by James R. Otteson
During the twentieth century, a succession of economists believed they had decisively refuted socialism as a system of political economy. From Ludwig von Mises to Friedrich Hayek, and from Milton Friedman to James Buchanan, they argued that centralized economic planning could not succeed in allocating our limited resources well or efficiently, and would inevitably lead to shortages, oversupplies, and decreasing prosperity. They took the failures of attempted socialist economies during the twentieth century as evidence that they were right.
And yet, increasingly many people today support centrally planned economies, and even claim to support socialism itself. Why? Did the economists miss something? Why did they believe that socialism would not work?
Over the last 100 years, over two dozen countries have attempted to implement socialist economies. The list includes not just the Soviet Union, Cuba, and North Korea, but Yugoslavia, Albania, Poland, Vietnam, Bulgaria, Romania, Venezuela, Somalia, Ethiopia, Cambodia, and many others.1 Countries in nearly every continent, with virtually every climate represented, with varying histories, cultures, languages, and traditions have tried—and consistently failed. In every case, the economies declined or collapsed, suffered reductions in prosperity and growing poverty, and in most cases eventually abandoned the attempts. Of course, the depressing results were not just in declining wealth: some 100 million innocent people have been killed by their own governments in the name of socialist, communist, and Marxist ideals.2
With a track record like that, it is indeed puzzling that so many people want to try again. Some supporters of socialism claim, however, that those were not authentic attempts at socialism. They were instead dictatorships that merely arrogated power to their leaders instead of serving the people and the common good that socialism champions. If we could get the right people in charge, and get the right motivations and institutions in place, then, supporters argue, we would see the benefits socialism promises.
But what exactly is socialism, and how is it supposed to work? The key to understanding socialism is, perhaps surprisingly, not contained in its aspirations. Socialism envisions a classless society of moral equals and reduced material inequality, a society that enjoys a wider sharing in its prosperity and that treats all people with dignity and respect. Those are worthy goals that many would endorse—which perhaps helps explain its appeal.
The question, however, is how to achieve those goals. A system of economics is not merely an ivory-tower theory, after all, but implicates a society’s actual institutions and affects its people in very real and practical ways. The question of how to achieve its goals presents the real key to understanding socialism, and to seeing how it differs from other systems.3 The practical mechanism for achieving socialism’s goals is through centralized economic decision-making. It proposes, that is, a person, or group of persons, who will make society’s economic decisions, including how its resources will be allocated, what industries it will have and not have, what its labor relations and policies will be, and so on. A market-based economy, by contrast, proposes decentralized economic decision-making, allowing individuals to make choices in their own cases based on their own schedules of value, their own goals and desires, and the opportunities and the constraints they face.
A socialist economy will thus have a national plan: its leaders will decide what are the proper values that the entire society will serve, and it will organize its economic activity in the service of those values. By contrast, a market-based economy will have no overall plan—except, perhaps, increasing prosperity, which may be laudable but is open-ended—and will instead allow individuals to form partnerships and associations, and engage in trade and transactions and exchanges, largely according to their own individual desires, wishes, and values.
Which approach is better—centralized or decentralized? We live in a world of limited resources, meaning that we cannot put our resources of time and treasure toward all good ends simultaneously. Thus, choices must be made, and there will always be tradeoffs: if we put resources in one direction, it means those same resources cannot at the same time go in another direction. If we cannot, alas, have everything we want, how are we to decide where our limited resources should go?
This question reveals a weakness of socialist centralized economic decision-making: centralized decision-makers, however expert, do not and cannot know what the best use of others’ resources is.4 Because they do not know all the citizens in their country, do not know citizens’ changing values, goals (including moral goals), and desires, and do not know the opportunities and constraints they face, centralized decision-makers inevitably make mistakes: they put too many resources in some places, leading to oversupplies, and too few resources in other places, leading to shortages. This is not necessarily because they are unintelligent or immoral, but, rather, because wise allocation of resources depends on detailed, particularized knowledge of individuals’ situations—which centralized decision-makers simply do not have.
Individuals are of course not infallible in their own cases, and hence they too will inevitably make mistakes. But their knowledge of their own situations is far greater than is that of distant leaders, who likely know nothing of them or their situations. For that reason, letting individuals make decisions in their own lives is far likelier to lead to good outcomes than if centralized decision-makers made them for them. That is exactly the prediction that the historical attempts at socialist economies have borne out. That does not mean, of course, that a market-based economy will be perfect. Far from it. In a world of limited resources, however, and of imperfect beings, perfection is unfortunately not on offer. Perhaps the best we can hope for instead is real, if gradual, improvements in the material conditions of increasingly many people. That is what has taken place in market-based economies. People are now wealthier, have longer life expectancy, have better access to food, shelter, healthcare, and education, and thus greater opportunity to construct for themselves lives of meaning and purpose, than at any other time in human history. And the more market-based a country’s economy is, the better its people—all its people, across all income and wealth classes—fare.
Socialism’s goals are appealing, but the centralized mechanisms it requires to achieve them has proved, after multiple attempts, not to match its aspirations. By contrast, for all their faults, markets have enabled billions of people to ascend out of their previous conditions of poverty. Just as a medical doctor should pay attention to what has worked and what has not worked when treating a patient, political economists should also pay attention to what has worked and what has not worked in improving people’s lives and conditions. By comparison with other systems of political economy, market economies have outperformed every other attempted system, including socialist systems, on virtually every measure of human well-being we have studied, and the contest has not been close.5
Though we have a long way to go to achieving universal prosperity, and we have many problems yet to be addressed (let alone solved), the large and growing body of evidence suggests that socialism, despite its attractive aspirations, will not help—and, indeed, would likely make things worse. Perhaps those twentieth-century economists were on to something after all.
Professor Otteson spoke to the Wheaton campus and community on Socialism this past February.
To view the entire lecture go to our Resource Center.
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1 See Paul Hollander, From Benito Mussolini to Hugo Chavez: Intellectuals and a Century of Political Hero Worship (Cambridge University Press, 2016) and Political Pilgrims: Western Intellectuals in Search of the Good Society, 4th ed. (Routledge, 2017); and Kristian Niemietz, Socialism: The Failed Idea that Never Dies (Institute for Economic Affairs, 2019).
2 See Matthew White, The Great Big Book of Horrible Things: The Definitive Chronicle of History’s 100 Worst Atrocities (Norton, 2012).
3 See James R. Otteson, The End of Socialism (Cambridge University Press, 2014).
4 See Friedrich Hayek, “The Use of Knowledge in Society,” The American Economic Review 35, 4: 519–30.
5 See the Heritage Foundation’s 2019 Index of Economic Freedom; the Fraser Institute’s Economic Freedom of the World: 2018 Annual Report; and Deirdre McCloskey, Why Liberalism Works: Why True Liberal Values Produce a Freer, More Equal, Prosperous World for All (Yale University Press, 2019).