Economic Theory

Socialism: will next time be different? (Part 1)


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On 21-24 June, the Alliance for Workers’ Liberty organised the conference ‘Socialism Makes Sense: Ideas for Freedom 2018’ in London. One of the speakers was the IEA’s Dr Kristian Niemietz. The article below is based on his remarks.

 

The key question over which we differ is whether there could be a version of socialism that is completely different from anything we’ve seen so far. A version of socialism that is both economically viable, and that also gives people genuine autonomy and control over their lives. You guys believe that that is indeed possible and perhaps even inevitable. I’m convinced that it’s not. I’m convinced that no matter how often we try, socialism will always lead to economic failure on the one hand, and to oppression and tyranny on the other hand.  And I’ll tell you why.

Let’s start with the economics. As I said, I believe that ‘democratic socialism’ is a mirage, that socialism can never be, in a meaningful sense, democratic. But let’s leave that for later. For the next ten minutes or so, let’s just assume that I’m wrong on that, and that you guys are right. Let’s assume that a democratic form of socialism is indeed possible.

It’s not a new idea. There were large democratic protest movements in Eastern Europe, before the Fall of the Berlin Wall. Those movements opposed the regimes of those countries, but they were not necessarily anti-socialist. They had factions that explicitly described themselves as socialists. They did not want to overturn socialism. They wanted to democratise it from within. Those movements failed – but we could imagine a version of history in which they had succeeded. Let’s imagine those movements had managed to kick out the old Stalinist elites, and establish their version of a socialist grassroots democracy. What would that have looked like?

Well, it would undoubtedly have made those countries, in many ways, much better places to live. They would probably have closed down the secret police. They would have freed political prisoners. They would have introduced freedom of speech, freedom of assembly, and so forth. All of that would have represented a massive improvement.

But – and this is a crucial point – that would not have sorted out those countries’ economic problems. It would have done absolutely nothing to close the huge gap in living standards that existed between Eastern Europe and Western Europe.

Democracy, human rights and civil liberties are all desirable in their own right. But they do not make countries rich. There is a lot of empirical literature which looks at the relationship between economic development, and the political system. Most of that literature finds that there is none. There is no relationship between prosperity and the political system. Democracies are, on the whole, no better at raising people’s living standards than autocratic governments.

There is a relationship in the sense that once people have reached a certain standard of living, they become more likely to demand democratic reforms. In other words: democracy is a consequence of prosperity, but it’s not a cause of it. Prosperity makes democracy more likely, but democracy does not make prosperity more likely.

Why does this matter? Because it seems to me that socialists make the implicit assumption that a democratic form of socialism would not just have been more humane, but also economically more successful. There is absolutely no reason to believe that it would. There is no reason to assume that a democratic form of socialism would have been any more economically successful than a dictatorial form.

The economic failures of socialism had nothing to do with the absence of democracy. That’s why I don’t accept it when socialists distance themselves from all real-world examples of socialism by simply saying, “Oh no, that’s got nothing to do with me. That was Stalinism. I’m a democratic socialist.” That may be so. But that is completely irrelevant. It’s irrelevant whether we’re talking about democratic socialism or Stalinism, because the economic problems are common to both. That’s why it’s fair to hold the economic failures of socialism against self-described socialists, including democratic socialists.

And if you do that, it quickly becomes clear which economic system is superior, socialism or capitalism. We can see this especially if we look at the natural experiments, the countries that have been divided into a broadly capitalist and a broadly socialist part. The most famous example of this is, of course, the division of Germany into East and West. After 40 years of socialism, East Germany’s economic output per capita was just one third of the West German level. The East was more equal, but nonetheless, the difference in total output was so vast that even a relatively poor West German was still better off than the average East German.

And East Germany is actually the most flattering example I could find, because it was the richest country in the socialist bloc. The gap between Maoist China and Taiwan was vastly greater than that, as is the gap between North and South Korea today. Again, that’s got nothing to do with the absence of democracy. South Korea and Taiwan were not democracies either until the late 1980s. They only became democracies when they were already highly developed.

