Over to the Left of responsible people like you and me, there’s a huge interest in socialism these days. Bernie Bros can’t get enough of the senator’s “democratic socialism” and the Democratic Socialists of America seem to be one of the fastest growing political organizations in the country. Millennials seem to be flocking to the banner – not all that much of a surprise, to be honest, as it really does sound good to those who are, by definition, too young to recall the disaster that actually existing socialism revealed in 1989.
At which point, if socialism is what you want, well, why not? I say this as a senior fellow at one of the most insistently free-market think tanks on the planet – we at the Adam Smith Institute tend to think of the guys at the Cato Institute as something akin to pantywaist liberals. The only people even more extreme than we are those who’ve entirely fallen over the edge: John Birch, Ayn Rand’s Objectivists, and so on. And still, I say if you want socialism, then why the heck not?
First, we’ve all got to agree on what socialism is: It’s in opposition to capitalism. Capitalism, by definition, just means that it is the capitalists (and this can include our pensions and 401(k)s), the people outside the productive organizations, who own them. Socialism just means that the people involved in doing the thing own the productive organizations. Farmers’ co-ops, worker-owned firms, customer cooperatives — these are all socialist forms. The ban on outside capital in law firms makes them – no, really – socialist forms of organization. You might not believe this, but when Goldman Sachs was still a partnership (up into the late 1990s) it was a form of a socialist organization. WinCo Foods and Woodman’s Food Market are both owned by the workers, and they work just fine.
There simply isn’t anything wrong with socialism. It’s not perfect, of course. No form of human organization is. It’s difficult to have a socialist steel mill, because how are 5,000 workers going to raise billions in capital?
What socialism isn’t is government healthcare, free university education, and so on. Sure, Sweden might have those things, but that’s social democracy, not socialism. By many measures, Sweden is more free-market and more capitalist than the U.S. They just tax more and government buys more.
The truly important distinction in a socio-economic system is between market-based systems and non-market ones. An interesting little paper from my own alma mater illuminates this point.
Paul Krugman has been known to point out that productivity isn’t everything, but in the long run it’s pretty much everything. What is meant is that there are two ways of producing more. We can simply use more raw materials (land, labor, capital, minerals and so on). Or we can become more efficient in how we use those things. That second is also known as improving "total factor productivity" in jargon terms. As Krugman has also pointed out, the usual calculation (from Bob Solow) is that 80 percent of economic growth in the market economies in the 20th century came from that productivity growth, not the use of more resources.
However, in the USSR, in its entire existence, there was no productivity growth. All economic growth – and there was a lot, they started close to the Stone Age in 1917 – came from consuming more resources, using more inputs. What we’d really like to know is what was the underlying cause here.
Which brings us to this new paper, a study of the Yugoslav economy. The great distinction here is that it was at least an attempt at a socialist and also market economy. The other Soviet-influenced economies were centrally-planned: Bureaucrats in whatever ministry telling the factories exactly what to produce, in what quantity, at what price. Yugoslavia had the workers owning the factories, but then interacting with consumers, competing with other producers, through a market, a market where prices varied.
The result of this was that the Yugoslav economy did have productivity increases and got richer by becoming more efficient, while the planned socialist economies did not. Sure, it wasn’t a perfect solution. But no one thinks that capitalist free markets are perfect either – they might be better, but they still ain’t perfect.
But we do indeed have this: Capitalist market systems improved productivity, socialist planned ones did not. The only market-socialist economy improved productivity. Thus, if we actually want to get richer (which is what increased productivity does) we need a market system. Whether that’s a socialist one or a capitalist one seems to be a second-order decision, one that’s less important. It’s the markets, the price systems, which are needed.
My own preference would be that we carry on just as we are, with a market in forms of organization. There’s absolutely nothing at all to stop you, me or anyone else setting up a co-operative. We also have the liberty to start a more capitalist form of organization.
In that case, carry on and good luck to all who sail in such vessels. What we do have to do, though, is make sure that we’re in a market-based system so that the various producers have to compete with each other – the truly vital part of whatever we do with the economy.
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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