Varieties of Socialism:Threats to Liberty & Social

Cooperation

∗ 1. State ownership of the means of production and replacement of market allocative mechanisms based on voluntary exchange and prices with allocation of resources by means of a general plan created and imposed by the state

∗ 2. Social Democracy aimed at securing equality and solidarity (Welfare States)

∗ 3. “Left-Wing” Socialism and “Right-Wing” Socialism∗ 4. Social Conflict and Statism or Social Cooperation and Liberty?

Varieties of Socialism

∗ Following the Disaster of the First World War, Communists Took Power in Russia and Attempted to Take Power in Bavaria, Hungary, and Elsewhere

1. Socialism as State Ownership of the Means of Production and Central

Planning

∗ Socialists promised “a turn from an abyss of suffering, anguish, starvation and degradation to the bright future of communist society, universal prosperity and enduring peace”

∗ V. Lenin, “The Chief Task of Our Day,” March 11, 1918∗ The Viennese economist Ludwig von Mises issued a major

challenge: How would communism solve the problem of “economic calculation”?∗ “Valuation can only take place in terms of units, yet it is

impossible that there should ever be a unit of subjective use-value for goods. … Judgments of value do not measure; they merely establish grades and scales.”∗ Ludwig von Mises, “Economic Calculation in the Socialist

Commonwealth” (1920)

1. Socialism as State Ownership of the Means of Production and Central

Planning

∗ Mises’s critique is sometimes mis-characterized as one of not having enough computers

∗ Or as one of “getting the prices right”∗ That could be done either through “market socialism”

(Oskar Lange) through which managers of state firms would be instructed to act “as if” they were maximizing profits, or

∗ Through implementation of linear programming models (following the brilliant insights of Leonid Kantorovich and others) and the assessment of optimal prices, i.e., indices that are equal to marginal costs

1. Socialism as State Ownership of the Means of Production and Central

Planning

Mises expanded his critique in “Socialism” in 1922

• “The problem of economic calculation is a problem which arises in an economy which is perpetually subject to change, an economy which every day is confronted with new problems which have to be solved.”

∗ “For a time the remembrance of the experiences gained in a competitive economy, which has obtained for some thousands of years, may provide a check to the complete collapse of the art of economy. … Yet in place of the economy of the ‘anarchic’ method of production, recourse will be had to the senseless output of an absurd apparatus. The wheels will turn, but will run to no effect.”

An inherited order of production can be continued, but becomes

increasingly senseless

Even pro-market economists who understood change failed to see the

problem∗ “For the theorist this [maximum of

consumers’ satisfaction subject to the limits imposed by the available resources] follows from the elementary proposition that consumers in evaluating (‘demanding’) consumers’ goods ipso facto also evaluate the means of production, which enter into the production of those goods.”∗ Joseph Schumpeter, Capitalism,

Socialism, and Democracy (1942)

F. A. Hayek responded in his 1945 essay “The Use of Knowledge in Society”: Schumpeter had confused

“implication” with “imputation”∗ Starting Point, derived from Carl

Menger: ∗ In a market economy, the value

of inputs are imputed from the value of outputs, i.e., the values of producer goods depend on, i.e., are imputed from the values of consumer goods; we value iron ore because of the value we place on the services yielded by the things we can make from it, not because of the labor that went into it. (In fact, it is not cost that determines price, but price that determines cost.)

Hayek Corrected Schumpeter….

∗ “Taken literally, this statement [of Schumpeter’s] is simply untrue. The consumers do nothing of the kind. What Professor Schumpeter’s ‘ipso facto’ presumably means is that the valuation of the factors of production is implied in, or follows necessarily from, the valuation of consumers’ goods. But this, too, is not correct. Implication is a logical relationship which can be meaningfully asserted only of propositions simultaneously present to one and the same mind.”

Hayek, continued...∗ “It is evident, however, that the

values of the factors of production do not depend solely on the valuation of the consumers’ goods but also on the conditions of supply of the various factors of production. Only to a mind to which all these facts were simultaneously known would the answer necessarily follow from the facts given to it.”

