What is socialism and why is it so bad?

Fiscal conservatism 105

I like to throw around the phrase that our President is a socialist, and I believe it is true. But there are many people who think this is a slur. I don't intend it as such. I believe it is descriptive of his motives and actions.

So let me take a minute to explain what socialism means to me and why I think it is bad for our country. I'm not an economist, of course, so this is just my personal observation. And I will try to keep it simple with an overview. If anyone wants to comment I'd be happy to go into more detail.

Like many political systems, socialism is probably great in its ideal form. The concept behind it is that people are people, everyone is equal, and they are all part of a larger society in which they can all do their part for society's improvement. I don't think you have to believe that "everyone is equal" means that everyone has to get paid the same. Someone who works harder or is more educated or is a lot smarter could be compensated more than someone who isn't. But there should be reasonable pay scales based on these factors.

In a centralized system, you need planning. You can't have everyone becoming a doctor because that pays the most or includes a villa at a seaside resort. So there needs to be some type of system to decide not just pay but careers, education, where you live, etc.

Who makes these types of decisions? Any oversight person or committee is going to have problems and there will be corruption in the process. Someone's nephew will be sent to medical school who is unqualified. Someone will be unfairly passed over because they don't have "connections." There will be a huge loss of freedom.

Of course, the "deciders" can't be paid less than who they decide for, otherwise they would be subject to envy and bribes. So their jobs become the most important ones (they are the members of the Party or their designees.)

So this theme of who decides is one weak link in the socialist system. Human beings are not perfect. They can make bad decisions, they can be unjustly influenced, and they can be crooked.

There is a second major problem and that is with incentives. Why do people work? What makes them productive?

Some people love to work, love their job, and would do it without pay. In a socialist system, if they were in their chosen field, they could perhaps be very happy. But there are many people who don't like their jobs, want to do something different (or nothing at all), and are forced to work. In socialism, there is presumably a work requirement but workers in this situation would obviously do the minimum. There is no incentive to do more than what is required.

Oversight by bosses who work for the state is also completely different than bosses who own the company (or work for owners). Owners are going to care a great deal more about success. So motivation is automatically built in to every level of a free-market economy.

So productivity is much lower in a socialized economy than it otherwise could be. That means less commerce and less wealth. There are fewer goods and services available. And that means that when an individual earns money, there is less to buy, so the incentive to work hard to earn more is much lower. This negative feedback loop affects the whole system.

Related to this is inefficiency. Centrally planned goods and services are never going to get the mix of goods and services right. Someone will think "we need widgets" and millions will be produced for an anticipated need, but they never get bought. No one "pays" for this mistake, it is just absorbed by society. So there is no harm to making these kinds of mistakes. Inferior products are just as good as superior ones because the payments are based on production, not quality or value.

Likewise you will have inefficient services. You will have too many or too few performing services. All of society bears those costs. It is like an "inefficiency tax."

Inefficiency takes another form. If you have 10 factories producing widgets, and one factory is superior, but all the widgets are the same price (that is fair, after all) then one brand is never available and when it is, it will be given to those with connections.

This doesn't mean that you can't ever produce any superior goods. There are plenty of ways to incentivize groups of people to do what society wants. But overall, this system will be much less efficient than a free-market system. So the Soviets were able to beat us into space, or the North Koreans can develop a nuclear bomb. But their underlying economy is much weaker for it.

The third problem is corruption. Look at Venezuela. They have lots of wealth from large oil reserves, yet the vast majority of people live in poverty (and still support their socialist dictators, how ironic.) When a billion dollars in oil is sold, why doesn't everyone get a check for $5,000 to do what they will with it? Why aren't foreign companies lined up to allow residents to spend their wealth?

All of these socialist systems end up with major winners and losers, just like capitalist systems. But the difference is that the winners are chosen by committee, not by the marketplace, and not by their contribution to that market but by the political power they wield.

In the U.S., some Republicans have termed this "crony capitalism" which seems to refer to major government investments in private enterprise when the enterprise has some connection to the government or its officeholders that allow it to bypass the normal procurement process for government spending. This is why most Republicans do not believe in government investment in the private sector.

