In an earlier article, “Economic Ignorance“, we discussed the importance of profits and the incentives to gain those profits. At the end of the article I eluded to the failure of socialism. This article will go into some depth of why socialism is a failure.

Flesh and Blood

We must first begin with the understanding that economics begins with human beings. Real flesh and blood people. We also have to take into account that as people, we are by definition, fallible and come pre-loaded with mistakes and shortcomings. If we didn’t have this fallibility then we would find ourselves living in a Utopia. All decisions would be exactly correct, the first time, and pencils wouldn’t have erasers attached to them. There wouldn’t be a need to have a judicial system, since all decisions would have been the most prudent every time and life, liberty and property would always be protected. Everyone would be supplied with plenty as all decision making would only advance the supply of goods in the market at the lowest cost possible. Our money would be worth more, year to year, as the prices of those goods would deflate due to the exchange of perfect information by all participants in the free market.

As great as this sounds, it’s not reality. Unfortunately, we are fallible and make plenty of mistakes. Our economy, as so many others, has faults and shortcomings. These shortcomings are due to the fact that any economy is simply based on human action. Human beings making purposeful decisions in how to best employ scarce resources to attain desired ends. This is the foundation for studying and understanding economics as a discipline. Without understanding how human beings react to one another and how this affects decision making ignores the base premise of why economics is even studied. An economy is not a mindless machine where some group of people should tweak this segment to get better results from another segment. Every intervention into the ability of free people to make their own decisions, good or bad, only leads to distortions that require another intervention to offset. Before long we find ourselves plodding down that “Road to Serfdom” F.A. Hayek described in his popular book. Understand, every intervention means that individuals were not able to make their own value judgments and required a paternal body of omniscient “adults” to make those judgments for them. The sheer audacity! To think that a body of individuals believe they have better knowledge of what you need to spend your money on, what it should be worth, how the prices should be set, how you earn that money is absolute insanity. How did these people become omniscient? When did this divine knowledge descend on them from on high to depart such wisdom among mankind?

Unfortunately, this is widely accepted in our society as the proper role of government. If it were not accepted then we wouldn’t have the government we voted for today. There are those in our society who believe that the central government has the answers to our problems. Since capitalism is laden with “market failures” it is then the duty of officials in government to remedy these failures. There are even those who ignore the historical empiricism of socialism’s disastrous outcomes and push for more and more intervention into the economy. They make claims that socialism is a good idea if only the right people were to employ it. I guess by “right” those who advocate intervention by the State simply mean “nice”. But, regardless of how nice the ruler may be in a socialist society, the outcome is never nice. Quite on the contrary. In this article we will ignore the historical evidence of the ruinous ideas of socialism or the first hand personal experience of this author while living in Berlin during the Cold War. We will describe how a free market capitalist system is head and shoulders above anything socialism could offer.

Mankind’s Fallibility

We have already discussed that human beings are prone to error. This is simply a part of human nature. As mortal human beings, we make decisions based on limited information. No individual has total and complete knowledge on any given thing. Let alone a wide range of things. Why do we think that government possesses such knowledge? This is what’s required by governments who attempt to implement socialism. A human or group of humans must possess all knowledge of all things in order to make wise or “nice” decisions for all of the individuals in society. Some argue that as societies become more advanced and complex some sort of government is required to keep things straight. If not then we would descend into utter chaos from the vast autonomous decision making. The nonsense of this line of thinking has been put to rest decades ago in the book, “The Clichés of Socialism”.

The response begins as follows,

“Let us take the simplest possible situation—just you and I. Next, let us assume that I am as wise as any President of the United States who has held office during your lifetime. With these qualifications in mind, do you honestly think I would be competent to coercively control what you shall invent, discover, or create, what the hours of your labor shall be, what wage you shall receive, what and with whom you shall associate and exchange? Is not my incompetence demonstrably apparent in this simplest of all societies?”

