The University of Chicago’s GenForward Project recently polled Americans aged 18 to 34 and found that 49 percent hold a favorable opinion of capitalism and 45 percent favorably view socialism. Among Democrats, 61 percent have a positive opinion of socialism compared to 25 percent of Republicans. For the first time in generations, socialism is likely to be an issue in the next Presidential election.
I suspect that the 90-plus percent who had an opinion would have difficulty agreeing on a definition of what they embrace or oppose. I am especially puzzled by the quarter of young Republicans who believe that a socialist economy is a good idea. Socialism promises to become one of the most ill-informed national policy debates of our lifetimes.
Defining socialism is not easy. No wanting to struggle coming up with a broadly accepted version, I will rely on society’s great arbiter, Wikipedia. The on-line encyclopedia provides the quotes used below. My contribution is confining our working description to the concept’s practical extremes, which I have unimaginatively named hard and soft socialism.
Hard socialism features direct government control of the pricing and allocation of the economy’s resources and “is usually associated with the communist states of the 20th century, where it was combined with a single-party political system. In a centrally planned economy, decisions regarding the quantity of goods and services to be produced are planned in advance by a planning agency. The economic systems of the Soviet Union and the Eastern Bloc are further classified as ‘command economies’, which are defined as systems where economic coordination is undertaken by commands, directives and production targets.” Central planners typically follow Enrico Barone’s mathematical recipe for planned socialist economies.
Central planners are additionally tasked to decide where and how much the economy should invest, responding to government directives about which sectors are to be winners and which losers. The Soviet directives in the postwar period, for example, emphasized nuclear energy and rockets at the expense of the fledgling computer industry – a consequential mistake.
Soft socialism is a much more common global phenomenon. It accepts market dominance in pricing and allocating scarce resources as well as in providing investment incentives. Market outcomes are collectively modified by taxes, public spending, and regulation. The last tends to be focused on public safety, working conditions, conditions of monopoly, the environment, and asymmetric information that damages market efficiency and consumer welfare.
Hard Socialism in Practice
This section highlights is personal, focusing on facts that mattered to me as an economics student trying to justify my youthful enthusiasm for socialism. In my teens, I was drawn to the strong form: public control of the pricing and allocation of resources as well as the size and content of investment. My instincts then are not unfamiliar to anyone teaching economics to young people. A benevolent government, empowered by democratic elections, can surely be more trusted to produce equitable outcomes than the impersonal marketplace. (The GEM Project provides a useful tutorial on why human beings, especially young ones, highly value fairness; see, for example, the May 11, 2018 post.) But the more I learned about how economies actually worked, the more idealism collided with facts. It is really important not to ignore facts.
The damning first fact was pointed out by more than one tolerant professor. The strong form of socialism has been tried many times; it has record. Examples include Russia, Eastern Europe, China, Cuba, and Venezuela. The relevant fact is that hard socialism has not worked as promised and is eventually abandoned. In the original example, the Soviet Union’s standard of living stagnated under strict central planning while its western European neighbors’ market-organized economies experienced enviably rising living standards. A closely related fact that must not to be ignored is that Russia and the Eastern Bloc erected strict border controls to keep their people from fleeing to the more prosperous West.
Careful study has yielded a range of reasons why hard socialism does not work in practice. I find two most compelling. First is the huge amount of practical information (on consumer preferences, the nature of production, economic opportunity, factor scarcity, productive efficiency, technological change, and on and on) that is spontaneously generated in market economies, frequently embodied in prices, and used to guide decentralized decision-making. By contrast, central planners make decisions based on relatively tiny amounts of information, producing debilitating misdirection and inefficiency. For elaboration on what has come to be known as the “economic calculation problem”, take a look at Ludwig von Mises’ “Economic Calculation in the Socialist Commonwealth” (1920). That article describes how individual subjective values are transformed in the price system into the objective information needed for the rational allocation of resources. In hard socialism, workable outcomes of the ill-informed central planning process require vital support from the huge, often corrupt, black markets that ubiquitously operate among firms.
