The Defects of Socialism

On September 26, 2011, in Economics, by sean.rosenthal

In the view of socialists, an unplanned market composed of profit-seeking entrepreneurs creates an economy in which the selfish interests of the individual supplant the public good, resulting in inefficient market failures, rampant inequality, and sometimes—as experienced during the Great Depression–perpetually high unemployment. Seeking to end the “unplanned chaos” of the market, historical and present advocates of socialism want the state to usurp the means of production from its greedy owners, enabling selfless government officials to create order through a centralized plan. However, in defending the merits of socialism, its supporters ignore problems that transform its attempts at instituting planned order into planned chaos, particularly problems of power, interest, and knowledge. To legitimize their claims, any serious advocates of socialism must address these essential problems in its design.

Unlike free markets that function through voluntary exchange within a decentralized order, the socialist paradise dangerously concentrates power into a single entity with a monopoly on force. By centralizing the means of production into a state with the authority to force its will on the people, socialists place the lives and choices of everyone into the hands of a small group of dictocrats. In Federalist No. 51, James Madison warned of the threat posed by such a centralization of power, noting that the danger could only be ignored “if angels were to govern men.” In recommending this concentration of power, socialists disregard that men far from angels, like communist Russia’s Joseph Stalin and communist China’s Mao Zedong, often abuse their power, resulting in the murdering of millions of people and the virtual enslavement of many more.

When responding to the history of oppressive dictatorships that has plagued communist nations, socialists lament the past oppressions but assert that the ideal socialist state managed by compassionate leaders would be free of such problems. By focusing on this ideal, they gloss over the inherent dangers associated with such a concentration of power. Certainly, as the socialists claim, a “benevolent dictator” may sometimes exercise his power and discretion without misuse, but the hope that a new “benevolent dictator” will perpetually replace a deceased one contradicts the reoccurring abuse of authority among leaders throughout several millennia of history. In a real socialist society, the government with its concentrated power and its control over all economic affairs can always abuse its authority, posing a constant threat to its inhabitants.

For the sake of argument, assume that men were ruled by angels at present and forevermore, hypothetically resolving the problem of power. Next, consider the incentives of each individual in a socialist society. Due to the egalitarian underpinnings of socialism, every citizen receives an equal share of society’s output regardless of the amount of work the individual contributes. By working harder, people receive a very small fraction of the benefit of their work while they experience the entirety of the cost—such as stress and foregone leisure. As a consequence, work involves a highly concentrated cost coupled with a diffused benefit. Although some people may be self-motivated or motivated by a sense of duty to the community, experience shows that most people deprived of monetary and other similar incentives work significantly less hard. With the majority of people seeking to minimize the amount of work they do, the overall product of the nation plummets, making everyone equally poor. Largely due to this problem of interest, the majority of the production within communist nations has come from the very small percent of land privately held by individuals. Without a suitable interest in working, most people greatly reduce their efforts, resulting in widespread poverty and rampant starvation.

In commenting on the problems of power and interest, socialists bemoan human nature, considering these criticisms proof that, if it were not for the selfishness and evil of humans, their grand designs would work. Even opponents of socialism often comment that it looks good on paper but fails simply due to the ethical shortcomings of humanity. According to its defenders and many of its opponents, socialism fails solely due to human nature rather than any inherent defect of the project. Holding firmly to this belief, socialists contend that their ideal state will arise after the capitalist system collapses and the ethical underpinnings of humanity change for the better.

To disprove these socialists, assume that humanity changes in such a way that the problems of power and interest disappear. Imagine a socialist state that has a complete control of the means of production, and assume the leaders of this state seek to use the accumulated resources to promote best the welfare of the people. How would they fulfill this task?

In attempting to allocate resources efficiently, the dictocrats in power confront an insurmountable problem of knowledge: how does one figure out what the people want? In a free market, businesses determine whether they are fulfilling the interests of consumers by comparing their revenue to their costs. Through these accounting methods, entrepreneurs use profits to guide their actions towards certain endeavors and losses to guide them away from others. Consequently, money and profits—albeit imperfectly—provide businesses with an objective measure of the subjective preferences of the people. In contrast, socialism has no profits and no losses; everything is produced, owned, and distributed by a single monopoly: the state. In such a system, the state has no way of determining the subjective preferences of individuals and no way of determining the costs of what it produces. Without this objective measure of benefits and costs, it cannot determine what individuals most value given a finite set of resources.

To try to resolve this problem of knowledge, the socialist state could distribute money equally to all of the citizens of the state and enable them to bid for what they want, enabling people who greatly value a product to bid higher than those who value it less. Through this method, the state can effectively determine who values what product the most; however, this method fails to determine the costs of resources, making a cost-benefit analysis impossible. Since the state owns all of the means of production, no competition for these resources exists, so no prices for them can exist. As a result, the socialist leaders cannot answer simple questions like: how much wood should be allocated to pencils and houses and chairs and its many other uses. Or, even simpler, what resources should be used to make these types of products in the first place?

For a simple example, devoid of a price for gold and a price for plastic, how could a socialist society determine whether to make plates out of gold or plastic? Although gold might be a better material than plastic in making plates, nobody in a capitalist society seriously believes that most plates should be made from gold rather than plastic since the price of gold far exceeds the price of plastic. With prices, this type of question seems trivial and obvious; however, when devoid of a price for gold and plastic, this otherwise easy judgment no longer has a clear solution. This problem of knowledge applies to the creation of every product, disabling the dictocrats running a socialist society from determining the economically sound combination of resources they should use when producing anything. Without free market prices, the socialist state guided by angels ruling saints still cannot create prosperity.

Rather than due to circumstances or leadership or any of a plethora of excuses, communist nations collapsed due to inherent defects in their design. Instead of wishing away the defects of socialism, its defenders must satisfactorily resolve the problems of power, interest, and knowledge that derail it from successfully working. For the opponents of socialism, they should consider to what extent government interventions in mixed economies experience similar shortcomings. Though to a lesser extent than in socialist states, the problems of power, interest, and knowledge create problems for all government interventions. As a result, the government’s involvement in the marketplace should be kept to a minimum, and individuals should be allowed to create prosperity in a free market.


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