I'd like to make one more point on this. We have many governments that lean socialist in Europe. These governments go back and forth. We have an avowed socialist as President of France now, but he was preceded by a capitalist. And then you have generations of wealth that has been accumulated. So it is easy to be a "socialist" country when there is plenty of money to throw around. You can give everyone eight weeks of vacation or jobs for life. Companies that have been around for a hundred years and then have these requirements thrust upon them can't do much about it, and may slowly die off trying unsuccessfully to compete with other companies (in other countries) that are not so burdened. But the negative effects in these countries could take years or decades to be obvious.

Some will read the above and say "capitalism is no better. You can have corruption, incompetence, evil, inefficiency, etc. as well."

Of course you can still have all those same flaws and motivations. People are people. But capitalism is not centrally planned. The market makes most of the decisions on the economy.

Why does a free-market economy work so well? I don't think anyone knows...and it certainly has flaws. But amazingly, it does work pretty well. And the proof is the economic success of capitalist countries all around the world. Free-market economies have generated much more production (wealth) than socialist economies.

Capitalism is based on greed and self-interest. Ideally, there are no limits on individual rights and freedoms. You can pursue any career, start any company, earn as much as you can, and spend it as you wish.

Getting ahead is based on merit (with luck thrown in, of course) and no person or committee is making arbitrary decisions. If you get great grades, you can go to medical school. If you perform well, you can become a doctor. If you work hard, you can make a million dollars. But if you work part-time or do a lousy job, you will earn less or get kicked out.

So there is a true cause-and-effect in capitalism. If you produce a crappy product or service, no one will buy it and you won't make money. You will need to change professions and do something that people want, or you will starve.

And, of course, you need to have some limits including criminal laws for things like bribery or insider trading and anti-monopoly laws.

Why is it fair to have millionaires in capitalism?

That is an easy one to answer. For every dollar that millionaire made, someone benefitted in handing over their money. If the millionaire gave advice, then people willingly paid for that advice and that advice was worth a million dollars (otherwise they would have paid less.)

If the millionaire is building widgets, then people wanted to purchase those widgets (otherwise they would not have.) They must have gotten a million dollars in benefits from those widget-purchases.

So when the millionaire counts his money, he is also counting the value he has produced for others, and they have willingly paid him for it at what that value was worth (to them.)

So you have efficiency and fairness.

Most people who criticize capitalism do so because we produce so many millionaires and billionaires. They see it as an unfair concentration of wealth and power, as if these monies were "taken" from the middle class or the poor. I don't see it that way at all.

Let's say I invent a new product. It is made by taking worthless dirt from my backyard and creating a ball out of it. Let's call the item "the dirt-ball." (TM and Patent Pending.)

This product becomes much coveted and everyone wants to buy it.

So I sell a billion dirt-balls. People who pay for it get some great benefit that is worth $19.99 to them. And I collect a ton of money.

So how is anybody harmed in these millions of transactions? No one was forced to buy the dirt-ball, and everyone who did so got at least $19.99 in value in exchange for their cash. In fact, I think you could argue that unless this was perfectly priced for every buyer, most would have gotten more than $19.99 in value (they may have been willing to pay the full $20 or more!)

Again, let me repeat that in a free-market system, no one had to buy the dirt-ball. So anyone who didn't want to pay for it did not contribute any of their money.

Even the state gets its share as I am forced to charge an additional 60 cents in sales tax. (This does not include my federal tax burden!)

So the buyers are happy, I'm happy, and I now have a billion dollars. Who has been harmed? The buyers are better off and I am better off. Everyone wins. And the non-buyers didn't pay a dime, so what do they have to complain about?

People who believe in socialism would have to show that this example is flawed somehow. I'd like to see them argue that. They'd either have to say that I should be prohibited from selling the "dirt-ball," or that people should be prohibited from buying it. But that would be substituting the wisdom of the socialist Steering Committee for every buyer of the dirt-ball, and there are millions of buyers. How can that make sense, unless you believe that people shouldn't be free to purchase the (legal) goods and services they want?

