30 March 2011

Capitalism, Socialism, and Scalability

Cohen’s book proceeds as follows.  First, he has us imagine a camping trip among friends.  Food and goods are shared freely.  Everyone abides by (purportedly) socialist principles of community and equality. Everyone does his part. No one takes advantage of anyone else. No one free rides. Everyone contributes. Everyone shares.
After a while, people begin to act like capitalists (as Cohen understands realistic capitalistic behavior). Harry demands extra food because he is especially good at fishing. Sylvia demands payment when she finds a good fishing spot. Leslie demands payment for her special knowledge of how to crack nuts. Harry, Sylvia, and Leslie refuse to share without extra payment. Morgan, whose father left him a well-stocked pond 30 years ago, gloats over having better food than the others.

The fundamental flaw in this argument is that there is an assumption of scalability, which simply means that socialism, which works well on a small scale, should also work well on a large scale.  Unfortunately, this assumption is simply incorrect.

In the first place, socialism requires a large degree of knowledge in order to be systemically efficient.  When one is dealing with a small number of people (e.g. a family), it is possible to have a large degree of knowledge without necessarily possessing a large amount of knowledge.  When more people enter the people, the degree of knowledge necessary remains the same while the absolute amount of raw knowledge required increases correspondingly (e.g. 60% of 10<60% of 100).  As the famous Dr. Sowell has remarked, “economic decisions are about tradeoffs, not absolutes.”  This principle applies to determining which economic system should be used.

In the second place, socialism requires that actors within a system be close in proximity.  It is difficult to ensure that all producers are producing enough if they are scattered over a large geographic area.  It is also difficult to determine who isn’t pulling their weight if people are not close in social proximity as well, which simply means that people who aren’t “close” to one another, in a platonic sense, are not likely to know what the others do.

Again, these two factors play a significant role in determining which system to use.  For small-scale societies, like the nuclear family, the socialist system makes more sense, for the absolute knowledge demands are low, and proximity is near.  This, then, is a very economical way of determining how to distribute production and resources, based on the specific skill sets and desires of the individuals working within the small-scale society.  In fact, socialism naturally lends itself to a system of informal barter.

Socialism is not, however, well-suited to a large-scale society.  The knowledge demands are simply too great for one person, or even a large number of persons.  And since large-scale societies also require large amounts of land for sustenance, there is then not enough proximity to reinforce the necessary social norms, leading to a significant free-rider problem.  Capitalism (or, more accurately, the free market) solves this problem through the division of labor, which requires only that system participants pay attention only to those things which are directly related to their interests, thus solving the knowledge problem and, to some extent, the proximity problem.

The break-even point for these systems is unknown, but I am willing to bet that the system size strongly coincides with Dunbar’s number.  At any rate, it should be obvious that advocating wide-scale socialism based on the success of small-scale socialism is as foolish as advocating small-scale capitalism based on the success of large-scale socialism.

Note:  I use the word “capitalism” interchangeably with “free market” in this post, simply for the sake of syntactical brevity.


  1. Here is something to think about. Socialism in democratic states does work when combined with capitalism, Germany is an example. However, socialists claim that capitalism is transitioning out, being slowly replaced by socialism. If we assume that this is correct and keep in mind that the shift is very gradual, one can see that perhaps some sort of sociocultural evolution is taking place that will reduce the amount of knowledge needed for it to work. I think that socialism is viable on a larger scale if introduced in this manner.

  2. Time will tell. I suspect that social enforcements (i.e. making sure everyone pulls their fair share) will eventually fall apart for the reasons described above. The personal relationships necessary to ensure that everyone complies simply do not scale well.