Breaking News: Socialists Still Don’t Understand Economics

Announcing New York City’s newly “balanced” budget back in June, Mayor Zohran Mamdani invoked the words of the Austrian economist Friedrich Hayek: “If socialists understood economics, they wouldn’t be socialists.”

That’s true. He should’ve stopped there. But Mamdani kept going, arguing that the past few months have shown that, to the contrary, socialists do understand economics. The supposed proof was that he’d solved “years of [capitalist] mismanagement through the embrace of [socialist] principles.”

So how did he pull off this “socialist miracle”? Well, he convinced Governor Hochul to provide a multi-billion dollar bailout, he used some accounting magic to delay pension payments, and he implemented new taxes on the rich. We’ll see how many of them actually stay to pay those taxes.

One potentially good thing he did was install “chief savings officers” in city agencies, tasked with finding 2.5% in wasteful spending to cut for 2027 and 2028. Not exactly a high bar, but we can hope, right?

Balancing the budget by asking the state to bail out NYC reminds me of how, until January of this year, Venezuela used to subsidize the Cuban regime with oil shipments. So I guess he’s right that “socialist principles” have come to his rescue.

Expanding on his budgetary miracle, he said, “There’s nothing fiscally responsible about balancing the budget on the backs of working people.” In context, he was referencing the fact that they’d refused to cut any of the countless services the city provides for its residents. But he revealed something deeper about his worldview with that statement. He’s implying that budgetary sanity, a matter of hard numbers, is somehow subject to a timeless battle between the rich and the working class. The oppressor and the oppressed.

Socialism. Communism. Marxism. Call it what you want, but that’s the Mamdani playbook.

The Zombie Labor Theory of Value

Let’s start with the idea underneath all of it: the labor theory of value. Marxism holds that the value of something is measured by the cost of its inputs, chiefly labor. Work harder, work longer, and the thing you made is worth more. It sounds intuitive, and it’s true in a very limited sense. All else equal, working harder or working longer hours does result in more value created. But working eight hours using primitive tools is unlikely to be more productive than two hours using cutting-edge technology. Digging holes in the desert for a whole day is worth exactly the same as spending just 15 minutes on the task: $0.00.

In the 1870s, three economists working independently, the Austrian Carl Menger, the Englishman William Stanley Jevons, and the Frenchman Léon Walras, all converged on what’s now called the Marginal Revolution. They showed that value isn’t set by the cost of inputs at all. It’s set at the margin, at the intersection of supply and demand. It doesn’t matter how hard I worked or how long something took to make. If nobody wants it, it isn’t worth anything. Value rises as supply contracts or demand expands, and it falls as supply expands or demand contracts, regardless of the production cost.

So the founding assumption of Marxian economics was overturned before the Soviet Union ever pulled Marx out of obscurity and put him to use. Somehow, that theory is now baked into the politics of our country’s greatest city.

Supply Creates Demand

There’s an even older idea underneath all of this: the law of markets, also known as Say’s Law. Properly understood, it says demand is made possible by supply. Your income is a function of how much you can produce. If you want to buy more, you have to get better at making more.

This is where Marxism runs into its deepest problem. Because it starts from a faulty theory of value, it also assumes the world is a zero-sum game.

If the labor theory of value were true, then anyone profiting off your labor would be stealing from you in some sense. Under that framework, labor has a one-to-one relationship with value creation, so any “surplus value” must be the result of a conspiracy against your interests. The next logical step is that, if you want to claw back your stolen wages, wealth must be redistributed, either through negotiation or by force.

Of course, that’s not actually how the material world works. The average American is wealthier today than a century ago because of technology, not because workers got better at collective bargaining. Income is a direct function of how much we can produce, and we increase what we can produce through technological innovation. The Industrial Revolution let us make more with every hour of effort. Capital, what Adam Smith called stored labor, gets invested in tools and machines so we can level up our productivity.

Here’s how the mechanism actually plays out. Say I’m a farmer and I invest in a tractor. I’m suddenly producing five times more wheat than before. I’m not the only one who can see the opportunity. Every other farmer either makes the same investment or loses market share to whoever can sell for less. Total output climbs, and food gets cheaper across the board.

Now, say I’m the blacksmith down the road. I still need to eat. As the cost of food collapses because farmers have new technology, my wages effectively rise as a share of what it costs to put dinner on the table. That’s how wages actually go up across the board. They’re the product of supply, not negotiation. We can’t all bargain our way to more if the total amount of stuff to go around is fixed. All you can do is redistribute what already exists. Growing the total requires making more, and making more requires technology.

Good Luck, NYC!

A state bailout doesn’t create new wealth, it just moves next year’s problem onto Albany’s balance sheet. Delaying pension payments doesn’t the obligations disappear, it just kicks them down the road. Treating the rich like the city’s piggy bank works great, until they leave. Rebranding DOGE as “responsible socialist governance” isn’t the worst option for NYC, but the targets Mamdani has set are nowhere near the size of the hole being papered over.

Every piece of Mamdani’s “socialist miracle” is the same move: treat the city’s finances as a fixed amount to be divided differently, rather than something to grow. The only way NYC can actually get the numbers to work past 2027 is the same way the farmer, the blacksmith, or any economy ever has.

Building beats bargaining every time, and no accounting trick can change that.