The Failures of Socialism

The Vision of Pure Socialism

In this lesson, we will explain the idea of a pure command economy, or what is also called a command-and-control economy. Remember that in a pure market economy, the ownership of resources is dispersed among private citizens, and economic outcomes are determined through the combination of actions taken by all of the resource owners. In contrast, in a pure command economy the government owns all the resources and makes all the decisions of what to produce with them. Depending on the writer, socialist theorists have proposed different methods by which government officials would reach such decisions, perhaps taking into account the desires of workers and the preferences of consumers. Yet ultimately, in a pure command economy it is the government that must assign jobs to workers, and give orders to factories and farmers.

Although granting such awesome powers to government officials[1] may sound frightening to many readers, the historical appeal of a command economy is the possibility of avoiding the seemingly unjust outcomes that occur in a system based on private property Indeed the very terminology is emotionally laden: A market economy is called capitalism, whereas a command economy is called socialism. Such labels imply that a market economy exists to serve the interests of the small class of capitalists (i.e., large property holders), whereas a command economy supposedly organizes the structure of production in order to serve the interests of all of society. Just as political revolutions swept away the monarchical and aristocratic power structures that had favored an elite minority, so too did socialist reforms champion economic democracy in which important economic decisions would be decided by the people (as represented by government officials) rather than by a rich minority who owned most of the (private) property.

Despite the good intentions of many socialist reformers, there are serious flaws with their proposals. In the present lesson, we will explain the major theoretical problems with a society that abandons the institution of private property and tries to replace it with socialism. In other words, using our knowledge of economics we will try to simply think through the idea of socialism and highlight some major problems that will occur any time it is implemented.

In the next lesson, we will briefly examine the historical record to see what happened in practice when some countries actually tried to implement socialist reforms. As we will see, the results ranged from bad to horrible, and will help to confirm the theoretical arguments we make below.

Socialism’s Incentive Problem

The most obvious problem with socialism is that it alters the incentives that both producers and consumers face, which could cripple the performance of any socialized economy. If a government really tried to implement the Marxist slogan, “From each according to his abilities, to each according to his needs,” it’s likely that most people would eventually not work nearly as hard as they did under a capitalist framework.

One of the key principles of a pure socialist system is the separation of production from consumption, meaning that workers use resources to first produce a pile of output, and then the government distributes the goods (such as residential housing) to various recipients according to criteria that are considered just or fair (such as how large a particular family is). Yet many observers would say that human nature itself implies that people won’t work nearly as hard in order to help society at large, as they will when they get to keep the fruits of their efforts. If these critics are right, then a socialist system might distribute its goods more “fairly” than a capitalist system according to a reformer’s criteria, but there will be far fewer goods to be distributed.

Who Picks Up the Garbage?

The problem of coaxing workers to put in long hours is related to the problem of distasteful jobs. Simply put, under a socialist system, who will pick up the trash and who will clean the public restrooms? In a market economy, wages can adjust to attract more workers to a particular occupation. It’s true, most 8-year-olds don’t announce, “I want to be a janitor when I grow up,” but the reason some people become janitors is that the job pays more than many other jobs requiring similar education and experience.

Under pure socialism—at least as phrased in Marx’s famous slogan—what people get to consume should have no relation to what they produce as workers. This takes away the most obvious method by which the socialist government can get “volunteers” for the distasteful jobs that must be performed. Naturally, socialist theorists have proposed other types of compensatory schemes, such as rewarding the comrades who work in the coal mines with more vacation days per year or with longer lunch breaks.

This might help somewhat, but it still could lead to absurdities in the use of scarce labor power. For example, a market economy might induce 100 men in a certain city to voluntarily agree to set their alarms every morning to collect trash for 8 straight hours, because they are paid enough money to afford a nice lifestyle. In essence, other members of the market economy strike a bargain, saying, “If you will deal with my trash every week, I’ll produce medical services / cook you a steak dinner / teach your kids algebra / etc.”

To repeat, this type of voluntary bargain is not available if the socialist leaders truly wish to depart from the methods of capitalism and private property. If the amount of personal consumption is to be based on considerations other than a worker’s contribution to total output—in other words, if workers are to be rewarded in a way different from what would happen under capitalism—then the leaders must tinker with the other characteristics of jobs in order to get enough volunteers for each occupation. For example, rather than having 100 men pick up trash and earn enough money to buy a fancy car, the socialist system might need 200 men devoted to trash collection, who only work 4 hours a day, and drive a boring car just like every other worker. Though the problem of trash collection could be solved in this way—by cutting hours—the socialist leaders now have 100 fewer workers for every other occupation compared to the capitalist system. This is just a particular manifestation of the broader problem—that under socialism, it is likely that many or most workers would not put forth the same effort that they would under a capitalist system in which their lifestyles were directly tied to job performance.

