Criticism of socialism

Socialism—defined as a centrally planned economy in which the government controls all means of production—was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty. Yet the idea and the ideal of socialism linger on. Whether socialism in some form will eventually return as a major organizing force in human affairs is unknown, but no one can accurately appraise its prospects who has not taken into account the dramatic story of its rise and fall.

Criticism of socialism is as old as socialism itself: arguments against socialism used in 1850 are still in vogue. There are two main kinds of critiques of socialism: arguments based on the economic theories of socialism, claiming that it’s a very inefficient system when compared to capitalism, and more abstract, political arguments, that claim that even if socialism is feasible, it’s still immoral.

Due to the distressful lack of democratic socialist countries, most empirical analysis of socialism comes from dictatorships, a fact that some adherents use as a scapegoat to criticism, claiming that this time it will be different. That doesn’t mean, however that the criticism is not valid to other forms of socialist. Some critics, such as the philosopher Karl Popper, also see socialism as inherently authoritarian and incompatible with human rights. As a result, according to them, dictatorships are just a natural result of socialism. Others, such as leftist economist and Nobel Memorial Prize Laureate argued that the repressive political system provided a substitute to the lack of incentives that socialism tends to produce, and a democratic socialist community would perform even more poorly than the Communist bloc did.

Prices and information
Surprisingly, the unplanned 'chaos' of a market economy turns out to be far more orderly than the 'planning' of a command economy

Why, and how are things produced in capitalism? As the Nobel Memorial Prize laureates Paul Samuelson and William Nordhaus explain:

In socialist economies, however, things are different. While analyzing the failure of communism, Harvard professor Greg Mankiw wrote:

What went wrong? Can other forms of socialism circumvent the limitations faced by the communist bloc? One of the most famous arguments against socialism was advanced by the Austrian economist Ludwig von Mises. According to Mises on his article , socialism is theoretically impossible because, in any economy, prices are a signal: if they are higher, the producers will produce more. If they are lower, the producers will produce less, adjusting the market accordingly. In socialism, however, prices are not defined by the market. As a result, no one knows how to produce.

The most famous attempt to refute Mises’ argument came from the Polish economist, who developed a market socialism theory. According to Lange (in what latter became the Lange-Lerner Theorem, or the Lange-Lerner-Taylor Theorem) planners would be able to use the information available on a central planning board to set prices, raising them to get rid of shortages and lowering them to get rid of surpluses. The problem, therefore, would be a matter of administration, not socialism or capitalism.

Anarcho-capitalist economist Bryan Caplan (so, even more radical than on his defense of the market economy than his Austrian fellow) also criticized Mises argument claiming that while economics calculation under socialism might be impossible, that doesn’t mean that socialism is, also stating that Mises’s idea is incompatible with his own epistemology. According to Caplan, incentives, which we’ll see next, are the main reason why socialist countries have performed so poorly.

However, a far more compelling criticism would soon appear by another Austrian economist.

Incentives
Try pouring water into a tank where there's a pipe at the bottom draining it out faster than you pour it, and each bucket you bring breaks that pipe an inch wider, and the harder you work the more is demanded of you, and you stand slinging buckets forty hours a week, then forty-eight, then fifty-six-for your neighbor's supper - for his wife's operation-for his child's measles-for his mother's wheel chair - for his uncle's shirt - for his nephew's schooling-for the baby next door - for the baby to be born - for anyone anywhere around you it's theirs to receive, from diapers to dentures - and yours to work, from sunup to sundown, month after month, year after year, with nothing to show for it but your sweat, with nothing in sight for you but their pleasure, for the whole of your life, without rest, without hope, without end.... From each according to his ability, to each according to his need... Another, more intuitive, albeit still relevant criticism, is the idea that the abolition of private property and the "From each according to his ability, to each according to his need" ideal may create bad incentives. Put in a very simple manner, most people don’t like to have their stuff taken – and won’t put much effort on their work if you give them too much free stuff.