The author continues,
  “Now, let us shift from the simple situation to a more complex society—to all the people in this room. What would you think of my competence to coercively control their creative actions? Or, let us contemplate a really complex situation—the 205,000,000 people of this nation. If I were to suggest that I should take over the management of their lives and their billions of exchanges, you would think me the victim of hallucinations. Is it not obvious that the more complex an economy, the more certainly will governmental control of productive effort exert a retarding influence? Obviously, the more complex our economy, the more we should rely on the miraculous, self-adapting processes of men acting freely. No mind of man nor any combination of minds can even envision, let alone intelligently control, the countless human energy exchanges in a simple society, to say nothing of a complex one.”

To agree that all human beings are fallible then logically, even the human beings in government office are just as fallible. The major difference is that when we as individuals make mistakes, it impacts a small segment of society. When government makes mistakes, it impacts everyone. When a business firm makes an error then the effects of the error are limited to the business itself or the sector where it functions. When government makes errors it affects all business in all sectors. One of the underlying problems with socialism is that it treats situations in the aggregate. Socialism is all about the collective of society and not the individuals who make up the society. We are not a part of a hive like good worker bees.

This is where capitalism shines through. It actually takes advantage of those shortcomings in the human nature. Specifically, our propensity to be self centered or even greedy. It was Adam Smith, long ago, who described this character flaw in mankind and explained that although people act out of their own self interest, by doing so, will always attempt to receive the best outcome for every economic decision. When the business owner attempts to receive a profit he must employ labor to do so. He didn’t set out to be an employment agency, but in order to produce goods for consumption; he must employ labor and create jobs. Until the day comes when we invent the “Replicator” as was used in Star Trek, this will always be the case. We will always have a division of labor specializing in certain tasks in order to complete economic projects. The entrepreneur’s “greed” is transformed to a benefit for society by employing labor, lifting the standard of living through competition in the market for better, higher paid labor to produce better products at lower cost for consumers. Competition also has its benefits for society. It disciplines entrepreneurs to wisely invest capital into those projects that consumers prefer. If he doesn’t then the entrepreneur will fail and those scarce resources will be bid up by other, wiser, entrepreneurs and re-employed in a profitable manner. Waste is never rewarded in a true free market capitalistic society.

The Economic Calculation Problem

It was in his seminal book, “Socialism: An Economic and Sociological Analysis” by Ludwig von Mises (http://mises.org/document/2736/Socialism-An-Economic-and-Sociological-Analysis) where Mises explained in 1920, that by the loss of private property in the means of production in a socialist society there can be no way to make proper economic calculations. A socialist economy is doomed from the onset. How can the State determine the value of the goods produced and then set the proper prices? Value is a subjective determination. In order for an object to have value it must first be owned by somebody. For the sake of time, I won’t go into the subjective value of goods in length, only suffice it to say, the prices of goods are determined in the market by individual consumers who assign value to each good produced. If an item is priced too high, it will not sell, profits will not be realized and people will be unemployed. If the same item is priced too low, it will create shortages for that item, profits will not be realized and people will be unemployed. The importance of the messages that prices send to entrepreneurs is paramount for the economy to even function at all. Prices help the entrepreneur determine quantity, quality and location of goods produced. In other words, to make correct economic calculations. It was Austrian economist Carl Menger, the father of Marginal Value Theory, who determined that the cost of producer’s goods (capital goods) and labor must be calculated from the prices of those goods. It was Karl Marx who erroneously believed, as David Ricardo before him, that prices depended on the amount of labor that went into producing the goods. This is better known in socialist circles as “The Value of Labor Theory”. In a socialist society goods are priced in accordance to the amount of labor that went into producing them. What’s wrong with this?

This can be explained best by example.

Imagine a baker takes 8 hours to produce 12 loaves of bread. The baker requires $2000.00 a week to cover rent, equipment, his livelihood and other overhead in order to stay in business. If we do the math, he would have to price each loaf at $33.33 if he worked a typical five day work week and $27.77 per loaf if he baked for six days a week. Well, let’s double his capacity to bake bread to 24 loaves a day. We see the bread would still be priced at $13.88 to realize his profits considering he would actually sell every loaf every day. How many consumers are willing to pay that for bread? Increase his output to 48 loaves a day and we see the price fall to $6.94 per loaf. Still a bit too high for bread.

Regardless of what the labor cost is, the baker must remain competitive in order to stay in business. If the market has determined that $3.00 is the average price for fresh baked bread, then the baker will have to adjust his labor, land and resources in order to remain in business and still make a profit. As a wise man once said, “Pearls aren’t valuable because men dive for them. Men dive for them because they are valuable.”

