1. II Can socialism work? Yes, but not well, and not long 1 Understanding socialism: why and how 2 Definitions: forms of ownership of capital, combinations of planning and markets 3 The problem of economic calculus 4 The problem of “creative destruction” 5 Two main reasons why no socialism can work well, and therefore last long 6 Lessons for understanding capitalism

2. 1 Understanding socialism: why and how Why: growing disappointment with “real” capitalism, renewal of political interest in socialism, need for warnings Simplistic arguments not enough, socialists are inventing new blueprints, apparently attractive to many, non-obvious reasons why “toxic” for all How: (i) consider both the current resource- allocation and structural development of an economy; and (ii) identify the damages from generic features of socialism

3. 2 Definitions of Socialism Category of institutional frameworks that exclude private ownership of capital (“means of production”) Capital can only be owned by government or collectives of employees: state socialism vs. labor-managed socialism Resource-allocation can be government planned, or use product and labor markets: planned socialism vs. market socialism The planning can be centralized or more or less informationally decentralized

4. 3 The problem of economic calculus Resource-allocation: how to determine the quantities of the goods produced, exchanged, and consumed? Markets do it by providing prices to producers and consumers von Mises: no prices without markets  waste of resources in socialism vs. Lange-Taylor, Arrow-Hurwicz: informationally decentralized planning, simulation of markets Hayek: no single mind can have all information; too slow exchange of information (bureaucracy) vs. praxis: large firms; use of modern IT  The feasibility of socialism not refuted

5. 4 Problems of “creative destruction” Neo-classical vs. Schumpeterian economics: constant vs. changing products and producers New products and new firms: many trials and few successes – keep in mind necessary errors! Socialist entrepreneurs: state bureaucrats or collectives of employees – too few good innovations, inefficient growth decisions Socialist error-correction: slow, soft budgetary constraints – too many errors last too long Selection of top entrepreneurs, managers and investors: mediocrities rather than champions

6. 5 Two main reasons why no socialism can work well, and therefore last long Without private and tradable capital: too few entrepreneurial trials in general, and excellent trials in particular Without reasonably open (competitive, or at least contestable) markets: too lax, if any, correction of errors (soft budgetary constraint) Example par excellence: the productivity of East German firms / the productivity of West German firms in 1990 = approx. 25% (NB: initially little cultural differences, work moral, sense of order!)

7. 6 Lessons for understanding capitalism The openness of markets (competitiveness, contestability): less important for efficient pricing, than for successful development (room for innovations, entrepreneurship, adaptation) Bankruptcies and liquidations of unsuccessful firms are key parts of market competition: error- correcting and excellence-searching (cf. the harm of tax-paid soft budgetary constraints, subsidies to “lame ducks”) Financial markets needed (but only if using the same principles): search for excellent investors able to pick rare winners among producers