In 1848, the British classical political economist and philosopher John Stuart Mill wrote on his book The Principles of Political Economy:

This criticism is so intuitive that Karl Marx and Friedrich Engels themselves tried to refute it on their Communist Manifesto, released on the very same year as Mill published his Principles of Political Economy.

Evidence hasn't been kind to Mill's argument: according to Nobel Memorial prizer Abhijit V. Banerjee on a World Bank study, there is no systematic evidence that cash transfer programs tend to discourage work. However, socialist countries have so far faced some serious problems at creating incentives, so much that they haven't managed to create a substitute to the market. In sectors where the party leadership really wants results, such as military, incentives are used. As the Pulitzer-winner journalist Hedrick Smith puts:

The collectivization of agriculture in the Soviet Union also shows how inefficient an economy without incentives can be: by taking the lands from the ‘’kulaks’’ and sending the food from the camp to the cities, millions died. The incentives that dictator Josef Stalin and his crew offered to their people? The right to not be shot if you worked. However, using the whip as an "incentive" can lower productivity. Why should you stuck your neck by trying new ideas when your gain would be minimal anyway and when failure could be met (if you're very lucky) with severe punishment? The lack of incentives also leads to wastes: since the community, and not the individual firms will pay for the resources, people tend to be less careful while managing them.



Eventually, the collectivization had to be halted and some private property and incentives were established. According to the economic historian Alec Nove, "How did the peasants survive the confusion and hardship of the revolution from above'? They could not have survived without the toleration, in and after 1930, of some private food-growing, and, after the initial excesses of super-collectivization, they were allowed some domestic animals." By 1934, private livestock holdings were again permitted, and in 1938 over threequarters of all cows, over two- thirds of all pigs, nearly two-thirds of all sheep in the Soviet Union were again in private hands. This wasn't the first time that the Soviet Union had to give up on socialism in order to survive: Under Vladimir Lenin, the so called "" had to be replaced by the, that abolished parts of the central planning and allowed for some private economy, especially on the agriculture.

Indeed, as early as 1931 Stalin gave up on the idea of creating “socialist men and women” who would work without monetary incentives. Thereafter, not only did different jobs get paid different wages but also a bonus system was introduced. Such bonuses however, created disincentives to technological change. First because innovation would take resources away from current production, risking the output targets. Second, because output targets were usually based on previous production levels. This created a huge incentive never to expand output, since these incentives only meant having to produce more in the future, as future targets would be “ratcheted up.” Underachievement was, therefore, the best way to meet targets and get bonuses. The fact that such bonuses were paid monthly also kept planners focused on the present, while innovation is about making sacrifices in order to have a better future.

We don’t need such an extreme example as the Soviet Union under Stalin to show how the economy can be distorted by policies that hinder incentives. In fact, even the most capitalistic countries, like the US, can have inefficiency problems caused by these policies. According to Harvard professor Greg Mankiw:

Despite all the efforts by the government, people under socialism are still self-interested. As a result, they try to find incentives whenever is possible. Economists Andrei Shleifer and Robert W. Vishny also claim that, under socialism not only industries have no interest to be efficient and innovative since they get no profit from but, but also that shortages were made by planners on purpose: because planners cannot keep the profits the firms earn in socialist economists, they intentionally create shortages in order to bribe costumers. In contrast, capitalism tends to create supplies, as producers want to sell more. Again, this sort of inefficiency and corruption also happen in capitalistic countries with a large public sector, such as France.

Prices, information and incentives
Finally, we can merge the two sections above into a different argument. Using classical political economists such as Adam Smith, David Hume and and focusing more on entrepreneurship rather than the price theory like Mises, Nobel Memorial Prize laureate Friedrich Hayek argued on his 1945 article  that knowledge is disperse in society: information only exists in tiny bits of incomplete and often contradictory knowledge. Businessmen know the best way to run their business, while workers know the best way of making products and consumers know what’s the best for them. How does market resolve this issue? Giving us the example of the tin market, Hayek writes:

In other words, let's suppose there's a disruption of the tin market. This information (although not necessarily the cause of such disruption) will spread through markets, and consumers will economize on tin and seek out substitutes. On the other hand, as the price of tin goes up, tin producers have an incentive to produce more. As economists Tyler Cowen and Alex Tabarrok wrote, “a price is a signal wrapped in an incentive”. All you need are producers trying to profit and consumers trying to save money.

