WHY SOCIALISM MUST FAIL by Hans Herman Hoppe
7 min readSep 15, 2019
Why Socialism Must Fail
HanS'Hermann Hoppe
S ocialism and capitalism offer radically different solutions
to the problem posed by scarcity: everybody can’t have
everything they want when they want it, so how can we
effectively decide who will own and control the resources we
have? The chosen solution has profound implications. It can
mean the difference between prosperity and impover-
ishment, voluntary exchange and political coercion, even to-
talitarianism and liberty.
The capitalist system solves the problem of scarcity by rec-
ognizing the right of private property. The first one to use a
good is its owner. Others can acquire it only through trade
and voluntary contracts. But until the owner of the property
decides to make a contract to trade his property, he can do
whatever he wants with it, so long as he does not interfere
with or physically damage the property owned by others.
The socialist system attempts to solve the problem of
ownership in a completely different way. Just as in capitalism,
people can own consumer products. But in socialism, prop-
erty which serves as the means of production are collectively
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owned. No person can own the machines and other resources
which go into producing consumption goods. Mankind, so to
speak, owns them. If people use the means of production, they
can do so only as caretakers for the entire community.
Economic law guarantees that harmful economic and so-
ciological effects will always follow the socialization of the
means of production. The socialist experiment will always
end in failure.
First, socialism results in less investment, less saving, and
lower standards of living. When socialism is initially im-
posed, property must be redistributed. The means of produc-
tion are taken away from current users and producers and
given to the community of caretakers. Even though the own-
ers and users of the means of production acquired them
through mutual consent from previous users, they are trans-
ferred to people who, at best, become users and producers of
things they didn’t own previously.
Under this system, previous owners are penalized in favor
of new owners. The non-users, non-producers, and non-
contractors of the means of production are favored by being
promoted to the rank of caretaker over property which they
had not previously used, produced, or contracted to use.
Thus the income for the non-user, non-producer, and non-
contractor rises. It is the same for the non-saver who benefits
at the expense of the saver from whom the saved property
is confiscated.
Clearly, then, if socialism favors the non-user, non-
producer, non-contractor, and non-saver, it raises the costs
that have to be born by users, producers, contractors, and
savers. It is easy to see why there will be fewer people in these
latter roles. There will be less original appropriation of natural
resources, less production of new factors of production, and
less contracting. There will be less preparation for the future
because everyone’s investment outlets dry up. There will be
less saving and more consuming, less work and more leisure.
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This adds up to fewer consumption goods being available
for exchange, which reduces everyone’s standard of living. If
people are willing to take the risk, they will have to go under-
ground to compensate for these losses.
Second, socialism results in inefficiencies, shortages, and
prodigious waste. This is the insight of Ludwig von Mises
who discovered that rational economic calculation is impos-
sible under socialism. He showed that capital goods under so-
cialism are at best used in the production of second-rate
needs, and at worst, in production that satisfies no needs
whatsoever.
Mises’s insight is simple but extremely important: because
the means of production under socialism cannot be sold,
there are no market prices for them. The socialist caretaker
cannot establish the monetary costs involved in using the re-
sources or in making changes in the length of production
processes. Nor can he compare these costs with the monetary
income from sales. He is not allowed to take offers from
others who want to use his means of production, so he can-
not know what his foregone opportunities are. Without
knowing foregone opportunities, he cannot know his costs.
He cannot even know if the way he produces is efficient or
inefficient, desired or undesired, rational or irrational. He
cannot know whether he is satisfying less or more urgent
needs of consumers.
In capitalism, money prices and free markets provide this
information to the producer. But in socialism, there are no
prices for capital goods and no opportunities for exchange.
The caretaker is left in the dark. And because he can’t know
the status of his current production strategy, he can’t know
how to improve it. The less producers are able to calculate
and engage in improvement, the more likely wastes and
shortages become. In an economy where the consumer mar-
ket for his products is very large, the producer’s dilemma is
even worse. It hardly needs to be pointed out: when there is
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no rational economic calculation, society will sink into pro-
gressively worsening impoverishment.
