How Socialism Fails Countries

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Posted: Oct 29, 2020 1:23 PM
How Socialism Fails Countries

Source: AP Photo/Ted S. Warren

Given my complete and utter disdain for socialism, I’m obviously a big fan of this discussion between Rand Paul and John Stossel.


In the video, Paul and Stossel draw a distinction between market-friendly welfare states in Scandinavia and genuinely socialist nations such as the Soviet UnionNazi Germany, and modern-day Venezuela.

That’s because, from a technical perspective, the defining feature of socialism is government ownership and control of the “means of production” and government-directed allocation of resources. In the most extreme cases, you even get policies such as state-run factories and collective farms.

Usually accompanied by central planning and price controls.

On this basis, Scandinavian nations are not socialist. Yes, they make the mistake of high tax burdens accompanied by lots of redistribution, but there’s very little government ownership and control. Markets drive the allocation of labor and capital, not politicians and bureaucrats.

And it’s also fair to say (assuming we rely on the technical definition) that politicians such as Obama and Biden aren’t socialist.

But what if don’t use the technical definition?

YouGov did a survey late last year to ascertain what ordinary Americans think. Here is their view of the policies that are (or are not) socialist. As you can see, the most-socialist policy is government-run utility companies and the least-socialist policy is separation of church and state.

To see the chart, click here.

I’m fascinated to see that so many Americans view government-run schools as socialist, much more so than a wealth tax or income tax.

It’s also interesting that Republicans and Democrats have somewhat similar opinions, other than on the topic of gun control.

But my main takeaway is that ordinary people aren’t that different than economists. They think – quite correctly – that socialism means control rather than redistribution.

But they had a better understanding after World War II, as noted by James Pethokoukis of the American Enterprise Institute.

When someone calls themself a “socialist” or says they think “socialism” has a lot of good ideas, what do they mean? …Back in 2018, Gallup updated a question it first asked in 1949: “What is your understanding of the term ‘socialism’?” …23 percent of Americans today understand socialism as referring to some form of equality vs. 12 percent in 1949; 10 percent think the means something about the public provision of benefits like free healthcare vs. 2 percent in 1949; and 17 percent define socialism as government control of business and the economy vs. 34 percent in 1949. …this idea of “control” is an interesting one. …The danger this view holds for human freedom and progress is obvious to us today — or should be… Skepticism of applied socialism — or any socioeconomic system without political freedom at its core — stemmed from harsh experience, not learned ideology. For many people, “socialism” meant “control,” with that control inevitably leading to terrible outcomes. One should hope these lessons do not need to be relearned.

Even some folks on the left draw a distinction between market-accepting left-wing policies (redistributionism) and market-disdaining control-oriented policies (socialism).

A few years ago, Jonathan Chait made those points in an article for New York.

…in the United States, liberalism faces greater pressure from the left than at any time since the 1960s, when a domestic liberal presidency was destroyed by the VietnamWar. While socialism remains highly unpopular among the public as a whole, Americans under the age of 30 — who have few or no memories of communism — respond to it favorably. …Meanwhile, Jacobin magazine has given long-marginalized Marxist ideas new force among progressive intellectuals. …Sanders’s success does not reflect any Marxist tendency. It does, however, reflect a…generational weakening of the Democratic Party’s identification with liberalism over socialism. …Years ago, he supported the Socialist Workers Party, a Marxist group that favored the nationalization of industry. Today he…holds up Denmark as the closest thing to a real-world model for his ideas. But, while “socialism” has meant different things throughout history, Denmark is not really a socialist economy. …it combines generous welfare benefits…with highly flexible labor markets — an amped-up version of what left-wing critics derisively call “neoliberalism.” While Denmark’s success suggests that a modern economy can afford to fund more generous social benefits, it does not reveal an alternative to the marketsystem.

David Brooks of the New York Times started out as a socialist, but he figured out that government-controlled economies simply don’t work.