Another example was given by Cowen and Tabarrok



If you don’t feel like reading the whole thing above, all you need to know is that, by eating candy bars, you’re making oil more expensive.

In socialism, however, it is impossible, according to Hayek, to assimilate so much information. Let’s keep our oil example. Oil is used to produce steel, but also to produce food. Which one is more important? A central planner has no way to decide this, and we’re only talking about two uses for oil (oil has many, many other uses, from a fuel to asphalt production). Moreover, even if we could compute all the information available. What would be the incentive to send the actual information to the central planners? Every user of would just claim that their use is the most important. One just need to study the history of the, when the American government tried to allocate the oil in the economy, to understand why it cannot work, and how a market economy managed to eliminated (through a painful way, it’s true) the shortage of oil. Now, if this failed at one sector, imagine the same thing happening with the whole economy? As once again, Cowen and Tabarrok put:

In other words, higher prices incentivize producers to produce more and compete with better products which will… lower the prices to consumers.

Furthermore, it is essentially impossible for all the relevant information to be communicated to a central planner. There is really no alternative other than some form of decentralization and a far more fundamental form of decentralization than envisaged by the market socialism model. Reformers who begin groping toward market socialism along Lange's lines regularly learn by bitter experience in their own countries that the hope Lange held out was illusory.

The Use of Knowledge in Society is widely regarded as one of the most important articles in the history of the economic thought, being considered one of the top 20 articles published in the American Economic Review during its first 100 years and Hayek is thought to have won the debate.

According to socialist economist Robert Heilbroner:

According to the former president of Harvard University and former United States Secretary of the Treasury Larry Summers, not only Hayek won the debate, but his teachings on how the market organizes the economy is perhaps the single most important insight of the economic thought:

Hedrick Smith’s misadventures on Soviet Russia illustrate well the failure of the central planning to allocate resources, and how shortages, surpluses and lines were a staple on the most powerful socialist country the world has ever seen:

Since the demise of Soviet-style socialism, another proposal to solve this issue is the use of technology. Socialist computer scientist claimed in his 1993 book Towards a New Socialism that a network of computers can plan the economy. Practical and empirical evidence of this proposal is still meagre, with journalists (read, not academics) Leigh Phillips and Michal Rozworski contributing to the debate, arguing that, if companies like Amazon and Walmart can plan their immense economies, so can countries. Another contemporary Austrian school economist, Peter Boettke, claimed that Hayek's point still stands because artificial intelligence can only find associations, not meaningful causal relationships, being therefore unable to overcome fundamental information-incentive problems that the market can solve. According to Boettke, it's not simply the knowledge that is difficult to compute; but also the knowledge tied up with questions of incompleteness and undecidability. "The subjective judgements of the exchange value of goods and services", he writes, "are translated into publicly information embodied in market prices only in the context of exchangeable private property rights, from which exchange ratios (i.e. market prices) emerge, and emerges only within that context (...)".

Private property matters
A famous motto by socialists is that. However, the evidence available shows that private property and property rights are vital to economic development. MIT economist Daron Acemoglu found that property rights, that is, institutions and rules and regulations protecting citizens against the power of the government and elites, like those protecting (or failing to protect) investors against government expropriation, have a first-order effect on long-run economic growth, investment, and financial development. Indeed, apparently one of the reasons why the world was so poor until not so long ago was because property rights weren't well protected, and one of reasons why places such as Africa are still so poor is the fact that the state cannot protect property rights. According to Acemoglu:

Contrary to popular belief, property rights can also prevent environmental degradation. Some environmental problems can be seen as problems of incomplete, inconsistent, or unenforced property rights regimes. One of the most famous market failures, the is maximized under socialism: when the entire community owns a certain asset, no one actually owns it – and no one takes care of it. UCLA microeconomist Armen Alchian gives us a good explanation of this, that also explains why socialist experiments have been so disastrous while taking care of the environment:



One important kind of property rights that socialists often oppose are intellectual property rights. Intellectual property rights are the key to, the processes which new firms replace inefficient incumbents by innovations. As a result, technical progress that takes place under socialist countries consists almost exclusively of copying of innovations introduced in developed capitalist countries. Intellectual property rights also boost economic growth (especially long-term, healthy economic growth) by making more investment activities possible, particularly research and development activities. The investments in tangible and intangible capital in turn stimulate long-term growth. Studying 80 countries in a 30 years panel, David M. Gould, William C. Gruben from the Federal Bank of Dallas found out that that, by influencing the incentives to innovate, stronger intellectual property rights protection corresponds to considerably higher economic growth.

It's not hard to understand why property rights matter so much. When property rights are insecure, laws are poorly enforced and there are too many barriers to start a business, the profit-maximizing firms will probably tend to have short time horizons and little fixed capital, and will often tend to be small scale. The most profitable businesses in these cases might even be the black market.

Property rights are also, according to Harvard historian Richard Pipes, fundamental to democracy and freedom. Contrasting England and Russia, Pipes argued that one became democratic and the other didn’t because of their culture and institutions regarding property rights. The importance of private property in England resulted, according to Pipes, into the development of individual liberty and democracy. The strength of the English Parliament, especially the House of Commons, grew as response to the king’s greed and need for money. In other words, the institution of private property in England forced the monarchs to respect property rights through their elected representatives in Parliament. On the other hand, in Russia with its historically weak tradition of private property, authoritarianism reigned.

Economic freedom fosters economic growth


For many reasons, socialists, in general, oppose to economic freedom, that is, the institutions that protect the liberty of individuals to pursue their own economic interests and undertake economic activities of their own choice. Evidence clearly suggests, however, that economic freedom is a determinant on economic growth since they promote greater opportunities for innovation and progress. In addition, economic freedom has an indirect positive effect on economic growth through its positive impact on physical capital formation. The reason for this is because economic freedom results in more competition and innovation. On its crusade against economic freedom, socialism ends up prohibiting the independent planning of self-interested individuals. Under a capitalist economy, when a person sees a profitable opportunity, they can act on their own initiative and are motivated to do so by the prospect of profit. As a result, new ideas can be implemented.

Some may argue that this economic freedom is only good for the rich. However, according to economists Andreas Bergh and Christian Bjørnskov, there is evidence that economic freedom affects all parts of the income distribution equally, and some indications that the growth effects are largest for the poorest and richest quintiles.

Reviewing over 400 studies, economist Robert A. Lawson discovered that, on average, people living in countries with higher economic freedom enjoy much greater levels of income. Many other measures, like poverty rates, political rights, civil rights, gender inequality, live expectancy at birth, infant mortality rates, and life satisfaction surveys, are also better in the countries with more economic freedom. When it comes to income inequality, he argues that economic freedom is not the likely cause of excessive inequality: the share of total income going to the poorest tenth of the population is about the same in countries with high economic freedom as it is in countries with low economic freedom.

The trade-off between efficiency and equity
“The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal sharing of miseries. The uneven distribution of wealth in the world is due to the uneven distribution of capitalism. On his seminal book Equality and Efficiency: The Big Trade-off, economist Arthur Okun gives us the following thought experiment:

When it enacts policies in order make the distribution of income more equal, the government also distorts incentives, alters behavior, and makes the allocation of resources less efficient. Socialists are often willing to pay in reduced efficiency for greater equity, but while taking steps to redistribute income from the rich to the poor, governments ends up harming economic efficiency and reduce the amount of wealth available to distribute. In other words, if we value equality, we would approve when a dollar is taken in a bucket from the very rich and given to the very poor. But, as Okun puts, this bucket of redistribution has a leak in it. Only a fraction of each dollar paid by the rich in taxes actually reaches the poor. Then redistribution in the name of equity has been at the expense of economic efficiency. In terms of Okun's experiment, we might find that for every $100 of taxation on the rich, the income of the poor increased by only $50, with the rest dissipated because of reduced effort or administrative costs, although the exact size of the -actual leak is still subject to much debate.

