Cuba's rectification program will be a success is difficult to say. Critics such as Sergio Roca contend that rectification is a failure, leading to problems of allocation, coordination, and motivation. But the fact that Cuba is still standing its ground shows that the program is not a complete failure by any means. It seems to me that what the Cubans lack in material goods, they make up in pride and a defiant independence.

Altogether in terms of motivation, the spirit of Che has led to achievements well beyond Von Mises' predictions. Round two of the debate goes to Che.

FREEDOM

The U.S. media is full of pictures of Cuba as a prisonhouse of downtrodden and frightened masses. Fidel is portrayed as a mad power-hungry dictator. But as Medea Benjamin and Kevin Danaher wrote in the Winter 1992 Global Exchanges newsletter,"No matter how many times we travel to Cuba, we are always struck by how different Cuba is from its image in the U.S. press." The truth is that many, many Cubans not only support their system but are willing to die defending it. More than 90% of Cubans vote in their electoral system which now is being broadened to include direct election of the provincial and national assemblies. This compares to less than 50% of U.S. adults who vote.

This is not to say that human rights abuses do not exist. The UMAP camps of the 1960s were a dark chapter in Cuba's revolutionary history where homosexuals, religious believers, and others were incarcerated in order to reform them. But today religious believers are accepted in the Communist Party. And attitudes towards gays are changing rapidly; Fidel was quoted in Mexico's Excelsior in June, 1992 as saying that homophobia is a holdover from Spanish colonialism and machismo.

Still, political opponents can easily end up in jail. And the present law against "potentially dangerous" people is arbitrary and can be easily abused by authorities. But compared to the death squads of El Salvador and Guatamala, Cuba is a human rights paradise. Ironically the followers of Von Mises and Hayek are so obsessed with the dangers of centralized planning that they will go to any lengths to subvert it. And of course this opposition to socialism not so surprisingly coincides with the class interests of those who stand to lose their property in the event of socialism.

Von Mises provides a rationale for the terrorism of the right when he argues that people who believe in socialism are ignorant of their true interests. Thus when Allende was democratically elected in Chile, the U.S. did not think twice about organizing a coup against him. The U.S. government knew what was best for the Chileans, and it was not socialism. Free marketeer Milton Friedman stepped in to aid Pinochet in privatizing Chile's economy. Not that Friedman's proposals have been a complete failure--Chile does have the highest per capita income in Latin America. But the murder of Chile's Allende supporters and the disgraceful poverty and suffering of Chile's poor makes a mockery of the comfortable life style of Chile's middle class. Likewise--by the logic that socialism equals slavery and that capitalism equals freedom--dictators, death squads, U.S. torture techniques, subversion of elections, assassinations, support for drug cartels, and invasions are all in the interests of preserving "freedom."

So who wins this round? The U.S. wins in terms of personal freedom, freedom to go into business, be homeless, make a billion or two in government contracts, etc. The U.S. also wins in terms of rhetoric and hypocrisy. Cuba wins in terms of mass participation and genuine democracy in the work place and in the community. I doubt if there are many places in the world where factory workers would say quite candidly that they felt that they ran their textile mill as some workers told me in Cuba.

Although Cuba wins in this round, I still must admit to some reservations. Some young people on Cuba's Malecon (the waterfront in Havana) will readily tell you that the U.S. is "freer" than Cuba, echoing Von Mises and Hayek's comparison of socialism to serfdom. Although they no doubt have false illusions about life in the U.S., not to mention other third world countries, they clearly do feel stifled in Cuba.

And Fidel does have tremendous power in Cuba. What if he becomes senile and starts to lose his judgement like Mao did? Is the Cuban system strong enough to tell Fidel "No" when he needs to hear it? I hope so.

INNOVATION

As in the issue of motivation, the Cubans are full of surprises. Cuba has a national unofficial mission to become a world medical power. They have concentrated many of their brightest youth in the field of biotechnology and have developed world class products such as hepatitis and meningitis vaccines, a burn treatment that rapidly heals skin, eye surgery techniques, herbal medicines, and many other achievements.

Cuba's creativity is not limited to medicine. The Cuban's ability to keep ancient U.S. automobiles running with makeshift parts, introduction of bicycles in the face of oil shortages, construction of ecologically sound Southeast Asian style fish ponds, development of new sugar cane derivatives,and planting of urban gardens all point to their determination to maintain self-determination. And the undeniable vitality of Cuban music and dance belies the cold, gray image of a totalitarian state.

