Economic socialism, such as what was conceived by Marx, is founded on two fundamental pillars:
1. Public property of the measures of production, work and capital.
2. Creation of a central planning organ (council of knowledge) that determines who, what, how much and when to produce.
Criticisms of socialism, theoretical impossibility and practice.
As they already explained in the 20’s and 30’s of the last century, the theories of the Austrian School of Economy, lead by Ludwig von Mises and Friedrich Hayek, and more recently by Jesús Huerta de Soto and Hans-Hermann Hoppe amongst others, the communist type of socialism is not technically possible for the following reasons:
1. Socialism assumes that all the available information can be managed by a central authority (regardless of the number of managers) overlooking that today’s society is based on the use of widely dispersed knowledge that far exceed the capacity of any individual mind. It’s said, the total volume of information is so immense and continuously changing, it is technically impossible to conceive that you can get to know it and process it centrally with no governing body. Today, there is no human or machine capable of compiling, accumulating, processing and managing all the ever-changing information (likes, needs, market circumstances…) to successfully organise and coordinate the running of society.
2. The type of information would need to be able to produce in concordance with the likes and needs of the citizens is in many cases subjective. It is scattered in the minds of the individuals, it’s tacit and cannot be formally articulated like for example, skills, creativity, know how, the entrepreneurship amongst those who have the ability to detect present and future needs of the citizens, or situations of imbalance (where a person wastes a resource, whilst another that needs it can’t get it), etc.
It’s said that not only the total volume of information is so immense that it prevents a central planning governing body from leading the whole society in a coordinated manner, however in many cases it couldn’t even collect the information needed to do so, as the people even if they wanted to, would not be capable of transmitting the ‘bits’ of information relative to the activities mentioned before. You cannot learn to be a good entrepreneur or a good footballer at school, at most, you can improve or perfect, but, you have a special ability to correctly develop the task, or you don’t have one.
3. You cannot transmit information that has not yet been created. In order to produce the quantity of goods and services demanded by society, it doesn’t stop with the information about how things were in the past, we need information of the future, because it does not occur to meet the needs of yesterday, but tomorrow (our likes and needs continuously change). Considering that future information is always uncertain, in a free market economy, this problem is resolved through the signal that contributes the benefit or the loss to the entrepreneur. In the words of Hayek, ‘the benefit is the signal that we say that we must produce to serve the people that we don’t know’. In a centrally planned socialist economy, there is no benefit or loss, we don’t have signals in order to produce in accordance with the needs of the citizens.
4. The exercise of systematic coercion by the state prevents the business process for discovering and creating the necessary information to coordinate society. In this sense, it’s a paradox, as the state, though the obstacle which suppressed people to act freely, exchanging information, buying and selling, selecting… seems exempt from the information that the people need in order to correctly coordinate society.
5. Finally, to eliminate the private ownership of production methods, we eliminate the incentive that the owners or citizens have to produce wealth.
In summary, the obvious problem is that the governing bodies suppose that we are the most capable people of the country and we act with all the possible good faith and willingness (perhaps a lot to suppose), we will practically never hit the target in decision making and we cannot coordinate society from above. We will produce a shortage in some cases and over produce in others, which will lead inexorably to extreme poverty, because of limited resources.
It’s no surprise that historically, socialism has received so much popular support. Take money from the rich to give it to the poor, when the large majority of the population is poor, it’s a policy that, by pure mathematical logic, should have a majority support amongst the citizens. However, a detailed study of the science of economics, especially the contribution by the theorists of the Austrian school of Economics, can bring us to see that if we are to fight poverty, and create a fairer world, these interventionist policies, perhaps, will not be the most successful.
Keep in mind that wealth is not a zero-sum game, wealth can create, but also destroy.
In my opinion, the key to fighting against poverty is not to distribute limited wealth that exists in a given time and place, but produce more wealth that, in a free market capitalist system, will be distributed inevitably (those who want or don’t want the rich) amongst the entire population, unevenly, yes, but what other option do we have? If we take the fish that are left over and we are obliged to give them to those who have none, we will solve the problem (for some unfairly and for others, fairly, not everyone will agree here), but, in any case, only on a temporary basis, since those who know how to fish will not return to produce surplus and we have not taught those who did not know how, to fish.
