Bernie Sanders' socialism would be a disaster for everyone

With the rise of Bernie Sanders as a serious contender for president, it is evident that many Americans are turning to socialism as the solution to our problems.  It is amazing how quickly the lessons of history are forgotten. These Americans should know that socialism has already been tried, and hundreds of millions of people suffered because of it.  The Soviet Union, China, India, and even the United States have already tried socialism in different forms.  Each and every time scarce resources were removed from free market based allocation, the standard of living significantly lagged or regressed compared to free economies.  In some cases, mass starvation resulted.

Bernie Sanders has self-identified as a democratic socialist. According to the constitution of the Democratic Socialists of America, the goal of socialism is to remove profit and loss as a mechanism for allocating resources. Instead, they would place bureaucrats in charge of most resources and production.  This is supposed to be okay because the bureaucrats are controlled by democratically elected officials. This, they believe, means that the people control the economy.

The problem with socialism is simple.  It removes true pricing as a means of transmitting information about how to allocate scarce resources.  Socialists want to shoot the messenger that tells them that something is scarce.  Socialists would eliminate profit.  Profit (and loss) is the price signal that indicates that capital has been put to good use.  Socialists want to provide “free” health care, extra time off, and college tuition.  Making things free hides the fact that these resources are scarce.  Lastly, socialists would eliminate wage disparity.  Wages are the signal of how productive labor is.  In all three cases I mentioned, the socialist economy will destroy, hide, or distort information about the reality that underlies the economy.  When society’s behavior doesn’t match reality, people suffer.

China, under Mao Zedong, adopted a completely socialized economy.  All production was governed by “the people” through government officials. In 1958 he instituted the “Great Leap Forward.” This was an ambitious plan to overtake western economies in industrial output.  Having eliminated the evils of capitalism (market driven pricing and allocation) Mao could realize the dream of socialist superiority.  Farmers were forced to give up private property and organize into communes.  Inefficient production methods were implemented by uninformed officials.  Planners mandated initiatives such as “backyard furnaces” for steel production, controversial agricultural techniques, and ill-planned irrigation projects.  The goal was utopian plenty for all, the result was economic devastation and the deadliest famine in history with a death toll of around 30 million. 

Democratic socialists are quick to distance themselves from communist failures such as these because they reject totalitarianism.  Yes, there are differences between communists and socialists in how power is maintained, but they have the same economic strategy: replacing market pricing with central planners.  The story of China’s economic successes over the last several decades has been the story of liberalization and the adoption of free market principles.

India, too, has tried socialism.  The Indian Constitution says India is a "Sovereign Socialist Secular Democratic Republic".  From the time of independence in 1947 until 1991 Indians lived under a system that has been called the License Raj.  This was a system of heavy handed control of the economy by government bureaucrats.  What resulted was half a century of stagnation.  When India abandoned central planning in 1991 it became one of the world's fastest growing economies.  The average growth rate jumped from 2% to 6%.  As Thomas Sowell put it, "The cumulative effect of growing three times as fast as before was that millions of Indians rose out of poverty".

Prior to liberalization, the Indian consumer would wait months, sometimes years to buy a car such as the Hindustan Ambassador...a copy of the British Morris Oxford which remained virtually unchanged for 40 years.  In state-owned banks, costumers would wait in lines that stretched out the door.  Indian business owners were saddled with so much red tape that it was easier to open new factories in foreign countries despite greater labor costs.  A poignant example of Indian socialism is this story about price controls: Poor in India Starve as Surplus Wheat Rots. 

Probably the most famous example of socialism is that of the Soviet Union.  In order to compare the USSR with Bernie Sander's ideal government, we must overlook the worst of communist oppression which is clearly not the goal of democratic socialists.  So, I will overlook the millions of deaths caused under Stalin and focus on the years afterwards.  The soviet economy was completely planned.  Everyone had a job.  Zero unemployment.  It sounds great until you realize that prices were not reflecting the reality of scarcity.  Everything was rationed by waiting in queues.  Quality and choice suffered.  Black and grey markets supplied people with services that the official economy could not provide.

Waste and inefficiency was rampant.  In Basic Economics, Thomas Sowell describes how Soviet planners mistakenly set too high a price on moleskins with the result that surplus pelts rotted in warehouses before they could be processed.  The planners ignored requests to lower the price for moleskins because they were too busy regulating another 24 million prices.  Socialism replaces distributed decision making (also known as liberty) with top-down control.  This control led to inefficiency across the board.  State operated farms were very inefficient.  Though only 3% of arable land was operated privately in 1980, that land was over 1000% more productive than state run farms.  As another example, Soviet Industry used more electricity than American industries while producing less.  Eventually the inefficiencies grew unbearable and the Soviet Union collapsed in 1991. 

