Why Socialism Causes Shortages

By Jeffrey Tucker

Thursday, May 16, 2019

You can believe that socialism is wonderful, as apparently many people do, and no one will stop you. You will get plenty of support from the media and academic elite. You can rally around their Twitter handles, podcasts, and Kindle tomes.

On the other hand, the whole theoretical basis for the idea was completely smashed a century ago. From a historical perspective, every prediction that socialism would produce nothing but chaos, deprivation, poverty, suffering, and death turned out to be true. If both theory and history scream “Fail!” — and this failure affects things you claim to believe in, such as human rights and dignity — it might be time to rethink.

Among the most conspicuous of socialism’s failings is its capacity to generate vast shortages of things essential for life. This is a universal feature of a socialist “economy,” and it always has been. In Maoist China, there was no meat and no fat in which to cook anything, if you could find something to cook. In Bolshevik Russia, there were never enough cars, apartments, or even loaves of bread. Every Latin American socialist experiment produced the same. All of this was thoroughly documented in the 1997 treatise The Black Book of Communism (among thousands of other books).

And since that time, we have observed no serious change in Cuba: It’s a life of scrounging around for basics, improvising repairs, and fear of falling buildings because materials necessary for repair are unavailable, with all technology stuck in time (pre-socialism).

In Venezuela, there is no meat, medicine, flour to make hosts for Communion, or reliable electricity, and the population is reduced to barter. The same is true in North Korea — where toilet paper is scarce and matches are housewarming gifts — the experience of which is a repeat of the tremendous deprivation of every other socialist experiment. Consistent with all evidence, “famine is a disproportionately prevalent outcome of socialist systems,” writes American Enterprise Institute resident scholar Benjamin Zycher. There is no reason to think it will ever be otherwise.

There is a reason to think that many people will continue to deny that it matters. Consider the views of two London-based journalists, Alan Gignoux and Carolina Graterol, who were recently interviewed by Counterpunch. They looked at the absence of meat in Venezuela and praised the population for going vegetarian: “Mango trees are everywhere, so you can pick a mango whenever you want,” Gignoux enthused. As for the energy shortage, Graterol said, “During blackouts, people told stories, played music, or went out and talked on the streets. It was a paradise, no TVs, smartphones, but real human contact.”

Yes, they actually used the word “paradise” to describe Venezuela today. If certain leftists are unable to see why mass deprivation of food and energy is so bad, it seems hopeless that they will see cause and effect at work in small-scale instances of government intervention. After all, the entire economy doesn’t need to be socialist to achieve the effect of shortage, restriction, and deprivation.

Microsocialism that disables market signals in any sector seems mostly to produce shortages, as price controls did for gasoline in the 1970s in the U.S., as rent control has done in New York City apartments, and as development restrictions have done in Silicon Valley. Too much regulation is another path to disabling market signals, and that also creates shortages, as it has in the U.S. child-care industry. The sector is so weighed down by regulation at all levels that it no longer benefits from the abundance-creating effects of market competition. And yet people are prone to blaming the free market for the consequences of these quasi-socialistic forms of intervention.

These results of shortage and deprivation under socialism are not random. There are explanations for them. With the rights to property denied and enterprise throttled through top-down control, the essential mechanisms that make economics work are radically disabled. It is also deeply demoralizing and demotivating to slave away in an economic structure that promises good for all but personally feels like a mandated rip-off. You can’t quit your job, you can’t find another, and you can’t start something new. Your every association and decision is policed by someone who claims to know better.

If you look up what creates wealth, beautifully explained by Adam Smith, top-down coercion against person and property does not figure into the mix. But there is an even more fundamental problem, having to do with pricing. Socialism has never overcome it. It was first revealed in 1920, when Ludwig von Mises explained that rational economic planning would be impossible under socialism. Shortages are only the most conspicuous feature of a system that results in chaos and corruption.

