WHY SOCIALISM IS ALWAYS AND EVERYWHERE AN ECONOMIC DISASTER
Socialism in all its forms has always been poisonous to economic growth and prosperity. This is not because the “wrong people” have been in charge of socialist regimes, and that “better” or smarter people could somehow make socialism work, or that all that is missing is democracy. Socialism is economic poison for several fundamental, inherent reasons. In other words, it is impossible for socialism to be anything but impoverishing as an economic system because of the very nature of socialism.
Every imaginable type of socialism was tried in the nineteenth and twentieth centuries, producing nothing but economic stagnation—or much worse. Some postcolonial African countries, like Zimbabwe, went from being economic breadbaskets to economic hell-holes.1 But everywhere, from Britain, India, and Latin America to Africa, socialism brought economic ruin. Worse, in the Soviet Union, China, North Korea, and Cambodia it manufactured not just poverty, but mass executions numbering in the millions and the most tyrannical regimes in human history.
At a minimum, socialism has what economists would categorize as an “incentive problem”; a “knowledge problem”; and an “economic calculation problem.” A good example of the incentive problem involves the first American pilgrims.
HOW SOCIALISM ALMOST DESTROYED AMERICA
The first American settlers originally adopted communal or socialized ownership of land and property. As a result, most of them rather quickly starved to death or died of disease.
When the first pilgrims arrived in Jamestown, Virginia, in May 1607 they found incredibly fertile soil and plentiful seafood, wild game, and fruits of all kinds. Despite all of this, within six months all but thirty-eight of the original 104 Jamestown settlers were dead, having starved.2 Two years later, 500 more pilgrims arrived in Virginia, transported there by the Virginia Company, and a shocking 440 of them died from starvation or disease. This became known as “the starving time,” described by one eye witness: “So great was our famine, that a savage we slew and buried, the poorer sorte took him up againe and eat him; and so did divers one another boyled and stewed with roots and herbs.”3 This man also remarked that the cause of the starvation was “want of providence” and “industrie” and “not the barenness and defect of the Countrie, as is generally supposed.”4 In other words, the problem was lack of effort, not a lack of resources.
The essential problem was that all of the pilgrims were indentured servants who had no financial stake in the fruits of their own labor. All that they produced went into a common pool to be used to generate profits for the Virginia Company as compensation for transporting them to America, and to support the colony. Working harder, longer, or smarter produced no additional benefit to anyone because the system that was set up was essentially agricultural socialism and everyone was compensated the same regardless of individual effort. The absence of property rights in the land, and of any link between effort and reward, destroyed the work ethic of the pilgrims, just as it always does in any socialist society, whether that of the Jamestown pilgrims or that of the former Soviet Union. Historian Philip A. Bruce wrote of the Jamestown pilgrims that the men idled over their tasks or refused to work altogether, and men who were known to be young and energetic by nature were “derelict.”5
In 1611 the British government sent Sir Thomas Dale to serve as the “high marshal” of the Virginia colony. Dale noted that the surviving settlers were healthy and spent much of their time playing games and other vigorous activities. He immediately identified the source of the colony’s problem as the system of socialized land ownership. Consequently, he determined that each man would be given three acres of private land from which he was only required to pay a tax of two-and-a-half barrels of corn to the Virginia Company. Everything else was his to keep or sell.
The Jamestown pilgrims then began to prosper. Each man realized that by loafing or shirking, he was paying the full cost of such behavior in the form of lost profits. At the same time, everyone realized that increased effort led to increased rewards. As historian Matthew Page Andrews wrote, “As soon as the settlers were thrown upon their own resources, and each freeman had acquired the right of owning property, the colonists quickly developed what became the distinguishing characteristic of Americans—an aptitude for all kinds of craftsmanship coupled with an innate genius for experimentation and invention.”6
The private property system that replaced agricultural socialism in the Jamestown colony was quickly expanded so that each settler who paid his own way was given fifty acres of land, and by 1623 all land had been converted to private ownership. Capitalism replaced socialism and the pilgrims thrived.
