A great deal of confusion going on in current political discussions. Such terms as socialism, welfare state, social safety net, free market, lassies fare capitalism are thrown around as monikers and used to frame users political positions but without actually giving them any real meaning. Most of political conversations these days are conducted not with real words but with their ghosts devoid of any stable meaning, which take any shape dependent on political preferences of their users. This phenomenon is not limited to just one ideological group as everyone, liberal and conservative alike throw around words and ideas in a very incongruent and confused manner.
In this post I want to focus on words socialism, welfare state and social safety net, which are often thought to be almost synonyms. Let me begin by stating that while socialist economics requires establishing the welfare state (population devoid of any rights to private ownership and free economic activity is at complete mercy of the State), the reversal of this statement is not true. Ironically, the first welfare state was conceived and realized by Bismarck in Germany to prevent spread of socialist ideas. The substantial social safety net developed in Nazi Germany played a huge role in ensuring popular support for Hitler. In neither of these cases existence of welfare state implied socialist type of economics. It should be noted, however, that Hitler's economics model was much closer to socialist ideals than current proponents of socialism are ready to admit. Hayek in his "Road to serfdom" gave very convincing arguments to support this point. In contemporary liberal political commentary successful socialism is often mentioned in relation to welfare states of protestant Europe such as Denmark, Netherlands, or Germany. For obvious reasons Greece, Spain or Portugal are talked about by modern proponents of socialism less frequently. At the same time, conservatives do not waste time pointing out to these states as examples of failure of socialism and by extension deny successes of the "Low Countries" and Germany in providing their citizens with free medicine and education.
Any kind of objective analysis must point out, first of all, that neither Denmark, nor Germany have socialist economies. Denmark, for instance, have been rated by Heritage Foundation as a country with most favorable for free markets economic system for several years in a row. Serious economic growth in Germany had began only after Germans significantly liberalized their labor laws. Let me clarify it for particularly stubborn liberals: liberalization of labor laws (making it easier for businesses to fire workers and freeing wages from dictate of the Unions), i.e. freeing labor market from regulations, means more capitalism and less government intervention in economy. Thus, in both examples of Denmark and Germany economic growth is directly caused by more and not less capitalism.
As a side note I would like to point out that discussions about socialism versus capitalism is often framed in terms of Keynesian versus Austrian school economic paradigms, which is undoubtedly wrong. Keynesianism may be an example of economists' equivalent of the delusion of grandeur, when economists believe that they can actually manage economy, but it is not equivalent to socialism.
Returning to the main point of the post, I hope it has become clear by now that presence of well developed social safety net with free medicine and education is not neccessarily imcompatible with free markets economy. This statement, of course, should be qualified because social safety net does create disincentives for productive particpation in the markets, and deflect resources form their most effective use. However, it is wrong to think about people as "pure homo economicus". No society can be built using economic efficiency as an only criterion. Political consideration, which sometimes require redistribution of resources to ensure political stability of the system, also play an important role. Thus, the main question is how much of safety net is too much? The answer to this question cannot be given by economists alone, as it depends on a great deal of local factors such as cultural traditions, the etnic homogeneity of population, the size of economy, economic inspirations of the populace etc. In short, in a democratic society, the extent of the safety net is determined by local social compact, and its success depends on ability of the citizens to resist the calls of the "sirens" of dependent life. It have been working for Dutch and Danes, and I happy for them, but combination of the welfare state with different cultural traditions of Italy and Greece resulted in a complete disaster. The selective use of European experience to promote liberal political agenda is a clear cut example of intellectually dishonest behavior of our progressive "intellectuals". However, when conservatives refuse to address successes of such countries as Denmark talking only about politically more convenient Greece and Portugal, they demonstrate shallowness of their political thinking.
Well, Lev, believe it or not you've actually written something with which I can agree almost completely. Yes, of course, European-style welfare states are totally different from Soviet-style planned economies and those who equate them, screaming that Obama is a socialist, for example, are either willfully tendentious or sadly misinformed.
ReplyDeleteMy reaction to Hayek's Road to Serfdom was tied to precisely this point. I thought Hayek presented a devastating critique of the Stalin era planned economy, but seemed quite irrelevant to present day discussions in which no one is proposing anything remotely similar to a Five-Year Plan. Using Hayek to attack present day calls for more effective state regulation is like sweeping the floor with a hammer.
