The political landscape in the United States continues to become ever more divisive—and ever more incoherent. The Trump administration is engaging in a major program of deregulation and lower taxation at home, while pursuing tariffs and a trade war abroad. Simultaneously, a growing fraction of the Democratic party is moving left from liberalism to progressivism to democratic socialism. Politicians like Bernie Sanders and Elizabeth Warren proudly call themselves democratic socialists and advance a vision for the country in which well designed regulations mitigate what they regard as the corrosive the effects and embedded inequality of the capitalist system. They rightly dissociate themselves from the brutality and totalitarianism of the socialist regimes, from the Soviet Union to China to Cuba to Venezuela; their hope is to achieve a state-dominated economy in a benign democratic form.
But how exactly does a socialist economy operate within a democratic system? As if on cue, this question is addressed by President Trump’s Council of Economic Advisors in a timely new report, “The Opportunity Costs of Socialism.” Its conclusion is that socialism cannot succeed even in democratic societies. The Report makes its case in part by showing how once prosperous nations like Cuba and Venezuela have become economic basket cases as formerly democratic institutions gave way to totalitarian rule.
The Council’s Report quickly provoked indignant responses for its “bizarre” juxtapositions of mass atrocities with market distortions. But even if the two issues are rigidly separate, Democratic socialists still have to explain why a system that has failed whenever it has been tried can succeed under their tutelage. To borrow a grandiose phrase from Marx, the internal “contradictions” of socialism doom it to failure. To see why, start with some definitions of socialism. As the Council notes, the Oxford English Dictionary defines socialism as “a political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole.” A somewhat shorter definition speaks of socialism as “collective ownership of the means of production,” in contrast of course with a regime of (bourgeois) private property. This latter regime, according to Marxist theory, “is the final and most complete expression of the system of producing and appropriating products, that is based on class antagonisms, on the exploitation of the many by the few.” More modern democratic socialists tend to soften the claim for state ownership by speaking, as does the democratic socialist journalist Meagan Day, of “pooling society’s resources to meet people’s basic needs.”
Claims like Day’s are long on aspiration but short on implementation. On the one hand, the socialists do not acknowledge the huge successes of the capitalist system that they so vehemently decry. Historically, as economist Robert Gordon has shown in his book “The Rise and Fall of American Growth,” the greatest improvement in human progress and well-being took place in the United States between 1870 and 1940, which, ironically, is the exact period dominated by laissez-faire constitutionalism—that is, the belief that government energies should be devoted to the protection of competitive markets from the risks associated with force, fraud and monopoly, coupled with strong support for charitable programs to help those left behind. These gains were not, and could not have been, constricted to the few rich. Indeed, the biggest achievement of that period was the rapid increase in life expectancy, the gains from which could not be confined to the top one percent as it moved from about 40 in 1870 to 63 in 1940.
The explanation for these gains lies in the success of the very institution that the Democratic Socialists deplore: the dominance of competitive markets over any alternative form of economic organization. Its legal presupposition is a system of freedom of contract that requires strong private property rights. The response on the left—from Marx to Day—is that competitive markets represent a form of “exploitation” that the Democratic Socialists will root out. Analytically, that claim gets matters exactly backwards. The reason why theft—taking the property of someone else without their consent—is socially destructive is that it leaves one side better off and the other side worse off. In the short run, the gains to the taker are almost always smaller than the losses to the prior owner, who knew best how to utilize the asset. In the long run, the outcome is still worse, for who will invest in creating and maintaining any asset that can be snatched away by others?
Voluntary contracts—those not tainted by duress or fraud—are exploitation’s opposite. They foster mutual gain for all parties. No self-interested person will enter into a voluntary contract for labor or goods unless he or she is left better off than before. Both sides have the same objective, so that these arrangements are a positive sum between the parties, while creating additional opportunities for third parties. That market has to be regulated in ways that guarantee the security of transactions, which allow these transactions to take place over long periods of time—a necessity in transactions for employment, loans, construction, insurance, and so on. It is for that reason that the state records title and requires certain key contracts, such as those for the sale of real estate, to be in writing. Of course, transacting parties act out of their self-interest, but that self-interest is constrained by the self-interest of others. Greedy persons tend to get frozen out of markets by becoming unattractive trading partners. Reputation is thus a powerful force keeping market actors in line.
The challenge to the Democratic Socialist is to develop some alternative form of social organization. But why believe that the collective ownership of social resources, or pooling resources, can promote the satisfaction of basic social needs? It can’t. The key payoff from ownership is control, and just who controls an asset that is owned by everyone? The state is an abstraction, as is the corporation. But there the similarity ceases. A corporation’s assets are owned by its investors, who can then organize a board of directors that chooses its chief executive officer. The group of founders is small and cohesive. No diffuse public body can exert that same kind of careful control over assets, and since the profit motive is ruled out of the picture from the start, the individuals that somehow take charge of the overall enterprise will do so by political intrigue. Once in control, they will have no strong incentive to economize on costs.
Nor, as Friedrich Hayek stressed long ago, do these “central planners” have any reliable information about the two things that are key to making any enterprise work: the costs of inputs on the one side and the value of outputs on the other. As the Council’s report rightly argues, socialist policies “provide little material incentive for production and innovation and, by distributing goods and services for ‘free,’ prevent prices from revealing economically important information about costs and consumer needs and wants.” When buyers and sellers agree on prices, they do not have to explain their decisions to any administrative body. These prices can move by the day or the hour, in response to market conditions, including other market actors. That is a time frame under which no administrative body can work. But even without centralized government control, everyone still labors under a powerful constraint from other market participants who will seek to economize on costs and develop new innovations. These market innovators, driven by the profit-motive, can produce novel products and services to fill market demand, knowing that they enjoy the protection of patents, copyrights, trade secrets and trade names. Will democratic socialists remove property rights in these areas? And still hope to foster innovation?
Democratic socialists understand that their collective utopia cannot function without the information and performance generated by private markets. So how does the collective we “pool” resources? Bold words notwithstanding, they sense that the abolition of all private property is a step too far. So they try to chip away at this structure in the search of higher equity. Elizabeth Warren has a hair-brain scheme to make corporations more accountable by allowing government officials to appoint some fraction of their members, without explaining how any director can simultaneously owe fiduciary duties—the highest legal obligation to act in the best interest of a party, and the rule that keeps our corporate law going— to parties with adverse interests. Bernie Sanders constantly pushes Medicare for all and free college tuition for all without ever understanding that with a price of zero dollars, supply and demand will be perpetually out of whack. Consumer demand explodes with the promise of free goodies, while the supply of goods and services shrinks given the want of revenue to cover wages and capital expenditures. When public price or wage controls ensure that supply will necessarily outstrip demands, only two responses, in tandem, occur. Queues form and quality declines.
The economic disruption will of course have political consequences. As the formal restraints on state power erode, factions will continue to vie for political advantage. In these settings, the one side can only win if the other side loses. This, in turn, ups the pressure on resources, which become ever more scarce. The tragedy is that Democratic Socialists are blind to both logic and history as they try once again to peddle to the public an experiment that has already failed far too often.