Thoughts and Impressions

Category: Socialism

Capitalism and Socialism are Opposites, Not “Two Complementary, Good Ideas”

The following was originally written for Americans for Tax Reform, where I am an intern:

Perhaps the most frustratingly incoherent part of Obama speech Wednesday was his repeated portrayal of the market and government planning as just two possible, non-exhaustive, mutually-reinforcing “solutions” to the current health care “crisis”.

There are those on the left who believe that the only way to fix the system is through a single-payer system like Canada’s — (applause) — where we would severely restrict the private insurance market and have the government provide coverage for everybody.  On the right, there are those who argue that we should end employer-based systems and leave individuals to buy health insurance on their own…. I have to say that there are arguments to be made for both these approaches.

Obama likes to present his plan as a sort of third way between government-run health care and the market, incorporating, as he said, “the best ideas of both parties together”. This is essentially nonsense. Our health care system cannot be made “more free market” and “more government-regulated” simultaneously.

The free market and government planning are exhaustive opposites. Every health care choice is either made freely by consumers selecting their most favored option, or it is chosen for them by government mandates. Under a market system, for example, consumers can either choose to buy health insurance through their employer or on the individual market. In a planned economy, by contrast, the government may order them to buy through their employer.

President Obama leaves little doubt as to which direction he will take our health care system:

Now, even if we provide these affordable options, there may be those — especially the young and the healthy — who still want to take the risk and go without coverage.  There may still be companies that refuse to do right by their workers by giving them coverage.

And that’s why under my plan, individuals will be required to carry basic health insurance — just as most states require you to carry auto insurance.  (Applause.)  Likewise — likewise, businesses will be required to either offer their workers health care, or chip in to help cover the cost of their workers.

But we can’t have large businesses and individuals who can afford coverage game the system by avoiding responsibility to themselves or their employees.  Improving our health care system only works if everybody does their part.

Obama’s plan, at its heart, requires that consumers be deprived of their free choice, so that the government can micromanage insurance premiums based on arbitrary notions of “just cost distributions”. This is, at its heart, socialism.

No Health Care on Saturday?

This piece was originally posted on Americans for Tax Reform’s blog, where I am an Associate (intern).

“If you think about it, UPS and FedEx are doing just fine, right? No, they are. It’s the Post Office that’s always having problems.”

– President Obama, 8/11/09

Obama is right – the post office isn’t doing so well.  Recently, Postmaster General John Potter requested that Congress end Saturday mail delivery in order to cut costs. As a rule, government sponsored enterprises (GSEs) fail to operate efficiently. GSEs exist to fill political, rather than market, demands, and they may not offer a product at a price that anyone is really willing to pay. Because politicians will ensure that organizations like the post office continue to function, its directors have limited incentives to cut unnecessary costs or operate at a profit.

So what will happen when the public option realizes, like the post office, that it cannot, metaphorically speaking, pay for health care “every day of the week”? It could imitate the post office and simply shut down on Sunday and perhaps Saturday as well. No consumers would sign up for insurance that only offered a 6/7 chance of providing coverage.

But a plan so bad that no one would purchase it fails to satisfy the arbitrary political demand for substantial government interference in the market. A government determined to have a “viable” public alternative to the private market is left with a few options once their offering fails on its own merits. They can subsidize it openly and have taxpayers pay for “weekend health care”. They can subsidize it implicitly by outsourcing administrative functions to other branches of the government (as the government outsources Medicare funds collection to the IRS). Or it can tilt the market in the public option’s favor by granting it special tax status and immunity from certain types of regulations and by passing laws that require the private market to adopt the public offering’s more expensive methodology.

Or it can do all of the above. As Edward Hudgins explains, the post office is a vivid example of government interference in defense of its sponsored firm. Congress has favored the post office with direct subsidies, tax privileges, and bans against “first-class mail” delivery in inter- and intra-city markets. Despite this generous patronage, the US Postal Service is $6 billion in debt.

Government offerings are a threat precisely because they respond to political, rather than market demand. Like the post office, they can only control costs by rationing. And like the post office, they can only ration after their competition has been regulated away. The government can cut health care on Saturday only after it has cut the rest of the private market. The twin arbitrary political demands of a public option ensure that we will be left with one meager, inefficiently delivered option. Why cater to politicians’ demands instead of actual consumer preferences?

Photo Credit: Davonteee

More Historic uses of the Term “Socialism”

Brian Doherty, in his book Radicals for Capitalism quotes Leonard Read, founder of the Foundation for Economic Education, as saying:

So far as I am concerned, I can see no hopes whatever for [MPS] to become a useful force in the fight for freedom… the philosophies range all the way from middle-of-the-roaders to one who is an out-and-out socialist.

