Classical political economy broke down mainly because it failed to base its explanation of the fundamental phenomenon of value on the same analysis of the springs of economic activity which it had so successfully applied to the analysis of the more complex phenomena of competition. The labour theory of value was the product of a search after some illusory substance of value rather than an analysis of the behaviour of the economic subject. The decisive step in the progress of economics was taken when economists began to ask what exactly were the circumstances which made individuals behave towards goods in a particular way. And to ask the question in this form led immediately to the recognition that to attach a definite significance or value to the units of different goods was a necessary step in the solution of the general problem which arises everywhere when a multiplicity of ends compete for a limited quantity of means.
The omnipresence of this problem of value wherever there is rational action was the basic fact from which a systematic exploration of the forms, under which it would make its appearance under different organizations of economic life, could proceed. And up to a certain point from the very beginning the problems of a centrally directed economy found a prominent place in the expositions of modem economics. It was obviously so much simpler to discuss the fundamental problems on the assumption of the existence of a single scale of values consistently followed than on the assumption of a multiplicity of individuals following their personal scales, that in the early chapters of the new systems the assumption of a communist state was frequently used—and used with considerable advantage—as an expository device.1 But it was used only to demonstrate that any solution would necessarily give rise to essentially the same value phenomena—rent, wages, and interest, etc.—which we actually observe in a competitive society, and the authors then generally proceeded to show how the interaction of independent activities of the individuals produced these phenomena spontaneously without inquiring further whether they could be produced in a complex modern society by any other means. The mere absence of an agreed common scale of values seemed to deprive that problem of any practical importance. It is true that some of the earlier writers of the new school not only thought that they had actually solved the problem of socialism but also believed that their utility calculus provided a means which made it possible to combine individual utility scale into a scale of ends objectively valid for society as a whole. But it is now generally recognized that this latter belief was just an illusion and that there is no scientific criterion which would enable us to compare or assess the relative importance of needs of different persons, although conclusions implying such illegitimate interpersonal comparisons of utilities can probably still be found in discussions of special problems.
But it is evident that as the progress of the analysis of the competitive system revealed the complexity of the problems which it solved spontaneously, economists became more and more sceptical about the possibility of solving the same problems by deliberate decision. It is perhaps worth noting that as early as 1854 the most famous among the predecessors of the modern “marginal utility” school, the German, H. H. Gossen, had come to the conclusion that the central economic authority projected by the communists would soon find that it had set itself a task which far exceeded the powers of individual men.1 Among the later economists of the modern school the point in which already Gossen based his objection, the difficulty of rational calculation when there is no private property, was frequently hinted at. It was particularly clearly put by Professor Cannan, who stressed the fact that the aims of socialists and communists could only be achieved by “abolishing both the institution of private property and the practice of exchange, without which value, in any reasonable sense of the word, cannot exist”.2 But beyond general statements of this sort, critical examination of the possibilities of a socialist economic policy made little headway, for the simple reason that no concrete socialist proposal of how these problems would be overcome existed to be examined.1
It was only early in the present century that at last a general statement of the kind we have just examined concerning the impracticability of socialism by the eminent Dutch economist, N. G. Pierson, provoked K. Kautsky, then the leading theoretician of Marxian socialism, to break the traditional silence about the actual working of the future socialist state, and to give in a lecture, still somewhat hesitantly and with many apologies, a description of what would happen on the Morrow of the Revolution.2 But Kautsky only showed that he was not even really aware of the problem which the economists had seen. He thus gave Pierson the opportunity to demonstrate in detail, in an article which first appeared in the Dutch Economist, that a socialist state would have its problems of value just as any other economic system and that the task socialists had to solve was to show how in the absence of a pricing system the value of different goods was to be determined. This article is the first important contribution to the modern discussion of the economic aspects of socialism, and although it remained practically unknown outside of Holland and was only made accessible in a German version after the discussion had been started independently by others, it remains of special interest as the only important discussion of these problems published before the War. It is particularly valuable for its discussion of the problems arising out of the international trade between several socialist communities. An English translation is now reproduced in the next section in the volume and we need therefore say no more about its argument.
All the further discussions of the economic problems of socialism which appeared before the War confined themselves more or less to the demonstration that the main categories of prices, as wages, rent and interest, would have to figure at least in the calculations of the planning authority in the same way in which they appear to-day and would be determined by essentially the same factors. The modern development of the theory of interest played a particularly important rôle in this connection, and after Böhm-Bawerk1 it was particularly Professor Cassel who showed convincingly that interest would have to form an important element in the rational calculation of economic activity. But none of these authors even attempted to show how these essential magnitudes could be arrived at in practice. The one author who at least approached the problem was the Italian economist Enrico Barone who in 1908 in an article on the Ministry of Production in the Collectivist State developed certain suggestions of Pareto’s.1 This article is of considerable interest as an example of how it was thought that the tools of mathematical analysis of economic problems might be utilized to solve the tasks of the central planning authority. An English translation will be found as an appendix to this volume.