THE PERILS OF SOFT SOCIALISM
by Richard A. Epstein
The political landscape in the United States continues to become ever more divisive—and ever more incoherent. The Trump administration is engaging in a major program of deregulation and lower taxation at home, while pursuing tariffs and a trade war abroad. Simultaneously, a growing fraction of the Democratic party is moving left from liberalism to progressivism to democratic socialism. Politicians like Bernie Sanders and Elizabeth Warren proudly call themselves democratic socialists and advance a vision for the country in which well-designed regulations mitigate what they regard as the corrosive effects and embedded inequality of the capitalist system. They rightly dissociate themselves from the brutality and totalitarianism of the socialist regimes, from the Soviet Union to China to Cuba to Venezuela; their hope is to achieve a state-dominated economy in a benign democratic form.
But how exactly does a socialist economy operate within a democratic system? As if on cue, this question is addressed by President Trump’s Council of Economic Advisors in a timely new report,[1] “The Opportunity Costs of Socialism.” Its conclusion is that socialism cannot succeed even in democratic societies. The Report makes its case in part by showing how once prosperous nations like Cuba and Venezuela have become economic basket cases as formerly democratic institutions gave way to totalitarian rule.
The Council’s Report quickly provoked indignant responses[2] for its “bizarre” juxtapositions of mass atrocities with market distortions. But even if the two issues are rigidly separate, Democratic socialists still have to explain why a system that has failed whenever it has been tried can succeed under their tutelage. To borrow a grandiose phrase from Marx, the internal “contradictions” of socialism doom it to failure. To see why, start with some definitions of socialism. As the Council notes, the Oxford English Dictionary defines socialism as “a political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.” A somewhat shorter definition speaks of socialism as “collective ownership of the means of production,” in contrast of course with a regime of (bourgeois) private property. This latter regime, according to Marxist theory,[3] “is the final and most complete expression of the system of producing and appropriating products, that is based on class antagonisms, on the exploitation of the many by the few.” More modern democratic socialists tend to soften the claim for state ownership by speaking, as does the democratic socialist journalist Meagan Day,[4] of “pooling society’s resources to meet people’s basic needs.”
Claims like Day’s are long on aspiration but short on implementation. On the one hand, the socialists do not acknowledge the huge successes of the capitalist system that they so vehemently decry. Historically, as economist Robert Gordon has shown[5] in his book “The Rise and Fall of American Growth,” the greatest improvement in human progress and well-being took place in the United States between 1870 and 1940, which, ironically, is the exact period dominated by laissez-faire constitutionalism[6]—that is, the belief that government energies should be devoted to the protection of competitive markets from the risks associated with force, fraud and monopoly, coupled with strong support for charitable programs to help those left behind. These gains were not, and could not have been, constricted to the few rich. Indeed, the biggest achievement of that period was the rapid increase in life expectancy, the gains from which could not be confined to the top one percent as it moved from about 40 in 1870 to 63 in 1940.
The explanation for these gains lies in the success of the very institution that the Democratic Socialists deplore: the dominance of competitive markets[7] over any alternative form of economic organization. Its legal presupposition is a system of freedom of contract that requires strong private property rights. The response on the left—from Marx to Day—is that competitive markets represent a form of “exploitation” that the Democratic Socialists will root out. Analytically, that claim gets matters exactly backwards. The reason why theft—taking the property of someone else without their consent—is socially destructive is that it leaves one side better off and the other side worse off. In the short run, the gains to the taker are almost always smaller than the losses to the prior owner, who knew best how to utilize the asset. In the long run, the outcome is still worse, for who will invest in creating and maintaining any asset that can be snatched away by others?
Voluntary contracts—those not tainted by duress or fraud—are exploitation’s opposite. They foster mutual gain for all parties. No self-interested person will enter into a voluntary contract for labor or goods unless he or she is left better off than before. Both sides have the same objective, so that these arrangements are a positive sum between the parties, while creating additional opportunities for third parties. That market has to be regulated in ways that guarantee the security of transactions, which allow these transactions to take place over long periods of time—a necessity in transactions for employment, loans, construction, insurance, and so on. It is for that reason that the state records title and requires certain key contracts, such as those for the sale of real estate, to be in writing. Of course, transacting parties act out of their self-interest, but that self-interest is constrained by the self-interest of others. Greedy persons tend to get frozen out of markets by becoming unattractive trading partners. Reputation is thus a powerful force keeping market actors in line.
