The Free Market 7, no. 2 (February 1989)
A roar, a shudder, and the end of the world. That was Soviet Armenia on December 7th when the great earthquake struck. Whole cities disappeared, as nurseries and factories, offices and homes, collapsed into rubble. In a few moments, more than 55,000 men, women, and children were crushed to death.
But no matter what seemed to be the cause, these people weren't victims of geologic forces; they were casualties of socialism.
The Armenian earthquake measured 6.9 on the Richter scale. In 1985, Mexico City had two back-to-back earthquakes measuring 8.1 and 7.5, yet they did far less damage, with almost all of the deaths caused by collapsing public housing. In Armenia, all the buildings were public, and they all collapsed.
Brian Tucker, a California geologist, says the destruction in Armenia was 100 times greater than it would have been in California from a similar size quake. In fact, the ratio is probably 1,000 to one. In 1965, a San Fernando Valley earthquake measuring 8.5 did relatively little damage, except to a federal government hospital, which crumpled and killed 40 people.
Nature is often blamed for the failure of socialism: bad weather for 70 years of Soviet crop failure and a drought for the Ethiopian famine. Socialist agriculture is the cause of food shortages in the USSR, while in Ethiopia, socialist dictator Mengistu has deliberately starved the peasants to collectivize and control them.
Unlike natural disasters, the destructive effects of socialism are not capricious. They are necessary consequences of government control.
In his important new book A Theory of Socialism and Capitalism (Kluwer Academic Publishers and the Mises Institute, 1988), Professor Hans-Hermann Hoppe shows that socialism must result in: 1) much less capital formation; 2) a gargantuan waste of resources; and 3) destructive overuse of the means of production. Armenia is an all-too-accurate illustration.
Capital
Under socialism, all capital goods are publicly owned. Without individual ownership, as Hoppe explains, under socialism there is almost no incentive to produce new capital goods, let alone to maintain older ones. Control over capital goods is exercised by politicians and bureaucrats, not owners.
There is no market for Soviet buildings or building materials. Everything is decided by central government planners, and citizens must live or work in whatever the bureaucrats erect. As a result, builders have no stake in the value of what they build, and since the buildings cannot be sold, there is no reason for managers to try to preserve what little value the structures have.
Waste
Making the best use of scarce resources is impossible under socialism. As Ludwig von Mises showed in 1922, socialism makes rational economic calculation impossible. There is, to take a simplified example, only a limited amount of steel, which must be allocated to both industry and building. Without market prices, there is no way to tell which is the more highly desired end.
We assume that concrete is less valuable than steel and that both are less valuable than marble. But we know this only because the market-generated prices tell us so. Without capitalism, no one can know what anything is worth.
The Soviets get a rough idea from Western price schedules, but that's not enough for rational economic calculation. To know how, when, and where to use capital and resources, there must be trade so that each good can have a market price.
Without freely set prices, the Soviet economy is necessarily chaotic, with random surpluses and shortages. Even if a builder wanted to build a sturdy apartment house in the Soviet Union, he probably couldn't get the necessary resources.
Overutilization
Under socialism, government builders must fulfill the central plan or else. Quality, which can't be bureaucratically quantified, means nothing; in fact, it is an impediment to turning out the ordered amount of production with the least amount of effort. The result is incredibly flimsy buildings.
The efficient production of buildings is an enormously complex process, too complex to be encompassed in a central plan. There is no way that bureaucrats in Moscow can handle it, let alone discover, like the entrepreneur, more effective ways of production.
In a free market, consumers ultimately determine the pattern of production. If buyers would rather have brick houses than wooden ones, the structure of production reflects this by raising the price of bricks, bidding them away from alternative uses where they are less highly valued.
Under socialism, this process is thwarted. The decisions of consumers have little if any connection to the central plan. Goods with little or no consumption value are produced, and everyone is made poorer.
It is no wonder that even in Moscow, buildings come crashing down five or ten years after they are built; even the structures still standing must have nets hung over the sidewalks to catch falling masonry. In the USSR's internal colonies, standards are even lower—so low that an earthquake that would have minimal effect in the U.S. turns Soviet cities into cemeteries.
The inconceivable death and destruction in Armenia is a vivid illustration about the importance of economics. Good economics results in prosperity and freedom. Bad economics results in a holocaust.
