The historical school on the knowledge problem

Mises belonged to the Austrian School of Economics. The Austrian School was opposed to the German Historical School of Economics in the famous Methodenstreit. These schools clearly were antagonists, and Mises (Reference Mises1966) wrote that the Historical School had no interest whatsoever in even considering the impossibility of economic calculation under socialism. Mises (701) stated that it is not puzzling that the ‘detractors of economics’ – that is, the historical and institutionalist schools – ‘failed to recognize the problem’. They ‘disparage economics […] in the interest of their interventionist or socialist propaganda’. We must count ourselves lucky that these schools ‘have not succeeded in suppressing the study of economics entirely’.

Why, then, did several members of the Historical School anticipate large parts of Mises's famous argument against the possibility of rational economic calculation under socialism? For want of any historical source on this matter, it is impossible to answer this question precisely. What I do in this and the following section, therefore, is reflect on the relationship between Mises's argument and the work of the Historical School and highlight their overlap.

If we paid attention only to the statements by the Historical School on social philosophy, it would be difficult to find common ground with the Austrian School. When the German Historical Schools emerged at the turn of the nineteenth century, they turned against the attempts by classical liberalism and, more generally, the Enlightenment to construct human societies based on human reason. Friedrich Carl von Savigny founded the Historical School of Law as a direct reaction to the intention of progressive and classical liberal scholars who wanted to create a new civil law for all German countries more or less from scratch. Savigny (Reference Savigny and Hattenhauer1814: 164–65), as a conservative, argued that it is an illusion to think that humanity is able to step outside history and to invent new laws without a deep understanding of customs and the historical development that led to the present state of affairs. The entire history of the nation constitutes the material of law. Law is not arbitrary but emanates from the innermost nature of the nation and its history. Therefore, ‘[e]very age must judiciously intend to see through this material that is given with inner necessity, to rejuvenate it and to keep it alive’ (Savigny, Reference Savigny and Hattenhauer1815: 264).

The Historical School of Economics adopted this approach and tried to understand present-day economic phenomena by studying their role and place in history. For Savigny, the main target was the idea that humans are able to discover and understand natural rights based on their reason alone and without consulting history. In a parallel effort, the Historical School of Economics tended to criticise classical economists for their unhistorical treatment of human nature and economic laws and for their belief that human societies would flourish based on individual liberty alone – that is, without any rules or institutions except for private property. Karl Knies, one of the founders of the Historical School of Economics, expressed his concerns about classical economics as follows:

Although the Historical School mainly targeted classical liberalism, it appears that its critical approach toward the creation of laws from scratch can easily be transferred to a critique of socialism. In any case, that is how several members of the Austrian School used this argument.

It is well known that Menger had praised Savigny for understanding law as a more or less unreflective product of a higher wisdom rather than as something derived from the planned action of a legislative body (Kolev and Dekker, Reference Kolev and Dekker2023). According to Roos (Reference Roos, Birner and Zijp1994: 295), much of what Hayek had to say about ‘embodied’ knowledge in law and society can also be traced back to the Historical School. Hayek knew Savigny's work, occasionally citing him approvingly. Hayek's (Reference Hayek2014: 46) view on the origin of rules is clearly reminiscent of Savigny:

Witt (Reference Witt1997: 47) points out that this argument, typical of Hayek since the late 1930s, is not consistent with the Austrian method. The younger Hayek himself had been keen to make deductions, in a logically consistent way, based on the premises of a pure equilibrium theory where there is no lack of knowledge at all. Raico (Reference Raico1995: sect. 7) presumes that both Menger and the older Hayek leaned toward spontaneous-order explanations for ideological reasons, that is, because they served to validate their liberal view of the social order. Tellingly, Hayek usually criticised socialism and interventionism for their pretence of knowledge but tended to ignore that Savigny, Knies, and others had used similar arguments against classical liberalism as well.

It is interesting to note that the Historical School of Economics itself did not attack only classical liberalism on the grounds that it tended to ignore history, customs, and institutions. Some of its members attacked socialism for the same reason. Bruno Hildebrand, for example, another founder of the Historical School of Economics, criticised socialists exactly because they overestimated the power of reason and ignored history:

Below we will see that several members of the Historical School, including Hildebrand himself, extended this rather general point and questioned the possibility of centrally planning the economy.

The institutional theory of capital

Given that the Historical School influenced the Austrian School on the issue of the limit of human knowledge, it does not appear to be a coincidence that it also anticipated the Austrian argument against the possibility of socialism. Yet, the relationship between the approach of the Historical School and the Austrian argument against socialism is even closer. This is particularly true for Mises's original version of the argument.

Not many economists know that Mises deviated from his fellow Austrians when it came to his treatment of capital and the institutions that underlie it in capitalistic societies (Braun et al., Reference Braun, Lewin and Cachanosky2016). The standard Austrian theory of capital concentrates on the physical activities of roundabout production processes and defines capital as produced means of production – i.e., as physical factors of production. In this sense, capital is not specific to a certain economic system or historical period but a universal phenomenon – a phenomenon that all humans can understand and discuss based on their reason and is independent of historical circumstances (Braun, Reference Braun2017).

