Socialism is Not the Answer
October 12, 2009 by admin
Efforts of local idealists are misguided
By Christopher L. Oppermann
It is not necessary to question the good intentions of those in attendance at Harvard’s September 17 meeting of socialists at Phillips Brooks House. They repeated time again that they sought to put an end to many ills facing our world: hunger, disease, poverty, and unending war. Adam Ziemkowski, a socialist activist working in Latin America, spent an hour explaining how all of these evils have one common denominator: the intrinsically flawed, anarchic, and exploitative system of capitalism. He sought to outline how a socialist society would function, and why it would be preferable to capitalism.
Given his record of populist activism, it seems obvious that Mr. Ziemkowski, like many Harvard students and Cambridge residents, wants his fellow human beings to live in prosperity, peace, and security. But having noble goals is not sufficient to make them reality.
Too often I have run across ideologically middle-of-the-road students, who, in an effort to maintain a reputation for being uncontroversial and politically correct, or simply to avoid argument, admit to the belief that socialism is impractical. But they will nearly always hasten to add, “In theory, it works great.” A rigorous analysis of socialism reveals that Mr. Ziemkowski’s criticisms of capitalism fly in the face of both common sense and accepted economic theory; socialism is a failure, even in theory.
Mr. Ziemkowski alluded several times to one of the central tenets of socialism, the labor theory of value. Formally introduced to the social sciences by Adam Smith, this principle asserts that the value of a good is determined by the amount of labor needed to produce it. But since a capitalist system entails ownership of land and capital, two of the means of production, by people external to the workforce, workers are paid less than the market price of the finished product. In this way, socialists argue, workers are robbed of a portion of the fruits of their labor.
This notion of profit as a form of theft defies the socialists’ own conception of how capitalism operates. If profit were merely the surplus value of a good, stolen from workers, then capitalists, eager to maximize profit, would have to attract workers to their own enterprises by outbidding each other through wage increases. This competition among employers would eventually bid down the stolen surplus value to zero – the point at which the economic cost of production, which includes wages and all other expenses, equals revenue. Profit cannot be exploited surplus value, therefore, because if it were, the same forces of greed that cheat profits out of workers would drive capitalists to bid them out of existence.
Nevertheless, Mr. Ziemkowski went on to say that profit should be abolished because of its essentially destructive function. Profit, he explained, takes societal precedence over serving people’s needs. In a world of profit-seeking, the greed of the few capitalists who own the factors of production – not the needs of the masses – determines what will be produced. He went on the criticize capitalism for its lack of a coherent, central plan, labeling it as “free market anarchy.” A socialist world, he claimed, would be able to cast off the oppressive burden of profit-seeking and replace it with democratic voting as the best way to decide what goods and services to produce.
This reasoning also betrays a fundamental misunderstanding of profit, which serves the essential function of regulating all kinds of economic activity. It is the feedback mechanism by which consumers dictate to producers whether or not resources in an economy are being used in a way that satisfies their needs. If an entrepreneur produces a product that people do not desire, they refuse to buy his product, and he loses money, forcing him to exit the market. This may be hard luck for one man, but it is a healthy phenomenon for the economy as a whole. The resources he had been using to supply undesirable products are released, and can be used by other entrepreneurs to create more desirable products.
Society benefits from this “creative destruction,” which can only be realized if a profit-and-loss system is allowed to operate.
Socialism, however, intends to replace this allegedly anarchic system with a democratic method of deciding what to produce. Instead of allowing profit and loss to regulate the use of resources, a socialist society would allow massive polls of the citizenry to determine what and how much to produce.
The advocates of this system forget to count their blessings. The market economy, in fact, is the greatest and most widespread democracy known to man. Every dollar spent is a vote cast. Every choice by every consumer to buy this or that contributes to the mechanism of profit and loss, a process that almost miraculously directs resources to ends most valued by consumers. Whereas a democratic command economy is only concerned about the preferences of 50 percent plus one of the electorate, a market accounts for the precise tastes of every single member of society. Only capitalism, with its feedback mechanism of profit and loss, can adjust production to accommodate the millions upon millions of constantly changing desires and preferences.
