Why do economists frown on socialism?

Economists generally have some bad things to say about socialism. Set aside, for the moment, the Soviet atrocities and focus on Sweden in the 1970ies, which described itself as a socialist state, without a gulag or pogroms. Bernie is prone to point to Sweden as the great example of democratic socialism in action. And it is true that many of the policies of socialism were carried out with little opposition from the Swedes. Before this, Sweden had already created a welfare state that provided many resources to help the poor. In the 1970ies, many industries were nationalized and run by the government, including radio, television and the telephone. Average tax rates were over 50 percent and the degree of progressivity ensured that most peoples' after-tax income were in a relatively small range. And all of this was approved of by the mostly homogeneous population. But economic results were poor and Sweden kept slipping as other European countries became more prosperous. After a serious economic crisis in the early 1990ies, the consensus broke down and most of the socialist policies were reversed, with the exception of the laws favoring labor unions which are still largely in force. In other respects, industry is significantly less closely regulated than their counterparts in the US.

Governments distort economic incentives

So why were economic results in Sweden sufficiently disappointing to persuade Swedes to back down on socialism? Economists predict that government control over prices distorts the incentives that determine resource allocation. For example, suppose that Sweden decides that brain surgeons should be paid the same as auto mechanics. But brain surgery is difficult and requires years of training. Make a mistake while operating and you can turn the patient into a vegetable. Make a mistake in diagnosing why a car won't start can be frustrating and the car owner may be annoyed with your failure, but the results are rarely fatal. As a result, few people will want to become brain surgeons. Furthermore, if you used to be a highly-paid Swedish brain surgeon before the government set the price, an alternative to learning auto mechanics is to leave Sweden and continue to practice surgery at your accustomed rates in another country. Either way, Swedish cars will run very well, but Swedes may have to go abroad to get their brains operated on.

Government monopolies are inefficient

Problems with incentives also tend to make government-run industries less productive and less innovative than ones in the private sector. The key here is that the government is the ultimate monopolist. Politicians often complain that certain private companies are monopolies - Standard Oil in the 1920ies, IBM in the 1970ies, Microsoft in the 1990ies, Google today. But none of these can compare with a true monopoly that is run by the govenment and enforced by threats of incarceration. Take for example the US Postal Service. In 1844, Lysander Spooner founded the American Letter Mail Company, which had offices in various cities, including Baltimore, Philadelphia and New York City. Stamps could be purchased and then attached to letters, which could be sent to any of its offices. From here, agents were dispatched who traveled on railroads and steamboats and carried the letters in hand bags. Letters were transferred to messengers in the cities along the routes which then delivered the letters to the addressees.

However, this was a challenge to the Post Office's legal monopoly. Although Spooner found commercial success with his mail company, his real problem turned out to be defending himself against legal challenges by the government. A law enacted in 1851 that strengthened the federal government's monopoly finally put him out of business. The lasting legacy of Spooner's challenge to the postal service was that the price of a stamp went from 5¢ to 3¢ in response to the competition his company provided. It is now the twenty-first century and the Postal Service still enforces its monopoly on delivering letters.

As far as innovation goes, the Soviet Union had quite a distinguished record of innovations in scientific fields - particularly those with possible military applications. And did you know that the Soviets invented the can opener? First, you had to wait in line for a couple of hours. Then you handed over a month's earnings and in exchange you were given a rock, which you could use to bash your can with until it opened.

Government monopolies give bad service

No sooner did I arrive in the US as an immigrant than I got a harsh lesson on what it means to deal with a government monopoly - in this case, the Immigration and Naturalization Service. To talk to someone about a requested change in status meant going to downtown to the INS building and entering a huge room, full of people like myself, taking a number and waiting usually for several hours before my number came up. I cannot imagine any private sector company treating its clients like this. This reminded me of the great line in Eddie Cochrane's song Summertime Blues:

Or, in my case, immigrants don't vote or have any say in the immigration process but they need to deal with it and the INS is the only game in town. The government has a monopoly so I couldn't take my business elsewhere, and without the threat of getting a call from my congressman, the INS had no incentive to treat me with any dignity or respect.

Government monopolies encourage corruption

Another problem with government monopolies is that they provide excellent opportunities for corruption. Suppose that the government must provide a license before you can build anything on your lot. You go down to the licensing office, but the official in charge says that there is a six-month backlog for issuing licenses. You say that you must start building right away - is there anything you can do to expedite matters? And, sure enough, there is something, but it's going to cost you.

Governments take productive resources from the private sector

In the 1920s, Franz Oppenheimer's book The State was widely read and heatedly discussed. One of the most interesting sections is where Oppenheimer discusses the two means by which a man can feed himself - work or robbery. Enriching himself through work, such as the creation of articles for sale in the private sector, Oppenheimer calls "the economic means". On the other hand, the unrequited appropriation of the labor of others he calls the "political means." In other words, rather than working, the man can seek special treatment of some kind with the state, which will allow him to use the coercive power of the state to enrich him. This special treatment might consist of him obtaining exclusive rights to create or to sell some economic good, or it could simply mean that he joins the bureaucracy and his income comes from taxes paid by others. His decision on whether to follow the economic or political means will largely be determined by which path is easier. The larger the state and the more intrusive it is in the economy, the easier it is for people to follow the political means, suggesting that a state, as it becomes socialized, develops a momentum that accelerates its motion towards totalitarian socialism. Suppose you grow up in China and want to make your fortune - what is the first thing you do? Become a farmer? Get trained as an engineer? Become a teacher? No, the first thing you do is to join the party because once you do that, whatever you want to do next will come much easier.

