Socialism: The Arguments For and Against

The argument. In a complex economy, the knowledge of what is scarce, what is wanted, what can be substituted for what, and at what cost, is dispersed among millions of people and much of it is local, tacit and constantly changing. Prices in a market aggregate that knowledge automatically: a rising price tells everybody, without anybody being told, that something has become scarcer or more wanted. A central planner abolishing markets in the means of production destroys the mechanism that generates the information and then has to make the decisions the information was needed for.

Why it is not a point about honesty or effort. Even perfectly informed and entirely benevolent planners face it, because the information does not exist in a form anybody could collect.

The replies. Market socialism at chapter 690 accepts the objection and keeps markets while changing ownership. Computation is said to have changed what is feasible, though the tacit and preference-dependent character of the knowledge is the harder half. And a mixed economy concedes the point for most goods while insisting on collective provision where markets fail worst, which is what almost every country actually does.

Incentives

Common ownership weakens the connection between effort and reward, so people work less, take fewer risks and innovate less.

The replies. People are motivated by more than money, as professions, cooperatives and open collaboration show; extreme inequality is not required to produce any incentive; and market socialism preserves the connection.

Liberty

Concentration of power. Where the state owns the economy it is also every person's employer, landlord and supplier, so a dissenter has nowhere to go. The dispersal of economic power is a protection of political liberty, whatever else it is.

The road to serfdom argument. Hayek's claim that comprehensive planning requires agreement about a scale of ends that a free society will not produce, so that planning tends towards compulsion.

The replies. These are objections to comprehensive state socialism and not to socialism generally, and every democratic socialist accepts them, which is why democratic socialism exists. The rebuttal is that private concentration of economic power also threatens liberty, and is not answerable at an election.

Human nature

Socialism assumes a cooperativeness that people do not reliably display, and its programme requires either a transformation of character or continual compulsion.

The replies. Behaviour is heavily shaped by institutions, and competitive institutions produce competitive behaviour, so the observation may be a description of the arrangement rather than of the species. But this reply must not be overstated, and the honest position is that the evidence supports neither extreme.

Efficiency and record

Where comprehensive state socialism was tried it produced shortages, poor quality, technological backwardness and, in several countries, famine and mass repression.

The replies. These are the record of one variety in particular circumstances, several of which were dictatorships before they were socialist; the comparison should be with what those countries would otherwise have been rather than with the wealthiest market economies; and the social democratic record in Western Europe is a socialist record too and is a very different one. The honest concession is that the failure of central planning was decisive and changed socialist thinking permanently.

Bureaucracy

Public ownership substitutes an official for an owner, and the official is neither elected nor disciplined by competition. This is guild socialism's own objection at chapter 690, made from inside.

The assessment an answer should reach

Three propositions, and they can all be held together.

Socialism's diagnosis has largely been accepted. That inequality is institutionally produced, that markets fail predictably, and that formal freedom without means is thin, are now common ground and are built into every developed state's arrangements.

Its central institutional proposal, comprehensive common ownership with central planning, failed, and the calculation problem is the reason.

What survived is the mixed economy and the welfare state, in which markets allocate most goods, the state provides those markets provide badly, and redistribution limits the resulting inequality. That settlement is not a defeat of socialism but is not socialism either, and describing it accurately is what a good answer does.

A worked example

A State is considering whether to run its bus services publicly, franchise them to private operators under a regulated contract, or leave them to an open market.

The socialist case for public operation. Transport is a necessity, and access to work, school and hospital depends on it. A private operator will run profitable routes and abandon others, so the people most dependent on buses will be worst served. The surplus from busy routes should cross-subsidise thin ones, which only a single operator can do.

The calculation objection. How will the public operator know how many buses to run where, when demand shifts, and what fare covers cost? A market generates that information; a planner must collect it, and will collect it late.

The market socialist answer. Franchise the routes competitively, so that bidding reveals costs, while the State specifies the network, including the unprofitable routes, and owns the depots and the fare system.

Which is what most systems actually do, and it is a good illustration of the assessment above: the socialist objective, universal access, is achieved through a mechanism that concedes the calculation objection.