Liberalism is based on the defence of individual initiatives, the supreme value being the freedom of the person, which implies to scrupulously respect the freedom of others. It proposes, to limit the intervention of the state in economic, social and cultural life.
The private ownership is the main field of the exercise of freedom. Ownership that should be understood, not only as material goods and capital, but also as the body and life, the acquired knowledge, ideas and creativity, the time that one has and the options amongst which one can choose freely.
Since I understand that the current democratic societies have already overcome the fear of social and cultural freedom ( apart from one or two religious fanatics), freedoms such as choosing who to love, be it a man or a woman, our beliefs, the desire to live or die and so on, I will focus on criticisms of liberalism economics.
Firstly, I should make it clear that the opposite of liberalism is not only socialism (centrally planned economy), but any kind of interventionism which is imposed in a coercive manner, thus reducing the freedom of human beings.
Understanding that there are many purposes as human beings but also, that we share the desire for the progression of civilisation, for which we need to develop and increase our knowledge and awareness, whose best ally is freedom.
Having clarified those aspects, I will move on to the economic criticisms of liberalism. The interventionists defend and justify the intervention of the state to correct what they call ‘market failures’. They argue that these failures are produced because individuals pursue selfish ends which must be tackled by the intervention of a supportive entity that pursues the common good. But is this actually so? Is it bad that we pursue out own interests?
Let’s go one step at a time, basically, what moves people to act?
According to Mises, individuals act (they undertake human action), to suppress their own discomfort, whether it is a physiological need, a security need, self realisation (also assisting another person), etc. It is basically a selfish motive, searching to suppress our own discomfort, is what moves people to act. Once the discomfort has been suppressed, one passes into a new phase of well being, not taking action until one feels new discomfort.
This is a continuous process and is not limited by time, until we die, the only moment in which a human being is released completely from the weight of the needs. The problem is that both selfishness and jealousy are feelings inherent to human beings, that have been and continue to be abused and demonised by many people, which makes it very difficult for us to learn to manage them and deal with them properly.
The feelings are not good or bad per se, that depends on the control we exercise on the feelings, and not vice versa. After all, the ability to control our feelings and impulses is what sets us apart from other animals.
This is why I don’t think it’s bad to pursue our own interests, provided that it doesn’t involve prejudice against other people. As they say, one persons freedom ends where another’s begins, and that ‘complex’ delimitation is the crux of the matter.
As Adam Smith said with the idea of ‘the invisible hand’, in a capitalist free market system: “… the operator thinks only of his own gain; but this case, as in many other cases is driven by an invisible hand to promote an end which is not present in his actions”…”it does not mean anything bad for society that such an end is not part of his purpose, so to pursue his own interests promotes society in a more effective way than if this was a part of his plans”.
Indeed, in a free market he who pursues his own profit* (selfish behaviour), is obliged to serve the interests of the consumer (supportive end), either creating, inventing, investing, hiring or producing. He must make the products or services available to the consumer (selling them), so if that person, on the other hand, decides to be the only beneficiary of those goods, he will not get more benefit than the by-product of his exclusive use.
If Steve Jobs had been the only person to use the Iphone, only he would have benefited from this advanced technology, but first of all, the price of a single Iphone is completely prohibitive (even for Steve Jobs), and, secondly, he would not have accumulated such enormous wealth. In this strange process, in which Adam Smith saw a kind of invisible hand (in reference to God), a free market is what God created to transform selfish causes into supportive effects.
[*by means within the law, leaving out of this analysis, those who pursue their own profit by methods of extortion, intimidation, theft or violence.]
Another common criticism is the huge differences in income that occurs in a free market capitalist economy.
It’s true there are enormous differences, though I do not agree that this can be described as fair or unfair. I’ll explain:
Differences exist in every area of life, plants, animals, human beings (races, cultures, religions, incomes…). It doesn’t mean we should eliminate them for the mere fact that they are different. History shows us that many people have tried to eliminate these differences by force, proclaiming themselves to be in possession of universal truth and wanting to do it justice. What has been achieved is precisely the opposite, enormous injustices with terrible consequences for humanity.
I want to understand that people who criticize the differences between income or wealth, do so because there are people currently living in subhuman conditions and do not have anything to eat. So, if no one lived in such conditions, no one would criticise the difference of income or wealth. That means, no one criticises that one person lives in an apartment of 80m2 and another in a house of 3,000m2, that one drives a Seat and another a Ferrari, that only one can choose between home cooked food and the other can enjoy gourmet dishes every day.
