ECONOMIC PERSPECTIVES – 71

Testing the Socialist hypothesis

GOING POSTAL – EMILE WOOLF – JANUARY 2020

Kristian Niemitz, Head of Political Economy at the IEA, wrote a book last year in which he explores the reasons why the idea of socialism persists as a viable economic system. In “Socialism: the Failed Idea that Never Dies” Niemitz notes that whenever real-life events demonstrate, yet again, that socialism, in all its guises as an economic system, simply doesn’t work, its ever-faithful adherents in the West declare that what failed wasn’t “real socialism”.

“it’s not real socialism”

 

We should note that the “fake socialism” epithet is only ever attached to a project after the event; when a socialist project is still under way, or in its early stages, no one ever claims “what we are doing isn’t real socialism”. As Niemitz shows, every socialist project goes through a honeymoon phase during which prominent Western intellectual liberals praise it enthusiastically. Only when the project’s grandiose ideas are seen to founder “in shallows and in miseries” does it get reclassified as “not real socialism”.

Led by personal reflections

I have pondered this conundrum long and hard for many years. As I have explained in earlier essays, both my parents were lifelong communists, and when the South African Nationalist government made life intolerable for them, as anti-apartheid activists rather than mere communists, our family emigrated to England.

It was then, as a teenager, that I took the trouble to read the texts that underpinned my parents’ Marxist beliefs. This was a revelation. At that point, for me, those beliefs lost all credibility. In fairness to my parents, I believe that their detestation of apartheid had developed into a fully-fledged embrace of communist principles. I, by contrast, had no difficulty in distinguishing between the utterly abhorrent apartheid regime and equally abhorrent, albeit different, tenets of communism. Consequently there was no risk that, as happened with my parents, these ideas might elide into a single belief system. I also had the advantage of learning the full import of Khrushchev’s 20th Congress revelations about Stalinism, which my parents and their closest “comrades” simply couldn’t countenance.

distinguishing socialism and communism

 

The distinction between communism and socialism isn’t usefully pertinent to this debate. Whether the former is an extreme form of the latter, or the latter a milder form of the former, is merely a question of degree, not of destination: the trajectory of both finishes up in varying degrees of societal impoverishment or worse. Socialism is in some ways more pernicious: masking its eventual destination, by allowing a degree of private economic involvement, is like being only slightly pregnant. Communism makes no pretence about the extinction of personal freedom “for the common good”. No one can define socialism’s final form because it has never quite got there before imploding.

The panoply of applicable steps

None of which seems to deter the misguided faithful from trying. Corbyn and his troupe of Momentum revolutionaries had a go in their 2019 election manifesto: reinstatement of full trade union domination over the labour force, permitting secondary picketing and wildcat strikes; heavy representation by “worker-directors” on company boards; confiscation of 20% of shares in large companies and their transfer to a workers’ trust; penal rates of tax for high earners; four-day week for public sector workers, plus an immediate 5 per cent pay rise; and other delicacies. Somehow these enticing ideas never made much headway with the electorate.

My problem is comprehension. I cannot understand how people with enough savvy to feed themselves can, at the same time, be so feeble-minded as not to comprehend for themselves the most basic economic truths. John Cowperthwaite, Hong Kong’s Financial Secretary, put it like this: “In this hard world we have to earn before we spend”.

….. expectation & dependency

 

Why is that so difficult to understand, even for those who demand that it’s the state’s job to provide, provide and provide? I suppose that when a society has descended into a pervasive malaise of expectation and state dependency nothing should surprise us.

Demands without rational bounds

Despite centuries’ worth of evidence, zealots never give up. Look around you. Right now revolutionaries in Chile are determined to nationalise resources and uproot everything in sight, including the institutions that alone could provide its seething populace with enhanced conditions, stability and renewed self-respect (as explained in Economic Perspectives 69, now on my website).

Spain is relearning the most basic economic lessons, painfully. Its hard Left now has a handle on the levers of state and a communist has joined the cabinet for the first time since the civil war in the ‘thirties. All free market reforms of the last decade are being reversed even though the latest measures conflict with the Spanish constitution itself.

It offers unbridled largesse of massive welfare spending; slashed student fees; ‘free’ child care; 16 weeks’ ‘paid’ parental leave (for both fathers and mothers); universal basic income for all; higher taxes on income and capital gains; rent controls in every major city; no longer linking pension benefits and GDP growth (or any other measure); restoration of all trade union powers and labour laws (making hiring and firing nigh impossible); minimum wage up by 33 percent; two extra months of bonuses. In Spain employers will be joining workers in the streets – all wearing gilets jaune!

higher taxes, of course!

 

Naturally, this folderol is to be funded by higher taxes on business, banks, energy companies and the wealthy – a formula that has never delivered its promise in any country, ever. And, incidentally, under EU laws you can’t pursue this kind of extravaganza and still remain in the Euro – but who cares about that? The record of compliance with rules in the EU is so flaky that they might as well tear them up.

