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Socialism is the
Big Lie of the twentieth century. While it promised
prosperity, equality, and security, it delivered
poverty, misery, and tyranny. Equality was achieved
only in the sense that everyone was equal in his or
her misery.
In the same way
that a Ponzi scheme or chain letter initially
succeeds but eventually collapses, socialism may
show early signs of success. But any accomplishments
quickly fade as the fundamental deficiencies of
central planning emerge. It is the initial illusion
of success that gives government intervention its
pernicious, seductive appeal. In the long run,
socialism has always proven to be a formula for
tyranny and misery.
A pyramid scheme
is ultimately unsustainable because it is based on
faulty principles. Likewise, collectivism is
unsustainable in the long run because it is a flawed
theory. Socialism does not work because it is not
consistent with fundamental principles of human
behavior. The failure of socialism in countries
around the world can be traced to one critical
defect: it is a system that ignores incentives.
In a capitalist
economy, incentives are of the utmost importance.
Market prices, the profit-and-loss system of
accounting, and private property rights provide an
efficient, interrelated system of incentives to
guide and direct economic behavior. Capitalism is
based on the theory that incentives matter!
Under socialism,
incentives either play a minimal role or are ignored
totally. A centrally planned economy without market
prices or profits, where property is owned by the
state, is a system without an effective incentive
mechanism to direct economic activity. By failing to
emphasize incentives, socialism is a theory
inconsistent with human nature and is therefore
doomed to fail. Socialism is based on the theory
that incentives don�t matter!
In a radio debate
several months ago with a Marxist professor from the
University of Minnesota, I pointed out the obvious
failures of socialism around the world in Cuba,
Eastern Europe, and China. At the time of our
debate, Haitian refugees were risking their lives
trying to get to Florida in homemade boats. Why was
it, I asked him, that people were fleeing Haiti and
traveling almost 500 miles by ocean to get to the
"evil capitalist empire" when they were only 50
miles from the "workers� paradise" of Cuba?
The Marxist
admitted that many "socialist" countries around the
world were failing. However, according to him, the
reason for failure is not that socialism is
deficient, but that the socialist economies are not
practicing "pure" socialism. The perfect version of
socialism would work; it is just the imperfect
socialism that doesn�t work. Marxists like to
compare a theoretically perfect version of socialism
with practical, imperfect capitalism which allows
them to claim that socialism is superior to
capitalism.
If perfection
really were an available option, the choice of
economic and political systems would be irrelevant.
In a world with perfect beings and infinite
abundance, any economic or political
system�socialism, capitalism, fascism, or
communism�would work perfectly.
However, the
choice of economic and political institutions is
crucial in an imperfect universe with imperfect
beings and limited resources. In a world of scarcity
it is essential for an economic system to be based
on a clear incentive structure to promote economic
efficiency. The real choice we face is between
imperfect capitalism and imperfect socialism. Given
that choice, the evidence of history overwhelmingly
favors capitalism as the greatest wealth-producing
economic system available.
The strength of
capitalism can be attributed to an incentive
structure based upon the three Ps: (1) prices
determined by market forces, (2) a profit-and-loss
system of accounting and (3) private property
rights. The failure of socialism can be traced to
its neglect of these three incentive-enhancing
components.
Prices
The price system
in a market economy guides economic activity so
flawlessly that most people don�t appreciate its
importance. Market prices transmit information about
relative scarcity and then efficiently coordinate
economic activity. The economic content of prices
provides incentives that promote economic
efficiency.
For example, when
the OPEC cartel restricted the supply of oil in the
1970s, oil prices rose dramatically. The higher
prices for oil and gasoline transmitted valuable
information to both buyers and sellers. Consumers
received a strong, clear message about the scarcity
of oil by the higher prices at the pump and were
forced to change their behavior dramatically. People
reacted to the scarcity by driving less, carpooling
more, taking public transportation, and buying
smaller cars. Producers reacted to the higher price
by increasing their efforts at exploration for more
oil. In addition, higher oil prices gave producers
an incentive to explore and develop alternative fuel
and energy sources.
The information
transmitted by higher oil prices provided the
appropriate incentive structure to both buyers and
sellers. Buyers increased their effort to conserve a
now more precious resource and sellers increased
their effort to find more of this now scarcer
resource.
The only
alternative to a market price is a controlled or
fixed price which always transmits misleading
information about relative scarcity. Inappropriate
behavior results from a controlled price because
false information has been transmitted by an
artificial, non-market price.
Look at what
happened during the 1970s when U.S. gas prices were
controlled. Long lines developed at service stations
all over the country because the price for gasoline
was kept artificially low by government fiat. The
full impact of scarcity was not accurately conveyed.
As Milton Friedman pointed out at the time, we could
have eliminated the lines at the pump in one day by
allowing the price to rise to clear the market.
From our
experience with price controls on gasoline and the
long lines at the pump and general inconvenience, we
get an insight into what happens under socialism
where every price in the economy is controlled. The
collapse of socialism is due in part to the chaos
and inefficiency that result from artificial prices.
The information content of a controlled price is
always distorted. This in turn distorts the
incentives mechanism of prices under socialism.
Administered prices are always either too high or
too low, which then creates constant shortages and
surpluses. Market prices are the only way to
transmit information that will create the incentives
to ensure economic efficiency.