Because, if this is the case, these people can emphatically say that these ‘social injustices’ have no solution. There is no human mind capable of designing a system in which it would be possible to satisfy all the needs (unlimited) of each and every human being if we don’t have unlimited resources at our disposal and without having to work for it.
To others, I can reassure them, as I think that there is hope that poverty (a subjective term) and hunger, even with limited resources, can be eradicated, as basic needs are not unlimited.
Even not being perfect, and everything that is not perfect is likely to be improved, the most efficient system which has served that purpose throughout the history of civilization is unfettered free-market capitalism, or at least not excessive, to the free exchange. Never before has there been so many of us. Never before have we had to feed so many mouths and for so long. Never before have we benefited so much from the scarce resources of the planet. Never before have we expanded and applied knowledge (science, culture and technology) so quickly and effectively.
Before the arrival of capitalism, all countries were extremely poor and only a privileged few (aristocracy, clergy and gentry) lived comfortably. Today, there are very high rates of middle and upper classes (only in capitalist countries with a high degree of market freedom). This has not happened in ANY of the communist experiments of the past century (USSR, China, Cuba, Vietnam, North Korea, Poland, Czechoslovakia, Hungary, East Germany, etc.). I believe that even if only because of these facts, free market capitalism deserves to be taken into account. How many people would support capitalism today, if it had the same reputation as communism?
If the wages and salaries of people within the same economy are not the same, it is because the tastes, the needs, the knowledge and the skill of those people are not the same. I don’t believe that is this justice or injustice. Is it perhaps unfair that Leonardo Da Vinci or Dali were too skilled with the brush, against thousands of unrecognised painters, and that people are willing to pay more to purchase or enjoy their paintings?
In a democratic free market society, I do not believe that it can be said to be unfair that one person earns a lot of money, and another earns little. Provided, of course that both respect the democratically elected laws. I understand these laws should be abstract, general, and equally applicable to everyone. It is obvious, that if the law, on the other hand, favours or damages one or another, things change.
The fact is that, for example, many people like football and they are willing to sacrifice an important part of their time and effort to enjoy a few hours watching a football match. I don’t believe it can be described as unfair by people who do not feel same way. It’s the fact that many like football, and many who are good footballers get a very large amount of financial compensation for their talents.
On the other hand, yes, I believe it can be seen as unfair if a person or group of people impose their wishes on the free choice of others. In this case, for example, subsidising theatres or museums and giving away these tickets, and putting a burdensome tax on football tickets. And I don’t believe it is worth using the excuse that the purpose is noble, that this measure only intend to cultivate the masses and unhook them from the “opium of the people”. If the people freely decide for whatever reasons, to remain uneducated and ignorant, do the ‘enlightened ones’ have the right to deprive them of their liberty? How can we ensure that we are not ignorant?
This famous phrase from the economist Pedro Schwartz about economic differences: “I don’t care about inequality, because I am not envious. I care about poverty”.
That being said, it is true that politically and economically we can, making use of a coercive force, limit or redistribute income and wealth of the individuals of a society. We can also set maximum prices (e.g. for products that we consider to be basic) or minimum prices (e.g. for wages), other than that, price would be freely determined by the market, but is the job of the economist to warn politicians and citizens of the consequences of such actions
1. Establishing maximum prices.
If we establish maximum prices for certain products below which is freely determined by the market, for example, because we consider bread to be a commodity that should be cheaper, there is an immediate shortage of demand, as a result of the new artificially reduced price of bread. There is also a shortage of supply as there are business people who abandon this economically intervened sector in favour of others where they can make more profit. Then, if the end was that the entire population could satisfy their needs of bread at a price that we had considered ‘fair’ or reasonable, what we get is precisely the opposite.
We will have a greater shortage of the product for the majority of the population, and the black market will flourish with higher prices, like before the intervention. Since the business adds to their costs, the cost of the risk derives from getting caught breaking the law. With this new situation, the majority of the population will not have access to the product (rationing books, long queues…) and the upper classes will hardly be affected, because they can pay the highest price on the black market. Indeed, the black market is where the offerer is always pursued, but never, or almost never, the plaintiff. I leave the examples to the imagination of the reader.
