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Friday, January 4, 2019

Why We Should Take the “Socialism” Part of Democratic Socialism Seriously

Democratic socialism isn’t the same as autocratic communism, but there are problems with socialism that democracy can’t solve.

In the wake of Alexandria Ocasio-Cortez’s recent primary victory, many writers have made the cases for and against democratic socialism. Both its defenders and its critics have tried to insist, quite rightly, that those who support democratic socialism are serious about the “democratic” part.

And it is important that critics take this point seriously: arguing that someone like Ocasio-Cortez is just a Stalinist wannabe is not an effective counter-argument. Those making the case for democratic socialism really do wish to avoid the totalitarianism of the 20th-century history of socialism. Whether they can avoid that outcome, despite their good intentions, is an issue I will return to in what follows.

Critics and supporters should also take the “socialism” part of democratic socialism seriously.

The Tyranny of the Majority

The website of the Democratic Socialists of America is clear about their desire to eliminate the profit motive, or the very least to subordinate it to “the public interest” in a large number of sectors of the economy. A good number of democratic socialists would expand public ownership and control into many of those same sectors. And all of them seem to agree that democratic control is needed for major decisions about “social investment” as well as trade, monetary, and fiscal policy.

Leaving economic decision-making to majority voting imperils the ability of those with minority tastes to acquire the things they desire.

The question is whether—even if we assume that the process is as democratic as the democratic socialists desire—they can actually create a world of peace and prosperity given the degree to which they wish to abolish markets and profits. I will argue that the answer is no.

As is often the case with these sorts of proposals, the details of how more democratic control over economic decision-making would work are left vague, but if they are serious about the “democratic” part, it will necessarily involve the participation of as many people as possible, presumably through some sort of voting mechanism. If instead, such decisions were left in the hands of a small group, even if they were elected by people in general, it would risk reproducing the same alienation and exploitation of the masses supposedly committed by capitalists and their bought-off politicians today.

In a recent piece for The Atlantic, Conor Friedersdorf raised the important critical point that leaving economic decision-making to majority voting imperils the ability of those with minority tastes to acquire the things they desire. For example, if we let Americans vote on whether resources should be devoted to the medical needs of transgender people, would it happen? Would residents of Utah vote to make sure that those who wished to consume alcohol and caffeine could do so?

That we aren’t sure that the answers to both questions are “yes” is a matter of much concern about the democratic-socialist vision. How a democratic and participatory process would ensure that the needs of minority consumers were met without over-riding the will of the people is not clear.

The (In)Efficient Allocation of Resources

As important as Friedersdorf’s point is, there is an even deeper problem at the heart of the socialist part of the democratic socialist vision. If public ownership is expanded and the profit motive removed, this implies the elimination of markets as the way in which resources in those industries are allocated. It certainly eliminates markets for ownership of capital resources by eliminating private and tradeable ownership claims to firms.

Markets are processes of discovery by which we learn things we otherwise would not, and could not, know.

The question facing democratic socialists is this: how, in the absence of market prices, profit and loss signals, and private ownership of the means of production will even the most purely motivated actors in a deeply democratic process know what their fellow citizens want and need and, what’s more important, how best to produce those goods and services?

Even if “the people” want to ensure that minority tastes and needs are accommodated, how will they know what those are? In a market economy, the exchange of private property generates prices that work to signal producers about what is wanted and how urgently. The ability of owners of private resources to risk those resources on their best guesses about what is wanted, and to have the feedback of profits and losses to inform them whether they judged correctly, is what enables us to figure out what people want.  And that’s true whether it’s the masses or more specialized tastes. Markets are processes of discovery by which we learn things we otherwise would not, and could not, know.

Those same prices and profits of the market help us figure out how best to make the things that people want. This part of what markets do is often overlooked by socialists of all stripes. They might be able to offer mechanisms by which consumers could communicate their desires so that “the people” could know what needs to be produced. Even then, however, socialists over-estimate how much of what we know can be effectively communicated in words and statistics.

The Tacit Knowledge Problem

A good deal of human knowledge, including the knowledge relevant to economic decision-making, is tacit. There are things we know yet are unable to articulate. Think about how you keep your balance on a bicycle. You know how to do it, but you cannot explain to someone else exactly how it’s done.

What socialists don’t have an answer to is how democratically controlled industries will know which inputs to use.

Acts of buying and selling in the market enable us to make tacit knowledge usable by others in the form of prices and profits. This is the sense in which prices are knowledge surrogates that enable our fields of economic vision to overlap such that we can coordinate our actions and use resources wisely. Market exchange is a process of communication that enables us to go beyond the articulate knowledge of words and numbers.

Given this role of prices, what socialists don’t have an answer to is how democratically controlled industries—in which there are no market prices, profits, or private property in the means of production—will know which inputs to use to make the outputs they believe people want. If you want to socialize health care, how do you know how many nurses, NPs, doctors, and lab techs you will need in each state, city, or hospital?  You want people to get medical care without paying a monetary price for it?  How will you decide who should provide that care?  And with what machines?  Made out of what materials?

