Complex issues sometimes are clarified by simple experiences. An example occurred a few years back at a small, isolated California college.
For servicing their odd-hour appetites, the students long had depended on a vending machine firm holding an exclusive franchise. and for years the students complained that the products were stale and the machines “ate” their money, returning neither food nor coin. The vending machine company complained that the students repeatedly damaged their machines, causing exorbitant maintenance costs.
The issue came to a head when the student government demanded that “something be done.” The college administration and the vendors mutually agreed to cancel their contract. The machines were removed, leaving the students with no on-campus source for snack items, just three weeks before finals. The nearest supply after 8:00 p.m. was fifteen miles away by winding road, far from convenient to scholars spending late hours at their desks.
The student government began to discuss elaborate plans for quick-food-service in a propose student union building, but the mediate need was not being met.
Meanwhile, one of the students faced dropping out of school for lack of funds; and once again Mother Necessity bore the fruit of invention. Drawing on his experience behind snack bars during summer vacations and football games, the young entrepreneur set up a makeshift stand near the existing student lounge. He served quality hot dogs, soft drinks, candies, and other goodies – all at prices comparing favorably with those of the distant short-order houses. The students had their snacks, at savings to them of time and money; and the young businessman was able to finish his education.
But the outcome might have been different. Officers of the student government, seeing the small private business succeed, quietly met with a Dean of the college, demanding that the hot dog stand be turned over to them on behalf of “the students.” They proclaimed it “immoral” for one student to profit from the needs of his fellows; the profits should be used “for the good of all.”
The same leaders had offered no practical solution to the snack problem. They lacked experience in operating such a complex enterprise, lacked knowledge of sources of supplies and equipment, lacked the time and desire to operate the hot dog stand themselves, and were unlikely to find a manager and staff motivated to do a proper job.
Fortunately, the Dean was both observant and practical. Declaring the hot dog stand one of the best things to happen to the college within his recollection, he refused the demands of the student government officers, allowing the small business to succeed.
Several Lessons Taught
The hot dog stand and the proposal to “socialize” it teach many lessons of broad applicability:
1. Through franchises, regulations, and special privileges, government creates monopolies, thereby reducing both service and prod-vet quality while preventing price competition. In our case the “government” was the college administration which had allowed only the one vending firm to sell on campus, thus precluding a more satisfactory means of supplying the students’ needs.
2. When free to operate, individual initiative will analyze consumer needs and provide for them with the most efficient use of resources. The student, seeking to fill his own desire for an education, recognized the opportunity to profitably serve others and did so with an initial investment of less than $50.
The capital available to private businessmen is extremely limited. While a government enterprise can use its police power to coerce taxpayers to finance it, private enterprise must convince potential investors that the expected return on their investment is satisfactory. The private firms, therefore, must allocate their limited resources in the most efficient and productive manner.
3. An exchange has indirect objectives, the obtaining of values not obviously involved and seldom recognized by socialist planners. In the exchanges at the hot dog stand, the seller’s immediate need was for money, which he accepted in trade for food which served the immediate need of the buyer. But the ultimate objective of each was his own education. Thus, “led by an invisible hand,” each indirectly advanced his own and the educational wealth of the nation through specialization and trade. In a socialist plan, as envisioned by the student officers, the hidden objectives would have been overlooked. Deprived of the opportunity to serve others’ needs, the young businessman would have had to forgo his education, reducing not only his personal wealth but also that of the community for years to come.4. Socialism means waste. Blind to the hidden objectives, socialists see only the direct exchange itself. This results in grandiose schemes requiring excessive resources for the “seen” need. In our situation, a minimal investment was required by the enterprising student, while the socialists proposed an elaborate facility which would require high investment and a long time for completion.
This is why socialist nations suffer such tremendous wastes and shortages. The well-known case of nail production in the USSR is a prime example. The planners called for so many tons of nails. The result – a small number of large, heavy nails, excellent for railroad spikes, but useless for building homes and furniture. The planners then called for a specified number of nails. That resulted in an immense supply of small nails, which would have made good tie tacks with some modification.
The planners were too anxious about political prestige to see that nails are produced to enable millions of people to satisfy their individual desires. The nails themselves were so far removed from the true goals, and the goals were so personal and subjective, that it was impossible for a handful of isolated bureaucrats to properly determine their production.
4. The free market acts to filter and accumulate the billions of bits and pieces of demand required in fulfilling millions of personal plans. Each individual seeks various resources to serve his plans, but each requires a different combination of resources. The businessman does not need to know what the plans are, or even what combination of resources is needed for any one project. He only needs to ascertain and provide for the cumulative demand for the items in which he specializes. In this way, the free market makes it possible to cooperate while each of us seeks only to fulfill his own needs.
5. Each individual in a free exchange receives a profit; the businessman’s profit is made by reducing the consumer’s cost. While the entrepreneur earned the money to finance his education, the other students also profited in the form of snacks to maintain their stamina during long hours of study, and a saving of time which might have been spent traveling to the nearest short-order house. Thus the businessman made his profit by reducing the costs in time, money, and discomfort to his customers.
Profit is not just the difference between price and costs in monetary terms. It also means the alleviation of physical and psychological uneasiness, the fulfilling of desires by effort which is less unpleasant than the consequences of not making the exertion.
