July 30, 2014

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Wednesday, April 30, 2014

Lack of pricing mechanism renders socialism unworkable


The problem with socialism, or the public ownership of the means of production, is a problem of calculation. In a socialist system, the manufacturers or “representatives” in charge of production cannot calculate using the market pricing system. At first glance this might seem unimportant to the untrained eye, but it is actually a fatal flaw.

You can order someone to produce something, you can even specify how much and what quality you want, but you cannot tell them how to do it right without a market pricing system. There are always multiple ways to produce things. Should you make a door handle out of two parts brass and one part tin or two parts tin and one part brass?  In a market system, the entrepreneur can determine which method of production is more efficient by looking at the current prices of tin and brass. If brass is cheaper, then it is more efficient to make the door handles with two parts brass and one part tin. On the other hand, if tin is cheaper it is more efficient to make the door handle with two parts tin and one part brass. Under the market system, the entrepreneur is rewarded with profit by choosing the more efficient line of production and thus better serving his costumers, the public.

Some might respond to this behavior as “Another example of capitalist greed! Under socialism the people’s representatives would be motivated by love of their brothers to produce efficiently and would not need a pricing system or profit!” They miss the point. Prices are determined by supply and demand.  In a socialist system the public/state owns all the means of production and there is no market. Without a market for the means of production, factor prices cannot form. Without prices to calculate how they are doing, producers are left helpless. Even assuming that the people’s representatives in charge of producing door handles are saints, how will they know how to help their fellow man? Without a price system, they cannot tell what supplies are available and they cannot tell what the people demand. This will always lead to gluts in some sectors of goods and horrible shortages in others.

Let’s say a new socialist regime has appropriated the door handle factory. They decide to avoid the problem of calculation by simply continuing on in the same way the entrepreneur did. Surely if it worked for him, it will work for them. But the thing about supply and demand, and therefore about prices is that they are always shifting. Maybe when the entrepreneur was in charge, tin was cheaper so he used two parts tin to one part copper. Shortly after the socialists take power, a massive, new easily minable copper deposit is found. The question is: is it still more efficient to make the door handles out of mostly tin, or is the copper supply so expanded that it is the less dear resource? Without a pricing system the Socialist representatives can only guess. What happens if they guess wrong? Not much, maybe if their waste of precious metals irritates the wrong people they could lose an election, but they wouldn’t face any personal losses.

Compare this to the capitalist system in which there are markets. Entrepreneurs are able to use market prices to determine how they should produce door handles most efficiently. They are motivated to do this well, because otherwise they lose money. No one enjoys losing money, so it’s a pretty powerful incentive to not be wrong. Under the market system, the entrepreneur who guesses wrong be bankrupted. Thus in a market system, those who are less able to produce cheap products are always losing influence to those better equipped to serve the public’s demands. It is a competition to see who can best serve the public, with the winners receiving opportunities to continue to serve in the future. The losers end up with a bunch of overpriced door handles they can’t sell and are separated from their ability to act inefficiently on so large a scale for the time being.

This is to show that socialism is inherently deficient. Market prices are what make the world go round. Without them,

would have to get used to a far lower standard of living. They would also have to deal with the absurdities brought about by completely incompetent producers. Imagine a world with 10 billion forks, but no spoons. Gluts and shortages such as that are the only possible outcome of socialism.

Rane McDonough is a Collegian contributor. He can be reached at rmcdonou@student.umass.edu.

7 Responses to “Lack of pricing mechanism renders socialism unworkable”
  1. CT says:

    This is a flawed analysis. Lets use your analogy of the making of alloys in door handles. In socialism the efficiency of using each metal can easily be determined by using production outputs. i.e. If at a period of time more tin is produced than copper (using the same manpower) then it will clearly be more efficient to use more tin than copper and doorknobs can be designed to the appropriate ratio.

    Futhermore the efficiency in creating the best doorknobs may not be the most efficient use of the metals in terms of the society rather than the doorknob market. That means that certain metals which are used in the Doorknobs are needed in a more important item such as train tracks then the system can then be designed to accommodative it. Whereas in the market it goes to whomever can afford it. So lets say the door manufacturer has more money and buys the metals needed for building of train tracks then making train tracks (a greater need) is delayed and since it provides a greater function it means that the metal resource has been used more inefficiently.

    And that is why capitalism is inherently deficient in comparison to socialism.

  2. Kris says:

    CTs counter argument makes no sense.

  3. Gavin Beeker says:


    So nice to see a fresh voice promoting free-market principles in the Collegian! Keep up the great work. Have you read Friedrich Hayek’s “On the Use of Knowledge in Society”? Here is a link if you haven’t: http://emilyskarbek.com/uploads/The_Use_of_Knowledge_in_Society_-_Hayek.pdf
    The combination of Hayek’s insights and those of Mises (who you are obviously quite familiar with) form an incredible one-two punch into the nature of the market and the limitations of even conceiving control over economic phenomena.

