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Why Socialism Fails

28 Comments » | Posted by oshane

Stillborn from the Beginning
A truly free market works precisely because it relies on the self-serving desires of most people acting as a manifold of countervailing forces against all the other self-serving desires in the system. Everyone acting in his own self-interest with a baseline of standards (no theft, no fraud, etc.) ensures that the average wealth per capita is raised. That is, while self-centeredness is ignoble, it is the reality of the human condition, and any economic system which pretends that this can be changed outwardly in, i.e., by external forces (read: government) pressing an ideal onto human lives, only works to create and increase misery, because it is based on fantasy. Communism and its attenuated form, socialism, are noble ideals but are fatally flawed for three major reasons.

First Reason: Perversion of Incentive
Communism and socialism do not just hope for, but rely on the good of mankind in aggregate to work. In fact, apropos to a previous discussion, all political purveyors of socialism/communism are selling hope and the value received is far less than the value paid out by the buyer. Believing in the current goodness of mankind, or rather in the goodness of every individual such as to expect that he will act in the best interest of others is rank madness. Socialism wrecks the ability for people to appropriately measure value for themselves by robbing them of incentive. When the fruits of labor are taken from a person in order to redistribute them in aggregate to everyone else, including him, he resents the theft of his labor but also comes to reliance upon the redistribution.

Jamestown and Plymouth
In Thomas J. DiLorenzo’s book, How Capitalism Saved America, he recounts the story of two early colonies in America, Jamestown and Plymouth. In both, the settlers were required to function in socialism; private property was not allowed and the settlers were required to toil for the “common good.” Within six months of the founding of Jamestown,

all but 38 of the original 104 settlers were dead, most having succumbed to famine. Two years later, the Virginia Company sent 500 more ‘recruits’ to settle in Virginia and within six months, a staggering 440 more were dead by starvation and disease.

He also recounts an example: if 1 out of 20 people refuses to work but can take as needed from the “common wealth,” he will still be able to maintain 95% of his “income” on average while 19 out of 20 people do their jobs. Once too many people realize they can game the system and do less work for more food at the expense of their fellow man, the system fails, and starvation ensues.

Thankfully, in 1611, a governor traveled to America and realized that the incentive structure for the English colonists was the culprit for the previous death and failure. He instituted private property with a small tax on the fruits of their labors. The people could (only) realize the full fruits of their own labor, and the colony began to thrive, because everyone, self-servingly, worked as much as they needed and desired.

Nature’s stochasticity is a far more potent motivator than government’s contrivances.

Socialism cannot possibly work, because it is axiomatically flawed on the notions that people should be selfless and government is the correct actor to ensure selflessness. Thus, in order to effectuate the schemes of the noble cause of “from each according to his ability, to each according to his need,” violent force is justified as a necessity to make men noble. This brings us to the second fatal flaw: socialism relies on force to make it work. By definition, because humans are amoral in aggregate, force is required to effectuate wealth transfer, because rational actors, on the whole, do not voluntarily give away money without value in return.

The Legal Tangent
In fact, our Anglo-Saxon legal system, particularly in the Law of Contracts, at a fundamental level (modulo all the reforms of the modern era), reflects an innate belief that individuals should receive value for value exchanged. The doctrine of consideration, quid pro quo, a bargained-for exchange of something received for something given, mandates that for a contract to be enforceable, it must have the element of consideration. Courts do not like to weigh the relative values of the “something given” for the “something received” because value is entirely relative to the circumstances of individuals in their own situations, and judges do not usually believe their purview is to monitor or value private contracts. An iPhone may be worth $600 to an early adopter, but only $300 to a later adopter or not worth any expense to someone who does not want one. If there is no consideration, the promise is often viewed as a gift, which is always legally revocable unless the promisee reasonably relied on the promise.

Inherent in the doctrine of consideration is that there must be an exchanged that was bargained for. Bargaining, as a legal term of art, does not mean wrangling, dickering or heavy negotiation is required. What it means is that there is an intention of both parties to exchange things of legal value to which both parties assent. By contrast, a contract forced upon one person by another, i.e., using duress, is voidable by the coerced party later.  Why? Because there was no bargaining. There was an exchange, and it might even be of relatively legal value, but the mere act of force makes the contract voidable by the party who was wronged by the lack of free will. It is not usually discussed in this manner, but duress is really the antithesis of consideration.

Second Reason: Socialism is Violence
Force, of course, is a form of duress, and though the United States now has a long history of employing force to get what it wants from its constituents and other peoples (starting, really, with Alexander Hamilton’s policies of excessive and overwhelming national power), the augmentation of the use of force to transfer wealth is still total anathema to our natural law notions in Anglo-Saxon society of what a fair and right contract is. We should all recognize that force to take wealth away from another person, while justified at a governmental level, is still theft on an individual level. So, while socialism might be noble in its thrust to ensure the welfare of other people, it is pragmatically reliant on the evil of violence to make it work.

