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Today’s Democratic Socialism Versus the Age-Old Version: A Comparison

Socialism was invented by French scholars in the 17th and early 18th centuries. They and their followers believed a just and harmonious society was attainable, and it was the job of the intellectual elite to discover the rules required to bring such a society into being. The political elite was supposed to implement these rules, and the secret police to enforce them.[1] The abolition of private property rights was a dominant rule.

For about two centuries, socialism could not find a place under the sun in the United States. The most prominent attempt heretofore was by Eugene Debs (1855-1926), who founded the Social Democratic Party of America. It never got off the ground. Yet in the United States in the 21st century, socialism is on the rise politically. The basic ideas and concepts of socialism—increasingly referred to as democratic socialism—have been defined. It is therefore possible to compare and contrast the 21st century version to the classic socialist doctrine.

This post will examine the two key features of today’s democratic socialism and their consequences for economic progress.

The fundamental institutional arrangements that define the difference between capitalism and socialism in general are, respectively, “the rule of law” and “the rule through law.” The rule of law prioritizes law over government and politics, and the individual over the community. The rule through law prioritizes government and politics over law, and the community’s common good (as defined by rulers) over the right of individuals to pursue their private ends. (Granted, no actual country satisfies either theoretical condition. Some capitalist countries are closer to the rule of law than others; some socialist countries are closer to the rule through law than others.)

It appears that democratic socialism has two objectives that are consistent with socialism in general: top-down control of the allocation and use of resources, and a top-down predetermined outcome (the common good). But democratic socialism also has two institutions that set it apart from its predecessors: It supports free elections and accepts private property rights. Hence, to gain power, democratic socialism must 1) win elections for the U.S. Congress or the White House, or both; and 2) constrain the free-market incentives of private property rights. On the other hand, the observed “tolerance” of free debate on the part of today’s progressives suggests that, once in power, they are likely to follow the generic socialist rule: one person, one vote, one time. Let us address the ill-effects (the costs) of both issues: winning elections and constraining property rights.

Stealing from Others in the Short Run

To win those congressional, senatorial, and presidential contests, the political-intellectual elite needs to promote an attractive cause. It found it in the unequal distribution of income in the United States. The battle cry of democratic socialism is the immorality of capitalism, which is to be corrected by redistributional policies such as free health care, government-guaranteed jobs, and free education.

However, redistributional policies require more government programs. More government programs entail an ever-increasing role for government in running the economy. An ever-increasing governmental role in the economy means that more and more people depend on government programs. Dependence on government programs incentivizes people to vote for a living. Redistributive policies thus turn into a process that generates, from one election to the next, ever-growing political support for replacing competitive markets with governmental control over the use of resources. Democratic socialists argue that the government revenues from taxing high-income earners, corporate profits, and all other economic activities that dare to grow, should be sufficient to support new public programs.

That might be true. In any given year, the ruling elite can redistribute already-produced incomes according its preferences. Yet its redistributional policies fall short of revealing the costs of democratic socialism. For incomes are not found; they are created. Redistributional socialism affects the behavior of income-creators, which, in turn, affects economic progress. The consequences of high taxation and excessive business regulations are then a major cost of democratic socialism, which its ruling elites ignore. Let us look at these costs with respect to the following groups of taxpayers: entrepreneurs, utility-makers, and legal immigrants.

Three Examples: Entrepreneurs, Professional Athletes, and Legal Immigrants

Entrepreneurship means the production of a new good, the opening of a new market, the discovery of a new source of supply, or using new technologies to produce old products (for example, fracking). In capitalism, entrepreneurs appropriate the benefits from successful investment choices and bear the costs of failure. The latter includes the funds supplied by entrepreneurs and the funds they have borrowed. The spread between expected benefits and total costs incentivizes the rate of entrepreneurial activities, and, consequently the rate of economic growth. For decades, the market determined this spread. And it worked. Millions of entrepreneurs, through successes and failures, created the American miracle.

