What Is Socialism?

By John C. Goodman

Since a leading contender for the Democratic presidential nomination has endorsed it, since most of his opponents have refused to denounce it, and since a majority of young people appear to approve of it, now is a good time to ask: what exactly is socialism?

If you go to Wikipedia, you will discover an enormously lengthy essay on the topic (maybe their longest on any subject), with 528 footnotes. But it’s all about aspirations. Not one word about all the evil things that happened to people who lived in socialist countries in the last century or who are living under socialism today.

Many people like socialism because they have no idea what it is.

Wrong Prices 

In a market economy the price system does three remarkable things.

First, it produces trillions upon trillions of individual prices – some changing every hour, every minute and even every second – that equate supply and demand. As a result, in most places, most of the time, buyers can buy as much they want and sellers can sell as much as they want at the existing price. The largest, most powerful computer in the entire world is incapable of duplicating that feat.

Second, it provides information that guides the production decisions of millions of workers all over the world. Even a simple pencil requires input from tens of thousands of workers, in this country and abroad – most of whom don’t know each other, never talk to each other and are largely unaware of each other. If you were to try to write down and feed into a computer all of the things that must be done in order to produce a pencil it would take a lifetime.

Third, the price system tends to maximize the value of what is produced in a way that could not be duplicated by any computer. In a market economy, most of the time the price buyers face reflects the social cost of production. Buyers won’t buy a product unless it’s worth to them at least as much as it costs society to produce it. At the same time, the price producers receive tends to reflect the minimum value consumers place on the good. Producers won’t produce a good unless it is at least as valuable to society as what it cost to produce. 

The fact that the price system produces these three remarkable outcomes, doesn’t mean the results can’t be altered.

Economists have always known that you can enjoy the benefits of the price system without accepting all of its outcomes. Suppose you think the market produces too many Oreo cookies and too few eBooks. You could put a tax on Oreos and give a subsidy to eBooks, while leaving the price system as a whole intact. Suppose you think Peter’s income is too high and Paul’s income is too low. You could take from Peter and give to Paul.

But these examples by themselves don’t count as socialism. Socialists don’t become socialists because they want to tinker around the edges. Socialists are socialists because they want to replace a system driven by thousands of people pursuing their own self-interest with a government-directed system that nominally aspires to some higher purpose. In a socialist economy, virtually every price is a government-controlled price. Virtually every wage is a government-controlled wage.

What difference does that make?

When socialists take over an economy they don’t rush out and acquire the most powerful computer they can find to create an intricate alternative to market-driven prices. Instead they tend to make very crude decisions – groping here and  grasping there, in an unending process of crisis management.

Under their rule, surpluses invariably emerge in some markets and shortages in others. Shortages are far more likely than surpluses because prices are no longer allowed to coordinate production decisions. Overall output soon becomes a fraction of what it could have been.

Wrong Goods and Services

Under socialism, the government does much more than set prices. It determines what will be produced, how it will be produced, where it will be produced and under what circumstances people will be able to consume what is produced. Since prices are not allowed to clear markets, inevitably there is rationing by waiting for food, clothing, housing, medical care and other necessities. People spend enormous time and effort trying to circumvent the rationing bureaucracies.

After the fall of the Soviet Union, Russians who came to the United States were the most awed by entering American grocery stores. There they saw row after row of food products – huge quantities of fresh produce, meats, dairy choices, all kinds of pastries, you name it. And they could buy as much as they liked of any product without restriction. Under communism, no Russian ever had this experience.

Even today, both Russia and China claim that health care is available as a matter of right, just like Bernie Sanders says it should be. But Russian workers are required to pay into a private health insurance fund, and one in every four dollars in paid medical care is an illegal payment to doctors and hospitals to get better and more accessible care. Even after that, Russian health care resembles Third World medicine. (See here and here.) In a survey of residents of large cities in China,  one-half reported making illegal payments to doctors to get care. 

Ironically, Russia and China might have two of the most privatized health care systems in the world, when all the black-market payments are factored in.

Wrong Incentives

To this point we have said nothing about why the government would want to control people’s economic choices. Whatever the stated goals, socialist governments almost always have an economic plan. Whatever the plan, it’s in no one’s self interest to carry it out. 

Let’s suppose the plan calls for you to have two bowls of rice every day, but you would like three. In a market economy you get the third bowl if you are willing to pay the market price. Let’s say that is $10. Under socialism, you are not allowed to have the third bowl at any price. So, your incentive is to spend up to $10 of effort to manipulate the rationing bureaucracy to get your third bowl.

Or let’s say the plan calls for you to work 8 hours a day, but you would prefer to work only 7. In a market economy, if you work one less hour you get one less hour’s pay. Let’s say that’s $15. Under the socialist plan you don’t have this option. So, your incentive is to spend up to $15 of effort to manipulate the bureaucracy in order to get an hour off.

Now, when everybody at the bottom has a self-interest in defeating a plan created by those at the top, guess who wins? Socialism, wherever it has been tried, has been an economic disaster. 