Of course, an obvious “solution” to the problems of shirking and the performance of undesirable jobs is that the government could simply force people to fulfill particular tasks. Just as the socialist leaders have the authority to decide what crops should be planted on each acre of farmland, in principle they could also tell each “unit” of labor what role he or she would play in the grand economy-wide production plan. Historically, some of the more naïve reformers thought that a socialist government could retain the worker’s right to choose his or her occupation, but other thinkers were far more candid about the duties of workers in a socialist society.

Yet even if we allow for the use of punishment, a socialist government would still face the problem of a drop in overall output because of the lack of cooperation from many of its workers. In a market economy, the allure of large financial rewards causes the best and brightest to rise up from the crowd, as it were, and demonstrate their talents and ambition. Even if they were willing to use draconian penalties, socialist rulers wouldn’t have been able to identify the potential output of a Bill Gates when looking at him and his peers at 20 years old. They could have threatened to whip or imprison the young Gates if he didn’t process enough statistical reports per hour, but it wouldn’t have occurred to them to demand, “You’d better come up with some computer ideas that will revolutionize the world, or else we’ll kill your family.” This is because no one had any idea of the genius lying inside the young Bill Gates (and Thomas Edison, Henry Ford, etc.) until he stepped forward and demonstrated it in the market economy.

Allocating “Capital” to New “Firms”

Everyone can immediately recognize the potential incentive problem under socialism when it comes to workers and shirking. An equally important, though far less obvious, incentive problem involves the allocation of “capital” to new “firms” in a socialist system. We are putting the terms in quotation marks, because strictly speaking there is no financial capital in a purely socialist system, and there aren’t independent firms, either. Under socialism, there’s just a massive collection of natural resources, capital goods, and workers with various skills, which the government planners must take as a starting point when they draw up a complex blueprint for the entire economy.

Even so, the socialist planners would face challenges similar to those solved by the financial markets under capitalism. For example, in a market economy the scientists employed by an oil company might convince their managers that it would be well worth it to spend $2 billion developing an offshore platform in a certain location in the Gulf of Mexico (and with extra safety measures in light of the BP spill). The managers would in turn make the case to their superiors and so forth, until finally the shareholders either explicitly or implicitly gave their approval. If the company didn’t have enough spare cash, it would have to issue either more bonds or stock in order to finance the project. Yet whether the project were funded internally or with outside assistance, ultimately private capitalists would need to put their own saved funds at risk in the hope that the project would bring enough new oil to market to justify the huge expenses.

Notice that the potential risks and rewards of the offshore project still exist under socialism; they are not mere artifacts of a market economy The socialist planners would not be omniscient; they too would have to rely on the guidance of scientists and other experts to estimate how many barrels of oil a proposed new platform would make available for future economic planning. Yet we now see the crux of the problem: How do the socialist planners responsibly pick the “winning” projects out of the thousands of competing proposals? After all, there are all sorts of ways one might deliver more barrels of oil—or energy in other forms—into the hands of future planners, but the current planners obviously cannot “fund” all of them, because there aren’t enough resources to go around. When it comes to this problem of choosing which risky ventures to approve and which to veto, the different incentives between capitalism and socialism manifest themselves once more.

To see why, suppose the government planners decided to naïvely fund those projects that promised the greatest return—whether measured in barrels of oil, minivans, gallons of milk, etc.—for a standardized contribution of current resources. This would simply give project managers the incentive to exaggerate the merits of their pet proposals. Note that they wouldn’t even necessarily be lying—though some obviously would—but rather they would understandably cite the most favorable studies and would not ask their staffs to spend much time dwelling on possible pitfalls in their proposal. The result would lead to a squandering of society’s scarce resources, as they were mobilized according to a central plan relying on the forecasts of the most unscrupulous and/or reckless promoters.

On the other hand, the government planners would also face the danger of establishing an incentive scheme that stifled creativity and risk taking. For example, the planners might follow a procedure whereby they took the advice of formally trained scientists and other objective experts on various things, but that if anyone ever turned out to be horribly wrong in one of his or her predictions, then the planners would never again allow this particular expert to influence the grand economic plan. Such a rule would certainly get rid of the snake oil salesmen, but it would also render the legitimate advisors far too conservative. People with bold ideas would be afraid to challenge the consensus of their peers, especially if their scheme would likely fail but had a small chance of being extremely successful.

Of course, the socialist planners could try to avoid both extremes by establishing incentives that both encouraged sensible risk-taking but weeded out the demonstrably incompetent. For example, the planners could take the total amount of resources they intended to devote to “new project development” and assign responsibility for a certain fraction of the resources to an individual expert, based on that expert’s overall track record. Any particular mistake would not disqualify an expert, so long as his or her successes had more than compensated for the failures. To motivate the experts to take risks when they believed there was a chance for great payoff, the planners could also stipulate that the standard of living of the experts would itself be proportional to their overall track record in handling society’s scarce resources.

