There are different varieties of socialism. The theoreticians of socialism had different ideas
about its functioning. However, there is one key difference that distinguishes socialist systems,
regardless of their variety, from capitalist ones. The difference is private property. To
be more precise, in capitalism there is dispersed private ownership of the factors of production,
understood as exercising control over them and the possibility of excluding
others from their use. This exercise of control, possession, means "possession,
use, disposal, deriving benefits, as well as its destruction or disuse." It is important to
emphasize that ownership also means legally excluding other people from using the good,
even if we are not using or guarding it at the moment. As an example, let's take the fact that
when we leave our apartment, no one has the right to use it in our absence without our consent.
So if the essence of the difference is the existence of dispersed private property,
we must look at what ensues from its existence and what will be the consequences of its absence.
In this way we will get to the essence of the difference between socialism and capitalism.
Ownership Restrictions From the fact that ownership implies control over
resources and the ability to exclude others from their use, it follows that there are ownership
constraints in a system of private property. The owner can control his own resources, but he cannot
freely control all the resources. If he wants to use the resources of another owner, he must obtain
permission from him, usually offering something in return. The need to obtain consent and the ability
to set conditions for its granting enables the division of labor, specialization and exchange.
If ownership restrictions did not exist at all, i.e. everyone could use any resource
without obtaining the consent of the owner, division of labor, specialization and exchange
would not exist. If the producer could not demand payment for his product, he would have no reason
to produce more than for his own use. What's more, all physical and intellectual forces, instead of
being focused on creating value, would concentrate on protecting the property currently in use and on
taking as much property as possible from others - currently using it. There would be chaos.
It should be noted that this is not what socialism is about. Socialism is not no property at all,
but ownership of all property by "one will". Even if we assume that society is to be the owner,
although it consists of many people, it is treated as a collective, that has its own
will. Will superior to the individual will of the individual that is part of it. Accordingly, this
"common property" is governed by the collective as a single entity. For practical reasons,
it elects its representatives. It elects, for example, a central committee that manages the
property of the collective on its behalf. This allows you to control the chaos described above
and the war of everyone against everyone, by determining who is to do what and what to own,
in the name of the so-called "common good". In this way, however, economic relations change
from mutual granting and obtaining consent by owners who control their property to
unconditional submission to this "one will" that determines what is entitled to whom. Thus, the
ownership constraints associated with dispersed private property disappear and are replaced by
the control of all resources by a single entity. This entity does not have to ask for consent. He
can freely use the resources. Division of labour, specialization and voluntary exchange are being
replaced by top-down tasks assigned to people for which they receive predetermined remuneration. The
whole system is run bureaucratically, and the owner is a monopolist with all the resources.
Money, prices and the entrepreneurial division of labor
With dispersed private property comes an exchange of ownership titles. People specialize,
for example, in baking bread, and then what they do not consume themselves,
they exchange for other things they need. Of course, in the modern economy,
many goods are not produced at all to directly satisfy the owner's need, but are produced solely
for exchange. Due to the problem of divisibility of goods, as well as the obvious difficulties that
accompany finding the right trading partner who will both have what we need and will be willing
to accept what we offer in return, people use indirect exchange6. They exchange goods for a
product that they do not ultimately want, but will find it easier to exchange it for something they
want. Such a product becomes a medium of exchange. The universally accepted medium of exchange is
called money. With the spread of money, goods are valued in monetary units. As a result of exchange,
the prices of these goods are formed. We have already talked about how prices
of consumer goods are determined in the film "How are prices determined". Production goods,
or factors of production, are valued as follows: The entrepreneur plans to produce a given good and
expects a certain price and a certain turnover. He must estimate these quantities before proceeding
with production. He then bids with other entrepreneurs the factors of production he
needs. Entrepreneurs, when bidding on production goods, take into account the future, expected
preferences of the consumer. Factors of production are more or less specific, which means that some
of them can be used to produce only one good, and some of them have very wide applications.
For example, rubber is needed in many different production processes, while a ready-made bread
slicing machine is suitable, well, only for slicing bread and will only be useful in the
production of sliced bread. Entrepreneurs, having developed specific expectations
regarding the future preferences of the consumer, bid on the factors of production, try to choose
those methods of production that require the least inputs and decide to produce only when they have
a chance to make a profit. Prices indirectly inform them about alternative uses of a given
factor of production. If a factor of production is expensive, it means that it should be conserved
because either its supply has decreased or it has found its more profitable use elsewhere.