Mises deviated from this approach (Lewin and Cachanosky, Reference Lewin and Cachanosky2018: 424). Following a rather unknown and often misinterpreted essay by Menger (Reference Menger1888; see Braun Reference Braun2015a for a summary and Braun Reference Braun2020 for a partial translation), Mises, when he talked about capital, concerned himself with the organisation of capitalism. He argued explicitly that capital is not a universal production factor but a historically specific concept. Mises (Reference Mises1966: 264) stated that the ‘concept of capital cannot be separated from the context of monetary calculation and from the social structure of a market economy.’ Mises (Reference Mises1932: 123) defined it as the tangible and intangible properties of business enterprises, whether they consist of money or are only expressed in money terms.

It is highly probable that Menger (Reference Menger1888) had adopted his view of capital from Richard Hildebrand, a member of the Historical School and the son of Bruno Hildebrand (Braun, Reference Braun, Bylund and Howden2015b: 78 ff.). This notion of capital revolves around the capitalistic institutions of private property, money, markets, the capitalistic enterprise, and financial accounting. The Historical and Institutional Schools claimed, as Hodgson (Reference Hodgson2014: 1,070) writes, that capital is historically specific to capitalism and must be analysed as such because only in this way can important features of this economic system be grasped.

A mature discussion of capital and its role in capitalism by a member of the Historical School can be found in Werner Sombart's writings. Sombart rejected the standard Austrian theory of capital. Böhm-Bawerk's famous books on capital and interest ‘fall outside the area of what I consider to be fruitful economic theory’ (Sombart, Reference Sombart1927: 128). It is ‘ridiculous’ to call a child that is picking berries and placing them in a basket a capitalist who is producing capitalistically (Sombart, Reference Sombart1927: 134). Capital is not a universal phenomenon; it is specific to capitalism, where capital-based enterprises organise the production process rationally by means of calculation and accounting (Sombart, Reference Sombart1927: 130). Sombart (Reference Sombart1927: 129) was explicit on this point:

It is only because certain amounts of wealth came to be dedicated to the purpose of making profit and separated from personal concerns that the ‘principle of acquisition’ (Erwerbsprinzip), distinctive of capitalism, was able to develop without limits. According to Sombart (Reference Sombart1919: 119), the institution of double-entry bookkeeping creates the capitalistic enterprise as a separate, acting entity. By means of accounting, the enterprise ‘assumes a separate existence’ and becomes ‘an entity which emerges as a subject conducting individual economic acts and which leads a separate life, outlasting the life of individuals’ (Sombart, Reference Sombart1919: 101). Capital is inextricably linked to these capitalistic enterprises, which combine the production factors and organise the production process under capitalism according to the principle of profit maximisation.

Mises (Reference Mises1966) constructed a theory of capital based on his historically specific approach to capital. It explains how the invisible hand of the market arranges for profit-oriented, capitalistic enterprises to organise the allocation of resources according to consumer demand (Braun, Reference Braun2017).

Again, it was the Historical School and, ironically, Karl Marx who preceded Mises in the development of such an institutional theory of capital. Marx (Reference Marx1859: 101 ff.) tried to understand and explain the logic of production under capitalism. He described the acquisitive activities of the capitalistic enterprise with the following formula:

$${\rm Money\ndash Commodity\ndash Money^{\prime}}$$

This formula, according to Marx (Reference Marx1859: 102), describes the ‘current form of bourgeois production.’ For capitalistic enterprises, money is not a means but the be-all and end-all of all transactions, ‘the starting point and the end point of movement’ (Marx, Reference Marx1859: 102). The goal of the production process is not to produce products but to make money. ‘Money is exchanged against a commodity in order to exchange the very same commodity for more money’ (Marx, Reference Marx1859: 102).

In Das Kapital, Marx famously combined this theory on the circulation of capital with the labour theory of value in order to explain that the difference between Money’ and Money (the profit retained by the capitalists) amounts to an exploitation of the labour class. Non-socialist authors, however, adopted Marx's approach to capital without combining it with the labour theory of value and simply used it to explain the role of capital in capitalism.

For example, Zwiedineck-Südenhorst (Reference Zwiedineck-Südenhorst1930: 1,072), a member of the Historical School (Grimmer-Solem, Reference Grimmer-Solem2003a: 23), developed an institutional theory of capital as a clear and explicit attempt to add substance to Marx's rather abstract approach. He showed how the transformation of land, labour, and produced means of production into products through production is embedded in the circulation of capital.