But Cuba does suffer from obstacles to innovation, as depicted, for example, in the Cuban film, "Plaf" which pokes fun at the bureaucratic roadblocks that prevent a young scientist from getting her discoveries implemented. Also, R.M. Ritter, writing in "Cuba in Transition", like Sergio Roca, questions the overall success of Cuba's rectification program. He charges that the move away from markets results in "innovation, learning by doing, response to changing circumstances being replaced by bureaucratism and centralized planning."

One problem is that the Cubans have been forced to use second rate Eastern European technology, where Ludwig Von Mises' predictions of lack of innovation came true with a vengeance. While in Cuba I marveled at a discarded standard light bulb from East Germany that looked like a Thomas Edison original--twice the diameter of our household bulbs with a big, heavy coiled wire filament. (Actually come to think of it, Western light bulbs have not advanced all that much either, thanks to the GE monopoly.)

Tallying up the innovation round, Che once again gets the nod, but in a split decision.

WHO WINS THE DEBATE?

How does this all add up? Cuba has shown that by following Che's ideas of stressing consciousness over market mechanisms, tremendous achievements are possible. Cuba's remarkable accomplishments are comparable to the great strides taken by the Soviet Union or China in the early years of their revolutions, where hunger was eradicated, education bloomed, and the economies grew rapidly. The Cubans have a great deal to be proud of, and they have shown that socialism can build a humane and forward thinking society.

Even though Cuba has shown that their socialist system is successful and deserves our support, their experience is not enough to prove that socialism is inherently superior to capitalism. In fact at this point in history, Cuba seems more like the exception that proves the rule.

In addition, of course, the Cuban experience certainly does not prove that socialism can work as a world system. I'm not ready to say that socialism on a world scale is impossible, but until Von Mises' calculation problem is resolved, socialism is not practical. Perhaps with the continuing advances in computers, we will evolve to the point that everyone could play a mass computer game called "go shopping" every day and all the necessary equations could be solved simultaneously.

But even then the contradictions between consumer desires on the one hand and environmental protection, social services, and longer range issues will need to be resolved. Thus there will have to be a world government and an internationally enforceable rule of law, something even Hayek advocated. Unfortunately the reckless disregard for international law displayed by the U.S. in its invasion of Panama, contra war on Nicaragua, and continuing blockade against Cuba (to name but a few examples) shows that the U.S., despite its lofty rhetoric, is the main obstacle to establishing such an institution.

The enthusiastic ovation given to Fidel Castro's speech at the Rio de Janeiro Earth Summit shows that Cuba has an important role to play as an independent voice against the excesses of capitalism. At Rio the U.S. isolated itself by placing its economic concerns above the interests of the global environment, truly embarrassing for the richest nation on earth, especially since the U.S. is the one country most responsible for the earth's ecological plight. But Fidel, pointing out that "there are no pretexts for cold wars, arms races and military expenditures," captured the sentiment of most world leaders and environmentalists as he asked why money spent on armaments could not be spent on development in poor countries and on the environment.

Without giving up Marx's powerful critique of capitalism's contradictions, socialists must admit that capitalism has made many advances and has proven far more resilient than Marx predicted. Most importantly, capitalism is able to resolve the calculation problem that led to the collapse of the socialist bloc. Although it is a bitter pill to swallow, the world is going to have to figure out how to survive undera capitalist system for a long time to come.

U.S. POLICY TOWARD CUBA

Before closing, I must stress that none of this changes the importance of defending Cuba in the face of U.S. aggression. In fact the U.S. hostility has little to do with whether Cuba is socialist or not. It obviously now has nothing to do with a Soviet threat. And it has nothing to do with human rights, free elections, or Fidel Castro.

The problem, as explained by Ricardo Alarcon, the Cuban representative to the U.N., in a November 13, 1991 press release, is that the U.S. considers all of Latin America its turf. Alarcon traces U.S. designs on Cuba from 1808, "ten years before the birth of Karl Marx," when the U.S. tried to buy Cuba from Spain, through 1901, "16 years before the triumph of the Socialist October Revolution in Russia," when the U.S. imposed the Platt Amendment on the Cuban Constitution, to May of 1959 when Cuba's Agrarian Reform Law" was confronted with Washington's stubborn and inadmissible opposition. . . .many months before the adoption of the first measures of a socialist orientation in Cuba and much before our re-establishment of relations with the Soviet Union."

Alarcon observes, "Any high school student knows the true motivations of the United States regarding Cuba."

Although I am not interested in waging polemics with anyone about this, I would very much welcome your comments, criticisms, and ideas about this paper.

Jack Fleck venceremos@igc.org 1992