Thoughts on economics and liberty

Let’s please stick to the standard definition of socialism, Kanishka Sinha. And no, socialism does not originate in market failure.

Upon my pointing out to Kanishka Sinha that Scandinavian countries are not strictly socialist but perfectly fit within the mould of capitalist societies – with highly distorted welfare systems, he has pointed out a few things, the first of which took me by quite some surprise.

He suggested that my characterisation of the first welfare theorem was wrong – that hadn't I heard of "market failure", and that socialism is a solution to such "market failure". Well, to me his jumping to market failure while I'm talking of the first theorem has seemed rather mystifying.

The first theorem is a highly stylised way of proving Adam Smith's 1776 insights. Arguably, it is the single most beautiful piece of mathematics in the world. It proves how ALL (each and every one) of the uniquely placed individuals across the world will, in seeking to maximise their utility (based on their preferences – some might not seek money, etc.), subject to their budget constraint, will successfully do so WITHOUT THE INTERVENTION OF ANY CENTRAL PLANNER. There are effectively trillions and trillions of equations being solved SIMULTANEOUSLY and effortlessly, with all prices, all preferences, all constraints taken into account by the price system. EACH MOMENT OF EACH DAY.

The entire concept of trade, price theory, hinges on this basic understanding, first. Everything else comes later. One can't talk about economics without understanding this theorem at many levels – anecdotal (e.g. I Pencil), intuitively (e.g. Hayek's The Use of Knowledge in Society) or formally (the first theorem in its simpler and more advanced shapes, to arrive at the pareto-optimality of a Walrasian equilibrium, with numersous extensions such as for the Arrow-Debreu economy). This is about the hyper-plane "dance" or "jig" by Prof. Magill (of USC) that I've alluded to on a number of occasions, earlier. 

Anyway, only AFTER this theorem or concept (and its counterpart – the second theorem) has been very firmly understood can we start looking at the relatively TRIVIAL (extremely minor in the big scheme of things) "failures" of markets. For instance, no one in his/her right sense talks about "market failure" without at the same time identifying and elaborating on the MUCH bigger (by an order of magnitude) government failure (e.g. public choice analysis). Moreover, economists' solutions to market failures rarely (if ever) involve direct government "take-over" of an activity, or the significant diminution of property rights.

In most cases, regulatory solutions are arrived at, based on general rules that apply to everyone. Now Kanishka Sinha surely knows that over the past three decades, regulation itself has become strongly market-based. We call it incentive design or market design. The great Jean-Jacques Marcel Laffont (who received the economics Nobel last year) has been perhaps the most influential in this regard. He'd be horrified at the idea that "market failure" leads to socialism! In fact I recall reading his stinging rebuke of crazy ideas of the "socialist" type (such as those advocated by idiot Piketty).

Anyway, this minor matter of linking market failures with socialism aside, the bigger issue now is that Kanishka has made up his own definition of socialism. Now, I don't quite recommend such an approach. It is not typically a good idea for a biologist to make up definitions for astronomers, or astronomers to do so for archaeologists. The idea of socialism is a purely political idea. Its roots go back to the socialist movement in Europe in the early 1800s (which, in turn, was inspired by the Utopians). The idea of socialism is about the economic system but it is NOT based on any economic analysis of equality or market failures (although Marx did try to put some economic mumbo-jumbo around it, but miserably failed; his only sensible piece of work is the first half of the Communist Manifesto where he faintly understands – hence appreciates – the great boost to human progress by capitalism). Socialism is, at its heart, ENTIRELY about power, about a battle between capital and labour.

Socialism doesn't say it is will achieve higher allocative efficiency than markets where there are market failures. It doesn't even care for market failures, e.g. information asymmetries, undersupply of public goods or oversupply of situations with negative externalities. Not ONCE did any socialist thinker refer to such things. 

Yes, they did refer to equality, but that was in the context of the misappropriation of the "surplus" created by labour. This is the by now thoroughly discredited labour theory of value (even Smith fell prey to it, but he could see through the veil of economics despite his failure to understand the meaning of value).

Socialism is not about a "desire to proactively create a society with reduced inequality through laws, taxes and educational systems – including wealth redistribution where required". Socialism is much more direct and bold. It says it will ABOLISH private property and ensure everyone gets the same outcomes. It authorises the direct seizure of property from the rich (NOT through taxes! – for there is no parliament in a socialist society, no taxation without representation concept). It argues that all profit is unearned, that labour's share has been deprived. It argues that price system can't value anything, and value must be calculated based on the input of labour into a product (it thereby creates its own price system, or at least administers prices, vastly distorting allocative efficiency)

Socialism is therefore a POLITICAL philosophy with its own economic system. Marx did not invent socialism. He built upon the works of Plato, the Utopians, Rousseau, and many other before his time.

I've discussed socialism (and its definitions) at length in BFN and DOF

But for now, I'm simply cutting and pasting (below) some standard dictionary definitions of socialism

I hope thse will persuade Kanishka that the two objections he has offered to my analysis (1) that I've forgotten market failure (2) that socialism is to be defined idiosyncratically as per his views, are not valid.

Once these two objections are agreed by him to be invalid, I'd be happy to discuss any other objections he has to my analysis of the Scandinavian situation.



a way of organizing a society in which major industries are owned and controlled by the government rather than by individual people and companies

Full Definition of SOCIALISM

1:  any of various economic and political theories advocating collective or governmental ownership and administration of the means of production and distribution of goods


a :  a system of society or group living in which there is no private property

b :  a system or condition of society in which the means of production are owned and controlled by the state

3:  a stage of society in Marxist theory transitional between capitalism and communism and distinguished by unequal distribution of goods and pay according to work done

1. a theory or system of social organization  that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

2. procedure or practice in accordance with this theory.

3. in Marxist theory the stage following capitalism in the transition of a society to communism, characterized by the imperfect implementation of collectivist principles.


An economic and political system based on public or collective ownership of the means of production. Socialism emphasizes equality rather than achievement, and values workers by the amount of time they put in rather than by the amount of value they produce. It also makes individuals dependent on the state for everything from food to health care. China, Vietnam and Cuba are examples of modern-day socialist societies. Twentieth-century socialist governments were overthrown in Czechoslovakia, East Germany and the U.S.S.R. While capitalism is based on a price system, profit and loss and private property rights, socialism is based on bureaucratic central planning and collective ownership.

Webster's New World College Dictionary

1. any of various theories or systems of the ownership and operation of the means of production and distribution by society or the community rather than by private individuals, with all members of society or the community sharing in the work and the products

2a) a political movement for establishing such a system

2b) the doctrines, methods, etc. of the Socialist parties

3. the stage of society, in Marxist doctrine, coming between the capitalist stage and the communist stage, in which private ownership of the means of production and distribution has been eliminated


Central to the meaning of socialism is common ownership. It means nobody being able to take personal control of resources, beyond their own personal possessions. In socialism, everybody would have free access to the goods and services designed to directly meet their needs and there need be no system of payment for the work that each individual contributes to producing them. All work would be on a voluntary basis.


Welfare is NOT Socialism – I'm not linking this to suggest I support welfare. I don't. But the things are different.

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Sanjeev Sabhlok

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