Ideas On Liberty OCTOBER 2004 Why Socialism Is “Impossible” by Richard M. Ebeling n the nineteenth century, critics of social- between work and reward that necessarily ism generally made two arguments against exists under a system of private property. the establishment of a collectivist society. What incentive does a man have to clear the IFirst, they warned that under a regime of field, plant the seed, and tend the ground comprehensive socialism the ordinary citizen until harvest time if he knows or fears that would be confronted with the worst of all the product to which he devotes his mental imaginable tyrannies. In a world in which all and physical labor may be stolen from him the means of production were concentrated at any time?2 Similarly, under socialism man in the hands of the government, the individ- would no longer see any direct benefit from ual would be totally and inescapably depen- greater effort, since what would be appor- dent on the political authority for his very tioned to him as his “fair share” by the state existence. would not be related to his exertion, unlike The socialist state would be the single the rewards in a market economy. Laziness monopoly provider of employment and all and lack of interest would envelop the “new the essentials of life. Dissent from or disobe- man” in the socialist society to come. Pro- dience to such an all-powerful state could ductivity, innovation, and creativity would mean material destitution for the critic or be dramatically reduced in the future collec- opponent of those in political authority. Fur- tivist utopia.3 thermore, that same centralized control The twentieth-century experiences with would mean the end to all independent intel- socialism, beginning with the communist lectual and cultural pursuits. What would be revolution in Russia in 1917, proved these printed and published, what forms of art critics right. Personal freedom and virtually and scientific research permitted would be all traditional civil liberties were crushed completely at the discretion of those with the under the centralized power of the Total power to determine the allocation of soci- State. Furthermore, the work ethic of man ety’s resources. Man’s mind and material under socialism was captured in a phrase well-being would be enslaved to the control that became notoriously common through- and caprice of the central planners of the out the Soviet Union: “They pretend to pay socialist state.1 us, and we pretend to work.” Second, these nineteenth-century anti- The defenders of socialism responded by socialists argued that the socialization of the arguing that Lenin’s and Stalin’s Russia, means of production would undermine and Hitler’s National Socialist Germany, and fundamentally weaken the close connection Mao’s China were not “true” socialism. A true socialist society would mean more free- Richard Ebeling is the president of FEE. dom not less, so it was unfair to judge social- 8 Why Socialism Is “Impossible” ism by these supposedly twisted experiments can be determined only through knowing in creating a workers’ paradise. Further- what people would be willing to pay for more, under a true socialism, human nature these resources on the market, given com- would change and men would no longer be peting demand and uses. motivated by self-interest, but by a desire to selflessly advance the common good. Prices Encapsulate In the 1920s, 1930s, and 1940s, the Aus- People’s Valuations trian economists, most notably Ludwig von Mises4 and Friedrich A. Hayek,5 advanced On the free market, private entrepreneurs a uniquely different argument against a express their demand through the prices socialist society. They, Mises in particular, they are willing to pay for land, capital, accepted for the sake of argument that the resources, and labor. The entrepreneurs’ bid- socialist society would be led by men who ding is guided by their anticipation of the had no wish to abuse their power and crush demand and prices consumers may be will- or abrogate freedom, and further, that the ing to pay for the goods and services that can same motives for work would prevail under be produced with those factors of produc- socialism as under private property in the tion. The resulting market prices encapsulate market economy. the estimates of millions of consumers and Even with these assumptions, Mises and producers concerning the value and oppor- Hayek devastatingly demonstrated that tunity costs of finished goods and the scarce comprehensive socialist central planning resources, capital, and labor of the society. would create economic chaos.6 Well into the But under comprehensive socialist central twentieth century, socialism had always planning, there would be no institutional meant the abolition of private property in mechanism to discover these values and the means of production, the end of market opportunity costs. With the abolition of pri- competition by private entrepreneurs for vate ownership in the means of production, land, capital, and labor, and therefore the no resources could be purchased or hired. elimination of market-generated prices for There would be no bids and offers express- finished goods and the factors of production, ing what the members of society thought the including the wages of labor. resources were worth in their alternative Yet without such a competitively gener- employments. And without bids and offers, ated system of market prices, Mises argued, there would be no exchanges, out of which there would be no method for rational eco- emerges the market structure of relative nomic calculation to determine the least-cost prices. Thus socialist planning meant the end methods of production, or the relative prof- of all economic rationality, Mises said—if by itability of producing alternative goods and rationality we mean an economically effi- services to best satisfy the wants of the con- cient use of the means of production to pro- suming public. It may be possible to deter- duce the goods and services desired by the mine the technologically most efficient way members of society. to produce some good, but this does not tell Given that nothing ever stands still—that us whether that particular method of pro- consumer demand, the supply of resources duction is the most economically efficient and labor, and technological knowledge are way to do it. continually changing—a socialist planned Mises explained this in many different economy would be left without the rudder of ways, but we can imagine a plan to construct economic calculation to determine whether a railway through a mountain. Should the what was being produced and how was most lining of the railway tunnel be constructed cost-effective and profitable. with platinum (a highly durable material) or Neither Mises nor Hayek ever denied that with reinforced concrete? The answer to that a socialist society could exist or even survive question depends on the value of the two for an extended period of time. Indeed, materials in their alternative uses. And this Mises emphasized that in a world that was 9 The Freeman: Ideas on Liberty • October 2004 only partly socialist, the central planners which to judge whether socialist central would have a price system to rely on by planning is a viable alternative to the free- proxy, that is, by copying the market prices market economy. Without market prices in countries where competitive capitalism there can be neither economic calculation still prevailed.7 But even this would only be nor the social coordination of multitudes of of approximate value, since the supply-and- individual consumers and producers with demand conditions in a socialist society their diverse demands, localized knowledge, would not be a one-to-one replica of the and appraisements of their individual cir- market conditions in a neighboring capitalist cumstances. society. Socialist and even some pro-market critics Central Planning versus of Mises have sometimes ridiculed his sup- Rational Planning posed extreme language that socialism is “impossible.”8 But by “impossible” Mises The pricing system is what gives rational- simply meant to refute the socialist claim in ity—an efficient use of resources—and direc- the nineteenth and early twentieth centuries tion to society’s activities in the division of that a comprehensive centrally planned labor, so that the means at people’s disposal economy would not merely generate the may be successfully applied to their various same quantity and quality of goods and ser- ends. Central planning means the end to vices as a competitive market economy, but rational planning by both the central plan- would far exceed it. Socialism could not cre- ners and the members of society, since the ate the material paradise on earth the social- abolition of a market price system leaves ists had promised. The institutional means them without the compass of economic cal- (central planning) that they proposed to culation to guide them along their way. achieve their stated ends (a greater material In the Soviet Union, for example, the older prosperity than under capitalism) would criticisms of collectivism were verified. The instead lead to an outcome radically oppo- Total State did create a cruel, brutal, and site to what they said they wanted to murderous tyranny. And the abolition of pri- achieve. vate property resulted in weakened and Mises emphasized that a socialist society often perverse incentives, in which individ- also would lack the consumer-oriented activ- ual access to wealth, position, and power ities of private entrepreneurs. In the market came through membership in the Commu- economy, profits can be earned only if the nist Party and status within the bureaucratic means of production are used to serve con- hierarchy. sumers. Thus in their own self-interest, pri- In reality, the rulers of the communist vate entrepreneurs are driven to apply their countries had other ends than that of the knowledge, ability, and “reading” of the material and cultural improvement of those market’s direction in the most effective way, over whom they ruled.