    I think your view of allocation of resources presumes a God’s-Eye view of the situation which no one intelligence could ever hope to take in. Who is to determine that the train track is a more important use of a particular metal than door knobs? Sure, it could be asserted that the train track, once completed, would ensure a more efficient transportation mechanism and have corresponding benefits. The problem, however, is that of trade-offs, whose relative merits on either side of the choice are always particular to time and place. For example, in a small-scale agricultural society the metal may be more urgently required for the construction of plows, and there may not be enough excess foodstuffs to support both farm-workers and train-track builders. This was the source of the tremendous suffering inflicted upon Ukrainian and Russian peasants by Stalin’s policy of rapid industrialization – sure, it transformed the USSR into an industrial nation quicky, but at a staggering human cost, one that the American, British and German industrial revolutions avoided entirely. In a society of private property, the trade-offs are made voluntarily by individuals who have internalized the effects of their choices, because of their very real impact on their lives, rather than foisted on them by a central planning committee.
    The beauty of the capitalist mode of production is the way it coordinates the plans of everyone; instead of a central planner, everyone becomes a planner of their own sphere, with knowledge of their own desires and resources. When individuals voluntarily set aside a portion of their incomes, these funds drive down the interest rate and signal to entrepreneurs that more resources are available for capital investments (trains, factories, etc.) Socialist-minded people, with best intentions, see great evil in the private ownership of property, especially the means of production. What they fail to realize is that this social arrangement creates an incentive for individuals to maintain these resources and use them for the most highly-valued ends of society. Not only is incentive (and therefore meaningful feedback as to one’s performance in the service of society) diffused so widely in a socialist society that it becomes insignificant to any one individual whether they use resources efficiently, but it becomes impossible to know the desires of our fellow men and women when everyone is forced to be the same and receive the same output. Totalizing altruism becomes the paradox of two polite men waiting for the other to enter the room first until the end of their days, writ large – we can’t all be altruists all the time or there would be no resources to be altruistic about!
    Intelligent use of resources becomes possible under capitalism because countless intelligences, rather than an inconceivable central intelligence, direct output according to the vagaries of time and place and the desires of their fellow men and women.
    All of this is to say nothing implied by the socialist’s casual use of the words “re-direct,” “design,” “plan,” which all imply the forceful administration of people by dictate, rather than free choice. No amount of wishful thinking can think away the violence inherent in socialism, which is only conceivable as a centrally-planned society. Were it not, it would be capitalism – capitalism and a money economy are the logical consequences of a society based on voluntary exchange. Take away private property and you take away the incentive to act as stewards of resources for humankind. Any kind of “lite” or federated socialism or syndicalism would be closer to capitalism but still much worse – it would be driven by the demands of organized and politically powerful producers rather than consumers, the satisfaction of which is always the ultimate source of profits in a capitalist order and hence production.

  4. N. says:

    thank god for capitalism, otherwise no one would be able to open a door! no but seriously… considering there are literally hundreds of years of history at stake in this topic, why on earth wouldn’t you talk about some actual instances of capitalist and socialist societies instead of a scenario that is not only entirely hypothetical (ie not real) but deeply silly? and does anyone really believe that ‘demand’ somehow originates organically in the individual? why else would we have a multibillion dollar advertising industry if not to cajole people into wanting things they don’t need and can’t afford? that’s the other thing. cute examples about door handles aside, capitalism is in crisis today because it has not found a way to extend itself beyond the cycle of credit and debt: the development of more advanced means of producing what people need to survive means these needs can be met with less and less input, so there is this need to produce ‘demand’ as it becomes harder and harder for the capitalist to profit on his investment. would someone please explain how the ‘beautiful’ capitalist mode will surpass this limitation imposed by the diminishing rate of returns which is ever more apparent in the ‘society’ around us, or whatever remains of it? thank you.

  5. M. says:

    Never thought about it like this, but your argument makes a lot of sense. Its nice to read one article that doesn’t condemn capitalism nowadays.

  6. Jordan says:

    Nice read. Ludwig von Mises and Friedrich Hayek presented their critiques of socialism in the first half of the twentieth century. At the time, the embrace for government intervention spread far and wide and most academics weren’t to be bothered by such nuanced arguments against socialism. Those who did respond kept refining their position of socialism closer and closer to the market. Oskar Lange eventually ended up endorsing “market socialism.” If socialism was workable, why did the debate keep moving closer to the market? Because the market is the standard of efficiency. Hayek’s paper has rightly been considered one of the greatest papers ever written and socialism impoverished whichever countries were foolish enough to attempt it.

  7. Rane says:

    Wasn’t expecting commenters familiar with Mises. Always nice to reach others with similar interests. I will look into that piece by Hayek.
    I used the example of a door handle precisely because of the lack of advertising for them. I have never seen a door handle advertisement, I am unfamiliar with door handle brands and the only differences between two different door handles I’d find significant are price and shape. So this a rare case where making it cheap is almost completely the only thing that matters.

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