4 Reasons Why Socialism Fails

Anthony P. Mueller

The new “democratic socialists” want to make their followers believe that one could redistribute wealth and income and socialize a large part of the economy without harming production and productivity. They claim that a comprehensive control of the economy by the government would bring more justice and more prosperity. The democratic socialists want more planning and less market. Yet this postulate ignores that socialism does not fail by accident or circumstance. Socialism fails because it suffers from four fundamental design defects.

• First, socialism eradicates private property and markets and thus eliminates rational calculation.
• Second, socialism allows soft budgets, so there is no mechanism in place to discard inefficient production methods.
• Third, abolishing private property and replacing it by the state distorts the incentives.
• Four, the socialist system with its absence of private property and of free markets inhibits the economic coordination of the system of division of labor and capital.

The Importance of Market Prices

Socialism cannot bring prosperity because it destroys the market functions of private property. Under socialism, private ownership of the means of production no longer exists, and thus there are no market prices for capital goods available. Institutionally, socialism consists in abolishing the market economy and replacing it with a planned economy. By doing away with private property of the means of production, one wipes-out market information and valuation. Even if the socialist administration puts price tags on the consumer goods, and the people may own consumer goods, there is no economic orientation about the relative scarcity of capital goods.

Many supporters of socialism suppose that business management is nothing more than a kind of registration or simple bookkeeping. Vladimir Lenin believed that the knowledge of reading and writing, and some expertise in the use of the basic arithmetic operations and some training in accounting, would be enough for the conduct of business operations. The socialists promote engineering and science, but they believe that there is no need for the entrepreneur. The regime may spend heavily on education but when there is no entrepreneurial economy, the people will stay poor, nevertheless.

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