The argument, which Kevin D. Williamson discusses at greater length elsewhere, is as follows.

Without the market forces of supply and demand (the trade that creates these forces; and private ownership of the means of production, which enables supply and demand to operate), all factories and industries will lose access to meaningful profit-and-loss accounting. Accounting signals relay information to owners about the success or failure of their enterprises. Without such accounting, there is no basis for managers of enterprises to make good decisions. You have no data on which to base your purchases, investments, production, hiring, wages, inventories, or anything else. You lose touch with the reality of the world around you. Such a system will be, quite literally, irrational and thereby subject to the whims of political elites.

This argument in 1920 — precise, relentless, decisive, and seemingly unanswerable — came as a shock to European intellectuals. F. A. Hayek reports that Mises’s point shook him from his own attachments to socialism.

What people didn’t know at the time (communication was far more limited) was that Mises’s proposition was already being proven in Russia. Three years earlier, to near-universal celebration among elite American intellectuals, the Bolsheviks had taken full control of Russia’s government and had begun to implement their vision of socialism. Supply and demand, price signals, and private ownership were out. Lenin’s first attempt to implement socialism came with full nationalization of industry, work mandates, controls on trade, pillaging of agricultural lands and produce, rationing and centralized distribution of everything, and a full ban on private enterprise.

This so-called War Communism was a comprehensive plan implemented with militarized ferocity. The results of this terror state were catastrophic. Production collapsed, falling by half. Money died and people were reduced to barter. Output for heavy industry fell to pre-revolutionary levels. The trains fell apart and stopped running. The grain harvest was half of what was needed to feed the population. And then there was famine that resulted in an estimated 3 to 10 million deaths between 1918 and 1921. That was the first comprehensive experiment in implementing socialism in a nation.

Protests and anger were palpable, and the Communist Party figured out it had a major political problem. In 1921, Vladimir Lenin reversed most of War Communism with his New Economic Policy, which permitted markets, ownership, trade, and profits. It was a temporary measure, but it saved the economy from total death, sparing millions of lives but also permitting the Communist Party to regain the control it was quickly losing. In time, the liberalization ended and the crackdowns began anew, leading to more suffering, shortage, deprivation, famine, and death.

That experience alone should have forever ended humanity’s romance with socialism. For many socialists at the time, it was proof enough; one-time socialist Max Eastman, for instance, saw the wreckage firsthand and devoted the rest of his life to defending real freedom. But the disaster was blacked out by many media partisans of the experiment, so that most people in the West, even in Europe, knew nothing about any of it. It was many decades later when the news finally got out. But now we know, as the former socialist Robert Heilbroner admitted in The New Yorker in 1989, that “Mises was right.”

So much for the purely theoretical explanation. In political reality, the ubiquity of shortage under socialism has an even more disturbing explanation. Economists Andrei Shleifer and Robert Vishny argued in a 1991 paper for the National Bureau of Economic Research that shortages under socialism serve the important purpose of providing bribe-based profits to the ruling class. That is to say, socialism’s functioning, to the extent it functions at all, depends fundamentally on corruption — sneaking around the plan and gaming the system to survive.

The Shleifer-Vishny argument asserts that, because factories under socialism are considered public utilities, their managers cannot keep accounting profits because all profits (even fake ones) go to the state treasury. That result is bad both for the factory managers and for the ministries and bureaucracies that issue plans and prices. The only way for them to obtain personal benefit from the economic system is through bribes. Shortages increase bribe profits, just as surpluses reduce them. So the goal of every participant in the system is to restrict consumer availability as much as possible.

Over time, everyone learns to bribe, so corruption eventually displaces normal economic functioning. “The reason for pervasive shortages is self-interested behavior by ministry bureaucrats who set the plan prices and output,” Shleifer and Vishny write. “These bureaucrats intentionally plan shortages in order to encourage bribes from rationed consumers.” As unofficial transactions, the bribe profits can be privately held rather than being turned over to the treasury.