Suppose we want to rent a room to run a video rental shop. We know that most people no longer
watch films on video cassettes and perhaps we will attract only a few enthusiasts of VHS equipment.
Let's assume that we have determined the expected demand and are looking for suitable location. It
turns out that the monthly rental prices of all the locations we have seen exceed the expected
monthly income. What does it mean? This means that other entrepreneurs find a better, more productive
(or at least they expect that) use for commercial buildings. Their revenue projections are more
optimistic than ours, so they are willing to pay more for rent. Of course, we also accept that some
of these entrepreneurs may be wrong. If someone makes a mistake, it is beneficial for economy
and efficiency not to drag a failed investment indefinitely. It is beneficial that the building
return to the market as soon as possible, so that it can be rented by a person with a better idea to
meet the client's needs. In this way, the owners "control" each other through the price system,
and the plans of one entrepreneur clash with those of another. This competition,
this entrepreneurial division of labor does not exist in socialism. There are no calculations,
there are opinions of the owner, which we will discuss in a moment. There are no plans of many
creative people and judging which of these plans and ideas are the best. There is only one plan
and there is no way to assess its effectiveness. The planner may decide we need a VHS rental. There
are no tools to judge whether it's a good idea, and there are no ownership constraints to stop it
from inefficiently allocating resources. There is also no incentive to stop inefficient operations,
so the social function of bankruptcy disappears. It's not that the idea of a VHS rental, as such,
is wrong. In our hypothetical example, the economic calculation shows that it is unprofitable
under the given conditions. If we had done the same calculation in the 1990s, when many people
rented VHS tapes, it might turn out that the rental was the best application for the a building
at the moment. Conditions change and economic calculation helps to adapt to these changes.
It is also impossible to overlook that by abolishing the entrepreneurial division
of labor, we deprive society of the benefits of the existence of great visionaries, whose
far-sightedness and making the right decisions strongly pushed economic development. John D.
Rockefeller had the same opportunities as others when it came to running the oil business, yet his
vision and customer focus made him a huge success and raised the standard of living for the masses
of people. In the long term, if it wasn't for him and Henry Ford, perhaps car travel would still be
a luxury for the richest. 9If it wasn't for Steve Jobs, we might not be using smartphones now.
It is worth noting that the existence of money only makes sense if there is an exchange. In
the absence of property, there is no need for money, for there is no need to offer
anything for someone's possessions. On the other hand, in the case of a single owner,
there is no one to exchange titles with. Let's do a little experiment:
Walk around the room and give everything you see a price according to your opinion. Will
the resulting prices constitute an objective criterion? If you start pretending that now
these prices are guiding your actions, will that be any different than if you made decisions about
your things without giving them prices? No, you will continue to do the same because you set
the prices as you see fit. Putting a price on anything unilaterally changes nothing.
The prices of the factors of production set by the sole owner in the market are superfluous
and irrelevant, because the single owner does not need prices to use his property freely.
Nor does the fixing of prices by him prevent him from making such arbitrary decisions in any way.
Real prices are subject to ownership restrictions. They influence the owner's decision about what
to do with his property in the face of other people's plans. To buy? not buy? Sell? Refrain
from selling? start production? Sell the factory? In 1920, Ludwig von Mises wrote an essay entitled
"Economic Calculation in the Socialist Commonwealth", which is considered to
be the beginning of the Calculation Debate, a heated argument among economists over the
possibility of socialism working effectively. Very simplistically, Mises's argument was as follows:
If there is no private ownership of the means of production, there is no exchange. If they
are not exchanged, their prices are not formed. When exchange cannot take place, there is no need
for money or prices, which classical socialists seemed to understand as something obvious,
and which was no longer understood in the so-called market socialism. Since Mises was
writing at a time when the classical socialists understood this, he could have assumed in his
original argument that the existence of property is implicit in considerations of money prices. It
probably would not even have occurred to him that anyone could dare to undertake such a daunting
task as introducing money and fixing prices in the absence of dispersed private property. If there
is no exchange, fixed prices can only express the preferences of the one who sets them. This,
in turn, deprives such quasi-prices of sense and meaning. Market prices express an
independent calculation of opportunity costs, thus allowing the assessment of resource efficiency.