We hope that you have noticed what’s happening. In the effort to correct the flaws with various ways of implementing socialism, our hypothetical central planners are led step by step to reinvent…capitalism.[2]

One Giant Monopoly

Thus far we have focused on the incentive problem the socialist government would face in motivating its citizens to participate in the desired fashion in the economic plan. But there are enormous incentive problems going the other way, too. Specifically, the government officials would have little incentive to take the preferences of the citizens (both as workers and consumers) into account when drawing up the grand economic plan. It is extremely ironic that many socialist reformers warn of the dangers of capitalist “monopolies” in particular industries, when their recommendation would establish one giant monopolist—the government—in control of all industries.

Even in nominally capitalist countries, we can nowadays see this principle in operation. For example, it is a common joke that the Department of Motor Vehicles (DMV) is not staffed by the friendliest of employees. In many cities the subway facilities are in various stages of disrepair. The condition of government-run hospitals for military veterans—let alone for committed psychiatric patients—can be downright scandalous. As a final example, notice that during the hot summer months, beer companies and air conditioner technicians welcome the huge volume of business with open arms, whereas government-regulated utilities scold their customers for using too much electricity or water.

There is a simple explanation for this undeniable pattern: When government agencies (or favored organizations in the private sector) provide goods and services to the public, they can’t be fired. People have to go to the DMV to get their licenses renewed and so forth; they can’t take their license business elsewhere to a company with friendlier staff. The manager of a grocery store has an incentive to keep surly employees away from customers, but the manager of a branch of the DMV doesn’t face nearly the same motivation. If his superiors were really interested in customer satisfaction, they could establish a compensation scheme whereby each DMV branch manager in a particular city were paid a bonus proportional to how many residents decided to take their “business” to that manager’s particular branch. But this simply pushes the problem back one stage: Why would the branch manager’s superiors care about keeping motorists happy, with all of the other things they have to worry about? It’s not as if the city government will take in more revenues from people who decide to become drivers due to the friendly DMV employees.[3]

To be sure, the people in a socialist society could vote in new government officials if they lived in a democracy, and they could ultimately undertake a violent revolution no matter what the form of government. All government officials—whether in a limited state presiding over a largely market economy, or even in a totalitarian socialist state run by a dictator—want to keep the public happy, generally speaking. Even so, the difference in incentives facing the people “in charge” between a pure market economy and a pure command economy is colossal. The very worst a capitalist “tyrant” can do is fire you (if you’re an employee) or refuse to sell to you (if you’re a customer). In contrast, if the government makes all hiring decisions in the entire economy and controls all the grocery stores, it can intimidate critics quite effectively by shipping them off to work in Siberia or starving them. And don’t expect the newspapers or other media to document the abuses—the government owns them, too.

Socialism’s Calculation Problem

In the historical debates over socialism, its opponents would raise the incentive problems described above (or in other forms) and the proponents would usually respond by arguing that people growing up in a socialist paradise would learn to work for the benefit of their neighbors. They claimed that a new “Socialist Man” would emerge, who was not selfish as people under capitalism were. The central idea was that in their natural state humans were benevolent and altruistic, but that the institution of private property conditioned them to become greedy and callous. Perhaps if the workers didn’t need to worry about providing for their families—so the socialists argued—they would have no qualms about going to the factories every day in service to the common good.

In this context, the opponents of socialism developed a much more fundamental critique.[4] Even if there were no problems of incentives—so that the workers happily performed whatever tasks they were assigned, and the socialist planners truly had nothing but the best of intentions for their citizens—socialism still would do a very poor job of using society’s resources efficiently.

Because the socialist government would own all of the resources, there wouldn’t be any markets for them. In other words, people wouldn’t be trading money for tractors, plots of farmland, barrels of oil, and so forth. This means that under pure socialism, there would be no prices for natural resources, labor, and capital goods. Without prices for their inputs, the socialist planners would have no way of estimating the total monetary cost of their projects. Therefore they would have no idea whether a particular project were making good use of the resources it consumed, or if it would help the citizens more by shutting down that project and using the freed-up resources to produce more of something else.

Remember that in a market economy accountants can use market prices to determine if a particular operation is profitable, or if it is suffering a loss. This measure provides a signal showing whether other property owners (implicitly) agree with an entrepreneur’s decision to commit scarce resources to the operation. A profit indicates that customers were willing to pay more for the finished product than the entrepreneur needed to spend in order to acquire the inputs. In contrast, a loss indicates that customers were spending more onother types of goods, allowing those entrepreneurs to bid up the prices of the required inputs and “fining” the original entrepreneur if he continues with his business plan. To sum up, entrepreneurs in a market economy receive constant guidance and feedback from the profit and loss test, which is only possible when all of the various inputs have market prices.

