It is argued that capitalist societies face injustices such as wealth inequality, environmental crises, and others; and socialism in various forms is offered as the solution for these problems. The idea is that if the state can control the economic resources and allocate them according to plans designed to achieve socialist ideals—equality of wealth distribution, environmental protection, social justice, among others—society will be better off. That much of our liberties will be sacrificed in the process, to socialists, if they even recognize it, is a justifiable price. Advocates of socialism seldom give much thought to the details such a pursuit would entail, arguing instead that the current ‘capitalist’ order is so lacking that surely with some effort the state could produce an outcome less so. This overlooking of details ignores the complexity of these problems and masks the operational challenges the central planning and subsequent interventions would need to surmount. These proponents will also highlight how capitalists undermine other important values of modern society such as democracy and the rule of law, and argue that the state should intervene to bring these capitalists in alignment. Notwithstanding the misdirected blame, they will invariably ignore how a government engaging in such measures would necessarily violate these very principles of democracy and the rule of law. Despite the problems we face under capitalism, socialism offers worse outcomes.

The moral problem: socialism/central planning would have to be a dictatorship in order to operate; this would violate the principles of liberty, democracy, and the rule of law.

The society/economy is comprised of parties with distinct, often contradictory interests. A piece of land might be desired by a farmer for planting cash crops; an industrialist might desire it to set up a manufacturing facility; a real estate developer might want to erect a residential complex on the same land; and someone living in an adjacent area might benefit from the land remaining untouched. How is the state to decide on the right way to allocate this piece of land without taking the side of one of the parties? Suppose the land is arable and the state calculates that it is in the best interest of the economy that the land be used for production of crops. Immediately, the questions of who would cultivate upon the land and what crop exactly will he cultivate follow. This single problem of utilization of the land requires significant analysis right at the outset, and is followed by more questions at increasingly lower levels of detail. Generalize this problem over all resources and means of production, and you can begin to imagine the scale of analysis that would be required. Even if such analyses are perfomed in good faith, a clear optimal answer will not arise in every case. This will necessarily force the state to take sides; it will cease to be a neutral party, its decision directly affecting who accrues economic gains and losses.

Ranking the utility of a certain use of a particular resource is not a trivial matter. Without looking into details, we might say that the resources should be first directed towards uses that produce the most moral good, and once that moral good is satisfied, the resouces should be directed to the next best moral good, and so on. For this to work in practice, we would need a complete moral/ethical code, ranking all the values we favor, and there has to be an agreement among the populace about this ranking. No such exhaustive code exists, or can possibly exist. And it is natural for people to disagree on what value should be prioritized. One might hold education as the foremost priority, someone else might consider health, yet another might focus on defense, transportation, or environmental sustainability. Since resources are limited, focusing on one will necessarily take resources away from another: not all areas can be the top priority. In addition, the problem mentioned earlier about the details (What kind of education: primary, secondary, graduate? What subjects: mathematics, history, technical education, trades?… What kind of health: free medicine or access to certain doctors? What kinds of treatments?… What transportation: roads, rails, airplanes; what are the connecting points?…) immediately plagues the central planner. It is not possible to satisfy everyone. The state will have to construct a value hierarchy on its own, and impose it on the populace.

This would violate individual liberty. Well, some liberties need to be sacrificed for the greater good, socialists argue. But what they miss is that it’s not just ‘some’ that you lose. The totalitarian creep of socialism subsumes all of your liberty. The question is not just about whether the state can satisfy your moral values and economic needs; rather, socialism questions what these moral values and economic needs are even allowed to be. Who decides what your moral and economic priorities are? Certainly not you, as yours will likely come in conflict with those of other individuals. It is the state that decides for you what moral values you hold and what your economic needs are. With socialism you cease to make free choices, you cease to possess liberty in any meaningful sense.

With liberty gone, we can see how socialism would be incompatible with democracy. Some countries find it fashionable to have their official name be “the Democratic Socialist Republic of…” or embrace both socialism and democracy in their constitutions, but some thought reveals the oxymoron. Socialism is mandated, so the democratic body in these countries cannot be allowed to come to an agreement to replace socialism itself. The formulation of the central plans requires repudiation of free choice of individuals, as described above, but it also requires the suppression of democracy. A democratic body can only move forward with the formulation of a policy if sufficient agreement exists. It implements its plans in areas with agreement, and leaves other areas for potential agreements in the future. In areas without sufficient agreement, the democratic body allows matters to be directed by the will of individuals, leaving the aggregate outcome to chance. This is not true for a socialist state. The central plan is all-encompassing and the implementation must move forward with or without (largely without in the case of most details) the agreement of the majority. Democracy is not possible in such a setting.

The suppression of democracy does not end there. In addition to forcing the central plan upon the economic participants, the state must also ensure that no future mandate overturns these plans and implementations, and if these plans/implementations are amended, they are only due to future central plans. The populace cannot vote into power a politician promising defiance of the socialist order; and if such a person is elected, he must be swiftly removed. To prevent the democratic body from disobeying the central plans, the state would have to stipulate restrictions on what kinds of policies the democratic body would propose. But even while following the letter of the central plan, the democratic body might forward policies that lead the individuals to pursue ends contrary to those sought by the state. In this case, the state would have to, upon realizing the effects, veto such legislations or stipulate a vast array of additional restrictions. This would continue until the democratic establishment is rendered toothless, and the socialist state impossible to oppose.

