The True Reason Socialism Can Never Be Sustained.

Totalitarian Socialism as an economic system is dead. The economics of Socialism are the economics of failure. Everybody knows this. We saw proof of this on December 26th, 1991, with the final collapse of the Soviet Union. For over 100 years, Marxism-Leninism had been a serious member of academic and political discussion; within the year, professors of Marxist Studies throughout the West were either canned or forced into other studies, and Marxoid politicians were forced into the fringe. Everybody understands that there are deep and insurmountable flaws within the Socialist Planned Economy, yet very few actually understand why a Socialist Planned Economy is impossible and cannot function sustainably.

The oft-repeated platitude goes something like this: “Communism would be perfect, but it doesn’t work because people are liars / greedy / selfish / [insert your favorite vice here]”. This is a roundabout acknowledgment of the Incentive Problem of Socialism. The Incentive Problem is not what I am most concerned with talking about today. Everyone has heard the Incentive Problem a zillion times. Everyone is probably sick of hearing about it (although this does not make it any less valid.) Nevertheless, we will take a moment to give it due examination.

If everyone, as Karl Marx wistfully wrote, “gives according to his ability” but only “takes according to his need”, then what incentive is there for anyone to do undesirable or difficult work? The famous question asked: “…But who will take out the garbage?” From the beginning, even hardcore revolutionary Socialists acknowledged the obvious existence of this problem.

Their response was that the upstart Communist societies would mold future generations into the new “Socialist Man”. Through careful cultural and societal conditioning, future generations would be crafted into tireless servants of the Collective, selflessly sacrificing personal gain for the general welfare. The popular Che Guevara-style solution for this was to replace material with moral incentives; through bestowing honors and titles, shiny medals emblazoned with “Hero of the Socialist Revolution” and so forth. Did any of this work? I don’t think so. We saw proof of this on December 26th, 1991. We saw proof in Tiananmen Square.

Let us, for the sake of argument, say that they were indeed successful; that Socialist nations were able to craft the new “Socialist Man”. New generations were dedicated to the Collective and State, robotic workers willing to work as hard as necessary for little to no pay-off. Reductio Ad Absurdum, this is conceivable. This would seem to solve the Incentive Problem. Perhaps there is hope for the Great Socialist Dream after all.

Not so fast. There is another grave problem. Even if all the workers have shovels in hand, ready for orders from the Central Planning Board…. How will the Planning Board know what to tell them to do?

This is the Economic Calculation Problem of Socialism. It was first articulated by the late economist Ludwig Von Mises in a famous 1920’s article, and has bedeviled Socialists ever since. The Economic Calculation Problem is the true reason why totalitarian Economic Socialism has not been, and never will be, sustainable. I will try to explain the problem in as simple terms as possible.

First, let us examine the Free Market. On the Free Market, private individuals or groups of individuals own the means of production; for example, an industrial factory that produces tractors. To build the tractors, the owners must calculate what resources they need, and how much should be utilized: materials, laborers, electricity, land, facilities, you name it. They calculate this based on how much it will cost to obtain said resources against how much they think they can sell the end product for. The key factor lies in the profit. If the utilization of purchased resources in production can produce a tractor for less than it will be valued on the consumer market, this is a signal that the owner has allocated his resources efficiently, and that he has found a consumer need he can fill. This tells him how many tractors he should build, and who he should sell them to. This process is true as well for the individuals that sold resources to the tractor-producer: the metal workers sell him metal for a profit, the laborers work for what they consider a profit (otherwise they would not voluntarily work), whoever else is involved gains a profit (if they allocate wisely) and knows they fill a market necessity.

All of this occurs between distinct and sovereign buyers and sellers, who compare their own subjective value scales against the scales of others (prices) to make voluntary exchanges. By knowing prices and profit, individuals have a standard by which they can allocate their resources efficiently. If a monetary loss is endured, individuals know they erred in their allocation of resources. The sum of these interactions, the collective knowledge decentralized throughout millions of buyers and sellers in a complex and developed economy of capital goods, produces the Free Market economy.

Now let us examine the Socialist Economy: In a classical Socialist Economy, a lá the USSR and the early People’s Republic of China, the Collective owns the means of production, again we’ll say a tractor factory. Whether the Collective is some kind of organic community or merely the State is irrelevant to us at this time. The important thing is that at some point, a person or group must plan production and make decisions. The Collective owns the means of production, and the fruits of labor are equally apportioned to the laborers involved in production. Keep in mind that a classical Socialist system eschews profit motive in favor of “production for need”. Therefore, the tractor is not shipped on basis of profit but on basis of where the Planners think it is needed. Perhaps someone will say “They need a tractor in Yakutsk”. The Planners will attempt to measure the necessity of a tractor in any given location, and decide if one should be produced. This is how they will determine who will receive tractors, and how many should be produced.