∗ “The practical problem, however, arises precisely because these facts are never so given to a single mind, and because, in consequence, it is necessary that in the solution of the problem knowledge should be used that is dispersed among many people.”∗ F. A. Hayek, “The Use of

Knowledge in Society,” American Economic Review (1945)

Socialist states abolished markets and prices in producer goods, while retaining money wages and money prices for

consumer goods

∗ The system lumbered forward, not by following the comprehensive plans created by the authorities, but through complex evolved systems of indirect exchange among enterprises, called “блат” (“Blat”) and carried out by the help of “Толкачи” (“Tolkachi,” or “Pushers”)

∗ There was, in effect, a highly inefficient and hampered market economy without the use of money prices, but the exchange of favors mediated by complex chains of indirect exchange.

The Soviets, following Lenin’s reading of Marx and of recent economic developments

∗ Transferred value from agriculture to factories∗ Lowered living standards among peasants and starved millions of them to

death in the process∗ Requisitioned grain early on during collectivization and sold it abroad for

money to buy equipment to build factories to produce steel and cement∗ Those factories produced huge amounts of steel and cement∗ That steel and cement was used to create factories to create

∗ Steel and Cement…..

There were, to be sure, huge advances in science and technology

∗ But the biggest were scientific and most went into military production, not consumer goods

∗ Those goods were used to cement the hold of the USSR over an empire that became ever more expensive as new countries were added

∗ Agricultural production fell dramatically and what kept the system going was the discovery of oil and gas in Siberia, which was very inefficiently extracted and exported for money that was used to purchase food and goods that could not be produced in the USSR (not in the sense of it was uneconomic, but it was virtually impossible)

∗ Central planning was ultimately unable to deal with the problems of change…..

∗ A few items need to be recalled….∗ When Gorbachev came to power, he was known for

saying “We cannot go on living like this.” He did not envisage, however, replacing socialism with markets, much less the dissolution of the USSR

∗ He was a confirmed Leninist

The dissolution of the Communist System you remember

Gorbachev’s Three Slogans

∗ Acceleration∗ Openness∗ Restructuring

∗ The third will help us to understand how the system staggered from one crisis to another

∗ Examples∗ The law on unearned income∗ The campaign against alcohol

The Anti-Alcohol Campaign Collapsed the Revenues of the State

Fiscal Implications of Anti-Alcohol Campaign

1984 1985 1986 1987

Tax revenues in state budget from sale of alcohol (billions of rubles)

36.7 33.3 27.0 29.1

Tax revenues in state budget from sale of alcohol (percent of GDP)

4.8 4.3 3.4 3.5

Retail sales of alcoholic beverages (billions of rubles

52.8 47.7 37.0 36.6

Retail sales of alcoholic beverages (percent of GDP)

6.9 6.1 4.6 4.4

Source: Yegor Gaidar, Collapse of an Empire, p. 135

The result was the use of the “soft budget constraint” of cheap credit from state banks to finance enterprises

∗ Massive inflation in an economy without free prices∗ Generated the “Ruble Overhang”

∗ Everyone had money…but there was nothing to buy∗ The ruble on the international exchanges collapsed in value

∗ The Soviet Empire became too expensive to afford and decisions were made to cut loose the ties to the empire in Eastern and Central Europe

The rest of the sorry story is probably better known to you..

∗ Further economic collapse∗ Shortages∗ Food crises∗ Republics declare their independence∗ August Putsch (1991) against Gorbachev to restore Soviet

system∗ Boris Yeltsin on the famous tank∗ Gorbachev resigns 25.December.1991∗ USSR dissolved 26.December.1991

∗Many people believe that there was a great between “Capitalism” and “Socialism” and…∗Capitalism won!

∗That debate never took place∗There was no debate∗One side ran out of money and collapsed….