Figure 1 can be used to explain how, in capitalism, the production process depends on numerous institutions. The production factors are combined, and output is produced within the enterprise. The enterprise must buy its inputs and sell its output for money on the market. In order to do so, it must be able to acquire and forego private property in commodities. Its profit is determined as the difference between revenues and expenses with the help of the institution of financial accounting or monetary calculation.

Figure 1.

The circulation of capital as illustrated by von Zwiedineck-Südenhorst (Reference Zwiedineck-Südenhorst1930: 1,069).

Zwiedineck-Südenhorst (Reference Zwiedineck-Südenhorst1930: 1,070 ff.) argued that capital is relevant because it allows to check whether the means applied have served their purpose. According to Mises's calculation argument, which is presented in the next section, this is exactly what socialist planning boards cannot do.

The components of Mises's argument against the possibility of economic calculation under socialism

Mises (Reference Mises1920, [1932] Reference Mises1951) is famous for his argument that socialism runs into unsurmountable difficulties because a central planning board would not be able to calculate, assess, or compare the value productivity of alternative production processes and therefore could not allocate resources rationally in society:

In other words, as Hayek (Reference Hayek1937, Reference Hayek1945) would stress later, socialism has a knowledge problem. The information available to a planning board would never suffice to allocate resources rationally. In contrast to Hayek, however, Mises did not confine himself to the knowledge problem. First and foremost, socialism had a calculation problem (Hülsmann, Reference Hülsmann1997: 24). His point was that socialist planning boards do not have a common yardstick at the ready that would help them to reduce the desirability of goods and services to a single dimension.

The decision-makers in capitalism, in contrast, and particularly the entrepreneurs, do have recourse to such a yardstick. In their calculations, they can rely on the market prices of the means of production. The market system transforms the ordinal preference rankings of different individuals, which are impossible to compare, into common, cardinal units – that is, money prices – and thus provides the basis for economic calculation (Hauwe, Reference Hauwe, Backhaus, Chaloupek and Frambach2019: 201).

Based on prices, entrepreneurs are able to assess whether they can employ a certain good or labour service usefully in a certain production process simply by calculating expected profits and losses. As long as they expect an input factor to generate profit – i.e., to increase a product's price enough to exceed the input's price – its employment is economically justified. Otherwise, they sell, abandon, or transfer the factor to another production process:

Socialism, Mises claimed, lacks a comparable common yardstick. As it abolishes private property rights in the means of production, these goods are not traded and therefore no market prices of them exist. Consequently, as a socialist central planning board does not have a yardstick to rationally compare inputs, outputs, and net results, they are not able to determine whether they have employed inputs economically in the production of output:

Mises admitted that socialism could solve this problem if it found ‘an objectively recognizable unit of value’, a yardstick ‘which would permit of economic calculation in an economy where neither money nor exchange were present’ (Mises, Reference Mises1920: 30). Mises added, however, that the only item which could conceivably replace money prices and be considered such a yardstick – labour – would be ‘unworkable’ because labour is not homogeneous and of uniform quantity (6). His famous conclusion was that it is impossible for a planning board to economise:

For the following discussion, it is helpful to dissect Mises's argument into its individual components. Interestingly, Mises based his argument not only on the theoretical and deductive approach of the Austrian School of Economics but also on important elements of the Historical School of Economics, particularly the institutional theory of capital.

The first component of Mises's argument – an Austrian one – is his critique of the labour theory of value. This critique consists of two aspects:

1. (a) Based on the subjective theory of value, Mises argued that the labour theory of value is utterly wrong. Objective values cannot be measured at all, he claimed, and relative values or prices depend on consumer choices, not on the amount of labour invested.

2. (b) Even if we accepted the idea that value is somehow measurable, labour could not serve as a yardstick for economic calculation anyway because labour is not uniform or homogenous.

It must be added that this critique had numerous predecessors. Streissler (Reference Streissler1990) pointed out that the subjective theory of value had been wide-spread in the German-language area before the neoclassical revolution of the 1870s. It is therefore unsurprising that, below, we will find it in the writings of several members of the Historical School.

The second component of his argument – a historical or institutional one – is his description of how capitalism solves the problem of economic calculation. Several capitalistic institutions are necessary to make this possible. They are the same as those that constitute the foundation of the institutional theory of capital. We need private property in the means of production; we need money so that there are money prices of all traded goods; and we need the enterprise and the institutions of monetary calculation, bookkeeping and financial accounting, so that we are able to calculate profits accurately.

Component 3 of his argument is that the market for the means of production guarantees that these means have market prices. This allows enterprises to extend their economic calculation to the higher stages of production – and hence the entire production process. Component 3 is historical as well. I separate it from component 2 because most predecessors of Mises missed it.

Component 4, the consequence of the other three components, is the point that socialist planning boards cannot solve the knowledge problem and are therefore unable to allocate resources and organise the production process rationally. This, of course, is the component that must be present or at least perceptible in any work dealt with in this paper; otherwise, an author cannot be understood as having anticipated Mises. As we have seen in ‘The historical school on the knowledge problem’ section, it is closely related to the approach of the Historical School as well.

