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.

Christianity and Economics, Part 6: Voluntary Exchange

For other articles in the Christianity and Economics series, click here.

There are numerous indications in Scripture that God intended for people to work together and help one another. After placing man in the garden, and charging him with the task of working it and keeping it, God said, “It is not good that man should be alone; I will make him a helper fit for him” (Gen. 2:18). God did not intend for people to function as isolated individuals cut off from human interaction. Man is benefited by working together with someone who will help him in his work. This truth is later affirmed in Ecclesiastes 4:9, “Two are better than one, because they have a good reward for their toil.” Much of the New Testament addresses the importance of Christians working together (John 13:33-34; 1 Cor. 1:10-12; 12:12-27; Rom. 12:4-5; Eph. 4:1-6, 11-16; Heb. 10:24-25; 1 John 1:7; 2:9-11).

God designed people to function best through interaction with others. But not all forms of interaction are good. Rather than helping Adam, Eve led him to take the forbidden fruit. One generation later, Cain murdered his brother Able. As mankind failed to work together in mutually beneficial ways, God gave Israel laws to govern their actions.

As the apostle Paul later observed, these laws can be summed up in the commandment to love one another.

Owe no one anything, except to love each other, for the one who loves has fulfilled the law. For the commandments, “You shall not commit adultery, You shall not murder, You shall not steal, You shall not covet”, and any other commandment, are summed up in this word, “You shall love your neighbor as yourself.” Love does no wrong to a neighbor, therefore love is the fulfilling of the law.

Romans 13:8-10; cf. Mt. 22:37-40

When people interact with one another in love, they do not take what belongs others and they do not threaten violence towards others. Rather than forcing their will on others, they seek to peacefully cooperate with one another.

Two Categories of Exchange

As we consider the economics of the interpersonal exchange of goods from a Christian perspective, we start by recognizing that all exchange of goods can fall into one of two categories: forbidden exchange and voluntary exchange.

Forbidden exchange is taking goods for yourself that God has not permitted you to have, that is, taking something that belongs to someone else. If a store has apples, and I want the apples, I could simply take the apples for myself. This of course would be stealing, which is wrong. I could purchase the apples, using counterfeit money. This would be fraud, which is wrong. If the store owner resists, I could choose to carry a weapon into the store and take the apples by force. This would be a threat of murder, which is wrong. Behind all of these actions are attitudes of covetousness and greed, which are wrong. Forbidden exchange is unloving because it harms others.

The other kind of exchange is voluntary. If I want the apples, I could simply choose to buy them. If I don’t have enough money to buy them, I could offer an alternative form of payment. For instance, I might offer to help bag groceries in exchange for the apples. It might even be that the store owner recognizes that I am hungry, and so he voluntarily chooses to give me the apples for free as an act of grace and kindness. In each of these examples, the exchange of the apples is voluntarily agreed upon by both parties.

In either case, I end up with the apples I desire. But unlike forbidden exchange, voluntary exchange benefits both parties involved, and fosters feelings of goodwill, love, and unity.

Voluntary Trade is Always Mutually Beneficial

Many profound and important economic principles can be logically established by reflecting on very simple illustrations. Suppose two boys packed sandwiches for lunch. Opie has a peanut butter and jelly, but prefers ham and cheese. Leon has a ham and cheese, but prefers peanut butter and jelly.

In this situation, we can easily see that both Opie and Leon would be better off by trading sandwiches. Opie could give Leon the peanut butter and jelly in exchange for the ham and cheese. As a result, both boys would enjoy a sandwich they value more than the one they packed.

From this example, a wise economic thinker can observe an important truth. For voluntary exchange to occur, each party must value the end result of the exchange more highly than their original state. If Opie and Leon both preferred their own sandwich over the other’s, they would have no desire to trade.

Similarly, if Opie and Leon both preferred peanut butter and jelly over ham and cheese, no trade would take place. In this situation, Leon would happily trade his ham and cheese for Opie’s peanut butter and jelly, but Opie would not agree to the trade, since he values his own peanut butter and jelly over Leon’s ham and cheese. For voluntary exchange to occur, both parties must view the exchange as an act that will lead to a more preferable situation.

