[Market Economy Guide] Why Did Socialist Economies Fail?

“French novelist André Gide was once a socialist,

but broke with it after seeing Stalin’s Soviet Union—uniform and miserable.”

“I saw the same people. Yet although they were the same Soviet people, the impression I received was completely different. I thought that those people rather resembled, in some ways, the Russian people of the tsarist era.” These are the words of André Gide, one of France’s leading novelists. In 1936, Gide hurried to the Soviet Union after hearing that his close literary friend, the writer Maxim Gorky, was critically ill, only to be appalled by the reality of the Soviet Union, which was utterly unlike what he had imagined.

“There was no equal life”

“In every house there was the same shabby furniture, a portrait of Stalin hanging on the wall, and nothing else. There was not even the smallest object, not even a trivial souvenir, so each person’s home could easily have been exchanged for another.”

Gide was horrified by the suffocatingly uniform and tightly controlled nature of Soviet society. At the very least, the Soviet Union was not the free and equal society he had imagined, and the lives of the people were no different from before. Only the ruler had changed; the equal and happy life for all that socialism proclaimed was nowhere to be found.

An economy controlled by the state fails

Gide was deeply disappointed by the Soviet Union’s unnatural and artificial equality. Until he actually went there, he had been an ardent supporter of socialism, so the greater his expectations, the greater his disappointment. Gide declared his permanent break with the Soviet Union—indeed, with socialism itself—saying, “Human nature is not simple. If one attempts to simplify, standardize, or reduce human beings by external force, the result will always be a destructive and miserable comedy.”

In Europe during the 1920s and 1930s, not only Gide but many intellectuals were captivated by socialism. They firmly believed that socialism was a system through which workers themselves could escape capitalist exploitation and achieve universal happiness. Thus they supported socialism as an ideal world capable of realizing the free and equal society that everyone dreamed of.

But the ideological claims of socialism were, in the end, nothing more than a fleeting illusion, dreamlike and insubstantial. In reality, socialism brought people neither economic prosperity nor equality. Social wealth, honor, and all kinds of privileges belonged to a new ruling class, while the people had to carry on difficult lives in conditions far poorer and harsher than before. Indeed, in a society cut off from the outside world and tightly controlled, where impersonal and uniform equality was imposed, socialism was even more oppressive and inhumane than the old monarchy.

If Gide saw through the essential contradictions of socialism, Ludwig von Mises proved, from an economic perspective, that socialism could not survive. In Socialism, Mises argued that “under a socialist system, because the supply and demand for the means of production are monopolized by state agencies, money prices cannot be objectively formed, and without money prices that reflect the relative scarcity of the means of production, rational economic calculation is impossible.” On that basis, he logically demonstrated the “impossibility of socialist economic calculation,” showing that a socialist system was bound to fail.

The dissolution and collapse of the Soviet Union in 1991

Under socialism, prices cannot be determined through the market, so even if one wishes to carry out economic calculation, it cannot truly be done. Even if the state sets prices and uses them for calculation, such measures are at best temporary expedients; because they are not prices determined in the market according to the laws of supply and demand, they are not appropriate.

Mises regarded capitalism as the most natural and rational economic system. That was because capitalism efficiently allocates limited resources—relative to human desires—among countless economic actors according to the laws of supply and demand, allowing the economic system linking production and consumption to function smoothly. Accordingly, he was convinced that capitalism alone is the unique system capable of realizing sustained economic development, social abundance and prosperity, and the values of freedom and peace.

The end of socialism that Mises had predicted soon became reality. In 1990, Germany was finally unified as a capitalist country. In 1991, even the Soviet Union, which had represented the communist bloc, was dissolved, and the communist bloc in effect collapsed completely. In the end, Mises was right in arguing that socialism was a system that was impossible to realize from the outset.

■ Please remember

In reality, socialism brought people neither economic prosperity nor equality. Social wealth, honor, and all kinds of privileges belonged to a new ruling class, while the people had to carry on difficult lives in conditions far poorer and harsher than before.

Sung-no Choi, President of the Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 사회주의 경제는 왜 망했나

Author: Sung-no Choi

Date: 2019-04-15

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=14&idx=20094