We completely take for granted the way in which markets smoothly enable producers to make these decisions using the signals of prices and profits.  Prices and profit calculations enable resources-owners to determine what combination of inputs appears to be the least wasteful in order to make what people want before they start producing, thereby not wasting valuable resources. Prices work as knowledge surrogates to help producers know how valuable people think those resources are so that producers make decisions that are the least wasteful possible.  

Prices Are a Form of Communication

Prices are the ways we make our private assessments of value publicly available for others to use to make their decisions before they produce. Profits and losses tell entrepreneurs after the fact just how well they decided. Those profits or losses inform the next round of decisions by entrepreneurs, all the time helping them figure out how to best provide what we want using the least valuable resources possible. Without prices or profits, what will perform this task under socialism, even the most widely democratic socialism one can imagine? How will this dispersed, contextual, and tacit knowledge be mobilized and made available for others to use?

There is a reason that the stock market is the very heart of a market economy.

Notice that this is not a matter of people’s motivation or psychology. Socialists sometimes like to invoke a version of “New Socialist Man” to escape these problems. They argue that people will just be different under socialism and that they will be motivated to serve the public interest. But motivation isn’t the problem here—knowledge is. How even New Socialist Man will acquire knowledge from others that they cannot express in words or numbers is a question most socialists have never faced.

Furthermore, consider what happens to firms in markets when they consistently fail in this task. Firms whose profits are negative period after period must either change their behavior or find themselves out of business. Firms with publicly traded private ownership shares will find the value of those shares (their stock) falling, reducing the firm’s value and making it more likely that other people might buy up those shares and take over the firm.

The opportunity to purchase the means of production and use them more wisely than the current owners is a key advantage of markets. In the absence of private ownership of the means of production, what will be the comparable corrective process? The long history of wasted resources and unwillingness to change that describes so many government programs would be spread to additional sectors of the economy. There is a reason that the stock market is the very heart of a market economy: it is where those who think they can do things better are free to take their shot. Even the most democratic version of socialism lacks that feature.

If what one supports, however, is something like worker-owned or worker-managed firms who still compete with each other in a genuine market, the argument above does not apply nearly as strongly. Such a system might well be immune to the problems associated with eliminating prices, profits, and private property. Whether such firms would face significant collective action problems associated with worker ownership or management is a separate issue for another time.

The Problem of Democratic Socialism Is Unresolvable

Without prices, profits, and a market for the means of production, the areas that democratic socialism would socialize would fail consumers and waste resources, impoverishing societies that adopted such policies. Those failures would force democratic socialists into an unresolvable dilemma.

Even the best-intentioned democratic socialism can end up with 20th-century style totalitarian socialism.

Critics might argue that specialized experts were needed to run these industries better than the people at large, undermining the democratic part of democratic socialism. Other critics might argue that it was necessary to re-introduce prices and profits, undermining the socialism part. Either way, the democratic socialist vision collapses. Down the first path lies the very totalitarianism they wanted to avoid, and down the second lies the market economy they are committed to rejecting.

This process also demonstrates how even the best-intentioned democratic socialism can end up with 20th-century style totalitarian socialism. As the socialism part of democratic socialism fails to reduce poverty and ensure that people get the goods and services they want and need, and as it becomes clearer that public ownership cannot provide anything close to responsible use of resources, the democratic planning process will become increasingly dominated by those with a comparative advantage in using the levers of power it has created.

Increased democratic control will not solve the problems that arise whenever people attempt to abolish the institutions of the market.

As Friedersdorf points out, putting economic control in the hands of the people actually centralizes control over resources in comparison to the decentralized ownership we see in the market. Such centralized control, even in the hands of “the people,” requires institutions of power and domination. Democratic socialists might be confident in their belief that “the people” would handle such power responsibly, but because they overlook the inevitable failure of an economic system lacking prices, profits, and private ownership, they have not thoroughly considered what might happen when the socialism half fails. When public ownership fails at allocating resources in any rational fashion, it is ripe to be taken over by those who care much less about meeting the needs of humans and much more about exercising power over them.

Marx never intended Stalin, but the latter is an unintended consequence of the Bolsheviks trying to put Marxism into practice in the immediate aftermath of the Russian Revolution. Democratic socialists can emphasize the adjective as much as they want, but the realities of socialism’s flaws will ultimately undermine both its democracy and its socialism.

Until socialists of all stripes come to grips with the role that prices, profits, and private ownership play in helping us to figure out both what people want and how best to produce it, they will continue to be mystified by socialism’s continued failure. Increased democratic control will not solve the structural problems that arise whenever people attempt to abolish the institutions of the market. In the end, the problem with democratic socialism is that it’s socialist.

Reprinted from

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.