If and when democratic socialists gain power, punitive taxes and government programs would reduce the spread between benefits and costs of entrepreneurial activities, and disincentivize entrepreneurship. Disincentivizing entrepreneurship reduces economic progress. Through this process, democratic socialism would move the market-controlled benefits-costs spread of entrepreneurial activities in competitive markets to bureaucratic control in political markets. George Stigler anticipated this critical change back in 1971. As the Nobel laureate in economics observed, “The state is a potential resource or threat to every industry in the society. With its power to prohibit or compel, to take or give money, the state can and does selectively help or hurt a vast number of industries.”[2]

Millions of dollars that people pay for football tickets is the best evidence that they get more satisfaction watching professional football players than from any other bundle of goods the same millions of dollars could buy. For young people, the total costs of seeking a career in football  include the opportunity costs of long hours of training during one’s high school and college years, and the probability of injuries. Those not drafted bear the entire loss of the choice they made. Those who are drafted might earn millions of dollars in the NFL, where the average playing career is about six to eight years. Confiscatory income taxes would incentivize some talented young people to choose careers other than football; that is, government distributional policies would make this group worse off. Redistributional policies would raise the players’ costs of injuries relative to after-tax benefits, incentivizing them to avoid hard hitting, a major attraction of the game.

Whether football stadiums are full or not depends on the quality of the game, which determines the demand for tickets. A change in the quality of the game would incentivize football fans to spend their money on “second best” activities.

In the 1970s, a relatively large group of people emigrated to the United States after fleeing Vietnam by boat and ship. The “boat people” knew nothing about our institutions and culture. They were also seen as competitors by many Americans, especially in the fisheries. Yet the “boat people” did not stand in line for welfare. They worked long hours, saved money, and became entrepreneurs. Within one generation, they created economic wealth with their bare hands. By 2017, the median household incomes of Asians and non-Hispanic Americans was $81,000 and $68,000 respectively—an amazing statistic in an America of  alleged white privilege. Democratic socialism would, via confiscatory taxes and environmental regulations, disincentivize the likes of the “boat people” from being too successful.

Stealing From Each Other in the Long Run

Two major components of private property rights that set it apart from other types of property rights are exclusivity of use and transferability of ownership. The first creates incentives for individuals to move their resources to the highest-valued uses these individuals are capable of discovering. The second provides incentives for resources to move from lower- to higher-productivity owners. The incentive effects of the exclusivity and transferability of ownership depend on the political system’s constitutional guarantees of credibility and stability of property rights in resources. In the Anglo-American legal tradition, private property rights serve the subjective preferences of property owners.

Consider an example.

In 1851, the city of Birmingham, England built a large sewer that polluted the Thames River.[3] The owner of a downstream property complained that the pollution was killing fish and affecting the health of his cows and sheep. He asked a court to issue an injunction. The city admitted that the sewer was polluting the river. However, it invoked the public good argument. It said that Birmingham’s 250,000 inhabitants would suffer from a plague or some other bad disease unless the sewer was allowed. The judge, in dismissing the city’s argument, said that he was not a public safety committee and that his function was to interpret the law—which in this case meant to protect the right of a property owner to enjoy a clean river. That is, instead of seeking governmental interference, the parties should negotiate a contractual agreement.

An efficiency-friendly consequence of free contracts is that they minimize resort to the state. But voluntary contracts are not good enough for democratic socialism. Why not? Because private ownership, supported by the rule of law, creates a conflict between the incentive effects of private property rights and the redistributional policies of democratic socialism. Hence it must attenuate private property rights.

How, and at what cost? The process is as follows: The value of any good to a person depends on the bundle of rights to do things with that good. (The value of a car to me is less if I have no right to resell it. I will pay more for a worker I can fire at no cost.) The attenuation of private property rights reduces that bundle of rights. A subtraction from the bundle of rights in goods affects those goods’ market (scarcity) prices. (For example, rent control has the same effect as confiscating a part of a privately-owned building.[4]) The attenuation of private property rights then creates a gap between scarcity prices and actual prices, and this difference means a less efficient allocation of productive resources. That is, this interference with the price of goods and services impedes the flow of resources from lower- to higher-valued uses.

Is Stealing From Each Other the Right Choice?

