That’s Not Real Socialism!

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.

They’re wrong. If we assume that socialism is only about the efficient management of the economy—no small assumption, to be sure—it is as dead as a doornail. Two economists, Ludwig von Mises and F. A. Hayek, put that theory to rest by demonstrating that it’s impossible for socialism to out-produce capitalism.

Let’s be clear: Socialism is not actually on the agenda in the U.S. As it’s traditionally defined, socialism means public ownership of the means of production—i.e., government control of the economy’s commanding heights. Socialism does not mean the welfare state, public services, public–private 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 not—in any intellectually rigorous sense—socialists, regardless of what they may call themselves on occasion.

It’s quite fashionable to play with socialist ideas. It’s 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 profession’s 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. There’s no way for socialism to produce more wealth than capitalism.

Mises’s argument was simple and elegant. In a socialist economy, the factors of production cannot be private property. Without ownership there’s no exchange, and hence no markets. Without markets, there are no market prices—those 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 they’re 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 Mises’s 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 doesn’t exist in a single place. It’s scattered throughout the minds and intentions of producers and consumers themselves. How, then, can buyers and sellers get what they want? Hayek’s 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. That’s why socialist countries—such as Cuba or North Korea—are 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 can—and should—argue 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 won’t 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 pain—all of which we should resist on principle. Abusing the s-word, however, will not help us do that.

None of this means that the Mises–Hayek critique is irrelevant to today’s political debates. The Austrian economists’ insights about property rights and information should make us hesitant to tinker with the economy. Alas, it’s hard to see much evidence of that hesitancy amid large swaths of our political class—left and right. Nevertheless, the fundamental point stands: Regulated market economies are a fundamentally different thing from centrally controlled economies. We blunt the force of Mises’s and Hayek’s masterstroke when we call everything we don’t 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 doesn’t immediately tank, many will mistakenly conclude that socialism works.

We absolutely should use Mises’s and Hayek’s insights to explain why so many of the economic initiatives of today’s Left will fail, even if they fall a long way short of full-blooded central planning. But let’s not fall into the trap of helping D.C. busybodies revive a dead economic philosophy.