Socialism in Colonial America

From time to time there have been small experiments with socialism. One of the most notable was in Jamestown. Jamestown? Yes. In the very first permanent English settlement in North America, there initially was no private ownership of the means of production. That meant there was no connection between how much people worked and how much they consumed.

The result? Something approaching mass starvation. In 1609, there were 500 settlers. Within six months, fewer than 100 were still alive. People were desperate. They ate dogs and cats, then rats and mice. Some apparently ate their deceased neighbors.

Then, with a new governor in charge, they created private property. David Boaz writes:

John Rolfe, the husband of Pocahontas, said that once private property was instituted, men could engage in “gathering and reaping the fruits of their labors with much joy and comfort.” The Jamestown colony became a success, and people from all over Europe flocked to America.

Selfishness vs. Altruism

Capitalism is sometimes described as institutionalized selfishness, while socialism is often described as institutionalized altruism. If anything, the reverse is true.

As Adam Smith pointed out, the only way to increase your income in a market economy is to meet other people’s needs. In a socialist system, the only way to increase your income is to undermine the plan. Doing so often means your increase in well-being is at someone else’s expense.

Paradoxically, socialism actually breeds the most harmful kind of selfishness, whereas capitalism fosters a spirit of cooperation.

In a capitalist supermarket, the presence of other people is usually good for you. People get advice and give advice. They compare notes. They socialize. When someone else buys something, they are not taking anything away from you.  It appears that every customer can have as much as he likes of every product. Cordiality tends to be the norm. Letting a disabled person cut in line at the checkout stand is normal and expected.

In a socialist supermarket, by contrast, the presence of other people is usually bad for you. There are long lines for a limited quantity of goods. If you are waiting in line to buy an orange, for example, other people are an obvious threat. By the time it’s your turn, there may be no oranges left. Or the only ones left may be green. Or maybe even rotten.

Under rationing by waiting, people are competing against each other for a limited supply. If other people weren’t there you could have the orange of your choice. It’s impossible not to see others as rivals who interfere with your wellbeing.

Are Scandinavian Countries Socialist?

Northern European countries are noted for their comprehensive social insurance and they are also democracies. Bernie Sanders and others have seized on those facts to refer to these countries as “socialist.” The apparent reason is to bolster the argument that you can take away people’s economic freedom without taking away their political freedom. But there are no such examples.

As any head of state of any Scandinavian country will quickly tell you, their countries are not socialist. They are  capitalist. In many ways they are more capitalistic than we are. For example, in Sweden, Norway and Denmark there is no minimum wage law. These three countries are also rated as among the easiest countries in the world to do business in. Most Nordic countries have no estate tax. Sweden has a country-wide school voucher program – with freedom of choice for parents and their children to choose among public schools, private schools and even for-profit schools..

A report by JP Morgan Chase, drawing on the latest international data, found that Sweden, Denmark, Finland, Norway and the Netherlands protect property rights somewhat more aggressively than the United States, exercise less control over private enterprise and distribute a smaller share of their total income to workers.

What about taxation? It is true that these countries have a larger public sector than we do, mainly because of such social welfare benefits as health and education. But these benefits are not paid for by taxing large companies and the very rich. In fact, taxes on corporations and high-income individuals are lower than they are in the United States.

Nordic countries by and large pay for middle class benefits with middle class taxes – especially payroll and consumption taxes. The top 10 percent of income earners in the United States pay 45 percent of all taxes, including all social insurance taxes. In Sweden, the top 10 percent pay only 27 percent of all taxes. Contrary to the claims of Bernie Sanders and Alexandria Ocasio-Cortez, Organization for Economic Cooperation and Development (OECD) statistics show that the United States has the most progressive tax system in the world.

Finally, even though Nordic countries are committed to the idea of universal health care coverage, health care is not free for middle-income patients. Out-of- pocket spending, for example, is 15 percent of total health care spending in Sweden. It’s only 11 percent in the United States.

Imprisonment, Torture and Death

There are several examples of economic freedom without political freedom, e.g., Hong Kong and Singapore. But there are no examples of an entire country that has abolished economic freedom while maintaining political and civil liberties.

It’s easy to understand why. If the government controls your job, your salary, your living choices and just about every other aspect of your economic life, how free will you be to challenge the rulers in the next election? All truly socialist regimes quickly became dictatorships – even if, like Nazi Germany and present-day Venezuela and Nicaragua, they started out as democracies; or, if like Cuba, there were false promises of democracy.

To this point, I have made no distinction between national socialism (fascism) and Marxist-type socialism (communism). The traditional political science literature tends to define the former as having private ownership with government control while the latter has both government ownership and control. However, the general rule is: the more government asserts its power in whatever way, the worse the economic deprivation and the worse the human rights atrocities.

In the 20th century, an estimated 169 million people were killed by their own governments. It was genocide on an unimaginable scale. The vast majority of these victims were murdered by socialist governments. The Russian communists were the worst (62 million) followed by the Chinese communists (35 million) and then the Nazis (20 million).

