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Opposition and criticisms of socialism and arguments for and against

A number of thinkers, economists and historians have raised some issues with socialist theory. These individuals include Milton Friedman, Ayn Rand, Ludwig von Mises, Friedrich Hayek, and Joshua Muravchik, to name a few. Most of their objections and critiques seem directed more at a centrally planned economy (not a part of all proposed socialisms), some at socialism and Marxism in general, but because these distinctions are relatively difficult to tease out of their writings, it is probably useful to take them up in a single context.

Incentives

According to the critics of socialism, under socialism incentives either play a minimal role or are ignored totally. A centrally planned economy without market prices or profits, where property is owned by collectively, is a system without an effective incentive mechanism to encourage productive activity. Socialism, say the critics, is based on the theory that incentives don't matter.

There are two forms of this critique. One form considers the incentives of the of central planners. The latter was essentially the point made by Slavenka Drakulic in How We Survived Communism & Even Laughed (ISBN 0060975407), where she argued that a major contributor to the fall of socialist planned economies in the former Soviet bloc was the failure to produce the basic consumer goods that its people desired. She argues that, because of the makeup of the leadership of these regimes, the concerns of women got particularly short shrift. She illustrates this, in particular, by the system's failure to produce washing machines.

In reponse, most socialists claim that the incentives in a socialist planned economy should come from the democratic nature of the system. Economic planners have an interest in doing a good job and delivering what the people need because that ensures the people will keep voting for them in elections. If the planners are doing a bad job and the economy is stagnating, the people will vote them out of office and elect a new government with a new economic plan. If they are doing a good job, then part of that good job will involve putting or keeping the right incentive effects in place for productive people. The kind of system that Slavenka Drakulic and others lived under was not a democratic one, so the planners had no incentive to cater to the needs of the people. Some socialists do not even consider such an undemocratic system to be socialist at all.

The other forms of the critique is that incentives increase productivity for all people and that the loss of those effects would be disastrous.

One response is Participatory economics in which effort and sacrifice should be rewarded but where there should no inherited wealth and where those with a higher genetic ability should not be rewarded. Other socialists disagree since this would create inequality.

Prices

According to the critics of socialism, the price system in a market economy guides economic activity so flawlessly that most people don't appreciate its importance or see its effect. Adam Smith dubbed this effect the "invisible hand" of the market. Market prices transmit information about relative scarcity and then efficiently coordinate economic activity. The economic content of prices provides incentives that promote economic efficiency.

Some forms of socialism propose to abolish markets entirely. All, or nearly all, advocate some form of governmental or other "social" interference with market prices. Free-market economists argue that a controlled or fixed price always transmits misleading information about relative scarcity and that inappropriate behavior results from a controlled price, because false information has been transmitted by an artificial price. See economic calculation problem for a more detailed decription of the problem.

Socialists opposed to the market generally argue that markets don't work nearly as well as thought. They point out that some people struggle to survive in capitalism while others have mansions, and that this itself is indicative of scarcity and evidence that free market pricing mechanisms are evidently not effective or equitable.

Obviously, a command economy tries to replace the invisible hand with a highly visible (and, according to socialists, more efficient) one. The claim is that a more rational result can be achieved by the efforts of economic coordinators rather than by market forces. While some socialists oppose a centrally planned economy, all advocate the overt inclusion of non-economic factors in determining economic decisions.

Socialists are sharply divided on the claim that market pricing produces allocative efficiency. There are market socialists who believe it is both possible and imperative that socialistic systems take this point into account. David Schweickart, a philosophy professor in the US, has said that socialists must endorse the market because otherwise "everything in the economy is subject to political debate -- every price, every product, every technology" and he says only two possible outcomes can result from this, "either anarchy or, more likely, the subtle or not so subtle shutting down of democratic input."

On the other hand, a Hungarian economist, Jonas Kornai, once a market socialist himself, modified his views subsequent to the fall of the Soviet system and its eastern European variants. Kornai has written that "the attempt to realize market socialism...produces an incoherent system, in which there are elements that repel each other: the dominance of public ownership and the operation of the market are not compatible."

A capitalist opponent of socialism would argue that both Schweickart and Kornai are right -- that markets are both a necessity and an impossibility for a socialism that would be humane, sustainable, and allocatively efficient.