I was a socialist in college. …My socialist sympathies didn’t survive long once I became a journalist. I quickly noticed that the government officials I was covering were not capable of planning the society they hoped to create. It wasn’t because they were bad or stupid. The world is just too complicated. …Socialist planned economies — the common ownership of the means of production — interfere with price and other market signals in a million ways. They suppress or eliminate profit motives that drive people to learn and improve. …Capitalism creates a relentless learning system. Socialism doesn’t. …living standards were pretty much flat for all of human history until capitalism kicked in. Since then, the number of goods and services available to average people has risen by up to 10,000 percent. …capitalism has brought about the greatest reduction of poverty in human history. …places that instituted market reforms, like South Korea and Deng Xiaoping’s China, tended to get richer and prouder. Places that moved toward socialism — Britain in the 1970s, Venezuela more recently — tended to get poorer and more miserable. …Over the past century, planned economies have produced an enormous amount of poverty and scarcity. …Socialism produces economic and political inequality as the rulers turn into gangsters. A system that begins in high idealism ends in corruption, dishonesty, oppression and distrust.

And, from the Wall Street Journal, here are George Melloan’s first-hand observations on the track record of socialism.

All economic systems are capitalist. A modern economy can’t exist without the accumulation of capital to build factories and infrastructure. The difference lies in who owns the capital—individuals or the state. …Having first visited the mother of socialism, the Soviet Union, in April 1967, I can extract a few historical nuggets… The Soviet state owned everything. State enterprises compensated their workers with rubles. …And those rubles bought very little, because the command economy produced very little (except weapons), and most of what it produced was shoddy. …stores were short on goods. …Rents were cheap, if you didn’t mind squalor. …Prices and production quotas were set by a huge Soviet planning bureaucracy called Gosplan, staffed by thousands of “economists.” Free-market pricing efficiently allocates resources. Price controls created waste as factories produced a lot of what nobody wanted. …Britain, where I was living at the time, was conducting a socialist experiment… After World War II, the Labour Party of Prime Minister Clement Attlee had nationalized coal, steel, electricity and transportation, with damaging and wasteful consequences. …I interviewed a steelworker in Sheffield who lived with his wife and two children in a “back to back” house with only a single door, at the front. …He didn’t own a car and had few other conveniences. A worker for U.S. Steel in Pittsburgh would have been appalled at such conditions.

Based on the above excerpts, which come from the right, left, and center, it would seem that capitalism has prevailed over socialism.

I like to think that’s true, but I do wonder whether there’s a point when redistributionism gets so extensive (and the accompanying taxes become so onerous) that it morphs into control. In other words, socialism.

And I also worry that there are indirect ways for government to control the allocation of resources.

In a column for the Washington Post, George Will wisely frets about backdoor socialism from the Federal Reserve.

…the Federal Reserve has, Eberstadt says, “crossed a Rubicon.” Wading waist-deep into political policies, the Fed is adopting, Eberstadt says, “the role of managing and even micromanaging the American economy through credit allocation, potentially lending vast sums not only to financial institutions but also directly to firms it judges suitable for government support. …It is by no means inconceivable that the current crisis will propel it to a comparably dominant position in domestic commercial credit.” If socialism is government allocation of economic resources (and hence of opportunity), …in the 2008 financial crisis, the Federal Reserve launched “creditor bailouts, propping up asset prices to keep investors from losing money, buying unprecedented assets.” The risk of moral hazard — incentives for reckless behavior — is obvious. …Central banks buying trillions of assets are thereby “allocating credit.” Which is the essence of socialism. The Fed buying government and corporate debt creates something difficult to unwind — what Cochrane calls “an entirely government-run financial system”: an attribute of socialism. …Near-zero interest rates…create, Eberstadt says, “zombie companies” that “can only survive in a low-interest [rate] environment.” The result is rent-seeking and economic sclerosis, because “America cannot succeed unless a lot of its firms fail — including its largest ones. Bankruptcy and reallocation of resources to more productive ends are the mother’s milk of dynamic growth.” The pandemic has propelled government toward promiscuously picking economic winners and losers. As has been said, governments are not good at picking winners, but losers are good at picking governments.

Let’s close by returning to the YouGov survey.

Here’s a look at the nations that the American people think are (or are not) socialist. Their top choices are correct, but they’re wildly wrong to have the Nordic nations ranked as more socialist than France, Spain, or Italy.

To see the chart, click here.

It’s also bizarre to rank New Zealand below the United States when the Kiwis routinely score higher than the United States in the major measures of economic liberty.

I’m equally baffled that people Mexico and India have more economic liberty than Canada.

The moral of the story is that the countries with the biggest welfare states are not necessarily the nations with the most government control over the allocation of labor and capital.