Why does socialism fail?

In the same radio discussion that I mentioned in my previous post, I heard the radio talk show host say that socialism — and variants of it — has been responsible for millions of deaths and has proven over and over to be a failure. He encouraged the self-described socialist to read some history.

I hear this point made on occasion. I find it frustrating because rarely is it mentioned why socialism fails.

Why does it?

I believe it’s for a couple main reasons.

There’s the knowledge problem. A free market of prices communicates vastly more and better information to allocate resources better than any small group of people can.

I also believe it stifles risky experimentation, which is the source of most innovations, large and small. Without risky experimentation, society rots. I’m not sure, but I think this may actually be a subset of the knowledge problem.



16 thoughts on “Why does socialism fail?

  1. Hi Seth – I think we discussed this (and bureaucracy) before. The knowledge problem is one factor, but the as Oskar Lange noted, “The real danger of socialism is that of a bureaucratization of economic life.” The problem of a centrally planned system is not so much “information” as it is the motivation to act on information (summarized from the link below).

    Here’s a link for “Socialism” from the Library of Economics and Liberty which you are familiar with:


    • Hi MIke — Thanks.

      I would argue that ‘bureaucratization of economic life’ is a result of the knowledge problem.

      Consider the quote from Smelev and Popov about moleskin prices. It says the reason the Ministry of Light Industry doesn’t change the moleskin prices is because they have no time since they have to keep track of 24 million other prices and “how can they possibly know what to change it today so they won’t have to raise it tomorrow?”

      That the knowledge problem again. Yet immediately following that quote the author writes:

      ‘The crucial missing element is not so much “information,” as Mises and Hayek argued, as it is the motivation to act on information.’

      I agree that there is a lack of motivation to act on the information, but why? Because of the lack of the right type of knowledge. Knowing one piece of information — that many pelts are rotting in a warehouse — and thinking that’s the only piece of information needed is an overly simplistic view of knowledge. The pelts would have never made it to the warehouse and off the moleskins’ backs, in the first place, without the knowledge problem.

      • I think that government actors lack of motivation to act on the knowledge because they don’t suffer or benefit from the consequences of their actions – as opposed to actors in a free economy. I think a subtle point the author was trying to make in reference to keeping track of 24 million other prices is that because the government official is “responsible” for everything rather than HIS (in an ownership sense) own thing, he has no incentive to get any individual thing right. If the official was responsible for everything, but actually owned one or some of the things such that he stood benefit or suffer if he got it right or wrong, he would make sure the things he owned were taken care of appropriately.

        I think that’s much of the problem in Washington today – they not only do not (and cannot) have the knowledge, they really don’t care if they get it right or wrong. Their concern is giving private citizens (voters) the IMPRESSION that they have the knowledge and are using it for the voters benefit.

        Why people continue to doubt themselves and place more confidence in federal officials than themselves and others who actually have skin in the game is frustrating.

        • I agree. Incentives matter. That’s partially what I mean by ‘the right type of knowledge.’ I have less incentive to act on knowledge where I don’t face direct costs or benefits from acting or not acting.

          But, I see this as a part of the knowledge problem. I’m not sure if Hayek and Mises did, but I do. I see incentives is a part of ‘local knowledge’ and prices.

          I agree that it is frustrating why people put so much faith in federal officials. I don’t believe many of them have thought too deeply about that meaning that they doubt themselves. Or, they too quickly conclude that they trust themselves, but not others, to make the right choices — except, apparently, the federal officials.

          But, they discount the knowledge problem. The federal officials could be the smartest, most wonderful and well-meaning people in existence, and it still wouldn’t work.

          • Agreed. In terms of the semantics of the knowledge vs incentives issue, I think it comes down to what my Econ prof used to call “willing and able.” You must have the incentive (willingness) to do something as well as the knowledge (ability) in order to actually act.

