by Svetozar Pejovich

Socialism was invented by French scholars in the 17th and early 18th centuries. They and their followers believed a just and harmonious society was attainable, and it was the job of the intellectual elite to discover the rules required to bring such a society into being. The political elite was supposed to implement these rules, and the secret police to enforce them.[1] The abolition of private property rights was a dominant rule.

For about two centuries, socialism could not find a place under the sun in the United States. The most prominent attempt heretofore was by Eugene Debs (1855-1926), who founded the Social Democratic Party of America. It never got off the ground. Yet in the United States in the 21st century, socialism is on the rise politically. The basic ideas and concepts of socialism—increasingly referred to as democratic socialism—have been defined. It is therefore possible to compare and contrast the 21st century version to the classic socialist doctrine.

This post will examine the two key features of today’s democratic socialism and their consequences for economic progress.

The fundamental institutional arrangements that define the difference between capitalism and socialism in general are, respectively, “the rule of law” and “the rule through law.” The rule of law prioritizes law over government and politics, and the individual over the community. The rule through law prioritizes government and politics over law, and the community’s common good (as defined by rulers) over the right of individuals to pursue their private ends. (Granted, no actual country satisfies either theoretical condition. Some capitalist countries are closer to the rule of law than others; some socialist countries are closer to the rule through law than others.)

It appears that democratic socialism has two objectives that are consistent with socialism in general: top-down control of the allocation and use of resources, and a top-down predetermined outcome (the common good). But democratic socialism also has two institutions that set it apart from its predecessors: It supports free elections and accepts private property rights. Hence, to gain power, democratic socialism must 1) win elections for the U.S. Congress or the White House, or both; and 2) constrain the free-market incentives of private property rights. On the other hand, the observed “tolerance” of free debate on the part of today’s progressives suggests that, once in power, they are likely to follow the generic socialist rule: one person, one vote, one time. Let us address the ill-effects (the costs) of both issues: winning elections and constraining property rights.

Stealing from Others in the Short Run

To win those congressional, senatorial, and presidential contests, the political-intellectual elite needs to promote an attractive cause. It found it in the unequal distribution of income in the United States. The battle cry of democratic socialism is the immorality of capitalism, which is to be corrected by redistributional policies such as free health care, government-guaranteed jobs, and free education.

However, redistributional policies require more government programs. More government programs entail an ever-increasing role for government in running the economy. An ever-increasing governmental role in the economy means that more and more people depend on government programs. Dependence on government programs incentivizes people to vote for a living. Redistributive policies thus turn into a process that generates, from one election to the next, ever-growing political support for replacing competitive markets with governmental control over the use of resources. Democratic socialists argue that the government revenues from taxing high-income earners, corporate profits, and all other economic activities that dare to grow, should be sufficient to support new public programs.

That might be true. In any given year, the ruling elite can redistribute already-produced incomes according its preferences. Yet its redistributional policies fall short of revealing the costs of democratic socialism. For incomes are not found; they are created. Redistributional socialism affects the behavior of income-creators, which, in turn, affects economic progress. The consequences of high taxation and excessive business regulations are then a major cost of democratic socialism, which its ruling elites ignore. Let us look at these costs with respect to the following groups of taxpayers: entrepreneurs, utility-makers, and legal immigrants.

Three Examples: Entrepreneurs, Professional Athletes, and Legal Immigrants

Entrepreneurship means the production of a new good, the opening of a new market, the discovery of a new source of supply, or using new technologies to produce old products (for example, fracking). In capitalism, entrepreneurs appropriate the benefits from successful investment choices and bear the costs of failure. The latter includes the funds supplied by entrepreneurs and the funds they have borrowed. The spread between expected benefits and total costs incentivizes the rate of entrepreneurial activities, and, consequently the rate of economic growth. For decades, the market determined this spread. And it worked. Millions of entrepreneurs, through successes and failures, created the American miracle.

If and when democratic socialists gain power, punitive taxes and government programs would reduce the spread between benefits and costs of entrepreneurial activities, and disincentivize entrepreneurship. Disincentivizing entrepreneurship reduces economic progress. Through this process, democratic socialism would move the market-controlled benefits-costs spread of entrepreneurial activities in competitive markets to bureaucratic control in political markets. George Stigler anticipated this critical change back in 1971. As the Nobel laureate in economics observed, “The state is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries.”[2]

Millions of dollars that people pay for football tickets is the best evidence that they get more satisfaction watching professional football players than from any other bundle of goods the same millions of dollars could buy. For young people, the total costs of seeking a career in football  include the opportunity costs of long hours of training during one’s high school and college years, and the probability of injuries. Those not drafted bear the entire loss of the choice they made. Those who are drafted might earn millions of dollars in the NFL, where the average playing career is about six to eight years. Confiscatory income taxes would incentivize some talented young people to choose careers other than football; that is, government distributional policies would make this group worse off. Redistributional policies would raise the players’ costs of injuries relative to after-tax benefits, incentivizing them to avoid hard hitting, a major attraction of the game.

