The Rise and Fall of Socialism

The term socialism refers to a broad set of economic theories of social organization advocating public or state ownership and administration of the means of production and distribution of goods and society characterized by equal opportunities for all individuals, with a fair or egalitarian method of compensation.

Upon trying to define what a socialist society is Nyerere pointed out the characteristics of socialist society by saying that “…and most central of all, is that under socialism Man is the purpose of of all social activity. The service of Man, the furtherance of his human development, is in fact the purpose of society itself. There is no other purpose above this: no glorification of “nation”, no increase in production-Nothing is more central to socialist than acceptance that Man is its justification for existence”. In this case, the basic assumption is that a society is not a socialist if in its organization, or its practices it discriminates or allows discrimination among its members..”The followings discussion trying to highlight the factors which led to the rise and fall of the socialism world wide.

Socialism is the Big Lie of the twentieth century. While it promised prosperity, equality, and security, it delivered poverty, misery, and tyranny. Equality was achieved only in the sense that everyone was equal in his or her misery. In the same way that a candle initially succeeds to give light to a single room but eventually collapses, socialism may show early signs of success. But any accomplishments quickly fade as the fundamental deficiencies of central planning emerge. It is the initial illusion of success that gives government intervention its pernicious, seductive appeal. In the long run, socialism has always proven to be a formula for tyranny and misery. Socialism does not work because it is not consistent with fundamental principles of human behavior. The failure of socialism in countries around the world can be traced to one critical defect: it is a system that ignores incentives. (Smith,2003)
In a capitalist economy, incentives are of the utmost importance. Market prices, the profit-and-loss system of accounting, and private property rights provide an efficient, interrelated system of incentives to guide and direct economic behavior. Capitalism is based on the theory that incentives matter!

Under socialism, incentives either play a minimal role or are ignored totally. A centrally planned economy without market prices or profits, where property is owned by the state, is a system without an effective incentive mechanism to direct economic activity. By failing to emphasize incentives, socialism is a theory inconsistent with human nature and is doomed to fail. Socialism is based on the theory that incentives don’t matter! [Babu,1982]
The reason for failure is not that socialism is deficient, but that the socialist economies are not practicing "pure" socialism. The perfect version of socialism would work; it is just the imperfect socialism that doesn’t work. The modern Marxists argue that theoretically socialism was perfect but not practically perfect as results they claim that socialism is superior to capitalism.

Therefore if perfection really were an available option, the choice of economic and political systems would be irrelevant. In a world with perfect beings and infinite abundance, any economic or political system–socialism, capitalism, fascism, or communism–would work perfectly. However, the choice of economic and political institutions was crucial in an imperfect universe with imperfect beings and limited resources. In a world of scarcity it is essential for an economic system to be based on a clear incentive structure to promote economic efficiency. The real choice socialist face was between imperfect capitalism and imperfect socialism. Given that choice, the evidence of history overwhelmingly favored capitalism as the greatest wealth-producing economic system available. [Bronner,2000]

The strength of capitalism can be attributed to an incentive structure based upon the three components (1) prices determined by market forces, (2) a profit-and-loss system of accounting and (3) private property rights. The failure of socialism can be traced to its neglect of these three incentive-enhancing components.
Prices
The price system in a market economy guides economic activity so flawlessly that most people don’t appreciate its importance. Market prices transmit information about relative scarcity and then efficiently coordinate economic activity. The economic content of prices provides incentives that promote economic efficiency. For example, when the OPEC cartel restricted the supply of oil in the 1970s, oil prices rose dramatically. The higher prices for oil and gasoline transmitted valuable information to both buyers and sellers. Consumers received a strong, clear message about the scarcity of oil by the higher prices at the pump and were forced to change their behavior dramatically. People reacted to the scarcity by driving less, carpooling more, taking public transportation, and buying smaller cars. Producers reacted to the higher price by increasing their efforts at exploration for more oil. In addition, higher oil prices gave producers an incentive to explore and develop alternative fuel and energy sources. [Bronner,2000]

The information transmitted by higher oil prices provided the appropriate incentive structure to both buyers and sellers. Buyers increased their effort to conserve a now more precious resource and sellers increased their effort to find more of this now scarcer resource.
The only alternative to a market price is a controlled or fixed price which always transmits misleading information about relative scarcity. Inappropriate behavior results from a controlled price because false information has been transmitted by an artificial, non-market price.
Usually the information content of a controlled price is always distorted. This in turn distorts the incentives mechanism of prices under socialism. Administered prices are always either too high or too low, which then creates constant shortages and surpluses. Market prices are the only way to transmit information that will create the incentives to ensure economic efficiency.