Table 1 collects the components of the economic calculation argument. In the following sections, I refer to this table when characterising the arguments made by the predecessors of Mises and Hayek in the Historical School of Economics.

Table 1.

Components of the economic calculation argument

It is no wonder that the connection between the historically specific notion of capital and the problem of economic calculation under socialism suggested itself to several members of the Historical School. Almost all of the scholars discussed in the following sections not only anticipated one or several components of Mises and Hayek's argument against socialism, but also employed a historically specific notion of capital or focused on one or several of the institutions behind this notion. Except perhaps for Schäffle (Reference Schäffle1870), they did not employ all components of Mises's argument. Nevertheless, their achievements are still remarkable given that real-world examples of socialism were still a long way off at their time.

Friedrich Julius Stahl on the impossibility of socialism

Chronologically, the first scholar that must be mentioned as a predecessor of Mises is Friedrich Julius Stahl (1802–1861). Stahl was a German legal philosopher associated with the Historical School of Law. In the preface of the first edition of his magnum opus on the philosophy of law, he spoke very positively of Friedrich Savigny, the founder of this school. Stahl (Reference Stahl1847: xix ff.) announced that he would apply, in his book, the historical method, proposed by Savigny, not only to civil law, as Savigny had done, but to law as such.

Stahl's contribution to the impossibility of socialism has been noticed only very recently (Braun and Wollboldt, Reference Braun and Wollboldt2022). This is surprising because Stahl is not at all an unknown figure. Born in 1802 near Würzburg (Germany), Stahl was and still is famous as a Christian and reactionary legal philosopher. Renowned management theoretician Drucker (Reference Drucker1933) even argued that Stahl shaped German thinking about the state up until the First World War. Some of Stahl's works have been translated into English, among them the lecture series that contains the most detailed version of his argument (Stahl, Reference Stahl1978). Unfortunately, copies of Stahl (Reference Stahl1978) are hard to come by, and then it contains numerous errors and confusing mistranslations.

Before I present Stahl's contribution, I have to say a few words about the origin of his ideas. In a footnote, he referred to Dönniges (Reference Dönniges1845), who ‘has illustrated the economic unfeasibility of the social theory [socialism] on the grounds that it removes the distinction between the value of labour and [the value of] its products’ (Stahl, Reference Stahl1846: 75).

Stahl exaggerated. Dönniges (Reference Dönniges1845) did not maintain the unfeasibility of socialism, and he did not go into a lot of detail on this issue. Dönniges criticised socialism mostly on the grounds of components 1a and 1b (see Table 1). The value of labour is not inherent to labour but derives from its products and the needs it satisfies (Dönniges, Reference Dönniges1845: 573). As talents and efforts differ, the value of labour is not the same for each labourer (574). From this, Dönniges (573) did not deduce the impossibility of socialism but claimed that ‘[i]t would be the highest arbitrariness and despotism to equalise the prices of goods or, what amounts to the same thing, to organise them according to principles of justice’.

Stahl, however, concluded from reading Dönniges (Reference Dönniges1845) that socialism was actually impossible. His own arguments are more sophisticated and contain mainly components 1a, 1b, and 4 (see Table 1). Component 2 features less prominently but can still be detected.

The first reference by Stahl to the argument in question that I can detect is in the second edition of the fourth volume of his book on the philosophy of law (Stahl, Reference Stahl1846). It contains a section labelled ‘The social theories [socialism] are indeed unfeasible’. Stahl (75) anticipated component 4 by saying:

Stahl (Reference Stahl1863) elaborated on this argument at length in a chapter entitled ‘Review of the socialist system and of Proudhon's doctrine of value from the economic point of view’. Stahl started the chapter with the blunt statement that ‘[f]rom the standpoint of economics, it [the socialist system] proves to be impossible and to be a system that does not enhance prosperity and enjoyment, but diminishes, even destroys them’ (Stahl, Reference Stahl1863: 240).

Once again, component 4 loomed large in his discussion. He attacked socialists such as Charles Fourier who had claimed that it was possible to plan the production process from above and in advance and without recourse to any measure of value. Stahl (Reference Stahl1863: 245 f.) argued that these plans would fail due to the ‘limit of human intelligence’:

Stahl (Reference Stahl1863) dug deeper than Stahl (Reference Stahl1846). The quoted passage demonstrates that he was aware of the general role of the institutional framework of capitalism (component 2). He contrasted the market – demands and sales – with central planning and claimed that the latter could not at all accomplish the task of allocating resources satisfactorily. His position on these institutions remains unclear, however, as he appears to identify them with ‘nature’, here and elsewhere.