  2. There’s a term used when discussing management of work-groups and teams: social loafing. It’s defined as, “the decrease in individual effort as group size increases”. There are four main causes/contributors: 1) the attitude that others aren’t carrying their own load so why should I?; 2) my effort level is lost in the crowd so no one will notice if I do a little less and a little less; 3) the rewards are shared so more work by me benefits others more than it benefits me; and 4) coordination loss as people’s efforts conflict or fail to align.
    Good managers try to reduce 1-3 by offering a reward system that is tied to individual accomplishments, by increasing individual accountability for team success, and by promoting transparency within the group which removes opportunities to hide. These are “capitalist/individualist” strategies, as opposed to “socialist/collectivist”, and can work for small teams. Some “socialist/collectivist” strategies can also help such as inspiring the group with common purpose, public shaming of under-performers, and profit sharing tied to group success.
    These can help, but as teams get larger, all of these incentives become more dilute. When the group is the size of a country, the individual incentives all but disappear. It’s like a limit function where as population gets large, individual motivation shrinks to its lower bound.

    • My point – the harm of socialism (the reduction in total productivity due to socialist coordination when compared to individualist self-interested coordination) will only be small (negligible) when the groups are small. Trying to apply a socialist coordination system to larger and larger groups results in greater and greater losses.

      As a coordination system, it basically sabotages itself and fails as soon as it competes with any system that incurs fewer losses.

      • Hi Adam — Thanks for the comments. I think I’ve seen ‘social loafing’ in action. I agree. Small groups tend to hold each other accountable. As the group size increases, you see the stuff you mention and you see people less likely to hold each other accountable. I think part of the reason for that is politics. You don’t want to call someone out, because that someone is buddies with another someone who carries a lot of weight — and the more people you get, the more of those types of dynamics that you get that impede good feedbacks.

      • “As a coordination system, it basically sabotages itself and fails as soon as it competes with any system that incurs fewer losses.”

        So small groups can rely on cooperation strategies but large groups cannot?

        • I think a better way to view this is Hayek’s discussion of family units and extended networks of people. Within families, money isn’t what motivates us to respond to others’ desires.

          A child may clean his room to avoid being yelled at. You might help your cousin move or build a deck so he might return the favor someday. Sure, sometimes there is money that trades hands, too, but that’s a smaller percentage of the time than when you’re dealing with people outside your family or group of friends.

          But, your family can’t make TV’s or pencils for you. So, outside of your family, prices become a better way to motivate millions of people to produce things for you.

          I do believe this type of dynamic exists in the workplace as well when you think about why you respond to the desires of those who you work closely with and those that are more distant.

        • I didn’t say that. Individuals in small groups just coordinate their actions more effectively than in large groups. Maybe that’s too obvious an observation.

          The result is, on a productivity per individual basis, a small group will out-compete a large group every time. The more complex the coordination, the more competitive the smaller group. I can think of numerous examples where this is the case, but would love to explore counter examples (where larger groups are better able to coordinate individual action) if there are any.

          • Sorry, my reply above was to Wally’s comment:

            “So small groups can rely on cooperation strategies but large groups cannot?”

            Seth, great point on family incentives, but you can see the coordination problem there too sometimes.

            When I took my kids camping for the first time and directed my kids on setting up a large tent, we ran into coordination problems even with such a simple task. When I had them stretch out the tent, one son pulled harder on his end and ended up yanking it away from the other one. When installing the poles became difficult, one son just quit, causing the whole thing to collapse. My daughter pounded some stakes into loose soil because it was easier than packed ground, causing the rain fly to come off in the wind. It took longer to set up the tent with “help” than if I’d done it on my own.

            The significant advantage large groups have is mass — military strategy frequently works to balance the small and large unit concepts. Move a 5,000-man regiment into an area to occupy and control it, conduct patrols by 4-man fire team or 13-man squad.

          • Hi Adam — I agree. But, your kids are in-training 🙂

            I will mention, that the military seems to understand this group effect as well, as they organize into small units, with the platoon being a ‘band of brothers’, very family-like.

    • Hi Adam — I had heard that headline in the news. I wondered how that was news since Thomas Sowell has been writing about that for years.

      But, I hadn’t heard that spin. What an amazing example of bias.

      This one sentence exemplifies the bias: “They rely on income from their work to maintain their social position and pay for things such as private tutoring for their children.”



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