“Socialism” is the term applied to an economic system where property is held in common and not individually, and where relationships among people are governed by the politically organized compulsion that this common property status entails. Socialism is thus opposed to the market economy, where relationships among people are organized on the basis of individual liberty and private property. The original socialist vision called for the abolition of private property and the replacement of market exchange with collective planning. No one any longer believes this form of social organization is workable. Rather than abandon socialism entirely, socialists have come now to think in terms of market socialism, a system that envisions islands of market exchanges scattered throughout a sea of collective planning.

The term “capitalism” was developed in the second half of the nineteenth century by Marxists and used as a term of criticism against the liberal system of free enterprise. The Marxist use was meant to convey the idea that the market economy was a system run by capitalists for the benefit of capitalists. This idea, when combined with the presumption that capitalists were few in number, with most people being laborers, was thought to prepare the ground for socialism to take root.

Much of the criticism of socialism has concerned its ability to promote the creation of wealth. Much discourse envisions some trade-off between economic and ethical values. This trade-off might hold that capitalism is economically more productive than socialism but that socialism is ethically superior. Much of the literature on socialism has sought to show how socialism could be made more workable economically. With the ethical superiority of socialism being taken for granted, any reduction in the economic advantage of capitalism would expand the sphere over which socialism could be practiced. As a pragmatic matter, then, some socialists might favor a gradual or creeping socialization, with the rate of movement determined by the steepness of the trade-off between economic and ethical value.

Common ownership does not mean that decisions concerning the use of resources are made collectively by the collectivity. Rather there will be individuals in positions of authority who will make choices in the name of the collectivity. Once this simple point is acknowledged, it becomes necessary to inquire into the operation of collective ownership. For there is good reason to believe that collective ownership will almost inescapably result in oligarchical and tyrannical rule, even if that rule is democratically organized.

Socialism arose as a rebellion against the impersonal relationships that were thought to characterize a market economy. Marx used the term “alienation” to express the idea that production in a market economy was for the market and not for direct use. The product of a worker’s labor was alienated from that worker through market transactions. Socialism was envisioned as a form of social organization that would avoid this alienation.

Socialism treats the national economy as an extended family and approaches economic organization from the perspective of household management. The sentiment “from each according to his abilities, to each according to his needs” does surely characterize well-working family relationships. The members of a family generally do contribute to the family economy according to their abilities, both in dealing with the outside world and in handling household tasks. Allocations of family resources are generally made on the basis of needs and not according to the market value of the work performed by individual family members. Socialism takes the ethical and organizational principles of a family and seeks to apply them to a national economy. Organizationally, this requires the replacement of market allocation processes by a planning process, in which the planning agency represents the household manager. But how can this be accomplished in any actual economy?

Private ownership is often portrayed in terms of fences and the like, with the focus on the separation of one person’s possessions from another’s. Common ownership, by contrast, is typically portrayed as featuring togetherness. Yet the reality is starkly different. Private ownership draws people together to pursue activities of mutual gain. In a well-ordered society private property and the pursuit of personal interest lead to the advancement of all. But throw in common property and the reverse results—common interest is sacrificed for personal.

The well-known “tragedy of the commons” illustrates socialism in operation. Consider the case of commonly owned oyster beds. The problem with common ownership is that small and large oysters are hauled up together, and effective management requires the small oysters to be returned to be caught at a later time. Socialism in this case requires self-denial even to have any chance at working. It requires the oyster fisherman to return small oysters for others to catch, despite the pain in his hands and his back from hauling in his nets.

Capitalism, on the other hand, requires no such self-denial. With private ownership, the oyster fisherman returns the small oysters to be harvested later after they have grown because they are worth more to his consumers, and, therefore, to him. Capitalism is a workable ethic that promotes the common good. Socialism is an unworkable ethic that destroys the common good. The resonance of socialism in some quarters is testimony to the worship of the abstract notion that preaches the love of mankind while refusing to aid the neighbor who comes into proximity. Capitalism devalues the abstract, at least as a principle to be striven for, and deals with concrete settings. It harnesses people where they are into a coherent pattern of mutual assistance, not for the love of assistance, but because of the recognition that mutuality is the only prospect for peaceful and prosperous survival this side of Eden. Socialism, by denying fundamental truths of human nature, would spread destruction in the name of straining to achieve the impossible.

