Adam Smith defined economics as the study of how people use scarce resources to produce goods and services to satisfy their wants. Economic systems describe the ways in which scarce resources are allocated in the societies they serve. Today, there are two main economic systems. Capitalism, in which individuals bid for ownership of resources based on their valuation of those resources. And Socialism, where the state owns scarce resources and allocates them either by directly distributing them or dictating the prices at which they can be sold.
The inherent advantage of a capitalist system is that prices are set by the value of a good or service to an individual. Individuals can bid goods away from each other for higher prices so that economic resources are always directed to the place in the economy where they are most valued. Socialism fails to produce as efficient of an economy because prices are set arbitrarily. There is no competition directing goods to where they are needed resulting in an inefficient system. This inefficiency is evident in the economic stagnation of many socialist countries today.
Venezuela was once an economically free state in the mid-20th century. Under the leadership of Hugo Chavez, it transitioned to a socialist state with nominal ownership of private enterprises. At first, this system worked well, as the country benefited from high oil prices. But when oil prices plummeted in the 2000s, Venezuela's economy collapsed. The socialist economic system led to a lack of incentives for private enterprise and innovation, and the government has barely been able to provide for its people since then.
Venezuela is also an excellent example of economic freedoms being tied to political freedoms. Initially, the socialist movement there was extremely popular. In the 80s and 90s, Venezuela was often touted as a prime example of Socialism working. But after the oil price dropped and oil production fell, the government became increasingly unpopular. It transitioned to an authoritarian regime to stay in power.
In Cuba, Socialism has been around for almost 100 years, and it will most likely continue in perpetuity. There hasn't been a recent spectacular economic collapse like in Venezuela, but the effects of Socialism are still easy to see. State-owned hotels and other infrastructures are in disrepair, and service in state-owned restaurants is poor. There is no incentive for proprietors to keep their buildings in good repair or to provide timely or effective service.
Where private markets are allowed to operate in Cuba, the service is much better at comparable prices. This is because owners of private restaurants compete for the scarce resources available on the island, and those that can provide better service at a lower price thrive. In this way, both the restaurant owners and their patrons benefit.
The reader may begin to see a trend in the places where Socialism takes root. Whatever the intention of a given government is, the elimination or control of prices does not affect the availability of a resource. It simply leads to a less efficient allocation of resources, thus hamstringing economic growth. And when prices are set low enough that everyone can buy something, people end up paying in other ways. They may have to wait in long lines, bribe officials, or resort to illegal markets where the risk of imprisonment or bodily harm drives the price of a good to astronomical levels.
The trend of economic stagnation under Socialism is not unique to Latin America. Nowhere is there as stark of a contrast between capitalism and Socialism as there is in Korea. The peninsula has been subjected to a large economic experiment for the last 70 years. After the Korean war ended and it was divided, the North and South had roughly equivalent GDPs. North Korea became strictly communist, and South Korea remained capitalist. Over the ensuing decades, North Korea has seen little economic growth and development, while South Korea is one of the great success stories of economic development in the 20th century. The difference between the two countries can be seen from outer space, where the South is lit by millions of lights radiating from Seoul, and the North is pitch black except for a tiny pinpoint of light marking its capital of Pyongyang.
North of Korea, China is led by a communist government. However, in recent years, the government has been communist in name only. China transitioned from strict communism in the 1990s, and its subsequent growth brought hundreds of millions of people out of poverty. As soon as markets were allowed to operate freely, the vast natural and labor resources available in China were used to transform the country into the economic powerhouse it is today.
In the United States, there is a growing popularity for Socialism among younger people. They want reform on a whole host of social issues but seem to be unaware of the consequences involved. History shows that when resources are allocated inefficiently, economic growth slows, democratic freedoms are lost, and people suffer horrendously.
After listening to Dr. Powell's talk, it seems that there is nothing defensible about Socialism. Why then is it so popular politically? And what arguments do people that defend Socialism make? I would like to hear what a prominent socialist might say in response to Dr. Powell's criticism.
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