SYSK recently published a podcast introducing the idea of socialism. Below is my open letter to them.
I love your podcast but was bracing myself for the socialism episode (I’m an economist interested in the socialist calculation debate, I’m no expert but many economists don’t even know about this debate). You guys did a great job discussing socialism and I was pleasantly surprised. Most people think “socialism can’t work because people will be lazy” but you rightly pointed out that gulags are a strong motivator and the real problem was a sluggish adaptation to changing conditions due to a non-spontaneous price system.
Some clarifying points:
- In economics socialism is defined as centralized control of the means of production (e.g. TV factories, but not necessarily TV sets). A socialist economy is one that takes this to its limit and as far as I know has only existed in Russia between 1918 and 1921.
- In 1920 Ludwig von Mises wrote Economic Calculation in the Socialist Commonwealth. Prior to this point the official socialist stand was essentially, “1. Capitalism lays the foundations for socialism. 2. ??? 3. Utopia!” Socialists had never described how socialism would solve economic problems (what to produce, where, by whom, for whom, etc.). Mises pointed out that those issues are solved automatically by the working of unfettered markets that match incentives with information. If the price of steel is $X/ton that tells buyers “you’d better feel pretty confident that you can use this steel to create something more valuable than that,” while telling sellers “the resources you are using would be better used elsewhere in the market if you can’t keep your cost below $X/ton.”
- (This is expressed eloquently by Hayek’s 1945 article, The Use of Knowledge in Society.
- Market socialism is a system where a socialist economy sets up pseudo-markets. So Josh and Chuck are each put in charge of a plant that makes shoes and each has to get the required leather. In theory they have to compete to get leather (just like in real markets) and that competition provides information about competing uses of different inputs. But if Josh turns a profit he doesn’t get to keep it for himself and if Chuck makes a loss he can’t go bankrupt (though he could get sent to the gulags). This sort of system was proposed in response to Mises’ 1920 article. This is when socialists started actually coming up with a theory of socialism (how it could work to allocate resources so that benefits exceed opportunity costs).
Here’s a great read that covers the essentials of this issue: National Economic Planning: What is Left. It boils down to this: without private property and rule of law (i.e. a situation where the “king” can’t arbitrarily interfere with people’s plans and has to follow the same universal rules as everyone else) there can’t be markets with profits and losses. Without that there can’t be prices that incorporate all the information, which is scattered and often tacit (i.e. non-reportable), relevant to economic decisions. Without those prices it becomes impossible for central planners to know the opportunity costs of their actions and so they cannot make economic decisions that are rational (i.e. weigh benefits to consumers against costs to producers). This is true even if we assume perfectly altruistic and motivated “New Soviet Man” and benevolent dictators.
Without markets central planners are groping in the dark. With markets there are no longer central planners.
Thanks for making my commute more enjoyable!
Your fan,
Rick
Notes On Liberty 
Thanks a lot for this, Rick. I wish we’d been able to explain it as clearly as you. Thanks for additional reading too.
Sorry to post this here but I have failed to find a way to send “listener mail” to Josh and Chuck. My hope is that Josh will see this reply.
In their recent podcast about Elevators they mentioned a story about the lazy susan having been invented by a chinese restaurant operator in the 1950s. They did not claim the story was true.
It is easy to refute. An search for “lazy susan” at the chronicling america site reveals lazy susans advertised in newspaper furniture ads as early as 1911. Some of the ads later in that decade include pictures and describe the item as revolving. The earlier ads use quotes around lazy susan, suggesting the term was new at that time.
Wow! I didn’t notice you (an essentially famous person… Or your assistant) responded to my comment! I’m happy to be of assistance. And I’m happy to lend my services in the future if you have economic questions in future podcasts.