The planners in a socialist system would have no such guidance. Engineers, chemists, and other experts could explain to them thetechnological possibilities for using their stockpile of inputs in order to produce various combinations of finished goods and services. Yet although the planners would know if a project were technologically feasible, they wouldn’t know if it were economical. Without being able to plug in market prices for each unit of input as well as each unit of finished output, the planners couldn’t reduce the total inputs and total outputs to a common denominator and see if the operation as a whole created or destroyed wealth. Therefore, even if we set aside the tremendous incentive problems, the socialist planners would also face an insurmountable calculation problem.

To grasp the nature of the calculation problem, you should spend a few moments reflecting on the fantastic complexity of a modern economy. On Day One of drawing up their grand economic plan, the socialist leaders would have at their disposal millions of workers with varying skills and endurance; deposits of oil, coal, diamonds, and other minerals; various factories, warehouses, research laboratories, and educational centers; billions of individual tractors, hand tools, and other pieces of equipment, in varying stages of obsolescence; and finally various infrastructures including power lines, telephone and data lines, highways, and bridges. Also remember that to make a coherent economic plan, the socialist leaders would need more than a simple tabulation of the various inputs at their disposal. They would also need to know the location of the units. For example, if the plan called for a certain mechanic on Tuesday morning to replace the worn-out tires on a tractor trailer, it would need to be the case that the mechanic, new tires, and tractor trailer were all located in the same city by Tuesday morning!

Yet even if the planners could somehow process all of this information—and do it quickly enough to update the economic plan in real-time in response to changing conditions—they still wouldn’t be able to overcome the calculation problem. In consultation with experts, they could determine various combinations of different output goods that they could produce with all of the inputs at their disposal. Yet even if they wanted nothing but to make their citizens as happy as possible, exactly how would they decide what to do?

Socialist critics of the market economy point to certain “abuses” and think that a group of experts could improve on the decentralized outcomes of a capitalist system. It strikes these critics as outrageous, for example, that some people own 10 sports cars and a yacht, while other people go hungry. But this ethical intuition is not enough to design an alternate economic plan. We can concede that the socialist planners would not use society’s resources in order to produce huge inequities in the standard of living among the people. Fair enough. That still leaves the question, what combination of goods and services should each person get? Even if the planners decide that citizens will have the same number of cars—perhaps adjusted for the number of family members of a certain age range, and the locations of jobs for people in the household—they would still need to decide how many total cars to produce, and how fancy to make them. After all, the citizens would like to drive very comfortable, sleek cars with air bags, air conditioning, and high-quality speakers. But to pour more resources into this area would leave fewer resources for other things that the citizens would also enjoy, such as more DVD players or bigger houses or more distribution centers (i.e., what would be called “stores” in a market economy).

The Loaded Term “Planning”…

The paradox of “planning” is that it cannot plan, because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping about in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.

– Ludwig von Mises, Human Action, p. 696

Solving the Calculation Problem?

Naturally, the socialist planners could devise various means of soliciting feedback from the people in order to serve them better. One obvious innovation would be to let the individuals or families have some means of influencing the grand economic plan. It would be obviously wasteful to literally produce the same exact combination of goods and services for each person, since vegetarians wouldn’t be interested in beef tips, whereas non-smokers wouldn’t want a ration of cigarettes. Yet to avoid the inequalities of a capitalist system, the planners would still want some way of ensuring that every individual or family had the same “amount” of consumption, however defined.

For example they might assign each person or family a certain quota of voting points each month, which they would use to order different goods and services. Items such as television sets and SUVs would subtract more points from a family’s quota than items such as a can of soda or loaf of bread, because it would obviously take “more” resources to produce the former items. (In other words, it wouldn’t be fair if one family voted to receive 10 television sets, while another family voted to receive 10 cans of tuna fish. Clearly the former family would be consuming more than the latter.) In order to pick the “correct” number of points for each type of good, the planners would rely on feedback from the managers running the distribution centers. If the shelves were clogged with TVs and the supplies of tuna fish were running low, the planners could reduce the number of points a family needed to deduct to order a TV, while bumping up the number of points it took to order a can of tuna. This would clear out the excess stockpile of TVs and prevent the supplies of tuna from running out.

Unfortunately this type of trick would only deal with excess or deficient supplies after they had been produced. Going forward, the planners would still need to tinker with their grand economic plan to decide whether to produce more or fewer TV sets (or cans of tuna) in the next period. From the feedback they received from the distribution managers, they would have an idea of how many total TVs would be ordered at various possible point totals assigned to a TV. But that still wouldn’t tell them whether the correct decision would be to (a) make more TVs next period and assign them a lower point score or (b) make fewer TVs next period and assign them a higher point score.