Third, socialism results in over-utilization of the factors of
production until they fall into disrepair and become van-
dalized. A private owner in capitalism has the right to sell his
factor of production at any time and keep the revenues deriv-
ed from the sale. So it is to his advantage to avoid lowering
its capital value. Because he owns it, his objective is to max-
imize the value of the factor responsible for producing the
goods and services he sells.
The status of the socialist caretaker is entirely different.
He cannot sell his factor of production, so he has little or no
incentive to insure that it retains its value. His incentive will
instead be to increase the output of his factor of production
without regard to its dwindling value. There is also the
chance that if the caretaker perceives opportunities of em-
ploying the means of production for private purposes— like
making goods for the black market— he will be encouraged to
increase the output at the expense of capital values. No mat-
ter which way you look at it, under socialism without private
ownership and free markets, producers will be inclined to
consume capital values by over-using them. Capital con-
sumption leads to impoverishment.
Fourth, socialism leads to a reduction in the quality of
goods and services available for the consumer. Under capital-
ism, an individual businessman can maintain and expand his
firm only if he recovers his costs of production. And since
the demand for the firm’s products depends on consumer
evaluations of price and quality (price being one criterion of
quality), product quality must be a constant concern of pro-
ducers. This is only possible with private ownership and mar-
ket exchange.
Things are entirely different under socialism. Not only are
the means of production collectively owned, but so too is the
income derived from the sale of the output. This is another
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way of saying that the producer’s income has little or no con-
nection with consumer evaluation of the producer’s work.
This fact, of course, is known by every producer.
The producer has no reason to make a special effort to im-
prove the quality of his product. He will instead devote rela-
tively less time and effort to producing what consumers want
and spend more time doing what he wants. Socialism is a sys-
tem that incites the producer to be lazy.
Fifth, socialism leads to the politicization of society. Hardly
anything can be worse for the production of wealth.
Socialism, at least its Marxist version, says its goal is complete
equality. The Marxists observe that once you allow private
property in the means of production, you allow differences. If
I own resource A, then you do not own it and our relation-
ship toward resource A becomes different and unequal. By
abolishing private property in the means of production with
one stroke, say the Marxists, everyone becomes co-owner of
everything. This reflects everyone’s equal standing as a
human being.
The reality is much different. Declaring everyone a co-
owner of everything only nominally solves differences in
ownership. It does not solve the real underlying problem:
there remain differences in the power to control what is done
with resources.
In capitalism, the person who owns a resource can also con-
trol what is done with it. In a socialized economy, this isn’t
true because there is no longer any owner. Nonetheless the prob-
lem of control remains. Who is going to decide what is to be
done with what? Under socialism, there is only one way: peo-
ple settle their disagreements over the control of property by
superimposing one will upon another. As long as there are
differences, people will settle them through political means.
If people want to improve their income under socialism
they have to move toward a more highly valued position in
the hierarchy of caretakers. That takes political talent.
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Under such a system, people will have to spend less time and
effort developing their productive skills and more time and
effort improving their political talents.
As people shift out of their roles as producers and users of
resources, we find that their personalities change. They no
longer cultivate the ability to anticipate situations of scarcity,
to take up productive opportunities, to be aware of techno-
logical possibilities, to anticipate changes in consumer de-
mand, and to develop strategies of marketing. They no
longer have to be able to initiate, to work, and to respond to
the needs of others.
Instead, people develop the ability to assemble public sup-
port for their own position and opinion through means of
persuasion, demagoguery, and intrigue, through promises,
bribes, and threats. Different people rise to the top under so-
cialism than under capitalism. The higher on the socialist
hierarchy you look, the more you will find people who are
too incompetent to do the job they are supposed to do. It is
no hindrance in a caretaker-politician’s career to be dumb,
indolent, inefficient, and uncaring. He only needs superior
political skills. This too contributes to the impoverishment
of society.
The United States is not fully socialized, but already we
see the disastrous effects of a politicized society as our own
politicians continue to encroach on the rights of private
property owners. All the impoverishing effects of socialism
are with us in the U.S.: reduced levels of investment and sav-
ing, the misallocation of resources, the overutilization and
vandalization of factors of production, and the inferior qual-
ity of products and services. And these are only tastes of life
under total socialism.
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