Socialism and Democracy
We previously noted that Marx’s aim—governmental control of resources in the interest of achieving a more equitable distribution of wealth—was widely embraced in the latter half of the nineteenth and early part of the twentieth century. Many converts to socialism, as said, accepted Marx’s end but rejected his proposed means—violent revolution—believing instead that socialism could be peacefully established.
In the late nineteenth century, one group of such converts organized to establish the aforementioned and highly influential English Fabian Society.[37] The Fabians were socialists who also regarded themselves politically as democrats, disavowing authoritarian or forceful imposition of socialism in any society. The Fabians, moreover, clearly perceived the potential contribution of democracy to the achievement of socialist goals. They recognized, in particular, that the democratic electoral process provides an ideal vehicle for the peaceful, nonviolent, and legal achievement of socialism toward which they aimed. Greater democratization would serve the achievement of such a purpose by widening the electorate, ideally to the point of universal suffrage. Such an extension of the franchise was to be combined with an educational agenda designed to lead the masses to embrace socialist values and aspirations. Fabians believed that such a combination of means—elections and education—would lead to the formation of democratic majorities persuaded to vote for candidates committed to various forms of socialistic legislation and regulatory policy, including progressive taxation. Socialism would thus be achieved not immediately and at a stroke but rather gradually and over time. Its movement would proceed not through violence but rather piecemeal and democratic enactment of socialistic policy. Both the celebrated slogan of the Fabian Society—“Make Haste Slowly”—and its adopted symbol—the turtle—clearly expressed its conviction that socialism would eventually be established in Western society through the slow-but-steady evolution of the democratic political process.[38]
Democracy, as we recall, is one traditional Western answer to the question of who shall rule—who shall be permitted to participate in the political process, determine law and policy, and hold office. The wider the democracy, the greater the range and number of individuals permitted to vote. The ultimate democratic goal, universal suffrage, was achieved in the United States in 1920 and Britain in 1928. As previously mentioned, Fabians and fellow travelers, such as American Progressives of the era, clearly perceived the potential means-end relation between democracy (majority rule) and socialism. The majority in any society is always comprised by the less-well-to-do members of society, the so-called “have-nots.” Wealthier members of society—the “haves”—are always a minority of the total population. It could thus confidently be expected that an ever-wider democratization of society—ever-wider participation of the masses in the political process—would enable ever-greater numbers of “have nots” to exert influence on electoral and legislative outcomes.
Fabians and Progressives further believed that the majority of a democratic electorate can readily be persuaded to vote for socialistic legislation that serves to redistribute or transfer wealth from the “haves” toward themselves. Toward that end, they advocated a policy of progressive taxation: individuals with relatively higher income are taxed at a higher rate than those with relatively lower income. By such means, wealth can be withdrawn from the “haves” and used to fund government programs (“entitlements”) that transfer income, goods, or services to the “have-nots.” Expanding democracy to the point of universal suffrage would more or less ensure that the relatively “poor” would constitute a majority of voters. Such a majority, educated to embrace socialistic values, could be expected to support legislation that transfers material resources from the “rich” to themselves, thereby indirectly, legally, and peacefully serving the socialist goal of equalizing the distribution of wealth across society. Fabians, Progressives, and fellow travelers were indeed correct: the achievement of socialist goals requires neither violence nor the drastic methods of pure communism but can rather be achieved by thoroughgoing democratization of the political process. Democratic majorities can (and do) achieve the political redistribution of wealth by supporting progressive taxation and redistributive legislation and regulation while simultaneously permitting private property and the rule of law more generally to remain nominally intact. We have previously discussed the modern phenomenon of totalitarian democracy.
Fabian or Progressive gradualism is one aspect of the process that has led to the transformation of the American economic order from a predominantly capitalist to a “mixed” economy. As mentioned, significant and vibrant elements of a market economy continue to exist in the United States, but such are intermingled with various socialistic measures that operate on principles incompatible with the principles of the market. The question is whether the simultaneous application of opposing economic principles—capitalism and socialism—can sustain a flourishing and prosperous society over time. In his celebrated book The Road to Serfdom, Hayek argues against the stability and long-run viability of such a “mixed” economy.[39] He maintains, on the contrary, that the tendency of an economic system that confounds contradictory principles is toward the gradual elimination of one or the other of the opposing elements. Either the socialistic elements will give way to market principles, or the reverse, the free economy will gradually find itself overwhelmed by collectivist command and control.
