Why Socialism Must Fail and the Necessity of Privatization
The great economist Ludwig von Mises gives future generations the most important advice needed to secure prosperity:
“Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence…All present-day political issues concern problems commonly called economic. All arguments advanced in contemporary discussion of social and public affairs deal with fundamental matters of…economics. Everybody’s mind is preoccupied with economic doctrines…Everybody thinks of economics whether he is aware of it or not. In joining a political party and in casting his ballot, the citizen implicitly takes a stand upon essential economic theories…As conditions are today, nothing can be more important to every intelligent man than economics. His own fate and that of his progeny is at stake…all reasonable men are called upon to familiarize themselves with the teachings of economics. This is, in our age, the primary civic duty. Whether we like it or not, it is a fact that economics cannot remain an esoteric branch of knowledge accessible only to small groups of scholars and specialists. Economics deals with society’s fundamental problems; it concerns everyone and belongs to all. It is the main and proper study of every citizen.” (Mises)
With this in mind we summarize three things every teenager should understand. The vital role that the concept or tradition of ‘private property’ plays in enabling economic competition which is what motivates the creation and spread of superior knowledge and subsequent order throughout the world, the Mises/Hayek explanation for the impossibility of central planning also taking into account the emergence of AI/Internet/etc., and the overall inefficiency of government bureaucracies compared to private sector orders.
Social orders (individuals or companies) are in cycles of production, trade, and consumption. If you are a freelancer you produce a product/service and trade it directly with society (customers) for money, and then trade the money back with society for the wealth you consume. If you work for a company, you produce your labor and trade it for money with your “employer” who combines it with the labor of others to produce a product/service which is then traded with society for the money from which your paycheck comes. Whether you looking at a freelancer, employee, or company, what is commonly referred to as sales revenue (your paycheck), is an estimate of the total amount of wealth produced. Costs, like employee wages which will be used by them to consume wealth(food, energy, housing, etc.), are an estimate of how much wealth is consumed from the economic pie. And profits, which are the difference between sales revenue (production) and costs (consumption) are an estimate of by how much additional wealth the economic pie has grown. A profitable order is an order (person/company) that produces more than it consumes and is therefore self-sustaining/alive. The global economy, or what the great 19th century British intellectual Herbert Spencer so cleverly referred to as the ‘Social Organism’, is really a vast collection of orders that are constantly trading with each other, each trade taking each participant/order from an inferior to a superior state of well-being from its perspective, otherwise the trade would not occur. Each trade can be seen as nourishing each order with what it needs from its own perspective. When Carl trades a dollar for a hamburger he values the hamburger more than the dollar and the restaurant values the dollar more than the hamburger so the action of trading takes place, which like all action which is not coerced, takes each participant from an inferior to superior state of well-being.
In the ‘Social Organism’ new/superior information arises and spreads through the minds of people/companies/orders due to ‘economic competition’. Why are BMW, Ford, Toyota, Microsoft, Google, Amazon, and all companies/people/orders constantly innovating and copying each other’s innovations/information thus continuously restructuring society in superior ways as fast as humanly possible? Because the concept/tradition of ‘private property’ gives everyone in their role as consumers the ‘freedom to trade’ their (life/order)-sustaining wealth for what they calculate/think is best, which in turn forces everyone in our role as producers to discover how to produce something society values (our labor, a product/service), which we do by, once again, innovating and/or copying existing innovations, in other words, by competing in the economic sense. As cost-cutting ideas emerge and inevitably spread vie competition leading prices to continuously fall, new profitable ideas arise and once again spread via competition in an endless cycle of knowledge generation/innovation. For example, computers were once very expensive, but once the price of making them came down enough, people easily realized that every home could have them, which gave birth to our computerized world and the Internet and all the great things that flow from it. The more wealth is produced, the more wealth has to be offered in exchange for labor as entrepreneurs/companies/orders compete against each other for the labor they need which helps explain why the economic pie grows for everyone.