2. Establishing minimum prices.
If we establish minimum prices below the market, it produces the opposite effect. A surplus of goods that do not attract buyers because they are not willing to buy the same amount at this new artificially high price. We see a clear example of this phenomenon usually in labour markets operated by the famous and popular policy of the establishment of a minimum wage. The higher we establish this minimum wage above what would free the market, the more unemployment we create. And I know that this reality offends many (a few years ago, me included), I will try to explain this phenomenon more clearly.
Unfortunately, it is quite common among most citizens to criticize economists, tarring them as frivolous, cruel, and even perverse when they analyse the labour market, like any other.
– How dare they treat us as if we were goods!
– We are talking about human lives, our effort and sweat! Of our rights as human beings!
However, these criticisms are as absurd as criticizing a physicist who warns us that, for the purpose of physical science, he is indifferent as to whether throw a car or a 3 month old baby into a five hundred metre ravine, as the result is the same. The force of gravity affects both physical bodies equally, and past ‘x’ seconds in one case and ‘y’ seconds in another, there shall be neither one nor the other.
The economist, as well as the physicist, only warns of the consequences of certain actions. One in the field of Economics and the other in the of physics, regardless of their method of study, priori deductive in the first case and experimental scientist in the second.
In a free market economy, wages and salaries, the greed or generosity of entrepreneurs and the laws which we establish have nothing to do with economists. In Spain, one could, for example, establish a national minimum wage of 3,000€ per month, but this would mean that few earn more (those whose productivity allows it) at the expense of many others (the lower classes) who can’t find work at all. This is because employers cannot afford to give more money to the worker, as it affects the production process. If they increase pay throughout the company and for a long period of time, they will make losses and will be forced to close.
The reason why a worker in Sweden earns more than a worker in Spain, for exactly the same work, is due to different rates of capitalization of both economies, i.e. the accumulation of capital per capita (physical and human) of the economy. A higher capitalization rate means higher productivity and thus higher wages.
It is clear that if, for example, the capital is multiplied by two, keeping the same workforce, it will increase productivity and therefore, increase wages. On the other hand, if it is the workforce that is multiplied by two, keeping the same capital, wages will fall hopelessly.
An increase in productivity, not only increases wages, but also reduces the marginal cost of production and increases in general, the quantity and quality of goods and services coming to market. As Mises said: “The beneficiaries have saved, accumulated and reinvested in machinery to benefit the common man twice: firstly, in its capacity as wage, increasing marginal productivity of work and therefore the real wages of all those who want to work. Secondly, in their capacity as a consumer, when products manufactured with the help of the additional capital are put on the market, and become available at prices lower than possible”.
In a society, someone is needed to undertake a project of investment (time or money), assuming certain risks and trying to improve, expand or innovate, as someone who is willing to be employed by others. Every entrepreneur can be a worker and every worker can be an entrepreneur. In this sense, there is neither good nor bad, neither smart people nor fools. There are people more adverse to risk (workers) who want to make a profit in return for their effort, knowing that they will get lower profits than if they work on their own, and other people who are more willing to assume some risk if they believe that they can obtain higher future earnings.
You could criticize the fact that entrepreneurs aim to acquire labour or capital at the lowest possible cost, but in this case, you should also be criticizing the consumer who aims to acquire products and services of a particular quality at the lowest possible cost.
Recently there has been a significant group of consumers that support what is known as “fair trade”, which, in a nutshell, means that consumers pay a higher price for a same goods in exchange for compliance with a number of conditions (“fair” wages, working conditions and wages suitable for producers, equality between men and women…). From this new demand, many companies have emerged to meet it. By their own definition (what is fair and who sets it?), and because of the difficulty in its control, I do not think this type of trade is the most efficient, but from the liberal perspective, everything that supposes free exchange between the parties is welcome.
3. Limitation or redistribution of income.
If we limit an artist or a genius’ possibility of further enrichment through their creations, arguing, for example, that the fruits of their success have amassed too much fortune and if they want to continue with their work, they will not be paid, it is clear that we limit their income and, therefore, in the short term, reduce income gaps among the population. But also, we deprive everyone of their new contributions, whether these ideas, works, goods or services are “impoverishing” the rest of the population in the medium to long term. This impoverishing is not only economic, it can be also cultural, social, scientific, etc.