Second, innovation and technological change, which is a central driver of rising living standards, usually occur market-organized economies; the record of centrally planned economies with respect to innovation and application is relatively dismal. Any voter, but especially those who love their I-phones, would benefit from reading Bill Baumol’s The Free-Market Innovation Machine. An informed electorate cannot ignore the disparate information and innovation outcomes between centralized and decentralized economies.
In wrapping up this too-brief assessment of strong-form socialism, readers have probably noted that I have simply ignored history’s close association between hard socialism and totalitarianism. My justification is that, if the first implies the second, then hard socialism must be rejected. The case would be closed, and I want to avoid a summary judgment.
Soft Socialism in Practice
Soft socialism is relatively uncomplex. Before its description, it will prove useful to take a quick look at the most common grievances that fans of socialism expect it to solve. Leading off, a lot of people are understandably upset about the dramatic worsening of U.S. income inequality. Unhappiness appears most focused on eye-popping upper-end corporate salaries. The hugely escalated earnings of professional athletes and entertainers seem to arouse much less anger.
Young people are also properly dismayed about environmental neglect, a national-debate issue that surpasses socialism in its ill-informed participation. The third and fourth examples are the problematic distribution of health care (the solution for which is thought by many to be “Medicare for all” – the new euphemism for universal public-funded health insurance) and the need to contain the spiraling costs of education as well as effectively deal with untenably large student debt. Consider each in turn.
Whatever the ethics of heavily skewed corporate-leadership pay, there are ways to alter it that are more effective and efficient than reorganizing the economy with strong-form socialism. The tax system can go a long way to providing whatever feasible balance the political process comes up with. It is also important to note here that in practice centrally planned economies have produced brutally skewed income distribution that always favors the political/military elite.
You can additionally tax environment-damaging corporate behavior sufficiently to change that behavior; subsidies can be used to the same end. We have experience doing both and know they work. Fiscal policy can also influence individual behavior if we exert the political will. Young citizens could usefully do some self-inspection by asking themselves why they are not doing all they can to pressure U.S. politicians to aggressively tax gasoline, which we know is one of the most effective anti-fossil-fuel measures that is effectively used in Europe. Pro-socialist environmentalists may also want to think hard about why Russia, Eastern Europe, Cuba, etc. became such environmental and aesthetic disasters.
“Medicare for all” and having the federal government forgive student debt and finance free tuition are arguments that must neither be dismissed nor adopted without close scrutiny. Both raise the particular caution that, if adopted, the new spending must be paid for. That means higher taxes or reduced government spending on other programs. Paying for new programs with borrowed funds is massively counter to young Americans’ interests. Readers of the GEM Blog understand that the federal deficit is already running at a frightening trillion-plus dollars a year, unprecedentedly massive red ink in a full-employment economy. We know how maintaining that self-destructive fiscal policy will play out. Future living standards will be broadly damaged by a combination of credit crises and high inflation that, among other unhappy outcomes, will be crowding out popular safety-net programs like Medicare and Social Security. Not that long ago, Greeks discovered the out-sized personal damage caused by unsustainable government borrowing.
My fundamental message on socialism is: We know how to effectively correct the market failure represented by the four grievances cited above, as well as others, without hard-socialism supplanting the market system. Taxation, public spending, and well-designed regulation are sufficiently powerful tools. We can avoid throwing the baby out with the bathwater. Adequate analysis of socialism boils down to babies and bathwater. Moreover, if soft socialism is indeed the use of fiscal and regulatory policies to correct broadly perceived market failure, we should recognize that the United States economy is already organized by that ideology. It follows that current debate is most effectively conducted in two parts. First, how to formulate economic goals that are both broadly understood and desired. Slogans, especially those designed to mislead, will not do. Second, how best to design market interventions (taxing, spending, and regulation) to achieve those objectives. To be legitimate, such choices must be ratified by a well-informed democratic political process.
Blog Type: Policy/Topical Saint Joseph, Michigan