Transferring incomes from those who earned them in economic markets to others via political markets would disincentivize their work efforts. The attenuation of private property rights weakens incentives for the future production of wealth. So, it is up to American voters to choose between political candidates whose policies are oriented toward equality of outcomes, and those whose policies are oriented toward equality of opportunities. Is it worth giving up the benefits of entrepreneurship, the hard-hitting feature of the most popular game in America, and incentives for ethnic groups to enrich themselves through hard work? A colleague said it well: “How different would our country be if the early immigrants had been given a welfare check instead of a shovel.” Must all productive citizens be equally poor to satisfy democratic socialists?

[1] The French Revolution of 1789, which was carried out in the name of a legitimate centralism enforced by an “enlightened” ruling elite, was in tune with the socialist doctrine.

[2] George Stigler, “The Theory of Government Regulations,” Bell Journal of Economics 2 (1971), 3.

[3] Example taken from Elizabeth Brubaker, “The Common Law and the Environment: The Canadian Experience,” in Who Owns the Environment?, edited by Peter J. Hill and Roger E. Meiners (Rowman & Littlefield, 1998).

[4] Suppose open market rent costs $1,000 per year. The value of the rental property at 10 percent interest is $10,000. Suppose the government sets the rent at $900 per year. The owner’s flow of income is down by $100 per year. And the value of building is now $9,000, that is, down by $1,000.

Reader Discussion

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on August 05, 2019 at 10:23:28 am

And, boy, what they did with those "shovels." (see the NYC subway system).

But more than this, fleeing from the *Shitholes* of Southern Europe, those shovels became a "spine" permitting, for the first time in generations, these new Americans to stand erect with a newfound confidence and pride.
And, it gave them a voice, admittedly after some delay, in their own governance AND disposition of the "bread" they had earned enabling them to build / buy a modest little home, from which their children and grandchildren embarked on, perhaps, more substantial / successful ventures.

In short, their hands were not upturned in supplication but rather firmly grasping the instruments of their, and the country's, progress.

Shovels aren't so bad, kids, Try Them!

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Image of gabe
gabe
on August 05, 2019 at 10:30:39 am

Look at the people in the photo accompanying this article. All of them are children. Well fed, well-clothed children.
Socialism for them is just something to do, something to organize a fun time around. Making banners, marching around, taking selfies and instagramming and snapchatting -- the aesthetic is the alpha and the omega for them. These are not the coal miners and ironworkers of yore, adults who felt the bleeding edge of a primordial capitalism cutting into them every day. How anyone can take any of these people seriously except in respect of the votes they wield is beyond me.

The original socialism progressed from Robert Owen to Ferdinand Lassalle to Marx & Engels to Lenin to Stalin (or you can substitute Chavez and Maduro for these last two since none of the kids marching around with their banners has ever read anything by Marx or Lenin or anything else: tl;dr). I'm not sure where along that progression today's child socialists are but it will end eventually with Lenin and then Stalin just like the last time. Unless responsible adults stop it. Because for these kids socialism is just fashion, but if they succeed in installing into government serious authoritarians, then Lenin and Stalin are inevitable.

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Image of QET
QET
on August 05, 2019 at 10:41:23 am

Social Democracy as it developed in Europe came down from an original revolutionary fervor to an acceptance of the liberal political order. It did so in large part because it was anchored, as Marxist theory said it was supposed to be, in the political organizations of the working class, i.e. unions. As Lenin discovered to his regret, the political consciousness of the working class didn't go beyond incrementalism; that's why he abandoned reliance on the workers and created a conspiratorial revolutionary party. Our "Social Democrats" seem to me, by contrast, to be moving upwards, towards a revolutionary politics out of and away from liberalism and they are already the intellectuals and professionals Lenin turned to. They are not anchored in labor unions or the working class. That is why I am dubious about the name they chose for themselves. My guess is that they are far less committed to free elections than the late 19th and 20th century European and American social democrats (think Norman Thomas or Sidney Hook) whose name they have taken.

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Image of Fred Baumann
Fred Baumann
on August 05, 2019 at 10:48:53 am

Give the little pretentious buggers some shovels.

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Image of gabe
gabe
on August 05, 2019 at 14:00:43 pm

What Bernie Sanders calls "Democratic Socialism" (aka "a mixed market economy", aka Capitalism) is what built and maintained the greatest middle class in history (in America and in the rest of the first world.)

