EKIP– Expert Club for Economics and Politics A Different Opinion
Jonathan Newman, Mises Institute
A great wave of anti-market and pro-socialist opinions has flooded the media in recent years. In most cases, these anti-markets make no distinction between state-sponsored organizations like the IMF and real markets. But that doesn’t matter, because the articles are often populist and vaguely worded – deliberately framed that way. Ultimately, it all comes down to one message: socialism works and is a better system than capitalism.
While most populism comes from the left, the right is not innocent, as it seems to be primarily concerned with promoting its own version, which clearly does not involve protecting markets. “Build bigger walls at the border,” for example, is not a satisfactory response to “Profits only bring evil!” Instead of resorting to such hollow populism or “ read Mises” statements, it should be shown once again that socialism – even with well-intentioned political leaders – is impossible and leads to disastrous consequences.
The need for profit, prices and entrepreneurs
Socialism is a system in which ownership of the means of production is collective (i.e., a state monopoly). It calls for the abolition of private ownership of the factors of production. Wages and profits are two sides of the same coin, and according to socialism, profits should be zero. The inherent theoretical problems of socialism arise from its formulation, not from the peculiarities of its implementation. However, supporters of socialism define the concept of "collectivity" as the absence of exchange of factors of production. Without exchange, there can be no prices, and without prices, there is no way to calculate the costs of production.
In a free market economy, the prices of factors of production are determined by their use in producing goods and services that consumers want. These same factors of production earn a profit that depends on their marginal product, and because each worker has some comparative advantage, there is a piece of the pie for everyone. If technological developments make some factors more productive, or if education and training make a worker more productive, then their prices and wages can be raised to a new and higher level of marginal product. An entrepreneur would not want to hire or buy any factor at a price that exceeds its marginal product, because the entrepreneur would make a loss.
Business losses are much more important than many people realize. Losses indicate that the resources used to produce a product are valued more highly in the market than what they produce. Losses indicate that value has been destroyed. Profits indicate that the opposite has happened. They are a sign that economic growth has occurred and wealth has been created. A profitable level of production is one at which the inputs that go into the production of consumer goods cost less than what consumers are willing to pay for those same consumer goods. That is, to consumers, the final product is worth more than the factors that went into its production. In other words, value has been added, not destroyed.
It follows that profits and losses are more than just important incentives or disguises in a conspiratorial system of the capitalist class; they are the only way to know whether a given production process has created or destroyed value and, accordingly, wealth. Under socialism, this system is absent. Under socialism, there is a single owner who does not bid to transfer the factors of production from one production line to another. Therefore, no one can know which use of the factors of production is better than another in a particular economic context. No one knows what to produce and how much to produce. This is economic chaos.
Without markets, we don't know what or how to produce.
Profits and losses guide and correct entrepreneurs in the process of producing products that they expect consumers to want. Without this information, including the costs of production, entrepreneurs cannot engage in economic calculations—calculating the difference between future revenues and costs of production to understand whether they are creating or destroying value.
In this case, workers are hired to work in areas where they do not have a comparative advantage. Farmers are sent to factories, and tailors to mines. Workers are on the wrong production lines and have the wrong tools for that production.
The Polish film “ Brunet Will Call” satirizes similar situations with consumer goods and means of production in the most unusual places. A butcher pulls a vehicle’s clutch cable from his freezer and gives it to the protagonist, who pays for it with information about the location of someone’s newborn twins’ stroller (in the flower shop).
So the failure of socialism does not depend on the culture, time, or place of the victims. Socialism is flawed at its core: “collective” ownership of the means of production. However, in practice, the theoretical problems of socialism give way to civil unrest that clashes with state power and results in more deaths than any war.
Production quotas must be imposed in the absence of a profit motive for production. Chaos will still reign, even in cases where workers do not lie about meeting their quotas. For example, if in nail production the quota is based on the number of nails produced, workers will produce many small, unusable nails. A weight-based quota will encourage workers to produce huge, again unusable nails – a situation ridiculed by this cartoon in Crocodile magazine in 1960.
Endless lines of people swarmed across the USSR, filled with people looking for shoes, even though shoe production in the USSR exceeded that in the U.S. The problem was that all shoes were too small, as their manufacturers did not (and could not) anticipate the sizes that consumers were looking for.
The Awakening of Socialism
Some of the cases are funny, others not so much. About seven million people died of starvation in the USSR in 1932 and 1933 alone. The authors of The Black Book of Communism (1999) estimate that communist and socialist regimes around the world were responsible for the deaths of nearly 100 million people. That's over 200 times the number of deaths by the United States in World War II.
Even today in Cuba the average wage is about $20/month. In North Korea, civilians are routinely arrested simply for watching South Korean television.
When people are hungry and miserable, the state cannot survive if people know that others are better off. It uses propaganda, disinformation, and censorship to make its already captive citizens even more confused and submissive.
This call for socialism in 2015 is surprising – if the impossible economic calculation and the astronomical number of victims haven't made the left turn its back on socialism, then I don't know what could.
Translated by Daniel Angelov, originally published here.
Original publication in English.