This was, I believe, in 1949, after the first Mont Pelerin Society meeting.  The Mont Pelerin Society was intended to be a classically liberal organization.  It vaguely describes its own mission statement accordingly:

Its sole objective was to facilitate an exchange of ideas between like-minded scholars in the hope of strengthening the principles and practice of a free society and to study the workings, virtues, and defects of market-oriented economic systems.

Given the organization’s purpose, it is unlikely that any of the original MPS attendees were “socialist” in the sense that they supported complete government control of the means of production for the purpose of equalization of income.  More likely they merely supported, as Mises complained, government controlled redistribution and Hayekian programs to guarantee a “minimum standard of living”.

If so, this is more anecdotal evidence for what I assert is a more commonly used alternative definition of “socialism” – generally, programs of mandatory redistribution run by the government.

Hayek Defines Socialism

From Hayek’s preface to the 1976 edition of The Road to Serfdom:

During the interval of time [since he had published the book in 1944] terminology has changed and for this reason what I say in the book may be misunderstood.  At the time I wrote, socialism meant unambiguously the nationalization of the means of production and the central economic planning which this made possible and necessary….  Socialism has come to mean chiefly the extensive redistribution of incomes through taxation and the institutions of the welfare state. In the latter kind of socialism the effects I discuss in this book are brought about more slowly, indirectly, and imperfectly.  I believe that the ultimate outcome tends to be very much the same….

Color me skeptical that the definition had simply “changed” in the 22 years – or in a mere 4 years, if Mises was indeed using it in the looser sense as early as 1948.  More likely, as Hayek drifted from more economic subjects (Brian Doherty pegs this at 1941 with the publicaion of The Pure Theory of Capital) to more liberal topics (The Road to Serfdom in 1944 and The Constitution of Liberty in 1960) he found himself engaging with a different group of people who used the term in a different way.

Is Socialism Best Defined Down?

I’ve previously argued that the term “socialist” should not be slavishly confined to its dictionary definition (common ownership of the means of production to achieve more equally distributed wealth).  Conservatives and classical liberals use it casually to describe redistributivist philosophies.  Today, I stumbled on a story about Ludwig von Mises that I think underlines my point.   From a Reason interview of Milton Friedman:

Reason: But you knew Mises personally. Did you see the intolerance that you find in his method also in his personal behavior?

Friedman: No question. The story I remember best happened at the initial Mont Pelerin meeting when he got up and said, “You’re all a bunch of socialists.” We were discussing the distribution of income, and whether you should have progressive income taxes. Some of the people there were expressing the view that there could be a justification for it.

I’ve been reading about Mises in Brian Doherty’s Radicals for Capitalism.  A leading economist of the Austrian school, Mises famously argued in his book Socialism that socialism faced intractable difficulties.  Mises snorts at sloppy labeling in one of the prefaces to Socialism.

My own definition of Socialism, as a policy which aims at constructing a society in which the means of production are socialized, is in agreement with all that scientists have written on the subject. I submit that one must be historically blind not to see that this and nothing else is what has stood for Socialism for the past hundred years, and that it is in this sense that the great socialist movement was and is socialistic. But why quarrel over the wording of it! If anyone likes to call a social ideal which retains private ownership in the means of production socialistic, why, let him! A man may call a cat a dog and the sun the moon if it pleases him. But such a reversal of the usual terminology, which everyone understands, does no good and only creates misunderstandings.

Assuming Friedman’s recollection was accurate, why did Mises (in circa 1948?) commit the error he criticized in 1932?  I think Socialism may partly answer the question itself.   A commonly owned system of production, Mises explained in the book, faces crippling knowledge problems.  All decisions on what to produce must be made by central (governmental) planners.  But planners have no way of knowing the best way to use any given set of inputs.  Because of dispersed knowledge about production, there is no guarantee that it will pick an efficient manufacturing scheme.  And because tastes vary, there is no objectively identifiable target basket of goods to aim for.  Without access to inherently subjective consumer preferences, planners cannot meaningfully choose between apples and oranges, much less between guns and butter.  In order to gain access to this knowledge, we need markets and private property.  Consumers reveal their true preference – in a way no census could capture – by the very actions of buying and selling on the market.

