Yesterday we published the article Austrian Economics For Dummies - The Market. In it we described what a true free market is from a Praxeological (and Capitalist) point of view. We also described the benefits associated with such free markets. Today we are going to extend this lesson and compare what happens within a Communist, Socialist and Capitalist environment in relation to markets.
IN THE BEGINNING
In order to perform a meaningful comparison, we need to clarify that all people have needs. Every single political or economic theory recognizes this fact. This could not be otherwise because we are physical beings who require physical goods and services. This much is a given. Thus, the main difference between Communism, Socialism and Capitalism is how to satiate those physical means more "justly". But nothing can be "just" if nothing was produced and thus there is nothing to distribute. As a consequence of this fact all such theories must deal with production. From this it is immediately obvious that the efficiency of production matters. A distribution of goods and services cannot be "just" if it is insufficient to accommodate all people in need. A distribution of goods and services cannot be "just" if it cannot satiate the needs of all people.
Thus all those theories deal with mechanisms to ensure the efficiency of production. Yet, there is a problem. As physical beings living in a physical universe our physical means are limited. We know from the start that any system will be incapable of producing sufficient goods and services to accommodate all the needs of all people. Thus how resources are allocated to produce what matters most in the largest possible amounts is important. A society cannot be "just" if it produces a trillion marbles and only a few loafs of bread because people cannot eat marbles.
Therefore production efficiency is important but the selection of production targets is also critical. We need to know what to produce and in which quantities in order to satiate the highest number of people in their most important needs.
All political and economic theories agree with these facts. Where they disagree entirely is in the process to achieve this goal.
CAPITALISM
Capitalists believe that this process of achieving maximum satisfaction with limited resources must be based on true free markets. They believe that people's savings can be harnessed for production purposes. The direction of this manufacturing process and its outcome is in turn decided by the purchasing habits of people. But in order for this direction to be accurate, the purchasing habits of people must be absolutely free so that these habits convey the information of their true desires. Any interference in purchasing decisions distorts its information leading production efforts in the wrong direction. This is so simply so because producers will manufacture goods and services which will not be in demand thus these goods and services won't be purchased because they won't be satisfying people's needs. Thus, if the information is incorrect, production processes will waste resources manufacturing stuff that nobody wants. This is how the efficiency of productive processes is decreased.
COMMUNISM
Communist markets
Communists believe that producers (owners) "exploit" workers. As such and in order to avoid this "exploitation" the only rational solution is for all the means of production to be in the hands of the people, or more precisely, in the hands of their representatives. Fair enough, this solution has removed the theoretical "injustice" present in the physical world. For argument's sake we will accept this point, although it is not true. Having taken possession and control of all means of production, the state must now determine what to produce and in which quantity. As we explained above, this is the ultimate goal of any political or economic theory (at least in theory). But there is a problem. In order to satiate people's needs we first need to know what those needs are. As communists believe that free markets are only the means through which producers exploit workers, they are banned. In communism markets are simply places to exchange money for goods and services at pre-determined and state-determined exchange ratios. In other words, in communist markets all prices are fixed by the state. Thus, the information that those prices convey is simply what the state believes to be "fair" and not what people want.
Inefficiency
It is true that there is some degree of overlap between what communist systems produce, what people want and the prices set by the state. It is nonsense to believe that communist production systems are incapable of manufacturing shoes or houses or bread. They most definitively can. As such, communist manufacturing system will produce a great deal of goods and services that people need and want. That is not the issue. The issue is that as a communist market does not convey any preference information through pricing, it is not possible for planners to optimize production systems. Basically, they don't have a clear indication of what it is that people want or need. They may have some idea but that's it. Based on unreliable and slow statistical analysis or production systems and consumption rates they may attempt to do so but such estimates will be…well…unreliable.
The direct consequence of this lack of data is that resources are used in the wrong production systems or at least in the wrong quantities. Basically, they are wasting resources. The goal was always to know what to produce and in which quantities in order to satiate the highest number of people in their most important needs. But this waste of resources implies that they will be far less efficient than capitalists.
And there are other problems. Redirecting resources to the wrong manufacturing process creates "domino effects" or ripples throughout the manufacturing chain. If planners consider that more pink shoes with fluorescent stripes are required, then manufacturing facilities must expand. This means to place more orders for machines to make such shoes and pink and fluo paints. These orders are relied to other supplying manufacturing facilities which will now need to expand their own manufacturing facilities (or at least change their production schedules), and so on. Every step of the manufacturing process wastes more and more resource to satiate a need that does not exist. This increases waste (and thus inefficiency) enormously.
