Is America having a socialist moment? Democrats are more likely than ever to embrace the label. Republicans strongly condemn it. Both sides agree that socialism is a live issue.
Theyre wrong. If we assume that socialism is only about the efficient management of the economyno small assumption, to be sureit is as dead as a doornail. Two economists, Ludwig von Mises and F. A. Hayek, put that theory to rest by demonstrating that its impossible for socialism to out-produce capitalism.
Lets be clear: Socialism is not actually on the agenda in the U.S. As its traditionally defined, socialism means public ownership of the means of productioni.e., government control of the economys commanding heights. Socialism does not mean the welfare state, public services, publicprivate partnerships, or even the occasional state-owned enterprise. Western Europe is not socialist. The Nordic democracies are not socialist. And despite their collectivist proclivities, the likes of Senator Elizabeth Warren and Representative Alexandria Ocasio-Cortez are notin any intellectually rigorous sensesocialists, regardless of what they may call themselves on occasion.
Its quite fashionable to play with socialist ideas. Its much less fashionable to be a socialist.
Almost a hundred years ago, economists fiercely debated the merits of competing economic systems. The issue then turned on whether socialism could beat capitalism at its own game. Socialists argued that the capitalist system was hopelessly anarchic because it lacked top-down coordination. Enlightened planners could fine-tune production to create more wealth for everyone. Using models from state-of-the-art economic theory, socialists could engineer economic efficiency from on high.
This argument appealed to many intellectuals and not a few politicians. But it was completely wrong. Mises and Hayek showed the world why. The greatest representatives of the Austrian school, both were accomplished economists who ranked with the professions elite. Hayek won the Nobel prize in 1974; while Mises never did, arch-Keynesian Paul Samuelson considered him worthy of the honor. Both made crushing arguments against socialism, demonstrating why it was not only difficult but impossible. Theres no way for socialism to produce more wealth than capitalism.
Misess argument was simple and elegant. In a socialist economy, the factors of production cannot be private property. Without ownership theres no exchange, and hence no markets. Without markets, there are no market pricesthose indispensable indicators of resource value across lines of production. And without market prices, nobody can compute profits or losses. Producers, then, will not have any reliable information about whether theyre satisfying customer demand. So much for rational economic calculation! Mises proved that socialism is like throwing darts at a moving board while blindfolded.
Hayek built on Misess arguments by further explaining the informational role of prices. His classic article, The Use of Knowledge in Society, is one of the most-cited papers in the history of economics. Contrary to the assumptions of would-be social planners, the knowledge required to coordinate an economy doesnt exist in a single place. Its scattered throughout the minds and intentions of producers and consumers themselves. How, then, can buyers and sellers get what they want? Hayeks answer: Market prices contain the necessary information and act as information surrogates. Supply and demand can be brought into harmony through price adjustments. Thanks to Hayek, we know the market-price system is the most powerful communications network ever devised.
This is the genius of capitalism: Free economies work because planning is decentralized. Households and businesses, not a national committee, make the decisions. By abolishing property, prices, and profits, socialism destroys the very foundations of economic harmony. No amount of good intentions or detailed production analysis by planners can cope with this fatal defect. Thats why socialist countriessuch as Cuba or North Koreaare poor. Socialists lucky enough to live in liberal democracies want to disqualify such examples as not real socialism. On the contrary: They are what socialism inevitably becomes.
Thankfully, there are very few advocates of socialism today and none of them have the ability to pass their agenda in the United States. We canand shouldargue about the costs and benefits of the Build Back Better Act and the Green New Deal, but even the most ambitious left-wing plans on offer from Democratic legislators wont turn the U.S. into Venezuela. Not even close. They can still do a great deal of damage, of course. Tax hikes, corporate welfare, and other forms of cronyism bring economic painall of which we should resist on principle. Abusing the s-word, however, will not help us do that.
None of this means that the MisesHayek critique is irrelevant to todays political debates. The Austrian economists insights about property rights and information should make us hesitant to tinker with the economy. Alas, its hard to see much evidence of that hesitancy amid large swaths of our political classleft and right. Nevertheless, the fundamental point stands: Regulated market economies are a fundamentally different thing from centrally controlled economies. We blunt the force of Misess and Hayeks masterstroke when we call everything we dont like socialism. Doing so, in fact, diminishes our ability to hold actual socialist regimes accountable for the poverty and misery of their citizens. Furthermore, moving the goalposts could backfire: If progressive Democrats pass their agenda and the economy doesnt immediately tank, many will mistakenly conclude that socialism works.
We absolutely should use Misess and Hayeks insights to explain why so many of the economic initiatives of todays Left will fail, even if they fall a long way short of full-blooded central planning. But lets not fall into the trap of helping D.C. busybodies revive a dead economic philosophy.