Incentives and Socialism

There are many, many issues with socialism. I will likely explore many of these in coming blog posts. However, I intentionally try to keep these fairly short. Therefore, in the spirit of brevity, I want to cover what I would argue is the absolute worst problem with any type of socialist thinking. This is the incentive problem.

It has been said that economics is the study of incentives. I do not think I entirely agree with the statement, but it is a compelling position. Briefly defined, incentives are anything that causes someone to act in a certain way. If I eat a plate of food, my incentive is likely that I am hungry. However, it might not be the only incentive. I might be stressed, it might be my favorite dish, it might be free food, or I might have an insistent grandmother forcing me to eat. Everything we do, we do because something is incentivizing that activity. Sometimes these incentives are obvious: I am incentivized to not drive into oncoming traffic to preserve my life. Sometimes they are subtle: I buy a brand of cereal because I unconsciously like the color of the box. Whatever form they take, these incentives are prods that guide each of us into certain behaviors.

The incentive problem in socialism is this: enacting socialist economic policies creates broad, sweeping de-incentivization. Let me explain. Socialists believe that inequality is the enemy. They consider inequality in income, education, opportunity, lifestyle, or health to be failures of the market that need correction. Marx saw these inequalities and used them to define his class struggle. He saw a minority capitalist class, the Bourgeoisie, which held all capital and means of production. This class was oppressing the majority working class, the Proletariat. His solution was a revolution that would strip the Bourgeoisie of their power and return the means of production to the Proletariat, a Worker's Paradise. This thinking has been reiterated for over a century in many forms, but it always returns to the same idea: we must take from the "haves" and give to the "have nots". This is meant to create a society in which everyone is equal. To put this in modern academic jargon, social equity has been achieved.

So what is the problem? Everyone being equal hardly sounds like a bad thing, right? Ignoring the clear affront to liberty in forcibly taking something from anyone, there is also a very practical economic reason this is a bad idea. Such a system de-incentivizes a society and dramatically drops production. In short, this systems breeds poverty, hunger, and shortages of every kind. Likely the most terrifying example from communist countries is that of the farmer. As a member of a command economy, this farmer is ordered to produce wheat. What is his incentive? If he produces massive amounts of wheat, all of it will be shipped off and re-distributed to the needy millions. If he produces little to no wheat, all of it will be shipped of and re-distributed. At best, he will see a marginal increase in the net amount of wheat at his family's table. Greater effort does not produce equally greater rewards. He is therefore incentivized to limit his effort as much as possible. It is a fact that communist countries saw a massive decline in agricultural output that led to mass shortages and starvation, I would argue this happened largely due to this phenomenon of de-incentivization.

A belief in liberty requires a belief that outcomes will be different for each individual. Each person is capable of contributing differently to the market. The market then rewards them according to the scale of their contribution. If I work harder, I make more money. If I produce more microchips, I can obtain a larger house. If I sleep on the job, I do not get to eat. In a free market, the primary incentives are self-preservation and profit — motivating incentives indeed. In a socialist command economy, my incentives are eliminated or ignored. It does not matter how hard I work or how little I contribute. I will receive the same outcome either way. This ignorance of basic economic theory has led to the collapse of socialist societies all over the world and the starvation of millions.

In our modern free societies, we see the ignorance of incentives and the forcing of equality all around us. The progressive income tax, the welfare state, affirmative action, free education, free healthcare, all are attempts at forcing equality on a society. In the future, I will likely write in detail on each of these things. For now, I will only state that it is our responsibility as rational thinkers to follow the incentives in each of these systems to their logical conclusions. Always ask, "In such a system, how will people logically respond?" Do not get caught in the downward spiral of "fairness" or "equity." Such thinking ignores incentives and logical conclusions. Keep in mind, if the right to private property is the hinge of the free market, incentives are the fuel.

Mr. Savage