What’s distinct about this argument is that it presumes that factory managers, workers, consumers, planners, and ministry officials — all part of a unified plan concocted by self-described socialists — are self-interested in the sense that they are seeking a better material life for themselves. This assumption is critical to their conclusions and contrary to most socialist theory, which presumes infinite benevolence at all levels of society, even to the point of the transformation of human nature itself. If you doubt that human nature can change, it is revealing to examine how socialism ends up working in real life.

Let’s take a look at some history. The Shleifer-Vishny theory pertains particularly well to a fascinating period of Soviet history. After the Second World War and the death of Stalin, Nikita Khrushchev took over as Soviet leader, from 1953 to 1964. This is a period when the leadership genuinely believed that they could make socialism work to the point that it would produce more material prosperity than capitalism did in the West. (This is what Khrushchev meant when he promised “We will bury you.”) With full input from Soviet economists, all of them well trained, they tried desperately to cobble together a system of planning that made rational sense without relying on “bourgeois” market forces.

It was an enormous failure. With Stalinism at an end, so too was the mass terror. But with the new Khrushchevian stability came the entrenchment and ubiquity of the bribe economy, the petty corruption of everyday life, and the spreading of a gritty mass cynicism. Khrushchev was never able to make socialism work, and he spent his last years as a discredited, dejected, and sad old man on a park bench. He became a non-person. “In his activities, there were elements of subjectivism and voluntarism,” reads the only mention of him in the Great Soviet Encyclopedia. (I wish everyone could read Red Plenty, by Francis Spufford, an accurate historical account of the Khrushchev years put in novel form, to understand why even non-terroristic versions of socialism are doomed to fail.)

For only so many decades can you believe that cracking down on corruption will fix a system that fundamentally depends on that very thing. Eventually, the Soviet system died of exhaustion, revealing an economy thrown back in time, universal cheating and cynicism, a dilapidated capital infrastructure, low-quality everything, and shortages of consumer goods that the poorest people in the West take for granted. Thus ended a 70-year attempt to implement socialism.

And what about the theory that the only real alternative to market signaling and free enterprise is the bribe-based intentional shortage? It has an intuitive plausibility. We can see how this works even in developed economies. After all, a government can disable price mechanisms and institute a bribe economy without full-on socialism. When it does, what you find is evidence of institutionalized shortages.

The taxi industry in New York, a municipal monopoly without competitive pressure, worked for decades to create a shortage of services, and then ride-sharing shattered that model. Every industry that requires occupational licensing — from lawyering to hair braiding to flower arranging — is working to restrict supply in order to drive up prices. And one likely reason that Congress declines to adopt a flat tax is that it would end the gray market of lobbying for favors in the tax code; offer hard-to-get tax breaks and you drive up the price of exemptions and therefore the private benefit to those in power.

What history and theory show about socialism is that in real life it has nothing to do with social welfare, improved conditions for humankind, or justice, much less fine-tuning the global climate to make it perfectly match scientific prognostications. Even when it doesn’t achieve economic collapse and famine, socialism defaults to an economy of restriction and corruption and the granting of terrible power to the ruling class, which then uses the system to pillage what it can while the masses suffer.

Now, I’m very aware of the tendency to write off all theory and history with the usual protest: This is not the kind of socialism I favor, because I’m a democratic socialist! You can add any adjective you want (from “syndicalist” to “nationalist”), but the effects of disabling prices, collectivizing property, suppressing market signals, and empowering ministries of control will always be the same. Economic reality doesn’t care about your visionary politics.

Socialism in real life results in precisely the caricature of capitalism that socialists themselves have denounced for centuries — and in the economic chaos and impoverishment that Mises predicted and explained in 1920. If you love deprivation, constriction, and general limits on material aspirations, plus a tyrannical ruling class that oppresses everyone else, you will love what socialism can and does achieve. Indeed, misery seems to be its only contribution to economic history.