The challenge to the Democratic Socialist is to develop some alternative form of social organization. But why believe that the collective ownership of social resources, or pooling resources, can promote the satisfaction of basic social needs? It can’t. The key payoff from ownership is control, and just who controls an asset that is owned by everyone? The state is an abstraction, as is the corporation. But there the similarity ceases. A corporation’s assets are owned by its investors, who can then organize a board of directors that chooses its chief executive officer. The group of founders is small and cohesive. No diffuse public body can exert that same kind of careful control over assets, and since the profit motive is ruled out of the picture from the start, the individuals that somehow take charge of the overall enterprise will do so by political intrigue. Once in control, they will have no strong incentive to economize on costs.
Nor, as Friedrich Hayek stressed[8] long ago, do these “central planners” have any reliable information about the two things that are key to making any enterprise work: the costs of inputs on the one side and the value of outputs on the other. As the Council’s report rightly argues, socialist policies “provide little material incentive for production and innovation and, by distributing goods and services for ‘free,’ prevent prices from revealing economically important information about costs and consumer needs and wants.” When buyers and sellers agree on prices, they do not have to explain their decisions to any administrative body. These prices can move by the day or the hour, in response to market conditions, including other market actors. That is a time frame under which no administrative body can work. But even without centralized government control, everyone still labors under a powerful constraint from other market participants who will seek to economize on costs and develop new innovations. These market innovators, driven by the profit-motive, can produce novel products and services to fill market demand, knowing that they enjoy the protection of patents, copyrights, trade secrets and trade names. Will democratic socialists remove property rights in these areas? And still hope to foster innovation?
Democratic socialists understand that their collective utopia cannot function without the information and performance generated by private markets. So how does the collective we “pool” resources? Bold words notwithstanding, they sense that the abolition of all private property is a step too far. So they try to chip away at this structure in the search of higher equity. Elizabeth Warren has a hare-brain scheme[9] to make corporations more accountable by allowing government officials to appoint some fraction of their members, without explaining how any director can simultaneously owe fiduciary duties—the highest legal obligation to act in the best interest of a party, and the rule that keeps our corporate law going— to parties with adverse interests. Bernie Sanders constantly pushes Medicare for all[10] and free college tuition[11] for all without ever understanding that with a price of zero dollars, supply and demand will be perpetually out of whack. Consumer demand explodes with the promise of free goodies, while the supply of goods and services shrinks given the want of revenue to cover wages and capital expenditures. When public price or wage controls ensure that supply will necessarily outstrip demands, only two responses, in tandem, occur. Queues form and quality declines.
The economic disruption will of course have political consequences. As the formal restraints on state power erode, factions will continue to vie for political advantage. In these settings, the one side can only win if the other side loses. This, in turn, ups the pressure on resources, which become ever more scarce. The tragedy is that Democratic Socialists are blind to both logic and history as they try once again to peddle to the public an experiment that has already failed far too often.
Footnotes
[1] https://www.whitehouse.gov/wp-content/uploads/2018/10/The-Opportunity-Costs-of-Socialism.pdf
[2] https://www.vox.com/policy-and-politics/2018/10/23/18013872/white-house-socialism-report-cea-mao-lenin-bernie-sanders
[3] https://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch02.htm
[4] https://www.vox.com/first-person/2018/8/1/17637028/bernie-sanders-alexandria-ocasio-cortez-cynthia-nixon-democratic-socialism-jacobin-dsa
[5] https://www.amazon.com/s?k=rise+and+fall+of+american+growth&hvadid=241591313962&hvdev=c&hvlocphy=9073479&hvnetw=g&hvpos=1t1&hvqmt=e&hvrand=4785986457999800065&hvtargid=aud-509611686427%3Akwd-296933301288&tag=googhydr-20&ref=pd_sl_7kgja8ycdc_e
[6] https://www.amazon.com/Progressives-Rewrote-Constitution-Richard-Epstein/dp/1933995068
[7] http://www.brown.edu/Departments/Economics/Faculty/Allan_Feldman/efiles/PDFs/Welfare%20Economics.Draft.pdf
[8] https://www.econlib.org/library/Essays/hykKnw.html
[9] https://www.wsj.com/articles/elizabeth-warrens-corporate-illogic-1536705547
[10] https://berniesanders.com/medicareforall/
[11] https://www.cnbc.com/2017/10/10/bernie-sanders-we-need-to-make-college-free-to-make-america-great.html
Editor's Addendum:
These are some of the comments that added useful information.
