Authored by Anthony Mueller via The Mises Institute,
The new “democratic socialists” want to make their followers believe that one could redistribute wealth and income and socialize a large part of the economy without harming production and productivity. They claim that a comprehensive control of the economy by the government would bring more justice and more prosperity. The democratic socialists want more planning and less market. Yet this postulate ignores that socialism does not fail by accident or circumstance. Socialism fails because it suffers from four fundamental design defects.
- First, socialism eradicates private property and markets and thus eliminates rational calculation.
- Second, socialism allows soft budgets, so there is no mechanism in place to discard inefficient production methods.
- Third, abolishing private property and replacing it by the state distorts the incentives.
- Four, the socialist system with its absence of private property and of free markets inhibits the economic coordination of the system of division of labor and capital.
The Importance of Market Prices
Socialism cannot bring prosperity because it destroys the market functions of private property. Under socialism, private ownership of the means of production no longer exists, and thus there are no market prices for capital goods available. Institutionally, socialism consists in abolishing the market economy and replacing it with a planned economy. By doing away with private property of the means of production, one wipes-out market information and valuation. Even if the socialist administration puts price tags on the consumer goods, and the people may own consumer goods, there is no economic orientation about the relative scarcity of capital goods.
Many supporters of socialism suppose that business management is nothing more than a kind of registration or simple bookkeeping. Vladimir Lenin believed that the knowledge of reading and writing, and some expertise in the use of the basic arithmetic operations and some training in accounting, would be enough for the conduct of business operations. The socialists promote engineering and science, but they believe that there is no need for the entrepreneur. The regime may spend heavily on education but when there is no entrepreneurial economy, the people will stay poor, nevertheless.
The Role of Scarcity
The socialists ignore scarcity. They assume that a plan could stipulate the allocation of goods and services according to needs and wants. Yet the planners must answer how such a plan should find its standards of valuation. Without prices and markets, there is no orientation about which factors of production are more and which are less valuable. The socialist planners have no knowledge of the costs of the production process. Without markets, the prevailing value structure remains unknown.
Supply in relation to want makes goods valuable. In a market economy, the relative prices show the degrees of scarcity. By observing the prices, the market participants receive the information that guides them to align their economic decisions to the market signals. The price system informs about relative scarcities. There is no need for a comprehensive system of detailed information about the origin and nature of the scarcity beyond the prices to make a rational decision. The price system reduces complexity for the individual decision maker to the single number of the price. In a market economy, the economic participants need only partial knowledge to act rationally. In capitalism, the motivation to gain profits and to avoid costs work as an incentive to behave rationally. In a market economy, the prices provide information and incentives simultaneously for the seller and the buyer.
All production faces the problem of an almost unlimited number of ways how to produce a good. One can manufacture a commodity with very different raw materials, technologies, and combinations of the production factors and in an endless variety of designs.
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Originally Posted by Zippyjuan
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