That is until the economic terrorists who hate us for the freedoms that strong unions, high marginal tax rates on the parasite class, and proper financial regulations gave us in the late 30s, the 40s, the 50s, the 60s, and the early 70s until said economic terrorists used the economic upheaval and stagflation caused by the oil embargo to launch their jihad against the middle class and shared prosperity.

38+ years of trickle-down/supply-side Satanomics, aka Conmanitalism, is taking a first world county and turning it into a nation of peasants who now require multiple income households just to survive.

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Image of Kuni
Kuni
on August 05, 2019 at 15:14:15 pm

Excellent economic analysis. I would only add the socially corrosive results of "voting for a living"; creating separate classes of makers and takers and enforcing the claims of takers with the power of government is disastrous to a community desiring peaceful coexistence...

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Image of OH Anarcho-Capitalist
OH Anarcho-Capitalist
on August 05, 2019 at 15:15:59 pm

"The very idea that profits "trickle down" to workers depicts the economic sequence of events in the opposite order from that in the real world. Workers must first be hired, and commitments made to pay them, before there is any output produced to sell for a profit, and independently of whether that output subsequently sells for a profit or at a loss. With many investments, whether they lead to a profit or a loss can often be determined only years later, and workers have to be paid in the meantime, rather than waiting for profits to "trickle down" to them. The real effect of tax rate reductions is to make the future prospects of profit look more favorable, leading to more current investments that generate more current economic activity and more jobs.

Those who attribute a trickle-down theory to others are attributing their own misconception to others, as well as distorting both the arguments used and the hard facts about what actually happened after the recommended policies were put into effect."

Thomas Sowell, "Trickle Down" Theory and "Tax Cuts for the Rich", Hoover Institution Press, 2012, pp.10-11

http://www.friesian.com/sayslaw.htm

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Image of OH Anarcho-Capitalist
OH Anarcho-Capitalist
on August 05, 2019 at 17:28:49 pm

Agreed!
Perhaps we should rename the phenomenon as "Trickle Up" as it is ONLY AFTER vast sums of monies are paid to workers, suppliers (actually nothing more than other workers) and many others that he or she who has undertaken the risk receives any recompense.

Admittedly, what you (and I) describe was more consequential in the age of "ownership" capitalism than it is in the present Age of Managerial Capitalism - but - the essential dynamics remain, while certain incentive structures have been altered.

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Image of gabe
gabe
on August 07, 2019 at 00:30:08 am

[…] Today’s Democratic Socialism Versus the Age-Old Version: A Comparison Svetozar Pejovich, Law and Liberty […]

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Image of PowerLinks 08.07.19 – Acton Institute PowerBlog
PowerLinks 08.07.19 – Acton Institute PowerBlog
on August 08, 2019 at 09:19:31 am

Apart from the 'age old' adage that investment leads to profit, the missing link here is the mutually shared incentive killer, atheism. And, of course, Christianity has neither greed nor material gain, much less oppression, as its motivator, 'dictatorship' - the recourse of Marx and his ultimate Communist progeny, the Leninist impatience with Fabian Menshivism, which is beginning to rear its ugly head here and now.

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Image of gdp
gdp
on August 12, 2019 at 01:02:15 am

[…] The American Conservative An Interview With Mister Rogers – Fr. John Catoir at Catholic Stand Today’s Democratic Socialism Versus the Age-Old Version: A Comparison – Svetozar Pejovich at Law & Liberty Sick, Pervy Male Sexual Acting Out Deserves Mockery, […]

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Image of MONDAY EDITION – Big Pulpit
MONDAY EDITION – Big Pulpit
on September 03, 2019 at 08:08:00 am

[…] Today’s Democratic Socialism Versus the Age-Old Version: A Comparison – Law & Liberty […]

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Image of Democrats go full Marxist: Officially embrace the “religiously unaffiliated” – Dr. Rich Swier
Democrats go full Marxist: Officially embrace the “religiously unaffiliated” – Dr. Rich Swier

Law & Liberty welcomes civil and lively discussion of its articles. Abusive comments will not be tolerated. We reserve the right to delete comments - or ban users - without notification or explanation.