How to explain why socialism leads to poverty

It is a common mis-perception on the right side of the political divide that they understand and can explain why socialism leads to poverty. The reality is that virtually no one can do this. I had made it part of many conversations over the years, especially after the Venezuelan economy had collapsed, to ask what exactly the problem with socialism is, but it is a much more difficult question than most people seem to understand. There is no doubt that every attempt to introduce socialism anywhere has led to economic ruin. It is as plain as day that socialism rapidly leads to a major reduction in living standards. Absolutely inevitable, but why? There is a relatively small but important literature on this question, but it is complex and is mostly for specialists who have a deeper understanding of the nature and operation of a market economy. You won’t get it unless you have studied economics already, or are prepared to put in the time. You are more than welcome to enter into the intricacies of the Socialist Calculation Debate which explains why without a free market an economy cannot determine either what to produce, and more importantly so far as the certain failure of a socialist economy is concerned, how to produce. Which is why every such economy must fall into an abyss from which they cannot even begin to emerge until their socialist institutions are removed.

I have therefore written an article, that I hope will be accessible to anyone, on why all socialist economies are doomed. I have based it on an earlier classic article published in 1958, I, Pencil which is why I have titled my own version, I, Mechanical Pencil. This is how I, Mechanical Pencil begins, which will explain what I wrote, and the connection with its earlier predecessor.

Many years ago, one of my early ancestors wrote his own life story in a wonderful autobiographical tale titled I, Pencil. He told the story of how he came to be, how he had been the result of thousands of many independent decisions made all over the world by many tens of thousands of individuals. Their collective actions explained how he came to be the pencil he was.

His aim was to explain why socialism doesn’t work. Whatever name you associate the idea of ‘socialism’ – whether it is ‘democratic’, ‘scientific’, ‘utopian’ or something else – socialism inevitably brings poverty and privation to the vast majority who are robbed of their political freedom as well. His aim had been to explain how our free market economic system brings us both freedom and prosperity; how a market economy is indispensable if we are to live our lives as we wish and in our own way, while also becoming more prosperous with each passing year.

Yet I fear his message has been lost in the modern world; in part because we live in different times with different kinds of problems, but also because many fail to separate out the political side of socialism from the economic. Socialist economies are always run from the centre and inevitably become a dictatorship with democratic constraints on the government crushed by those who take control. That is the certainty of it. Political freedom disappears when a socialist government takes over. The loss of freedom is straightforward and unmistakeable. There are no exceptions.

But hidden away beneath the political dimension are the reasons behind the economic catastrophe that follows the introduction of a socialist regime. These outcomes are visible at every turn. There is no disguising the massive reductions in income and personal wealth that are inflicted upon virtually everyone in a socialist economy, other than, of course, those who run the country. Everyone sees it, but virtually no one understands why so many things go so wrong everywhere within the economy and almost all at once.

I have therefore set out to explain why this happens, because we take the prosperity we have so much for granted. We now live in far and away the richest communities that have ever existed. Even the poor are only relatively poor, and live better than all but the royalty of earlier ages – in fact, probably even better than royalty then did as well. I won’t say things are perfect or could not be improved. But I will say that any solution to our problems that tries to make things better by introducing a socialist program of some kind is not only doomed to failure but is absolutely certain to make conditions far worse. Of this, there should be no doubt whatsoever.

I commend the article to you and feel free to pass it along as far and wide as you like.

2 thoughts on “How to explain why socialism leads to poverty

  1. After a discussion today regarding the above; I received this reply:-
    the problem is that the word ‘socialism’ is used too widely to have any true meaning. Russia? Greece? Scandinavia? It simply makes more sense to point out that the ‘socialist paradises’ of Scandinavia, which are the only ones that supporters of socialism will admit to existing, have state churches (and in Denmark and Finland the churches *collect* taxes), are monoracial, are monarchies, and support whaling – and ask which of these policies they wish to implement.

  2. “this calculation cannot be done. It becomes literally impossible to do.”

    I would really like a full exploration of that by collaboration between an economist and either a mathematician, a computer scientist, or someone that really groks the differences between “NP-Hard” and “NP-Complete”. Market complexities scream “This is more difficult than the Traveling Salesman Problem.”

    IMNSHO, that one point explains both “Why”, but also “How, exactly” we go from vaguely functional *small-scale* examples to the complete catastrophes when writ large.

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