Wednesday, March 20, 2013

Socialism Can’t Work

You say “socialism can’t work”. That statement is correct if by “socialism” you mean central planning of all economic activity. However, if by “socialism” you mean “large-scale government intervention in the economy to provide a social safety net and assure minimum standards of well-being” then socialism not only works, but it works a lot better than unfettered capitalism does. 

Those who criticize central planning rightly point out that in a centrally planned system a factory manager is not interested in increasing production because he does not  have a stake in the outcome – i.e., he does not get a cut of the profit or whatever. In technical terms this is known as “inadequate incentives”  i.e., that the compensation method does not encourage responsible decision-making. People are paid to work, but they don't get a piece of the action when they improve quality or other aspects of the product.

But exactly the same criticism has been made by dozens, if not hundreds, of economists when writing of the US economic system. Examples:

  1. The board of directors of a typical American corporation is peopled by the general manager’s cronies, who unanimously vote for pay raises, etc., whatever the general manager wants.  So American managers’ pay is NOT determined by the results of their work (i.e.  making a profit), as has been demonstrated countless times by empirical studies. US managers pay is NOT correlated with the profits they make for their companies, contrary to the claims of that corrupt mouthpiece for corporate capitalism, Thomas Sowell.  In Germany corporate law forbids this kind of crony capitalism by means of a specially designed corporate structure of governance.

  2. The Wall Street wheeler-dealers who triumphantly drove the economy into the ground in 2008 were also being compensated in a manner that did not encourage them to deliver quality merchandise. These turkeys were paid up front for selling securities, and when the securities later turned out to be worthless, the wheeler-dealers were not forced to sacrifice any of their ill-gotten loot.


So the proper conclusion to draw from the statement “Socialism can’t work” is NOT (smugly besmirked) “Capitalism is best”, but instead, “Whatever you want to call it, whether capitalism, socialism, Islamism or anarchism, people must be compensated in such a manner that they are answerable in the long term for the results of their work.”

No comments:

Post a Comment