4 Simple Reasons Why Socialism Fails

Authored by Anthony Mueller via The Mises Institute,

The new “democratic socialists” want to make their followers believe that one could redistribute wealth and income and socialize a large part of the economy without harming production and productivity. They claim that a comprehensive control of the economy by the government would bring more justice and more prosperity. The democratic socialists want more planning and less market. Yet this postulate ignores that socialism does not fail by accident or circumstance. Socialism fails because it suffers from four fundamental design defects.

  • First, socialism eradicates private property and markets and thus eliminates rational calculation.

  • Second, socialism allows soft budgets, so there is no mechanism in place to discard inefficient production methods.

  • Third, abolishing private property and replacing it by the state distorts the incentives.

  • Four, the socialist system with its absence of private property and of free markets inhibits the economic coordination of the system of division of labor and capital.

The Importance of Market Prices

Socialism cannot bring prosperity because it destroys the market functions of private property. Under socialism, private ownership of the means of production no longer exists, and thus there are no market prices for capital goods available. Institutionally, socialism consists in abolishing the market economy and replacing it with a planned economy. By doing away with private property of the means of production, one wipes-out market information and valuation. Even if the socialist administration puts price tags on the consumer goods, and the people may own consumer goods, there is no economic orientation about the relative scarcity of capital goods.

Many supporters of socialism suppose that business management is nothing more than a kind of registration or simple bookkeeping. Vladimir Lenin believed that the knowledge of reading and writing, and some expertise in the use of the basic arithmetic operations and some training in accounting, would be enough for the conduct of business operations. The socialists promote engineering and science, but they believe that there is no need for the entrepreneur. The regime may spend heavily on education but when there is no entrepreneurial economy, the people will stay poor, nevertheless.

The Role of Scarcity

The socialists ignore scarcity. They assume that a plan could stipulate the allocation of goods and services according to needs and wants. Yet the planners must answer how such a plan should find its standards of valuation. Without prices and markets, there is no orientation about which factors of production are more and which are less valuable. The socialist planners have no knowledge of the costs of the production process. Without markets, the prevailing value structure remains unknown.

Supply in relation to want makes goods valuable. In a market economy, the relative prices show the degrees of scarcity. By observing the prices, the market participants receive the information that guides them to align their economic decisions to the market signals. The price system informs about relative scarcities. There is no need for a comprehensive system of detailed information about the origin and nature of the scarcity beyond the prices to make a rational decision. The price system reduces complexity for the individual decision maker to the single number of the price. In a market economy, the economic participants need only partial knowledge to act rationally. In capitalism, the motivation to gain profits and to avoid costs work as an incentive to behave rationally. In a market economy, the prices provide information and incentives simultaneously for the seller and the buyer.

All production faces the problem of an almost unlimited number of ways how to produce a good. One can manufacture a commodity with very different raw materials, technologies, and combinations of the production factors and in an endless variety of designs.

Setting Priorities

Along with the technological feasibility of a project, one must calculate its profitability. Without costs in relation to sales, a technical evaluation makes no sense. That a project is technically viable does not mean that its realization is also worthwhile. What appears efficient from a technical point of view need not be so in terms of economic expediency. With costs left out of the consideration, socialist production is blind to the risk of producing goods that cost more than they are worth. In a socialist economy, even a benevolent dictator could not provide the right mix of goods in terms of price and quality

Socialists suppose that to implant their rule on the economy all that is necessary is to socialize the private companies, replace the management, and install worker councils, and the new economic order would flourish. The early socialists expected that abundance would follow not least because now the workers would get what before went into the hands of the capitalists as profits. Yet the socialists ignored that the socialization of the means of production was just the beginning. They failed miserably in running the economy.

The error of socialist economic planning is to assume that business management could also continue as before after socialist operators take over the capitalist management. While the socialist regime can train administrators and engineers and put the party members in the position of directors, these new leaders cannot decide according to relative scarcities because there is no longer a private property-based entrepreneurial price system available.

The reality of socialism is the command and obedience. Without orientation from markets and prices, brute force rules the allocation of the goods. The claim to combine socialism and democracy is as much a fraud as the assertion that socialism would bring prosperity. Socialism’s true face is totalitarian despotism .

It is no wonder that even a degenerate capitalism produces more prosperity than the best socialism. Therefore, the task ahead cannot be to remove capitalism in favor of socialism but to make capitalism better. In other words: make it more capitalist.