Stahl (Reference Stahl1863) also addressed other socialist proposals. Pierre-Joseph Proudhon, for example, had made the point that it was possible to introduce labour time as the measure of value of all goods and, consequently, to pay labourers according to their labour time. What needed to be done, Stahl wrote, was to demonstrate the unfeasibility of Proudhon's demand that it is the task of society to fix the price of all products and all services according to the standard of labour time and to achieve the corresponding equality of wages per hour (Stahl, Reference Stahl1863: 248).

In his response to Proudhon's challenge, Stahl employed components 1a and 1b. First of all, he wrote, goods are not valued according to the labour time that is necessary to produce them. It is the other way around: labour is valued because and insofar as its product is valuable to consumers: ‘All value is based on the product itself, i.e., the usefulness, the utility, the virtue that it has in itself’ (250). Stahl (249) ridiculed the labour theory with the following story:

Stahl did not leave it at that. The classical economists had not been able to explain prices based on a subjective theory of value (use value) because they could not solve the diamond-water paradox of value. Stahl (Reference Stahl1863: 250) did not cite his influences, but like several German-language economists of his time (Streissler, Reference Streissler1990), he anticipated the neoclassical revolution of the 1870s by explaining how goods with objectively high use value (such as water) can end up having lower prices than goods with objectively low use value (such as diamonds):

Stahl then went on to demonstrate that even if we grant the possibility of taking labour time as the measure of value, socialism is still ‘not achievable’ (Stahl, Reference Stahl1863: 251) because labour time is not homogenous (component 1b):

The quality of Stahl's argument and the number of details he mentioned are astonishing given that the lectures printed in Stahl (Reference Stahl1863) stem from the 1850s. He was the first of a number of members of the Historical School who criticised socialists for their ignorance of the calculation and knowledge problems.

Bruno Hildebrand on economic calculation under socialism

Bruno Hildebrand (1812–1878) discussed the impossibility of socialism in his programmatic book Die Nationalökonomie der Gegenwart und Zukunft (The economics of the present and the future), one of the foundational treatises of the Historical School. The ‘fundamental errors’ of socialists and communists, Hildebrand stated, are their organisational plans for a socialist society: ‘[W]e will demonstrate that all socialist organisation plans are impossible’ (Hildebrand, [Reference Hildebrand1848] 1922: 213). In the subsequent chapter, entitled ‘All socialist organisation plans are unfeasible’, Hildebrand employed components 1b, 2, and 4 of Table 1. Component 2 in particular is much more prominent in Hildebrand than in Stahl. It must be added, however, that Hildebrand ([Reference Hildebrand1848] 1922: 213) referred to Stahl's treatment of socialism but did not give him credit for his attempt to demonstrate the unfeasibility of socialism a few years earlier.

We have seen in ‘The historical school on the knowledge problem’ section that Hildebrand applied Savigny's arguments against classical liberalism to socialism. He argued that socialists ‘break with the past’ and try to ‘form communal life […] by reason’ (Hildebrand, [Reference Hildebrand1848] 1922: 214). But, he did more. In the same way that Savigny had argued that law cannot be invented from scratch but must develop organically, Hildebrand argued that the economy cannot be re-organised from scratch as if it had no history. Accordingly, he defended the institutions of private property, money, and the market against the attacks of the socialists who wanted to abolish them and to organise the economy in a new and different way (Hildebrand, [Reference Hildebrand1848] 1922: 196–211).

The organisational plans of socialists are doomed, Hildebrand concluded, because the socialists do not have a method of rational allocation of resources in society. Socialists would have to come up with an alternative to the market economy. What they need is rules or laws that determine how the individual suppliers of goods and services are compensated in a way that consistently guarantees that the value of outputs surpasses that of inputs:

There is no foundation for such a law, Hildebrand ([Reference Hildebrand1848] 1922: 215) added. First of all, ‘it presupposes the knowledge of the entire demand and the entire supply [Leistungen]’ (indication of component 4). Second, and more importantly for Hildebrand, outside a market economy it is impossible to find rules that indicate how the individual contributors should share in the consumption of the social product. Statements such as ‘From each according to his ability, to each according to his need’ (Hildebrand, [Reference Hildebrand1848] 1922: 216) are mere slogans that are of no help.

The reason he gave for the inability of socialism to find such rules clearly foreshadows component 1b of Mises's argument. For Hildebrand ([Reference Hildebrand1848] 1922: 215), the main deficiency of socialism is its lack of a yardstick for the value of production or consumption:

Earlier in his book, Hildebrand ([Reference Hildebrand1848] 1922: 208) stated that money is necessary as a measure of value. Socialism, in short, is unfeasible for Hildebrand because it lacks the historically grown institutions of capitalism, where money prices serve as a yardstick in the economic calculations of entrepreneurs and where the distribution of the social product to the productive factors is oriented towards the contribution of each factor to the monetary profits of enterprises.

