2020: The Centenary of the Most Important Breakthrough in the History of Economics

January 2, 2020 Updated: January 2, 2020
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Commentary

Welcome to the year that sounds tailor-made for an optometrist’s office: 2020. Here’s wishing you all the best in the year ahead.

One century ago, the year 1920 featured events both momentous and trivial. In the United States, the right of women to vote was guaranteed by the passage of the 19th Amendment. It might also have been the year when we had our first female president, in a de facto sense. With President Woodrow Wilson having been incapacitated by a stroke the previous October, no bill became law unless Wilson’s wife, Edith, decided to move her husband’s hand to sign it.

It was also the year when Babe Ruth began to play for the New York Yankees and led the Yankees to their historical dominance of the sport. On a sadder note, 1920 saw the only fatality in Major League Baseball history, when Ray Chapman died a day after getting beaned by a pitch. Curiously, it took “only” 51 years for MLB to require batters to wear a protective helmet (although several players received “grandfathered” exemptions, with the last non-helmeted player—Bob Montgomery—retiring in 1979).

Also in 1920, the first transatlantic radio signal was transmitted and the first commercial radio station license was granted. Pittsburgh’s KDKA, which still operates today, received the federal government’s first commercial radio license, and transmitted its first commercial broadcast on Nov. 2. Detroit station WWJ—still in existence—transmitted its first commercial broadcast on Aug. 20, 1920, but it was operating under an amateur license.

Another 1920 milestone was when the U.S. Post Office banned the practice of shipping children by parcel post. Yes, believe it or not, cost-conscious parents had found that the post office was the cheapest common carrier for moving infants and toddlers from Point A to Point B.

Meanwhile, south of the border, Pancho Villa surrendered, effectively ending a decade of revolutionary upheaval in Mexico. North of the border, the Royal Canadian Mounted Police Force was established, giving rise to a cultural icon—“the Mounties.”

Among all the memorable breakthroughs, milestones, achievements, and events that happened in 1920, none surpasses in importance for the world a momentous discovery in the field of economics. Indeed, that breakthrough in economics was comparable in significance to Einstein’s theory of relativity in physics and the 16th-century Copernican revolution in astronomy. It was easily the greatest economic discovery of the 20th century.

In 1920, Austrian economist Ludwig von Mises published an essay, “Economic Calculation in the Socialist Commonwealth,” which he subsequently expanded into his 1922 600-page masterpiece, “Socialism: An Economic and Sociological Study.” Mises proved, with irrefutable logic, that socialism was inherently unviable. He didn’t merely argue that socialist experiments, such as in the newly formed Soviet Union, would not succeed, but demonstrated that they literally could not succeed in bringing prosperity to the masses.

Mises’ explanation of the impossibility of a socialist system to improve the economic wellbeing of a populace is this: With the state in charge of economic production, production is no longer oriented toward satisfying the most urgent needs and wants of the people. Consequently, state-decreed prices don’t reflect how much value the people attached to various goods. Instead of prices serving as useful traffic signals that allocate scarce resources according to supply and demand, and thereby direct and coordinate production rationally, prices under socialism are arbitrary and economically meaningless.

With prices totally divorced from value, it’s impossible for anyone, including government officials, to calculate profit and loss—i.e., to determine whether the existing wealth of society is being increased or diminished by current production processes. Consequently, socialist economic planners inevitably fly blind. Without intending to, they command the overproduction of goods that people don’t want, while failing to produce enough of what they do want.

The contrast with free markets is stark. In free markets, firms that excel in creating value for consumers earn profits (representing new wealth that has come into being) and are able to expand production. Conversely, firms that don’t serve consumers well, but consume scarce resources in uneconomic production, shut down.

Under socialism, with no way to distinguish profitable, wealth-creating production from unprofitable, wealth-destroying production, the government simply props up all firms indiscriminately. In doing so, the socialist leaders fulfill their promise to provide everyone with a job, but at a horrible cost: Without a mechanism—prices that communicate value—by which to calculate profit and loss, the socialist state inevitably supports and prolongs inefficient and uneconomic production.

That destroys wealth and inevitably makes the socialist society poorer.

It boggles the mind to contemplate how many human beings—literally billions of them—could have been spared the deprivations and depredations of socialist economic planning if only Mises’ explanation had been heeded. Now, a century later, with the historical evidence of socialism’s miserable failures in the USSR, Maoist China, Cuba, North Korea, Venezuela, et al. having grimly played out in accord with Mises’s explanation of economic law, it’s astonishing that any intelligent adult would favor socialism over private property and free markets.

Who is at fault for this tragic blindness? One can’t blame the man on the street for ignorance about the problem of economic calculation; Mises’s writings on socialism are pretty heavy going. But there’s no excuse for the economics profession remaining largely silent on this matter. It’s disheartening to see most economists veering off into all sorts of esoteric academic theories—many of them depressingly trivial—when they could sound an alarm to protect people from the economic harm that socialism inevitably inflicts.

The failure of today’s economists to alert people to a profound economic truth—the fatally flawed ideology of socialism—is a case of professional misfeasance, if not malpractice.

The best thing the economics profession could do in 2020 would be to make amends for past negligence and do a better job of making sure that more people understand the great economic breakthrough of 1920.

Mark Hendrickson, an economist, recently retired from the faculty of Grove City College, where he remains a fellow for economic and social policy at the Institute for Faith and Freedom.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.