There are no genuine “buyers” or “sellers” in this system. Early Socialist nations did not use money, such as during Lenin’s period of “War Communism” in Russia, but this produced downright chaos which I regrettably do not have time to discuss here. In Socialist nations that do utilize money (as they all have eventually done), a “buyer” paying $10,000 for a tractor from the “seller” is not really a sale at all, as both parties ARE mere agents of the Collective on the bottom line, which owns all means of production. All transactions are intra-Collective. Ultimately speaking, the Collective sells a tractor to itself for $10,000. This may sound silly, because it is. Any purchase is nothing more than a shuffle of assets within the Collective. (NOTE: You may wonder if different Collectives might possess their own sovereign means of production. That would lead us to discuss Anarchist Communism/Syndicalism, which are different stories for a different day.)

The implications of this carry massive economic baggage, which may not be readily apparent on the surface. Consider this: The Free Market tractor entrepreneur knew if he was allocating his resources efficiently by measuring profit. He could count the costs of his resource inputs, calculate a price, and measure profit through sales. This way, he could adjust the process of production however he sees necessary to make the process efficient and sustainable.

Now consider the Socialist Planners: How do they know if they are allocating resources efficiently? By what standard can they examine their production process and know that they are utilizing their resources in the most efficient and sustainable way? How can they know how many should be built for the most effective allocation of resources? You might pooh-pooh this as a short bridge to be crossed when we get to it, but we aren’t restricted to just a single firm in this thought experiment; we’re talking about an economy of widely varying industries in different orders of production. How can the metal producers know how much alloy should be forged, or the Power Company know how much power can be efficiently supplied? Answer: They cannot rationally decide. Any decision they make will be mostly arbitrary and haphazard.

It might seem surmountable: The farmers tell the Planners they need a tractor; the Planners tell the tractor factory to make a tractor; the tractor factory tells the metal workers they need some metal; the metal workers tell the miners they need some ore, and so on. Practicality issues aside, this still does not answer the question: How does ANY of them know if they are efficiently allocating resources? Resources are scarce. This is a universal truth. If resources are not efficiently allocated, eventually the gears of the economy grind to a halt as resources disappear. Without the feedback of the market system, they can never rationally make these decisions.

Any decision will be largely arbitrary. Socialist nations can only get an idea of real prices by examining prices in Free Market societies, otherwise they would be unequivocally lost on making price decisions. Some decisions may be less bad than others, but when we are talking about developed industrial economies such as the USSR or the USA, even a few errors in the higher stages of production can have exponentially larger impacts. That is why Socialist nations are famous for long bread lines, shortages of necessities across the board, regular power failures and/or power rationing, mazes of idle and empty factories, blocks upon blocks of dilapidated and abandoned housing projects… Without the ability to rationally allocate resources, the Socialist Economy can never approach efficiency and cannot be sustained.

Without any Free Enterprise, risk, profit and loss, there can be no rational prices; with no rational prices, there can be no economic calculation. Thus spoke the Economic Calculation Problem. This problem has never been overcome. Throughout the history of Socialism, apologists have attempted to either muddle the arguments with obscure appeals to morality and social justice, or ignore these questions altogether.

The only real attempt to overcome the Economic Calculation Problem was by Polish economist Oskar Lange, who developed the idea of “Market Socialism” in the 1950’s as a way to supposedly mimic the actions of the Free Market economy on the small scale while still allowing Planners to retain overall control. To Socialists, this was the long-awaited answer to the problem. In fact, some even said it would outperform the Free Market, as “Market Socialism” would allow Central Planners to make quick market interventions and supposedly sharpen the socialist market in ways the Free Market never could allow.

Market Socialism was implemented throughout the USSR and Eastern Bloc. This was, of course, all an exercise in failure. I will write an article dissecting the finer points of Market Socialism at some point, but the important thing to know is this: you cannot have a Free Market on a small scale with Central Planners still pulling strings from on high. It is still a Planned Economy, and suffers from the same Economic Calculation Problem. Once again… we saw proof of this on December 26th, 1991.

I try to avoid spending too much time expounding on classical State Socialism. Everyone already knows it is a failure and that its promises are all fraudulent. However, it is important for people in these modern times to understand these ideas. Recall all those professors and politicians I mentioned in the first paragraph… they didn’t just disappear with the fall of the Soviet Union. After the Great Collapse, a subtle shift was made. Influential people who formerly supported the notions of a Planned Economy in the open now admit the productive power of Capitalism and the Free Market, but insist that the Free Market be controlled, regulated, and manipulated by the well-meaning and supposedly omniscient political and bureaucratic class through price controls, tariffs, quotas, restrictive labor regulations, whatever action suits their agenda-of-the-day. These are all elements of a Planned Economy. Remember that the more Centralized Planning occurs in an economy, the more inefficient the processes of production become.

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