EKIP– Expert Club for Economics and Politics A Different Opinion
Millions were killed in the name of the socialist "kingdom of plenty", and even more were the fates marked by persecution, torture and camps. According to the well-known "Black Book of Communism", the victims of the hammer and sickle in the 20th century numbered 94 million - a staggering number, which becomes even more terrifying when we get acquainted with stories from the Cultural Revolution in China, the Volga famine of 1921 or today's North Korea.
Perhaps this is why even critics of the Soviet Union and socialism often fail to point out its complete economic bankruptcy, to the point that the father of the Chicago School, Frank Knight, declared that the USSR's problem was more political than economic. Therefore, on the eve of a date like September 9th, it is worth mentioning why socialism is economically impossible.
The problem of incentives
The most popular criticism of the socialist economic order is related to the distortion of economic incentives - also known as the "who will take out the garbage" problem. Who would do the heavy, difficult, or highly specialized tasks, since (at least in some socialist models) every worker should receive equal remuneration as part of the collective? Why, in the absence of private property, profit and loss, should the management of a company have an incentive to innovate and create more?
A good illustration of the principle is the story of the teacher and the average grades. To explain how incentives are distorted under socialism, the teacher promised to give all students the same average grades. After the first test, the result was A's - the uneducated were happy, the educated - not so much, because their work had gone to other people. In the second test, the class's grade became A's - some students were still pushing themselves, but the meaning of the efforts was starting to be lost. The final result of the exercise was a failure for the entire group.
Any attempt to "average" and "equalize" the results leads to demotivation of the entire group and wasting the potential of those who want and/or can do more.
The problem of knowledge
Nobel laureate Friedrich Hayek formulated the second major economic disadvantage of the socialist (and more precisely, planned) economy – the impossibility of using dispersed knowledge. Each person possesses information that is highly specific to the place and time they are in – how a certain machine works, what the residents of a given neighborhood are looking for, how the prices of those raw materials are moving, and so on.
This specific knowledge cannot be aggregated and transmitted to the central planning body in the socialist economy. Neither in terms of time (i.e. quickly enough to react to it), nor in a form suitable for reading it (an index of taste preferences in Shumen for summer 2012?). In this sense, the only ones who can create economic plans are the holders of this knowledge – the individuals. A planning body in a remote office cannot access the necessary information to report on in its five-year plans.
The problem with economic calculation
In fact, the most serious economic flaw of socialism was defined by the Austrian economist Ludwig von Mises in his famous 1920 article “ Economic Calculation in The Socialist Commonwealth.”
In short, Mises' thesis is as follows: in a socialist method of functioning of an economy, the main mechanism for directing economic decisions - the price system - does not function. The reason for this is that (at a minimum) the state owns all capital resources (land, manufactured goods, etc.), and the existence of only one owner prevents market exchange. From there, since capital goods have one owner and there is no exchange - we also do not have prices, which are the main reference point for economic agents for where and how much capital to invest. The price is a carrier of a huge amount of information - about what quantities of a resource are available and how much it is in demand - the lack of such knowledge, encoded in prices, leads to endless cycles of shortages or overproduction.
Even if they did not suffer from the other problems mentioned earlier in the article, without prices, central planners simply guess what, where, how and for how much should be produced. This is why the planned economy is practically a groping in the dark, leading to complete chaos. Murray Rothbard also explains how the Soviet Union did not collapse at its inception, since economic calculation was impossible for its prominent leaders. He emphasizes that the USSR was an island of socialism (and far freer than the theoretical models of the socialists themselves) among still functioning (relatively) market economies. This allows the use of reference prices from real markets (a fact confirmed by researchers of the planned economy), which are traded or “copied” from. No less important were the ubiquitous black markets – the so-called blat, where real, albeit unsanctioned, exchange took place.
And so on the mournful September 9th, it is good to remember that socialism and the planned economy are not only ideologies of robbery and death, but also economic fiction.
It is useful when presenting "Why Socialism Can't Work Economically?" to be aware of its theoretical basis.
It is useful when presenting “Why socialism can't work economically?” to present a truth about its theoretical basis.
From here the question arises: Why can't the BSP bring the country forward economically? It's just that communism and capitalism are two mutually exclusive things.
Incomplete, but true, as far as the Soviet model of "socialism" or also called "communism" is concerned. The problem, however, is that for socialism (as a theory) the main thing is not the denial of the market, but the distribution of income between the factors of production in a single commodity.
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And to put it in plain terms and in economic terms - Four main factors of production are involved in the creation of each good - raw materials, labor, capital (machines, equipment, technologies), entrepreneurship. The problem is that only one factor - entrepreneurship has captured and distributed sales revenue. It also directly collects losses, but then the subject simply disappears, and we are talking about a working economy, i.e. we can exclude the option with losses. In both cases, however, we have an internal disproportion, which, in addition to creating social tensions, also unbalances the economy as a whole.
In other words, the problem that so-called socialism must solve is in the model of distribution of income from a commodity between the individual factors of its production. And thereby improve the balance and potential of the market.
"The problem with socialism is that at some point you run out of other people's money"
Hmm, this practically makes sense of the theory of super-powerful elites: the planned economy. Because if they existed, we would have to be in their planned economy 🙂 Which is proof that they simply can't be that powerful (not that it's not clear, but it's just another one).