The same tragic mistake of adopting agricultural socialism was made in the Massachusetts colony where about half of the original pilgrims who landed in Cape Cod in 1620 were dead within a few months. Fortunately, the leader of the Mayflower expedition, William Bradford, recognized the problem:
For the young men that were most able and fit for labour and service, did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. The strong, or man of parts, had no more division of victuals and clothes than he that was weak and not able to do a quarter the other could; this was thought injustice. . . . And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc., they deemed it a kind of slavery, neither could many husbands brook it.7
Socialism was the root cause of the starving pilgrims in the original Massachusetts colony. Bradford recognized this and, like his Virginia predecessors, decided to abandon agricultural socialism and allow private property ownership. In his own words, it was decided that the pilgrims of Massachusetts
. . . should set corn for every man for his own particular, and in that regard trust to themselves; in all other things to go on in the general way as before. And so assigned to every family a parcel of land, for present use . . . and ranged all boys and youth under some family. This had very good success, for it made all hands very industrious, so as much more corn was planted. . . . The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability. . . .8
By 1650 privately owned farms were as predominant in Massachusetts as they were in Virginia and elsewhere in the colonies, and the American economy began to thrive and prosper. The institutions of private property and free markets led to a burst of entrepreneurship and wealth creation. By 1776 the young American economy was a hundred times larger than it was in the 1630s, and Americans had already become among the most affluent people in the world.9
As has been proven hundreds of times in world history, whenever socialism is applied, economic disaster, even to the point of starvation, follows. As the economist Murray Rothbard wrote, by the early twentieth century:
[E]veryone, socialists and non-socialists alike, had long realized that socialism suffered from an incentive problem. If, for example, everyone under socialism were to receive an equal income, or, in another variant, everyone was supposed to produce ‘according to his ability’ but receive ‘according to his needs,’ then, to sum it up in the famous question: Who, under socialism, will take out the garbage? That is, what will be the incentive to do the grubby jobs, and, furthermore, to do them well? Or, to put it another way, what would be the incentive to work hard and be productive at any job?10
One hundred and fifty years of experiments with socialism in dozens of countries, large and small, proved the truthfulness of Rothbard’s admonition. Russia was the world’s largest exporter of grain before adopting socialism in 1917. Because of socialized agriculture, as many as ten million Russians died of starvation in the 1920s and 1930s. When Mao Tse Tung socialized Chinese agriculture, as many as thirty million Chinese starved to death between 1959 and 1962. Socialism produced horrifying human disasters in Cambodia, Ghana, Ethiopia, Tanzania, and other countries during the twentieth century.11
The exact same kinds of results occurred in manufacturing and all other industries under twentieth-century socialism. For as economist David Osterfeld wrote: “[S]ocialism, by its very nature, rewards sloth and indolence and penalizes diligence and hard work. It therefore establishes incentives that are incompatible with its self-proclaimed goal of material prosperity. The inherent dilemma of socialism is that individuals who respond ‘rationally’ to the incentives confronting them will produce results that are ‘irrational’ for the community as a whole.”12
In the early twentieth century some socialists argued that socialism would somehow rather magically transform human beings, effectively taking the place of God to create a new “socialist man” who would no longer be acquisitive and interested in pursuing his own self-interest. This was long ago proven to be a farce, as it never occurred anywhere on earth despite the use of terror and mass murder by the former Soviet Union, China, Cuba, and other socialist regimes in vain attempts to “prove” their theory to be correct.13
THE KNOWLEDGE PROBLEM
A second reason for the inherent and inescapable failures of socialism as an economic system is known in the economics profession as the “knowledge problem.” This problem is associated with the writings of the Nobel prize-winning economist Friedrich Hayek, who first explained the idea in a 1945 academic journal article entitled “The Use of Knowledge in Society.”14 In that article Hayek explained that the kind of knowledge that makes the economic world go ‘round is not just scientific knowledge but the detailed and idiosyncratic “knowledge of the particular circumstances of time and place” that the millions of people who make up the world economy possess and utilize to perform their unique jobs and live their lives. No government planner could possibly possess, let alone efficiently utilize, such vast knowledge.
For example, consider something as simple as a slice of pizza. What would it take to make a pizza from scratch? Well, the first ingredient would be dough, which would require a wheat farm to raise the wheat that is turned into flour, which in turn is turned into pizza dough. The wheat farm requires all of the engineering know-how that is used to build all of the tractors and other farm equipment; farm tools, fertilizers, irrigation systems, and what not. Then there is the grain storage business and all that goes into it, along with the trucking industry that is used to transport the grain. The transportation industry requires gasoline or diesel fuel, which means the petroleum industry must become involved, including all of the sophisticated engineering knowledge that is used to extract petroleum from the earth (or the ocean floor) and refine it into gasoline.
So far, considering just one ingredient of a common pizza—dough—we learn that it requires the efforts of probably hundreds if not thousands of people from all over the world, all with very specialized “knowledge of the particular circumstances of time and place” that they use to do their jobs.