Karl Knies on the role of money in capitalism and socialism

Hildebrand hinted at the important role of money as a measure of value, but Karl Knies (1821–1898) dedicated large parts of his book on money to this issue. At the outset, Knies (Reference Knies1885: 6) stated that the institution of money is supposed to eliminate the ‘social evil’ that comes with the ‘so very difficult and so unsatisfying assessment and comparison’ of economic goods in a natural economy. Any plans for organising the production process without trade and money would bring along this social evil, especially in modern societies with their highly developed and complicated system of division of labour. It is no coincidence, Knies (Reference Knies1885: 5) wrote, that social reformers who demand the abolishment of money suggest that the organisation of the economy should depend on ‘the unlimited prevalence either of fatherly benevolence facing naive piety or of a supposedly highly prudent, highly just etc. supreme power facing blind obedience on the part of all people that are involved’.

Knies did not claim explicitly that socialism is unfeasible. Yet, he tried to demonstrate why Marx had not succeeded in his attempts to replace the monetary unit with the quantity of labour as the measuring rod for the value of goods and claimed that socialism would drift towards a despotic government if it were to abandon money and money prices. His argument built mainly on components 1b and 2 of Table 1.

It must be mentioned that when it comes to capitalistic institutions (component 2), Knies (Reference Knies1885: 72) was well aware that some economists claim that capital is historically specific – a ‘historical category’, as he expressed it. However, Knies was not ready to follow these economists. Knies (Reference Knies1885: 29) was of the opinion that it had not helped economic science that Adam Smith and many other economists tended to make apodictic pronouncements in favour of certain definitions of capital over others. Accordingly, Knies (Reference Knies1885: 24–83) himself, in his long discussion of capital, did not dare to come to a definite conclusion on the term capital but rather discussed the merits and demerits of existing definitions of the term. That is, he did not opt for capital as a historical category that is a part of the institutional framework of capitalism.

Still, his argument against socialism rests on his analysis of one capitalistic institution, namely money, and how it helps to solve the issue of valuating goods and services. Knies (Reference Knies1885: 151) mentioned that Karl Marx had wrestled with exactly this problem. His argument against Marx's solution runs as follows.

According to Marx, exchange value derives from the quantity of simple labour that is necessary, on average, to produce a certain good. Knies (Reference Knies1885: 156) objected that there are many cases where this is not true at all and where labour time cannot be the substance of value. The apprentice will never be able to replicate ‘the artwork of his master even in a multiple of the time that the master needs’. Knies (Reference Knies1885: 158) added that it is an illusion if Marx wants to measure the value of all products of labour by the quantity of simple labour (component 1b of Table 1). According to Knies, the problem is that different kinds of labour cannot be compared. They appear to be comparable only because in capitalistic societies they all have a money price. That the price of advanced labour can be expressed as the multiple of the price of simple labour, however, does not imply that simple labour could serve as a measuring unit for advanced labour (1885: 158). Knies's argument was that the existence of money may make it possible to express the price of any good as a multiple of the price of any other good, but that does not mean that it is possible to express the quantity of any good as a multiple of the quantity of any other good. Rather, what is needed is a tertium comparationis, a monetary unit that has a certain and predetermined amount of value itself that can be used to express the value of all other goods (1885: 163). The task of money is to ‘be the special tool by means of which the social fungibility of value, necessary because of the division of labour in the exchange economy, is realised in all valuable goods’ (1885: 164).

Although Knies (Reference Knies1885) did not explicitly deny the possibility of socialism, he came to the conclusion that a ‘socialistically organised society errs’ when it ‘determines the value substance and the measure of value’ (1885: 165) on the basis of labour and not on the basis of use value, which is present in all goods as well as the monetary unit.

To sum up, Knies tried to understand the role that the institution of money plays in capitalism. As part of his analysis, he demonstrated the problems that economic systems that abolish money would face. In doing so, he employed and combined components 1b and 2 of Mises's argument.

Albert Schäffle on economic calculation under socialism and capitalism

Albert Schäffle (1831–1903) was a member of the German Historical School. He was a sociologist, economist, and politician and Menger's direct predecessor at the University of Vienna. Schäffle's contribution to the economic calculation argument against socialism is well established. Hodgson (Reference Hodgson and Vint2010) covers Schäffle's Quintessence of Social Democracy, and Braun (Reference Braun2016) focuses on his Kapitalismus und Socialismus. Schäffle (Reference Schäffle1878: 307 ff.) contains another discussion on economic calculation under socialism. However, Schäffle (Reference Schäffle1878) is less forceful than Schäffle (Reference Schäffle1870), probably because of some developing socialist tendencies in his thinking. That is why I concentrate on Schäffle (Reference Schäffle1870) and confine myself to categorising its contributions according to Table 1.

