Socialism seems more popular than ever. Why is a mystery to me. Socialism will never succeed. That is, socialism will never be able to match capitalism in delivering overall prosperity and a high standard of living for the average person.
Why not? I will boil it down to three main reasons.
What is socialism?
First, let’s clarify what ‘socialism’ we’re talking about. Socialism has had many meanings.
Official socialism means government ownership of the means of production. That is, government owns the businesses, factories, machinery, warehouses, retail stores, etc. Official socialism forbids private property.
More casually, people seem to have expanded the definition of socialism to include economies that allow private property but also have significant government control of the economy. Casual socialism doesn’t forbid private property, just frowns on it.
All versions of socialism share one thing in common: significant government control of the economy, justified by a belief that supposedly elite technocrats can manage the affairs of the people better than the people themselves.
People like to argue about what should or should not be called socialism. Personally, I’m not too concerned about the terminology. Socialism, utopian socialism, national socialism, communism, fascism, social democracy. Whatever. Terminology is just an interesting technicality.
To me, what really matters is the impact on our lives. Excessive government control harms prosperity. That’s what matters, not the name we give it. Prosperity is harmed whether control comes from government ownership of assets OR from excessive regulation and taxation of privately-owned assets.
This post will mostly address official socialism. However, the same points generally apply to all versions of socialism.
Problem 1: Wealth-creation
The largest error of socialism is a fundamental misunderstanding of how wealth is created.
Socialists believe wealth is stolen or achieved by dumb luck. They don’t believe wealth is earned. They think wealth-creation benefits only a few rather than providing broad benefits to society.
Many of the other problems of socialism flow from this misunderstanding. It explains why socialists are offended by the mere existence of wealth. Socialists usually want to ‘stick it’ to the rich.
Don’t take my word for it. Look at what they say. For example, look at the following responses from French politicians after businesses and rich individuals pledged hundreds of millions of euros to rebuild Notre Dame after last week’s fire:
“[L]arge companies … can mobilize a crazy amount of money for Notre Dame,” but they do nothing to address “social misery” in France.
“You see there are billionaires who have a lot—a lot—of money… It shows the inequalities we regularly denounce.”
Rich donors should instead just “start paying [their] taxes.”
Remember, those are responses to generous donations aimed at rebuilding a cherished national landmark!
Anti-wealth comments are not rare. Here are a few more:
“No one needs that much money.”
“It is wrong that some people should be comfortable and well fed when other people are starving.”
“Every billionaire is a policy failure.”
If you own a business, “you didn’t build that.”
These comments betray a misunderstanding of how wealth is created. Wealth is not random. Nor is it (usually) achieved by stealing or luck. Wealth comes from hard work, good ideas, entrepreneurial risk-taking, thrifty saving, and smart investment. Wealth is earned.
Attacking wealth is therefore morally wrong and economically suicidal. Obstructing wealth-creation doesn’t make sense – unless you misunderstand wealth-creation.
If you believe wealth is evil and unearned, then socialist policies seem natural:
- If wealth comes from stealing, why not tax it all away and redistribute to more deserving folks?
- If wealth comes from cheating, why not heavily regulate all the pathways to wealth?
- If private property equals theft (I’m not making this up!), why not abolish private property?
- If wealth sort of automatically appears, why does anyone need the incentive of profit?
Their misunderstanding leads socialists to want as much wealth redistribution as possible. They’d like to see a grand leveling of society.
However, the socialist cure is worse than the disease. Let’s illustrate with an example. Suppose government can redistribute all existing wealth in equal shares to all adults. What will happen after this Great Leveling?
Some people will work their tails off, while others will work as little as possible. Some will be driven by ambitious dreams to build something big, while others will be content with what they have. Some will live thriftily and save prudently, while others will spend like drunken sailors. Some will invest wisely, while others won’t.
The result? We’ll once again end up with wide disparities of wealth! Human beings are not robots with identical levels of ambition, work ethic, intelligence, creativity, and thriftiness. Wealth disparity is totally inevitable, unless prohibited by oppressive tyranny.
But wait, it gets worse. Renewed disparity is not the worst thing. Reduced prosperity is.
After the Great Leveling, people will remember the confiscation of wealth. Many of the talented and ambitious folks will think, “Why bother creating wealth if it will just be seized?” The threat of confiscation will cause them to work less and invest less for the future.
Socialists may like that outcome because it stops some people from becoming wealthy. But wealth benefits virtually everyone. Therefore, stopping wealth-creation harms everyone. It’s cutting off your nose to spite your face.
