FUNDAMENTAL TRUTH #39: “Socialism is easier said than done.” -Old Pithy

Posted by PITHOCRATES - November 9th, 2010

Capitalism vs. Socialism

Socialism as a political/economic theory is pretty involved.  With an involved history.  And if you’re suffering insomnia one night I recommend reading some of it with a glass of warm milk.  Should put you right to sleep.

Let me simplify it a bit.  To begin with, by ‘socialism’ I mean any form of collectivism (socialism, communism, fascism, statism, social democracy, etc.).  They’re all similar.  Just variations on a theme.  And they all suffer the same defects.  Three of which I summarize here:

  • Public (instead of private) ownership of the means of production, distribution, and exchange
  • Put the common good before individual wants or desires
  • Equality of outcomes

That’s not everything.  But it’s the 3 big reasons why socialism fails.  Basically, socialism is the opposite of capitalism.  In fact, socialism was created to defeat capitalism.  The East-West rivalry during the Cold War was the final showdown between the two systems.  And we know how that turned out.  (In case you don’t, capitalism won).

Public (instead of private) ownership of the means of production, distribution, and exchange

Mikhail Gorbachev asked the great Margaret Thatcher how she fed her people.  Her reply stunned him.  She did nothing.  The Soviet Union was struggling to feed her people with their socialist command economy.  And they couldn’t do it.  They who had great tracts of some of the most fertile farmland in the world.  And yet they still had to import grain from their arch nemesis.  The United States.  To keep famine at bay.  The free markets of capitalism didn’t have to struggle to feed her people, though.  The United States had food to spare.  And even though Great Britain is an island nation that had to import much of her food, there were no famine fears in Great Britain.  The socialist just couldn’t understand how that was possible.

One of the problems with socialism is that it ignores market forces.  And perverts the economic decision making process.  In a free market, market forces maximize the use of scarce resources that have alternative uses.  The market does this through the laws of supply and demand.  And prices.  Things high in demand but low in supply have high prices.  This ensures there is enough of that supply available for those who really need it.  Anyone who pushed a car to the gas pump during the gas shortages in the 1970s understands this.  When the Nixon administration kept prices artificially low, everyone bought and used gas until the supply ran out.  If we had let prices rise to their true market price, those who didn’t absolutely need gas would have cut back on their purchases, leaving gas available to those who really needed it and were willing to pay a high price for it.

When the state takes over the economy, politicians make economic decisions for political reasons.  They ignore the ‘invisible hand’ of the market place.  In the Soviet Union, the state boasted about its industrial output and filled stores with tractor parts no one wanted to buy.  Meanwhile, people stood in line for hours in hopes of buying soap or toilet paper.  And no matter how hard they tried they just couldn’t increase the yield of some of the world’s most fertile farmland.

Put the common good before individual wants or desires

Doing what’s best for the common good sounds noble.  And easy to do.  We all agree our children should be safe.  And should have enough to eat.  And that our schools should serve them breakfast each morning.  And teach them about contraception.  Well, okay, it’s not that easy to do.  Because different people want different things.  And different people think different things are better for the common good.

This is the problem of putting the common good before our individual wants or desires.  Few can agree on what the common good is.  We know our own wants and desires.  But we have no idea what other people want or desire.  Unless we ask them.  But does that even help in determining the common good?  Get a group of your friends and family together.  Make it at least 10 people.  Now get the ten of you to agree on a movie to see.  You know what will happen?  First of all, you’ll waste a lot of time saying, “I don’t care.  What do you want to see?”  Then people will start suggesting movies.  And for every one suggested, someone will vote it down.  This will go on until you finally arrive at a movie that no one wants to see.  But because it’s the movie everyone hates the least, everyone’s willing to settle for it.

