Why Socialism Fails: The Decision Problem

    Motivation is an obvious problem, but let's say that you could get past that. Maybe its public executions, or maybe you have some techno-magic and actually destroy humanity itself in favor of some NPC socialist new men. Everyone's a happy willing slave in your socialist utopia.

    It turns out that even with perfect motivation, socialism will still fail anyway. It will fail because of a fatal flaw, that is impossible to avoid in any socialist system.

    Mises called it "the calculation problem," and in this post I refer to it as "the decision problem." The nature of the problem is, because there is no market in socialism, certain fundamental conditions either 1) become impossible due to the unavoidable absence of information needed to make decisions, or 2) information is destroyed or skewed, thus causing systematic bad decision-making. Either way, bad decisions quickly accrue, leading to systemic failure.

Seeing the decision problem

    Starting from the utopian ideal, one way the question can be phrased, is someone getting out of bed in the morning and asking "What am I going to do today?" In a capitalist society, he can take stock of his skills, assets, and needs, and then look at available opportunities. In the case of jobs, he can pick a job that gives the maximum economic and psychic profit, where "psychic profit" means "I feel great."

    Someone may, for example, face the choice between a $60,000 job where he can work near home, and an $80,000 job that requires him to travel on a regular basis. If the guy is single, extra travel and money might be awesome. If he's married and has young children that need Dad, he might forego the extra money. This would be an example of an economic vs. psychic profit comparison.

    Similar to our motivation problem, if you had a situation where every job was treated equally, then there is no economic profit difference from the worker's perspective. Because of that, there is only one kind of profit in this situation: psychic profit. And usually that means slacking off, or gaining power over someone else. However, since we killed psychic profit to create perfect slaves in this utopia, all decisions about what to do are indeterminate, and good decisions (that produce useful goods) are equal to bad ones (that produce nothing or waste resources, aka feminist poetry).

Resource Allocation

    One of the goals under socialism is common or public ownership of institutions, and the means of production. In this case, we arne't making decisions at the level of individuals, or about consumption. Instead, these are investment questions, like how to utilize a resource, or which factory to build, and where to build it.

    I studied chemical engineering in college and grad school, and we learned that in a capitalist system, you can do techno-economic analysis to estimate profit when deciding whether to expand an existing plant, build new, and so on. Also, the choice of materials. If it isn't profitable, that means society is telling us we are wasting resources. Also, if the project is unprofitable due to land being expensive, then it also tells us society wants the land to be reserved for another use, and we try to find a different location. If labor is too expensive, then once again, society is saying that they want the workers in question to be doing something else.

    That is what money is for, to communicate the needs and desires of society. When there is no profit, decisions on whether to make one type of good or another, or decisions on how to use a resource, cannot be determined. Since the goods are commonly held, there is no market, because there are no buyers or sellers. Without a market, there is no price, and what you tend to see again is "psychic profit only" expressed in the form of wasteful projects that look really impressive, or a "free" or cheap service that again utterly wastes what is being given away.

    One famous American example of this kind of socialism is the price of helium. Since it all comes from one mine in the world, and is controlled by the US government (socialism), they didn't think about profit and simply sold helium at production cost. This is why we had helium balloons growing up, Which were fun, but an extreme and embarrassing waste. The scientific community (I was part of the community on this one) was and is outraged and wants a market where the price increased at least 20-fold, making helium balloons impossibly expensive ($40 a balloon anyone?). This would reserve rare and precious helium only for magnetic resonance imaging, gas chromatography, low-temperature physics, and the like.

    The communist countries aren't the only ones who have made bad decisions via socialism.

Multiply these sorts of waste out into every single industry, and you will see the squandering of resources everywhere (the communists nations also had a famously bad environmental record, for the same reason). And once the resources are used up... you guessed it, poverty and starvation.