So if democracy is not the issue, what is? What was it about market economies that made them so much more successful?

Well – that would be a topic for a whole conference of its own, but I’d like to allude, briefly, to two major points.

It is widely believed that socialism failed because people weren’t altruistic enough. They weren’t prepared to work hard for the common good, they were primarily interested in their own good. That, I think, is a red herring. Socialist economies never relied on altruism. They used material incentives. They had mandatory production quotas, bonus payments and wage differentiation. So that was not the issue.

No, it’s got to do with what economists call the knowledge problem.

Firstly, we simply don’t know, from the outset, how to organize a successful enterprise, let alone a successful industry or a cluster of industries. Nobody could have planned Silicon Valley. Nobody could have planned the tech hubs of London.

What we need is a trial and error process. We need to try lots of different things, we need to experiment with lots of different ideas, most of which will fail, but some of which will succeed and get more widely adopted. And that is essentially what a market economy is: it is a constant process of trial and error. Socialist economies have never been able to replicate this process. They tried for a while, they had the concept of ‘socialist competitions’, but it never got very far, because socialism and competition just don’t mix well. You either have a centrally planned economy, or you don’t. And if you do, you can’t allow much variation. People have to stick to the plan.

Secondly, socialist economies by definition do not have market prices. And market prices are an extremely valuable source of information. They bundle and transmit information about conditions of supply and demand, and they coordinate economic activity.

Market prices are not set by any central authority, but by the purchasing decisions of millions of people. All of those people know something about their own particular circumstances of time and place; if nothing else, they know their own needs and their own preferences better than anyone else. They all act upon that knowledge in the purchasing decisions they make, and in this way, in a sense, market prices absorb and bundle all that knowledge.

Market prices then coordinate behavior. Let’s say, there’s an increase in demand for firewood. This will quickly lead to an increase in the price of wood. People who use wood for other purposes, such as furniture, will now have an incentive to economise on the use of wood. Find a substitute. Make plastic tables instead. Or make smaller tables. Whatever it is.

And for producers, there’ll be an incentive to produce more wood, and in the long term, to plant more trees.

In market economies, such adjustments happen all the time, every day. In the vast majority of cases, we don’t even realise it. We notice that some prices have changed, we adjust our behavior accordingly. In this way, we get neither lasting shortages nor lasting surpluses.

In a socialist economy, prices can’t play that role. They’re set by bureaucrats. Which is why they don’t contain much useful information.

That’s why socialist economies had all these coordination problems and huge inefficiencies. Again, it’s irrelevant here whether we’re talking about democratic socialism or Stalinism. That’s a problem which is common to both.

Socialism cannot provide prosperity. Whether it’s democratic socialism or Stalinism is irrelevant. It is socialism per se which is the problem, democratic or not.

But the lack of economic success was, of course, related to the authoritarian character of socialist regimes. The Berlin Wall wasn’t build because the people in charge were all evil psychopaths. It was built because the GDR was losing over 200,000 people every year. For the leadership, the choice was not between Stalinism or a democratic, liberal socialism. It was between Stalinism and a collapse of the whole system. Authoritarian socialism, or no socialism at all. They chose the former.

 

Continue to Part 2.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).


8 thoughts on “Socialism: will next time be different? (Part 1)”

  1. Posted 25/06/2018 at 13:41 | Permalink

    What a load of simplistic rubbish!
    Not a word about exploitation, artificial price fixing, shareholders’ pleasing, the sharemarket manipulations
    and how all of this inevitably leads to political corruption.
    There is no such a thing as ‘free market’ and there never was one. Markets are manipulated and rigged from the first gong at Wall Street to the closing time of the Far East Exchanges. There has never been in history a capitalist economy that did not succumb to corruption and exploitation. The ‘invisible hand’ was functional only in transferring big money from entrepreneurs’ pockets to politicians’ pockets. And let us not forget that Milton Friedman was recruited by the FBI already in the 1930’s. His job was just as yours Niemietz, to convince the plebs that it is in the best of their interests to remain powerless and rightless.
    Socialist policies and national wealth can be compatible if there is co-operation between workers and entrepreneurs on a national level, and between their concerted efforts and the intentional market. Impossible? Naivete? Wishful thinking? Perhaps the next world war will teach everyone concerned that greediness, just conventional and nuclear military power, has its limits. Just as the world had to come together to avoid atomic destruction, it will have to come together to prevent devastation by greedy piggish capitalism and irresponsible consumerism.
    Don’t try to tell it to your financial backers. They might turn you into a socialist by making you redundant.