One thing I wonder about though, is what the term socialism actually means. Of course we can start with Marx and define socialism as the transitional period after the overthrow of capitalism by the proletariat but before the attainment of full fledged communism. But the problem is, as the historian Martin Malia pointed out (you'd like his book the Soviet Tragedy), socialism was an artificial construct. Nothing like socialism had ever been found in nature, and no one knew what it was supposed to look like. So it was defined in the Soviet Union as a kind of tautology -- we're a socialist state; we're building socialism; this is what we've built; it must be socialism; we must be a socialist state; etc. etc. Present day commentators on the right often seem to accept this Leninist tautology and use the term socialism to equate any kind of movement to preserve or enhance the social safety net with Soviet totalitarianism. Never mind that there is a long tradition of European Social Democracy that explicitly rejects the Soviet model and sees socialism in very different terms. My sense, and I think we're on the same page here, is that it's probably best to avoid this kind of terminology entirely and stick with more descriptive labels. At least terms like 'planned economy,' 'welfare state' and 'market economy' have relatively stable meanings and aren't as prone to be used as ideological scarecrows.
The fact is that a binary opposition between socialism and capitalism is problematic in that it obscures the fact that both market mechanisms and state intervention have a necessary role to play in the functioning of any healthy economy. I'd like to see an example of an actual country with a reasonable healthy economy and social order that functions exclusively on free market principles with no state intervention at all. Both sides are necessary and veering too far in one direction or the other is likely to end in disaster.
This gets me to my last point about the current crisis in Europe. The key point, I think, in comparing the 'good' welfare states with the bad is not so much the amount of state involvement in the economy as it is the quality. What makes the Northern European states more successful than the Southern states is that they have long traditions of relatively honest and effective governance. It's worth noting that all of the three countries you mentioned--Greece, Spain and Portugal--were governed by military dictatorships well into the 1970s. They had less opportunity to develop a culture of civic involvement and responsible citizenship. So, again, I agree completely that using either the northern or southern European examples to justify or discredit 'socialism' is pointless. Better to ask what are the policies and practices evident in the Northern European states that make state regulation and the social safety net productive and effective.
Nathan, it is nice to see you agreeing with me, but I am afraid, you missed one of the points I tried to make. I tried to separate the issues of safety net and state regulations by pointing out that Denmark has the least regulated economy, according to Hermitage Foundation, despite of its extensive safety net. Let's try not no group these two concepts together. They are different.
ReplyDeleteActually I did see the point on Denmark and Germany, but it didn't really fit in with the argument I was making. Still, I'm happy to consider the issue. First, I'm not so sure that a social safety net can be separated so easily from state regulation. After all, one of the main goals of a safety net is to protect and defend the population. So the question naturally arises--from what? Hurricanes, droughts, famines--it goes without saying. But a safety net also exists to protect people against man-made disasters that strike on the level of the individual--unemployment, work-related injuries, environmental contamination, professional incompetence, etc. These protections, of course, cannot be maintained without imposing guidelines and limitations on the actions of private businesses--hence the need for regulation. So, I think it's fair to say that there is a connection.
ReplyDeleteTurning to Denmark, I'd like to know what exactly the Hermitage Foundation had in mind when it referred to Denmark as one of the least regulated economies. I did a little poking around, and everything I saw suggested quite the opposite. There's one thing I'll grant--Denmark appears not to have a minimum wage. But beyond that, the government appears to be setting the rules every step of the way. In the realm of labor law for example, an employer must give an employee who is being terminated three month's notice, and if the termination is not demonstrably due to the employee's performance or behavior then compensation must be paid at a level set by the state. Compare that to the situation here where you're liable to be handed a few boxes when you walk in the door and be escorted out by a security guard at the end of the day. Here, of course, we have no unions to protect us. In Denmark they do. As of 2005, 75% of the Danish workforce were union members. The interesting thing is that the Danish Unions hardly ever go on strike--they don't need to.
In the area of environmental regulation, the Danish appear to be quite rigorous. They have an Environmental Protection Agency that establishes strict standards for all manner of pollutants and carries out regular inspection of industries.
Somehow it's hard to reconcile this evidence with the notion that the Danes are somehow free from government regulation. Yet for all that they have weathered the economic crisis better than most (they were smart enough to avoid the Euro!) and are home to a number of prosperous industries and corporations. All of this would seem to belie the notion that a state regulation and economic prosperity are somehow mutually exclusive. The issue is not whether the economy should be regulated but how. The Danes have managed to find an intelligent and resourceful way to handle regulation and they are reaping the benefits. Others have not been so successful, but the answer is better rather than fewer regulations. If your car is a lemon, you trade it in for one that works better--you don't go out and buy a horse and carriage.
