THE POINT OF AN ECONOMY IS TO INCREASE WEALTH:

Socialism--social ownership of the means of production--is a well-known alternative to markets. Less known, however, is that, decades ago, socialist economists conceded that an efficient socialist economy would replicate market outcomes. To be sure, the likelihood that a system of centralized planning could replicate market outcomes is another question entirely. The debate is lengthy and is well-known; there's little need to rehash it here.

While there are indeed examples of socialism in the United States, that is, where the government owns the means of production (public schools, roads, some hospitals, and, until 2001, a cement plant in South Dakota), what today's American "socialists" mainly advocate is enhanced social insurance and, for businesses, some form of cartelism or enhanced regulation that would have the same effect.

Government-run "cartels" exist when business ownership remains in private hands, but production and pricing decisions are made by government-created planning boards. Cartelization was the centerpiece of the economic program of FDR's National Industrial Recovery Act during the Great Depression. Yet even today, government organized cartels continue in some markets in the U.S., particularly in agriculture, and there is increasing interest in adopting some form of "managed agricultural supply," as in Canada. There are some calls to have the government expand cartels broadly throughout the economy. In his book, The New Class War, Michael Lind expressly advocates New Deal-like cartels as a part of the solution to America's current economic problems. 

The point of government-run cartels is precisely to mute the prisoner's-dilemma aspect of markets as deleterious to the common good. The irony of cartelization, however, is that, by design, it distributes benefits less broadly than markets do, and cartels impose "deadweight" losses on society relative to markets. 

First, the crazy genius of markets is that they democratize, or socialize, the benefits of production rather than socialize the means of production. It's easiest to see this with price competition, but it occurs with quality competition also. The prisoner's-dilemma incentive structure created by markets induces business owners to dissipate their profits (beyond those minimally needed to stay in business) through lower prices. Everybody throughout society has access to these lower prices. Further, as profits are democratized through the market in the form of lowers prices, everybody's dollar goes further. The same nominal wage for a worker will purchase more goods and services as these profits are dissipated through price competition. Living standards go up even though nominal wages may not.

The economic case for cartels typically revolves around protecting businesses from "ruinous competition" (that is, the market's prisoner's dilemma) for the stated purpose of providing higher wages to workers. (While the stated goal is usually to increase wages, truth be told, cartels rarely hurt owner profits as well.) Yet these gains--while they can be real for the workers in the cartelized industry --are distributed far less democratically than the market distributes those same gains. The gains are limited to the workers in the cartelized market rather than distributed to everyone in society.

Like other regulatory tools, markets are not always optimal, just as taxes, or subsidies, or civil or criminal penalties are not always the right regulatory tool for every situation.

The impact of cartelization is not simply a matter of redistributing gains from everyone throughout society to a privileged set of owners and workers in cartelized industries. Added to the redistribution of gains from all to some, cartels also shrink the size of the economic pie that gets distributed.

The problem with cartelization relative to the regulatory effects of market competition is that cartels raise prices and reduce supply. The supply reduction and increased prices, which is the very purpose of cartels, creates a deadweight loss that market pricing does not create. Essentially, the economic pie is smaller with cartels than with markets because cartels stymie the prisoner's-dilemma aspect of markets. Basically, the democratic pricing systems generated by the regulation of market competition provide more benefits for people than prices under a cartel system.

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