In his famous two essays on the anarchist model of law and defense, Robert Murphy gives a good summary of libertarian critique of socialism while also explaining not just the advantage but the necessity of capitalism:
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The traditional opponents of socialism argued that it had insufficient incentives for the average worker; without tying pay to performance, people would shirk and output would be far lower than in a capitalist economy. Only if a new “Socialist Man” evolved, who enjoyed working for his comrades as much as for himself, could a socialist system succeed.
Although valid, this criticism misses the essence of the problem. It took Ludwig von Mises to explain, in a 1920 paper, the true flaw with socialism: Without market prices for the means of production, government planners cannot engage in economic calculation, and so literally have no idea if they are using society’s resources efficiently. Consequently, socialism suffers not only from a problem of incentives, but also from a problem of knowledge. To match the performance of a market economy, socialist planners would not need to be merely angels, committed to the commonweal—they would also need to be gods, capable of superhuman calculations.
At any time, there is only a limited supply of labor, raw materials, and capital resources that can be combined in various ways to create output goods. A primary function of an economic system is to determine which goods should be produced, in what quantities and in what manner, from these limited resources. The market economy solves this problem through the institution of private property, which implies free enterprise and freely floating prices.
The owners of labor, capital, and natural resources—the “means of production”—are free to sell their property to the highest bidder. The entrepreneurs are free to produce and sell whatever goods they wish. The ultimate test of profit and loss imposes order on this seeming chaos: If a producer consistently spends more on his inputs than he earns from selling his output, he will go bankrupt and no longer have any influence on the manner in which society’s resources are used.
On the other hand, the successful producer creates value for consumers, by purchasing resources at a certain price and transforming them into goods that fetch a higher price. In the market economy, such behavior is rewarded with profits, which allow the producer in question to have a greater say in the use of society’s scarce resources.
None of this is true in the socialist state. Even if they truly intended the happiness of their subjects, the government planners would squander the resources at their disposal. With no test of profit and loss, the planners would have no feedback and would thus be operating in the dark. A decision to produce more shoes and fewer shirts, or vice versa, would be largely arbitrary. Furthermore, the individuals to ultimately decide the fate of society’s resources would be selected through the political process, not through the meritocracy of the market. [Ad kan.]
* * *Sometimes people blame the failure of socialism in Russia on the dictators. But what did the violation of human rights have to do with the economy (besides the fact that they had to force people into socialism, just like today in the US people are forced into being taxed, so that US auto industry can be bailed out)? Killing off the intelligentsia did not cause the great famines of 1920’s and 30’s. Collectivization of the farms did. Suppressing freedom of speech was terrible, but it wasn’t the reason why the Soviet Union had to import grain from Canada after the Virgin Lands disaster (and other similar campaigns).
One adviser to Khrushchev was Trofim Lysenko, who promised greatly increased production with minimal investment. Such schemes were attractive to Khrushchev, who ordered them implemented. Lysenko managed to maintain his influence under Khrushchev despite repeated failures; as each proposal failed, he advocated another. Lysenko's influence greatly retarded the development of genetic science in the Soviet Union. In 1959, Khrushchev announced a goal of overtaking the United States in production of milk, meat, and butter. Local officials, with Khrushchev's encouragement, made unrealistic pledges of production. These goals were met by forcing farmers to slaughter their breeding herds and by purchasing meat at state stores, then reselling it back to the government, artificially increasing recorded production.
In June 1962, food prices were raised, particularly on meat and butter (by 25-30%). This caused public discontent. In the southern Russian city of Novocherkassk (Rostov Region) this discontent escalated to a strike and a revolt against the authorities. The revolt was put down by the military who opened fire on unarmed demonstrators. According to Soviet official accounts, 22 people were killed and 87 wounded. In addition, 116 demonstrators were convicted of involvement and seven of them executed. Information about the revolt and the massacre was completely suppressed in the USSR, but spread through Samizdat and damaged Khrushchev's reputation in the West.
Drought struck the Soviet Union in 1963; the harvest of 107,500,000 short tons (97,500,000 t) of grain was down from a peak of 134,700,000 short tons (122,200,000 t) in 1958. The shortages resulted in bread lines, a fact at first kept from Khrushchev. Reluctant to purchase food in the West, but faced with the alternative of widespread hunger, Khrushchev exhausted the nation's hard currency reserves and expended part of its gold stockpile in the purchase of grain and other foodstuffs.