To solve this question, the planners might try pushing the voting system up a stage. They might give points to the various factory managers, allowing them to order different amounts of workers, gasoline, electricity, and so forth. Just as families were allowed to use their votes to order different combinations of finished goods, the TV producers and tuna producers would use their votes to order different combinations of inputs. That would help ensure that the TV producer didn’t “hog” resources unfairly at the expense of the tuna producer.

But this too wouldn’t totally solve the calculation problem, as the planners would soon realize. Although it might seem appropriate to force each individual to consume the same “amount” of goods by assigning everyone an equal amount of voting points, it would clearly be nonsensical to insist that each factory manager get the same amount of resources for his or her operation. In other words, if the planners each month awarded the same number of voting points to the TV producer as the tuna producer, they would be ensuring that society devoted as many resources to TV production as tuna production. But why in the world would we expect that to be the right thing to do, in order to use society’s scarce resources to make the citizens as happy as possible?

In order to come up with a coherent and objective way to solve this thorny complication, the planners could award points to each factory manager, proportional to the amount of points that the citizens earmarked for those goods at the distribution centers. In other words, if the citizens used five times as many of their “consumption points” to order television sets as they did to order cans of tuna fish, then in the next period the socialist planners could award five times as many voting points to the TV factory managers as they did to the tuna producers. This rule would allow the citizens to give feedback to the planners not only in terms of stockpiles of already-finished goods, but also in the decision of how many units of each good to produce in future periods.

By now you have probably realized where our discussion is heading. The way the socialist planners can solve the calculation problem is to make their system operate more and more like… capitalism.

Economic Theory and History

In economics, basic theory is not developed through a process of hypothesis which is then refuted or confirmed by empirical observation. On the contrary the basic principles laid out in this book are largely logical exercises that simply coach you through particular trains of thought. Basic economic analysis is not a set of relationships discovered in a laboratory or after poring over reams of price data. Rather, this reading gives you a mental framework for interpreting price data and other historical evidence.

In this spirit, then, we are not in the present lesson trying to “test” the analysis of socialism. Strictly speaking, regardless of the historical record of socialist regimes, the economic arguments we discussed in the previous lesson would still be valid—assuming we didn’t make an outright mistake in our reasoning. However, it would always be possible that our results, though valid, were unimportant. For example, it could be perfectly true that socialist rulers suffer from the calculation problem in determining the best uses for their country’s resources, and it could also be true that workers in a socialist system do not have the same incentives to work as hard as they do under capitalism.

Still, what if these factors only meant that the switch from a pure capitalist system to a pure socialist one, would make the average person 1% poorer? Or worse still, suppose the problems we noted with socialism were correct, but that they were counterbalanced by some virtues of socialism that we ignored in our discussion. Then we might wonder whether this book made an efficient use of resources by devoting an entire lesson to the topic of socialism, rather than the economics of leaving the toilet seat up.

As we will soon see, the historical record suggests that there is an enormous difference between socialist and capitalist countries. To be clear, the evidence is not conclusive, in the sense that it can trump economic theory. Remember, the basic principles or laws of economics are couched in terms of tendencies; we must hold “other things equal” when discussing how a certain change will impact the economy.

When it comes to the historical record and economic theory, the mere fact that a particular country experienced widespread starvation after implementing socialist policies doesn’t prove that socialism is a bad economic system. After all, it’s possible that the socialist policies would have ushered in unprecedented wealth, except that the workers’ revolution occurred coincidentally at exactly the same time as a devastating earthquake or volcanic eruption.

But as you will see, the historical record is far more extensive than simple anecdotes of particular socialist regimes experiencing temporary calamity. The record of the 20th century is quite clear that regimes implementing socialism did not succeed in their promise to provide their people with a higher standard of living in a society free from unfair social privileges. On the contrary, the spread of officially socialist governments went hand in hand with some of the darkest episodes in human history.

Communism versus Fascism

In typical political discussions, the ideology of a regime or its ruler can be placed on a simple spectrum running from left to right. On the extreme left are communists such as Joseph Stalin and Mao Tse-Tung, while on the extreme right are fascists such as Adolf Hitler and Benito Mussolini. According to this standard framework, other ideologies and leaders are much less extreme, and so fall in between these endpoints. For example, Barack Obama would be to the right of Stalin but to the left of Ronald Reagan, who in turn would be a “leftist” compared to Hitler.

