Category Archives: Socialism

The Rise or Fall of Socialism

Is socialism on the rise (Bernie Sanders)? Or is it on the decline (Venezuela’s economic implosion, Brazil’s impeachment of their socialist President, Cuba and North Korea’s decades of abject poverty)? To be fair, one could likewise cite the relative success of China, Denmark, Norway, or Canada as proof of socialism’s success. Why the difference? Why are some putatively socialist countries not total economic basket cases whereas others clearly are? To uncover the answer we must understand why some groups of people come together and achieve their goals while others fail. In any endeavor there is a group of individuals who have tight control over the means of goal achievement. This allows them to direct those means so as to ensure an efficient operation that will achieve the desired ends. Does that not remind you of something else? Like say a business perhaps? The reality is that the modern nation-state is simply a really big company, with shareholders (citizens), a board of directors (congress/parliaments) and a president running the show. Unfortunately this is one corporate stock you can’t sell if you disagree with how the company is being run.

So if states are structured as a business, why do some fail and some thrive? For the same reasons any business might fail or thrive. Success entails the optimization of three factors: consent, control, and resources. All factors play a role, however any one of them can overwhelm the others. This is the reason we see very different outcomes in a variety of nominally socialist countries, e.g. Venezuela vs. Denmark. It is not enough to cite Cuba (excessive level of state control) as a failure and therefore close the case on socialism. Were that the case then one would be susceptible to charges that capitalism can’t “work” because sometimes a business goes bankrupt. However it is just as disingenuous for those on the left to cite oil-rich Norway (abundant resources) as proof of socialism’s success. If Cuba had Norway’s oil resources it would be faring far better. Or maybe not, as in the case of oil rich Venezuela which too suffers from excessive state control of the economy and is presently circling the drain.

Countries that exert a high degree of control (totalitarian) over their citizens will always experience less “success” than those that exert little control. Less control means greater freedom to innovate and solve problems from the bottom up rather than the top down. Formerly socialist/communist countries (China, Vietnam) that have embraced the benefits of freedom (that is, free vs. state managed markets) within their borders have seen improved standards of living relative to those that have not (Cuba, North Korea, Venezuela). As a country or business grows in size, efficient control becomes exponentially more difficult. This is due to the Hayekian knowledge problem. Stated simply it is the reason that a family farm runs smoothly but a state run collective not so much. Unfortunately, those in charge don’t realize they lack the appropriate knowledge and thus make sledgehammer style choices that only serves to undermine the endeavor. The solution to the size-control problem is to move toward less control and smaller size through decentralization. Large businesses with autonomous subsidiaries have mastered this problem well.

A critical and often overlooked factor in the success of a state is consent. Without consent the process will be crippled if participants undermine or refuse it. This is a key difference between business endeavors and state endeavors; states always compel those who do not consent to participate. Businesses cannot force people to work for them or for customers to buy their products. Apathy was not an option when it came to the rise of 20th century socialism. The motto of Russia, China, Vietnam, and Cambodia: join us or die. Democracies maintain an illusion of consent that mollifies a credulous citizenry into the quiet acceptance of being ruled. They are better than dictatorships, but not by much, and fall far short of the benefits one would see with true pluralism.

To make America great again we must recognize that while our resources are substantial our size puts us at a disadvantage. The only way to overcome that disadvantage is to loosen, not tighten, the reigns of economic control and to foster true consensual pluralism by permitting those who wish to not participate in the dominant system to work toward building alternatives that will expand, not constrain, choice.

I’ll Gladly Pay You Tuesday – Not!

Jimmy enjoyed life. To more fully enjoy it Jimmy needed some money. Jimmy could have worked and saved and worked and saved – but that takes too long. Jimmy wanted to enjoy life NOW. So Jimmy borrowed money from Bob and promised to repay it later – he was a young man; he had plenty of time to pay it back. But Jimmy quickly burned through that loan and was unwilling to suffer the indignation of giving up his carefree lifestyle. So he asked to borrow some more – and he was given more, but at a higher interest rate that reflected Bob’s growing uncertainty about Jimmy’s ability to pay him back. This cycle continued for a while until the interest rate got high enough that Jimmy started to borrow less and less. Then came along Jimmy’s wealthier, older brother Timmy who agreed to co-sign all future loans with Jimmy. Knowing how wealthy Timmy was, Bob felt a lot better about his prospects for getting repaid, so he agreed to a lower interest rate. With this new found credit-worthiness Jimmy went on a binge of borrowing that vastly exceeded what he had done up to that point. This cycle of new Timmy-guaranteed loans continued until one day Timmy said “no more.” To help his brother out Timmy convinced Bob (owing to their strong business relationship) to take a “haircut” on the outstanding loans (that is, write down the amount owed) if Jimmy promised to get his financial affairs in order. Jimmy agreed and Bob complied. But after only a few years Jimmy was back to his old borrow and spend ways and Timmy and Bob had had enough. No more loans until Jimmy paid his loans on time. Jimmy was capable of doing this, but only by drastically cutting back his expenditures. Predictably Jimmy balked. He insisted he would not pay back anything unless Bob once again took a “haircut” and gave him more time to repay. The moral of the story? Don’t live beyond your means by borrowing from tomorrow to pay for today’s luxuries. Also, don’t lend money to those that obviously are unable or unwilling to repay it. This advice applies equally to individuals as well as to countries.

For those unfamiliar with the details of the current Greek debt crisis this little tale above illustrates in the abstract how Greece has behaved over the years. All the details are true, only the names have been changed to protect the innocent. Jimmy is Greece (Jimmy the Greek, get it?), Bob represents all those banks that have lent money to the Greek government over the years, first by buying Drachma based bonds and now EU-based Greek debt, and lastly, Timmy represents the EU itself. After the Euro was fully adopted in 2002 in the EU all member nations retired their national currency in favor of the Euro. The economically more productive countries imbued the Euro with a fiscal resilience that the economically weaker countries (such as Greece) have exploited. Like a reckless teenager using daddy’s credit card, under the Euro regime Greece has been able to borrow more and at a better rate than they ever could have under their Drachma.

Some have suggested if only the EU were more like the US Greece would not be in this bind. In the US the wealthy states subsidize the poorer states via federalized tax transfers (Social Security, welfare, infrastructure projects etc) without the poorer states “owing” anything. That, however, is in invalid comparison. Those are federal programs forced upon all the states. Greece is not in financial straights because of EU mandates. Greece is in trouble because of its own internal government spending. A more apt comparison would be the looming pension crisis in US states (e.g. California, Illinois, New Jersey, etc) where the governments of those states made promises to public worker retirees that are impossible to keep. Citizens of Georgia will be no more interested in bailing out Californian public sector pensioners than are citizens of Germany interested in bailing out a similarly profligate Greece. The pattern is universal in democracy: a gullible public showers with the most votes those politicians who promises them financial security with one hand by robbing their children’s piggy bank with the other.

Although we rubbernecking Americans may feel secure atop the perch of our SUV-sized economy while we idle past the spectacle of Keynesian-influenced deficit spending and Socialism that is Greece, our time is coming. When debt is measured in relation to a country’s tax revenue (that is, the ability to repay it) the US comes in third  – right behind Japan… and Greece. Be afraid. Be very afraid.