On the other hand, socialists who do reject the market mechanism of pricing make the following points:

• That capitalism has a natural tendency toward monopoly, leading to distortion in prices. This is essentially the same argument used by critics of socialism, but with the terms reversed: assuming monopoly to be inevitable, the socialists argue that the conditions will not be present for the "invisible hand", and other means not available under free market capitalism must be found. For example, this argument is repeatedly invoked in the 2001 Program of the Communist Party of Canada, which refers to the current system as "State-monopoly capitalism" and argues, that "financial and industrial monopolies dominate agriculture, and farmers are compelled to pay high monopoly prices for seed, equipment and other inputs, while the prices they get for their produce are set by the powerful packing, milling, grain-handling and railway monopolies."
• That market systems are distorted by the unequal power of the players in the markets. Globalissues.org editor, Anup Shah (a leftist, though not necessarily a socialist) makes this case, suggesting that the current neo-liberal order might be better called "neo-mercantilism" and applying to it Adam Smith's critique of how military power distorted trade under mercantilism.
• That one or another socialist approach can mitigate the role of externalities in pricing, producing results at least as efficient as those under capitalism. This was basically the argument put forward by Oskar Lange and the Paretians ; see also Pareto efficiency.

Profits and losses

Many historical and proposed forms of socialism would not operate under a profit-and-loss system of accounting. All these forms of socialism give less of a role to competition than does a capitalist economy. According to its supporters, a profit system is a monitoring mechanism which continually evaluates the economic performance of every business enterprise. In theory, at least, under capitalism the firms that are the most efficient and most successful at meeting consumer demand are rewarded with profits. Firms that operate inefficiently and fail to serve the perceived public interest are penalized with losses.

By rewarding success and penalizing failure, the profit system provides a strong disciplinary mechanism which continually redirects resources away from weak, failing, and inefficient firms toward those firms which are the most efficient and successful at serving the consumer demands of their corresponding market segment. A competitive profit system ensures a constant re-optimization of resources and moves the economy toward greater levels of efficiency. Unsuccessful firms cannot escape the strong discipline of the marketplace under a profit/loss system. Competition forces companies to profit (which advocates of capitalism tend to equate with serving the public interest) or suffer the consequences.

Under central planning, there is no profit-and-loss system of accounting to accurately measure the success or failure of various programs. Without profits, critics argue, there is no way to discipline firms that fail to serve the public interest and no way to reward firms that do. Therefore, they claim that centrally planned economies do not have an effective incentive structure to coordinate economic activity.

Socialists may respond to these assertions with a variety of counter-arguments. First and foremost, they focus on the role of democracy, rather than competition, as a means of regulating economic activity and increasing efficiency. In other words, if the state runs the economy and the people have democratic control over the state, then the people can reward the state for efficient economic management (by voting for the current leadership in elections) or penalize the state for operating an inefficient economy (by voting against the current leadership in elections). Efficient planning is rewarded, inefficient planning is penalized. Thus, democracy ensures a constant re-optimization of resources and moves the socialist economy toward greater levels of efficiency. A democratic state is forced to serve the public interest or suffer the consequences.

As a corollary to this argument, socialists claim that inefficient planned economies can only exist for prolonged periods in undemocratic conditions, where the people cannot reward or penalize the state for its performance.

Furthermore, the majority of socialists find the notion that companies serve "the public interest" outright laughable. They argue that the profit/loss motive encourages companies to cut costs and raise profits in ways that do much more harm than good to the public. For example, a company will try to deceive the public in any way it can, and as often as it can. A company will also try to get the maximum work from its employees for the minimum amount of money, keeping wages as low as it can, and, as the capitalists hold high concentrations of capital and restrict access to vital resources, the workers are left with little bargaining power. Finally, since the rich have more money than the poor (and therefore there is more profit to be made in serving the rich rather than the poor), capitalism encourages companies to cater to the interests of the rich and ignore the needs of the poor. Hence, a profitable company is not necessarily one that serves "the public interest."

For example, drugs companies have little incentive to produce drugs to cure diseases such as malaria, which primarily affect poor countries that cannot afford to buy them, but those same companies devote huge resources to developing drugs for the relatively trivial complaints of the rich western consumers who can pay. In a nutshell, the profit/loss motive encourages companies to serve the interests of the rich, not the interests of the wider public.

Another argument can be seen in an article published by the Socialist Party (England and Wales), claiming that the profit motive inherently puts capitalism at odds with ecologically sound policy. (http://www.socialismtoday.org/69/green.html).

Private Property

Another defect of socialism, according to its detractors, is its disregard for the role of private property in creating incentives that foster the sustainable use of resources. This idea is the so-called tragedy of the commons.