Although there are various ways of categorizing political ideologies, this standard left/right spectrum makes little sense economically. For although they differ in other important respects, communism and (extreme) fascism are both forms of socialism. Communism seeks to establish government ownership over the means of production through a revolution of the working class. Fascism too seeks to establish absolute government control over the means of production, though the institution of private property is symbolically retained. In practice, however, extreme fascism is socialism, because the government lays down explicit rules governing how owners can use “their” property. Indeed, the term Nazi itself stands for National Socialism. The term signifies that the difference between the communists and the Nazis wasn’t over the sanctity of private property rights, but rather the philosophy that would guide the socialist rulers in their steering of the economy to serve the collective good. The communists tended to be more concerned with international class struggle, whereas the fascists were more concerned with the strength of their individual nations (and the Nazis in particular with the purity of racial bloodlines).

When it comes to evaluating the fruits of various ideologies, therefore, the horrors of both Soviet Russia and Nazi Germany can be laid at the feet of socialism. Say what you will about the inequalities and mercilessness of a pure market economy, the Holocaust would not have been possible in a society where private property rights were sacrosanct. Wise political thinkers have always warned that if rulers have the power to do great good, they simultaneously have the power to do great harm. The 20th century experience with both “left” and “right” totalitarianism shows that this was no idle warning.

Socialism’s Body Count

In this final section we will very briefly review some of the general statistics concerning the sheer murderousness of various socialist regimes in the 20th century Now it is true, the governments of capitalist countries participated in their share of mass killing as well, including most famously the United States’s atomic bombing of Hiroshima and Nagasaki, but also the Allied conventional bombing of German and Japanese cities which killed hundreds of thousands of civilians. Capitalist countries also participated in great historical injustices such as the African slave trade, extermination of indigenous peoples, and imperialist exploitation of colonies. Naturally the proponent of a pure market economy would point out—quite correctly—that these actions were either (a) necessary measures of self-defense to protect property and lives, and/or (b) deviations from the principle of private property rights and thus not an indictment against capitalism as an institution. But if we are to acquit capitalism of the crimes committed under its banner, then should we not give the same courtesy to socialism? After all, no Marxist academic at Harvard would have wished for the Russian people to suffer the purges of Stalin. He could simply claim that in practice the Soviet rulers didn’t implement true socialism.

One important difference between the crimes of capitalist regimes versus socialist ones—important at least in terms of evaluating them as economic systems—is that the crimes of capitalist regimes largely concerned outside victims, whereas the deaths we document below occurred among the socialist regime’s own populations. If a particular group of, say, 10 million citizens were deciding whether to embrace the institution of private property on the one hand, or to entrust their fate to a group of experts who would plan the economy on the other, they might be particularly interested to know that if history is any guide, those rulers might very well turn around and slaughter 500,000 of them. It’s true, the people might implement safeguards, and cite the experience of democratic socialist regimes in history that did not end up killing their own people, but socialism’s allowance for this possibility is surely an important thing for the group to ponder before giving their final answer.

Another important difference in the criminal records of various regimes is the sheer quantitative disparity. Many “leftist” thinkers would argue that the Chilean dictator August Pinochet was the capitalist analog to Marxist dictators, as Pinochet overthrew a democratically elected socialist and then implemented “shock therapy” economic reforms with advice from economists trained at the University of Chicago. Yet even if we agree with this comparison, the record is still in favor of capitalism. As brutal and thuggish as Pinochet’s regime was, it didn’t kill up to a quarter of the entire population in fewer than four years, as did the communist Pol Pot’s Khmer Rouge regime in Cambodia.

Obviously one single person intentionally killed by a government is one victim too many. The material in this chapter is certainly not offered to excuse or minimize the crimes and atrocities committed by governments claiming to uphold the institutions of private property and free markets. Yet many people have simply never heard the facts, and do not realize that the totalitarian socialist regimes of the 20th century became internal killing machines on a scale that places them in a different category altogether.

The Broad Numbers

You are no doubt familiar with the atrocities committed by the National Socialists in Germany under the leadership of Adolf Hitler. You may not realize that in terms of numbers, communist regimes were actually much worse. The Black Book of Communism is a respected collection of essays published by Harvard University Press. Many of the authors were formerly communist historians detailing the new knowledge of the activities of communist regimes after archives were made public with the fall of the U.S.S.R. To give you a quick idea of the contents, we quote three excerpts from the editor’s Introduction:

Having gone beyond individual crimes and small-scale ad-hoc massacres, the Communist regimes, in order to consolidate their grip on power, turned mass crime into a fullblown system of government. After varying periods, ranging from a few years in Eastern Europe to several decades in the U.S.S.R. and China, the terror faded, and the regimes settled into a routine of administering repressive measures on a daily basis, as well as censoring all means of communication, controlling borders, and expelling dissidents.