The Worst Get to the Top

Although socialists claim that workers are exploited under capitalism, no greedy capitalist has ever begun to match the degree of exploitation that has occurred under socialism.

Stalin, Mao Tse Tung, Fidel Castro and Hugo Chávez lived like kings and accumulated vast fortunes while their own people often faced starvation. Kim Jong-un and the current rulers in Cuba and Venezuela are following in their footsteps. Here are some particulars:

    • The world’s greatest mass murderer, Josef Stalin, killed almost 43 million people, many by forced starvation. He was one of the world’s richest people at his death.
    • Chinese communist leader Mao Tse-tung was the second greatest mass murderer in world history, killing almost 39 million. His granddaughter today is one of the richest people in China.
    • Between 1 and 3 million people starved to death under the regime of North Korea dictator Kim Jong-il. A UN report estimates that 18 million North Koreans go to bed hungry every night under the regime of his son, who managed to slip by international sanctions and import $2.09 billion in luxury goods from China for his personal benefit. The items included Mercedes-Benz S-Class cars and a luxury yacht worth as much as $6 million.
    • While ordinary Cubans stood in breadlines, Fidel Castro had his own private yacht and his own private island. In Havana, he lived in an immense estate with a rooftop bowling alley, a basketball court and fully equipped medical center.
    • During the reign of avowed Marxist Hugo Chavez in Venezuela, ordinary people faced food shortages, skyrocketing inflation and abject poverty, Yet Chavez’s daughter, María Gabriela Chávez, had bank accounts in the U.S. and Andorra with assets totaling nearly $4.2 billion – making her the richest person in the country.

Worker Exploitation

A cardinal tenet of Marxism is the idea that workers do not get to keep the value of what they produce. Instead, the capitalists extract a surplus from them – that is little better than theft.

Marx wrote several decades before the development of the economic concept of marginalism (usually associated with Alfred Marshall). Today, all mainstream economists believe that workers get paid wages that are roughly equal to their marginal product (the value of what they contribute to the products their employers sell).

However, there is one system under which workers are routinely paid less than the value of what they produce. It’s socialism.

Cuba pays its doctors the equivalent of $67 a month and nurses $25 – sums that must be far below any fair estimate of their economic contribution. (The average monthly salary for all Cuban workers is $25, according to official statistics.) Cuba also lends doctors to other countries – roughly 50,000 a year, including 30,000 in Venezuela. Although the government doesn’t say how much it pays its doctors on foreign soil, it is clearly less than what Cuba collects from the host countries: an $8.2 billion “profit” was expected in 2014 alone.

Why don’t Cuban doctors defect, once they are beyond the reach of the Cuban police state? They know if they do, their families back home in Cuba will pay a painful price.

Two Countries, Two Systems

In social science, there are very few controlled experiments. It would be unimaginably cruel to arbitrarily divide people into two groups, letting one have capitalism and freedom and forcing the other to endure dictatorship and socialism. Yet the course of history has done just that.

In 1945 Korea was divided into two countries. The people in these two countries were virtually identical. They were biologically related. They had the same culture, the same traditions and the same genes. For the next 75 years, South Korea had a relatively free market economy, while private property was abolished in North Korea. 

The result? In 2015, most North Koreans were living in poverty, on the verge of starvation. Their average family income was less than $5 a day. By contrast, South Korea was one of the most prosperous countries in the world. Average family income there was 22 times higher and people were 2 to 3 inches taller than their relatives in the north.

At the end of World War II, Germany was similarly divided, along with the city of Berlin. Same people. Same culture. Same genes. Initially, per capita income was actually higher in the East. But by the time of reunification in 1989, East German income was less than one-third of income in the West.

No Exit

Wherever there is oppression, people try to leave. In 1961, the East German communists erected a Berlin Wall to prevent that. Before the Wall’s erection, 3.5 million East Germans  defected from the East to the West, many by way of Berlin. The Wall was guarded by soldiers in watch towers who supervised a “death strip” that would-be escapees had to cross.

More than 100,000 people attempted to escape East Germany, and more than 5,000 people succeeded in escaping over the Wall. Among the unsuccessful, as many as 200 or more were killed by fellow Germans, for no other reason than attempting to live in a free society.

As many as 77,000 people may have died trying to escape Castro’s Cuba.

An estimated 30,000 people have defected from North to South Korea. The not-so-lucky face death by public execution.

More than four million Venezuelans, around 13 percent of the country’s population, have emigrated since the socialist revolution began in 1999.

Americans who are enamored with socialism should try talking to those who have rejected it by voting with their feet.

John C. Goodman is President of the Goodman Institute and Senior Fellow at The Independent Institute. His books include the soon-to-be-published updated edition of Priceless: Curing the Healthcare Crisis, the widely acclaimed A Better Choice: Healthcare Solutions for America, and New Way to Care: Social Protections that Put Families First. The Wall Street Journal and National Journal, among other media, have called him the “Father of Health Savings Accounts.”