3. Entrepreneurship Trumps Marx

The last thirty years of world history should be evidence enough to the open-minded that socialism necessarily leads to economic failure. Not only did the Soviet empire collapse in economic disgrace, but those countries that have continued to deny a market economy are known to be poverty-stricken wrecks.

For those with a more scholarly aptitude, there is more evidence that the state’s ownership of the means of production only leads to failure and resource misallocation. The various agrarian-socialist experiments, such as New Harmony and Brook Farm, have all ended in absolute failure, and the first colonies in American (Jamestown and Plymouth) were economic failures until they allowed the private ownership of the means of production (farm land).

To see why socialism must always fail economically, we need to look no further than the theory that serves as its ultimate foundation. Socialism, whether it is of the Marxist revolutionary model, the Fabian Society’s evolutionary model, or any of the other share-the-wealth schemes, rests upon the very idea that the value of any commodity is based solely upon the amount of labor that is involved in its production. This idea is known as the “labor theory of value,” first expressed by Karl Marx, but since adopted by those that insist upon “economic justice.”

The labor theory of value is contradicted by the practical experience we have of commodity markets where prices and values go up and down while the amount of labor involved stays the same. It is also contradicted by our experience with sales in retail stores and the book values of our cars that decline even when we leave them at rest. Value, and the price that accurately measures it, is really a product of demand, the desire that potential purchasers have for it, regardless of the labor involved. The labor theory of value is simply a very naïve idea upon which the very naïve system of socialist thought is based.

If we look deeper at the labor theory of value we can see the political history of the twentieth century unfurl before our eyes. We can see Mikhail Gorbachev surrendering in defeat to a triumphant Ronald Reagan, and we can see the massive shortages and starvations that have plagued socialist nations wherever they have existed. The labor theory of value does not measure human needs and therefore neglects the most important part of value – value is what satisfies human need.

The labor theory of value claims that labor is the only thing that determines a commodity’s value and that the capitalist simply exploits labor to produce this value. Neglected is this theory is the value of natural resources, varying human talent, and the entrepreneurship that provides the critical function of finding human needs and the means of satisfying those needs.

Among the things that are neglected in the labor theory of value is the ability of the astute capitalist who allocates resources in such a manner as to meet human demand. The difference between the economic disaster that occurred in Soviet Russia and the economic juggernaut of the West is primarily a result of the West’s ability to recognize true value. While the Soviets fumbled under a theory that placed no value on the entrepreneur’s ability to discover and satisfy human needs, the entrepreneurial driven market economies of the West let human needs determine value. The West succeeded because labor, natural resources, and the genius of successful decision-makers were drawn to the real source of value – human need.