Distinctions that carry marks

What these arguments are NOT

They are not all aimed at the same thing. The calculation objection destroys central planning and leaves market socialism standing. Naming the variety is the first step of any answer here.

"Socialism failed" is a claim about one variety. Chapter 690 made the point and it is worth repeating.

The success of the welfare state is not a socialist victory alone. Modern liberalism arrived at much of the same programme from a different premise, and a careful answer notices that.

The calculation objection is not the incentive objection. They are constantly confused. One is about information, the other about motivation, and only the first is fatal to planning even among saints.

Quick revision

1. In favour: the diagnosis is accurate, since outcomes correlate with circumstances of birth more than with effort; formal freedom without means is empty; cooperation is undervalued; markets fail predictably; political equality does not survive economic inequality; the record on the eight hour day, child labour, safety, insurance, health and schooling is substantial; and it answers the distributive defect of utilitarianism.
2. The economic calculation problem, Mises and Hayek, is the serious objection: the knowledge of scarcity and want is dispersed, local and tacit, prices aggregate it automatically, and abolishing markets in the means of production destroys the mechanism that generates the information. It applies even to perfectly benevolent and honest planners.
3. Other objections: incentives; concentration of power, since a state that owns the economy is every dissenter's employer; the road to serfdom; over-optimism about human nature; the historical record; and bureaucracy, which is guild socialism's objection from inside.
4. Replies: market socialism concedes the calculation problem and keeps markets; democratic socialism concedes the liberty objection; the record is of one variety and social democracy is also a socialist record.
5. The assessment: the diagnosis was accepted, the institutional proposal failed, and what survived is the mixed economy and the welfare state, which is neither a defeat of socialism nor socialism.

Test yourself

1. State the economic calculation problem and say why it is the serious objection. That in a complex economy the knowledge of what is scarce, what is wanted, what can substitute for what and at what cost is dispersed among millions of people and is largely local, tacit and constantly changing. Prices aggregate that knowledge automatically, a rising price signalling scarcity or increased demand without anybody being informed. A planner who abolishes markets in the means of production destroys the mechanism that generates the information and must then take the decisions the information existed for. It is the serious objection because it applies to perfectly informed and entirely benevolent planners: the difficulty is that the information does not exist in any form that could be collected.

2. Distinguish the calculation objection from the incentive objection. The incentive objection is about motivation: common ownership weakens the link between effort and reward, so people work and innovate less. The calculation objection is about information: even people working with complete dedication cannot know what to produce, in what quantities and by what methods, once the price system that generated the answers has been abolished. The two are constantly confused, and only the first can be met by appealing to non-monetary motivation, professional ethics or cooperative enterprise, since none of those supplies the missing information.

3. What are the strongest arguments in favour of socialism? That its diagnosis is factually accurate, outcomes correlating far more strongly with circumstances of birth than with individual effort. That formal freedom without means is thin, a criticism strong enough to have changed liberalism itself. That markets fail predictably through monopoly, information asymmetry, external harms, public goods and unequal bargaining power. That political equality does not survive severe economic inequality. And that its practical record includes the eight hour day, the prohibition of child labour, workplace safety, social insurance, public health and universal schooling, all won against opposition and now so accepted that their origin is forgotten.

4. How should the historical record of socialism be assessed? Carefully, and by variety. Comprehensive state socialism with central planning produced shortages, poor quality, technological backwardness and, in several countries, famine and repression, and that failure was decisive and permanently changed socialist thinking. But several of those states were dictatorships before they were socialist, so the political failures are not all attributable to the economics; the comparison should be with what those countries would otherwise have been rather than with the wealthiest market economies; and the social democratic record in Western Europe is also a socialist record and is a very different one.

5. What is the fair assessment of socialism? That its diagnosis was largely accepted and its central institutional proposal failed. The claims that inequality is institutionally produced, that markets fail predictably, and that formal freedom without material means is thin are now built into the arrangements of every developed state. Comprehensive common ownership with central planning failed, and the calculation problem is the reason. What survived is the mixed economy and the welfare state, in which markets allocate most goods, the state supplies what markets supply badly, and redistribution limits inequality; that settlement is neither a defeat of socialism nor socialism, and saying so accurately is the answer.