The businessman earns his profit by cooperating with his customers in relieving their discomforts. Each individual could strive to satisfy all his own needs directly and without cooperation with others; but he is unlikely in that way to fill any but his simplest needs, perhaps not even those. The specialization which develops from the free exchange economy enables each person to maximize his profits – in every sense – while aiding others to do likewise.
Neither party to a free exchange would bother to make the trade unless he believed he benefited in some manner. If he can elsewhere obtain a greater value – convenience, lower price, higher quality, more pleasant atmosphere, greater psychological pleasure – he will do business there. Only under compulsion, such as theft or socialism, will an exchange normally result in a net loss in satisfaction to either of the participants.
6. Socialism encourages current consumption rather than investment and production. While the student businessman would have been prevented from completing college, the student government would likely have used the profits (if any) for short-term projects or consumption – a party, dance, athletic uniforms, and the like.
Such a result is almost inevitable. Political office holders know their time in power is limited, so they naturally tend to seek immediate and visible results, both to lengthen their stay in office and to show they have “accomplished something.” The result of this pressure is to increase consumption and expenditures and to overlook the “unseen” potential value of saving and investment. People are made to feel prosperous while consuming their capital. Socialism has no means to determine the proper balance between consumption and investment.
A distinction should be made between investment in a free market and the quasi-investments in totalitarian societies. An investment, as we use the term, is the voluntary allocation of scarce resources to the process of production, based on an economic calculation of current costs and expected future returns. In Socialist societies, the allocation is compulsory and political, rather than voluntary and economic. The greater the degree of socialization, the more difficult the calculation of costs and returns. In the case of totalitarian socialism, the costs are ignored altogether, even in terms of human suffering and life, in order to attain an ideological goal and to further the political careers of the planners. Such socialist “investments” consume capital. Only in a free economy is there maximum incentive to create and invest capital to better serve consumers.
7. Socialism harms rather than helps the poor. The student officers were not pressed financially. Most of them were from prosperous families or had ample scholarships or loans. They had sufficient free time to be involved in student activities. The entrepreneur lacked those advantages. In order to obtain the education which hopefully would allow him to advance from a lower economic level, he sought funds through his own productive efforts.
When a socialist, fascist, communist, or any totalitarian system is imposed, it freezes economic status. Social advancement comes by way of political influence rather than personal merit and effort. This is a major reason why many wealthy businessmen, especially those who inherited their wealth, oppose free enterprise and press for government intervention. In a free economy they constantly face a challenge from less wealthy individuals and groups who are more highly motivated, skilled, or intelligent. Political intervention allows those on top to nip any such challenge in the bud, regulating it out of existence while retaining their own positions.
Freedom encourages self-improvement and advancement and thus benefits the poor. Socialism relegates the poor to a form of serfdom.
8. Socialism encourages base motives. While the reasons why the student officers sought to socialize the hot dog stand were never mentioned publicly, and may not have been mentioned privately, two unpleasant possibilities existed.
The student businessman had opposed the election of those officers, and continued to oppose many of their policies in office. As a further “insult,” he offered an immediate and successful solution to the snack problem, which they had been unable to do.
Political revenge, envy, frustration, and face-saving are characteristic of socialized economies. The purges in communist nations are simply an extreme example, and logical result, of these motives. While claiming to protect the people from “saboteurs, profiteers, and greedy speculators,” communists eliminate political rivals and establish scapegoats for their own failures. The intelligent and productive are physically destroyed, or prevented by fear from taking the risks necessary for productive effort and economic advancement. The talented hide their abilities, so as not to be caught in the purges. The result is stagnation and decline to bare subsistence – or even lower.
9. Socialism “produces” only when it expropriates the results of individual creativity. Freedom creates, socialism expropriates. The student government sought the use of other people’s capital, time, talent, and effort to implement its proposal of a quick-foodservice in a new student union. When a more practical solution was found independently, they sought to confiscate the plan and its income.
Russian officials recently admitted that while they have large petroleum reserves they lack the technology to extract oil efficiently from either the undeveloped areas or the currently producing wells. Their solution is to import the technology, materials, and supplies from economies more free than their own – their usual solution since seizing power over fifty years ago.
There are recent proposals to establish a government-run oil company in the United States to act as a guideline for private firms. But few of those who make the proposal could distinguish a cracking tower from a storage tank, let alone explain an octane rating and how it is produced. The socialist scheme would have to rely on the technology developed by “greedy” capitalists during the past century and extort from taxpayers the funds to finance construction and operation.
No one can be compelled to think, create, and invent. Thought is not communal, but personal and individualistic. Compulsion is counter-productive in intellectual matters. With no hope of reward, but sure punishment for failure, an individual will not attempt to create. As a rule he seeks to maximize pleasure and minimize pain.
Improvement has occurred in socialist societies when, contrary to their theories, rewards have been granted for individual merit and achievements. In free societies, those firms are most successful which offer employees wide latitude in achieving corporate goals, and which reward achievement most directly.
Socialism contains the seeds of its own destruction. To the extent that it follows its theories, it causes a decline in thought – man’s most basic tool of survival – and with it knowledge and production. A totally socialist world would be of short duration, collapsing into anarchy and feudalism. But it would inflict unimaginable suffering.
So, let us learn the amazing economic lesson of the hot dog stand. Neither a student government nor a cumbersome bureaucracy in Washington is a reasonable alternative to competitive private enterprise.