Socialism is a failure – but popular. Capitalism is a success — but unpopular. Why?

Socialism always and everywhere eventually has ended up creating economic stagnation and loss of freedom. The more aggressively it has been tried — think the old Soviet Union and Mao Tse Tung’s China — the more horrific the human cost in lives and living conditions. Yet its appeal refuses to die, especially among academics and people who don’t have to rely on others buying something from them in order to make a living. The answers to why socialism fails and why it remains popular have a common root.

A basic idea of socialism is that we should all help each other just as if we were part of one big family. A member of a well-functioning family asks not what the others can do for her but what she can do for them. Karl Marx summed up the core credo: From each according to his ability, to each according to his needs.” Idealistic young people in particular find this idea deeply appealing.

What makes socialism as unworkable and pernicious as it is emotionally satisfying is that it doesn’t scale. We are all communists within our family and rightfully so. We give our time and resources to family members without explicitly wanting or expecting something in return because we know and care about them. The powerful bonds of blood, interaction, and familiarity, however, weaken exponentially as one proceeds outward from the concentric circles of family, friends, local community, nation, and world.

Our capacity for treating everyone like family is limited by our nature and circumstances. An individual’s capacity for understanding and caring for people is inherently limited. As each of us proceeds beyond our inner circles, we more and more require something in exchange for what we are willing to give up. Exchange and concern for self interest necessarily replace compassion. We  all are aware that since our resources are limited, we have to get the most we can with what we have.  Socialism fails because it is inconsistent with our inherent desire to look after immediate family and friends first.

Even if we all were saints, socialism still wouldn’t work. Under socialism, exchanges — what you get for what you give up — are set by the fiat of some central authority with the power to coerce compliance, i.e., the state. When prices are set by fiat rather than by voluntary exchanges among free people, the information as to the values people assign to goods and services relative to one another does not exist. The term we give to this vital information is “price”. Without a free price setting mechanism based on people’s preferences as revealed in what they actually buy and sell, huge waste and therefore chronic poverty are inevitable.

A free market pricing system is the only mechanism ever devised whereby a society can generate the relative values of an unfathomably complex set of goods and services such that what is provided is roughly consistent with what people want. The latest country to learn this basic truth is Venezuela which under Chavez socialism became an economic ruin.

In contrast to socialism, capitalism scales beautifully almost without limit. It does not arouse feelings of solidarity and brotherhood, however, because it is impersonal. At the same time as it encourages entrepreneurship and allocation of resources according to what people really want, capitalism disperses power and therefore promotes individual freedom. Its effectiveness in encouraging freedom and prosperity is difficult to see because no one is in control. That in fact, is the beauty of the whole system, and one reason intellectuals tend to treat capitalism as a disease: they are not only not in control; they are not particularly relevant. Capitalism is indeed a precious gift, but it comes at the cost of supplanting the ideal of universal human brotherhood with the principle of mutually beneficial exchange.

Clerics, the preponderance of whom seem to be sympathetic to socialism, communism, progressivism, etc. tend to be hostile to capitalism on grounds that it is a great system for giving people what they want rather than what’s “good” for them. And, it doesn’t benefit those who have nothing to offer in exchange. Both critiques are true but beside the point. The right question is “Compared to what?”

Advocates of socialism, which essentially is a pale version of communism, espouse the idea that socialism is superior because everyone will be taken care of, regardless of their ability to offer something other people might want. They fail to acknowledge that under any of the “isms” other than capitalism, eventually everybody except the politically-connected elites end up much poorer than they would have been under a capitalistic system. To take an extreme example, in Cuba health care is free to all, but there is precious little of it.

Capitalism works better than any other process ever devised for generating wealth. It is agnostic as to ends. It leaves the choice of ends to free individuals, not to clerics and bureaucrats. No system for organizing human activity can provide guidance as to the “right” ends, — what best promotes human flourishing long run. That kind of guidance is best left to religion, culture, and custom — practices based on persuasion and appeal to moral sentiments rather than the coercive power of the state.The way to give everyone the opportunity to flourish, including those who can’t produce, is not to suppress capitalism but to encourage it — sustain the process – and find ways of encouraging its beneficiaries to share their bounty with the less fortunate voluntarily. Under any “ism”other than robust capitalism, efforts to “help” usually become little more than a means whereby entrenched interests can improve their ability to get more from the rest of us for doing less. The classic means for extracting unearned wealth from one’s fellow man is to enlist the coercive power of government.

Paradoxically, socialism, whose implementation requires a strong central power and high levels of taxation, dulls the incentive to help one’s less fortunate neighbor. Under socialism, helping others is outsourced to government. If you really wanted to help a family member, a friend, or someone you knew who really needed help, would your first choice be to outsource that job to a government employee? Res ipsa loquitur. Use capitalism to grow wealth and other means — preferably, in my opinion, voluntary private associations — to provide for the less fortunate. No “ism” can do both well, and only capitalism can do one well.