What Is Socialism?

Since a leading contender for the Democratic presidential nomination has endorsed it, since most of his opponents have refused to denounce it, and since a majority of young people appear to approve of it, now is a good time to ask: what exactly is socialism?

In a free market, you can buy just about any product you can afford so long as you are willing to pay the market price. Since market prices tend to reflect the social cost of production, in order to consume a good, you must pay what it costs society to produce it. On the supply side, people often have many employment opportunities. But wherever you work, the wage you receive will tends to reflect the social value of your contribution to the economy’s output of goods and services.

Under socialism, government rather than the market sets prices and wages. What difference does that make?

If the government sets the price below the market price, people will buy goods and services that are worth less to them than the social cost of their production. For example, it might cost society $10 to produce a good that is worth only $5 to the person who obtains it. The result will be over-consumption, provided people can actually obtain the good. (Often they cannot.) If the government sets the price above the market price, people will refrain from buying and consuming things they otherwise would have purchased. For example, society might be  capable of meeting a people’s needs with a good for a $10 price they are willing to pay. But because of a $20 mispricing, there will be under-consumption.

Similar distortions occur in the labor market. If government-set wages are above or below market wages, workers will respond by over-producing or underproducing various goods and services, relative to the value consumers place on them.

Under socialism, the government does much more than set prices. It determines what will be produced, how it will be produced, where it will be produced and under what circumstances people will be able to consume what is produced. Since prices are not allowed to clear markets, inevitably there is rationing by waiting for food, clothing, housing, medical care and other necessities. People spend enormous amounts of time and effort trying to circumvent the rationing bureaucracies.

To this point we have said nothing about why the government would do these things. Whatever the stated goals, socialist governments almost always have an economic plan. Whatever the plan, it’s in no one’s self interest to carry it out.

Let’s suppose the plan calls for you to have two bowls of rice every day, but you would like three. In a market economy you get the third bowl if you are willing to pay the market price. Let’s say that is $10. Under socialism, you are not allowed to have the third bowl at any price. So, your incentive is to spend up to $10 of effort to manipulate the rationing bureaucracy to get your third bowl.

Or let’s say the plan calls for you to work 8 hours a day, but you would prefer to work only 7. In a market economy, if you work one less hour you get one less hour’s pay. Let’s say that’s $15. Under the socialist plan you don’t have this option. So, your incentive is to spend up to $15 of effort to manipulate the bureaucracy in order to get an hour off.

Now, when everybody at the bottom has a self-interest in defeating a plan created by those at the top, guess who wins? Socialism, wherever it has been tried, has been an economic disaster.

Capitalism is sometimes described as institutionalized selfishness, while socialism is often described as institutionalized altruism. If anything, the reverse is true.

As Adam Smith pointed out, the only way to increase your income in a market economy is to meet other people’s needs. In a socialist system, the only way to increase your income is to undermine the plan.  Doing so often means your increase in wellbeing is at someone else’s expense.

Even if socialist governments respected human rights – even if they didn’t imprison, torture and murder dissenters – socialism still imposes huge economic cruelties on ordinary people. That’s why northern European countries that have flirted with socialist ideas have subsequently abandoned them. In many ways, Scandinavian countries today are more capitalistic than we are.

There are several examples of economic freedom without political freedom, e.g. Hong Kong and Singapore. But we have no examples of a country that has abolished economic freedom while maintaining political and civil liberties.

It’s easy to understand why. If the government controls your job, your salary, your living choices and just about every other aspect of your economic life, how free will you be to challenge the rulers in the next election? All truly socialist regimes quickly became dictatorships – even if, like Nazi Germany and present-day Venezuela, they started out as democracies.

To this point, I have made no distinction between national socialism (fascism) and Marxist-type socialism (communism). The traditional political science literature tends to define the former as having private ownership with government control while the latter has both government ownership and control. The general rule is: the more government asserts its power in whatever way, the worse the economic deprivation and the worse the human rights atrocities.

In the 20th century, an estimated 169 million people were killed by their own governments. It was genocide on an unimaginable scale. The vast majority of these victims were murdered by socialist governments. The Russian communists were the worst (62 million) followed by the Chinese communists (35 million) and then the Nazis (20 million).

Although socialists claim that workers are exploited under capitalism, no greedy capitalist has ever begun to match what socialists have done.

Stalin, Mao Tse Tung, Fidel Castro and Hugo Chávez lived like kings and accumulated vast fortunes while their own people often faced starvation. Kim Jong-un and the current rulers in Cuba and Venezuela are following in their footsteps.

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