Lack of pricing mechanism renders socialism unworkable

By Rane McDonough

Flickr/tobym

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 [email protected].