Contrast the doctrine of consideration, required in Anglo-Saxon legal systems, with contract laws in civil countries, which do not necessarily recognize the need for consideration. It is not surprising, therefore, that in cultures without a long history honoring the notion of bargain to ensure the satisfaction of parties exchanging value, communism and socialism took root faster, even with our early forays into forced socialism. See Jamestown, supra. Because these political theories are fundamentally based on oppressive force–in contrast to force being used in the name of liberty here, even though liberty does not require it–the doctrine of consideration as an innate part of our culture has been a silent bulwark to such force. Unfortunately, the Pacific and Atlantic oceans seem to not be wide enough . . .

Ironically, the Jamestown/Plymouth colonies are poignant examples from our own history of why a modern socialist government relies on force to effect an economy. The perversion of incentives leading to low production are evident to even the most mindless pro-government drone, which is why modern governments employ force to ensure the “health” of the socialist state.

Of course, labor at gunpoint does not comprise a worthwhile society; it is a Prison.

Vitiating the Counterexample
Naive proponents of socialism correctly point out that the apostolic community of believers in Yeshua (“Jesus”) was the first successful manifestation of communism. I suppose the inherent argument is that if it was good enough for Jesus . . .

The surprisingly overlooked flaw in this counterexample is that the association of believers was entirely voluntary, because at no time did Yeshua command his followers to preach the good news to convert by force. I believe it is a hallmark of Good for people to voluntarily associate and combine their assets and incomes in a manner to synergetically benefit one another. But it is the voluntariness (the “cheerfulness” in scriptural semantics) that makes it noble and good, not the sharing by itself.

Let each one give as he purposes in his heart, not of grief [grudgingly] or of necessity [compulsion], for Elohim loves a joyous [cheerful] giver.

2d Corinthians 9:7 (The Scriptures, Inst. for Scripture Research 1998)

Third Reason: The Corollary of Correct Valuation
Correct valuation of labor in the form of goods and services can only be appropriately calculated by the parties to their own contract. This is definitely a corollary to the observation that incentives remain healthy when individuals have control over their own labor. Only you know what you really need. Only I know what I really need. If we are friends, we may be able to effectively negotiate on behalf of one another and trade for value in a way that satisfies the other person. Of course, we run the risk of not doing so. Why? It is as simple as the fact that we cannot read one another’s minds and perfectly understand one another’s goals.

Multiply that by the billions of transactions that occur daily. Is it even fathomable that a central planner (especially a bureaucratic committee prone to inaction and inefficiency, detached from the reality of life and the harshness of nature) can correctly value the effectuate transactions between hundreds of millions of people? No, such a proposition is patently absurd.

The market is not a controllable system: it is simply the sum-greater-that-its-parts of all value exchanges between the actors in a population. It is more organic than technical, and it is only predictable on an individual level where we can spend time imperfectly analyzing how actors might negotiate and trade value. If you know all about me, you, again, can probably predict how I would want to transact business and for how much money. Of course, that requires time, patience and astute observation to get it right.

Thought Experiment
Let’s assume a central planning committee has the resources to observe each person constantly and to get to a point where it can accurately predict the appropriate value exchange for each person. Let’s assume this observational analysis only takes one minute one time for each person in the country. Let’s also assume each person enters into five transactions daily. For 327,000,000 people, it would require 3,111 man-years to accomplish the analysis to ensure the central planner could have the information necessary to direct the economy. The assumptions for the experiment are prima facie conservative in favor of the theory socialism, of course, and the result is, nonetheless, literally incredible.

One alternative is that the central planning committee simply fails to do what it believes its job is. It is doomed to failure, because “getting it right,” i.e., ensuring maximum wealth in a centrally controlled manner for each person, is impossible. Because no one appropriately small subset of people can correctly evaluate economic incentives for hundreds of millions of people, the wealth transfer is guaranteed to be lopsided and ineffectual. The plight of the Soviet, Chinese, Cuban and several southeast Asian peoples from the twentieth century are evidence of this.

Socialism promotes misery, starvation, violence and murder. The worst that can be said for capitalism is that it allows for poverty due to nature and poverty due to laziness, both of which decrease over time in a free market. All examples of non-voluntary socialism in their stated quest to eliminate poverty only increase it.

The true alternative is that we can simply allow for each person to transact for himself freely. Liberty is the hallmark of a workable economic system. As flawed as capitalism is for relying on man’s self-centered nature, it is paradoxically this reason that makes capitalism pragmatically perfect.

The antecedent post at FaithFoundry is here.

The Market Analysis
Charles Revson of Revlon stated, “In the factory we make cosmetics, in the store we sell hope.”  See endnote α.

Clearly, as in other industries, a primary thrust of the business owner in the wedding industry is to sell hope to the couple.  This sentiment of salespeople everywhere is particularly powerful in industries where hope has been interwoven with tradition over centuries.  Specifically, what the couple hopes for on their wedding day is often preconceived, because traditions surrounding marriage are so old that they have become standards nearly unquestionable to the conscious mind.  A couple’s hope, therefore, is often a manifestation of the desire that those particular traditions will be fulfilled in a perfect way.  For example, how often does the bride in our culture want beforehand to wear blue jeans and a blouse?  Not only is she looking for a white wedding dress (the tradition), she aspires to find the perfect, most fitting, unique white dress which will cause all of her loved ones to awe in her beauty for the day (the hope).

