If Socialists Understood Economics, They Wouldn't be Socialists (Vol. 212)
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Understanding Why Free Markets Work is First Step Toward Understanding Why Socialism Fails
“If Socialists Understood Economics, They wouldn’t be Socialists”
This famous quote by Friedrich Hayek is something worth serious consideration.
Why?
Because so many of our citizens have lost their way, do not understand economics, and look for the ‘easy way out’ without understanding the implications of what they are proposing or supporting.
Hayek is one of the noted Austrian economists who understand and promoted free enterprise/market economies. One of his classic books, written in 1944, is The Road to Serfdom. Although a somewhat tedious read, it spells out clearly the dangers of central government planning and collectivism. It explains why this is so harmful economically and, if unchecked, is the path to Serfdom.
It is worth the time to read, but this is a recap of its central points:
Central Planning Leads to Tyranny: Hayek argues that when a government takes total control of economic decision-making, it inevitably destroys personal freedom. He claims that central planning cannot tolerate dissent; therefore, the state must use oppressive force to make everyone conform to a single economic plan.
The Shared Roots of Totalitarianism: He challenges the popular wartime idea that Nazism and fascism were capitalist reactions against socialism. Instead, Hayek argues that fascism, Nazism, and Soviet communism all grew from the same root: government control over the economy.
The Slippery Slope: Hayek warns that even well-intentioned democracies (like Great Britain and the United States at the time) could slowly slide into totalitarianism if they rely too heavily on government planning to fix peacetime social problems.
Individualism and the Rule of Law: He advocates classical liberalism, free markets, and the rule of law. He argues that a free-market economy is the only system that truly protects individual liberty and prevents the “serfdom” of the individual.
Perhaps even more important is the understanding of what is a good economic system and why it works well. With that understanding, the rest takes root in knowing why opposing economic systems do not work.
At the core of Hayek’s reasoning is individual freedom. While individuals must comply with the Rule of Law, they are otherwise free to do as they please. Reasonable laws are required to protect individual rights for all members of society. This is clearly a part of our Founding documents and necessary to prevent tyrannical abuse from the majority in a democratic society. Private property and Rule of Law are the foundation upon which a market economy functions.
Individual freedom is so critical because it unleashes the most powerful force in the world: Incentives. If we can own property and have the freedom to pursue improving our lot in life, we will do so. It can take many forms. We can offer our services to employers who will pay us for our skills, or we can start a business to earn profits which we are free to keep and add to our wealth and prosperity. Each is free to pursue their own goals for their own sake as they see fit. They only prosper when they satisfy the needs and wants of others. While not intentional, their interests are aligned.
Adam Smith said it best writing in The Wealth of Nations: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest...”
For this to work effectively, government must let the markets work in a laissez-faire economy, within the Rule of Law.
This does not preclude government social support programs, and Hayek supported these, so long as government did not interfere with the marketplace with artificial controls over the economy. There should be no price interference, support programs, or subsidies in the marketplace.
With this freedom, markets and economies have flourished. Those countries that have been well governed, and provided this general framework, have progressed dramatically in contrast to those that have not.
With this background, it is easy to see why other systems have consistently failed. When there is no incentive to work, no ability to profit from your efforts, this inevitably leads to stagnation and decline. If hard work and creativity do not improve our condition, why should we? We shouldn’t and we don’t. It is just human nature at work.
Incentives are the necessary ingredients for success. Socialism and Communism or any autocratic form of government does not provide this and will and always has failed wherever it has been instituted.
Bottom Line
While no system of government today is perfect in all respects, those that follow the primary focus that Hayek proposes, have become rich. The closer we follow the prescription, the more we prosper.
It comes down to a simple formula for success: Limited Government + Fiscal Responsibility + Individual Freedom = Growth and Prosperity.
Hayek was right: Once you understand basic economic principles, you will never be a Socialist.
A Message From Les Rubin, Founder and President, MSE:
I started Main Street Economics 7 years ago to address these challenges.
The problems and suggested solutions are covered in layman’s language on our website – MainStreetEconomics.org. While you are there, Contact Congress, just click on a simple link on the site – it will send a message about your concerns to your representative and senators.
Do it right now, no procrastinating allowed!
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