A beginner’s guide to socialist economics

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In recent years, I have given a number of presentations to high-school and college students on the importance of economic freedom and persistent threat of socialism – as witnessed, for example, by the recent economic meltdown in Venezuela. One problem that I have encountered is that young people today do not have a personal memory of the Cold War, let alone an understanding of social and economic arrangements in the Soviet bloc, which, I suspect are either downplayed or ignored in American school curricula. As a result, I have written a basic guide to socialist economics, drawing on my personal experience growing up under communism. I hope that this – somewhat longer piece – will be read by the millennials, who are so often drawn to failed ideas of yore.

As a boy growing up in communist Czechoslovakia, I would, for many years, walk by a building site that was to become a local public health facility or clinic. The construction of this small and ugly square-shaped building was slow and shoddy. Parts of the structure were falling apart even while the rest of it was still being built.

Recently, I returned to Slovakia. One day, while driving through the capital of Bratislava, I noticed a brand new suburb that covered a hill that was barren a mere two years before. The sprawling development of modern and beautiful houses came with excellent roads and a large supermarket. It provided a home, privacy, and safety for hundreds of families.

How was it possible for a private company to plan, build, and sell an entire suburb in less than two years, but impossible for a communist central planner to build one small building in almost a decade?

A large part of the answer lies in “incentives.” The company that built the suburb in Slovakia did not do so out of love for humanity. The company did so, because its owners (i.e., shareholders or capitalists) wanted to make a profit. As Adam Smith, the founding father of economics, wrote in 1776, “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.”

In a normally functioning market, it is rare for only one company to provide a certain kind of good or service. The people who bought the houses in the suburb that I saw did not have to do so. They could have bought different houses built by different developers in different parts of town at different prices. Competition, in other words, forces capitalists to come up with better and cheaper products – a process that benefits us all.

Communists opposed both profit and competition. They saw profit-making as useless and immoral. In their view, capitalists did not work in the conventional sense. The real work of building the bridges and plowing the fields was done by the workers. The capitalists simply pocketed the company’s profits once the workers’ wages have been paid out. Put differently, communist believed that the capitalist class exploited the working class – and that was incompatible with the communist goal of a classless and egalitarian society.

But capitalists are neither useless nor immoral. For example, capitalists often invest in new technologies. Companies that have revolutionized our lives, like Apple and Microsoft, received their initial funding from private investors. Because their own money is on the line, capitalists tend to be much better at spotting good investment opportunities than government bureaucrats. That is why capitalist economies, not communist ones, are the leaders in technological innovation and progress.

Moreover, by investing in new technologies and by creating new companies, capitalists provide consumers with a mind-boggling variety of goods and services, create employment for billions of people, and contribute trillions of dollars in tax revenue. Of course, all investment involves at least some level of risk. Capitalists reap huge profits only when they invest wisely. When they make bad investments, capitalists often face financial ruin.

Unfortunately, communists did not share the above views and banned private investment, private property, risk-taking and profit-making. All large privately held enterprises, like shoe factories and steel mills, were nationalized. A vast majority of small privately held enterprises, like convenience stores and family farms, were also taken over by the state. The expropriated owners seldom received any compensation. Everyone now became a worker and everyone worked for the state.

In order to prevent new income inequalities and new classes from emerging, everyone was paid more-or-less equally. That proved to be a major problem. Since people did not make more money when they worked harder, few of them worked hard. The communists tried to motivate or incentivize the workforce through propaganda. Posters of strong and determined workers were ubiquitous throughout the former Soviet empire. Movies about hardworking miners and farmers were supposed to instill the population with socialist zeal.marian-communist-economics-1Propaganda alone could not increase the productivity of communist workers to Western levels. To incentivize the workforce, communist regimes resorted to terror. Workers who slacked off on the job were sometimes convicted of sabotage and shot. More often, they were sent to the Gulag – a system of forced labor camps. Sometimes, the authorities arrested and punished completely innocent people on purpose. Arbitrary terror, the communists believed, made the rest of the workforce more productive.

In the end, tens of millions of people in the Soviet Union, China, Cambodia, and other communist countries were sent to labor camps. The living and working conditions in the camps were inhuman and millions of people perished. My great uncle, who was accused and convicted of being a supporter of the underground democratic opposition in communist Czechoslovakia, was sent to mine uranium for the Soviet nuclear arms program. Working without any protection from radiation, he died of cancer.

By the late 1980s, communist regimes lost much of their revolutionary zeal. Terror and fear subsided, and productivity declined further. Thus, in the late 1980s, an average industrial worker in Western Europe was almost eight times as productive as his Polish counterpart. Put differently, in the same time and with the same resources that a Polish worker needed to produce $1 worth of goods, a Western European worker could produce $8 worth of goods.

