Why Socialism Cannot Work

Some people believe that capitalism is unfair and causes some people to be poor and some to be rich and if we just had a fair government to make sure that everyone was treated right that everyone could be wealthy, or at least, everyone would be middle class. Therefore they believe that the government should take money from the rich and give it to the poor in order to balance the playing field.In order to try and understand why socialism will not work and even though it is not perfect, capitalism is the only way to be fair, we must first understand why and how money is created and distributed.

Essentially money is nothing more than a way to exchange goods and services instead of trading goods and services directly with other people. In a simple world, the government would print money and distribute it to people based on the production of the people and then people would use the money to trade for services from other people. In a perfect world money would be regulated in such a way that every person would have money based on their ability to produce a product or service that someone else would be willing to pay for. Therefore your wealth would be worth what people are willing to pay for your service. This is where the problem of creating money starts. In order to have enough money in the hands of people, someone must first determine the value of each person’s service and then distribute to them start-up capital. Then each person would have the money to pay for a service from someone else and then the cash flow would start. How would you do that and who would be trusted to make that determination? Also once the cash flow starts, some people will have more demand for their service so they would be receiving a larger portion of money than someone that has a service that is not in big demand. As time went on some people would become very rich and some would become very poor with a lot of people in between. Therefore, even in a perfect world, there will be some rich people and some poor people and unfortunately there is no way around it. As an example; far more people will be willing to pay for food when they are hungry than they would be willing to pay for a pencil. Therefore if you can grow food, your service is naturally going to be worth more than the pencil maker’s service. Since the food grower is producing a product that everyone needs, eventually more and more of the money in existence will go to the food grower, while the pencil maker will see less and less money going his way.

This is a natural rule of supply and demand that cannot be corrected by redistribution of the wealth.

To help understand why redistributing the wealth will not work let’s examine what would happen if we decided to tax the food grower and take some of his money and give it to the pencil maker, and to be fair we will also examine another method the socialists try; we could just have a minimum wage to pay the pencil maker so that he earns a “fair” wage for his service.

First let’s say that the farmer is earning $100,000 per year and the pencil maker is only making $25,000 per year so we decide to tax the farmer $30,000 per year and give it to the pencil maker in order to bring him closer to the income of the food grower. Now the pencil maker is making $55,000 per year and the food grower is making $70,000 per year. The pencil maker now has no incentive to try and figure a way to make more money by either increasing production or diversifying into other business, since he now knows that if he makes more money it will just be taken from him so he just sits back and takes what he gets. At the same time the food grower decides that he is wasting his time working hard so he begins to slack off on some of his production. This causes there to be a shortage of the food needed to feed everyone and suddenly people that have enough money will pay more for the food, which causes food prices to rise. This means that eventually the pencil maker, who is making more money but still less than the food grower, can’t afford the food he needs because of inflation. Also the farmer, who now is growing less food, is making even more money than before, because of the higher prices. Since the government helped out the pencil maker before, the pencil maker goes back to the government and demands that the government tax more money from the food grower to give to him. This creates a vicious cycle of ever increasing prices (inflation), food shortages and even higher taxes that can only end in eventual rebellion.

Next let’s say we don’t raise taxes but we institute a minimum wage to help the pencil maker make more money for his service of making pencils. Again we have created a greater cost for something, pencils, and people that buy pencils will have to pay more for them. This means that they must cut back on their buying of other things or they must charge more for their service to keep from lowering their standard of living. Of course some people can’t raise prices because there is not a big enough demand for their service, but the food grower is providing something everyone needs and he will have to raise his prices in order to maintain his standard of living. Everyone that can raise prices will, but the pencil maker is again caught in the fact that he has less demand for his service and therefore, even though he is making more money he can’t afford the higher prices for food so that he is not earning enough money. Therefore he goes back to the government and asks for another minimum wage increase. So you see, whether the government uses tax increases or minimum wage increases to redistribute the wealth, eventually you create a vicious cycle of inflation. The only solution is for the government to allow the free market to eventually work through the process of supply and demand so that people determine what their service is worth. If you feel you are more valuable than you are getting paid you must either change your service or your skill level or you must move to where you can get paid what you are worth. If you are not willing to make the change necessary to get paid more money, you should just accept what you get and shut-up.