So what happens when government sets the prices of all goods produced? How does the State determine value? Value is only determined by the private property ownership of production and consumption goods. This is where socialism begins its death spiral from the onset. Without consumers setting prices, the required information to determine quantity, quality and location of goods is lost. This is how houses in the Soviet Union were built without roofs. The State determined it would pay producers of nails a certain amount per metric ton of nails. So, logically, without the price information as to what type and size nail to produce, the nail manufacturers just made really big nails. They got paid by the State and houses didn’t get roofs as there were no small roofing nails produced. Had the nail company been privately owned and the means to produce nails been privately owned, then the manufacturer would be incentivized by the profit motive to determine what size nail to produce and where to sell them at what price. As Mises concluded, without the private ownership of the means of production there cannot be any economic calculation.

Equality and the Classless Society

The father of socialism, Karl Marx determined that the whole volume of mankind’s struggles throughout history were due to class struggles. To Marx, the root of all social ills was because some rich people were taking advantage of poor people. The middle class were just accessories in this exploitation. Yes, this is overly simplified, but the crux of the matter is that socialism heavily rests on the notion that a classless society would be ideal. Karl Marx took the “All men are created equal” part of the Declaration of Independence to an extreme. His analysis meant that not only are all men created equal, but should be equal in all facets of life. This equality involves equal outcomes as well. No one person should have more or less than any other in a socialist society. “From each according to his ability, to each according to his need”. Socialism also determines that since all property is owned by the Collectivist State and not privately owned, then even the individual himself is owned by the collective. Everyone in a society owns that fraction of everyone else equally. Everyone in society owns your labor and your person equally. So, how does a member of a socialist society keep track of that fraction of ownership they may have in everyone else? The answer lies with the State. The supremacy of the State is pinnacle in socialism. A group of wise, right thinking officers of the State will determine what happens with all property. Here in lays the rub. By establishing a group who controls the others we have created a class of superiors and an underclass of inferiors. We now have a class society where an oligarchy not only controls all wealth but every individual as well. So much for the classless society and an end of exploitation. Socialism only functions in a state of totalitarianism. This is inescapable.

Ignoring Ownership

We’ve so far covered the economic and political failures of socialism. What about the philosophical? That can be analyzed by understanding the human condition of wanting to own “stuff”. Pure and simple. Whether you believe in Adam and Eve in the Garden of Eden or not, people have always wanted to own stuff. Call it coveting if you will, but this is the base condition of humankind. People don’t work for the sake of work as Marx contended with his idea of “The Socialist Man”. Rather, work is performed to have something for it. As in the previous article, no one acts unless they first have the incentive to act. This little fact was ignored in the days of the Soviet Union. This is ultimately what led to the fall of the Berlin Wall and disintegration of the Soviet empire. The East Berliners could peer over the wall every day to see the land of decadence and plenty inside the Wall in West Berlin. The Czech people as well as the Polish, the Ukrainian and Russian alike all want something to show for their hard work and labor. Something to call their own. They wanted to leave a life to their children void of lack, want and hunger. As was stated above, this desire to own things, the desire of private property ownership, can only be answered by capitalism. It’s capitalism that has been able to transform a negative like greed and turn it into a positive such as wealth, leisure, and a raised standard of living for all. Socialism has only led to misery, shortages and ultimately large scale death.

So, why do our western “leaders” in government and academia still advocate socialistic ideals? Is it because no one “nice” has come along to implement it? Cannot highly educated people see something a blue collar guy, like this author, cannot? The arguments against socialism have been made long before this century. We saw the results of State intervention when the Soviet Union collapsed. Yet, interventionism is still called for by what are considered our wise “leaders”. In the United States both political parties, economists and academic professionals fall on the side of more and more intervention into, not only our lives but into the lives of people all over the world. Such intervention only leads to more irregularities in the market causing suffering among people. It leads to more control and loss of liberty. State intervention, in the form of socialism is still evil on its face, no matter how nice the ruler happens to be.

We have purposefully ignored the intervention of corporatism in this article as to stay focused on socialism. This will be discussed in a future article.