In addition to democracy, the rule of law is also incompatible with socialism. In rule of law, the state lays down the rules which individuals must follow. Individuals are free to exercise their choices, use economic resources as per their judgment, provided the laws are not broken. Only if the law is broken, is the state machinery expected to step in and restrict the individual. The law, in this case, serves as a prediction machine: it allows individuals to predict how those they interact with will behave, including the state apparatus. If the laws are broken, the individuals can expect noncooperation from other individuals and retribution from the state. Under rule of law, the state must remain neutral towards different parties and towards the lawful pursuits of various ends. But in socialism, if the individuals while following the laws, pursue ends contrary to those of the central plan, the state needs to nevertheless rein their actions and restrict their use of economic resources. It is not possible to foresee how individuals will use the economic resources, so it is not possible to proscribe those uses beforehand. The laying down of all the necessary laws is not possible; the state must, following individual actions, resort to arbitrary enforcement. It must make new laws in response, and, when the consequence of these laws is the hindrance of pursuit of the ends sanctioned by the central plan, the state must also arbitrarily refrain from enforcement. The socialist state cannot commit to the rule of law if its central plans are to be carried out.

In the absence of individual liberties, democracy, and the rule of law, the socialist state would necessarily have to be run as a dictatorship.

The practical problem: socialism cannot handle the complexity of modern economy/society; allocating resources per central plans would lead to poor outcomes.

So what if it is a dictatorship? Perhaps a dictatorship is justified if resources are allocated optimally and abundance is generated, the socialist might argue.

To argue against this supposition, we return to the calculation problem. For constructing the optimal plan, it is not sufficient that there exist a complete ethical code that helps the planner rank-order priorities. The planner must have detailed knowledge of all the means of production in the economy. That is, detailed knowledge about all the available land, the capacities in which the lands may be used, all knowledge about all plants and equipments and their capabilities, etc. Also, for raw materials, it is not enough to know what the current state of all such materials is, but also all upcoming states; that is, it is in addition to knowing the exact overall stock, the planner must know (or predict) all flows. Needless to say, the central planner does not have the surveillance capabilities to gain all such knowledge in a timely manner. In the absence of this information, socialism is hobbled even before it gets to the next stage of performing the equally impossible computation of the best use of these means of production.

If somehow the central planner manages to put to decent use all the means of production, he is faced with the problem of updating the plan according to the changes that result from the implementation of this plan. It is important to remember that the economy is dynamic, the states of the means of production ever in flux. A plan, no matter how appropriate, will drift away from being correct when the actions of the economic actors result in an array of unanticipated surpluses and deficits. The new plan must take into account the new reality. Again, we have the problem mentioned above: it is not possible for the central planner to extract all the accurate information in a timely manner. At best, he would be operating on information collected earlier, which might have deviated substantially from reality by the time the amended plan is operationalized. Socialism simply does not have the tools to handle the complexity of the economy.

How does capitalism deal with this complexity? Under conditions of free market, where everything can be exchanged for everything else at ratios negotiated voluntarily by the individual market participants, prices emerge. Prices serve an essential function in the economy by compressing all relevant information about the supply and demand of a good or service at a moment in time or place into a single number, relieving the decision maker from accounting for details like whether all the factories producing the good are operating properly, whether the resources feeding into those factories are available, whether there is a new use case for the good leading to its higher demand, etc. Armed with the price of the good, the buyer need only compute for himself whether the expected benefit of the good would justify the current acquisition cost, and the seller need only determine if the disposal benefit is satisfactory to himself. A declining inventory of the good due to excess demand/short supply leads to a rise in price, which signals to all the producers that there is more money to be made by making the good available to the market. Who will buy the final product and what use will it be put into, the producers need not know; they need only consider the price and determine if they can profit from the production. Similarly, a burgeoning inventory of the good due to lowered demand/excess supply leads to a drop in price, signaling to the producers to reduce the production of the good and put their resources to other uses. Again, the reasons behind the increased inventory need not be considered by the producers. In the first case, the rise in price conveyed an economic need, which the producers entered the market to meet and make profit; in the second case, the fall in price conveyed that the need had been met, encouraging the producers to leave. Without a central planner’s investigations, without any record or analysis of details, prices convey the relatiive urgency of various needs throughout the economy, providing just enough information for economic participants throughout the economy to use their skills and knowledge to satisfy these needs and make profit.

Brief note on money: Note that a price is simply a ratio of something in terms of something else. It does not necessarily have to be in a fiat currency. The price of a certain watch may be ten pairs of a certain brand of shoes, or equivalently, an hour of consulting service of a certain expert, and so on. The ratios in terms of certain goods become more prevalent due to their characteristics: durability, recognizability, divisibility, scarcity; these goods begin to acquire monetary recognition as individuals start accumulating them for the purpose of exchanging them. The most traded good, thus, emerges as money, and market participants find it convenient to denominate prices in terms of this money, which, historically, has been gold.

Ultimately, socialism cannot work because it does not have meaningful prices. The needs as decided by the central planning authority are supplied to the individuals, and they must accept them. Since the central planner makes decisions without proper current information, the allocations would likely sub-optimally satisfy even those goals that have been coercively set.

So far, the criticisms have been of socialism in its true form, one with absolute control and central planning. Some advocates of socialism are wont to promote its lite flavor, one where markets are allowed to a limited extent, so long as the socialists objectives are not flagrantly defied.

Recognizing the practical function served by money as a medium of exchange, this socialist government may allow some form of fiat to serve as money. But this fiat money is disconnected from the prices that emerge from voluntary action of individuals; the state, using its complete moral code, has to lay down a set of acceptable prices. Whenever the voluntary exchange among individuals exert meaningful price pressures, inviting market participants to pursue ends that might defy the state, the state must respond with arbitrary measures, as described previously. The socialist state, in order to keep the incentives of the economic participants from not misaligning with its plans, is forced to set prices, or at least price floors and ceilings. Thus, prices are never allowed to be meaningful. They never convey to the central planner the right information.

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