In his latest memo titled – Shall we Repeal The Laws of Economics?, Howard Marks reflects on his early understanding of economic systems, shaped by George Orwell’s Animal Farm. He highlights the dangers of centrally planned economies, using the book’s motto—”From each according to his ability, to each according to his needs”—to explain why such systems fail.
Marks argues that free markets outperform command economies due to the importance of incentives and supply and demand. While idealism may seem appealing, he emphasizes that economic realities, such as the balance of taxes and incentives, cannot be ignored without negative consequences, stressing that economic trade-offs are inevitable.
Here’s an excerpt from the memo:
My first step toward understanding the workings of the various economic systems came in junior high school in the late 1950s, when I read George Orwell’s Animal Farm. Orwell wrote it in 1945 as a thinly veiled critique of Russia and communism/socialism.
That book taught me most of what I needed to know about free markets versus command economies. If you haven’t read it, or if you read it so long ago that you can’t remember what it says, I suggest you pick it up.
In the allegory of Animal Farm, the animals took over the running of the farm. For me, the key lesson emanates from the motto they painted on the barn wall, borrowed from Karl Marx: “From each according to his ability; to each according to his needs.”
What an idealistic statement! It would be great if everyone produced all they could, with the more able members of society producing more. And it would be great if everyone got what they need, with needier individuals getting more.
But, as the animals on the farm soon learned, if workers only get to keep what they need, there’s no incentive for the more able among them to put in the additional effort required to produce a surplus from which to fill the needs of the less able.
The great challenge, of course, is to strike the proper balance: to take enough from the successful in the form of taxes to fund services, government programs, and wealth transfers without eroding their incentive to work or encouraging them to seek out low-tax jurisdictions.
What I discuss above are the economic facts of life, and some of their ramifications may be less than ideal. But idealists’ wishes don’t govern economies; these realities do.
Foremost among them are the power of incentives and the influence of supply and demand. The rules must be respected; they can’t be ignored, wished away, or overridden without consequences.
Anyone who thinks it’s better to live in a centrally planned economy that prefers evenly distributed benefits over free markets hasn’t studied history (or read Animal Farm). It may sound good in theory, but it has never worked.
The laws of economics will always win out eventually. Nations can respect them and reap the associated benefits, or they can try to contravene them and pay the price in terms of underperformance.
In the world of politics, there can be limitless benefits and something for everyone. But in economics, there are only tradeoffs.
You can find the entire memo here:
Howard Marks Memo – Shall We Repeal the Laws of Economics?
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