However, the memory of the terror has continued to preserve the credibility, and thus the effectiveness, of the threat of repression. None of the Communist regimes currently in vogue in the West is an exception to this rule—not the China of the “Great Helmsman,” nor the North Korea of Kim Il Sung, nor even the Vietnam of “good old Uncle Ho” or the Cuba of the flamboyant Fidel Castro, flanked by the hard-liner Che Guevara. (pp. 2–3)

[W]e have delimited crimes against civilians as the essence of the phenomenon of terror. These crimes tend to fit a recognizable pattern even if the practices vary to some extent by regime. The pattern includes execution by various means, such as firing squads, hanging, drowning, battering, and, in certain cases, gassing, poisoning, or “car accidents”; destruction of the population by starvation, through man-made famine, the withholding of food, or both; deportation, through which death can occur in transit… at one’s place of residence, or through forced labor…. Periods described as times of “civil war” are more complex—it is not always easy to distinguish between events caused by fighting between rulers and rebels and events that can properly be described only as a massacre of the civilian population.

Nonetheless, we have to start somewhere. The following rough approximation, based on unofficial estimates, gives some sense of the scale and gravity of these crimes:

  • U.S.S.R.: 20 million deaths
  • China: 65 million deaths
  • Vietnam: 1 million deaths
  • North Korea: 2 million deaths
  • Cambodia: 2 million deaths
  • Eastern Europe: 1 million deaths
  • Latin America: 150,000 deaths
  • Africa: 1.7 million deaths
  • Afghanistan: 1.5 million deaths (p. 4)

[O]ne particular feature of many Communist regimes [was] their systematic use of famine as a weapon. The regime aimed to control the total available food supply and, with immense ingenuity to distribute food purely on the basis of “merits” and “demerits” earned by individuals. This policy was a recipe for creating famine on a massive scale. Remember that in the period after 1918, only Communist countries experienced such famines, which led to the deaths of hundreds of thousands, and in some cases millions, of people. And again in the 1980s, two African countries that claimed to be Marxist-Leninist, Ethiopa and Mozambique, were the only such countries to suffer these deadly famines. (p. 8)

Close to a Controlled Experiment

As we noted in the disclaimer at the beginning of this lesson, in truth there can be no controlled experiments in the social sciences in general, or in economics in particular. People cannot be completely controlled by the experimenter, so that it is impossible to repeat a particular experiment with the same initial conditions except for one minor tweak.

When it comes to the horrible legacy of communist regimes, some apologists have argued that the crimes were the result of a particularly violent or oppressed people. For example some have argued that after being oppressed by the czars for so long, it is no wonder that the Bolshevik revolutionaries took things too far once they gained power. But if full-blown socialism were implemented in a civilized, democratic society, the socialist could claim, things would be much different.

The closest we can come to testing such a claim is to look at regions that were very similar in all other respects except for their institutional framework. One such example would be East versus West Berlin during the Cold War. Since this was a wartime partition of the same city, clearly the customs, language, religious views, and so forth were initially quite similar on both sides of the “Iron Curtain.” Yet over time, the gap in the standard of living grew substantially, with the capitalist society outpacing its communist mirror. And as many cynics noted during the Cold War era, one telling difference between East and West Berlin was that the guards on the Soviet side of the Wall were there to keep people in their ostensible worker’s paradise, whereas the border guards of capitalist countries had the job of keeping illegal immigrants out.

An even starker illustration of the difference between extreme socialism and moderate capitalism is the case of Korea. (After World War II the Soviet Union was closely associated with communist North Korea, while the American forces stayed in South Korea.) Journalist Barbara Demick provides compelling anecdotal evidence in her book Nothing to Envy, based on interviews she conducted with defectors from North Korea. Here is an excerpt from the opening chapter:

If you look at satellite photographs of the far east by night, you’ll see a large splotch curiously lacking in light. This area of darkness is the Democratic People’s Republic of Korea.

Next to this mysterious black hole, South Korea, Japan, and now China fairly gleam with prosperity. Even from hundreds of miles above, the billboards, the headlights and streetlights, the neon of the fast-food chains appear as tiny white dots signifying people going about their business as twenty-first-century energy consumers. Then, in the middle of it all, an expanse of blackness nearly as large as England. It is baffling how a nation of 23 million people can appear as vacant as the oceans. North Korea is simply a blank.

North Korea faded to black in the early 1990s. With the collapse of the Soviet Union, which had propped up its old Communist ally with cheap fuel oil, North Korea’s creakily inefficient economy collapsed. Power stations rusted into ruin. The lights went out. Hungry people scaled utility poles to pilfer bits of copper wire to swap for food. When the sun drops low in the sky, the landscape fades to gray and the squat little houses are swallowed up by the night. Entire villages vanish into the dusk. Even in parts of the showcase capital of Pyongyang, you can stroll down the middle of a main street at night without being able to see the buildings on either side.

