My friend Daniel Krawisz gave a great presentation on the failure of socialism and how it can never work. On the anniversary of the collapse of the Soviet Union, I would like to very briefly summarize the austrian perspective on why socialism has never worked, and will never work.
Ludwig von Mises was the first who clearly articulated this in his essay "Economic Calculation in the Socialist Commonwealth". Basically what is said is the following:
On the free market, businesses must make money by fulfilling a want or need in the marketplace. If a business is able to provide something that people want, and do so efficiently, they are rewarded with profits. If they are unsuccessful in this endeavor, they are penalized with losses, while other businesses that are able to allocate their scarce resources more effectively get the money that did not go to the other business. Therefore, the most efficient businesses that offer the best products at the lowest cost to the consumer get the most rewards. That is a VERY brief summary of how a free society, with no coercive agent such as a government limiting cooperation, would and should work.
On the other hand, socialism does not work that way. For my purposes, I will define socialism as any government action that involves funding (which essentially is any government action). As a government does not produce anything, they do not earn money in the way that a business would. Instead, a government forcibly takes money from individuals and businesses. Once they have this money, they simply reallocate it to whatever they deem is most worthy.
This creates THE problem of socialism: there is no way to determine if that reallocation is efficient. If this were to happen on the market, that is to say a business takes its profits and decides to spend some of it on a machine that could increase production and profits in the future, there is still some uncertainty. The entrepreneur will be able to find out if his or her investment was worthwhile by doing some simple cost-benefit analysis and by looking at the profits and losses. If the investment ends up increasing profits, then it was a good investment, but if it results in losses, then it was a bad investment.
A government, on the other hand, is incapable of determining this, because there is no system of profits and losses and no way to perform any sort of cost-benefit analysis. ANY government spending is inefficient because that money has been stolen from the market and there is no way to know how that money would have been spent otherwise.
This leads me to the great example that Frederic Bastiat discussed, "The Broken Window Fallacy". If one were to say that war is good for an economy (and yes, war IS a form of socialism), then this is a great example to use. Bastiat essentially pointed out the idiocy in saying that breaking a window is good for the economy as that action employs someone to fix or replace the broken window. Sounds well and good right? WRONG! The problem is this. Let's say that the owner of the building in which the window was broken has $100. He is now compelled to spend that $100 on fixing the broken window, instead of spending it on a new suit or whatever else he felt was a better use of his money. Now society has lost the benefits of whatever he would have spent that money on, because he is now compelled to spend his money on the window. It is inefficient to break windows and employ window makers, because without that money being spent on fixing and making new windows, it would be spent in other areas that the individual deemed more important.
Well, that is enough of my rambling for today. Happy Fall of the Berlin Wall Day!
Yours in Liberty,
Andy
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