Mises’s critique was not the cause of the collapse, but helps to explain it

2. Social Democracy aimed at securing equality and solidarity (Welfare States)

∗ The “welfare state” goes by various names

∗ Sozialstaat∗ Stato Sociale∗ Volksstaat∗ Welfare State∗ Folkhemmet∗ государство всеобщего

благосостояния

∗ Estado del Bienestar∗ Previdência Social∗ L'État-providence∗ 福利制的国家

∗And it is nearly everywhere…

∗ Because it creates advantages for rulers and political constituencies for its continuance

∗ “I will consider it a great advantage when we have 700,000 small pensioners drawing their annuities from the state, especially if they belong to those classes who otherwise do not have so much to lose by an upheaval and erroneously believe they can actually gain much by it.”

∗ “I have lived in France long enough to know that the faithfulness of most of the French to their government….is largely connected with the fact that most of the French receive a state pension.”

∗ “Many of the measures which we have adopted to the great blessing of the country are Socialistic, and the State will have to accustom itself to a little more Socialism yet.”

The welfare state was created as a political strategy

Otto von Bismarck

How are welfare state schemes structured?

PAYGO principlePay-As-You-Go

Fiscal Illusion

“Many of the measures which we have adopted to the great blessing of the country are Socialistic, and the State will have to accustom itself to a little more Socialism yet.” -- Otto von Bismarck

Characterized as “Social Rights”

The Welfare State is also a Tragedy of the Commons

∗ If I don’t catch the fish, someone else will…..so one restricts his activities of fishing

∗ If I don’t get that government subsidy or favor, someone else will…..

∗ Everyone is in conflict with everyone else….

∗ Not only the poor, but the rich line up for their subsidies

Socialist states of the first type seek to substitute for decentralized planning and coordination through the market and other voluntary mechanisms a comprehensive system of state planning

Socialist states of the second type (Welfare States) seek to take responsibility for the well-being, or welfare, of the society; they need not systematically displace markets, but create organs of state power to assume responsibility for producing and/or delivering certain services to the people

“Germany will be at its greatest when its poorest citizens are also its most loyal.” --Adolf Hitler

The Weimar Republic was the “most advanced” welfare state of its day

∗ We have accepted, so to speak, a second Bill of Rights under which a new basis of security and prosperity can be established for all -- regardless of station, or race or creed. --Franklin D. Roosevelt, 11.Jan.1944

The “Social State” model was copied almost everywhere

PAYGO Funding Systems are equivalent to “pyramid

schemes”Such schemes generate large and growing “fiscal imbalances”:

the difference in present value between what the government is projected to spend under current law on all expenditure categories—entitlements, defense, roads, and everything else—and what it is projected to receive in taxes across all revenue accounts.

“Since liabilities would accumulate only gradually, this arrangement reduced costs in the early years and made the proposed levels of compensation feasible after all. Although this would be achieved at the price of piling up problems in the future, it allowed any consideration of state subsidies to be put off for the moment.”

--E. P. Hennock, The Origin of the Welfare State in England and Germany, 1850–1914 (Cambridge: Cambridge University Press, 2007)

The Instability of the Welfare State Was

Evident from Its Very Start

Some estimates (2009) of the extent of the fiscal imbalance in Europe

For the US, the fiscal imbalance is at least$80,000,000,000,000 ($80 trillion); for EU member states as a whole, calculated only over a 50 year time horizon, the imbalance is over €53,000,000,000,000 (€53 trillion; most recent estimate is $78 trillion); those are the sums that governments would have to have in interest-earning accounts right now – in addition to all other revenues they receive – just to fund their current obligations

Percentage point increases in average tax rates and percentage point cuts to selected expenditure programs needed -- immediately and permanently -- to eliminate fiscal imbalances in EU countries

But it’s not just the unfunded liabilities at stake

∗ Intragenerational Transfers Get All the Attention

∗ But Intergenerational Transfers are Far More Significant

The consequences of not addressing these issues are serious: the rise of extremist movements looking for

scapegoats….

If you think that this is bad….

If you think that this is bad….