Profits and Losses
Socialism also collapsed because of its failure to operate under a competitive, profit-and-loss system of accounting. A profit system is an effective monitoring mechanism which continually evaluates the economic performance of every business enterprise. The firms that are the most efficient and most successful at serving the public interest are rewarded with profits. Firms that operate inefficiently and fail to serve the public interest are penalized with losses.
By rewarding success and penalizing failure, the profit system provides a strong disciplinary mechanism which continually redirects resources away from weak, failing, and inefficient firms toward those firms which are the most efficient and successful at serving the public. A competitive profit system ensures a constant re-optimization of resources and moves the economy toward greater levels of efficiency. Unsuccessful firms cannot escape the strong discipline of the marketplace under a profit/loss system. Competition forces companies to serve the public interest or suffer the consequences. [Smith,2003]

Under central planning, there is no profit-and-loss system of accounting to accurately measure the success or failure of various programs. Without profits, there is no way to discipline firms that fail to serve the public interest and no way to reward firms that do. There is no efficient way to determine which programs should be expanded and which ones should be contracted or terminated.
Without competition, centrally planned economies do not have an effective incentive structure to coordinate economic activity. Without incentives the results are a spiraling cycle of poverty and misery. Instead of continually reallocating resources towards greater efficiency, socialism falls into a vortex of inefficiency and failure.

Private Property Rights
A third fatal defect of socialism is its blatant disregard for the role of private property rights in creating incentives that foster economic growth and development. The failure of socialism around the world is a "tragedy of commons" on a global scale. The "tragedy of the commons" refers to the British experience of the sixteenth century when certain grazing lands were communally owned by villages and were made available for public use. The land was quickly overgrazed and eventually became worthless as villagers exploited the communally owned resource.
When assets are publicly owned, there are no incentives in place to encourage wise stewardship. While private property creates incentives for conservation and the responsible use of property, public property encourages irresponsibility and waste. If everyone owns an asset, people act as if no one owns it. And when no one owns it, no one really takes care of it. Public ownership encourages neglect and mismanagement. [Smith,2003]

Since socialism, by definition, is a system marked by the "common ownership of the means of production," the failure of socialism is a "tragedy of the commons" on a national scale. Much of the economic stagnation of socialism can be traced to the failure to establish and promote private property rights.

Incentives Matter
Without the incentives of market prices, profit-and-loss accounting, and well-defined property rights, socialist economies stagnated and withered. The economic atrophy that occurred under socialism was a direct consequence of its neglect of economic incentives.
No bounty of natural resources can ever compensate a country for its lack of an efficient system of incentives. Tanzania, for example, is one of the world’s wealthiest countries in terms of natural resources; it has the world’s largest lakes (Lake Victoria &Tanganyika), natural gas, tanzanite, diamonds, and gold minerals. Its valuable farm land, lakes, rivers, and streams stretch across a land area that have a fertile soil. Yet Tanzania remains poor. Natural resources are helpful, but the ultimate resources of any country are the unlimited resources of its people–human resources.

By their failure to foster, promote, and nurture the potential of their people through incentive-enhancing institutions, centrally planned economies deprive the human spirit of full development. Socialism fails because it kills and destroys the human spirit.
Therefore, the rise and fall of the socialism world wide was due to the fact that it was inconsistence with human nature since it was based on the theory that incentives don’t matter. Also socialism failed to operate under a competitive, profit and loss system of accounting as well as its blatant disregard for the role of private property rights in creating incentives.