“At first sight it is not evident why such a socialist system with competition within industries as well as between them should not work well or as badly as competitive capitalism. All the difficulties one might expect to arise seem likely to be only of that psychological or moral character about which so little that is definite can be said. It is true that the problems which arise in connection with such a system are of a somewhat different nature from those arising in a ‘planned’ system, although on examination they prove to be not so very different as may appear at first.
The crucial questions in this case are: What is to be the independent business unit? Who is to be the manager? What resources are to be intrusted to him and how is his success or failure to be tested? As we shall see, these are by no means only minor administrative problems, questions of personnel such as those which have to be solved in any organization today, but major problems whose solution will affect the structure of industry almost as much as the decisions of a real planning authority.
To begin with, it must be clear that the need for some central economic authority will not greatly diminish. It is clear, too, that this authority will have to be almost as powerful as in a planned system. If the community is the owner of all material resources of production, somebody will have to exercise this right for it, at least in so far as the distribution and the control of the use of these resources is concerned. It is not possible to conceive of this central authority simply as a kind of superbank which lends the available funds to the highest bidder. It would lend to persons who have no property of their own. It would therefore bear all the risk and would have no claim for a definite amount of money a bank has. It would simply have rights of ownership of all real resources. Nor can its decisions be confined to the redistribution of free capital in the form of money and perhaps of land. It would also have to decide whether a particular plant or piece of machinery should be left further to the entrepreneur who has used it in the past, at his valuation, or whether it should be transferred to another who promises a higher return from it.
In imagining a system of this sort, it is most charitable to assume that the initial distribution of resources between individual firms will be made on the basis of the historically given structure of industry and that the selection of the managers is made on the basis of some efficiency test and of previous experience. If the existing organization of industry were not accepted, it could be improved or rationally changed only on the basis of very extensive central planning, and this would land us back with the systems which the competitive system is an attempt to replace. But acceptance of the existing organization would solve the difficulties only for the moment. Every change in circumstance will necessitate changes in this organization, and in the course of a comparatively short space of time the central authority will have to effect a complete reorganization.
On what principles will it act?
It is clear that in such a society change will be quite as frequent as under capitalism; it will also be quite as unpredictable. All action will have to be based on anticipation of future events, and the expectations on the part of different entrepreneurs will naturally differ. The decision to whom to intrust a given amount of resources will have to be made on the basis of individual promises of future return. Or, rather, it will have to be made on the statement that a certain return is to be expected with a certain degree of probability. There will, of course, be no objective test of the magnitude of the risk. But who is then to decide whether the risk is worth taking? The central authority will have no other grounds on which to decide whether the risks he has run in the past were justified? And will its attitude toward risky undertakings be the same as if he risked his own property?
Consider first the question how his success or failure will be tested. The first question will be whether he has succeeded in preserving the value of the resources intrusted to him. But even the best entrepreneur will occasionally make losses and sometimes even very heavy losses. Is he to be blamed if his capital has become obsolete because of an invention or a change in demand? How is it to be decided whether he was entitled to take a certain risk? Is the man who never makes losses because he never takes a risk necessarily the man who acts most in the interest of the community? There will certainly be a tendency to prefer the safe to the risky enterprise.
But risky, and even the purely speculative, undertakings will be no less important here than under capitalism. Speculation in the function of risk-bearing by professional speculators in commodities will be as desirable a form of division of labor as it is today. But how is the magnitude of the capital of the speculator to be determined, and how is his remuneration to be fixed? How long is a formerly successful entrepreneur to be suffered to go on making losses? If the penalty for loss is the surrender of the position of “entrepreneur,” will it not be almost inevitable that the possible chance of making a loss will operate as so strong a deterrent that it will out balance the chance of the greatest profit? Under capitalism, too, loss of capital may mean loss of status as capitalist. But against this deterrent is always the attraction of the possible gain. Under socialism this cannot exist. It is even conceivable that general reluctance to undertake any risky business might drive the rate of interest down to nearly zero. But would this be an advantage to society? If it were due only to the satiation of all the absolutely safe channels of investment, it would be bought at a sacrifice of all experimentation with new and untried methods. Even if progress is inevitably connected with what is commonly called ‘waste,’ is it not worth having if on the whole gains exceed losses?
But, to turn back to the problem of the distribution and control of resources, there remains the very serious question of how to decide in the short run whether a going concern is making the best use of its resources. Even whether it is making profit or losses is a matter which will depend on one’s estimate of the future returns to be expected from its equipment. Its results can be determined only if a definite value is to be given to its existing plant. What is to be the decision if another entrepreneur promises to get a higher return out of the plant (or even an individual machine) than that on which the present user bases his valuation? Is the plan or machine to be taken from him and to be given to the other man on his mere promise? This may be an extreme case, yet it only illustrates the constant shift of resources between firms which goes on under capitalism and which would be equally advantageous in a socialist society. In a capitalist society the transfers of capital from the less to the more efficient entrepreneur is brought about by the former making losses and the latter making profits. The question of who is to be entitled to risk resources and with how much he is to be trusted is here decided by the man who has succeeded in acquiring and maintaining them. Will the question in the socialist state be decided on the same principles? Will the manager of a firm be free to reinvest profits wherever and whenever he thinks it is worth while? At present he will compare the risk involved in further expansion of this present undertaking with the income which he will obtain if he invests elsewhere or if he consumes his capital. Will consideration of the alternative advantages which society might derive from that capital have the same weight in this computation of risk and gain as would his own alternative gain or sacrifice?
The decision about the amount of capital to be given to an individual entrepreneur and the decision thereby involved concerning the size of the individual firm under a single control are in effect decisions about the most appropriate combination of resources. It will rest with the central authority to decide whether one plant located at one place should expand rather than another plant situated elsewhere. All this involves planning on the part of the central authority on much the same scale as if it were actually winning the enterprise. While the individual entrepreneur would in all probability be given some definite contractual tenure for managing the plant intrusted to him, all new investment will necessarily be centrally directed. This division in the disposition over the resources would then simply have the effect that neither the entrepreneur nor the central authority would be really in a position to plan and that it would be impossible to assess responsibility for mistakes. To assume that it is possible to create conditions of full competition without making those who are responsible for the decisions pay for their mistakes seems to be pure illusion. It will at best be a system of quasi-competition where the person really responsible will not be the entrepreneur but the official who approves his decisions and where in consequence all the difficulties will arise in connection with freedom of initiative and the assessment of responsibility which are usually associated with bureaucracy.”
“Profit is the signal which tells us what we must do in order to serve people whom we do not know.” – Friedrich Hayek
This man is one of the smartest people to ever live.
The anti-profit mentality is very similar to a lot of religious mentalities.
I don’t fully understand why certain things are believed, and I will dedicate my life to providing a philosophy about this subject, that that sentence is so profound that it gets to the core of many different realities, which is comforting.
The epistemology of truth and lies is what I’m going to dedicate my life to.
I just hope that I provide things that are objectively true, and that my pieces of work aren’t inherently incorrect, to create beliefs that are false in the minds of the people, and that are objectively torn to shreds later on by someone smarter than I am.
That would make my life sad.
However, if I was able to provide things that were true and valuable, that would be the greatest gift that I could ever receive.
Turn on subtitles. It makes things a lot easier.
Another genius, right here.
I love this man I can’t wait to read more of this man’s works.