Socialism vs. Free Market Capitalism

The debate of the 20th century is once again raging. Despite capitalism’s resounding defeat over the failing socialist regimes – the Soviet Union, Cuba, and North Korea particularly, far-left millennials insist on a return to these miserable times. A recent survey by YouGov found that a strong majority of Generation Z types and millennials viewed Socialism more positively than Capitalism. The usual excuse, “It wasn’t real Socialism”, is frequently mentioned by Socialist advocates; the same phrase uttered by all the Socialist leaders of the aforementioned regimes, before driving their nations into the abyss.

Free Markets and Prosperity

A clear correlation exists between the economic liberalism of a nation and its prosperity. Economic freedom is defined by how little state intervention there is in the economy; policies such as low taxes, limited regulations, and liberalised trade borders constitute a free economy. According to the index of Economic Freedom in 2022, Singapore and Switzerland ranked 1st and 2nd respectively; similarly, both nations rank in the top 5 for GDP per capita in the world.

World’s most free economies

This clear correlation between prosperity and economic freedom is unsurprising. Free market economies promote hard work and innovation through a more efficient allocation of resources. As a pose to government bureaucrats wasting your money, the private sector efficiently allocates funding to projects which are profitable and worthwhile in the long term. A profit represents an addition to society and occurs when the product of two or more services is more valuable than the two separately. The larger the profit, the more valuable the service is to society – hence the profit itself.

As free markets drive innovation through an efficient allocation of resources and the profit incentive, living standards in these nations are unsurprisingly far higher than their Socialist counterparts. The bottom three nations in the economic freedom index are Cuba, Venezuela, and North Korea. Cuba’s GDP per capita was at the same level in 1970 and 2000, Venezuela saw an inflation rate of 1,300,000% in 2018, and the latter has a GDP per capita lower in 2020 than in 1955. Not only is there a correlation between economic freedom and prosperity, but also government intervention and misery.

Socialism and Stagnation

The lack of a profit incentive in Socialist economies makes stagnation inevitable. Equal treatment for all individuals puts hard work in vain. Why work hard if the result is the same? North Korea’s economy hasn’t grown since the Korean War of 1955 for this reason. There is no incentive to try and improve your material well-being as the rewards are shared with those who are undeserving. Human nature is selfish. Capitalism harnesses human nature to benefit the whole of society through individuals pursuing their selfish needs to create a product that can benefit others.

“Greed, for a better word, is good”

Michael Douglas on Capitalism

Socialism creates a misallocation of resources. A common misconception about Capitalism is that money creates wealth. Money only creates wealth if it is used efficiently and effectively. It is solely a medium of exchange to facilitate productive transactions. If money itself created wealth then printing money would make us all rich. This is why money must be allocated to productive sectors of the economy that create value – a profit. A loss signals not only a misallocation of resources but also money. Alternative transactions that could’ve made society better off could otherwise have taken place with those same funds. This helps us understand the dilemma with socialism.

As governments determine the allocation of resources in a Socialist economy, this creates a misallocation of resources which prevents meaningful economic growth. In a Capitalist economy, businesses know what consumers want and desire through price signals. A higher price from excess demand signals producers to make more of a certain good or service. As a result, price signals promote an efficient allocation of resources and businesses can easily determine what consumers desire. Such a mechanism is impossible under a Socialist regime as the government allocates resources. Consumers have no say in what needs to be produced and thus there is a lack of innovation as resources are wasted.

Historical Comparisons

Thankfully, history can show us examples of Socialist failures. East and West Germany are a good comparison as both regimes started from a similar place following the collapse of the Third Reich. Following WW2, the West German economy experienced a sharp rise in real GDP per capita and prosperity under the Capitalist regime; in contrast to East Germany, witnessing a decline in living standards during the 1980s.

East and West Germany comparison

Despite this, Socialist and misery defenders point toward the Rhine and industrial heartlands in West Germany, attributing them to the strong economic growth as a pose to the failure of Socialism. Given the sharp rise in GDP following East Germany’s departure from Socialism and embrace of Capitalism, this argument hardly holds. Similarly, the economic growth in West Germany was largely service-based and had little to do with increases in manufacturing output – although this isn’t to say productivity within the industrial heartlands remained stagnant. The fact that East Berlin had to set up a wall to prevent East Berliners from moving to the prosperous West tells the entire story of the failure of Socialism.

Even if you take this poor argument for what it’s worth, there is little doubt that South and North Korea are a perfect comparison of Capitalism and Socialism. Following the Korean War in the 1950s, both nations stood as the world’s poorest. The North had access to natural resources and certain minerals. Despite this advantage, the economic circumstances of the two couldn’t be starker.

