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5. Binary Intervention: Government Expenditures

3. Resource-Using Activities: Socialism

Socialism—or collectivism—occurs when the State owns all the means of production. It is the compulsory abolition and prohibition of private enterprise, and the monopolization of the entire productive sphere by the State. Socialism, therefore, extends the principle of compulsory governmental monopoly from a few isolated enterprises to the whole economic system. It is the violent abolition of the market.

If an economy is to exist at all, there must be production in order to satisfy the desires of the consuming individuals. How is this production to be organized? Who is to decide on the allocation of factors to all the various uses, or on the income each factor will receive in each use? There are two and only two ways that an economy can be organized. One is by freedom and voluntary choice—the way of the market. The other is by force and dictation—the way of the State. To those ignorant of economics, it may seem that only the latter constitutes real organization and planning, whereas the way of the market is only confusion and chaos. The organization of the free market, however, is actually an amazing and flexible means of satisfying the wants of all individuals, and one far more efficient than State operation or intervention.

Up to this point, however, we have discussed only isolated government enterprises and various forms of government intervention in the market. We must now examine socialism—the system of pure government dictation—the polar opposite of the purely free market.

We have defined ownership as the exclusive control of a resource. It is clear, therefore, that a “planned economy” which leaves nominal ownership in the hands of the previous private owners, but which places the actual control and direction of resources in the hands of the State, is as much socialism as is the formal nationalization of property. The Nazi and Fascist regimes were as socialist as the Communist system that nationalizes all productive property.

Many people refuse to identify Nazism or Fascism as “socialism” because they confine the latter term to Marxist or neo-Marxist proletarianism or to various “social-democratic” proposals. But economics is not concerned with the color of the uniform or with the good or bad manners of the rulers. Nor does it care which groups or classes are running the State in various political regimes. Neither does it matter, for economics, whether the socialist regime chooses its rulers by elections or by coups d'etat. Economics is concerned only with the powers of ownership or control that the State exercises. All forms of State planning of the whole economy are types of socialism, notwithstanding the philosophical or esthetic viewpoints of the various socialist camps and regardless whether they are referred to as “rightists” or “leftists.” Socialism may be monarchical; it may be proletarian; it may equalize fortunes; it may increase inequality. Its essence is always the same: total coercive State dictation over the economy.

The distance between the poles of the purely free market, on the one hand, and total collectivism on the other, is a continuum involving different “mixes” of the freedom principle and the coercive, hegemonic principle. Any increase of governmental ownership or control, therefore, is “socialistic,” or “collectivistic,” because it is a coercive intervention bringing the economy one step closer to complete socialism.

The extent of collectivism in the twentieth century is at once under- and overestimated. On the one hand, its development in such countries as the United States is greatly underestimated. Most observers neglect, for example, the importance of the expansion of government lending. The lender is also an entrepreneur and part owner, regardless of his legal status. Government loans to private enterprise, therefore, or guarantees of private loans, create many centers of government ownership. Furthermore, the total quantity of savings in the economy is not increased by government guarantees and loans, but its specific form is changed. The free market tends to allocate social savings to their most profitable and productive channels. Government loans and guarantees, by contrast, divert savings from more to less productive channels. They also prevent the success of the most efficient entrepreneurs and the weeding out of the inefficient (who would then become simply labor factors rather than entrepreneurs). In both these ways, therefore, government lending lowers the general standard of living—to say nothing of the loss of utility inflicted on the taxpayers, who must make these pledges good, or who supply the money to be loaned.

On the other hand, the extent of socialism in such countries as Soviet Russia is overrated. Those people who point to Russia as an example of “successful” planning by the government ignore the fact (aside from the planning difficulties constantly encountered) that Soviet Russia and other socialist countries cannot have full socialism because only domestic trade is socialized. The rest of the world still has a market of sorts. A socialist State, therefore, can still buy and sell on the world market and at least vaguely approximate the rational pricing of producers’ goods by referring to the prices of factors set on the world market. Although the errors of even this partial socialist planning are impoverishing, they are insignificant compared to what would happen under the total calculational chaos of a world socialist State. One Big Cartel could not calculate and therefore could not be established on the free market. How much more does this apply to socialism, where the State imposes its overall monopoly by force, and where the inefficiencies of a single State's actions are multiplied a thousandfold.

One point should not be overlooked in the analysis of specific socialist regimes: the possibility of a “black” market, with resources passing illicitly into private hands.16 Of course, the opportunity for black markets in large-sized goods is rather limited; there is more scope for such trade where commodities (like candy, cigarettes, drugs, and stockings) are easy to conceal. On the other hand, falsification of records by managers and the pervasive opportunity for bribery may be used to establish some form of limited market. There is reason to believe, for example, that extensive graft (blat) and black markets, i.e., the subversion of socialist planning, have been essential to the level of production which the Soviet system has been able to attain.

In recent years, the total failure of socialist planning to calculate for an industrial economy has been implicitly acknowledged by the Communist countries, which have been rapidly moving, especially in Eastern Europe, away from socialism and toward an ever freer market economy. This progress has been particularly remarkable in Yugoslavia, which is now marked by private as well as producers’ co-operative ownership and by the absence of central planning, even of investments.17

  • 16. This differs completely from the artificial play-at-markets advocated by some writers as a method of permitting calculation under socialism. The “black market” is a real market, though very limited in scope.
  • 17. On the Yugoslav experience, see Rudolf Bicanic, “Economics of Socialism in a Developed Country,” Foreign Affairs, July, 1966, pp. 632–50. See also Deborah D. Milenkovitch, “Which Direction for Yugoslavia's Economy?” East Europe, July, 1969, pp. 13–19. Yugoslav economists are even thinking in terms of developing a stock market and refer to this latent development as “socialist people's capitalism”!See the November 25, 1966, Research Report of Radio Free Europe. On the impossibility of economic calculation under socialism, see Mises, Human Action; F.A. Hayek, ed., Collectivist Economic Planning (New York: Augustus M. Kelley, 1967); and Trygve Hoff, Economic Calculation in the Socialist Society (London: William Hodge & Co., 1949).