As
the tsunami of enthusiasm for socialism builds, it seems an
appropriate time to try to understand why socialism is ultimately
disastrous for every society that embraces it. Although the term
'socialism' is used to describe everything from a modest amount of
welfare to total government control of all productive resources,
metaphorically it is like cancer. Even a small tumor grows and
metastasizes and ultimately kills its host. Those that embrace
socialism are never satisfied until they are standing in line for a
loaf of bread.
In
this discussion, we will look at the problems of the 'socialism lite'
that is promoted and practiced in the Western Democracies, where the
government limits itself to redistribution, rather than the
totalitarian version where the government owns and controls all
productive resources. However, the full version is probably
ultimately inevitable since, as is pointed out above, all socialism
is unworkable and its proponents will resort to totalitarian control
as a last ditch strategy.
Part
of the lack of understanding in the U.S. of socialism's flaws is a
result of the fact that economics is not taught in the public school
system, and counter arguments are limited to citing historical
examples and cliches such as Margaret Thatcher's “The problem with
socialism is that you eventually run out of other people's money.”
This quote highlights another part of the problem - arguments against
socialism tend to be couched in terms of money. Unfortunately, money
is an abstraction that most people, including a lot of academics, do
not really understand. Those that do tend to argue in terms of
nuances and jargon that mean nothing to the general public.
It
is more insightful to look at socialism in terms of the actual goods
and services that proponents like to promise as 'free' or provided by
a socialist government. The current list includes 'free education'
over and beyond the current K-12 public school system, 'free
healthcare' over and above the current Medicare, Medicaid and the
like, and a liturgy of other freebies that already partially exist in
one form or another. But government financed K-12 education already
consumes the bulk of most local governments' budgets. Government
support for higher education has driven the cost of college to the
point that without some financial support most people cannot afford
to attend. And government involvement in healthcare has resulted in
skyrocketing costs that threaten to bankrupt even the Federal
Government, etc. All this seems to have been lost in the bleat for
more 'freebies'. But this again presents the problem in terms of
costs and money, and the pro-socialism forces just counter with their
cure-all mantra - we can just tax the rich to pay for everything.
The
first and foremost thing to think about in understanding why
socialism can't work is to to realize that, although the government
can steal the people's money, rich or poor, and can even create money
out of thin air, they do not produce more goods and services. They
can even steal non-money assets to redistribute, but again they
cannot add to the total goods and services available. Thus goods and
services that are transferred to the beneficiaries of the socialist
system must be taken from the rest of the populace. There is no net
benefit to the society as a whole. This inevitably must reduce the
total goods and services available since few will be inclined to
produce or provide if the fruits of their efforts with be stolen from
them. Saying it differently, you
can take away the money (from the rich) but can only take away a
minimum amount of goods and services from them. It's not like they
have giant stores of hard goods and services lying around.
The
temptation is again to believe that only the rich will be stolen
from, but this is a fallacy. Whereas the rich may have the most
'money', they only consume a small fraction of the total goods and
services available. In fact, most of their supposedly excessive
wealth is actually invested in capital goods, those factories and
other infrastructure that are necessary to produce the consumer goods
that the bulk of the populace want and need. The rich obviously only
account for a pittance of the education and healthcare services that
are at the top of the socialist's 'freebie' list, so virtually all of
those goods and services to be redistributed in the socialist's
schemes must come from the rest of the people. Putting it
differently, the impact on the available goods and services in the
marketplace by the actual consumption by the rich is negligible. If
any attempt is made to redistribute the capital goods part of the
rich's wealth, the obvious result has to be less production and less
total goods available. Once you kill the goose, there are no more golden eggs.
Returning
to money arguments, let us just point out that neither taxation nor
inflating the currency (creating money out of thin air) create more
goods and services, as is discussed above. In fact, all such schemes
are almost guaranteed to reduce the available goods and services, so
any short term benefit to those hoping to gain from the 'freebies'
will be very brief if not totally nonexistent. Increasing tax rates
will decrease investment in capital goods as well as tax revenue, as
has been demonstrated several times, and even a tax rate of 100% just
guarantees that production of goods and services will cease.
Lastly,
creating money to fund socialist schemes just reduces the value of
existing dollar denominated savings such as bonds and CDs, and even
the money under the mattress, but again does not add to the goods and
services that such savings hope to buy in the future. Thus anyone
who saves will find the proverbial cupboard bare when they try to
cash in their savings.
Once
again, the moral is clear. Socialist schemes cannot share the
wealth, only the poverty. Or, in other jargon, there ain't no such
thing as a free lunch.
Here is a pretty good layout for why socialism will ultimately fail. In a nutshell you reduce the "rich's" ability to create goods and services and expand the demand at the same time. The demand rises dramatically for the "free" goods and services yet those who actually create these things are limited and "penalized" thus slowing and lessening the items that are now in much greater demand.
ReplyDeleteHere is a pretty good layout for why socialism will ultimately fail. In a nutshell you reduce the "rich's" ability to create goods and services and expand the demand at the same time. The demand rises dramatically for the "free" goods and services yet those who actually create these things are limited and "penalized" thus slowing and lessening the items that are now in much greater demand.
ReplyDeleteIn scanning your post, I classified it as a version of the "incentive" defect in socialist systems. If that's correct, then I think you missed the irrefutable defect that Mises identified in his 1922 book, "Socialism," and that is the coordination problem.
ReplyDeleteBy definition, socialist systems have common ownership of the means of production. When the means of production are NOT privately owned, there is no such thing as market-derived prices for goods, services or factors of production. Markets only exist when owners (private owners) have profit-loss decisions.
In any economy above the complexity of a parlor game, it becomes increasingly difficult to know the relative value of heterogeneous products. For example, how does anyone know that, at this moment, there are too many truck tires, not enough truck engines, and adequate numbers of other components to handle, at this time, the sudden bumper-crop of potatoes being harvested? In a socialist system, a committee decided a year ago on the number of each products to make. But in a market-driven one, because engines are in short supply, the market price rises, signalling that firms making them should divert resources to that. Only a market system can, via the moment-by-moment changes in price signals, coordinate to meet the always-changing requirements. Socialist systems would leave the potatoes rotting in the fields...and in practice that's exactly what happened. Socialism is phenomenally wasteful, an inversion of its proponents' claims that "profit" is a waste. Without the signal of profit and loss, no one really knows how much of anything is the right amount. Only private ownership and a market can yield price signals to coordinate the astonishing heterogeneity of an economy above the level of a Stone Age.
I might also add that your observation about adding money (or worse, these days, credit-money) to an economy doesn't add products to the marketplace was best characterized by Jean Baptiste Say, and is thus called "Say's Law."
ReplyDelete"In order to consume, you must first produce." In other words, if you want to enter the market and obtain shoes from the cobbler, you must first have something in hand to trade (or money, if barter is given way to a money-economy.) Those who enter without having first produced are literally con-artists who are "spending" counterfeit coins.
This gets incredibly confusing to people today with credit systems. If Able lends Bob $100 so Bob can buy a saw, that's not inflationary. If Able is a banker, and he creates that $100 simply as an entry on his ledger, and lends it to Bob who spends it at the saw store, and the saw store deposits it with Able at Able's bank, then this is NAKED counterfeiting. The ability to enter the market and buy the saw was created by fiat, no actual marketable product was added to the marketplace, a saw was simply consumed, making the market overall poorer. That Able then charges "rent" (interest) on a "product" that was created out of thin air is pure con-artistry. Thus is modern banking a huge scam.