Building on my four-part series (here, here, here, and here) explaining the case against socialism and my five-part series (here, here, here, here, and here) on socialism in the modern world, today’s column will look at the economic argument against that statist ideology.
Practically speaking, this seems unnecessary. After all, we can simply look at the utter failure of socialist economies (think Cuba, North Korea, and Venezuela).
But since there are still people who think collectivism is a good idea (especially naive young people!), let’s look at a new scholarly study in the Journal of Comparative Economics. Authored by Andreas Bergh, Christian Bjornskov, and Ludek Korba, it estimates the impact of socialism on economic performance.
Before looking at the findings, let’s first celebrate that far fewer people are suffering under socialism today. Here’s a chart from the study, based on two different methodologies, showing the percentage of socialist countries over the past 70 years.
As you can see, the first few decades after World War II were not good news. More and more nations fell into socialism.
Now let’s look at some of what the authors discovered, starting with some introductory analysis.
From a neoclassical mainstream view, the problem with socialism comes mainly from the weak or absent incentives for work and investment in socialist economies and the suppression of the price coordination mechanism of economic activities. To this can be added the weakened incentives for innovation and entrepreneurship…a forceful critique of socialism comes from the Austrian school, according to which the main problem with socialist planning is the waste of knowledge and creativity that is inherent in centralised decision-making… This paper therefore looks at the effects of socialism, both using new and updated data covering a somewhat ignored group of 22 developing countries that turned socialist sometime during the time period 1950 to 2020. …we define socialism as a socio-economic model based on almost full social (state or quasi-state) ownership of means of production and the related command central plan.
Here are the key findings.
Our fixed effects estimates indicate that developing countries that transition to socialism lose on average approximately 2–2½ percentage points in annual growth relative to similar countries. …These losses are qualitatively similar to those experienced by countries in Central and Eastern Europe that implemented socialist economies after WWII and imply substantial losses of human welfare over a typical socialist spell of one and a half decades in a developing country. …Our estimates are also politically relevant, suggesting sizable losses in income and human welfare from implementing a socialist economy in a developing country. In a typical country in our sample that turns socialist, the accumulated loss over the first five years amounts to almost 400 USD per inhabitant and more than twice that amount in lost labour productivity. …Overall, we document that implementing a socialist centrally planned economy in developing countries has had dire economic and social consequences.
Given these statistical findings, and given what we see with our own eyes, I can think of no better way to end this column than sharing this quote from Thomas Sowell.
Dan Mitchell is co-founder of the Center for Freedom and Prosperity and Chairman of the Board. He is an expert in international tax competition and supply-side tax policy.
