Enjoying a wonderful book… and excellent primer on socialism and the free-market. The book is by Thomas J. DiLorenzo, and is titled, The Problem with Socialism. Here is an extended excerpt… I highly recommend the book:
…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.”
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.
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.” 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, and in his later 1949 treatise, Human Action.” 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. 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.
The pervasive rallying cry of socialists is “equality.” Capitalism creates too many inequities, they say. But they ignore the fact that all human beings are unique, and inequality is thus inevitable. The relentless socialist crusade for “equality” is not just a revolt against reality; it is nothing less than a recipe for the destruction of normal human society, as the Russian and Chinese socialists of the twentieth century, among others, proved. In the name of socialist equality they destroyed their economies, condemned hundreds of millions to poverty, and executed millions of dissenters. And even after all that, they never created anything remotely like an egalitarian society.
Democratic-socialist countries that have not gone to these murderous extremes have nevertheless been content to live off of the capital accumulated from limited or previous free markets in their countries.
Socialists are less concerned about equality before the law, or equal rights to liberty, than they are with material equality, which, of necessity, has to be forced upon society by the state. Rabbi Daniel Lapin, a clergyman who is also an economic writer and speaker, points out that anything made by God, whether it be humans or stones (which can range from small pebbles to glittering diamonds of infinite variety) is unique; while things made by man, like bricks, can be made uniform. The essence of the socialist enterprise is to use the coercive powers of government to turn us all into identical bricks.
The desire to turn unique human beings into identical socialist bricks explains why socialist regimes are often totalitarian—because it is the only way they can make a serious attempt to achieve their aims.
The socialist obsession with equality has always been at war with the division of labor and knowledge that comes naturally in a market or capitalist economy. Ludwig von Mises noted that “The fundamental social phenomenon is the division of labor and its counterpart, human cooperation,” which, in turn, is what leads to economic progress and development. The uniqueness of every human being—our differing physical abilities, mental abilities and interests, different aptitudes, preferences ad infinitum—mean that we naturally tend to specialize in something, to focus on what we do best.
In a market economy, this allows us to specialize in what we do best, and get paid for it, and then trade with other “specialists” for the goods and services we desire. An obvious consequence of this is that a capitalist economy creates an interconnected community that constantly strives to supply all of us with the best goods and services at the lowest price; it provides employment for people of all imaginable talents and abilities; it blows past subsistence economies (where one individual or family or village has to do everything itself); it creates wealth (which can support charity); and it encourages international trade, because not only are human beings unique, but so are their material and geographical resources. No government program, for instance, can ever change the fact that Saudi Arabia is a vast desert with huge supplies of oil, or that
the American Midwest contains millions of acres of some of the most fertile farmland on earth. The Saudis specialize in oil and sell it to Americans; Americans specialize in agriculture and sell food to the Saudis whose irrigation systems, as sophisticated as they are, still render agricultural production several times more expensive than what can be achieved by American farmers. The international division of labor, as much as a domestic division of labor, results in everyone becoming more prosperous. Another point is that the division of labor (and knowledge) has always spawned a different kind of human cooperation in the form of teamwork, for many tasks cannot be performed by single individuals. Hence, people tend to become specialists not only in some skill or trade, but also as members of a team that produces goods and services. The division of labor and the pursuit of profit encourage human cooperation.
In a market economy people are paid, and businesses earn profits (or incur losses) strictly according to how good a job they do in meeting consumer demand. A good definition of capitalism in this regard would be: “Give me that which I want, and I will give you that which you want.”
Inequalities of income are inevitable because of competition—some businesses and entrepreneurs do better than others. The key point, though, is that the market is fluid. Businesses can change or improve; workers can find more profitable enterprises or better ways to apply their skills.
To socialists, it is not just generic “inequality” that is wrong and has to be eliminated by government, there is also the so-called “Iron Law of Oligarchy.” This is the insight that in every organization or activity, a few people will typically emerge as the leaders or top producers. Thomas Jefferson called this the phenomenon of a “natural aristocracy.” We see it with “elite” athletes in professional sports; “top-of-the-chart” musicians and entertainers; Fortune 500 companies; lists of the top one hundred doctors, lawyers, or schools; and so forth. In a market economy, such “elite” individuals and institutions can demand higher wages or tuitions or whatever than the average. To most of us, there is nothing wrong with this. But socialists, and sometimes mere bureaucrats, often think differently.
The great H. L. Mencken noted that all governments, not just explicitly socialist ones, are enemies of the most energetic, productive, and motivated. In his words:
All government, in its essence, is a conspiracy against the superior man: its one permanent object is to oppress him and cripple him. If it be aristocratic in organization, then it seeks to protect the man who is superior only in law against the man who is superior in fact; if it be democratic, then it seeks to protect the man who is inferior in every way against both. One of its primary functions is to regiment men by force, to make them as much alike as possible and as dependent upon one another as possible, to search out and combat originality among men. All it can see in an original idea is potential change, and hence an invasion of its prerogatives. The most dangerous man to any government is the man who is able to think things out for himself, without regard to the prevailing superstitions and taboos.
- Thomas J. DiLorenzo, The Problem with Socialism (New Jersey, NJ: Regnery, 2016), 22-36,