Profits and Losses
Socialism also
collapsed because of its failure to operate under a
competitive, profit-and-loss system of accounting. A
profit system is an effective monitoring mechanism
which continually evaluates the economic performance
of every business enterprise. The firms that are the
most efficient and most successful at serving the
public interest are rewarded with profits. Firms
that operate inefficiently and fail to serve the
public interest are penalized with losses.
By rewarding
success and penalizing failure, the profit system
provides a strong disciplinary mechanism which
continually redirects resources away from weak,
failing, and inefficient firms toward those firms
which are the most efficient and successful at
serving the public. A competitive profit system
ensures a constant reoptimization of resources and
moves the economy toward greater levels of
efficiency. Unsuccessful firms cannot escape the
strong discipline of the marketplace under a
profit/loss system. Competition forces companies to
serve the public interest or suffer the
consequences.
Under central
planning, there is no profit-and-loss system of
accounting to accurately measure the success or
failure of various programs. Without profits, there
is no way to discipline firms that fail to serve the
public interest and no way to reward firms that do.
There is no efficient way to determine which
programs should be expanded and which ones should be
contracted or terminated.
Without
competition, centrally planned economies do not have
an effective incentive structure to coordinate
economic activity. Without incentives the results
are a spiraling cycle of poverty and misery. Instead
of continually reallocating resources towards
greater efficiency, socialism falls into a vortex of
inefficiency and failure.
Private Property Rights
A third fatal
defect of socialism is its blatant disregard for the
role of private property rights in creating
incentives that foster economic growth and
development. The failure of socialism around the
world is a "tragedy of commons" on a global scale.
The "tragedy of
the commons" refers to the British experience of the
sixteenth century when certain grazing lands were
communally owned by villages and were made available
for public use. The land was quickly overgrazed and
eventually became worthless as villagers exploited
the communally owned resource.
When assets are
publicly owned, there are no incentives in place to
encourage wise stewardship. While private property
creates incentives for conservation and the
responsible use of property, public property
encourages irresponsibility and waste. If everyone
owns an asset, people act as if no one owns it. And
when no one owns it, no one really takes care of it.
Public ownership encourages neglect and
mismanagement.
Since socialism,
by definition, is a system marked by the "common
ownership of the means of production," the failure
of socialism is a "tragedy of the commons" on a
national scale. Much of the economic stagnation of
socialism can be traced to the failure to establish
and promote private property rights.
As Peruvian
economist Hernando de Soto remarked, you can travel
in rural communities around the world and you will
hear dogs barking, because even dogs understand
property rights. It is only statist governments that
have failed to understand property rights. Socialist
countries are just now starting to recognize the
importance of private property as they privatize
assets and property in Eastern Europe.
Incentives Matter
Without the
incentives of market prices, profit-and-loss
accounting, and well-defined property rights,
socialist economies stagnate and wither. The
economic atrophy that occurs under socialism is a
direct consequence of its neglect of economic
incentives.
No bounty of
natural resources can ever compensate a country for
its lack of an efficient system of incentives.
Russia, for example, is one of the world�s
wealthiest countries in terms of natural resources;
it has some of the world�s largest reserves of oil,
natural gas, diamonds, and gold. Its valuable farm
land, lakes, rivers, and streams stretch across a
land area that encompasses 11 time zones. Yet Russia
remains poor. Natural resources are helpful, but the
ultimate resources of any country are the unlimited
resources of its people�human resources.
By their failure
to foster, promote, and nurture the potential of
their people through incentive-enhancing
institutions, centrally planned economies deprive
the human spirit of full development. Socialism
fails because it kills and destroys the human
spirit�just ask the people leaving Cuba in homemade
rafts and boats.
As the former
centrally planned economies move toward free
markets, capitalism, and democracy, they look to the
United States for guidance and support during the
transition. With an unparalleled 250-year tradition
of open markets and limited government, the United
States is uniquely qualified to be the guiding light
in the worldwide transition to freedom and liberty.
We have an
obligation to continue to provide a framework of
free markets and democracy for the global transition
to freedom. Our responsibility to the rest of the
world is to continue to fight the seductiveness of
statism around the world and here at home. The
seductive nature of statism continues to tempt and
lure us into the Barmecidal illusion that the
government can create wealth.
The temptress of
socialism is constantly luring us with the offer:
"give up a little of your freedom and I will give
you a little more security." As the experience of
this century has demonstrated, the bargain is
tempting but never pays off. We end up losing both
our freedom and our security.
Programs like
socialized medicine, welfare, social security, and
minimum wage laws will continue to entice us because
on the surface they appear to be expedient and
beneficial. Those programs, like all socialist
programs, will fail in the long run regardless of
initial appearances. These programs are part of the
Big Lie of socialism because they ignore the
important role of incentives.
Socialism will
remain a constant temptation. We must be vigilant in
our fight against socialism not only around the
globe but also here in the United States.
The failure of
socialism inspired a worldwide renaissance of
freedom and liberty. For the first time in the
history of the world, the day is coming very soon
when a majority of the people in the world will live
in free societies or societies rapidly moving
towards freedom.
Capitalism will
play a major role in the global revival of liberty
and prosperity because it nurtures the human spirit,
inspires human creativity, and promotes the spirit
of enterprise. By providing a powerful system of
incentives that promote thrift, hard work, and
efficiency, capitalism creates wealth.
The main
difference between capitalism and socialism is this:
Capitalism works.
"Socialism
is a philosophy of failure, the creed of ignorance,
and the gospel of envy. Its inherent virtue is the
equal sharing of misery."
- Winston Churchill
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