With the above in mind we can already see why Socialism/Communism/ ‘Central economic planning’ is IMPOSSIBLE. The following simple example suffices to show this. 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, in other words, he is failing to reorder the world in a superior way as calculated by the hundreds/thousands of brains nearby (perhaps they don’t like picadillo at the $8 price and prefer the already existing options), if too low, they might not cover costs and cause the business/order to consume more than it produces leading to an overall shrinking of the economic pie and thus go out of business. 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 (one that produces more than it consumes while also providing a superior alternative to customers/society). The concept/tradition of ‘private property’ plays the fundamental role here as well, it is not until matter/things are privately owned, that they are controlled/coordinated by profit/order/maximizing brains/cpus. A similar Cuban restaurant/meal might be profitable in Austin, Texas selling the picadillo for $6.50 because costs/consumption like real estate, transportation, and labor might be lower there compared to Miami Beach. In Oslo, Norway, the costs might be $20/meal due to the additional consumption of wealth that has to take place as the ingredients are shipped so far and numerous other factors, which again, are highly time and place specific and only discoverable by local actors.
The restaurant owner discovers laborers/equipment/‘food distributors’ with the right prices to hopefully create a profitable order/restaurant. He places orders for the food/ingredients which can be seen as increasing in value as they are delivered to the restaurant, at a cost of course, that which must be consumed(fuel/food/etc.) by the driver/etc. The waiters begin producing the ‘meal experience’ by seating customers and taking the orders, the cooks increase the value of the ingredients by combining/cooking/transforming them and thus producing the meals, the waiters further increase the value of the meals by further transforming/transporting them from the kitchen to the table. The customers consume the meals, their internal order/cells will further consume them as they produce their heartbeats and all that is required to keep the cells/people/orders alive/etc. Customers traded money which will then go to the owner, cooks, waiters, suppliers, etc. and then traded with countless orders/businesses so that they too can consume/live. Each actor producing and consuming at different rates using prices and ‘economic calculation’ to ensure more production than consumption at the whole restaurant level, and at each individual level as the waiters and cooks manage their personal spending/lives. The food-supplying company uses the prices in its own relevant corner of the world to likewise organize itself profitably. Thus prices, and the vital information they convey, are what allow ‘economic calculation’, they allow cars/picadillo/stuff to be built from parts/beef/inputs, which themselves are built from other inputs, each input managed/ordered by entrepreneurs/brains with highly specialized time and place specific knowledge/skills, leading to never-ending conveyor belts of interlocking cycles of production/consumption, each moving/reordering matter in increasingly valuable ways. Since prices contain highly time/place specific information it is absurd to arbitrarily copy the price from one place and apply it to another.
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.” (Mises)
Who can anticipate the firing of trillions of neurons in billions of brains to predict/plan the resulting desires/ideas?
Socialist/Communist countries and governments in general also face an ‘incentive problem’. In free societies or the private sector in general, each mind/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/society. Socialist/Communist countries are national MONOPOLIES that lack the innovative/competitive incentives in free/capitalist/competitive societies/orders. If a superior car/idea is made by a company/order anywhere in the planet, every competitor/order in the planet MUST copy the innovation due to the public’s freedom to trade with and thus nourish the superior company/order/idea. Socialist/Communist/‘Public sector’/National bureaucracies get their wealth through taxation/compulsion so they have less incentive to be efficient and/or copy innovations. Central plans can’t work if people are free to not go along with them so they inevitably require compulsion/slavery. 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/superior ideas/change. 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/monopoly is obviously a criminal act. 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.” (Spencer’s essay, “Overlegislation” )
And finally Spencer describes the situation we currently find ourselves in:
“They listen with eager faith to all builders of political air-castles…and every additional tax-supported appliance for their welfare raises hopes of further ones. Indeed the more numerous public instrumentalities become, the more is there generated in citizens the notion that everything is to be done for them, and nothing by them. Each generation is made less familiar with the attainment of desired ends by individual actions or private combinations, and more familiar with the attainment of them by governmental agencies; until, eventually, governmental agencies come to be thought of as the only available agencies.” (Spencer’s essay “The Coming Slavery”, in audio)
So 1) the impossibility of economic calculation under Socialism/Communism, 2) the unproductive/wasteful incentives in such regimes/government and 3) the monopolistic nature of government should help one understand why Socialist/Communist regimes were/are always in socioeconomic chaos. The image below is one of our most powerful memes for explaining the difference between Socialist/Monopolistic orders (North Korea) and free/competitive/Capitalistic ones (South Korea)