Booko Ninjiin The lazy, unthinking unproductive drones are moved by Socialism. The elites of the Left are moved by emotion and the chic of the idea of Socialism, as they ever have been since Karl Marx. Intellectual children strive for distinction from their peers. Some embrace Socialism out of greed, a need to set themselves apart or the fact they are the non-contributors to society and culture. Or all of the above. |
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Daniel Artz Excellent discussion of the shortcomings of socialism. I would note that most socialists have a very limited understanding of economics; they think that economics deals only with the allocation of scarce resources, and completely ignore the function of producing those same resources. They act as if the resources simply exist, and the only question is how to most equitably dole them out, as if economic resources appear by magic in a fixed unchangeable quantity. But those resources did not simply appear by magic, they had to be produced, and just how much of those resources are produced depends upon incentives. You cannot alter the distribution of the resources - the question with which socialists are concerned - without also altering the incentives to produce the resources. It is impossible to disentangle the production question from the allocation question. That is the essential failure of socialism - by seeking a “fairer” distribution of goods, socialism destroys the incentives to actually produce economic goods and services, ensuring an ever shrinking economic pie. |
Alison Poole What a lot of left-liberal academics who have little to no economic training often think is that, surely, it seems a central planner could coordinate economic activity better than the market can do, with its business cycles, unemployment, and other symptom of disequilibrium. What Hayek famously saw and argued, and that the fall of communism confirmed, is that this “common-sense” idea is fallacious. The principal reason is that knowledge, especially knowledge of how to do something rather than facts or procedures that can be communicated as a set of directions, is difficult to transfer. As a result, the manager of a complex system is unlikely to have all the information she needs in order to be able to exercise control intelligently. Thus the importance of decentralized methods of coordination, such as the market, in which dispersed knowledge- each individual consumer’s knowledge of his needs and opportunities, each individual seller’s knowledge of his costs, his suppliers, his customers- is aggregated by the price system. If, discovering that a particular input needed for the manufacture or distribution of a product is likely to become scarce, a seller buys up a large quantity of the input and stores it, her action forces up the input’s price and the higher price induces others to economize on their use of it and by thus increasing their costs leads them to raise the price they charge for their product, thereby in effect communicating the information about higher input costs to the entire market. Prices ultimately act as a method by which private information is diffused throughout the market and ultimately throughout the entire world economy. Prices impound information. |
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Daniel Artz responds to Alison Poole There is a tendency by everyone to understand a complex system based upon a paradigm which they understand. It is a very natural tendency to simplify complexity to make it easier to grasp. Few systems are more complex than a national or world economy, with billions of individual decision-makers, and billions upon billions of decisions affecting the economy every day. Unfortunately, the paradigm most people fall back on to try to understand this complexity is a mechanistic view - the economy as machine, which needs direction and maintenance by outside operators. It is much rarer that people can see the economy as organic, a system in which order arrives spontaneously rather than having order forced upon it. |
GAbuck Democratic Socialism is simply a term for milking the capitalist cow for all its worth. They don't really want traditional socialism, i.e. collective ownership. They want to tax society as much as possible in order to provide themselves, the state bureaucracy, with resources to give the people "free" stuff. Healthcare, education, housing, jobs, etc. ad infinitum need to be provided because people, in the democratic socialist view, are nothing but chattel to be tended to, incapable of self preservation without expert oversight. Ironically, they aren't completely wrong. Many Americans today are completely dependent on the productive classes for their daily needs. They are chattel. |
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Liz Kef Any article like this that does not even attempt to seriously address the successful models in Scandinavian countries is not actually engaging in the debate, it's just propaganda. I would say the same to a cheerleading article from the left. Sweden is quite socialist, by our standards. So is Venezuela. One seems to be working pretty well, one does not. If we're thinking about policy, only addressing one of those examples is not serious debate, and is not intellectually defensible. |