Many people do not realize that the United States is also greatly influenced by socialism.  We have numerous examples of state planning interfering with a free allocation of resources.  A wave of government activism in the economy began with Woodrow Wilson when he signed the Federal Reserve Act.  The Federal Reserve System was one of the causes of the Great Depression.  The depression then led to an alphabet soup of programs, most of which ended up increasing the severity and lengthening the duration of the depression (See Burton Folsom's book New Deal Or Raw Deal).  Nixon used price controls.  Lyndon Johnson waged an unsuccessful war on poverty.  Laws intended to promote home ownership caused the housing boom, and later bust.  Government red tape of the last decade has led to a slow recovery.  We have too-big-to-fail businesses protected by government.  All the elements we have seen in India, China, and the Soviet Union exist in the United States to some degree.  The problems of a shrinking middle class, rising health care costs, and high college tuition are the result of socialistic intervention.  It is appalling that Bernie Sander's would prescribe more socialism as the antidote to the problems caused by socialism.

Bernie Sander's has said "I think we should look to countries like Denmark, like Sweden and Norway".  These are his ideal examples of democratic socialism.  He fails to understand that we are already like those countries.  Scandinavian countries rate closely with the United States in the Index of Economic Freedom.  The scores of the U.S. Denmark, Sweden, and Norway for 2016 are 75.4, 75.3, 72.0, and 70.8 respectively.   Where they may have high taxation, they make up for it with more business freedom and less corruption.  The United States federal government spends about 40% of GDP per year, much of it on social programs. When you take into account our debt, corporate taxes, and the hidden tax of inflation, our tax rates aren't that different than Scandinavia.  That is socialism.  Couldn't some of our problems be the result of the socialism we already have?  And couldn't some of Scandinavia's success be due to the free market capitalism they have?  The answer is yes and yes.  Just like India, recent economic success there is also the result of market liberalization.   

Free market based allocation of resources has been proven to be the most efficient and equitable method over the long term.  It is also more democratic than “democratic” socialism.  People voting for public officials are voting for a package deal taking the bad with the good.  Voters are also engaging in speculation since they are voting for unrealized promises.  And they cannot change their votes during long intervals between elections.  Thomas Sowell explains that in a free market, consumers make their choices every day. “A person and can buy one company’s milk and another company’s cheese…then they can change their minds a day or a week later and make wholly different choices.”  Nothing forces entrenched powers to kneel to the will of the people better than the great voting machine known as the Free Market.  

In short, socialists such as Bernie Sanders would destroy both of the things they claim to care about: democracy and prosperity.

Thoughts from F.A. Hayek: The Road to Serfdom

I recently read "The Road to Serfdom" by F.A. Hayek, first published in 1944.  I really liked the book.  Hayek has great insight into human nature and social organization. The main theme of his book is that an overly powerful state will eventually make its citizen's slaves to a set of values chosen by the bureaucratic elite.  Nazi Germany is exhibit A.  Hayek grew up in Austria and knew the history of Germany's socialism first hand.  He shows that  Germany's National Socialism was the natural conclusion to the expanding power of the state promoted by earlier socialists.

Hayek also provides a history lesson of the term "liberalism".  Because the United States began its existence based on liberal ideas of freedom and self government, the word  "conservative" has taken on a strange meaning for Americans.  To be conservative in the U.S. is to uphold that original liberalism.  Hayek, being from Europe, where the liberal ideas never reached their fullest expression, was striving for that liberalism.  Hayek took issue with the fact that in America, statism (the movement to increase the influence of the state) was mischaracterized as liberalism. (Hayek later wrote this 1960 essay: Why I am not a Conservative, an interesting look at political brand names.)

I'd like to share some of my favorite passages from the book. Hayek was inspired by Tocqueville.  He uses this quote early in the book:

"Democracy and socialism have nothing in common but one word: equality.  But notice the difference: while democracy seeks equality of liberty, socialism seeks equality in restraint and servitude." (Ch 2, Pg 77)

Hayek noticed that socialists took the liberal idea of freedom and corrupted it into the idea of "freedom from want".   He said:

"What the [socialist] promise [of freedom] really amounted to was that the great existing disparities in the range of choice of different people were to disappear.  The demand for the new freedom was thus only another name for the old demand for an equal distribution of wealth. But the new name gave the socialists something in common with the liberals and they exploited it to the full....what was promised to us as the Road to Freedom was in fact the High Road to Servitude".

Hayek saw that when bureaucrats plan the economy, they subvert the efficient transmission of price information.  This inevitably leads to less efficiency and to distortions such as we see with our health care system.