In the American case, generous social programs, especially social security and Medicare, reduce the need for people to save for old age and health contingencies. However, countries with larger redistributive policies than US have found declining labor-force participation, growing unemployment, and rising budget deficits. These countries have taken steps to reduce the burden of the welfare state. One good example of this is Sweden, where in the 90s the was forced to liberalize the economy, severely cut spending (including cuts in the social security and pensions), and consolidate a harsh fiscal policy in order to make the country’s welfare state sustainable.

The trade-off is also perceived on taxation systems: equality and efficiency will often conflict on taxes. Heavy income and property taxes might discourage people from working as hard as they otherwise would, discourage them from saving and may also lead capital flight, such as happened on France under François Hollande, of the French Socialist Party. Meanwhile, luxury taxes may also create distortions such as as they often have a very elastic demand. One good example happened in the US under George H. W. Bush administration: Bush tried to reduce the deficit budget by taxing luxury goods such as yachts. However, this resulted in a collapse of the yacht industry. The government expected a revenue of around US$30 million, but ended up with only half of it, spending more on unemployment benefits from those that were fired due to the new tax than it collected with it. When it comes to wealth taxes, even proponents of this policy, such as the French economist Gabriel Zucman, acknowledge that they have failed so far, arguing that they would, however, work in the US.

Additionally, macroeconomist Robert J. Barro argued that high levels of inequality reduce growth in relatively poor countries but encourage growth in richer countries. As economic growth is probably the best thing for raising the quality of life of the poor, socialists, on their quest for equality might in fact deteriorate the quality of life of millions.

That doesn't mean, however, that inequality is efficient. Nobel Memorial Prize laureates Abhijit V. Banerjee and Esther Duflo showed that the growth rate is an inverted U-shaped function of net changes in inequality: Changes in inequality (in any direction) are associated with reduced growth in the next period, although their data has little to say on whether inequality is bad for growth. On his The Price of Inequality, Nobel Memorial Prize George Stiglitz shows (with mostly anecdotal evidences, it's true) how inequality can also harm the economy, with the wealth using their power to shape monopolies, incur favorable treatment by the government, and pay low taxes. According to a 2011 IMF study, in the long term, the trade-off might not in fact exist, and too much inequality may also bring political instability, which can discourage investment and growth. Finally, there are, of course, policies that can promote both equality and efficiency when well-designed, such as good public education.

Government consumption, government failures and state-owned enterprises
A chief tenet between socialists, such as Bernie Sanders and Alexandria Ocasio-Cortez in the US is the increase of the government spending, especially in the welfare state. While there are many arguments in favor of this, many other variables should be considered, especially considering the scale of the projects proposed, as a higher level of government spending means not only is a higher share of income taken in taxes but also that there are higher transfer payments that reduce incentives to work. Americans are not only richer than Europeans, but are also getting richer, and one of the reasons for this is the smaller size of the government.

A myriad of studies explain why a larger government slumps economic growth. Studying about 100 countries in the post-war world, Harvard professor, Robert Barro, concludes that “the cross-country data indicate that government consumption is inversely related to growth, whereas public investment has little relation with growth". According to Swedish economist Stefan Fölster “that an increase of the expenditure ratio by 10 percentage points is associated with a decrease in the growth rate on the order of 0.7–0.8 percentage points”. A bigger government also harms the employment rates. A study conducted by another Harvard professor, Alberto Alesina, states that a reduction by one percent of government spending leads to an increase in investment by 0.16.