South Korea and North Korea’s economic comparison

South Korea saw an exponential rise in growth and living standards whereas North Korea has declined. Under the economic and political dictatorship of the Kim family, North Korea has subjected its citizens to eternal misery and hardship with no end in sight. In fact, without the Soviet Union and China, North Korea would be in an even worse predicament than is the case currently. From the 1980s onwards, North Korea has used its natural resources to exchange for electricity and food. Yet as the Kim regime has failed to put this to productive use, North Korea has continued on the path to misery. Witnessing the two nations at night from space says it all.

Satellite image of North and South Korea at night

“It wasn’t real Socialism”

When capitalists point out the failure of every single Socialist regime that has ever existed, Socialists like to use the excuse that it wasn’t real Socialism. However, the irony is that whenever a Socialist regime initially starts well, these same Socialists are always quick to give praise. For example, prominent Socialists such as Chomsky and the ex-shadow chancellor John McDonnell were initially quick to praise the Venezuelan regime before resorting to criticism and denialism once the Socialist regime went south.

[W]hat’s so exciting about […] Venezuela is that I can see how a better world is being created […]. The transformations that Venezuela is making toward the creation of another socio-economic model could have a global impact.”

Noam Chomsky (2007)

“I never described Chávez’s state capitalist government as ‘socialist’ or even hinted at such an absurdity. It was quite remote from socialism.”

Noam Chomsky (2017)

“[Chávez] lit a spark that really started a firebrand […] Venezuela and the Bolivarian Revolution became an item on the agenda for all socialists […] [H]ere you had the contrast between capitalism in crisis, and socialism in action”

John McDonnell (2014)

I don’t think [Venezuela] is a socialist country. […] I don’t think they have been following […] socialist policies […] And as a result of that they’re experiencing problems.”

John McDonnell (2018)

From this, we can deduce the three stages of Socialism. The initial honeymoon phase occurs at the beginning – workers glee at becoming managers of their respective businesses and things look bright. Secondly, there is the whataboutery and denialism phase. As workers cannot manage businesses and the economy, resources become misallocated at the hands of bureaucrats experimenting with trial and error, coupled with falling investment and productivity, the Socialist economy begins to falter. The final stage is ‘not real Socialism’, with the usual suspects in total denial about its failure, instead looking for a scapegoat for the regime’s failure.

Socialism doesn’t work for the reasons mentioned above. Trial and error by government bureaucrats produce a misallocation of resources that limits economic growth and results in stagnation (the capitalist system has the price mechanism which automatically allocates resources efficiently), little choice from consumers in Socialist economies gives them no alternative. Whilst in a Capitalist economy, poor services by a business can result in you switching to an alternative competitor, in a Socialist economy, everyone owns part of a single firm that has a monopoly within the industry. To implement changes that would improve quality, workers under a Socialist regime would have to convince a majority of staff to agree to such. Unlike in a Capitalist regime where there are alternatives to poor quality services, such a luxury is non-existent under a Socialist economy.

The primary reason why the Socialist ideals espoused by the likes of Karl Marx and Engels never come to fruition is that they aren’t practical in the real world – hence the turn to ‘not real Socialism.’ Real Socialism as far-left Socialists want it, just isn’t practical and doesn’t work, which is why all Socialist regimes morph into authoritarian dictatorships with stunted economic growth and prosperity. It becomes untenable that a hand of individuals can handle the allocation of resources for the entire economy. As a result, these individuals have to resort to force and authoritarianism to try and achieve this. The idea of Gulags and a wall to keep citizens from leaving the state (Berlin Wall) was never espoused by Marx; yet, these ideals remain commonplace across socialist regimes globally.

Ultimately, the failures of Socialism to promote living standards are evident, by comparing the misery of Socialist regimes to the success of prosperous Capitalist economies. Socialist regimes inevitably become a dictatorship due to their inherent nature. The ideals in the manifesto aren’t applicable to real life, with too many assumptions making the ideal impractical in reality. Think of it like a blueprint to fly – just simply jump out of a building and open your arms. This will enable you to fly, assuming that there is no gravity. The problem is that in reality, gravity does exist – hence flying by following this method doesn’t work in reality. The same phenomenon is witnessed with Socialism; the manifesto’s ideals are implemented without any regard for the impossible assumptions, leading to a turn towards authoritarianism.

Sadly, the ‘hip’ nature of being a Socialist keeps this torrid ideal alive; an ideology that has plunged millions into poverty, and even death in the case of the Chinese Famine of the 20th Century.