Now imagine that little exercise with a thousand people.  The agreeing process will be even more difficult.  In fact, it may be impossible.  It is very unlikely that one thousand people will agree to anything.  And if they try they will waste an enormous amount of time in the process.  No.  Someone will have to decide for the group.  Someone will have to weigh everyone’s opinion and decide what is best for the common good. No matter how many people disagree with this one person’s decision.  F.A. Hayek wrote a book about this.  The Road to Serfdom.  He said socialism ends in dictatorship.  Because there’s no efficient means to determine what’s best for the common good.  He predicted this would happen in Germany with their creeping state socialism.  And Adolf Hitler proved him right.

Equality of Outcomes

If a business has a good year, they tend to be more generous at the holidays.  Let’s say a business owner wants to give out some Christmas bonuses to thank her employees for all their hard work.  She goes to her accountant.  Asks what’s the maximum she can give out without giving herself any cash-flow problems at the beginning of the new year (taxes, insurance, etc.).  The accountant crunches some numbers and says $50,000.  If she has 15 employees, that’s about $3,300 each.  Which should make for a pretty Merry Christmas.  Now, let’s say she has 125 employees.  That works out to a $400 bonus per employee.   Which won’t be quite as merry.

The lesson learned?  The more people included in the getting of something, the less each one gets.  And so it is with socialism.  The only way to get equality in outcomes is to give everyone less.  Sure, we can afford to give Congress people a Cadillac health insurance plan.  But we could never afford to give the same coverage to everyone.  To be able to give coverage to all the people, each person will have to get less.

And they will continue to get less.  As costs go up, it is difficult to maintain the same level of government benefits.  Eventually, they’ll have to raise taxes to cover the higher costs.  And when they can’t raise taxes anymore, they’ll have to reduce the amount of benefits.  Or, in other words, they’ll have to ration benefits.  A bureaucrat will have to decide who should get what.  Which could easily turn health care into politics.  A political opponent needs an expensive cancer treatment?  So sorry.  We’ve already reached our quota this year.  Try again next year.

Socialism is Slavery

What it comes down to is this; socialism really fails for one reason.  It goes against human nature.  It only works when we sacrifice our wants and desires so that others may have their wants and desires.  It’s not trying to keep up with the Jones.  It’s helping the Jones get ahead of you.  It’s living your life to serve others.  And there’s another word for that.  Slavery.  Hence the title of Hayek’s book.  The Road to Serfdom.  For socialism to work, the state must become a dictatorship.  And we must become its slaves.  But few willingly volunteer for servitude.  So, given the choice, we will ultimately choose to make socialism fail.

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LESSONS LEARNED #13: “If you were to live under the socialist maxim ‘from each according to his ability to each according to his need’ you would find yourself surrounded by needy people with no ability.” -Old Pithy

Posted by PITHOCRATES - May 13th, 2010

KEY TO CIVILIZATION growth is the food supply.  Food surpluses in particular.  Before dependable food surpluses, life was short, harsh and miserable.  Especially for women.  When they weren’t working in the fields they were giving birth and raising children.  High infant mortality rates, though, inhibited population growth.  Most of the children women gave birth to didn’t survive to adulthood.  So there was a constant state of child rearing.  But few children survived to help with the business of family life.

Malnutrition and famine were common.  Feudalism provided a precarious balance between life and death.  For centuries the common people (i.e., peasants) eked out survival on their landlord’s manor.  The lord owned the land.  The peasants worked it.  Most of the bounty went to their lord.  But they kept what they grew on a small strip of land for themselves.  Just enough for subsistence.

But England changed all that.  By 1750, her agricultural output was second to none.  Private property.  Free market economy.  Capitalism.  Increased productivity.  Specialization.  These all combined to provide incentive.  Incentive produced food surpluses.  Food surpluses produced profits.  Reinvested profits improved farm yields.  This produced more profit.  And the cycle continued.  In less than a century feudalism would disappear from England.  There, you either worked land you owned or were paid wages to work land owned by others.  People began to live longer and healthier lives. 

