The Hoover Institution publishes an unusually good casual explication of the real reason socialism not only does not work, but cannot work: the Impossibility of Socialist Calculation:
After gaining power a century ago and then holding onto it through a civil war, the Soviet communists were intent on building a socialist state that would overwhelm capitalism. State ownership and scientific planning would replace the anarchy of the market. Material benefits would accrue to the working class. An equitable economy would supplant capitalist exploitation and a new socialist man would rise, prioritizing social above private interests. A dictatorship of the proletariat would guarantee the interests of the working class. Instead of extracting surpluses from workers, the socialist state would take tribute from capitalists to finance the building of socialism.
The basics of the Soviet “horse” were in place by the early 1930s. Under this system, Stalin and his Politburo set general priorities for industrial ministries and a state planning commission. The ministers and planners worked in tandem to draw up economic plans. Managers of the hundreds of thousands of plants, factories, food stores, and even farms were obligated by law to fulfill the plans handed down by their superiors.
The Soviets launched their planned socialist economy as the capitalist world sank into depression, trade wars, and hyperinflation. Soviet authorities bragged of unprecedented rates of growth. New industrial complexes grew from scratch. Magazines featured contented workers lounging in comfortable resorts. The message: The West was failing, and the Soviet economic system was the way to the future.
As the competition between capitalism and Soviet socialism became more pronounced during the Cold War, serious scholarly study of the Soviet economy began. The overarching research agenda of Western scholars was “scientific planning”—the socialist belief that expert technocrats could manage an economy better than spontaneous market forces. After all, would not experts know better than buyers and sellers what, how, and for whom to produce?
It was the Austrian economists F. A. Hayek and Ludwig von Mises who resisted this idea most forcefully. In their landmark critique laid out in a series of papers written from the 1920s through the 1940s, they concluded that socialism must fail. In modern economies, hundreds of thousands of enterprises produce millions of products. Even with the most sophisticated computer technology, managing such large numbers would be far too complex for an administrative body trying to allocate resources. Modern economies, therefore, are too complex to plan. Without markets and prices, decision-makers will not know what is scarce and what is abundant. If property belongs to all, what rules should those who manage assets for society follow?
The Soviets’ solution to the complexity and information problems was a national plan that spelled out production goals only for broad sectors, not for specific transactions. In other words, rather than mandate the delivery of 10 tons of steel cable by factory A to factory B, the planners set a target for the total number of tons of cable to be produced nationwide. Only a few specific goods—such as crude oil, aluminum ore, brown coal, electricity, and freight-car dispatches—could be planned as actual transactions. Everything else had to be planned in crude quantities, such as several million square meters of textile products. Product specifications, delivery plans, and payments were worked out at lower levels and often with disastrous results.
Soviet scientific planning, in fact, directed only a minuscule portion of products. In the early 1950s, central agencies drew up less than 10,000 planned indexes, while industrial products numbered more than 20 million. Central agencies drew up generalized plans for industrial ministries, which issued more detailed plans to “main administrations,” which prepared plans for enterprises. There never was a pretense that the top officials would plan the production of specific products.
To make matters even more complicated, virtually all plans were “drafts” that could be changed at any time by higher state and party officials. This constant intervention, called “petty tutelage,” was an irritant from the first to the last day of the Soviet system, but it was a key pillar of resource allocation.
If you want to read some truly artistic masterpieces of illogic, read a few socialist papers attempt to prove that socialist price-calculation is possible. The two primary papers, written first by Mises, then further articulated by Hayek, are two of the most conclusively devastating critiques of anything ever published. And the empirical evidence subsequently gathered over decades resoundingly supported their logical conclusion.
It’s not an accident that the Impossibility of Social Justice Convergence sounds a lot like the Mises-Hayek law.