Unsurprisingly, a larger, more active government, also leads to more government failures. Many socialists also detract the Market economy because of market failures, believing that the government activity may solve them. However, as Public Choice scholars argue, government activity often makes the outcome even worse. The reason is the same as we saw before in the third section: the incentives and information to act are not available to bureaucrats and politicians. Such failures arises when government has created inefficiencies because it should not have intervened in the first place or when it could have solved a given problem or set of problems more efficiently, that is, by generating greater net benefits. Using thirty years of empirical evidence on the efficacy of market failure policies initiated primarily by the federal government, but also by the states, economist Clifford Winston argues that the welfare cost of government failure may be considerably greater than that of market failure. Some policies have forced the U.S. economy to incur costs in situations where no serious market failure exists. Such failures often happen because politicians are also people. They have their goals, and be elected and re-elected are goals number one and two. They aren’t always looking out for the well-being of society as a whole, and are willing to sacrifice the national interest to solidify their base of voters. A bigger government also leads to more corruption, probably the most detested of all government failures.

Some socialists also favor state-owned enterprises (SOEs) instead of private ones. But many many studies across many countries and economic sectors found out that SOEs are less efficient than mixed or private sector enterprises in every measurement imaginable. This is especially true to manufacturing sectors, as SOEs have to face competition of private companies. A study conducted by the World Bank concluded that SOEs often:
 * Are less efficient than private companies
 * Do much worse to control pollution
 * Can undermine fiscal stability and fuel inflation as they are often unable to generate the resources to finance their operation, and have to rely on public money.
 * Have a negative effect on economic growth
 * Crowd out expenditure on health and education
 * Capture a disproportionate share of credit, squeezing out private sector borrowing

Additionally, Harvard economist Martin Feldstein argues that, one of the reasons why the American economy grows faster than the European economy despite the fact that Americans are already richer than Europeans, is the fact that are virtually no state-owned enterprises in the US.

The very few SOEs in the US also face similar problems. Another reason why some socialists like SOEs so much is because of their allegedly ability to fix market failures. However, according to Nobel Memorial Prize Paul Krugman, perhaps the most well-known left-wing economist in the US, SOEs don't work well even when it comes to remedy market failures such as :

Why are SOEs often so inefficient? For the same reasons we saw before. In a market economy, companies that fail to motivate workers, produce goods of reasonable quality, or meet their production targets are ultimately driven out of the market. However, state-owned enterprises often don't even have to worry about competition or about being driven out of the market, and it is the government that set prices and foot the bill if these enterprises lost money.

"But how did the Soviet Union grow so much then?"
Stalin apologetics often claim that their favorite dictator put one of the poorest countries in Europe in the space era. The Soviet economy was, however, far less impressive than what these people think, and the Imperial Russia, far more remarkable, being one of the fastest growing countries in the world in the early XXth century. If the New Economic Policy wasn't repealed, the Soviet Union might have been a much wealthier nation by 1940. In the worst case scenario, a Tsarist economy would have achieved a rather similar structure of the economy and levels of production as Stalin’s economy by 1940. The short-run (1928-1940) costs of Stalin’s policies for industrialization are very significant for an economy in a peaceful period. Japan, for instance, achieved a far more prosperous economy without any mass starvations in the same period.

The Soviet government was just an apparatus of repression, and could use force to move resources from agriculture, where they were very inefficiently used, into industry, what resulted into high growth rate. Such growth, however, couldn't last forever, since it didn't came from technological advance outside the military and aerospace field. Even during Stalin's rule, waste and inefficiency were the rule. Stalin himself spent his time making seemingly trivial decisions, like setting the price of metro tickets, and corruption and rent-seeking were the rule. In the 1970s, the country's economic growth had all but stopped. The Soviet economy came to rely more and more on oil and gas, and when the prices started to drop, the country fell apart.

"And how about China?"
An even less inspiring argument, advanced for instance by the Stalinist philosopher Domenico Losurdo, is that the Chinese economic miracle shows the efficiency of socialism. The problem is, China only started to grow after the many reforms, after the dictator Mao Zedong died, when China abandoned much of its socialist institutions. The first reforms dismantled many of the aspects of the command economy that China has struggled under Mao. Agriculture, for instance, was an economic sector that had been gravely damaged by collectivization and the misguided attempt to industrialize rural areas. In the late 1970s, these, however, these policies failed began to be reversed. Among the first reforms was the revival of household farming. As a result, the grain output rose by nearly one-third between 1978 and 1984. Additionally, these increases in agricultural productivity freed up hundreds of millions of workers to move into industrial labor.

