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Thursday, December 8, 2011

Socialist Theater 101

The consensus of economists today is that socialism generally doesn’t work. Ludwig von Mises and F.A. Hayek are seen as the victors of the socialist calculation debate, which took place in the first half of the twentieth century. For the most part this consensus is new. Originally the market socialists were seen as victorious; their technical neoclassical models of trial and error, and the duration and seeming success of the Soviet Union, appeared to indicate that the two Austrian economists’ claims against socialism were wrong. There were two problems, however. First, the market-socialist models never addressed the knowledge problem at the center of the Mises/Hayek critique. Second, the Soviet Union was not what it appeared.

The closest the Soviet Union came to actual pure socialism was the period known as War Communism, 1918 to 1921. This period is unanimously seen as a disaster, even among socialists. Production fell in most if not all industries, and millions starved to death. From then on the Communist Party struggled to keep hold of both their Marxist ideology and their power. Naturally the latter took precedence, and as a result the price system, which they originally wanted to abolish, took on a larger and larger role. Henry Hazlitt discusses Josef Stalin’s struggle with exactly this problem in today’s document, the October 20, 1952, Newsweek Business Tides column, “Stalin as Classical Economist.”

The Soviets certainly liked to keep up appearances. At a glance the Soviet economy looked centrally planned. The planning board for each industry set output levels, and the State owned de jure all means of production. A closer look, however, revealed a different story. As Boettke and Anderson pointed out, the Soviet economy was closer to that of a mercantilist economy, a heavily regulated market economy effectively run by rent-seeking government officials and factory managers. De facto, the factory managers were the owners and residual claimants. They paid the State for the right to run the factory, and in return the State created a monopoly for them, just as in the mercantilist system of old.

Middlemen, known as the Tolkachi, worked on behalf of the State enterprises to sell surplus commodities on the one hand and purchase needed products on the other. They essentially created a market that allowed for economic calculation not possible under a pure socialist system.

This system of course was highly inefficient and unstable, but it allowed the Soviets to stay in power a lot longer than would have been possible under their socialist dream. As Hazlitt put it, “[B]ureaucratic price fixing is a farce, a fraud, and a disaster, . . . economic planners are presumptuous blind men groping in the dark, and . . . there is no substitute for free markets.” In reality, as Hazlitt shows of Stalin, the Soviet rulers were simply putting on a show. Playing the role of the productive socialist economy was capitalism itself.

Download Hazlitt’s “Stalin as Classical Economist” here. 

  • Nicholas Snow is a Visiting Assistant Professor at Kenyon College in the Department of Economics, and previously a Senior Lecturer at The Ohio State University Economics Department. His research focuses on the political economy of prohibition.