The British Empire ruled the civilized world in the 19th century.  Representative government.  Abolition of slavery.  Free trade.  The Industrial Revolution.  These things, and others, gave them wealth, power and moral authority.  A lot of good came from this island kingdom.  Including the United States.  They weren’t perfect.  There was a learning curve.  But the modern capitalistic economy which they gave us liberated the masses.  It let us do what we wanted to do, not just what we had to do.  In particular, women, who could do more than just raise families and work in the fields.  One day, she could even become prime minister of Great Britain.

FOOD SURPLUSES BEGET industrialization.  Food surpluses beget everything, really.  Food surpluses release human capital to do everything else we do besides farming.  England was at the van of this modernization.  Others followed.  In time. 

Russia abolished serfdom (i.e., feudalism) in 1861.  Industrially backwards at the time, this liberty awakened a dormant human capital.  They followed the English model.  In time, with the advent of steamship and rail transportation, Russian grain competed with other European producers.

Joseph Stalin, looking to jump ahead in the industrialization process, implemented collective farming in the late 1920s.  He turned away from the English model.  The government became land owners.  It was feudalism on a grand scale.  Large collective farms would produce vast food surpluses that could feed industrial cities.  And there would still be surpluses left over to export to raise capital to build these industrial cities.  At least, that was the plan.

With less incentive came less productivity.  What land the former serfs had come to own was lost to the state.  The state took so much of the harvest that there was little food left for those who labored to grow it.  And the price the state paid for their crops was less than it was before collectivization.  The ‘free’ serfs were earning less and working more.  They didn’t like it.  And chose not to participate.  Collectivization became forced collectivization. 

Deportations, terror, murder and famine followed.  Perhaps more than 5 million starved to death during the famine of 1931 and 1932.  Others were to follow.

Forced collective farming produced famines elsewhere.  In China, during Mao Zedong’s Great Leap Forward, forced collectivization produced even greater famine deaths.  Historians estimate that 20-30 million, maybe more, starved to death in the famine of 1959–62.  Though hard numbers aren’t available, North Korea suffered a devastating famine in the late 1990s that claimed millions.  But in the West, in the 20th century, famine was unheard of.  When the United States suffered during the great Dust Bowl of the 1930s, there was no corresponding famine despite the loss of productive farmland.

WITH INDIVIDUAL LIBERTY comes incentive.  With incentive comes productivity.  A small island nation of free land owners could produce grain to feed themselves with surplus left over for export.  Nations with great fertile tracts farmed by forced collectivization led to famine.  Slaves have little incentive other than to subsist.  The collective good means little to them when they are starving.  They continue to sacrifice.  And continue to suffer.  Even if they do produce a few more bushels of grain.  So if the suffering is the same, what is the incentive to work harder?

As individual liberty declines, those in power tend to exploit those they rule.  In the name of the state.  Or the common good.  This is easy to see when it results in famine or revolution.  Not easy to hide those things.  But it is a little more difficult to see when the results are more benign.  Longer unemployment benefits, for example.  I mean, those are pretty nice.  Hard to see the downside in them.  As it is in other benefits these rulers give us.  So we are seduced as they whisper these sweet nothings in our ears.  And soon we willingly cede our liberty.  A little at a time.

WITH THE RISE of individual liberty, there was a corresponding decline in the ruling elite thanks to representative government.  Great Britain gave this gift to us and the United States took it to incredible heights.  The oppressed everywhere immigrated to the United States to feed a growing industrial demand.  Being new, we did not know all the affects of industrialization.  When the bad things came to light, we addressed them.  Great Britain, for example, was one of the first to protect women and children from the worse of industrial society.  Still, working conditions could be harsh.  As could life in the industrial cities.  Poverty.  Filth.  Disease.  And it was the wretched state of life in these slums that gave birth to a new school of thought on industrialization. 

