The Incentive Problem with Socialism

”In a private property environment, people bear the full costs of their actions and reap the full benefits.  Therefore, they have an incentive to engage in productive activity.  They have an incentive to only do those actions for which the benefit outweighs the cost.  Producers have an incentive to make only those goods that return them a profit.  Therefore, they also have an incentive to use resources carefully.  They are encouraged to maintain and accumulate capital and invest that capital wisely.

in a socialist economy, however, the situation is very different.  Because there is not private property, people do not bear the full costs or reap the full benefits of their actions.  If Melody Singer, a producer of classical records, is able to manufacture and sell five hundred thousand box sets of Sibelius symphony recordings in one year and that she could earn a two dollars profit on each set in the free market, her profit would be one million dollars in one year.  Suppose that she lives in a socialist country, however and the central planning board dedides that, even though she has great ability to produce interesting Sibelius compilations, she only needs $25,000 a year to live on.  What does that do to her desire to produce Sibelius records?  Her desire dissolves faster than you can say Finlandia.

Suppose on the other hand, that the central planning board decides that a family of four needs $100,000 on which to live even though neither the father nor the mother engages in productive employment.  If they do nothing, they still receive their income.  What does this do to their incentive to work?  Their incentive to work likewise withers away faster than the grapes of wrath left on the vine to spoil.”

Foundation of Economics—A Christian View, pp. 484-485, Shawn Ritenour