When outsiders stare into the void that is today’s North Korea, they think of remote villages of Africa or Southeast Asia where the civilizing hand of electricity has not yet reached. But North Korea is not an undeveloped country; it is a country that has fallen out of the developed world. You can see the evidence of what once was and what has been lost dangling overhead alongside any major North Korean road—the skeletal wires of the rusted electrical grid that once covered the entire country.

North Koreans beyond middle age remember well when they had more electricity (and for that matter food) than their pro-American cousins in South Korea, and that compounds the indignity of spending their nights sitting in the dark. Back in the 1990s, the United States offered to help North Korea with its energy needs if it gave up its nuclear weapons program. But the deal fell apart after the Bush administration accused the North Koreans of reneging on their promises. North Koreans complain bitterly about the darkness, which they still blame on the U.S. sanctions. They can’t read at night. They can’t watch television. “We have no culture without electricity,” a burly North Korean security guard once told me accusingly.

But the dark has advantages of its own. Especially if you are a teenager dating somebody you can’t be seen with.

When adults go to bed, sometimes as early as 7:00 P.M. in winter, it is easy enough to slip out of the house. The darkness confers measures of privacy and freedom as hard to come by in North Korea as electricity. Wrapped in a magic cloak of invisibility, you can do what you like without worrying about the prying eyes of parents, neighbors, or secret police.

I met many North Koreans who told me how much they learned to love the darkness, but it was the story of one teenage girl and her boyfriend that impressed me most. She was twelve years old when she met a young man three years older from a neighboring town. Her family was low-ranking in the byzantine system of social controls in place in North Korea. To be seen in public together would damage the boy’s career prospects as well as her reputation as a virtuous young woman. So their dates consisted entirely of long walks in the dark. There was nothing else to do anyway; by the time they started dating in earnest in the early 1990s, none of the restaurants or cinemas were operating because of the lack of power.[5]

When discussing her book on NPR, Demick relayed the story of a defector who—ironically enough—decided he would leave North Korea after looking at his government’s propaganda against their southern neighbor. The photo showed striking South Korean workers who were at a protest, and the point of course was to demonstrate the miserable condition of laborers in the exploitative capitalist society. But the North Korean told Demick that three things jumped out at him from the photo, which eventually made him risk his life by fleeing the country.

First, the photo showed that average people in South Korea had cars. This was not the case in North Korea. Second, the photo showed that the striking worker—though clearly enraged with his fist clenched in the air—had a pen in his shirt pocket. This too was unheard-of among the average people of North Korea at the time. Third, the fact of the rally showed that the workers in South Koreawere allowed to protest. That too was an alien concept to North Koreans.

As the case of North Korea perhaps makes clearer than any other single comparison, socialism has the power to devastate entire economies and literally starve (whether intentionally or accidentally) millions of people. It is crucial to know sound economics because civilization itself is at stake.

The Fatal Conceit

“By the 1980s, Kim Il-sung or [his favored son] Kim Jong-il, who was increasingly assuming his father’s duties, offered ‘on-the-spot guidance’ to address the country’s woes. Father and son were experts in absolutely everything, be it geology or farming. ‘Kim Jong-il’s on-site instructions and his warm benevolence are bringing about a great advance in goat breeding and output of dairy products,’ the Korean Central News Agency opined after Kim Jong-il visited a goat farm near Chongjin. One day he would decree that the country should switch from rice to potatoes for its staple food; the next he would decide that raising ostriches was the cure for North Korea’s food shortage. The country lurched from one harebrained scheme to another.”

—Barbara Demick, Nothing to Envy: Ordinary Lives in North Korea (New York: Spiegel & Grau, 2009), p. 65


  1. There are some socialist thinkers who are also anarchists, meaning they propose the abolition of the State along with the abolition of private property. Obviously this type of socialist does not advocate that the government seize control of all resources. To keep things simple we will continue to assume in the text that we are dealing with government control, but much of the economic analysis would apply to the “anarcho-socialist” proposals as well. You should be aware, however, that many self-described socialists would deny that their system entails State power over workers.
  2. The great Austrian economist Ludwig von Mises made this argument in his classic work Socialism, originally written in German in 1922 (Indianapolis: Liberty Fund, 1981, pp. 192–94).
  3. Even if this were to happen, the people in charge of compensating DMV branch managers wouldn’t themselves be able to pocket the extra revenues from issuing more licenses.
  4. Ludwig von Mises systematically laid out the calculation objection, which we are about to summarize in the text, in a 1920 article.
  5. Barbara Demick, Nothing to Envy: Ordinary Lives in North Korea (New York: Spiegel & Grau, 2009), pp. 3–5.