Why Socialism Always Fails: Economic Calculations
When I started writing this piece it was intended to be a single post on the economic failures of Socialist systems, but it quickly turned into a very long article to post all at once. Since whole books have been written on this subject, I suppose I shouldn’t be surprised. I’ve tried to distill the most salient points into something more approachable than a 1000 page economic treatise, and will be addressing one point at a time in a series.
Economies are important. Lives depend on the efficient distribution of resources, and it is heartbreaking to see people unable to afford their most basic needs. It is natural to assume that something is unfair, that someone is being screwed, that something needs to be fixed, and that someone smart enough can fix it.
The truth, however, is that poverty is nearly always the result of economic interventions. The result of a centrally planned economy is poverty, and eventually starvation. We are seeing this play out right now in Venezuela, but it is a sad story that has been told many times throughout history. In the Ukraine, people starved to death under the Soviet Union despite having some of the most fertile soil in the world after their crops were confiscated by the Kremlin. There are many reasons why planned economies do not deliver on their promises, but I will primarily focus on economic theory in these first few posts, rather than a moral argument or a discussion of human nature.
The main objection to Socialism by the great Ludwig Von Mises was the lack of economic calculations. In free markets, economic harmony is maintained by the price system and the forces of supply and demand. Prices allow businesses to calculate costs and benefits, which indicate the efficiency of their operation. Increasing efficiency maximizes profits, and leaves resources available for others. In communism, prices are eliminated entirely, but even a single socialized industry can cause havoc in the market by disrupting prices.
A rise in prices indicates either shortage of resources or an increase in demand. High prices send a signal to entrepreneurs to enter a market and provide a product or service. As new firms enter the market, competition between them forces prices back down. This drop in prices tells new firms not to enter the market, and to instead focus on another area of the economy.
Eventually, the profit margin is too low for a business to survive, and only those who use resources most efficiently are able to continue. The number of firms providing a product or service maintains a balance with the supply of resources and the demand for their product. Because of this, large scale shortages are rare, never last long in a free market system, and prices drop over time.
In Socialism, the prices are reduced artificially. When prices are manipulated by forces outside of the market it typically results in a shortage. Too many people want to use too much of the resource. Within a particular industry, there is no competition to streamline production and minimize costs. Resources are simply squandered until a shortage is produced, which also affects other industries dependent on those same resources. It must also be pointed out that resources originate in nature. Ore must be mined, crops must be grown, oil must be pumped. If these resources are misused, ecosystems suffer as a result.
Both shoes and tires require rubber. A soviet planner may decide that the people require shoes more than they require tires. Because human bodies grow and change over time, perfect information on the number of a particular size of shoes needed is impossible to maintain without a price system. There would always be shortages of some shoe sizes, and surpluses of others. Meanwhile, there will be a shortage of tires for cars. It may be easier to request a whole new car from central planning than to obtain a new set of tires. After all, you must be pretty important to have a car at all in the Socialist utopia. This ultimately creates waste, which makes the whole society poorer.
The only solution to the shortages produced by central planning is to implement rationing, but how can this be done fairly? Some people and businesses need more than others. How can the most important industries and people be decided? In a free market, people vote with their dollars. In a planned economy, these decisions are made arbitrarily. The most important segment of a centrally planned economy is, of course, the planners themselves. Socialist governments typically put on mass displays of excess to show their success at the expense of their starving citizens.
Economies are too vast and complex to be planned by a central authority. They require individuals making assessments of value in their own self interest. Without accurate information generated by the price system, these choices are not based on actual availability of resources. Free markets are not perfect, but they cannot be fixed by removing information and incentives which prevent shortages.