Just as they replaced the profit motive with propaganda and terror, so the communists replaced competition with monopolistic production. Under capitalism, companies compete for customers by slashing prices and improving quality. Thus, a teenager today can choose between jeans made by Diesel, Guess, Calvin Klein, Levi’s and many others.

Communists thought that such competition was both wasteful and irrational. Instead, communist countries tended to have one monopolistic producer of cars, shoes, washing machines, etc. But, problems soon arose. Since producers in communist countries did not have to compete against anyone, they did not have any incentive to improve their products. Compare, for example, the BMW 850 that went into production in West Germany in 1989 and the Trabant that was made in East Germany at the same time.marian-communist-economics-2marian-communist-economics-3Communist producers were protected from domestic competition by having a monopoly. They were also protected from foreign competition by prohibitively high import tariffs or an outright ban on imports. Put differently, they had a “captive” consumer base. The Trabant car manufacturer did not have to worry about losing consumers, since the latter had nowhere else to go.

Moreover, the workers at the Trabant car plant received the same salary irrespective of the number of cars they produced. As a result, they produced fewer cars than were needed. People in East Germany had to wait for many years, sometimes decades, before they were able to buy one. Indeed, shortages of most consumer goods, from important items such as cars to mundane items such as sugar, were ubiquitous. Endless queuing became a part of everyday life.

Under capitalism, shortages are generally avoided through the movement of prices. Some prices, like those of national currencies traded globally, change virtually every second. Other prices change more slowly. If there is a shortage of strawberries, for example, their price will rise. As a result, fewer people will be able to buy strawberries. On the upside, the people who value strawberries the most and are willing to pay the higher price will always find them.

The movement of prices provides important information for the capitalists. Capitalists take their money and invest it in more profitable business ventures. If the price of something is rising, not enough of it is being produced. Investors rush in with new capital, hoping to make a profit. Production increases. The economy as a whole thus tends toward an “equilibrium” or a point at which capital is distributed roughly where it is needed.marian-communist-economics-4Prices are an important source of information, but where do they come from? In a capitalist economy, nobody sets prices. They emerge “spontaneously” in the market place. Every time I buy a cup of coffee on the way to work, for example, I incrementally increase the price of the coffee bean. Every time I fail to buy my usual morning cup of coffee because I am late for work, I decrease its price by a tiny amount. If everyone stopped buying coffee, its price would collapse.

Communists banned profit, capitalists, competition, free trade and much (if not all) private property – all of which are necessary for accurate prices to emerge. Instead, tens of millions of prices for items ranging from tractors to a loaf of bread were set annually (or every few years) by government bureaucrats. Since they could neither accurately predict how much bread would be produced (i.e., supplied) nor how much bread would be consumed (i.e., demanded), the bureaucrats almost always got the prices wrong.

Price-setting made shortages associated with low productivity worse. If the price of flour was set too high, bakeries would bake too little bread and bread would disappear from shops altogether. If the price of flour was set too low, too much bread would be baked and much of it would end up rotten. Put differently, communist economies were very inefficient.

To complicate matters, communists sometimes mispriced items intentionally. The price of meat, for example, was kept too low year after year out of political considerations. Low prices created an impression of affordability. On their trips abroad, communist officials would often boast that the workers in the Soviet empire could buy more meat and other produce than their Western counterparts. In reality, shops were often empty. As a consequence, money was of limited use. To get around shortages, many people in communist countries resorted to bartering goods and favors (or services).

Under communism, the state owned all production facilities, such as factories, shops and farms. In order to have something to trade with one another, people first had to “steal” from the state. A butcher, for example, stole meat and exchanged it for vegetables that the greengrocer stole. The process was inefficient, but it was also morally corrupting. Lying and stealing became widely used and trust between people declined. Far from fostering brotherhood between people, communism made everyone suspicious and resentful.marian-communist-economics-5Of course, not everyone was equally affected by shortages. Government officials and their families could generally avoid the daily hardships of life under communism by having access to special shops, schools, and hospitals. Communism started as a movement for greater equality. In reality, it was a return to feudalism. Like feudal societies, communist societies had an aristocracy composed of the communist party members. Like feudal societies, communist societies had a population of serfs with limited or no rights and little possibility of social mobility. Like feudal societies, communist societies were held together by brute force.

Postscript:

I am sometimes asked why, if communism was so inefficient, it had survived as long as it did. Part of the reason rests in the brute force with which the communists kept themselves in power. Part of it rests in the emergence of smugglers, who made the economy run more smoothly. When, for example, a communist shoe factory ran out of glue, the factory manager called his contact in the “shadow” or “underground” economy. The latter would then obtain the glue by smuggling it out of the glue factory or from abroad. Smuggling was illegal, of course, but it was preferable to dealing with the government bureaucracy – which could take years. So, in a sense, communism’s longevity can be ascribed to the emergence of a quasi-market in goods a favors (or services).