On the other hand, in 1995 and after, reforms involved widespread privatization. The state's share of industrial output declined from around 50% in 1995 to 24% in 2008. China also saw an expansion in the legal protection for private enterprise. There was no rule of law in China before these reforms. However, as a market economy was introduced, a corresponding legal system had to be developed. A major development was the adoption of elements of the German civil law such as the right for private citizens to sue the government. Despite the opposition to private property rights by the communists reforms were able to create and protect property rights. At the same time, the country re-joined the global economy. This leads to further investments and growth. And why do people in China save so much? Because the social safety net in "socialist" China is abyssal, and people have to save their much of their money in order to retire.

Since the rise of Xi Jinping, China has gradually move away from the market. As a result, its economy has slowed-down too, although other factors, such as the and an ageing population also explain this slower growth. A 2023 study found out that that, while remarkable, China's growth pattern is very similar to that of several other East Asia economies that initially grew very quickly. The study also suggested that China's growth will substantially slow even further, so much so that the US growth rate will likely be higher than China's by 2043. The authors also argued that China's income per capita will level off at roughly 44%of the US level around 2100.

So, what?
It is no absurd to claim that China and Soviet Union grew more because of capitalism than because of socialism. But still, supposing China is a socialist nation and that the Soviet Union grew because of socialism, that still isn't a good argument for socialism. 80 per cent of all famine victims in the twentieth century died in the Soviet Union and China. Does the all these famines, authoritarianism and violations against human rights in these two countries worth the economic growth? Especially considering how many countries also saw a tremendous economic growth under democratic institutions?

The black market
What's the longest and most painful road to capitalism? Socialism.

As we saw, the centralised planned economy that stymies private initiative, the endless regulations, as well as poor quality production, ensure that consumer goods are in chronic short supply under socialism. The lack of incentives and the limitations of the planned economy resulted in what is often called the, that is, the black market and the informal sector in the economy. The existence of the second economy can be traced to the earliest years of Soviet power and its size is unknown, but was indeed huge, and its existence was everywhere. Not only the productive activities of the second economy have clearly increased the standard of living in the Soviet Union but its efficient production also made it possible for the government to continue with a policy that gives priority to heavy industry, the space industry, and the military sector. While part of this black market was composed of drugs and alcohol, the largest black market is that of ordinary consumer goods, since, as we saw, the most powerful socialist nation in history was always facing short supplies.

That doesn't mean, however, that this black market only brought benefits to those living under socialism. The effects of the second economy were so widespread that they affected the demography of the country: beneficiaries of the second economy rarely moved to urban areas with strong industrial economies where less potential of unofficial earnings exists. A considerable part of the today's mighty Russian Mafia was created due to such markets.

The Soviet Union wasn't the only country plagued by a huge, parallel market. Countries with very different socialist systems, such as Yugoslavia, China, Angola and Cuba faced the same problems. While more of an anarchist experiment than a socialist one, the short-lived Revolutionary Calatonia also had to deal with black markets. In the Yugoslavia, a country that adopted a market socialist model, perhaps more than 25% of the GDP in 1981 was composed by the Black Market. The socialized sector of the economy was very affected, with enterprise managers, politicians, and administrators resorting to unofficial economic methods to enable an overadministrated, overregulated and inefficient economy to function.

Perhaps the most important lesson that the second economy of the socialist countries can give us is that humanity tends to adapt and seek out the market. Even under the repressive Soviet system prices that evade central control will inevitably appear and not even the Soviet machine of repression could enforce well regulations against prices sought by sellers and accepted by buyers, that is, based on agreement. In other words, society can stand the socialist repression, but it can't get away of markets.

The history of black markets in socialist countries also raises doubts on the viability of "democratic" socialism. If even the socialists dictatorships of the 20th century were unable to suppress the market-oriented profit motive, then how to do this within a democracy? Indeed, as economic historian and Nobel Memorial Prize laurate Douglass North puts, the Marxist theory of socialism is deficient because it needs what he called a "fundamental change in human behavior to achieve its results, and we have no evidence of such a change (even after seventy years of socialist society)."