In 1870, Schäffle was still convinced that socialism would be impossible. He stated explicitly that it is ‘utopistic that the economy of a large people could be directed from a central point’ (Schäffle, Reference Schäffle1870: 192) and that it simply ‘cannot be done’ (Schäffle, Reference Schäffle1870: 205). His argument is reminiscent of component 4 of Table 1:

Schäffle (Reference Schäffle1870) substantiated this claim with components 1a, 1b, 2, and 3. As Braun (Reference Braun2016) focused on the role of 1a and 1b in Schäffle's work (for component 1a see also Dekker, Reference Dekker2016: 55 f.), the present paper concentrates on component 2, the necessity of capitalistic institutions for rational economic calculation, and component 3, the necessity of money prices of the means of production.

At the outset, Schäffle (Reference Schäffle1870: 19 ff., 92) distinguished clearly between capital goods (Kapitalgüter) and capital (Kapitalvermögen). Whereas he defined capital goods as produced means of production, as technical or physical elements of the production process, capital is something entirely different. Capital ‘directs’ and ‘organises’ (Schäffle, Reference Schäffle1870: 21) the production process via monetary calculation:

According to Schäffle, the capitalistic institutions of money, financial accounting, and private property in the means of production make rational economic calculation possible. Capital, understood as a correlate of these institutions, plays the essential role in the production process. It ‘combines’ the different assets that are technically necessary for the production of specific goods. For example, the viticulturist combines, with his capital, all assets that are necessary for the production of wine (Schäffle, Reference Schäffle1870: 109).

Schäffle is the only one of the authors discussed in this paper who even included component 3 of Mises's argument. He wrote that there is, at the societal level, a division of capital, a coordination of the individual business assets of the numerous entrepreneurs in the different stages of production. Schäffle (Reference Schäffle1870: 109–110) explained that the division and specialisation of capital is made possible because the assets of all the individual enterprises together constitute a large, intertwined production apparatus. The organic relationship of all capital goods in this apparatus is created by the striving of the capital of each enterprise for the highest profit. In this way, enterprises put checks and balances in place for each other. Their ‘competitive seeking for profit has become the organising power of the economy’ (Schäffle, Reference Schäffle1870: 114). Schäffle (Reference Schäffle1870: 114) included the means of production in the higher stages of production in his analysis of how capitalism is organised:

In other words, Schäffle is aware of the role that the prices of the means of production play in capitalistic societies. Schäffle's discussion of the way enterprises organise the capitalistic economy by orienting their actions towards monetary profits therefore foreshadows Mises's discussion in his magnum opus Human Action.

Schäffle's Kapitalismus und Socialismus indeed does more than allude to the economic problem of socialism. It contains all components of Mises's later argument against socialism and demonstrates that what Mises did years later is closely connected to the research programme of the Historical School. It was his analysis of capitalistic institutions – money, financial accounting, private property, and the market – that led Schäffle to claim that socialism was unfeasible.

I must add that Schäffle's book is more than seven hundred pages long and is based on public lectures. His arguments are scattered throughout the book and accompany treatments of philosophical, sociological, and historical issues. Still, Schäffle had a very good sense of the role of monetary calculation in capitalism and the problem any economic system would face if it were to forgo capitalistic institutions.

Further members of the German Historical School on the impossibility of socialism

Lorenz von Stein (1815–1890) was a lawyer and economist who wrote extensively on the role of capital and enterprises in capitalism. He is important in the history of economics and socialism because he brought the first important debates on socialism in France to the attention of the German public (Pasquino, Reference Pasquino1981: 1). Stein (Reference Stein1887: 370) did not focus on the role of economic calculation, but it appears that he was aware of the problem. He declared that ‘50% of all socialists believe in the promises of communism because they do not have an idea of even the simplest accounting procedures’. He even claimed that ‘nobody who has learned to calculate and to account could ever become a socialist’.

The German agronomist Georg Calberla (1845–1904) was not a direct member of the Historical School. In his critique of Marx, however, he referred to Gustav Schmoller and especially Albert Schäffle as his two role models who had directed analysis of socialism to the right channels (Calberla, Reference Calberla1877: 11).

Calberla (Reference Calberla1877: 46) stated that ‘a socialist system absolutely needs a measure of value in order to distribute the social product’. However, Marx had made the ‘fateful error’ of constructing ‘equal undifferentiated abstract human labour as the actual essence of value’. In his book, Calberla (Reference Calberla1877: 46) demonstrated ‘how wrong this is’.

According to Calberla (Reference Calberla1877: 25), it is the ‘fundamental theorem of the entire socialist doctrine’ that ‘the sole basis of [exchange] value is the human labour embodied in each commodity’. Calberla argued against this that labour cannot serve as a measure of value. He employs elements 1a and 1b (see Table 1) in order to demonstrate this point. It is ‘not the intensity of human effort, not the duration of labour’ that determines the value of the product of labour but ‘the degree of urgency of the needs that the product can satisfy’ (Calberla, Reference Calberla1877: 30). Therefore, different kinds of labour have different values, depending on the needs they can satisfy. From a ‘subjective standpoint’, human labour is ‘not of equal value, not equally useful, not equal’ (Calberla, Reference Calberla1877: 34).