Harvard’s socialist meeting, dismal as it was, confirmed once more F.A. Hayek’s classic observation: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” If only our socialist brethren would realize the boundaries of their human powers. It would spare us much suffering in the years ahead.
This is awesome! Those socialists are gonna go down…..and hard at that! Keep it up Chris O!
While I’m far from agreement with the socialist program, I feel that this article fails to engage the full strength of their critique. (Note: I did not attend this meeting. It’s entirely possible that this article responds to what was actually said there, in which case I suspect the socialists failed to formulate their own ideas carefully enough.)
You note “This notion of profit as a form of theft defies the socialists’ own conception of how capitalism operates. If profit were merely the surplus value of a good, stolen from workers, then capitalists, eager to maximize profit, would have to attract workers to their own enterprises by outbidding each other through wage increases.”
This analysis utterly disregards the practical conditions under which workers operate, or the notion of the capital-possessing classes as operating in an oligarchic fashion. While such notions are reductive and at least partially outdated, it is easy to see that practical considerations would prevent such maximal outbidding. Take, for example, company towns in the late nineteenth century. There, the economic systems were designed in a deliberately exploitative fashion, and the monopolistic practices of company town owners prevented any sort of meaningful competition from arising. There was no bidding war, because there was no one to bid against. Even leaving aside the manipulation of debt to trap workers in an untenable position, the job market in general was poor. Fierce competition for jobs undermined the potential of workers to leverage their services for wage increases. Someone who demanded more payments was fired. Another would take their place. The bidding wars you suppose do not always emerge. That’s not a theoretical contention. It’s an observed fact.
You may note, and rightly, that the situation outlined does not represent a truly free market. However, I would reply by saying that monopolistic development is an observable tendency in unregulated environments. Humans are naturally collaborative. Without incentives or pressures to act otherwise, those with the most power will collaborate with each other, to the detriment of the rest.
Or, if I may summarize: you argue that exploitative wage schemes cannot, theoretically, exist. Exploitative wage schemes have been observed to exist. I’m relying here on late nineteenth century examples where workers did not receive livable wages, where company owners were fantastically wealthy, and where the companies continued to operate successfully after minimum wage-maximum hours standards were imposed. I’d argue that these cases demonstrate that workers are sometimes paid less than the company can “afford,” and that your theoretically optimal job market does not, in fact, exist.
“The market economy, in fact, is the greatest and most widespread democracy known to man. Every dollar spent is a vote cast.”
Surely this rhetoric is, at best, misled. While we can debate the relative merits of capitalist and socialist economic systems, it is neigh-universally accepted that the maxim “one person, one vote” is fundamental to any truly democratic system. It is unnecessary to debate the utility of economic inequity. We can see that some people have more money than others; therefore, the free market inasmuch as it has ever existed does not possess the property of equal power for each person, therefore, it is undemocratic.
“Whereas a democratic command economy is only concerned about the preferences of 50 percent plus one of the electorate”
As someone who did not attend the meeting, I cannot speak to the accuracy of this claim. But Surely their exist democratic systems that would also encourage the production of goods assuming they commanded a substantial plurality of the electorate. Which, after all, seems to be what the market itself does. Concerns about the enormous precision of the market are addressed below.
“a market accounts for the precise tastes of every single member of society.”
This statement succumbs to the common misconception of free market advocates, that the market is infinitely and perfectly responsive. It’s not. People operate with imperfect information, and they draw imperfect conclusions from that information. While I agree that the responsiveness of the market may be superior to the responsiveness of repeated referenda (generally), it’s not true that it’s universally responsive. Case in point: the brief messages that precede cell phone answering machines, letting you know to leave a message after the beep. They’re wildly unpopular with consumers, and very difficult to get rid of. Why? Because companies know that they can use these messages to increase everyone’s bills by a marginal but valuable amount, and nobody will resist in an organized fashion (CITE: http://pogue.blogs.nytimes.com/2009/07/30/the-mandatory-15-second-voicemail-instructions/?ref=technology). So the market certainly isn’t perfectly responsive to the desires of its inhabitants.
Those are just a few responses I thought of as I read your article. I apologize for their occasional disorganization and wordiness, and I’d love to hear your responses.