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Two Reasons Why Socialism Repeatedly Fails

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Socialism will always encounter two big problems when regimes attempt to implement it: 1) the impossibility of economic calculation without true market prices, and 2) the lack of an incentive to produce only what consumers actually want. 

The following simple example helps to illustrate the impossibility of economic calculation without market prices: a Cuban restaurant in Miami Beach sells a picadillo dish (ground beef, plantains, rice) for $8. Prices in general and thus the $8 price provide vital information. Perhaps $1, might be profit, and $7 will be spent in costs, in other words, in the necessary consumption of wealth needed to produce the meal/wealth, things like equipment/electricity/food/supplies, and everything employees and their families will consume at home (food, energy) thanks to their paychecks that came from the $7/meal. The businessman discovered two things that are impossible for a central planning body to discover regardless of the good intentions of its members or their intelligence, 1) that there are enough customers nearby willing to patronize the restaurant at the $8/meal price thus making their lives better, and 2) how to reorder $7 worth of stuff(labor/supplies/etc.) to profitably produce the meal.

If he sets prices too high, customers will choose other superior competing options. If he sets prices too low, He won't be able to cover costs and will go out of business. In other words, if he can't entice consumers to buy at a profitable price, the entrepreneur is failing to reorder the world in a way desired by the hundreds/thousands of people nearby who each value things differently. Therefore, Socialism/Communism can’t work because only businessmen dispersed throughout society are at the right time and place needed to discover people’s desires(1) and (2) how to properly set prices and thus create a profitable and competitive order ( i.e., one that produces more than it consumes while also providing a superior alternative to customers/society).

Nikita Khrushchev, who followed Stalin as head of the centrally planned (Socialist/Communist) Soviet Union, is credited with saying “When all the world is socialist, Switzerland will have to remain capitalist, so that it can tell us the price of everything." Unfortunately for Khrushchev, and the billions who suffered economic chaos and an inevitable decline in production under Socialist/Communist regimes all over the world, prices in Switzerland (or anywhere else) embody information about the costs/consumption of those particular places at specific times and are no good elsewhere.

With the Internet, pricing information all over the world can help customers find/nourish cheaper/better products/orders/companies and also help producers likewise thus greatly accelerating competitive knowledge/order-spreading but it will NEVER lead to the success of central economy-wide planning because no computers/system can get in the brains of entrepreneurs to predict what products/businesses they will create and thus alter society, and similarly, no computers can get in the minds of consumers and predict how they will choose to spend their money/wealth thus once again altering the social order’s numerous cycles of production and consumption. As Mises so eloquently explains:

The consumers, by their buying or abstention from buying, ultimately determine what should be produced and in what quantity and quality. They render profitable the affairs of those businessmen who best comply with their wishes and unprofitable the affairs of those who do not produce what they are asking for most urgently. Profits convey control of the factors of production into the hands of those who are employing them for the best possible satisfaction of the most urgent needs of the consumers, and losses withdraw them from the control of the inefficient businessmen. In a market economy not sabotaged by the government the owners of property are mandataries of the consumers as it were. On the market a daily repeated plebiscite determines who should own what and how much. It is the consumers who make some people rich and other people penniless.

But who is in a position to determine what it is the consumers want and need? Only private entrepreneurs who daily are either rewarded or punished by the needs of consumers in the marketplace. Socialism, lacking a price system has no means of knowing the needs of consumers.


Socialist regimes in general also face an "incentive problem." In free societies, or the private sector in general, each entrepreneur is incentivized to be as productive as possible and keep inefficiencies to a minimum since he owns/keeps the additional wealth or losses. On the other hand, the government employee or bureaucrat gets the same pay (ability to then consume) whether his department did a good job (produced a lot) or not, and is also not risking his own wealth since that comes from the taxpayers. In other words, regimes are national monopolies that lack the innovative/competitive incentives in competitive systems.

Inefficiency Requires Coercion

Central plans, of course, can’t work if people are free to not go along with them — so they inevitably require compulsion/slavery. For example, it is a criminal act in Communist countries to start a business. It is also a criminal act everywhere to not pay taxes that sustain public sector bureaucracies like "public education." So there is little incentive or wealth to sustain other, more desirable competitors when taxpayers are forced to sustain certain government "enterprises." For example, the NYC public(monopolistic) school bureaucracy consumes over 24,000 per year to “educate” a K-12 student. Refusing to pay a single dollar that goes to this bureaucracy comes with heavy sanctions from the state itself.

In his essay "Overlegislation" Herbert Spencer beautifully comments on the differences between governmental(law-made) orders and private/competitive ones:

How invariably officialism becomes corrupt every one knows. Exposed to no such antiseptic as free competition — not dependent for existence, as private unendowed organizations are, upon the maintenance of a vigorous vitality; all law-made agencies fall into an inert, over-fed state, from which to disease is a short step. Salaries flow in irrespective of the activity with which duty is performed; continue after duty wholly ceases; becomes rich prizes for the idle well born; and prompt to perjury, to bribery, to simony. ... Officialism is habitually slow. When non-governmental agencies are dilatory, the public has its remedy: it ceases to employ them, and soon finds quicker ones. Under this discipline all private bodies are taught promptness. But for delays in State-departments there is no such easy cure. ...

Consider first how immediately every private enterprise is dependent upon the need for it; and how impossible it is for it to continue if there be no need. Daily are new trades and new companies established. If they subserve some existing public want, they take root and grow. If they do not, they die of inanition. It needs no act of Parliament, to put them down. As with all natural organizations, if there is no function to them, no nutrient comes to them, and they dwindle away. Moreover, not only do the new agencies disappear if they are superfluous, but the old ones cease to be when they have done their work. Unlike law-made instrumentalities…these private instrumentalities dissolve when they become needless. ...

Again, officialism is stupid. Under the natural course of things each citizen tends towards his fittest function. Those who are competent to the kind of work they undertake, succeed, and, in the average of cases, are advanced in proportion to their efficiency; while the incompetent, society soon finds out, ceases to employ, forces to try something easier, and eventually turns to use. But it is quite otherwise in State-organizations. Here, as everyone knows, birth, age, back-stairs intrigue, and sycophancy, determine the selections, rather than merit. The “fool of the family” readily finds a place in the Church, if “the family” have good connections. A youth, too ill-educated for any active profession, does very well for an officer in the Army. Gray hair or a title, is a far better guarantee of naval promotion than genius is. Nay, indeed, the man of capacity often finds that, in government offices, superiority is a hindrance — that his chiefs hate to be pestered with his proposed improvements, and are offended by his implied criticism. Not only, therefore, is legislative machinery complex, but it is made of inferior materials.

Jorge is a computer programmer from Miami Beach, Florida. He writes the "Hayekian" blog on Medium.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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