Within a well-working household, decisions concerning resource allocation are based on intimacy and love. Family members possess detailed, concrete knowledge of each other’s abilities and needs, and they are bound together by love. But no matter how desirable an extension of the family model to a nation might sound, it is an utterly impossible extension to make. Socialism cannot resolve the problem of economic calculation, so it cannot achieve the social cooperation that is its pronounced objective. It is in no one’s capacity to organize the economic activities of a complex society. Household management may be possible, but national economic management is not. The organization of economic activity can only occur through a bottom-up process, as it were. In a market economy, such organization arises through the interplay among persons when each pursues his interests, and when the relationships among people are governed by the legal principles of private property and freedom of contract. It is within such a framework that prices arise for goods and services, and these prices serve as valuable guides for enabling people to make economic decisions that form a coordinated pattern. The abolition of market exchange would destroy market prices and ipso facto the coordinating function that those prices perform.

The treatment of a socialist economy as an extended household is simply impossible because the requirements for the acquisition and use of precise, detailed knowledge are well beyond human capacity. Economic life in any but the simplest of societies is just too complex to be directed or planned by any social manager. This was true for the Soviet Union even in the days when it declared itself to be practicing central planning. For those plans were compiled from the bottom up as a validation of what had been done, along with instructions to do 2 percent more the next year. This is not central planning, but rather a prediction of what is likely to happen, with the sum of those predictions being called a plan. As Paul Craig Roberts put the matter, “The Soviet economy can be viewed as a polycentric system with signals that are irrational from the standpoint of economic efficiency.”

Alas, the recognition that economic calculation is impossible without markets has led not to the abandonment of socialism but to the development of market socialism. This version of socialism envisions a sharp distinction between capital goods and consumer goods. There would be social ownership of capital goods, the produced means of production, but consumer goods would be owned individually and allocated through markets. The presumption in this case is that market prices for consumer goods can be used to derive valuations for capital goods, thus overcoming the knowledge problem that plagued socialism without markets.

Yet this version of socialism, too, is an exercise in fiction. Ludwig von Mises noted that the market socialists “want people to play market as children play war, railroad, or school. They do not comprehend how such childish play differs from the real thing it tries to imitate. . . . A socialist system with a market and market prices is as self-contradictory as is the notion of a triangular square.”

In fact, the idea that it would be possible to derive capital-good valuations from consumer-good valuations is a fiction derived from a reification of abstract economic models. In a market economy there is a systematic relationship between the prices of consumer goods and capital goods, as all markets are linked together. But to abolish markets for capital goods through the collectivization of ownership does nothing to overcome the problems of economic calculation. Indeed, the very distinction between consumer goods and capital goods is an analytical distinction developed by economists as an aid to thinking. But it is not a distinction that is capable of concrete implementation. For instance, is a car a capital good or a consumer good? Some might say it is a capital good when used in a business and a consumer good when used by individuals. But what if those individuals are in business for themselves? Thus, while the rigid separation between capital and consumer goods may be useful for analytic purposes, it is not useful as a concrete guide to economic planning. In a modern economy almost everything is a capital good, in that it yields services over time. Market socialism is as much a fiction as is socialism without markets.

Socialism is often portrayed with a humane face, as represented by the term democratic socialism. But however it is portrayed, socialism entails the substitution of group decision-making for individual choice. And group decision-making on a large scale tends to be oligarchic and responsive to special interests, even when it is democratically organized.

Socialism cannot prevent people from competing for what is scarce. All socialism can do is create offices of authority with the right to influence the outcome of such competition. Whereas winners under market allocations will be those who bid more money directly, under socialism the winners will be those who do so indirectly—and perhaps directly as well, depending on the extent of bribery. Whether the socialist system is authoritarian or democratic may well matter in several important respects, but in either case oligarchic governance for the benefit of special interest groups will have replaced the true democracy of the capitalist marketplace.

Further Reading

N. Scott Arnold, The Philosophy and Economics of Market Socialism

Peter J. Boettke, Calculation and Coordination: Essays on Socialism and Transitional Political Economy

Anthony De Jasay, Market Socialism: A Scrutiny

Friedrich A. Hayek, ed. Collectivist Economic Planning

Ludwig von Mises, Socialism: An Economic and Sociological Analysis

This entry was originally published in American Conservatism: An Encyclopedia, p. 789.