This gives way to the paradox that the most successful artists/genius has (i.e., one that offers what the majority of the population deems as good). They are handicapped by our policy of limitation of income, against those whose art or idea has not been endorsed or has been to a lesser extent.
The same thing happens when we limit the income of employers. The ability to generate wealth requires enormous and specialist skill if done legally. Left out of this consideration are all those scroungers, petty thieves or scoundrels, whether they are businessmen, politicians, workers of the private sector or public employees, prisoners of envy or uncontrolled frustration, who known how to, or been able to make a fortune by legal means, who try to achieve their goals by using all sorts of tricks.
As today’s democratic society is structured, with high taxes, where more damage makes corruption high, specifically between large enterprises and the public administration managed by the various political parties that are in power.
Finally, look at what happens if we compulsorily redistribute earnings of certain citizens by means of taxes.
If the redistribution is voluntary, we would not have negative consequences beyond the cost of opportunity. That is, if for example a rich businessman decides to donate half of his fortune to a Congolese village to create schools, hospitals and to help factories or other forms of revenue to survive then it will have a very positive effect for the village and for the wealthy entrepreneur, who will feel happy for helping voluntarily. The cost of the opportunity is equal to everything he could do with half of his fortune, but didn’t do. For example, help a Mozambican village or undertake other business projects.
It is different to redistributing though taxes. In this sense, there are negative consequences in so far as it is not a voluntary action for both parties, and for the system, in my opinion, it can NEVER be considered fair. It is true that the state offers a series of services in exchange for our taxes, but we do not chose them freely. It is as if a supermarket were to do our shopping on our behalf, and set a price which, by law, we must pay for the entire basket.
Tax implies imposition, but the damage will be less the more neutral it is, and the more ‘voluntary’ it seems. That means that, the taxpayer must perceive the establishment of taxes not as something completely voluntary, but as something very positive. This should be perceived not only by a few, but by the vast majority of taxpayers. The more who see it like this, the less damage tax will cause. It seems obvious, that when this occurs, the tax should always revert to benefit society. Here is the problem, because not all people share a common end, and, above all, nobody prioritizes them in the same way.
In practice, enforcement generates infinite injustices, distorts the market and resource allocation and does not diminish inequalities. Moreover, it tends to increase them, as people or companies with greater resources always find a way to evade taxes. Meaning that the middle classes pay the highest amount of tax.
Also in the case of the redistribution of income, it has the paradox that, by pretending to do justice, we harm the artist, genius, entrepreneur or worker that brings more value, and contributes to society. Namely the singer who sold many records, the genius whose invention advances society, the businessman that creates more jobs and the workers who are more productive and efficient. We “reward them” significantly by increasing their taxes.
Instead, the singer only sold discs to relatives and friends, the genius inventor of the briefs with a zip, the entrepreneur who is resting on his laurels and the worker that any entrepreneur would like for their competence is “punished”, paid with the profits of others.
In short, the economy of an entire country, where millions of people interact every day, buying, selling, working, producing… it is certainly a highly complex system which I do not think can be managed from above. It will be virtually impossible for the government to foresee each of the consequences which result from their interventions. Something similar to what happens is called the ‘butterfly effect’, where the slightest variation in initial conditions or “rules of the game”, can cause the system to evolve in ways completely different to those predicted.
I want to finish with an emphasis on that I consider FREEDOM TO BE THE SUPREME VALUE OF THE HUMAN BEING, consciousness his best ally and fear his greatest adversary. But even considering that freedom is the supreme value, I believe that no one should use violence to try to impose it, therefore, like life itself, it will come when the circumstances need it.
Freedom offers the human being a myriad of rights, but an equal number of responsibilities and if we demand freedom, we must also act responsibly. Isn’t this what we ask of our children when they are calling for greater freedom?
Two examples of this responsibility is care for the environment and for our own finances. The first, because once we are gone, there will be others who deserve to be able to enjoy the planet, and the second because we cannot declare financial independence from the state, and if we go bankrupt, it’s our refuge. This privilege applies solely to our dear banks, but, that is another story…
Jorge Pérez Montes, affiliated member of the spanish Individual Freedom Party (Partido de la Libertad Individual) http://www.p-lib.es
Translation from Spanish to English provided by Hannah Norish, through the PerMondo initiative.