Fascism
The attempt to combine capitalistic and socialistic practices is also a prominent feature of another type of collectivized economy that shares important attributes with socialism, namely, fascism. The term fascism is widely if inappropriately employed in contemporary discourse as a potent emotional symbol, usually associated with various political evils such as dictatorship, authoritarianism, fanatic nationalism, racism, militarism, and so on. Such usage no doubt stems from its popular association with the image of Adolph Hitler and the German Nazi Party (National Socialist Party), the most infamous face of fascism in the twentieth century. Such careless and emotionally charged usage, however, should be avoided. The term fascism is more than a mere emotional epithet. It designates an objective concept whose meaning is essential to analytic clarity.
Modern fascism is of Italian origin, first emerging in the totalitarian regime of Benito Mussolini (1883-1945). The term derives from the Latin fascis—a bundle of bound rods containing an axe and blade protruding from the center. In ancient Rome the fasces was employed as a symbol of the power and jurisdiction of a magistrate (legal administrator). It was revived in modern Italy in conjunction with the regime established by Mussolini, whose symbol was the fasces and whose slogan was “strength through unity.” Hitler and the Nazis later adopted the term fascism and reinterpreted it in line with their particular purposes.
With respect to economics, the term fascism, like the terms socialism and capitalism, refers to a distinctive set of economic arrangements, namely, a collectivist organization of economic activity sometimes called corporatism or syndicalism. It is akin to communism and other forms of economic socialization in that it too involves governmental or state control of resources within society. Unlike classic communism, however, and somewhat like the conception of a mixed economy, it does not involve the abolition of private property. Property remains nominally private but industries and workers are organized into large associations—corporations and unions. Individual entrepreneurship is discouraged or prohibited. Ideally, every individual and association of individuals is grouped within one of three massively organized entities—what Americans call “Big Business,” “Big Labor,” and “Big Government.” Representatives of the three organized sectors participate in the formation of economic plans for society as a whole, planning that involves government in every instance. Government officials more or less issue directives to corporate and union leaders, perhaps with some negotiation of benefits for particular economic sectors, and corporations and unions carry out the resulting plans. Individual pro
perty is no longer under exclusive direction of its owners but rather must be employed to fulfill the purposes established or approved by government in conjunction with the other two organized sectors. Government ultimately directs the allocation of resources but in a roundabout manner. By such indirect methods, however, government may potentially gain control of resources as effectively as the direct control exercised under communism proper.
“Crony Capitalism”
Over time, the United States has come to adopt economic arrangements that combine capitalist, socialist, and corporatist elements, a form of mixed economy variously referred to as “crony capitalism,” “political capitalism,” “state capitalism,” and, most recently, “participatory fascism.”[40] Crony capitalism, like fascist corporatism, must be sharply distinguished from authentic capitalism. Capitalism, as we have seen, is based upon private direction of personally owned resources, guided by market prices and regulated by the discipline of profit and loss. Its successful operation depends upon the existence of both freely forming relative prices and authentically competitive markets. Market competition means that any person is free to enter or exit any industry or business at any time. Such competition or even potential competition serves to ensure that resources are employed in the least wasteful manner and toward fulfillment of actual consumer demand. A firm that is wasting resources, charging unnecessarily high prices, or not fulfilling consumer demand, may be, and typically is, challenged by a newcomer with a better idea. Business leaders often dislike capitalism precisely for this reason; however successful they may have been in the past, they are always threatened by the possibility of new competition. Contrary to popular belief, capitalism does not primarily serve “capitalists”—producers, investors, and entrepreneurs—but rather consumers. The forces of competitive markets serve to ensure least-cost production and tailoring of production to the specific needs and wants of consumers, not the wellbeing of producers.
Business firms, then, especially large and well established organizations (“Big Business”), often seek means to shield themselves from the forces of market competition. The most common approach is to seek political and legal protection from such competition, as evidenced by the more than 7,000 so-called “lobbying” firms headquartered in Washington D.C. The mission of such lobbyists is generally to influence the federal legislative process toward the end of obtaining political privileges for the firms, industries, and interests they represent. Such privileges take various forms but they all serve to shield producers from market competition. Among the historically most common forms of “special-interest” pleading is the attempt to obtain monopolistic privileges for a particular firm or industry, that is, gain the exclusive right to produce a particular good or service. Monopoly (“one” producer) is not necessarily sinister-in-itself. Benign monopolies may in fact develop in a free-market economy. Such could occur, for instance, if one producer possesses such superior knowledge and expertise that others simply cannot compete in terms of cost and quality. The only way to know, however, whether a monopolist is benign, that is, actually serving the best interests of the consumer in the most efficient manner, is the existence of potential competition. In a free economy, a monopolist that charges exorbitant and unjustified prices, “gouging” the consumer, will eventually be challenged by competitors. If the price charged by the monopolist is actually higher than necessary to produce a given item, other producers have every incentive (potential profit) to enter the market and sell the item at lower cost. If a monopolist remains unchallenged in a market economy, on the other hand, it is probably because no one can do better.