As the fundamental theorem of socialism is wrong, Calberla (Reference Calberla1877: 59) concludes that socialism is impossible:

Calberla (Reference Calberla1877) is a work of criticism. It deals with the problems of socialist systems. Therefore, it does not contain an analysis of capitalistic institutions (component 2 of Table 1). But Calberla was well aware of the role that these institutions play. In a short passage, he stated: ‘Everyone has to admit that production on the basis of free, individual property and the exchange of value by means of general signs of value [money] are the preconditions of the present-day degree of material emancipation of humanity’ (Calberla, Reference Calberla1877: 58). Private property and money appear to be necessary for the division of labour in modern societies.

A brief comment is warranted on the so-called younger Historical School around Gustav Schmoller and Adolph Wagner. This school is sometimes referred to as ‘socialism of the chair.’ However, as Bunyk and Krasnozhon (Reference Bunyk and Krasnozhon2022: 180 f.) explain, while the younger Historical School was arguing for an interventionist state and social policy, it could hardly be called socialistic. On the contrary, an important impulse for the social reform activities Schmoller organised and directed since the early 1870s was his fear of socialist revolution (Grimmer-Solem, Reference Grimmer-Solem, Eley and Retallack2003b: 107). And even though I was not able to trace the calculation argument in the literature of the younger Historical School, Wagner (Reference Wagner1907: 692) at least echoed Bruno Hildebrand's point briefly. Despite his sympathy for some socialist ideas, he stated explicitly that the ‘realisation of the Socialistic system of economy makes demands upon the intellectual and moral qualities of men […] which all that we know of men […] shows to be pitched far too high.’

The continuing importance of the institutional theory of capital

In the socialist calculation debate, Oskar Lange and Abba Lerner opposed the idea, propagated by Mises, that socialism would fail without a market in which the prices for the means and factors of production could be determined. They backed their position with mathematical standard models. As Boettke et al. (Reference Boettke, Coyne, Leeson, Garrison and Barry2014: 283) explain, the Lange–Lerner theorem basically applied neoclassical economics to a socialist system. These authors and their followers maintained that a central planning board could act as a Walrasian auctioneer by announcing and adjusting prices until equilibrium is achieved. The neoclassical general equilibrium model was supposed to describe not only capitalist market economies but also socialist economies (Hodgson, Reference Hodgson2016: 37). The applicability of the model was thought to be independent of the actual institutional context.

In contrast, Mises position was that the rational allocation of resources, described by the neoclassical equilibrium model, is contingent on a certain institutional and historical background. Only in a market economy where private property rights in the means of production are upheld and the institutions of monetary calculation exist can societal resources be reasonably evaluated according to their utility for the final consumer. Socialism, which does not have or even actively rejects these institutions, is therefore not able to evaluate and economise its resources.

One basic element of Mises's argument – the institutional theory to capital – has since been abandoned by large parts of the economics profession (Hodgson, Reference Hodgson2014: 1,077). Tellingly, the three-volume collection of seminal papers on capital theory published by Edward Elgar in 2005 contains only two (out of a total of 71) contributions that are associated with this theory: Schumpeter (Reference Schumpeter, Bliss, Cohen and Harcourt2005) and a few, mainly polemical pages in Veblen (Reference Veblen, Bliss, Cohen and Harcourt2005: 161–167).

We must not overlook the fact that the adherents of the institutional approach to capital are at least partly to blame for its neglect. Apart from Veblen's contribution, the three major controversies on capital in the history of economics took place without notable interference by advocates of the institutional approach. Neither the Austrians Menger and Mises nor the respective generations of Historical School economists entered the debate. Furthermore, what may have been the most extensive attempt to develop the institutional theory of capital, Mises (Reference Mises1966), has been neglected not only by his intellectual opponents but also by most of his followers in the Austrian School, who preferred and still prefer the standard Austrian theory of capital, which defines capital as a physical factor of production.

From a current perspective, this must be considered a loss for economic science. The institutional theory of capital does not exhaust itself in the critique of socialism. Its purpose is to describe important processes within the market economy and how they depend on certain institutional preconditions. These processes are at risk of being jeopardised not only by the outright socialisation of the means of production. Any reform of these institutions may have important, possibly undesirable consequences for the creation and distribution of wealth in market societies.

To give an important example, by abandoning the institutional theory of capital, economists have deported themselves of the ability to comment profoundly on the implications of the far-reaching reforms of financial accounting and corporate governance witnessed in recent decades. This is not the place to comment on the viability of these reforms. The point is that they concern activities of capitalistic enterprises, particularly monetary calculation and profit-making, which are described and explained by the institutional theory of capital. Therefore, this theory is not only important for demonstrating certain problems of socialism; it may also serve as a basis for explaining and commenting on somewhat related problems that have haunted capitalistic economies since at least the 1980s, especially the increasing macroeconomic instability and the supposed or actual tendency of managers toward short-termism.