The tragedy of the commons, in its narrowest sense, refers to the situation of certain grazing lands communally owned by British villages in the 16th century. These lands were made available for public use (or, more precisely, the use of those with rights in that common land). According to Garrett Hardin and others, because each individual had more of an incentive to maximize his (or her) own benefit from this common land than to be concerned for its sustainability, the land was eventually overgrazed and became worthless. (However, studies by C.J. Dahlman and others have largely refuted the claim that any such tragedy actually occurred. Access to the commons in the 16th century was constrained by a variety of cultural protocols and was far from equal. See Tragedy of the commons for further discussion.)

The line of argument is that when assets are publicly owned, there are no incentives in place to encourage wise stewardship. While private property is said to create incentives for conservation and the responsible use of property, public property is said to encourage irresponsibility and waste. In other words, the argument is that if everyone owns an asset, people act as if no one owns it. And when no one owns it, no one really takes care of it.

There are several socialist counterarguments to this. First they might take a different view of human psychology, a view of motives as depending more on the specifics of nurture and education than on an underlying soulist or genetic nature. In this context they might contend that the "tragedy of the commons" is only the result of the indoctrination of children in the present capitalist society, and that the nurturing of children in a future socialist society will lead to a cherishing of public property.

Socialists further point to the free will that they believe is inherent in every human being and to the variety of social structures that have existed in human history, using them to support the claim that no type of behaviour is fixed in stone.

Another socialist counterargument is that some things are almost inevitably commons, notably the quality of the physical environment. While the past and present communist states have an even worse record than capitalist states in this respect, many socialists today would argue that was due more to their non-democratic nature than to their socialist aspects and that, in principle, a democratic system of planning could achieve appropriate shared management of this inevitably shared resource. In actual practice, this is even what many otherwise capitalist societies have chosen to do , imposing government regulations to restrict air and water pollution. (Paul Burkett makes a specifically Marxist case for socialism as being better able to address the issue of managing the environment in an article "Ecology and Marx’s Vision of Communism" in Socialism and Democracy, Vol. 17, No. 2 .)

There exists a contrary body of theory on free-market environmentalism, arguing that the most effective direction of reform is continued privatization of the commons On the level of practice, the USA, and some others, have experimented with market solutions in the form of emissions trading. Such trading has certain aspects that are more socialist than capitalist, since it uses an artificially created market in which a government decides the number of emissions credits that will be in circulation and the rules under which they may be traded.

Lastly, there is a body of thought, often linked to cultural anthropology and to modern institutional economics, that recognises that constraints must exist to prevent the private overuse of resources. However, this perspective contends that alternative institutions than private property might well be just as effective or more effective in meeting those goals and better suited to meeting social goals. This was the belief of many early Bolsheviks, particularly Georgi Plekhanov, who evoked this idea to make his case that a socialist state would need regulations. The arguments of Hayek and von Mises target this claim more directly.

Central Planning

Even anarchists usually advocate some form of coordination, so that different groups of workers function smoothly together, no matter if in a local community or on the scale of the world. Furthermore, it is not possible to vote about everything, if for no other reason than that information gathering, discussion, and voting takes time. Meaning that much power must be given to leaders, at least temporarily.

But central planning or anarchist coordination requires very good knowledge of the future in order to make good decisions. But in the real world it is often impossible to make long term predictions as discussed in chaos theory. In capitalism this is solved by simultaneously trying many possible solutions and letting the real world and competition find the best. But anarchist coordination or central planning means that often one or only a few solution will be chosen. And in many cases these solutions will be the wrong ones due to the faulty forecasting.

Historic Examples

Critics of socialism argue that all historical attempts at its implementation have been transient failures. In communist states large scale human rights violations occurred, see The Black Book of Communism. Almost all former communist states has abandoned the system. Socialists sometimes point to hunter-gatherers as being a successful long-lived form of anarchism but many such societies had low living standards and frequent violence, see Primitivism.

However, adherants to the Marxian doctrine of Historical Materialism argue that true socialism can only develop as a response to the contradictions of bourgeois capitalism; therefore, the failure of those experiments in socialism to date can be attributed to the fact they did not emerge in this manner. The Soviet Union is a case in point - Tsarist Russia was quasi-feudal, not capitalist, and was overthrown by a small cadre rather than by a mass revolution. So it is argued by some Marxists that the failure of Soviet socialism to sustain itself is actually an affirmation of Historical Materialism.

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