« Previous Article Next Article »

Why Socialism Sucks

| 01.26.2017 |

Business is the act of producing and trading goods for a higher price than the cost to make them. If no profit is made from a sale of goods, then a business is unable to function. All profits are merely the ability for those involved in a business to buy other goods and allow other businesses to make a profit.

 

 

Effort, ingenuity, and luck affect the outcomes of business by allowing the innovator to create something new or provide what is most necessary at a given moment. We call these individuals “entrepreneurs,” the adventurers of business. They create the most profits, which allow for the most purchasing of goods. Thus, the entrepreneurs are those who keep the economic wheel constantly spinning.

 

But high profits can often create jealousy. How can someone else be better than me? Was it was through corruption or deception? Was the system rigged? Why can't the government run all businesses and ensure that everyone gets the same?

 

Thus, the socialistic mentality is born: individuals must be corrupt and government must be pure, so only government should run businesses. Jean-Baptist Say, the French businessman who defined and popularized the term “entrepreneur,” takes on this topic from a practical business perspective in A Treatise on Political Economy.

 

Say begins Chapter XVIII of his book with a fundamental truth of economics: “There can be no production of new value, consequently no increase of wealth, where the product of a productive concern does not exceed the cost of production. Thus, whether government or individuals be the adventurers in the losing concern, it is equally ruinous to the nation, and there is so much less value in the country.”

 

If a product brings in a negative revenue, either the seller has to stop selling it or funds have to be drawn from another source to continue production. However, governments are unlikely to stop production, and Say points out that they use the people to fund the subsidization of the goods: “It is of no avail to pretend, that, although the government be a loser, its agents, the industrious people, or the workmen it employs, have made a profit. If the concern cannot support itself and pay its own way, the receipt must fall short of the outlay, and the difference fall upon those, who supply the expenditure of the state; that is to say, the tax-payers.”

 

If a product sells for $500, yet it costs the government $500 for resources to make the product and $500 for labor, then the taxpayers are covering the expenses of the labor at an equal level. If a product sells for $500, yet it costs the government $1000 for resources to make the product and $500 for labor, then the taxpayers are paying far more than if they would have provided the laborers their wages directly without any production.

 

There are many examples of this very problem in Say's France, and he states, “This establishment, instead of a source of wealth to the nation at large, for the government is fully aware of the loss to itself, is, on the contrary, a source of perpetual impoverishment. The annual loss to the nation is the whole excess of the annual consumption of the concern, including wages, which are one item of consumption, above the annual product. The same may be said of the manufacture of porcelain at Sevres, and I fear of all manufacturing concerns carried on upon account of governments.”

 

Say continues, “A nation had much better buy outright what it thinks proper to bestow; it would probably obtain for less money an object full as precious; for individuals can always undersell the government.”

 

However, not all problems with government-based business are simply based on the costs of manufacturing: “There is a further evil attending the productive efforts of the government; they counteract the individual industry, not of those it deals with, for they take good care to be no losers, but of its competitors in production. The state is too formidable a rival in agriculture, manufacture, and commerce; it has too much wealth and power at command, and too little care of its own interest. It can submit to the loss of selling below prime cost; it can consume, produce, or monopolize in very little time so large a quantity of products, as violently to derange the relative prices of commodities: and every violent fluctuation of price is calamitous. The producer calculates upon the probable value of his product when ready for market; nothing discourages him so much, as a fluctuation that defies all calculation. The loss he suffers is equally unmerited, as the accidental gains that may be thrown into his hands. His unmerited gains, if any there be, are so much extra charge upon the consumer.”

 

By having ultimate control over trade, the government can choose to reduce the price it receives on goods simply to monopolize a certain market. Not only can governments subsidize goods so they don't need to sell at cost, they can prohibit or hinder businesses from accessing supplies or workers. Governments can also over regulate businesses to limit competition.

 

However, there are some goods that governments must make, especially those related to war: “There are some concerns, I know, which the government must of necessity keep in its own hands. The building of ships of war cannot safely be left to individuals; nor, perhaps, the manufacture of gunpowder. However, in France, cannon, muskets, caissons, and tumbrils are bought of private makers, and seemingly with benefit. Perhaps the same system might be further extended.”

 

Although we currently have private industries working in weapons manufacturing, there are security dangers related to private companies selling to competitors or providing an insufficient product. There is also a strong possibility of fraud among government contractors: “ A government must act by deputy, by the intermediate agency of a set of people, whose interest is in direct opposition to its own; and they will of course attend to their own in preference. If it be so circumstanced as to be invariably cheated in its bargains, there is no need to multiply the opportunities of fraud, by engaging itself in production and adventure; that is to say, embarking in concerns, that must infinitely multiply the occasions of bargaining with individuals. “

 

Say does acknowledge the benefit of public works that have a utilitarian nature: “But, although the public can scarcely be itself a successful producer; it can at any rate give a powerful stimulus to individual productive energy, by well-planned, well-conducted, and well-supported public works, particularly roads, canals, and harbours.”

 

Additionally, government can also aide business by establishing educational institutions: “Academies, libraries, public schools, and museums, founded by enlightened governments, contribute to the creation of wealth, by the further discovery of truth, and the diffusion of what was known before; thus empowering the superior agents and directors of production, to extend the application of human science to the supply of human wants. So likewise of travels, or voyages of discovery, undertaken at the public charge; the consequences of which have of late years been rendered particularly brilliant, by the extraordinary merit of those who have devoted themselves to such pursuits.”

 

Although education and public works can help make business easier, they are not necessary functions of government. However, defending the people from enemy threats is a necessary function of government, and safe allows businesses to prosper: “But of all the means, by which a government can stimulate production, there is none so powerful as the perfect security of person and property, especially from the aggressions of arbitrary power. This security is of itself a source of public prosperity, that more than counteracts all the restrictions hitherto invented for checking its progress. Restrictions compress the elasticity of production; but want of security destroys it altogether.”

 

According to Say, the only way to truly benefit the people is to have a highly functioning economic system in which many goods are produced and consumed. No system in which production is primarily or even partially in the hands of the government can ever be effective. Not only is government production inefficient, it has no incentive to reduce inefficiencies.

 

As long as government can subsidize goods with taxpayer funds and create stifling regulations to stop competition, then government cannot be effective in business. Even a government that buys goods from businesses instead of producing their own is prone to corruption, with vendors having no incentive to provide a high quality good for a reasonable price.

 

If one wants a system where people produce and consume based on their own efforts, then government run businesses must be limited. However, if one wants a system where people are given free goods or wages without having to produce anything, then government run businesses are the only way to accomplish this goal. The former is an efficient system that maximizes the benefits to all people, whereas the latter is a welfare based system that incentivizes not producing.

 

There is nothing fair or honest in socialism. It defies the fundamentals of business and takes from those who produce to give to those who refuse to produce. In every socialistic system, the costs of goods ultimately outpaces the ability for the people, or the government, to pay for them because they are no longer connected to the reality of the market.

 

Socialism is not a new concept but one with an ancient pedigree. It is based on the desire of wanting what you do not deserve. Say's warning against government-based business and those who promote them is old, but it is still pertinent today.

 

Jeffrey Peters is an Annapolis, Md.-based writer and political consultant.