Socialism doesn’t work for two reasons (at least). Such a system gets incentives wrong and it cannot aggregate and produce information. Academic debates on these points have been hashed out for nearly a century now. When the Austrians were writing their academic critiques of socialism in the early half of last century (edited: thanks jvb) it was coming at a time when the possibility of the success of Socialism was still an open empirical and theoretical question. Very thoughtful and intelligent people of all political persuasions were inquiring whether this sort of a thing could work.
The “Can Socialism Work” Debate was won decisively by the Austrians because they demonstrated how even in a world where all of the incentives were right, where all of the people were good and wanted to work hard for their “brothers” the lack of a price system will doom those economies to massive misallocations of resources and stagnation. Consider, in a world without prices (or even where the socialist planners looked to other countries for price to influence their planning choices) how could we know which consumers wanted oranges and when and in what forms? Just because people in Western New York like their OJ in cartons (pre-squeezed by the processors in Florida) and are willing to pay $3.00 per half-gallon for it does not mean that this signal correctly captures the value to consumers in the Mediterranean or what it would cost to produce this product in Valencia. And even looking to prices elsewhere, assuming they capture the values and costs in the socialist country perfectly, is going to fall short because these values and costs change regularly. By the time planners observe them and integrate a new plan for production and distribution, it will surely be too late. There’s more to the story, especially when we include the time dimension and how long term planning and investment decisions are made in terms of the acquisition of human and physical capital, and the types of products and production processes to develop.
Ironically, it never came to this. Socialism failed because as the famous saying went, “people pretended to work and the planners pretended to pay them.” Some may argue that for brief periods under the rule of some despots, the “people” did actually work hard – at least the few that were not sent off to Gulags, but on the whole the reason the whole edifice collapsed is that the incentives never were right. The Austrians won the intellectual argument by allowing for the possibility that people would work hard for their brothers instead of working hard for their own interests as happens in capitalist “systems”, so in this sense they “doubly” won it.
My own two cents on why the people didn’t work hard may perhaps be a little different than is popularly exclaimed. For centuries people have posited that with a new system will come anew “socialist man.” In fact, one of the most influential parts of my reading of Hayek is that he is just as worried about how the psychology of people changes under different forms of governance and economic activity as he is about the actual impacts of those organizational forms. But there are limits to this psychological change. People are not totally impressible lumps of clay to be molded – even after several generations. Thus, why did the incentives never quite work under socialism? I think for two reasons.
First, as my student Stephen Macaskill nicely stated on TV a few days ago, liberty is inherent in human nature. Working for the sake of someone else, by diktat, cuts against the grain of this fact. Second, my view is that even in the most socialistically inclined countries and within the most socialistically inclined organizations, the views of the leaders and organizers are far more extreme than the views of the median member of the community. In other words, the “man on the street” in a socialist country undoubtedly likes the idea of unlinking value from reward, but my sense is that he has this belief not for himself, but for the other guys. My sense is that people rarely question that their own efforts are meritorious and deserving of reward, it’s the efforts of “other guys” that are not as deserving. Once a socialist order is implemented, and reward has nothing to do with value produced, it turns out that the only “other guys” lying around are the socialist leaders themselves, the nomenklatura. Everyone else, by the virtue of the system, is just like me – and obviously all of the folks just like me should be rewarded for the efforts they put forth.
But even if that is not quite right, my sense is that the socialist leaders are still more socialistically inclined than the average person. Why? The benefits to the “masses” of of altering the world order, as compared to the costs of doing something to get to the new world order are far smaller than the net benefits to the leaders of the revolution. As a result, the leaders of the collectivist revolutions may be misled into just how much “the people” really do want such a new world order by extrapolating their own feelings onto them.
Or, I could be totally wrong. It doesn’t matter though. The facts remain, it was both the failure of the incentive system and the virtually nonexistent (non-black market) price system that doomed these places to misery.