Then there is the tomato sauce, which requires a tomato farm and all the farm equipment, tools, fertilizers, irrigation, transportation, and so forth that is involved in growing and marketing tomatoes. A dairy farm is then needed to produce milk, which is turned into cheese for the pizza. And on and on. The lesson here is that what makes the economic world—indeed, human civilization itself as we know it—possible is the international division of labor and knowledge in which we all specialize in something in the marketplace, earn money doing it, and use that money to buy things from other “specialists.” All of this occurs spontaneously without any government “planner” consciously dictating how to make pizzas, how many to make, or where pizza parlors should be located.
As Adam Smith explained in his famous 1776 treatise, An Inquiry into the Nature and Causes of the Wealth of Nations, what motivates people to put forth all of this effort and cooperate with each other to give us “our meat and our bread” is not their selflessness or their love of their fellow man, but their concern for their own wellbeing. By pursuing their own self-interest in the free market, they coincidentally, as though led by an “invisible hand,” benefit the rest of society as well. As for socialism, it is worth repeating that no government planner or group of government planners with the most powerful computers available could conceivably possess and utilize all of the constantly changing information that is needed to produce even the most common and simple consumer goods, let alone sophisticated products like automobiles and computers.
The false notion that government planners under socialism could possess and make better use of all this information than the myriad consumers, workers, entrepreneurs, business managers, and other market participants in thousands of different industries was labeled “the pretense of knowledge” by Hayek in his Nobel prize acceptance speech in 1975. It was, said Hayek, the “fatal conceit” of socialists everywhere.
Hayek also pointed out how the free-market pricing system is indispensable as a tool of any functioning economy. Government-mandated prices, such as we have in socialist economies, produce nothing but chaos. In a market economy, prices are like road signs; in this case, they reflect the relative scarcity of goods and services, the intensity of consumer demand, and help us order our economic lives. When a product or service becomes more scarce consumers look for alternatives, which is one engine of innovation. When prices rise, investors are alerted to consumer demand and look to provide consumers with what they want at a lower price or to improve on the existing product or service.
Without market prices, rational economic decision making is impossible, which is another core reason for the failures of socialism to produce anything but poverty, misery, and economic chaos.
THE CALCULATION PROBLEM
The most devastating critique of socialism is known as the “calculation problem.” Economist Ludwig von Mises explained it in his 1920 treatise, Socialism: An Economic and Sociological Analysis,15 and in his later 1949 treatise, Human Action.16 Socialists who advocate government “planning” with government ownership of the means of production face an impossible task, said Mises, because they have no idea how to go about arranging the production of goods and services without real, market-based capital markets (such as the stock market, private banking system, and so on). It is capitalist entrepreneurs, Mises wrote, the professional speculators, promoters, investors, and lenders, who all have a personal financial stake in the investments they make, who allocate capital in a market economy. Their indispensable tool is market prices, which guide them to invest in a rational, profitable way, meeting consumer demand. Under socialism, where government owns all the means of production and capital “markets” are nonexistent, and resources are allocated by bureaucrats to meet “plans” that might have no basis in economic reality.
In a capitalist economy, entrepreneurs have to meet consumer demand or go bankrupt. This doesn’t mean that capitalist markets are “perfect,” only that there is an enormously powerful incentive for private investors to invest their money in ways that will be rewarded by consumers. This incentive, however, is totally absent from a socialist economy, where it is not consumer demand (and the investors’ desire to make a profit and avoid a loss), but government direction, that allocates economic resources, which is why Mises deemed socialism to be “impossible” as a viable economic system; it simply makes no economic sense.
Some seventy years after Ludwig von Mises first explained the impossibility of rational economic calculation under socialism, the well-known socialist economist Robert Heilbroner authored a momentous essay in The New Yorker entitled “The Triumph of Capitalism,” in which he begrudgingly admitted that “Mises was right” about socialism all along.17 At the time, the seventy-year-old Heilbroner was the Norman Thomas Professor of Economics at the New School for Social Research and had spent the previous thirty years of his academic career advocating and defending socialism. (Norman Thomas was a twentieth-century presidential candidate of the American Socialist Party.)
The point here is to note the irony of the renewed popularity of “socialism” today, especially among a segment of the college student population, when even longtime twentieth-century defenders of socialism such as Robert Heilbroner finally admitted that it was a massively failed and misconceived idea. To be a modern-day advocate of socialism is to completely ignore all sound economic logic, more than a century of history, and the words of honest socialist intellectuals like Heilbroner who were finally forced to confront reality after ignoring it for most of their adult lives.