Nordic-style Socialism

Then we come to the last refuge of Left-wing apologists who persist in showcasing the Nordic countries as examples of socialism that really works in practice as well as theory.

What is rarely recognised is that the oft-cited Nordic economic model arose after those countries were already prosperous. Indeed, they are now migrating away from government involvement in the economy and free markets are again taking over. Numerous state-owned entities have been privatised, taxes are being reduced and the generosity of their welfare systems curtailed. The real message of the Nordic experience is about the limits, not the successes, of “democratic socialism”.

they have the story upside down…

 

Typically, those like Bernie Sanders in the USA, who cite the Nordic economies as a socialist ideal, have the story completely upside-down. These countries were successful free market economies well before they built their welfare states. Their economies yielded high earnings for employees, allowing their governments to raise levels of tax revenue sufficient to facilitate generous welfare for their relatively small, homogenous, disciplined citizenry in a corruption-free state.

Norway’s abundant natural resources

Let’s get some perspective. Norway’s economic success rests on its abundance of natural resources in relation to a total population of only 5 million (about half of London’s!). Those resources include ample reserves of forestry, mining, fishing, oil and natural gas. Its oil fund is the world’s largest sovereign wealth fund, worth $200,000 per citizen!   Its wealth wasn’t created by any social democratic policies – it was nature. They didn’t even need to try too hard.

The popular notion that Nordic countries are socialist strongholds persists, but is outdated. They have, in varying degrees, abandoned collectivist economic model and now favour free markets in which hard work generates commensurate rewards.

Sweden’s migration from sense to insanity – and back

Sweden’s earlier experience is a classic template of failed ideas. Between 1965 and 1975 the number of its civil servants grew from 700,000 to 1.2 million, alongside growing government inefficiency, intervention in economic affairs and greater regulatory control. Its public sector, mainly social services, absorbed the entire growth in the Swedish workforce.

increase in numbers living off the State

 

In 1960, for every 100 people working in the private sector, there were 30 living off the state and paid out of taxes. By 1990 the number living off the state grew to 151 for every 100 working in the private sector. Get that? It means that there were significantly more people living off the state than contributing to its costs! This dire condition reflects Sweden’s pre-1960 transition from a capitalist free-market economy to a socialist model. Small wonder that prominent entrepreneurs like Ingvar Kamrad, founder of IKEA, emigrated in deep frustration.

This malfunctioning dogma crippled productivity and a comprehensive counter-movement was bound to follow. In 1991 both corporate and income taxes were slashed in a tax-cutting programme that continues to the present time. Sweden nevertheless remains a high tax, high welfare economy, but the direction of travel by successive governments over the past 30 years has been towards more freedom over more equality, and more market over more state.

When citizens are prepared to work hard, display innovation and ingenuity, take risks – and are vouchsafed the natural rewards – income inequality will always result. That’s natural. The notion of equality of reward is as unnatural as equality of ability. Throughout the Nordic states balance has undoubtedly shifted towards capitalism. Young people, enthusiastic about the ideas of Bernie Sanders, should take sober note – and gain the experience of having to rely on having a job!

Economic freedom

Canada’s Fraser Institute compiles a worldwide ranking of countries in its “economic freedom” index. This attempts to identify the degree to which a country’s institutions correspond with a defined ideal – which is a government whose role is limited to (i) protection of property rights; (ii) provision of national defence; and (iii) assuring access to sound money.

We would expect a socialist government to rank poorly in any ranking based on these criteria. Hong Kong and Singapore, unsurprisingly, top the list, and the US ranks 12th. But Denmark ranks 15, Finland 17, Norway 25 and Sweden 27. Pro-free market countries like South Korea and Japan rank 32 and 39 respectively.

Nordic countries have shown that they can afford high welfare provision because their market economies are so productive – not the other way round. And it certainly isn’t socialism. Those who still cite Sweden as a socialist ideal conveniently overlook its real glory days. Prior to the 1960s it had a free economy, low regulation and an immense capacity for wealth generation. Between 1870 and 1950 it had the highest per capita income growth in the world, and was one of the richest.

what they were redistributing did not exist!

 

It was only in 1960 that its government lost the plot with a hopeless wealth redistribution programme over which it lost control. As with every socialist programme ever tried, no guiding economic measurement was available to tell them the wealth they were redistributing didn’t exist.

Oh, and Capitalism – don’t forget!

Under capitalism there is no free lunch, and satisfaction of wants must be paid for by prior production funded by savings. In practice, like any economic system, it is marred by excesses and distributive distortions. But there are no adverse manifestations of capitalism that cannot be cured by pursuing policies of sound money, unilateral free trade and a transparent low tax regime. That, not socialism, is the optimum direction of travel.

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[EMILEWOOLF –19/1/20]