If socialism had stopped Rockefeller and Carnegie from becoming wealthy, society wouldn’t have gotten cheaper oil and steel. If socialism stops the next Bezos or Zuckerberg from becoming wealthy, then society won’t get the next Amazon or Facebook. We’ll all be worse off.
Failure to understand this is the key flaw of socialism.
Problem 2: Knowledge
The second major flaw of socialism relates to knowledge. To believe socialism is effective requires us to believe elite rulers know how to manage Joe’s life better than Joe himself. This is Hayek’s ‘fatal conceit.’
It’s an impossibility. There is no way politicians and government employees can have adequate knowledge of the billions of local issues in the far-flung corners of the economy. They cannot have better knowledge about Joe’s work and family situation than Joe himself. They cannot have better knowledge of the local welding industry than Joe and his employer.
Likewise, government cannot know Joe’s preferences better than Joe himself. Does Joe want a Whopper or Thai food? A blue car or a red one? An apartment with two bedrooms or three? Does Joe prefer cheap clothing and expensive cars or expensive clothing and cheap cars? Government cannot know what Joe values.
Is it possible for people with insufficient knowledge to effectively ‘manage’ the economy? No. But that’s exactly what socialism tries to do!
Maybe if life was fixed and unchanging, central planning by a few elites might work. They could document the best solutions for all industries and occupations in some central ledger.
However, that bears no resemblance to reality. Life is always changing. Natural disasters strike, consumer preferences change, new technologies emerge, etc., etc.
When change occurs, a reaction is required. In the free market, millions of people figure out the best new solutions by interacting with each other and running many ‘experiments.’ Market prices communicate abundance or scarcity, plus other information. The free market harnesses millions of brains to work on Joe’s behalf.
Elite central planners can’t adapt nearly as well. They don’t have the knowledge, and they intentionally shrink the brain pool to a relative handful of people.
The inferior knowledge of central planners dooms socialism to a lower standard of living.
Problem 3: Incentives
The third major flaw of socialism relates to financial incentives. Most people are motivated by money to some degree. We like to be paid for our work, we prefer to pay lower prices, and so on. Money isn’t the only motivator, but it’s a big one.
Socialism weakens or destroys incentives. Consider the following areas:
Property: People are more likely to take care of property, even increase its value, if they own it.
People are less likely to take care of, or invest in, communal property.
Work: People are more likely to work hard if they can keep more of their income.
People are less likely to work hard if they receive little or no financial benefit from doing so. As the old Soviet joke went, “They pretend to pay us, and we pretend to work.”
Profit motive: Profit motivates businesses to innovate, invest, increase productivity, and satisfy customer demand. Profit motivates inventors to keep searching for something better. Profit motivates investors to invest.
Socialism eliminates profit. Production is planned by the elite, not by private businesses responding to customer demand.
Prices: Free markets allow prices to float up and down, communicating abundance and scarcity. High prices motivate businesses to increase supply of a demanded item. High prices motivate consumers to use less of a scarce item.
Socialism doesn’t use market prices. Producers have no added incentive to increase production of scarce or demanded items. Buyers have no added incentive to conserve scarce items.
Self-interest: Joe has a strong incentive to pursue his self-interest when making decisions. Government doesn’t have nearly as much incentive to help Joe. This alone makes it more likely Joe will get what he wants if he makes his own decisions, rather than government deciding for him.
As you can see from the various examples just listed, socialism destroys the incentives that motivate people to act in ways that improve prosperity. The result is less prosperity.
The human toll
Socialism certainly takes an economic toll. Poor economic conditions can make life miserable.
But socialism has an even darker side. What we call communism has killed roughly 100 million people and led to a loss of human dignity for countless more.
Anyone interested in the human toll of communism can check out this website called Spider & The Fly. They have speakers who tell their own stories of what life was like under communism. Their speakers are available free of charge for video or phone conferences.
Official socialism, with government ownership of the means of production, will never work. It doesn’t allow prosperity to flower. It usually ends in misery and collapse.
But watered-down socialism doesn’t deserve any awards, either. It may not be as bad as official socialism, but it’s still bad. Watered-down socialism produces watered-down prosperity.
Green New Deals, $15 minimum wages, and government-guaranteed jobs may not rise to the level of official socialism, but they’re too close for comfort.
I encourage you to enter comments or questions below. Two rules: 1) be reasonably polite, 2) address the issue and avoid personal attacks.