Saturday, November 19, 2011

Socialism and Capitalism Are Quite Different

Andy Logar posts (19 November) in American Thinker HERE

Socialism's Fundamental Flaws”

“In the Soviet model the state owned the means of production thus all workers were employed by the state -- essentially each working for everyone else, the collective, but not directly for themselves. This was effectively a compulsory altruism which, because not being a primary human drive, introduced a fatal systemic flaw to an economy so bereft of incentives as to engender the famous Russian quip: ‘We pretend to work and they pretend to pay us.’

“As if one were not enough, the second fatal flaw was the elimination of the free market and its replacement by the planned economy -- where supply and demand were in the hands of technocrats and not the invisible hand of free-market capitalism

Be clear, I have no sympathy for the ‘socialism’ practiced in the Soviet Union or elsewhere, of which criticism by Andy Logar I broadly agree, but I have no confidence in his characterization of the pre-Soviet economy as ‘the free market”, nor as replacing “free market capitalism”. It was largely a pre-capitalist continent, dominated by a repressive oligarchy and a semi-feudal countryside.

Stark contrasts between two extreme poles of description, as is usual in such ideological posts, do not help clarity in the argument that Logar’s post purports to make. He even makes an unfortunate and questionable statement in describing the Soviet model of state ownership as: “essentially each working for everyone else, the collective, but not directly for themselves”. It was the French, 18th-century Physiocrat, Mirabeau, who correctly commented that in markets, each individual thinks they work for themselves, but in actuality they ‘work for others’. How true!

In seeking to realise our self-interests we unintentionally serve the self-interests of others in the mediation that necessarily is the voluntary exchange process. No market would function if people tried to work only ‘for themselves’; their voluntary exchange behaviours must necessarily take account of the self-interest of others (see Adam Smith in Book 1, chapter 2, Wealth of Nations: ‘address the self-love of others, not your own’). That is what free markets bring about. In contrast, in Soviet Socialist Systems everybody in fact worked, under direct compulsion, for the State that decides what they and everybody else gets in return. This is the essential difference between markets and socialism.

Turning to Andy Logar’s sentence: “the planned economy -- where supply and demand were in the hands of technocrats and not the invisible hand of free-market capitalism”, we confront another source of Logar’s error.

It was Oscar Lange, the Marxist, pro-Soviet economist-cum-technocrat, who taught at Michigan and Chicago in the 1930s and 1940s, and who penned the notion that what he called the role of Adam Smith’s so-called “invisible hand” in directing market transactions (a wholly invented attribution he learned from an oral tradition in some US universities, as is often exposed on Lost Legacy, viz, there is no actual invisible hand), would be supplanted by the expected, though never realised, superior benefits of a centrally planned economy.

Lange specifically alluded to the invisible hand’s evident failures in the 1930s depression that contrasted allegedly with the far superior prospects of an harmoniously planned socialist economy, then being imposed without harmony by Stalin in Russia, and later on in Poland, in which the planners allegedly replaced the market’s ‘invisible hand’ (see his 1936. “On the Economic Theory of Socialism, Part I.” Review of Economic Studies 4, no. 1: 53–71; 1937 and Part 2, 4, no. 2: 123–142).

Paul Samuelson (Economics: an introduction to economic analysis, 1948, p 36) took up Lange’s challenge to the superiority of capitalism by recasting what Adam Smith actually wrote about ‘an invisible hand’ and invented the general rule that Smith said ‘selfish’ actions unintentionally led to ‘public benefits’, later re-cast as an early prediction of General Equilibrium theory. Unfortunately he attributed that nonsensical myth to Adam Smith, and even more unfortunately, most modern economists believe it, which Lost Legacy fights daily to challenge.

[NB: The ‘selfish’ myth actually came from Bernard Mandeville’s ‘Private Vice, Public Benefits’, Fable of the Bees, 1724 and resurrected by Ayn Rand, and broadcasted in the ‘greed is good’ libel].

In sum, Andy Logar’s pieces in the ‘American Thinker’(?) rightly critiques socialism, without really understanding the difference with capitalism, and, sadly, does not really appreciate Adam Smith’s political economy in Wealth Of Nations, nor his Theory Of Moral Sentiments.

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Blogger airth10 said...

That is a big flaw in Andy Logar's argument, that the pre-Soviet economy was a free market, capitalist one. It was no such thing.

Ideologues like him are always making such rash statements.

5:09 pm  
Blogger Unlearningecon said...

What amuses me is how internalised it is among many that the Soviet Union had a bad economic performance, when it was actually doing quite well for some time.

6:42 pm  

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