In 1844 Friedrich Engels wrote The Condition of the English Working-Class to expose life in these slums.  He would collaborate 4 years later with Karl Marx on a treatise called The Communist Manifesto.  And from this Marxism, Communism, socialism, collectivism, etc., would follow.  As economic systems go, these would all prove to be failures.  But the essence of them lives on.  State planning.

You see, it was capitalism that gave us the industrial slums.  And that was good propaganda for a ruling elite looking to rule again.  So they whispered sweet nothings into our ears.  They talked about a Social Utopia.  From each according to his ability to each according to his need.  Fair taxation (i.e., only the ‘rich’ pay taxes).  Social safety nets (paid for by taxes of the rich).  Shorter workdays.  Longer paid vacations.  More government benefits.  A burgeoning welfare state.  Free stuff for everyone.  Again, paid for by taxing the rich who have exploited the working class.

What evolved was the elimination of the middle class.  You had the evil rich (and the middle class were, for all intents and purposes, rich because they didn’t need government help) whose wealth the government taxed away.  And the poor.  The poor who the government would now take care of.  If elected.  And they were.  They seduced a great many people with their utopian vision.  Even in the West. 

Great Britain and the United States would fall to this seductress, too, thanks to the Great Depression.  It was capitalism that gave us the Great Depression, after all.  The greed of the money people.  And so these great nations declined from greatness.  They became welfare states, too.  They had short respites during the 1980s.  Margaret Thatcher helped rejuvenate Great Britain.  Ronald Reagan, the United States.  But the ruling elite whispered more sweet nothings in our ears and the decline continues.

In 2010, our appetite for state benefits appears to be insatiable.  And we may have run out of wealth to tax away to pay for it.  California is on the brink of bankruptcy.  New Jersey elected a governor who proposed draconian spending cuts to stave off bankruptcy.  Other ‘blue’ states (i.e., states who vote Democrat) are also in trouble.  Underfunded pension obligations.  Demands of teacher unions.  Of government worker unions.  Everyone is there with their hand out.  None of them are willing to sacrifice for the common good.  No, they expect others to do the sacrificing.

THE OBAMA ADMINISTRATION has increased federal spending to such record levels that Communist China is concerned about our fiscal/monetary policies.  As they should be; they hold a lot of our debt.  The federal government has ‘bailed out’ private industry and taken de facto control.  They have created a healthcare entitlement that will cost more than a trillion dollars.  More spending is coming.  And it is all for the greater good.  They are vilifying those who are not poor, taxing away what wealth they can from them and giving it to the poor.  When about half the electorate doesn’t pay any income taxes, there is little opposition to raising taxes on those who do.  For if the ‘rich’ complain, the government vilifies them.

Where will it all end?  It is difficult to say.  How will it end?  Badly.  We can look at Europe who we seem to be emulating.  They’re further down The Road to Serfdom than we are.  With the excessive government spending, there will have to be greater government revenue (i.e., taxes).  Previous methods of taxation may prove insufficient.  Hello value added tax (VAT).  It’s all the rage in Europe.  It’s a multiple tax.  At every stage of production, government is there.  Taxing.  From the raw materials to the final assembly, government is there at every stage.  Taxing.  VATs will increase government revenue.  But they will also make every day life more expensive.  VATs increase the sales price of everything you buy.  And you pay it again at checkout.  It’s everywhere.  Everything will cost more.  From manicures to lattes to toilet paper to tampons.  And this is a tax everyone pays.  Even the poor.  It is a regressive tax.  The rich will pay more, but the poor will feel it more.  This hidden tax will take a larger portion of what little the poor has.

But how bad can it really get?  In 2010, I guess the answer would be to look at Greece to see what happens when a country can no longer sustain her welfare state.  And the people aren’t all that keen on losing the government benefits they’ve grown accustomed to.  It isn’t pretty.  But when you start down that road (from each according to his ability to each according to his need), the taking and giving always get bigger.  It never gets smaller.  And when you reach a critical point, government just can’t sustain it any longer.  And it crashes.  Like in Greece.

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