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Nehru’s influence on Congress continues

nehru science.png

This is the same political party that ruled India for around 80% of its existence, which followed socialist economic policies all the way to the late 1980’s and early 1990’s, when India was about to go bankrupt. They were then forced, essentially with a gun to their head, to implement economic reforms. Despite that, they continue to advocate socialism. Gods save India from them.

How Africa Got Left Behind

Robert Colvile’s excellent article on Prince Charles’s misunderstanding of the causes of African poverty provides a good opportunity to take a closer look at Africa’s economic history.

African poverty was not caused by colonialism, capitalism or free trade. As I have noted before, many of Europe’s former dependencies became rich precisely because they maintained many of the colonial institutions and partook in global trade. African poverty preceded the continent’s contact with Europe and persists today. That is an outcome of unfortunate policy choices, most of which were freely chosen by Africa’s leaders after independence.

Like Europe, Africa started out desperately poor. The late Professor Angus Maddison of Groningen University has estimated that, at the start of the Common Era, average per capita income in Africa was $470 per year (in 1990 dollars). The global average was roughly equal to that of Africa. Western Europe and North Africa, which were parts of the Roman Empire, were slightly better off ($600). In contrast, North America lagged behind Africa ($400). All in all, the world was both fairly equal and very poor.

The origins of global inequality, which saw Western Europe and, later, North America, power ahead of the rest of the world, can be traced to the rise of the Northern Italian city states in the 14th century and the Renaissance in the 15th century. By 1500, a typical European was about twice as rich as a typical African. But the real gap in living standards opened only after the Industrial Revolution that started in England in the late 18th century and spread to Europe and North America in the 19th century.In 1870, when Europeans controlled no more than 10 per cent of the African continent (mostly North and South Africa), Western European incomes were already four times higher than those in Africa. Europe, in other words, did not need Africa in order to become prosperous. Europe colonised Africa because Europe was prosperous and, consequently, more powerful. Appreciation of the chronology of events does not justify or defend colonialism. But it does help explain it.

Africa’s fortunes under colonial rule varied. Much progress was made in terms of health and education. Maddison estimates that in 1870, there were 91 million Africans. By 1960, the year of independence, the African population grew more than threefold – to 285 million. The OECD estimates that over the same time period the share of the African population attending school rose from less than 5 per cent to over 20 per cent. On the down side, Europeans treated Africans with contempt, and subjected them to discrimination and, sometimes, violence.

That violence intensified during Africa’s struggle for independence, as the colonial powers tried to beat back African nationalists. As a result, African leaders took over countries where repression of political dissent was already firmly established. Instead of repealing censorship and detention laws, however, African leaders kept and expanded them.

It was precisely because colonial rule was so psychologically demeaning to Africans in general and nationalist leaders in particular that post-independence African governments were so determined to expunge many of the colonial institutions. Since rule of law, accountable government, property rights and free trade were European imports, they had to go. Instead, many African leaders chose to emulate the political arrangements and economic policies of a rising power that represented the exact opposite of Western free market and liberal democracy – the Soviet Union.

Emulating the USSR in the 1960s was not altogether irrational. During the 1930s, the country underwent speedy industrialisation, transforming a nation of peasants into a formidable power. Industrialisation came at the cost of some 20 million lives, but it allowed the USSR to triumph over Hitler’s Germany (at a cost of an additional 27 million lives). By the early 1960s, the country not only produced massive amounts of steel and armaments, but also seemed poised to win the scientific contest with the West, when Yuri Gagarin became the first man in space on April 12, 1961.

The astonishing wastefulness and backwardness of the Soviet economy did not become apparent until the 1970s. By that time, unfortunately, the socialist bacillus infected much of Africa, which adopted one-party government that destroyed accountability and the rule of law, undermined property rights and, consequently, growth. Price and wage controls were imposed, and free trade gave way to import substitution and autarky.Africa’s love affair with socialism persisted until the 1990s, when, at long last, Africa started to reintegrate into the global economy. Trade relations with the rest of the world were somewhat liberalised and African nations started to deregulate their economies, thus climbing up the rankings in the World Bank’s Ease of Doing Business report. That said, even today, Africa remains the least economically free and most protectionist continent in the world. That – and not free trade – is the problem.

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India also got left behind thanks to ridiculous Socialist policies by the idiot Nehru and his progeny.

Capitalism Helps Women

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Does capitalism help or hurt women? A fascinating book from Cambridge University Press, Capitalism, For and Against: a Feminist Debate, seeks to answer that question.

