What Is Economic Socialism?
With the increasing popularity of radical political figures such as AOC and Bernie Sanders, I feel it increasingly necessary to articulate the reasons why socialism is a fundamentally flawed ideology.
I reject socialism not because I am one without compassion or wish for rich corporate leaders to indulge themselves with more money, but because the advocates of socialism ignore economic laws that have manifested themselves in reality and in theory. In this situation, I do not define socialism as government building roads or funding police stations. Rather, I define it as AOC or Sanders would:
The central planning of the economy.
Political advocates of socialism rely heavily on the state owning the means of production. The state dictating and deciding what needs and needs not be produced in the economy. But the fact of the matter is that centrally planned economies do not work. And additionally, capitalist economies work more efficiently in raising the standard of living.
What Is Economics?
Economics plays a huge role in political elections. You’ll often hear politicians go on about how they have caused the economy to flourish. You’ll hear buzz phrases like “I created millions of jobs”, “Or I’ve improved the economy more than President Obama”. But what precisely comes to mind when you hear the word economics?
Most will think of finance, budgeting, money, and jobs. But this is wrong. *Economics is simply the study of how scarce resources are allocated. *In a socialist economy, this happens from the top down. This sort of economic allocation is called
centralized planning. The bureaucrats and politicians at the top dictate prices and what they deem as necessary for the economy.
In a capitalist economy, economic allocation happens through all members of the market network. This is called
distributed planning. Essentially, knowledge of demanded items on the market are decentralized across all individuals that participate in the market. No one entity can track or determine what the market needs most. And academics and politicians are baffled by the idea that the economy cannot be rationally planned from the top down.
The role of prices illustrates the superiority of the capitalist system over the socialist one. Prices are not arbitrarily set for an item. Prices act as a signal for people to say how much they want things and how much they are willing to offer. As demand for an item increases, if prices are kept low, then the supply is diminished. In order to keep up with rising demand, prices are naturally raised so that they are allocated to those that desire it the most.
How Prices Function In A Distributed Economy
For example, let’s say that the demand for yogurt increases dramatically due to a scientific study attributing yogurt to a 10-year increase in life expectancy. The increase in yogurt sales signals to producers that more milk is needed to allocate towards yogurt. Let’s say that yogurt has 10x the demand that cheese and ice cream have, the scarce amount of milk available is allocated more towards yogurt then it is towards cheese and ice cream. This causes the prices of milk to increase. Subsequently, the allocation of living cows versus dead cows also increases, causing the cost of slaughtering a cow to increase. Because of the demand for more living cows and the rising price of dead cows- prices of leather belts, shoes, jackets, steak, hamburgers, baseball mitts and a host of other items increase. To take it further, the increase in the price of baseball mitts causes baseball game tickets to go up. Wow, that’s a lot to keep track of! And that’s only scraping the surface[1].
It is extremely complex to track the seen and unseen ramifications of shifting prices in an economy. But how a distributed market accounts for this is through prices. Prices help offset the low supply of items and create the right incentives for those who actually desire an item on the market. It happens in real time.
Could you imagine a bureaucrat who was tasked with the responsibility of setting prices for dairy, but failed to take into account baseball mitts, steak, hamburgers and leather boots? The price for these things would fail to reflect the demand of yogurt and subsequent shortages of these items would be rampant. Now imagine a bureaucrat that is responsible for setting prices for 3.8 million items. It is impossible. The economists of the Soviet Union attempted this and ended up with a massive surplus of moleskins, but a lack of bread[1].
And to address AOC’s statement that socialism in the U.S. would take on the form of what was democratically deemed to be “needed”, she fails to grasp the idea that the allocation of scarce resources is best done through price signals and not the whims of the democratic majority. The general populace does not economically know what everyone else wants. And to declare it by legislative fiats, would lead to disastrous shortages. Individuals participating in a market are best able to display their subjective needs by “putting their money where their mouth is.”
Central Planning Affects Supply And Demand
As articulated above, socialist economies own the means of production and attempt to set prices for millions of items. To look at how a centrally planned economy would deal with prices, take the example of rent control.
Let’s say the price for a studio apartment in San Francisco has risen to $2000 per month. Due to these “absurd” prices, the government steps in (due to popular demand) and arbitrarily sets the prices at $1500 per month. This is to ensure that “greedy” landlords don’t raise the price. But what are the effects of this? The lowered prices signal to college students and young kids that they should move out of their parent’s house. Movie stars and rich business men realize that they can afford to keep a summer home in San Francisco and a winter home in Hawaii. Soon the demand for apartments shoots up, but the prices do not adjust, leading to a diminished supply. Thus, the control of prices incentivizes individuals to enter a market when they normally wouldn’t[2].
Conclusion
This isn’t an exhaustive reason as to why I reject the tenets of socialism, but it is nonetheless a compelling one. Socialist economies can still attempt to set prices and allocate goods. In fact, we could get the most intelligent politicians in the world and have them attempt to run the economy. And perhaps it would work better than the Soviet Union.
But the argument here is not whether an American socialist economy would work better than the Soviet Union, but rather that the capitalist economy would do much more to raise the standard of living and respond in real time to adjusting supply and demands.
I don’t even argue for a complete capitalist economy here, because the fact of the matter is that in reality, most national economies are mixed economies. But what we have seen in the historical record is that when a nation leans more and more towards central planning, standard of living drops, poverty increases, and people starve. On the other hand, when a nation leans more towards a distributed planning system the opposite occurs[1].
I can sympathize with liberal movements that desire to restructure drug laws, protest against wars/foreign intervention, and angrily point out crony capitalists receiving their corporate welfare. The heart of the liberal philosophy is that we should pursue that which increases the welfare of all individuals around the world. In fact, I would say much of my political tendencies align with these classical liberal values. But the centralized planning of economies will in fact destroy the wealth that has been created from distributed systems and plunge society into a lower standard of living. And for this reason, I reject socialism and its illiberal tendencies.
[1] Basic Economics, Thomas Sowell, Chapter 1 The Role of Prices
[2] Basic Economics, Thomas Sowell, Chapter 1 Rent Control