PS I didn't even have a chance to mention taxation in Denmark -- annual tax revenues are 49% of GDP! So much for trickle down economics...
Nathan, here is the link to Heritage Foundation page on Denmark: http://usconservatives.about.com/gi/o.htm?zi=1/XJ&zTi=1&sdn=usconservatives&cdn=newsissues&tm=70&gps=323_458_1436_642&f=00&tt=3&bt=1&bts=1&st=11&zu=http%3A//www.heritage.org/. I should have been more accurate in describing it as ONE of the economically freest countries. It is the 8 place overall and 3rd in Europe. On a more general note, we again stumble upon a fine distinction between the rule of law and the rule of regulations, which is not the same thing, at least in my mind. The general ideas is that Laws must apply equally to everyone and not to have as its goal to favor one group of population or kind of business over others. In other words the homogeneity of the Laws must prevent distortion of the markets. Regulations on the other hand, are much more arbitrary and depends on perceptions of particular bureaucrats about what is good and what is bad. They often seek to present advantages to some or cure disadvantages of the others at the expense of the rest of population.
ReplyDeleteOf course Denmark has laws regulating interaction between capital and labor, with respect to environment, and such. No one with exception may be of anarchist wing of libertarian movement would deny the need for a legal framework. It is what makes capitalism possible. The important fact is what these laws do and how much compliance with them cost. We can have a separate discussion about it. To compare with US, as far as I know, they do not have many of ours cumbersome and unnecessary regulations such as Affordable Housing Acts, Equal Opportunities Acts, Protection of Disable people Act, and such. Example, just today I listen on the radio how sensible idea of liberalization NYC taxi market by allowing livery cabs picking up passengers from streets is being railroaded because they cannot ensure that all the cabs are wheel chair accessible. Can it be more ridiculous than that?
I get the general distinction between laws and regulations, but I'm not sure I buy it. First of all, while I agree that law should not discriminate, on the other hand, laws are often directed toward particular sectors of the economy such as telecommunications, banking and finance, manufacturing etc. And if laws did not favor some industries and burden others, I doubt all those lobbyists would still be in business. But the biggest problem with your distinction is the notion that laws and regulation are somehow diametrically opposed. In fact the two go hand in hand. Laws establish the overall framework, but regulations are still needed to implement and enforce the law, which I believe is the constitutional designated power of the executive branch of government. I think we've covered this ground before, so I won't belabor the point.
ReplyDeleteGetting back to Denmark it's obvious from the quick round of research I was able to do, that the Danes have no shortages of regulations. Want to open a fish farm in Denmark? Apply to the Danish AgriFish Agency of the Ministry of Food, Agriculture and Fisheries and don't forget your copy of the Regulation on the Establishment and Operation of Ocean Farms--etc, etc. And of course, the Danes have all the requisite laws on disability and discrimination based on gender, race, ethnicity, etc. It's called civilization and there are plenty of places you can go to escape it, but you may not make it back.
I heard about the taxi proposal that was killed. But apparently it wasn't just the wheelchair business that did it in. The taxi medallion owners were dead set against it because they thought it would lessen the value of their investments, and apparently the livery companies didn't want it either, since it would disrupt their business model. So the snuffing out of what looked like a sensible idea was a group effort, and business interests played more than their fair share.
I do not want to go into much details about Denmark, since it is quite established that whatever their regulatory burden is it is much less than that of other less successful countries such as Greece or Spain.
ReplyDeleteA taxi example is a perfect illustration of what happens when government starts regulating economic activities. It all began when the City straited regulating the taxi business in late 30th by limiting the access to the market to only those having medallions. The next step they had to introduce price control because they created a monopoly. Now we have an extremely inefficient system poorly performing its functions, and virtually impossible to reform because of a large number of entrenched interests. Let the government power to regulate more, and everything will look like NYC taxi business. This is the whole point.
While driving home from work today, I listened to NPR reporting on Europe crisis. The underlying theme was that concentration of Europe on austerity undermines growth, which is not surprising to hear on NPR. However, the theme emerging from this discussion was something less expected. The commentator actually said that European countries including the powerhouse of Germany has significant internal resources to stimulate growth without spending much money. They just need to eliminate regulations stifling innovations and liberalize labor market. This was a refreshing and welcoming piece of reporting coming from NPR.
ReplyDeleteCheapest Qurbani I would like to say that this blog really convinced me to do it! Thanks, very good post.
ReplyDelete