The Real Reason Why Socialism Doesn’t Work

Mises Institute Fellow Jonathan Newman writes about Ludwig Von Mises’ devastating critique of socialism for its lack of pricing (bold emphasis added):

With private ownership of the means of production, entrepreneurs hire laborers and purchase capital and natural resources based on their contribution to the productive process as measured by consumers’ willingness to pay for the final output. Anticipated revenues from the sale of output guide production and investment decisions. Any deviation from the consumers’ wishes results in lower profits or even losses.

Under socialism, in which the private ownership of the means of production is abolished, there can be no meaningful prices of the inputs to production processes. Production decisions are merely “groping in the dark,” as Mises put it in Economic Calculation in the Socialist Commonwealth. Mises showed that there is no forward-looking way to compare anticipated revenues to the costs of production and there is no way to retrospectively measure the success of any production process. Economic calculation, essential to any growing and flourishing market economy, is impossible.

I’ve written previously on why socialism doesn’t work using rather simple analogies, but I think pointing out the lack of pricing is just as effective and easy to understand.

Socialism doesn’t work because it rejects this fundamental aspect of a functioning market economy.

If you can’t set prices, you can’t determine the actual value of products or goods, and therefore you can’t prioritize where or how to allocate resources. The exchange of goods and services cannot occur in any meaningful way.

Pricing is essential to the natural market regulation of supply and demand.

What most people think of as “socialism” is in reality an economic model whereby the government meddles in private sector industry via regulations, but does not actually manage the means of production the same way it does in truly communist countries. This allows prices to be set, though they can still be manipulated and warped as we saw with the dotcom bubble, the housing bubble, and now the student loan bubble.

Socialism is just a form of economic statist LARPing in which we are forced to pretend things are worth as much as our wise overlords say it is.

In his piece Newman starts off talking about the Federal Reserve, which engages in quantitative easing and artificial credit.

Both of these are a form of statist LARPing within the economy.

Unfortunately, people can pretend indefinitely but the market does not, which is why you get shortages whenever you implement price controls. And with the boom always comes the bust.

The market will always correct itself sooner or later.

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3 Responses to The Real Reason Why Socialism Doesn’t Work

  1. “we are forced to pretend things are worth as much as our wise overlords say it is.”

    This is the dream of most intellectuals I think. They are so frustrated that no one recognizes how valuable they are to society, because of how typically lazy, self centered, and generally unproductive they are, that they dream feverishly of imposing their value scale or (Vision) on the whole world even if a few (hundred) million people need their lives shortened to accomplish it. As Lenin said, one death is a tragedy; a million deaths is only a statistic.

    Have you heard of Peter Joseph and his Zeitgeist movement? They advocate a system of world government run on what they call resource based economics where scientists (presumably) would catalog all remaining quantities of resources on Earth, and some super computer would then determine the ‘prices’ of goods and services on the market. There would be no money. We would all just ‘get’ what we need from 3d printers and vertical farms run by automation and controlled by the said super computer, which could determine the true value of things supposedly much better than we flawed humans. Somehow they come to the conclusion that this would be freedom.

    Sounds more like a backdrop to a good dystopian sci-fi novel rather than an economic system in the real world to be forced on real people. They are kind of on the bandwagon of the utopian post-scarcity cult. An interesting version of new school socialism, except they will deny that they are socialists, even though Peter is clearly a Marxist. When I was first becoming convinced of libertarianism I ran into this guy on Youtube, watched his movie, and thought he was a force to be reckoned with, even if I disagreed with him on nearly everything. Now I think we liberty folks have much more to fear from the MMT (modern monetary theory) crowd. Sanders had one as his economic advisor to his presidential election campaign.


    • The Question says:

      Sounds more like a backdrop to a good dystopian sci-fi novel rather than an economic system in the real world to be forced on real people.

      Ah! Don’t tempt me! I have a bit of a love-hate relationship writing science fiction. 🙂


  2. liberty says:

    There was a time when Americans believed in freedom.

    The US is dying from a million cuts. Part of the reason the USA is a nanny police state now is that whenever there is a problem, the kneejerk reaction in the US is to call for a new law.

    Nanny state laws are not the best solution, however. Nanny state laws lead to more laws, higher fines, and tougher sentences. Thirty years ago, DWI laws were enacted that led to DWI checkpoints and lower DWI levels. Seatbelt laws led to backseat seatbelt laws, childseat laws, and pet seatbelt laws. Car liability insurance laws led to health insurance laws and gun liability laws. Smoking laws that banned smoking in buildings led to laws against smoking in parks and then bans against smoking in entire cities. Sex offender registration laws led to sex offender restriction laws and violent offender registration laws.

    Nanny state laws don’t make us safer, either. Nanny state laws lead people to be careless since they don’t need to have personal responsibility anymore. People don’t need to be careful crossing the street now because drunk-driving has been outlawed and driving while using a cellphone is illegal. People don’t investigate companies or carry out due diligence because businesses must have business licenses now.

    The main point of nanny state laws is not safety. The main purposes of more laws are control and revenue generation for the state.

    Another reason laws are enacted is because corporations give donations to lawmakers to stifle competition or increase sales.

    Many laws are contradictory, too. Some laws say watering lawns is required, while other laws say watering lawns is illegal.

    Many nanny state laws that aim to solve a problem can be fixed by using existing laws. If assault is already illegal, why do we need a new law that outlaws hitting umpires?

    Nanny state laws are not even necessary. If everything was legal would you steal, murder, and use crack cocaine? Aren’t there other ways to solve problems besides calling the police? Couldn’t people educate or talk to people who bother them? Couldn’t people just move away? Even if assault was legal, wouldn’t attackers risk being killed or injured, too?

    Jail or not, you need to live with your conscience.

    If there is no victim, there is no crime.

    We don’t need thousands of laws when we only need 10.

    Freedom is not just a one way street. You can only have freedom for yourself if you allow others to have it.

    Should swimming pools be banned because they are dangerous? Hammers? Bottles? Rocks? Energy drinks? Lighters? Pillows?

    People think crime magically goes away when something is outlawed, but there are still murders even though it’s illegal.

    Control freaks might get angry when a neighbor owns three indoor cats, but what did the neighbor take from them? Why should this be illegal?

    Is outlawing cats something a free country should do? Doesn’t banning everything sound like the opposite of freedom?

    Instead of getting mad at people who like liberty, why don’t people realize that freedom goes both ways?

    If you allow others to paint their house purple then you can, too.

    If you allow others to own a gun then you can, too.

    If you allow others to swear then you can, too.

    If you allow others to gamble then you can, too.

    Who wants to live in a prison?

    Think. Question everything.
    [The Question: Great observations. Thanks for commenting!]


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