Governments penalize diversity

Another example of that kind of process is the lack of diversity that emerges from government monopolies. In the field of primary and secondary education, children are required to attend either public schools or certified private schools (historically, mostly religious schools.) States often require that teachers use specific textbooks in their classes. But in a secular world, this sets up tensions between public and religious education. In 1925, there was the famous Scopes Monkey Trial in Tennessee, which pitted the Modernists, who said evolution was not inconsistent with religion, against Fundamentalists, who said the Word of God as revealed in the Bible took priority over all human knowledge. The case was thus seen both as a theological contest and as a trial on whether modern science should be taught in schools. The defendent, John Scopes, was accused of illegally teaching evolution to his high school students. He was convicted and fined $100, although the conviction was later overturned on a technicality.

Similar controversies have continued to emerge. In 1999, Kansas declared that teachers should give classroom time to Creationism, a religion-based explanation for the creation of the earth and of mankind, in addition to or as an alternative to the more conventional scientific explanations. This attracted nation-wide attention and the debate raged on for several years until the decision was reversed in 2005.

But why must we have these divisive debates? Of course, we'd like our kids to be taught the Truth, and nothing but the Truth, but we are many and one man's obvious truth is another man's dastardly lie. Why should President Obama get involved in the bathroom debate in North Carolina, instructing schools to provide access to restrooms and locker rooms according to the gender the kids personally identify with? The obvious problem is that the government, be it Federal, State or even school district, requires a one-size-fits-all policy. If I want to send my kid to a school that teaches Creationism, shouldn't I have that opportunity? Why aren't schools like grocery stores, free to spring up wherever there is a demand for one catering to a particular set of needs? The only comeback to that is that the State knows better than I do how to educate my child - a chilling message that sounds like an attempt to turn everybody's children into pod people from Invasion of the Body Snatchers.

Incidentally, Sweden provides vouchers for students to use at any school, public or private. This provides some significant benefits by forcing public schools to compete if they want to continue to exist. However, all schools still have to follow the curriculum set by the state, so there is no diversity in what is taught.

So, in summary, there are numerous ways in which socialism causes harm to the economy. Pricing signals are distorted so that the wrong career choices are made and production targets are messed up. Government monopolies are inefficient. They do not encourage innovation and will likely overcharge the public for their products. They will also lead to corruption as the individuals dealing with the public are able to extract monopoly profits under the table from those they deal with. A large public sector also allows people to look to the political means as a way to make money, rather than create things of value that can be sold in the private market. And large governments inevitably try to impose uniformity of various kinds on the population, which causes discontent and prevents a more diverse culture from developing.

Socialism and the gulag

Sweden never went as far as the Soviet socialist model, where the State extended its reach to almost all economic activity and where decisions affecting millions of people could be made with little or no reference to constitutional principles. If Stalin decided to relocate hundreds of thousands of Chechnyans to Siberia, they were relocated, case closed. Political dissenters were (and still are) dealt with through show trials and incarceration or even assassination. Aleksandr Solzhenitsyn's book The Gulag Archipelago provides a horrifying picture of conditions in forced labor camps, based in part on his own experience as a prisoner. It is not surprising that modern socialists are anxious to disassociate themselves from the Soviet model. But what assurance do we really have that American socialism would not degenerate to this level?

In my humble opinion, it was the homogeneity of Sweden's population that saved them from this fate. Madison's warning about the dangers of different factions fighting about who gets what is only a danger to the extent that there are factions willing to fight. Most Swedes however saw socialism as something they were all in together, so the need to fight over it may not have been there.

Stalin, on the other hand, presided over many different peoples, with many different languages and interests. It is quite likely that the USSR could not have existed without totalitarian control. Post-Soviet Russia may have an easier time of it, but under Putin's tender management, Russia seems to be light years away from a constitutional democracy.

American socialism

Which model would American socialism likely follow? Perhaps the most likely model would be America in the 1930ies, a time when there was widespread unemployment that conventional policies seemed unable to remedy and when many American intellectuals strongly approved of Stalin's management of the USSR. At the same time, the American Constitution was still held in high regard and it was unthinkable that any major changes would be made to it. Indeed, when Roosevelt tried to increase the size of the Supreme Court in order to appoint new justices who would be more favorable to his policies, his own party refused to go along. The tax system was made more progressive, with the top marginal rate raised to 79%. Federal government expenditures started out the decade at 3.5% of GDP; by the end of the decade, they had almost tripled, to 10.4% of GDP. This is a huge yearly change, although, by postwar standards, these expenditure levels seem laughably low compared with expenditures of over 20% of GDP in 2019. (If we add in state and local government spending, the total is now more than one third of GDP.)

On the other hand, the country seems more fractured now than it was in the 1930ies. When RBG died and Trump filled the empty seat on the Supreme Court, many Democrats said publicly that after gaining power, the first thing they would do would be to pack the court, as Roosevelt tried to do. I guess we'll see what happens, but I am horrified that they are willing to state publicly that they plan to abolish the Supreme Court as an independent power. The Constitution is also not as respected as it used to be, seeing as it is just a piece of paper with scribblings on it made by a bunch of dead white slave-holding men. Perhaps it can be tossed aside as easily as those statues. And equality of outcomes (as opposed to equality of opportunity) seems to be the professed goal of many people who don't even think of themslves as socialists.

So I don't have much faith in my own predictions. But this I do know: power corrupts. And the more power we place in the hands of the state, the more it will be abused and used against us. Let us remember the words of George Orwell: all animals are equal, but pigs are more equal than others. Perhaps there were no pigs in Sweden, but there were plenty of them in the Soviet Union and I fear that there may be plenty of them in America too.

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