Whether football stadiums are full or not depends on the quality of the game, which determines the demand for tickets. A change in the quality of the game would incentivize football fans to spend their money on “second best” activities.

In the 1970s, a relatively large group of people emigrated to the United States after fleeing Vietnam by boat and ship. The “boat people” knew nothing about our institutions and culture. They were also seen as competitors by many Americans, especially in the fisheries. Yet the “boat people” did not stand in line for welfare. They worked long hours, saved money, and became entrepreneurs. Within one generation, they created economic wealth with their bare hands. By 2017, the median household incomes of Asians and non-Hispanic Americans was $81,000 and $68,000 respectively—an amazing statistic in an America of  alleged white privilege. Democratic socialism would, via confiscatory taxes and environmental regulations, disincentivize the likes of the “boat people” from being too successful.

Stealing From Each Other in the Long Run

Two major components of private property rights that set it apart from other types of property rights are exclusivity of use and transferability of ownership. The first creates incentives for individuals to move their resources to the highest-valued uses these individuals are capable of discovering. The second provides incentives for resources to move from lower- to higher-productivity owners. The incentive effects of the exclusivity and transferability of ownership depend on the political system’s constitutional guarantees of credibility and stability of property rights in resources. In the Anglo-American legal tradition, private property rights serve the subjective preferences of property owners.

Consider an example.

In 1851, the city of Birmingham, England built a large sewer that polluted the Thames River.[3] The owner of a downstream property complained that the pollution was killing fish and affecting the health of his cows and sheep. He asked a court to issue an injunction. The city admitted that the sewer was polluting the river. However, it invoked the public good argument. It said that Birmingham’s 250,000 inhabitants would suffer from a plague or some other bad disease unless the sewer was allowed. The judge, in dismissing the city’s argument, said that he was not a public safety committee and that his function was to interpret the law—which in this case meant to protect the right of a property owner to enjoy a clean river. That is, instead of seeking governmental interference, the parties should negotiate a contractual agreement.

An efficiency-friendly consequence of free contracts is that they minimize resort to the state. But voluntary contracts are not good enough for democratic socialism. Why not? Because private ownership, supported by the rule of law, creates a conflict between the incentive effects of private property rights and the redistributional policies of democratic socialism. Hence it must attenuate private property rights.

How, and at what cost? The process is as follows: The value of any good to a person depends on the bundle of rights to do things with that good. (The value of a car to me is less if I have no right to resell it. I will pay more for a worker I can fire at no cost.) The attenuation of private property rights reduces that bundle of rights. A subtraction from the bundle of rights in goods affects those goods’ market (scarcity) prices. (For example, rent control has the same effect as confiscating a part of a privately-owned building.[4]) The attenuation of private property rights then creates a gap between scarcity prices and actual prices, and this difference means a less efficient allocation of productive resources. That is, this interference with the price of goods and services impedes the flow of resources from lower- to higher-valued uses.

Is Stealing From Each Other the Right Choice?

Transferring incomes from those who earned them in economic markets to others via political markets would disincentivize their work efforts. The attenuation of private property rights weakens incentives for the future production of wealth. So, it is up to American voters to choose between political candidates whose policies are oriented toward equality of outcomes, and those whose policies are oriented toward equality of opportunities. Is it worth giving up the benefits of entrepreneurship, the hard-hitting feature of the most popular game in America, and incentives for ethnic groups to enrich themselves through hard work? A colleague said it well: “How different would our country be if the early immigrants had been given a welfare check instead of a shovel.” Must all productive citizens be equally poor to satisfy democratic socialists?

 

[1] The French Revolution of 1789, which was carried out in the name of a legitimate centralism enforced by an “enlightened” ruling elite, was in tune with the socialist doctrine.

[2] George Stigler, “The Theory of Government Regulations,” Bell Journal of Economics 2 (1971), 3.

[3] Example taken from Elizabeth Brubaker, “The Common Law and the Environment: The Canadian Experience,” in Who Owns the Environment?, edited by Peter J. Hill and Roger E. Meiners (Rowman & Littlefield, 1998).

[4] Suppose open market rent costs $1,000 per year. The value of the rental property at 10 percent interest is $10,000. Suppose the government sets the rent at $900 per year. The owner’s flow of income is down by $100 per year. And the value of building is now $9,000, that is, down by $1,000.

Svetozar Pejovich, an emeritus professor of economics at Texas A&M University, is a senior research fellow at the International Centre for Economic Research in Torino, Italy.

The views expressed on AustrianCenter.com are not necessarily those of the Austrian Economics Center.