Could market socialism work?
A market socialist economy is an economy in which firms are owned and controlled by the government but then sell their products to consumers in competitive markets. The closest thing that the world ever had to a market socialist economy, Yugoslavia, suggests that no. Just like other socialist countries, Yugoslavia under Tito had a strong start (exactly what one would expect due to the ), but in the long term, the country showed the same problems that other socialists faced, like stagnation, international debt, enterprise inefficiency, inflation, and, of course, an authoritarian government. Labour-managed firms distorted labour incentives to innovate and with increasing domestic unemployment, a large fraction of Yugoslavs responded by emigrating, draining the domestic supply of labour. The relationship between the public and the private sector on market socialism is less-than-stellar too. The two sectors should cooperate while concurrently engaging in market competition with each other, but that's not what really happen. As economist János Kornai put:

There is also another problem with market socialism. Market socialists such as the American economist often obfuscate the importance of politician's intentions by imagining complex corporate governance structures and believe that a market socialism can work under a democratic system. However, Corruption and mismanagement are almost inevitable under the market socialist system as politicians tend to influence more and more the firms. These problems will probably arise even supposing that socialism can be democratic, as SOEs around the democratic world suggest. In these countries, governments failed at biding the political influence on them, and there's no reason to believe that this wouldn't happen in a system where the free enterprise is even less prominent.

In the end, even a mitigated form of socialism such as market socialism fails for the same reason as other socialist systems. The authorities don't have the information to run the economy. The incentives are misdirected. There isn't enough competition. The economy fails to adapt and innovate.

Socialism results in totalitarianism
[S]ocialism can be put into practice only by methods which most socialists disapprove On his most famous work, The Road to Serfdom, Friedrich Hayek also argued that socialism would almost inexorably lead to a totalitarian government. Why may socialism lead to this “road to serfdom”? This is because, according to Hayek, economics ends are not separate from the other ends of life. As he writes:

A state socialist government needs power to plan the collective economic activity and constraint the individual choices, and one intervention inevitably leads to another. Bureaucrats would make most of the decisions. As planning becomes more and more embracing, it also becomes, according to Hayek more necessary to qualify legal provisions increasingly by reference to what is “fair” or “reasonable”. In practice, this means that it becomes necessary to leave decisions of concrete cases more and more to the freehand of the judge or authority in question, which completely undermine the concept of the rule of law, based on abstract rules. While some may argue that Hayek arguments is a slippery slope, it's hard to argue that this is precisely what happened in most, if not all countries that tried to plan their economies.

Economist Daron Acemoglu argued that Hayek's argument is incapable of explaining the Nordic Model of social democracy, but Hayek was clear on his book that he wasn't talking about the welfare state on his criticism towards planning and socialism.

Markets and freedom
Democracy and socialism have but one thing in common—equality. But note well the difference. Democracy aims at equality in liberty. Socialism desires equality in constraint and in servitude. Indian Nobel Memorial Prize laureate Amartya Sen claimed that economic efficiency is not the only reason why the market economy is superior to socialism. According to him, a denial of opportunities of transaction, through arbitrary controls, like socialism proposes, is also a source of unfreedom. In other words, people are prevented from doing what can be taken to be—in the absence of compelling reasons to the contrary—something that is within their right to do in socialism. This point, according to him, does not depend on the efficiency of capitalism nor on any analysis of the consequences of having or not a market system; it is based only on the importance of freedom of exchange and transaction without let or hindrance. This is not an argument for laissez-faire, as there are many areas where regulations are required, but there is, according to Sen, some social loss involved in denying people the right to interact economically with each other. Sen continues his argument with the following though experiment:

A similar argument was made by Harvard philosopher, who claimed that a socialist society would have to forbid capitalist acts between adults, even when they are totally consensual. According to Nozick, individuals have a right to private property and that compulsory redistribution would be a form of unjustified coercion.