Just wait

∗Until the base of the pyramid shrinks further∗Promises to pay for medical care, retirement,

and other benefits are not kept∗Taxes rise on those working to finance those not

working

It’s time to ask questions about the sustainability of welfare states and alternative means of providing retirement, aid to the unfortunate, medical care, and social solidarity

The current obligations of the state to pensioners and others cannot be

fulfilled….and there will be default of one kind or another

Some governments in Europe – notably Hungary and Poland – have taken steps that reduce short-term measures of public debt, but by doing so, they have merely confiscated private savings and increased long-term state liabilities

For a PDF version, google:After the Welfare State PDF

3. “Left-Wing” Socialism and “Right-Wing” Socialism

∗ Have more in common than many would like to admit

∗ They draw from the same roots and the same Zero-Sum mentality

Marxism claimed “scientific status” resting on historical materialism and the analysis of surplus value

∗ “These two great discoveries: the materialist conception of history and the revelation of the secret of capitalist production through surplus value, we owe to Marx. With them socialism became a science….”∗ Friedrich Engels, The

Development of Socialism from Utopia to Science (1880)

In fact, the foundations of Marxism (actually, Engels-ism) were laid much earlier, on the hatred of commerce and the

calculation of economic profit∗ “You have brought about the

fraternization of the peoples – but the fraternity is the fraternity of thieves. You have reduced the number of wars – to earn all the bigger profits in peace, to intensify to the utmost the enmity between individuals, the ignominious war of competition!”∗ Friedrich Engels, “Outlines of a

Critique of Political Economy” (1843)

The old attacks on usury and “making money from money” were restated in more virulent form

∗ “The immorality of lending at interest, of receiving without working, merely for making a loan, though already implied in private property, is only too obvious, and has long ago been recognized for what it is by unprejudiced popular consciousness, which in such matters is usually right.”

∗ ….∗ “[I]mmorality’s culminating point is the

speculation on the Stock Exchange, where history, and with it mankind, is demoted to a means of gratifying the avarice of the calculating or gambling speculator.”∗ Friedrich Engels, “Outlines of a Critique of

Political Economy” (1843)

Marx made the connection more direct: “capital” represented the spirit of the Jews

∗ “Let us not look for the secret of the Jew in his religion, but let us look for the secret of his religion in the real Jew.

∗ What is the secular basis of Judaism? Practical need, self-interest. What is the worldly religion of the Jew? Huckstering. What is his worldly God? Money.”∗ Karl Marx, “On the Jewish

Question,” 1843

What was the worst effect of market exchange and liberalism, according to Marx? Christians had been transformed into Jews.

∗ “The Jew has emancipated himself in a Jewish manner, not only because he has acquired financial power, but also because, through him and also apart from him, money has become a world power and the practical Jewish spirit has become the practical spirit of the Christian nations. The Jews have emancipated themselves insofar as the Christians have become Jews.”∗ Karl Marx, “On the Jewish

Question,” 1843

Karl Marx was especially vitriolic about “the loan-mongering Jews of Europe”

∗The Favorite Enemy of Socialists:∗The Rootless

Cosmopolitans∗ Who have no connection to

the soil∗ Who do not share “our”

interests∗ Who conspire behind our

backs to manipulate us

∗ “The loan-mongering Jews of Europe do only on a larger and more obnoxious scale what many others do on one smaller and less significant. But it is only because the Jews are so strong that it is timely and expedient to expose and stigmatize their organization.”∗ Karl Marx, “The Russian Loan” (1856)

From Marx to Sorel, Mussolini, and Beyond∗ The theme of class conflict and a general uprising

of those oppressed by “capitalism” was taken up by Sorel and his follower Mussolini

∗ “Now Fascism throws the noxious theories of so-called Liberalism upon the rubbish heap. When a group or a party is in power it is its duty to fortify and defend itself against all. The truth, manifest henceforth to all whose eyes are not blinded by dogmatism, is that men are perhaps tired of liberty. They have had an orgy of it. Liberty to-day is no longer the chaste and severe virgin for whom fought and died the generations of the first half of the past century. For the youths of to-day, intrepid, eager, stern, who envisage the dawn of the new era, there are other words which exercise a more potent fascination and these words are: Order, Hierarchy, Discipline . . . .”∗ Benito Mussolini, The Life of Benito Mussolini (English

translation by Margherita G. Sarfatti, foreword by Signor Mussolini, 1925)

