A few economic problems with socialism and a few economic benefits of the free market you probably haven’t heard of

By Ryan Augustine
July 24, 2025 Anno Domini

The Economic Calculation problem, or the true cost problem

In a command economy, the state tells the manufacturers what to produce. This is called a quota. The Economic calculation problem, which has never been solved, is that if everything in a command economy is based upon production quotas, then the true cost of goods produced can never be known. This is because to produce goods, you need resources and labor. Therefore, when the factors of production are themselves quotas, then there is no mechanism which to ascertain the cost of what gets produced. For instance, if a steel manufacturer is told to produce 100 tons of sheet metal, he must pay his labor the quota of 10,000 rubles and get his ore from the miner who, in turn, is given a quota to produce 1,000 tons of ore. Because of this relationship, the central planner may say that one unit of sheet metal costs 10,000 rubles per 10 units of ore. However this is a false cost because it is arbitrarily set. For instance, if the ore manufacturer delivered 10,000 tons of ore it may be discovered that the steel manufacturer could produce 2,000 tons of steel at a cost of one unit of sheet metal to 5 units of ore. Likewise, if workers were paid twice the rubles, it may be discovered that efficiency more than compensates. In a quota-based system, this is impossible to determine.

Where this causes problems for the central planner is how he must plan to allocate resources and production quotas. Goods and resources are a scarcity. There are only so many units which can be produced in a year. If a country can only produce 100 mega-units of iron ore a year, does the central planner write quotas for 20 MU of iron ore for 2 MU sheet metal so that 0,2 MU of cars can be produced, or does he write a quota for 10 MU of iron ore for 1 MU of sheet metal so that 0.1MU of cars can be produced? But more importantly, how does the central planner know that Iron Ore is a 100:1 ratio of ore to cars at 20MU and at 10MU? How does he know that his labor costs will be equally scalable? Most importantly, how does the central planner know whether 20 MU of ore or 10 MU of ore is the most efficient use of the iron ore resource when iron ore is also needed for things like buildings, bridges, tanks, prison bars, and statues of Lenin? He can’t. In other words, there is no mechanism to discover the true cost of allocating 100 units of ore to produce one car at the expense of not allocating 100 units of ore to build one gulag. Thus, the true cost of gulags, cars, and all goods is forever unknowable.

This dovetails into the second problem with command economies: the production problem, which is simply that in a socialist economy, there is no direct mechanism to determine what do produce at all. In a quota-based system, such as socialism, the supply of goods is fixed, so the demand mechanism of the law of supply and demand which regulates how much of a good is produced is broken. Not only that, but the quality and type of good produced is retarded. For instance, if a lightbulb manufacturer is given a quota to produce one million lightbulbs, that manufacturer is likely to produce one million 5-watt lightbulbs because they are small and cheap. Demand may indicate that of those one million lightbulbs, 900,000 should be 50 watt, but because there is no feedback mechanism to the manufacturer everyone will have to settle for dim lighting. In fact, the manufacturer is incentivized to not meet demand because doing so would jeopardize his quota. This isn’t just theory, there is a story out of Soviet Russia that there was always a shortage of roofing nails because the nail manufacturer was given a quota to produce tons of nails, so the manufacturer would always produce the heaviest nails, and roofing nails, being small, were rarely made. Furthermore we can see the famous quality coming from Warsaw pact countries where cars like the Yugo were famous for their (lack of) quality. If Communism were truly the theory of “from each, according to his ability; to each, according to his need”, then Communism is antithetic to its own principles.

This dovetails into the third economic problem: the immoral market. Communism, or central planning, is an inefficient market. It is one which converts the factors of production to their greatest economic value. Because it is an inefficient market, it becomes an immoral market. For the purposes of this article, morality can be simply defined as choosing to do the right thing over the wrong thing. As mentioned in the production problem, the lightbulb manufacturer was incentivized to cut corners, but he is also incentivized to develop corruption, graft, and bribery. This is because by cutting corners, resources which have been allocated to lightbulb manufacturing stockpile and go to waste due to the production of less resource-intensive goods. To maintain the quotas for his raw materials, which makes the manufacturing process easier, the lightbulb manufacturer must find a way of getting rid of those excess raw materials. Thus, the effects are two-part: quotas for raw materials are inefficiently too high and, thus, the cost to produce a good is overestimated, leading to shortages. Secondly, an immoral manufacturing system is established which relies upon lying, cheating, stealing, black markets, and organized crime. These vices become entrenched, and in short order, the lightbulb Commissar is more interested in making illicit profit from the black market and operates the manufacturing plant as inefficiently as possible to increase his personal wealth through graft. Furthermore, such things do not exist in a vacuum and spread throughout the entire economy; whereby, everyone becomes aware and incentivized to cheat and steal, and every vice is fair game. If a market simply involves the exchange of value between people, and all interactions are an exchange of sorts, then it follows that a Communist economic system creates an immoral society by extension.