Many view the collapse of the Soviet Union as evidence that Mises was correct.  But, as Brian Doherty explains, this may miss the point:

To Mises, the so-called socialist economies never achieved a true functioning socialism, which was not possible to begin with.  The Soviet Union and other communist countries suffered from a particularly virulent form of interventionist state capitalism larded with hampered merkets.

If pure socialism is truly “impossible”, then to reserve the word for complete instances of its academic sense is to kill it.  Progressives who realize how toxic the term has become would no doubt be comfortable with this.  But conservatives and classical liberals use it in another commonly understood way outside of the university.  As with Mises at the Mont Pelerin meeting, the word describes redistributivist policies that aim at better equalizing income.  Pedantically discarding this more common meaning, which everyone uses, does no good and only confines our rhetorical lexicon.

The Quick Lurch Toward Socialism

Conservatives have been criticized for unfairly imputing socialist sympathies or policies to President Obama, but our new president has now demonstrated that he is more than ready to embrace at least symbolic socialist policies.  President Obama recently signed into law executive pay-limits for financial companies receiving future TARP loans in reaction to “shameful” bonuses received on Wall Street.  The government may soon set wages for those at the top – perhaps for those at the bottom tomorrow?

In case you were wondering what the new, hopeful, changed socialism would look like, well now you know.  It is a political Frankenstein –  just like the old socialism.   The President, shackled to an unpopular and embarrassing stimulus plan, tries to divert attention with banal demagoguery against greedy executives.  Claiming that $18.4 Billion in bonuses represents an “unacceptable” figure (How does he figure this?  What amount of bonuses would be economically efficient?), the administration has decided that it will cap the salaries (Does this even relate to bonuses?) for executives of future companies accepting bridge loans at $500,000.

They have pulled from thin air a meaningless number.  Government has no way of determining what efficient or “appropriate” wages for these critical positions are.  Nor do Treasury officials seem to be making any claim to have done so.  But the administration does know what is good for its own health: running heedlessly ahead of populist furor in order to secure a percentage point or two more in the next opinion poll.  We should fear our government’s willingness to impose aimlessly punitive numbers on the private sector and, moreover, how quickly it has done so.

Fortunately, this socialism is still only symbolic.  It is unclear if the price ceiling rules affect any companies at this point, or if they ever will.  Perhaps we will be lucky, and the measure will defeat itself by simply driving companies out of the bailout queue.  But the line between the public and private seems less of a barrier each day, and President Obama’s stimulus plan will soon give the economy a very real, trillion-dollar shove toward – and perhaps across – that line.

What does Socialism Mean?

Well let’s check at

The first few definitions run something like this (from the Random House definition):

1. a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole.

My sense is that this definition is used often in economic or academic circles, in which socialism is the antonym of capitalism, the privatized or free-market controlled means of production and distribution.  This is the definition that Ilya Somin uses when he talks about socialism on the Volokh Conspiracy.

But this doesn’t seem to be the sense in which some conservatives today use the term.

Here’s another definition from (Webster’s):

A theory or system of social reform which contemplates a complete reconstruction of society, with a more just and equitable distribution of property and labor

The words “just” and “equitable” are certainly contentious, but the definition at least captures the sentiment that socialism isn’t just concerned with who controls industry. Control of industry is a means to the ends of creating an “equitable” distribution of goods, more even than would exist in the free market.

Since socialism as state control of resources, as Ilya Somin notes above, has become a largely discredited method of achieving class equity, the significance of the proper definition has diminished. Outside academia, the word socialism lost its unuseful connotations of state control, but retained its association with class redistribution of wealth.

It seems to me that in modern usage, the word socialism is meant to describe government policies that distribute resources and wealth from richer to poorer people as a matter of distributive justice.  In the United States, the word is used this way by conservatives, especially, who intend a pejorative connotation.  Again from Webster’s:

The general tendency is to regard as socialistic any interference undertaken by society on behalf of the poor

This is fine.  Language is a constantly shifting thing, and words have always adopted their meaning from societal consensus, not their definitions in archaic texts by centuries-dead German revolutionaries.  It is useful to have a word that specifies policies that fight class inequality as an injustice in of itself, or that redistribute income and goods out of convictions about class justice.  No other word usefully fills this spot – redistributionism is too technical, liberalism and progressivism too vague and all-encompassing.

And in any event, the distinction between a government which controls industry directly, and one that effectually controls all wealth in society, to distribute as it wills, is a thin one indeed.

So, let’s call it socialism, because we already do.

Why am I posting this?  Well, I’m going to be calling Obama a socialist.  I just want to be clear that I prefer the term in its commonly-understood definition, even when its academic one is also appropriate.

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