My Fundamental Argument Against Socialism

Prices are pieces of information that facilitate coordination between actors.

They communicate changing supply and demand conditions, allowing actors to make real-time, rational judgments about how they ought to allocate resources if they are to be efficient and if their ventures are to be successful.

As Hayek writes, the price system is a “machinery for registering change.”

Prices arise from the decisions and valuations of individual actors who, by their observation and closeness to the sources and uses of commodities, understand how changing conditions—in the earth, the skies, the minds of men—affect the supply and demand associated with those commodities. Most intimately, they begin with the owners of such commodities, whose livelihoods depend on rational and sustainable allocation of such commodities as objects of sale to their fellow human beings.

This is key: That prices begin as subjective valuations in the minds of those with a personal stake in the priced commodities, and that these valuations are then informed incessantly by the valuations of others with different perspectives and understandings of dynamic supply and demand conditions. These prices are affected even further by the uses of these priced commodities down the structure of production—influences that extend back up (and down) the production structure to communicate changed conditions at any point.

It is simply fact, then, that a socialist society has no prices, and thereby no means to allocate resources such that changing supply and demand conditions at any point in any good’s production structure proportionally affect a good’s price.

A socialist society, understood as an arrangement where the means of production are owned by the state (representing, in theory, the common interest of all members of society) and not by individual actors, divests anyone in the society of the incentive and uniquely-associated knowledge to adequately adjust prices to reflect changing conditions. Whereas shifts in demand and supply are, in a free market economy, observed in the behaviors of actors exchanging their produce—in ever-changing volumes—for some goods more than others, such behaviors ostensibly do not occur in a socialist economy, where materials are not owned by individual actors, but are owned more-or-less by all, with no one person having a greater stake in some commodity than another.

Prices, therefore, carry no use as information regarding changing supply and demand conditions in a socialized society. They do not communicate from one actor to another the unique knowledge possessed about how events might and do affect the value of some good. Rather, they serve simply to direct actors toward or away from certain goods as deemed appropriate by those with the duty of setting prices (they direct actions toward here or there, but they do not guide actions toward true efficiency). Though perhaps not entirely arbitrary, assuming some methodical rationale on the part of such bureaucrats, prices in a socialized system do not serve to communicate changing real world conditions, but assume the role of communicating someone or another’s interpretation of how changing conditions ought to affect price.

Socialism divests prices of their use in reflecting real conditions and informing actors (that is, connecting them to the real world and to all their fellow actors), and instead imagines some imputation of value by prices onto goods, based on some schema rooted in something other than actual, true valuations on the part of actors with a personal stake in relevant goods.

This is true only so long as planners do not possess the means to predict the valuations of all a society’s actors. Such a means would be some feat, indeed—it entails comprehensive, real-time knowledge of not just all changing material conditions, but all shifts, at all times, in human needs and preferences, and the simultaneous rational synthesis of all such data. Absent this capacity (that is, in the conceivable real-world as we know it today), valuations in a socialist system occur in a parallel universe, where markets for commodities do exist and thereby influence the subjective interpretations of actors in a world unmarked by socialism whatsoever even after private ownership is verboten

Prices in a socialist context, therefore, are not prices at all, but fiats. Their use is merely to advance some end (be it even so noble as maximizing human welfare). They possess no characteristic of market prices—they do not communicate changes in supply and demand rooted in the minds of individual valuators with a personal stake in valued goods. They do not facilitate efficient adjustments to ensure a steady and rational flow of goods toward their most valued ends—Hayek’s “machinery for registering change.” And they do not economize on information and guide actors’ behaviors regarding their productive energies, as such entrepreneurship is of no use when all production is planned, and decreed valuations say nothing, with certainty, about how energies might be spent toward productive ventures.

Mises writes, “There is no such thing as prices outside the market.” This is a fact of nature. What alleged prices may exist in a completely planned and socialized society will direct activity toward some end or another, but will not accurately inform actors of changing real conditions nor guide them toward efficient goods allocation relative to what goes on the real world of subjective wants and valuation.

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Nick Freiling

Founder/CEO of PeopleFish. I write on technology, market research and economics. Bylines at Startup Grind, FEE, the American Enterprise Institute and the Mises Institute.

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