The important implication of this observation is this: voluntary exchange is always expected to be mutually beneficial. Both parties must believe they will benefit from the exchange or they would not agree to the exchange.

If Opie and Leon agree to trade sandwiches, who is better off? As long as they have both voluntarily agreed to the exchange, they are both better off. If either boy believed he would be worse off from the trade, no sandwich exchange would have occurred.

Voluntary Exchange Creates Wealth

 As long as the trade was voluntary, both boys were able to obtain something they value more. We could call this increased value their “profit” (see part 4). Observe that both boys have profited by increasing the value of their lunch, yet without adding a single item of food to the table. The number of sandwiches are the same. The same ingredients are used. And yet, because of the trade, both boys are better off. One boy does not benefit at the expense of another. How can it be that both benefit without adding food to the table? Because both boys value the sandwiches differently.

This illustrates another important principle. Voluntary exchange has the ability to create wealth even with a fixed number of resources. We must not imagine the distribution of wealth as a zero-sum game, where one person gets a bigger slice of a pie only at the expense of leaving the other person with a smaller slice. This is false because wealth is not a fixed sum, but can be increased by voluntary trade. As long as trade is voluntary, there are no “winners” and “losers”, “exploited” and “exploiter”, or “oppressed” and “oppressor.” This is only true, however, when both parties benefit from the trade. Both parties benefit only when it is a trade they would both voluntarily agree to.

It should be noted that the judgments about the benefit of exchange are made before the trade takes place. One or both parties could certainly be in error. Leon may trade for Opie’s peanut butter and jelly, only to later discover that Opie used crunchy peanut butter, and Leon only likes smooth peanut butter. In this situation, Leon was not unjustly taken advantage of by Opie. He was not bullied into trading sandwiches. Leon simply made an error, and suffered a loss of value as a result of the mistake.

As noted in part 4 of this series, losses are important. As a result of the mistake, Leon will learn that he does not in fact prefer Opie’s peanut butter and jelly. Next time Leon sees a friend with a peanut butter and jelly sandwich, before he agrees to a trade he will know to first ask “does your mom use crunchy or smooth peanut butter?” As a result of the loss, Leon will become a wiser entrepreneur.

The Fallacy of “Price Gouging”

Sometimes people have a hard time believing that all voluntary trade is mutually beneficial. For instance, during times of extreme shortages, prices can rapidly increase. It is not uncommon for gas prices to almost double after natural disasters. When gas prices increase, it is common to hear gas stations accused of “price gouging.”

Of course a gas station owner may choose to keep their prices low as an act of kindness. In this case, the gas station owner may willingly choose to suffer financial loss so that they will enjoy the profit of knowing they have helped their customers during a time of need. As long as the decision to keep prices low is voluntary, both parties benefit as a result of the exchange.

But suppose the gas station owner chooses to increase prices. In such a situation, is the owner of the gas station profiting at the expense of those who buy the expensive gas? One might be tempted to think so. But before assuming that the gas station owner is acting unjustly or unloving towards their customers, we must think clearly about the nature of the exchange.

We have observed that for a voluntary exchange to occur, both parties must think that the trade will be mutually beneficial. If gas stations are in fact able to sell their gas at double the price, this must mean that there are buyers who think the gas is more valuable to them than the money they exchange for it. Otherwise, they would simply decide not to purchase the gas. At a minimum we must conclude that the gas station owner is not harming their customers since their customers think they are better off as a result of the exchange. The choice to increase prices may not be as selfless as the gas station owner who decided to keep prices artificially low, but it certainly cannot be described as oppression or exploitation.

On the other hand, if the local government were to force the gas stations to sell their gas at a cheaper price, this could be described as oppression or exploitation, since the exchange of gas would benefit the buyers at the expense of the gas station owners. It can also be noted that reducing the profits of the gas providers would only serve to prolong the shortage by removing the incentive for increased gas production (see part 4).

Oppression and exploitation are only features of forbidden exchange, where dishonestly, theft, and violence enable one party to benefit at another’s expense. As long as exchange is voluntary, no one party will benefit at another’s expense. On the contrary, overall wealth will increase as both parties are able to improve their overall satisfaction.