  2. Posted 25/06/2018 at 15:01 | Permalink

    @Cyril Chilson:
    “There has never been in history a capitalist economy that did not succumb to corruption and exploitation.”

    Please could you point me towards some examples of socialist economies that have been less susceptible to corruption and exploitation than capitalist economies?

  3. Posted 25/06/2018 at 16:11 | Permalink

    “Rubbish,” “manipulated”, “simplistic,” “greedy,” “capitalism”, “something, something”, “consumerism,” “greediness,” “exploitation,” “corruption”, “capitalism,” “workers”, “something, something”

    There. I’ve just summated Cyril Chilson’s ( and that of every other brain dead socialist on the planet) entire vocabulary

  4. Posted 25/06/2018 at 16:11 | Permalink

    Yes. The Scandinavian countries. Especially in Sweden and Norway and to a certain extent, Germany (I am referring particularly to the 1970’s) and Be. Don’t get me wrong: corruption is always a risk, but socialism has better potential than capitalism (which is corrupt by definition, see my arguments above) to fight corruption. And finally, it is no more than a propagandistic trick to claim: “Socialism had always failed” on the basis of the communist block. Socialism in its present context seeks to learn from the mistakes of the past and address the terrible challenges of present-day piggish capitalism. The institution which ‘hosts’ our discussion here has been assigned one single job: to confuse and brainwash those who believe that their lives cannot be better without manic consumption and those who simply don’t give a toss about others and live in the illusion that their reaches are an insurance policy against (almost) everything. Both types are wrong.

  5. Posted 25/06/2018 at 19:17 | Permalink

    Scandinavia and Benelux have maintained a mixed system with strong socialist elements. It doesn’t take a research of UN reports to find that these countries are at the bottom of the international corruption table.
    You may also find that historically the political system in the countries concerned had become less susceptible to corruption especially after they had introduced socialist elements into their respective economies (after the 2nd World War in particular).

  6. Posted 26/06/2018 at 13:44 | Permalink

    >And let us not forget that Milton Friedman was recruited by the FBI already in the 1930’s. His job was just as yours Niemietz, to convince the plebs that it is in the best of their interests to remain powerless and rightless.

    Thanks for this information, I will write to the FBI straight away and ask them if they have any money left to pay me. I only hope that Niemietz hasn’t already snaffled it all.

  7. Posted 27/06/2018 at 10:59 | Permalink

    Does Cyril Hilson really think that Scandinavian countries are Socialist? In many ways they are far more capitalist than the UK. That’s why they rank highly on indices of economic freedom.

    Do they have state run medical systems? Do they have our levels of ‘social’ housing?

    The fact is that they are generally free market systems with high taxation/redistribution levels – they are not socialist.

  8. Posted 29/06/2018 at 09:59 | Permalink

    This is a really well argued piece. However, the problem with recent expressions of ‘socialism’ within the Labour Party is not solely about it being economically superior to capitalism. The problem is that there is a tendency for them to disregard economics and finance altogether, with human happiness regarded to be emergent from grassroots ‘democracy’ or mutualism. This seems to be the direction Momentum want to take. For a longer defence, I would de-construct the paradox of libertarian socialism, buts that’s a topic for another tome perhaps. It results in a system where poverty is seen as spiritual and the mutualism comes from us all being poor together. The ‘tax the rich’ arguments are slightly different, but remain the same, they’re about removing prosperity and re-distributing poverty. The outcome of Corbynite Economics is equality, but equality of very little…

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