Quasi-prices do not change the character of the authoritarian decisions of the sole proprietor,
nor do they bring him any closer to making better economic decisions. They cannot be
called anything other than an attempt to hide the fact that real prices no longer exist.
Economic calculation Goods are valued in a monetary
unit. Every consumption and production good has a price. Valuation in monetary units is the common
denominator, which makes it possible to carry out an economic calculation. When starting an
investment, an entrepreneur looks to the future. He tries to predict the future prices that
customers will be willing to pay for his product or service. This is speculation about the future.
Having determined the expected revenue, he bids for the factors of production needed to complete
the project. In order to make a profit, it cannot allow the incurred costs to exceed the expected
future revenues. He must choose the method of implementing the investment that will cost
as little as possible. Good economizing is about achieving a goal with as little input as possible,
and not meeting less urgent needs at the expense of more urgent ones.
Let's imagine that we want to carry out a railway route from point A to point B. Unfortunately,
there is a huge mountain between A and B. We have to decide how to deal with this problem.
We can trace a route around the mountain, on the surface of the mountain, or we can build a
tunnel. Each of these methods requires the use of different factors of production. Drilling
the tunnel will require heavy mining equipment, concrete, reinforcements, ventilation systems,
and the work of engineers and workers. Laying out a route around the mountain will take even
more work of track-laying workers, more steel and traction wires (due to the longer route),
but it will not require heavy mining equipment and so much engineering work. On the other hand,
the route on the surface of the mountain will involve the development of a method of driving
the train on the sloping surface. It may be necessary to purchase a different locomotive,
or to modify the tracks accordingly. The tracks themselves, however, will be
shorter than on the route around the mountain. What should we choose? How do we know which
of these solutions is correct? We don't know until we compare the costs of each. Moreover,
under certain conditions, one method may be more advantageous, and under other conditions, another
method will be less expensive. For example, let's imagine that due to the closure of several mines,
the prices of heavy mining equipment and the prices of the work of engineers, whose experience
will be useful to us when drilling a tunnel, have fallen sharply. Perhaps then it will turn out that
the tunnel is the cheapest option. It may also be the other way around. If several new mines were
just opening, the cost of tunneling would probably be too high compared to the alternatives. These
are precisely economic fluctuations which cannot be determined a priori and which cannot be known
without an enterprising division of labour. This is why Mises wrote that without monetary
economic calculation, the planner is “groping in the dark”. This is not to say that the planner
is unable to make a decision. The point is that he takes it blindly. It may seem to him
that it would be best to run the route around the mountain, but this is only his opinion,
which is not supported by any objective premises. There is no tool - in the form of a monetary
calculation - to assess which of the three methods will be a better management of scarce resources.
As capital is heterogeneous, it cannot be reduced to any denominator other than expressed
in a monetary unit. For example, we cannot take weight as a criterion. A kilogram of a mining
machine is not worth the same as a kilogram of a road roller, so it would be absurd to say that
a given method is better because it will use less kilograms of capital. We cannot assume man-hours,
because an engineer's hour is not worth the same as a track-laying worker's work,
so one cannot claim that a given way is better because it wastes fewer hours of work. In turn,
relying on quasi-prices imposed by the planner does not distinguish this decision-making
process from relying on his own opinion that "some solution is better in his opinion",
because these quasi-prices do not express anything other than his preferences. Market prices are the
only ones that allow a reasonable comparison of the costs of different production methods.
This brings us to the summary. Socialism cannot work effectively not because there are no prices,
but because there is no dispersed private property. When it ceases to exist, there
are no restrictions on ownership, no exchange, and no entrepreneurial division of labour. Thus,
the possibility of significant prices that provide information necessary for proper management is
eliminated. Yes, the planner can set quasi-prices, but it doesn't matter, because these prices
express only his will, not the confrontation of plans of various entrepreneurs competing
for resources. The elimination of market prices makes economic calculation and thus economic
efficiency impossible. Therefore, in light of the formulation of theses about market socialism,
Mises' argument should be rephrased as follows: "socialism is an inefficient economic system
because it abolishes private property, not prices." The analysis of the meaning
of ownership and the conclusions drawn from it were noticed and described by polish economist
dr Matt Machaj. He described them in his book, which is an extension of his doctoral thesis,
entitled "Capitalism, Socialism and Property Rights". If something is unclear to you,
or you feel that too little has been said about something, ask questions in the comments.