Such monopolistic superiority is possible but relatively rare in a capitalist economy; most monopolies have been, and are, the result not of market forces but rather political intervention or favoritism. “Crony capitalism” is the result of successful efforts, whether of industries, firms, or individuals, to influence governmental policy in their favor and at the expense of other producers, consumers, and taxpayers. In the case of monopoly, the aim is to obtain exclusive privilege to produce a particular good or service by legally prohibiting competitors from entering the market. Political actors, seeking to reward past supporters or win future support, can and do grant such favors to their friends or “cronies.” Economic history clearly demonstrates that the vast majority of historical monopolies result not from capitalist processes but rather government intervention in the market process.[41]
Outright monopoly, however, is not the only form of political protection sought by corporate and business interests. Such protection can also be obtained by various forms of governmental regulation that similarly serve to shield such interests from competitive market forces. Historically, regulated industries have often been involved in designing the very regulations under which they must operate, regulations that typically benefit larger and established producers at the expense of smaller producers and potential newcomers to the field. A typical example is recent financial legislation (the so-called “Dodd-Frank” bill) that establishes onerous capital requirements for banks and other lenders. Such requirements penalize smaller community banks and benefit corporate giants such as Bank of America and Citibank. An account of crony or political capitalism should also mention the legions of quasi-independent contractors who lobby legislators to win lucrative government contracts, often without competitive bidding. As early as the 1950s, President Dwight Eisenhower warned Americans of the growth of what he called the “military-industrial complex”—the “conjunction of an immense military establishment and a large arms industry”—that not only potentially threatens our “liberties or democratic processes” but also parasitically feeds on government at the expense of other businesses and taxpayers in general.[42]
Licensing regulations are another form of special-interest pleading that serves to buffer existing producers from competition at the expense of both unlicensed producers and consumers. The history of licensing laws shows that the demand for such laws is often initiated by practicing members of the occupation in question. The aim is to shield the license holder from competition from unlicensed businesses offering the same good or service. Professions that win political privilege in the form of licensing laws force losses on both unlicensed producers, who may no longer practice their trade, and consumers. Licensing laws decrease the supply of providers and restrict competition within the licensed industry or profession, which means that consumer choice is limited to fewer suppliers. The reduction in competitive pressure also means that suppliers have less incentive either to improve quality or reduce cost (and thus price) of the good or service in question. Ceteris paribus, a reduction in supply, whether of producers or produced goods, tends to lead to an increase in price. As Nobel Laureate economist Milton Friedman noted, “[trade licensing] almost inevitably becomes a tool in the hands of a special producer group to maintain a monopoly position at the expense of the rest of the public. There is no way to avoid this result."[43]
Crony capitalism and other forms of governmental privilege or favoritism benefit politically influential industries in other ways as well. Huge corporate “agribusiness,” for instance, lobbies for agricultural subsidies that enable producers to stay in business even if total sales from their products are not sufficient to cover costs of production. In recent years, Americans have witnessed governmental “bail-out” after bail-out, from giant insurance companies like AIG to General Motors to labor unions unable to meet their pension and health-care obligations. A “bail-out” to industry is nothing more than a government subsidy, funded by present or future taxpayers (if the funds are obtained by borrowing). It is a reward to politically connected and organized interests at the expense of unorganized interests, such as individual taxpayers and small business.
Bail-outs, like agricultural subsidies, permit nonviable firms to remain in business despite the fact that they are unable to win a number of customers sufficient to pay the costs of their operation. In an authentic market economy, such producers would su
ffer losses and go out of business. Such indeed is the proper and rational economic consequence, difficult as it may be for those directly involved in a failing business or industry. We have seen that “losses,” in the language of price, mean that consumers do not want the products offered by the producer or at least not at the seller’s asking price. Losses signal to producers that they are doing something wrong—wasting scarce resources to produce unwanted items—and must change course. Governmental bailouts, however, override such price signals and encourage wasteful production of items that consumers do not value. Such bailouts, moreover, are generally paid for by taxation, which means that resources of productive workers are taken and politically redistributed to firms with a demonstrated inability to allocate limited resources efficiently and wisely (demonstrated by the very fact of economic losses). Such economic irrationality benefits the privileged firms but harms taxpayers, other businesses, and society at large. Resources are scarce and should not be used to produce uneconomic goods and services, that is, goods that cost more to produce than people are willing to pay. In the modern American economy, however, the market process that serves rationally and spontaneously to allocate scarce resources to their best use is often overridden by political intervention. Such intervention necessarily distorts the market process, which can only serve its function if producers are subject to the discipline of both profit and loss.
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