In ultimate analysis the communist system simply collapsed because it was incapable of bringing this waste under control. It was incapable of optimizing the use of their resources. The further communist systems move in time away from a free market, the less information they have and thus the more waste they produce. This process is unavoidable. The final consequence is that all that waste accumulates to the point that very little can be manufactured at all. Game over.
It all comes down to the fact that information available in prices through a true free market simply does not exist in a communist system.
SOCIALISM
As we mentioned several times before, socialism is nothing more than communism-light. This can be understood in two ways.
The first way is that socialism takes over all the means of production but only in selected industries, for example public schools or roads.
The second way is that socialism interferes with pricing of certain goods or services due the perceived need for "social justice". Thus, certain prices of goods or services are capped, for example medications.
It is obvious that these two mechanisms interfere with true free markets. In so doing the prices paid in said markets represent political theories and not the wishes of the people. As a consequence of these deviations, productive systems under socialism become wasteful and inefficient, same as under communism.
The difference between communism and socialism in market terms is simply a matter of degrees, not a matter of political or economic theory. They base their actions on the same principles thus they achieve the same (dismal) results.
However, there is one noticeable difference. As all the means of production are in the hands of the state, any error in production planning is immediately visible. The typical example of this phenomenon was the empty shelves and perpetual long queues that existed in the USSR.
This is not so under socialism. As a socialist system is a hybrid system between managed and pseudo-free markets, there is a certain degree of resiliency do to the existence of private producers. If the state makes a mistake in the provision of goods and services, there are other, private producers, who compensate for this error. Thus, state planning mistakes are not immediately obvious. Furthermore, this "resilience" of socialist systems is viewed as "proof" that socialist systems "work" when in reality is the remnants of free markets that continually save the day!
However, there is one point that needs to be made. The inherent and unavoidable trend of socialism (it being communism-light) is towards communism. Step by step and decade after decade socialist countries take over more and more of production systems and interfere more and more in free markets. This is unavoidable and a vicious spiral. As a socialist system makes a given manufacturing process less efficient, there is less wealth to be had. Thus, more people will require "social assistance". Therefore more productive systems will have to be coopted in order to artificially lower the prices of those goods and services in order to make them accessible to "people in need". But this process will introduce more waste in those productive systems reducing yet again the total amount of available wealth, thus creating even more "people in need" which will justify taking over even more productive systems and so on. This process was also described in the article Socialism - The Most Addictive Drug, albeit from a different point of view.
JUSTICE
We are the first ones to point out that capitalist systems are inherently "unjust". Yes. Rich people will have a great deal more of wealth than poor people. Yes. There will be people who will lack even the most basic necessities. Yes. There will be people that will abuse and exploit, truly exploit other people (exploitation as forcing them against their will). Yes. Yes. Yes. And Yes. All that and more is true. Undeniably.
There is always a but.
We must go back to first principles and revisit what was our original goal. Our goal was not to maximize justice (whatever this may mean) but to optimize production so that the maximum amount of people get their most important needs satiated with the limited physical resources we have at hand.
In other words, the goal was to make the life of as many people as possible as good as possible by providing them with what they need. Emphasis on possible.
In achieving this goal capitalism is unbeatable. No other system comes even close. Many systems have tried, tried and failed. Miserably. Thus, until a better system can be found, we will remain capitalists because it works far better than anything else.
Yes. Some things are that simple. We are not in love with capitalism. We are in love with the results it produces. The second a different system can produce better results, we will drop capitalism like a hot potato. But any such new system must prove itself. Theories abound, proofs are very, very scarce.
CONCLUSION
In the end the purpose of free markets is simple; to provide producers with the information they need to satiate the needs of as many people as possible and so so as efficiently as possible. Free markets are self-optimized processes. They already operate at peak capacity in terms of efficiency. Any tampering of any kind only decreases their proficiency, "social" theories aside.
We are not communists nor socialists not because we are not drawn towards a strong desire to see everybody on earth happy and satiated. We are capitalists because capitalism works. Capitalism (as expressed by free markets) is the true voice of the people, one person at the time.
At this junction you have to make a choice. You can either have your political vote ignored by politicians or you can have your buying habits as a consumer do the effective voting for you. It's your choice. Just one thing. Going into the future (which is increasingly socialist/communist) don't come complaining back to us, as you are unable to satiate your needs. We told you so.
Note: please see the Glossary if you are unfamiliar with certain words.
