Christianity and Economics, Part 9: The Economic Problems of Socialism

To read previous articles in the Christianity and Economics series, click here.

Previous articles in this series have examined moral and economic principles of voluntary exchange. The purpose of this article is to begin an investigation of the polar opposite of voluntary exchange, that is, socialism.

The term “socialism” is often connected to many modern political debates. As stated in Part 1, I have no interest in debating socialism from a contemporary left/right political paradigm (both sides embrace socialism to various degrees). My aim is simply to discuss socialism as an economic concept and examine it as it pertains to Christian ethics.

What is Socialism?

The defining characteristic of socialism is that central planners direct the production and exchange of goods, while individuals fill less innovative roles. In a socialist economy, the governing authorities (or a board appointed by the governing authorities) make key decisions about what is produced, in what quantity, who should produce it, how those goods are distributed, and at what costs. Instead of allowing people complete freedom to choose what goods and services they exchange their money for, they are provided with whatever goods and services central planners have chosen for them.

Even in economies where private property is legally recognized, there is no true private property because the government retains ultimate authority to direct the exchange of goods and set prices wherever they see fit. Most modern economies could be described as mixed economies, which include some degree of voluntary exchange, while also including socialist oversight of certain industries, such as healthcare, transportation, and education.  Although mixed economies may enjoy more benefits than a purely socialist economy, the problems with socialism still exist and need to be recognized.

Unlike an economy founded on voluntary exchange, where entrepreneurs take risks in order to earn a profit by serving the needs of their customers, the promise of a socialist economy is that everyone’s needs will be taken care of with a greater degree of equality. But can socialism actually deliver on it’s promise to give life and give it more abundantly?

As an economic system, socialism is open to two important critiques. First, socialism can be examined from an economic perspective, by answering the question of whether or not socialism can successfully solve the complex problems of resource allocation. Secondly (in order, not in importance), Christians must examine socialism in light of biblical ethics in order to determine whether it is morally right. This article will focus on the economic critique, while the next article in this series will focus on the ethical critique.

The Incentive Problem

There are numerous economic problems that socialism cannot overcome. First, there is the incentive problem.

In an environment where property ownership is respected, where people are free to exchange their possessions voluntarily, people bear the full costs of their actions and reap the full benefit. Therefore, they have an incentive to engage in profitable activity, where the benefits outweigh the costs. Producers have an incentive to only produce those goods which earn them a profit, and an incentive to minimize their costs to use their resources as efficiently as possible. This in turn encourages more innovation and responsible risk taking. If you are the first to create a new product, or find a better way to offer a service, and if you are willing to risk your own time and resources to meet an unmet need, you can enjoy personal benefit, or profit.

Under socialism, the situation is very different. Because property rights are not upheld, people do not bear the full risk, or enjoy the full benefit of their decisions. Therefore there is no incentive to innovate, because the ability to enjoy the rewards hinges on the choices of central planners.

Of course, as a Christian, we may feel the urge to object that the ability to earn a profit is not, and should not be the primary incentive to work and serve the needs of others. But we must remember that the word “profit” simply refers to the benefit we hope to enjoy from the actions we take. As noted in part 4, profit may or may not be of monetary value. If I give money away to a charity, it can be “profitable” if it advances the cause I am passionate about.

Even in situations where the profit we seek in monetary, this is not necessarily wrong, since Christians do have the responsibility to provide for their families (cf. 1 Tim. 5:8) and multiply their potential for giving (2 Cor. 9:6). Can the “profit” we seek be driven by unholy attitudes, such as greed or covetousness? Absolutely. But that is a separate issue from the one being raised here.

Regardless of whether the benefit sought is selfish or selfless in nature, people are more inclined to produce when they believe their work will result in the benefit they seek. For this reason, a system which allows for people to enjoy profits will incentivize greater innovation, result in a larger pool of goods, and lead to a greater satisfaction of otherwise unmet needs.

The Knowledge Problem

Another practical problem for socialism is the problem of disbursed knowledge. For socialism to succeed, central planners must have knowledge about what resources are available where, and in what quantities, and what processes should be put in place to combine and deliver those resources in a way that will provide the most benefit for the most people.

The problem is that central planners can only make those decisions by using the knowledge made available to them, which will always be less than the collective, yet dispersed knowledge of an entire society. Knowledge about how to most efficiently create specific products is only known to a relatively small number of people inside a particular industry. Magnify this fact by the vast number of different products in a modern economy, and you can begin to grasp the vastness of the knowledge problem faced by central planners.

One of the most important benefits of the division of labor is that different people have different advantages over others regarding the unique knowledge and skill necessary to make wise decisions within their particular industry. That is so much knowledge can only be learned by on-the-job training, and expertise can only be gained by years of experience. Scientific and academic knowledge helps, but to make such knowledge operational in the most efficient way, it must be continually adapted to the real life and ever-changing circumstances decision makers find themselves in.

In a free society, every participant has the incentive to put their knowledge to good use to benefit both themselves and others. But it is impossible for any socialist central planner to gather and process all the knowledge necessary to efficiently direct an economy.

For central planners to successfully run an economy, it would require nothing short of omniscience, which no man has (cf. Job 38-41). Anyone who believes a select group of people would be capable of understanding all the intricacies of a fully functioning economy should recall the words of the book of Ecclesiastes:

Man cannot find out all the work that is done under the sun. However much man may toil in seeking, he will not find it out. Even though a wise man claims to know, he cannot find it out.

Ecclesiastes 8:17

The Economic Calculation Problem

One vitally important piece of knowledge is how to coordinate prices. Since many resources – such as steel – have a variety of different possible uses, prices serve as signals about whether the use of a specific resource is satisfying the top priorities of a society. For instance, should a factory produce car parts or nails?

One interesting feature of a free economy is that prices are determined by supply and demand. If people want more car parts (and the supply is the same), prices go up. When there is a surplus supply of car parts (and demand stays the same), prices go down. Prices continually fluctuate in response to the ever-changing subjective values of individuals who make up society, and the supply available at any given time.

In a free society, prices signal when there is a greater need for one product over another, that is, for car parts or nails. Since entrepreneurs have the incentive to maximize their resources in the most profitable way possible, they will coordinate their production based off market prices.

But to whatever extent the exchange of property is not voluntary in nature, prices cease to accurately reflect the subjective values of individuals in a society. When central planners determine and fix prices, those prices do not reflect the true state of supply and demand.

When prices cease to serve as signals about what products are most needed, any central planning board’s ability to effectively plan economic activity will be greatly hindered. No matter how honestly and uprightly they strive to meet the needs of the greatest number of people, they will fail. That is because without prices to signal where there are unmet needs, there is no guide, no map, and no compass to guide their decisions.  No matter how well intentioned they may be, central planners simply cannot make their decisions effectively because socialism destroys the ability to rightly identify the present supply and demand of goods.

A centrally planned economy is just a system of groping around in the dark. Jesus’s warning about following blind leaders would fit nicely in a discussion of the dangers of socialism.

Let them alone; they are blind guides. And if the blind lead the blind, both will fall into a pit.

Matthew 15:14


Because of the incentive problem, knowledge problem, and economic calculation problem, the case for socialism is not grounded in economics. But even if we recognize the numerous economic problems with socialism, as Christians we must always remember that material goods are not the end all be all of human existence. We must remember that “man shall not live by bread alone.” Even though socialism is not as productive as a free market, some will argue that socialism is more moral and can provide for greater equality than a purely free economy.

Because economic prosperity does not determine what is true and right, we must examine the morality of socialism in light of biblical ethics. This will be the subject of the next article in this series.