Philosophy professors Ann Cudd of Boston University and Nancy Holmstrom of Rutgers University both want more freedom and higher material living standards for women. But they disagree on how to achieve that goal.

One thinks capitalism is the answer; the other socialism. Their differences boil down to two points: how capitalism has affected women to date, and the viability of alternative systems to improve a woman’s lot.

The professors may disagree – yet the data sides overwhelmingly with capitalism.

When it comes to material living standards, Cudd presents page after page of evidence to demonstrate “that capitalism has brought about a massive improvement in life for human beings” by reducing poverty and spurring technological innovations in, for example, healthcare. Death in infancy or childbirth is much rarer that it once was. Family sizes are smaller, since children generally survive into adulthood. And women’s options have multiplied as a result.

Holmstrom, however, claims that capitalism has lessened women’s material well-being; it has, she says, exacerbated inequality, which she conflates with poverty. Cudd counters that those who care about women’s welfare should focus on poverty, which is at a historic low.

But giving women the freedom to flee rural penury in order to work in factories, counters Holmstrum, has made them worse off. “The lives of subsistence peasants may be limited, but materially adequate and stable,” she writes. She thinks factory jobs “seldom provide a way out of poverty”.

Cudd answers that the world’s poorest people are overwhelmingly rural, performing informal subsistence agricultural labour: “Global capitalism has not changed their lives very much; they live much as their ancestors did.”

As the data shows, factory work has, indeed, helped women escape both poverty and the stricter gender roles of rural areas. And while Holmstrom implies that the world’s poor prefer agricultural drudgery to urban work, the ongoing global migration from rural areas to cities provides evidence to the contrary.

Capitalism, says Cudd, has not just liberated women from the fields but helped society to see them as individuals. It promotes not only material progress, but also social innovation, which has helped break downthose old prejudices such as sexism. “Capitalism derives its primary justification from the maximisation of individual liberty,” she says, “and capitalist societies promulgate the ideology of individualism, which helps to break down … sexist norms and practices.”

Indeed, the capitalist worldview subverts sexism and other forms of collective prejudice – just look at how it eroded India’s caste system.

“Capitalism reduces the oppression of traditional societies that impose hierarchies of gender and caste,” writes Cudd, because embedded within market exchange itself is the idea that each individual should be free to pursue her self-interest. Market participation also increases women’s bargaining power within society, empowering them to lobby for legal equality and greater freedom.

Holmstrom, on the other hand, defines freedom as negative liberty (freedom from interference) and what some philosophers call positive liberty (the means to act). To be free, Holmstrom contends, a woman needs adequate material resources and an environment of social tolerance.

But capitalism has actually increased freedom as Holmstrom conceives it – by reducing poverty and encouraging social tolerance. As the philosopher Jason Brennan noted, “as a matter of historical fact, protecting negative liberties is the most important and effective way of promoting positive liberty”.

Holmstrom is resistant to this view, observing that some capitalist states deny their citizens freedom outside the economic realm. But then, aren’t dictatorships that at least allow their citizens economic freedom (Chile under Pinochet) better than anti-capitalist dictatorships (modern Venezuela)? After all, capitalism fosters the conditions for people to escape poverty and ultimately demand more personal and political freedoms.

The debate is complicated by the fact that the professors disagree over how to define a capitalist state. For example, Cudd and Holmstrom both denote Sweden and similar states with high social spending as capitalist, but Cudd does not count oligarchic states such as Saudi Arabia as such. And Holmstrom insists that the exclusion of such states makes for a biased “persuasive definition” of capitalism.Yet Holmstrom does not want to count any past socialist system as truly socialist – which in turn shows her bias.

Cudd notes that capitalism compares favourably on practically every indicator of human wellbeing to the socialism practised by the Soviet Union, Maoist China, and Cuba today. Holmstrom, bizarrely, alleges that the Soviet and Maoist systems helped women, and praises the Soviet Union for offering “free” childcare and laundry services.

One might respond that if a woman resorts to cannibalising her own children to survive a manmade famine (as thousands did while millions of others died starving), endures rape in a gulag (“rape was so common as to be considered routine”), or faces execution for political dissent, then laundry services do not meaningfully improve her situation.

While Holmstrom thinks those states helped women, she believes no society has ever truly given “the people” (rather than a bureaucracy) control over the means of production. She does admit she is comparing capitalism to an imagined ideal of socialism. And anticipating charges of Utopianism, she points out that many major social changes such as women’s suffrage once seemed unreachable.

Yet ultimately, she offers little in the way of evidence that her vision wouldn’t fail like all of the other socialist experiments throughout history. There, is after all, ample data on where that road leads – and it is hardly a paradise for workers, women or anyone else.