Moreover, because marriage is so important and fundamental to the health of a family, which is the atomic unit of society, the couple already has a built-in hope that the wedding and celebration will be excellent as a predicate for an excellent marriage.  This is not necessarily a good proxy, but the hope is potent, because the wedding and celebration are precisely meant to be metaphors for the marriage itself.

With such hope already present as couples shop for services to plan their weddings, it does not take much to convince them of the high value of the enterprise of the wedding day.  Further, it takes only a little bit more to convince the couple that this high value is appropriately represented by the seller’s high prices.  Candidly, there is nothing wrong if both parties believe their contract represents a correct valuation to both of them.  But, hope certainly commands a premium on the services if not for the services themselves, because hope is a primary predicate for demand.

Another way to summarize this is to think of wedding planning as event planning for the most important life event that most people go through.  Because of the importance the buyers attach to the event, the seller commands a premium in exchange for the implicit (sometimes explicit) consideration that the wedding vendor will provide services and products with the utmost standard of care and high orienation to detail.  The catering will be ordered, accommodating to all food-allergies and quiet.  The flowers will be a certain species of Bird of Paradise and appropriate filler flowers of complementary color.  So on and so forth.

From the seller’s perspective, while some of the value is demand (hope) driven, some of the value is also a premium for the compensation of risk inherent in the hope.  If something goes wrong, there could be hell to pay to the couple, but if everything goes right the worrying about everything going right and the extra labor required to ensure a successful event requires such a premium.

Of course, we also tend to highly value beauty, design and prospect (“the view” of the mountains or ocean, etc).  Wedding venues, in order to serve as an appropriate metaphor for the aspirations of the couple and the couple’s loved ones about their marriage, often incorporate exquisite views or thoughtfully designed beauty.  If not, given the hope couples usually have for the representational effects of their wedding, they may be choosing a venue for convenience, which can also command a higher premium.  In fact, this premium is exacerbated or increased (vis-a-vis buyer or seller), especially because real property, land, is unique and not fungible (one thing of the same type is as good as another).  A ton of scrap metal is the same as another ton of scrap metal.  A wedding venue is not the same as any other.

Moreover, the market pricing signals for wedding planning are not as smooth and predictable as for other services or commodities.  People do not get married often enough to be able to iteratively judge value.  The lack of the number of signficant digits in pricing is indicative of this.  A venue might cost $5,000 (or the moral equivalent, $4,999), but were demand in society more pervasive and frequent, the market might make the pricing much more precise, e.g., $3,826.23.  Here, the risk the vendor is requiring for lack of pricing signals is $5,000 – $3,826.23.  More complexly, wedding vendors actually still do have more signals available to them (many customers constantly) than the buyer has (pricing from only several competing vendors one or a few times in her life), which means they will be able to extract a premium for buyer ignorance as well.  Of course, little of this is usually conscious to the seller or buyer, but is reflected in normal principles of human action, because pricing is often done intuitively until there are many many more pricing signals with which buyers and sellers interpolate.

The “racket”, thus, is the buyer’s  indignation arising from their intuitions that the vendors are extracting a premium based on their hope and ignorance.  Buyers usually concede to the rationality of premium-for-risk, which is why high cancellation penalties are usually not argued.  But, because the hope the buyer-couple has with respect to their marriage translates into expectations about their wedding, they easily conflate the two and can irrationally but intuitively respond to the seller’s premiums as profiting on their marriage.  No, the seller is rightfully profiting from the wedding, but it is so easy to mix the two up that it frustrates many couples looking to wed within a budget.

The market is amoral, but at least in a theoretically free market, the buyers have the choice to walk away from the deal before the contract is signed if they feel the value is asymmetric.  And with respect to the market only (as opposed to other non-economic considerations about weddings in the next upcoming post), frustration with pricing is an asymmetric internalization of value.  The buyer can be frustrated, “You want me to pay $35,000 for 40 seats in a boat house?  No.” and the seller can be frustrated, “You want me to provide my oceanview beachside mansion in Monterey for $500?  No.”  In both cases, the frustration is legitimate with respect to the individuals who are negotiating, because they perceive the value received does not equate to the value given in consideration.

Thought experiment: Couple finds the perfect wedding venue for $20,000 but only wants to spend $5,000. They may express frustration at the pricing for a value they just don’t perceive and chalk it up to the wedding racket.  Conversely, let’s say the couple’s demand-pricing is really elastic, and they are willing to pay $20,000 for a venue the vendor knows is usually worth $5,000.  He’ll be thrilled!  On the other hand, if Couple finds the perfect wedding venue but because of very low demand might be able to get it for $1,000 where its previous going rate was $20,000, the seller might resent the fact that they are “getting a steal while the same Couple in the first instance will stop complaining about “the wedding racket” and take the deal.

In a free market, again amoral (and justly so), resentments and thrills are always based on asymmetries of perceived value exacerbated by the underlying or circumstantial hopes that the buyers and sellers bring to the table.

α Stephen M. Feldman, Free Expression and Democracy in America 299 (U. Chi. Press 2008).