@rno responding to Liz Kef Scandinavian countries are free market economies, not socialist countries. |
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B Fox The Canadian and German education systems, as just two examples, are free and very high quality. The German economy is dominated by private enterprise, yet college and health care are guaranteed. This is the model, and, although not perfect, it is not failing...as your account would otherwise predict. Where is Sanders or Warren stating that the economy should be state-dominated? |
Joey Grossman responding to B Fox Ummm...sorry, you’re just wrong about the Canadian education and health care system. I’m a Canadian lawyer, born and raised in Toronto. Post-secondary education here, while a little less than post-secondary education in the US, is a fortune. My son’s first undergrad year at U of Guelph cost $20,000.00 for a simple communication program. As for health care, it is an unmitigated disaster and always has been. Most good doctors leave because they can make so much more money elsewhere (the amounts they can bill the government for services are low and it’s illegal to charge people except for certain small, trivial things). The average wait time in an average emergency room in Toronto is 4-6 hours. I had a sudden back problem 5 years ago for which my family doctor wanted me desperately to have an MRI. Wait times for MRIs are between 3 and 6 months. My doctor finally pulled some strings after a couple of weeks with a colleague here who owns a radiology lab and I was able to jump the queue (which is illegal). The MRI showed a spinal abscess. I had by then developed sepsis and surgery had to be done immediately. Had I had to be placed in the usual queue for MRIs, I would have died. None of this is unusual for anyone who lives here. Please tell your friends, neighbours and politicians the facts about our health care system and stop listening to propaganda. |
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maddog23 responding to Joey Grossman No State-run healthcare system in the world is actually used by those in the government that administer them. Every one has private fall-back systems for the elites to use(why do you suppose it is so?). Thank you Joey for “clearing the air.” |
Feliks Gailitis There really is no such thing as "soft socialism". Once they assume any kind of power, it instantly becomes exactly what socialism always was and always will be, a system of force and coercion. I agree with much of what the poister below me says, except for one thing. Democratic Socialists today are totally ignoprant of history and do not apply logic to their rhetoric, or any facts whatsoever. I have yet to hear anything from Bernioe that wasn't pure rhetoric devoid of facts, and as for Ocasio-Cortez, my God, she epitomizes the ignorance and literal stuopidity of the modern left. |
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aar33178 Soft, or benign socialism is only a way station on the way to communist totalitarianism. The coercive nature of that system combine with a "it wasn't done right/by the wrong people/not funded adequately" stream of endless excuses after every failure as they march us towards that Utopian light at the end of the tunnel. America, don't be fooled by the "moral, compassionate and just" arguments; behind the liberal smiley mask, they are our own Stalins, Maos, and Castros. They promise Norway (a Norway that doesn't exist according to Norwegians) , but they mean us to be Venezuela. Or Cuba. Or the Soviet Union. Or worse. Take it from me, the son of political exiles and asurvivor of communism. You have no idea how quickly "Medicare for all" devolves into the Gulags for many. I've lived it. |
Shawn O'Donnell Ho, hum these Socialism does not work discussions are funny. I want all of you do to a few things, first don't accept Social Security or Medicare. Then start writing letters to your Senator and tell them you want to disband or at least defund the Department of Defense which is the largest socialist organization in the world. Next, go online buy a ticket to any Nordic nation, Taiwan, or Singapore and see the Failure of Democratic Socialism. |
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Scooter72 in response to Shawn O'Donnell UM why would we not accept Social Security? I paid into it for 32 years and counting. Social security is a right you pay for not a government hand out. The government has spun it into some kind of benefit they are giving us, since they cannot figure out how to pay back what they took from it. |
Richard A. Epstein, the Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, is the Laurence A. Tisch Professor of Law, New York University Law School, and a senior lecturer at the University of Chicago. He is author of "The Intellectual Poverty Of The New Socialists."
This article was published October 29, 2018
and is archived at https://www.hoover.org/research/problem-soft-socialism/.
It is archived at Think-Israel at
http://www.think-israel.org/epstein.softsocialism.html. The
photo was not part of the original article.
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