Black Markets Reveal the Power of Economic Laws

By Allen Gindler

If we consider economics to be an objective science, its rules should also have universal significance and use, despite differences in societal order. However, socialists of the materialist camp are committed to the idea that common ownership of the means of production would change the way economic laws unfold under socialism. Basically, they reject the notion of the universality and objectivity of economic rules by suggesting that the laws would change along with a change to the social formation.

Socialism in the Market Economy

Thus, communists adhered to the Marxian idea that socialism would rectify a “surplus value” law, end the “exploitation” of workers, and efficiently regulate the production, distribution, and consumption aspects of the economy. They sought to eliminate the market regulatory mechanism and replace it with directives of the central planning authority. Bolsheviks enthusiastically got down to business: they eradicated private property, collectivized everything and everyone, and implemented an official planned economy.

Did it effectively turn off market relations as they thought it would?

No. In contrast to the common perception, socialism has been unable to kill the market economy. The market went underground and turned into a black market. Black markets existed in capitalist countries as well, but they worked underground because they dealt in illegal commodities and services. The black market under socialism served the same purpose, but the list of commodities and services included mostly items of everyday and innocent consumption that people under capitalism could easily purchase in stores. Virtually all groups of personal consumption products found their way to the black market at some time and in some places. Everything from jar lids to toilet paper was subject to black-market relations.

Despite the proclaimed planned economy, people were engaged in market relations on all levels and trusted more the price of the goods and services that were established by the market and not dictated by the government. The official exchange rate of the ruble to the dollar was 0.66 to one in 1980. But nobody except party nomenclature was able to enjoy such a favorable exchange rate. At the same time, the black market offered four rubles for one American dollar.

There was no production of jeans in the Soviet Union, but like all their peers abroad, Soviet youth wore jeans. The price was 180–250 rubles for a pair depending on the brand, which was almost twice as much as the monthly wage of an entry-level engineer. A visiting nurse charged one ruble for one injection if a patient lived below the fifth floor. The price reached 1.5 rubles for patients who lived on the fifth floor and up. A plumber happily repaired a faucet for just a bottle of vodka.

Two Prices for Everything

Therefore, in the Soviet Union, any significant goods had two price tags: one real and another virtual. The state set the first price through some obscure methods; the usual mechanism of supply and demand established the second price on the market. If you were lucky, after several hours of standing in a queue, you could purchase goods at the state price. However, due to the chronic lack of everything for everyone, the same product could be bought on the black market at a much higher price.

The virtual price became real on the black market and reflected the actual value of the goods for the buyer. The presence of two price tags is a confirmation of the thesis of Ludwig von Mises regarding the impossibility of economic calculations under socialism. At the same time, this is proof of the immortality and immutability of the economic laws of the free market, even under a totalitarian regime. Therefore, two economic systems and two sets of prices co-exist under socialism.

People were forced to use the services of the black market, even under the penalty of severe punishment, including up to the death penalty. Almost the entire society was engaged in various corruption schemes to support a certain standard of living. There was a paradoxical situation when the shelves of the supermarkets were empty, but refrigerators at home were more or less full.

The black market was filled with smuggled goods from abroad, as well as commodities produced in underground workshops. But more often, everyday products were specifically kept from retail to create a shortage and sell them on the black market at a speculative price. Socialism had undermined the normal flows of production, distribution, and consumption by ignoring the objective laws of economics. Nevertheless, an underground market and the intrinsic entrepreneurial spirit of the people helped them survive the socialist madness.

Regardless of the proclaimed successes of the Soviet economy reported by Communist party leaders, the socialist economy was unable to compete with its capitalist counterparts. Communists decided to create a system that somehow mimicked the work that a free market had successfully and automatically performed for centuries. Thus, they introduced socialist competition that was supposed to replace free market competition. Surely enough, it was an inadequate and unfortunate replacement. The rewards for winners in the capitalist competition were far higher than for the winners under socialism. For example, the capitalist winner enjoyed a significant increase in well-being.

Moreover, the principal winner of the free-market competition was society as a whole. This is a natural feature of a free-market economy and the main reason why the evolution of human societies selected this mode of production. A competition during socialism gave to the winners some publicity, a certificate of honor, maybe a trip to a “sanatorium” (that is, a health spa), and other bagatelles that people usually did not appreciate. But most importantly, society as a whole did not enjoy a significant improvement in well-being.

Socialism Disrupts Progress

People were not sufficiently stimulated and were underpaid, which explained the lower labor productivity compared to capitalist countries. Moreover, this is despite the notion that the means of production, at last, belong to the workers themselves. People had a famous saying that can be considered the quintessence of Soviet-style socialism: “They [the government] pretend to pay, and we pretend to work.”

Socialism is a set of systems that try to artificially inhibit the free flow of objective economic laws by creating subjective barriers in the form of specific legislation and punitive policies. Socialists mistakenly think that if they assault private property and market relations, the economic laws will also change. They have taken up the task which, in principle, has no rational solution. Nothing good comes from the idea of ignoring or violating the fundamental laws of economics. These laws still exist, regardless of opinions and neglect to recognize their real character and the impossibility of changing them.

Socialism disrupts the evolutionary process and leads society to a dead end. The desperate economic situation of ordinary folks in Venezuela, Cuba, and North Korea—the remnants of socialist undertakings—is a direct result of building a society in defiance of the natural action of the fundamental law of economics. As a rule, socialist regimes were buying time by employing slave labor, plunder, coercion, and everything else that an aggressive totalitarian regime could offer. However, in the end, the means of socialistic life support was exhausted, and then returning to the natural and healthy market relations, where the laws of economics work for the benefit of the human race.

The same laws of market economics have worked in different human societies: from pre-historic to post-industrial, but still, socialists continue to entertain the idea of tampering with these forces of nature.

Allen Gindler writes for the Mises Institute.

This article is republished with permission from the Mises Institute. 

This article was sourced from FEE.org