∗

Georges Sorel (1847-1922)

Benito Mussolini(1883-1945)

Hitler adopted Marxist ideas of conflict as the foundation for his own worldview, merely adding a “racial” dimension to Marx’s own anti-

semitism∗ “The racial world view is

fundamentally distinguished from the Marxist by reason of the fact that the former recognizes the significance of race and therefore also personal worth and has made these the pillars of its structure. These are the most important factors of its world view. If the National Socialist Movement should fail to understand the fundamental importance of this essential principle, if it should merely varnish the external appearance of the present State and adopt the majority principle, it would really do nothing more than compete with Marxism on its own ground.”

National Socialism as Fulfillment of Marxism∗ “Fundamentally, these new means of

political struggle can be traced back to the Marxists. I only needed to adopt and further develop them, and I essentially had what we needed. I just had to continue, with greater resolve, where the Social Democrats had failed ten times over because they insisted on trying to achieve their revolution within the framework of democracy. National Socialism is what Marxism could have been if it had freed itself from its absurd, artificial connection with the democratic system.”∗ Quoted in Hermann Rauschning,

Gespräche mit Hitler (1939)

For Socialists of Left and Right, the world is divided up into “us” and “them,” and “we” are defined by our

enmity with “them”∗ “the specific political

distinction…can be reduced to that between friend and enemy”

∗ “The enemy is not merely any competitor or just any partner of a conflict in general. He is also not the private adversary whom one hates. An enemy exists only when, at least potentially, one fighting collectivity of people confronts a similar collectivity.”

Struggle (“inherent antagonism”) permeates collectivism of the left and the right

∗ “is not the relationship to an external Other as the enemy a way of disavowing the internal struggle which traverses the social body? In contrast to Schmitt, a leftist position should insist on the unconditional primacy of the inherent antagonism as constitutive of the political.”∗ Slavoj Žižek

Self HelpFriendly Societies/Mutual AidCommercial InsuranceCharity

4. Social Conflict and Statism, or Social Cooperation and Liberty?

∗ If we desire to live in peace, we must embrace the practices and the institutions of peace and prosperity

∗ Well defined and voluntarily transferrable property rights

∗ Free market economy∗ Limited Government∗ Freedom of Trade

The classical liberal response: the right to one’s modest peculiarities

∗ "Human groupings have one main purpose: to assert everyone's right to be different, to be special, to think, feel and live in his or her own way. People join together in order to win or defend this right. But this is where a terrible, fateful error is born: the belief that these groupings in the name of a race, a God, a party, or a State are the very purpose of life and not simply a means to an end. No! The only true and lasting meaning of the struggle for life lies in the individual, in his modest peculiarities and in his right to those peculiarities.”∗ Red Army Colonel Pyotr Pavlovich Novikov’s

thoughts as he inspects soldiers assembled under his command, in Vasily Grossman’s novel of the Battle of Stalingrad, Life and Fate

Vasily Grossman (1905-1964) as a correspondent for

, Red Star, the newspaper of the Red Army

Liberalism is not only the philosophy of prosperity and progress, but of peace and respect

Vasily Grossman (1905-1964) as a correspondent for , Red Star, the newspaper of the Red Army, and later novelist of Soviet terror

Liberalism is not only the philosophy of prosperity and progress, but of peace and respect • "Human groupings have one main purpose: to

assert everyone's right to be different, to be special, to think, feel and live in his or her own way. People join together in order to win or defend this right. But this is where a terrible, fateful error is born: the belief that these groupings in the name of a race, a God, a party, or a State are the very purpose of life and not simply a means to an end. No! The only true and lasting meaning of the struggle for life lies in the individual, in his modest peculiarities and in his right to those peculiarities.”• Red Army Colonel Pyotr Pavlovich Novikov’s

thoughts as he inspects soldiers assembled under his command, in Vasily Grossman’s novel of the Battle of Stalingrad, Life and Fate

Vasily Grossman (1905-1964) as a correspondent for , Red Star, the newspaper of the Red Army