In contrast to Communism, the following will outline some of the benefits of the free market, which seldom are mentioned. Authors note: I dislike the term capitalism because it was popularized by Karl Marx. In Marxism, capitalism refers to the concentration of the factors of production, i.e., equity and capital (money) by a small elite who then use the power of capital (money) to oppress the working class. Many people define capitalism with the free-market, because it has been used conversationally by people as such for so long. However, when engaging with socialists, it’s important to draw the distinction, as often times both people will be arguing past each other mixing up terms. In this way, Marx has poisoned the well, but this is not an article about Karl Marx’s Jewishness, so if you wish to substitute capitalism for free-market, feel free.

The first benefit of the free-market is that it has a self regulating mechanism towards morality, or a degeneracy ceiling. In the free-market, producers compete against one another to gain profit. We may therefore call the free-market competitive. Because it is competitive, producers are constrained in their behavior. A producer which uses its raw material inefficiently will have diminishing and negative returns, eventually going out of business. In a sense, there is a survival-of-the-fittest mechanism inherent in economic competition; just as physical fitness uses your body’s energy most efficiently for work, economic fitness is a producer using his company’s resources most efficiently for work in order to make a profit. Vices are naturally destructive and inhibit economic fitness. Lying, cheating, stealing, and generally being disagreeable create losses and friction within an organization. Thus, companies are incentivized to discourage and punish vices within their workforce. Likewise, virtues such as dedication, hard work, intelligence, ingenuity, resourcefulness, and being pleasant improve productivity and incentivize companies to promote them. This is why things like mission statements and core values will never extoll stealing and lying in a free-market system. While companies are made of people, and bad people will always exist and need employment, a company that encourages bad behavior is self-limited and will soon go out of business. Another way to say this is that no company will be perfect. In fact, many companies exist which have poor cultures and are not a good place to work in; however, a competitive free-market puts a cap on how bad they can be, as good employees will leave, productivity will decrease, and the company will loose money until it goes out of business if things get out of hand. This is why free-markets tend towards prosperity and stable society over the long run.

Continuing from above, the second benefit is that the free market promotes co-operation and social trust. The economic value of relationships between people cannot be overstated. Free-market economic relationships are formed by two main factors: being good to work with and delivering results, and many firms are in business solely because of long-developed relationships with key clients. Because of this, there is a strong incentive to prioritize trust between people in a company and people outside of the company; likewise, there is an equally strong incentive to co-operate with clients to meet the scope of work, even if it differs from the company’s expectations. This is because of the value of reputation, return business, and branding. If a company is difficult to work with or doesn’t meet consumer expectations, then they quickly lose revenue, as firms and consumers will search out other companies to meet their demand. If a free-economy is a society made up of independent actors who need profit, then they are collectively incentivized to promote social cohesion.

The third and final benefit is that the free market is an efficient market, which uses price as an efficient resource allocator. The free market is made up of voluntary transactions which can be divided into two parts: the good or service provided and the price. Price is the cost it takes for the supplier to meet the demand of the consumer and it is a mostly efficient mechanism for the allocation of resources. This is because price fluctuates to incentive resources to go to where they are needed most. If any company has a shortage of resources, following the laws of supply and demand, the price they are willing to pay for those resources will increase beyond what other companies, who do not have shortages, are willing to pay. Thus, the resource will be sold to the highest payer who needs it the most. For instance if there are only 100 units of aluminum and the aircraft manufacturer has a high demand for new planes, they will pay more for the aluminum than the soda maker will. Therefore the increase in the price of aluminum allows for the most efficient use of the aluminum resource as the demand for new planes is greater than the demand for soda. Extrapolating to all resources, the free market not only provides the most efficient use of resources but also the least amount of waste, as the production of resources is directly tied into the market mechanism, and resources which decrease in price, due to overabundance, do not go to waste but are purchased by buyers who would otherwise not have bought them.

Well, there you have it. A few facts of economics you may have not have heard of. Authors note: I hope to write a second part to this article in the future which explores mixed economies and neo-socialist ideas such as solidarism. These theories rather that combining the best of socialism (whatever that might be) with the best of the free-economy lead to poor results. As a final note, I am not a libertarian. I believe that some government and institutions, like the Catholic Church, are necessary to maintain a free-economy and prevent bad actors from gaming the system. God bless.