As President Obama moves our healthcare system to a socialist model, all of the inherent problems in central planning are going to come up. They haven't yet, because the transition hasn't really started. Many of the significant changes have been put off for several years. For example, Obama allowed the "bad" plans that would be eliminated under Obamacare to be continued for a couple more years. So many of the health insurance cancellations that people and companies would be receiving by now have been delayed.

It is possible we will live with a dual system for some time, but it is likely that eventually we will move to a "single payer" system in which the government provides the service and individuals are forced to participate. Then we will see the effects of socialism in all its glory. Unfortunately for our children and their children, the people will end up suffering.

If you want a preview of what we are likely to see, let me refer you to Exhibit A, which is the University of Massachusetts educational system.

See http://www.masslive.com/politics/index.ssf/2014/02/umass_staff_earn_the_....

This is a centrally planned, government-run system. And, not coincidentally, it is under a one-party government. Successful socialist systems don't like competition in politics because their initiatives can be overturned in a free-market system and the people they annoint as "winners" under socialism tend to lose their rank and priviledge under capitalism.

NEXT: Rich versus poor, FC 106: http://www.actonforum.com/blogs/allenn/rich-versus-poor

PART ONE (Introduction): http://www.actonforum.com/blogs/allenn/political-philosophy-fiscal-conse...

PART TWO: http://www.actonforum.com/blogs/allenn/free-100-bills

PART THREE: http://www.actonforum.com/blogs/allenn/mountain-full-donkeys

PART FOUR: http://www.actonforum.com/blogs/allenn/you-didnt-build-those-cabins

PART FIVE: http://www.actonforum.com/blogs/allenn/jack-kemp-american-hero

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Patch Response (1)

Bob • 2 hours ago
The argument begins with a false premise, ie., that President Obama is a Socialist. He's a member of the Democratic Party, not the Socialist Party. Like most Democrats he advocates liberal and pragmatic policy and is in no way an ideologue. If he were a Socialist, he'd be a member of the Socialist Party advocating for Socialist policies, as is and does Senator Sanders from Vermont.

"Socialism" is the overused substitute for our former bogeyman, Communism. The U.S. is definitely a social democracy, watching out for its poor, when it can, and keeping open avenues for social advancement, the oft-told rags to riches story. Many of these stories begin in PUBLIC schools and continue through federal land grant universities, often proving that talent will out, a distinct social benefit wrought by access to public education. If that's Socialism, hooray for Socialism. But it isn't.

The U.S., because it has such institutions as Social Security and Medicare, benefits of a central government, employs some of the sensible social supports that might ensue from Socialism, but it also, when not applying tariffs, engages in plenty of free marketing and competition. It is such a free-market country that it runs through periods where businesses centralize and become monopolies: the railroads of the 19th Century; the Microsofts and Googles of the 21st Century. But these eventually go the way of all things as new technologies emerge and business decentralizes, the swing of the pendulum so to speak.

Labels are fun to debate, and politicians are perpetual targets of smears, but we'll roll on through cycles of national behavior that at times resemble an order of some kind and at other times resemble chaos. So it goes.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.

Reply to Patch (1)

Hi Bob,

No politician in the U.S. could ever be elected President as a member of the "Socialist" party. So your first point is wrong. If President Obama were a true socialist, he would have to hide his affiliation.

In the election, he brushed off this criticism, saying he was NOT a socialist. Yet he pursues many policies that some (including me) would call socialistic. Is he a "Communist?" I don't think so. But does he believe in government control of healthcare, redistribution of wealth, and "you didn't build that"? Yes to all of the above.

Monopolies do not end because of cycles; they end because we have laws against monopolies. It is a correction to total free market capitalism.

You are right that there are many aspects of our fundamental free-market economy that do not strictly follow that label, like a ban on monopolies or social security or free education for kids. The point of my article is to show that Obama wants us to move much further to the left than we already are, more towards the full socialist model.

Allen Nitschelm has lived in Acton since 1998 and writes about fiscal issues at the
local and state level. He is a former member of the town's Finance Committee
and is an Associate Publisher of Acton Forum.