"The important point here is that the price system will fulfill this function only if competition prevails, that is, if the individual producer has to adapt himself to price changes and cannot control them.  The  more complicated the whole [economic system], the more dependent we become on that division of knowledge between individuals whose separate efforts are coordinated by the impersonal mechanism for transmitting the relevant information known by us as the price system." (Ch 4, Pg 95)

Hayek demonstrated that economic planners cannot foresee all the unintended consequences of their plans, no matter how gifted they may be intellectually.

"We all find it difficult to bear to see things left undone which everybody must admit are both desirable and possible.  That these things cannot all be done at the same time, that any one of them can be achieved only at the sacrifice of others, can be seen only by taking into account factors which fall outside any specialism...which lie outside our immediate interest and for which, for that reason, we care less." (Ch 4, Pg 98, italics added)

 He is adept at showing that simply because a nation is democratic, it is not necessarily free from arbitrary use of power.

"There is no justification for the belief that, so long as power is conferred by democratic procedure, it cannot be arbitrary; the contrast suggested by this statement is altogether false: it is not the source but the limitation of power which prevents it from being arbitrary." (Ch 5: Planning and Democracy, Pg 111)

I think Hayek's most important contribution is in the area of values and state morality.  He shows that governments that plan the economy also control morality.  That is, the rulers push their values and their quest for certain ends onto all people. We recently saw how certain views on contraception were pushed onto Americans by arbitrary rule makers empowered by the Patient Protection and Affordable Care Act (Obamacare).

[The government] must, of necessity, take sides, impose its valuations upon people and, instead of assisting them in the advancement of their own ends, choose the ends for them.  As soon as [an interest-promoting] law is made, it ceases to be a mere instrument to be used by the people and becomes instead an instrument used by the lawgiver upon the people and for his ends.  The state ceases to be a piece of utiltarian machinery intended to help individuals in the fullest development of their individual pesonality and becomes a "moral" institution which imposes on its members its views on all moral questions, whether these views be moral or highly immoral. In this sense the Nazi or any other collectivist state is "moral," while the liberal state is not. (Ch 6: Planning and the Rule of Law, Pg 117)

"And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower--in short, what men should believe and strive for." (Ch 7: Economic Control and Totalitarianism, Pg 127)

"To undertake the direction of the economic life of people with widely divergent ideals and values is to assume responsibilities which commit one to the use of force; it is to assume a position where the best intentions cannot prevent one from being forced to act in a way which to some of those affected must appear highly immoral." (Ch 15: Prospects for International Order, Pg 116)

In my view, the moral nature of state planning makes statism a secular religion.  Only, it is a religion that is forced on others via the ballot box rather than by persuasion.

Hayek makes the distinction between arbitrary rule and the Rule of Law.  Arbitrary rule becomes necessary when the state attempts to plan the entire economy, because lawmakers cannot foresee all the minutia involved.  The movement toward arbitrary rule is exemplified in the U.S. by the tendency to turn over ever more power to unelected alphabet-soup agencies run by the executive branch.

"It is the Rule of Law, in the sense of the rule of formal law, the absence of legal privileges of particular people designated by authority, which safeguards that equality before the law which is the opposite of arbitrary government...It may even be said the for the Rule of Law to be effective it is more important that there should be a rule applied always without exceptions than what this rule is.Often the content of the rule is indeed of minor importance, provided that the same rule is universally enforced." (Ch. 6 Pg. 117)

"By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way a democracy may setup the most complete despotism imaginable." (Pg. 119)

The book also touches on themes that are probably agreed upon by everyone.  Nobody tired of negative campaign advertising will take issue with this:

"It seems to be almost a law of nature that it is easier for people to agree on a negative program--on the hatred of an enemy, on the envy of those better off, than on any positive task.  The contrast between the "we" and the "they," the common fight against those outside the group, seems to be an essential ingredient in any creed which will solidly knit together a group for common action." (Ch. 10, Why the Worst Get On Top, Pg 160)

"If the members of one's group cannot all be personally known, they must at least be of the same kind as those around us, think and talk in the same way and about the same kinds of things, in order that we may identify ourselves with them. Collectivism on a world scale seems to be unthinkable--except in the service of a small ruling elite." (Pg 161)

And if you've ever uttered the phrase "Absolute power corrupts absolutely", this should ring true to you:

"To split or decentralize power is necessarily to reduce the absolute amount of power, and the competitive system is the only system designed to minimize by decentralizing the power exercised by man over man... 

Economic power, while it can be an instrument of coercion, is, in the hands of private individuals, never exclusive or complete power, never power over the whole life of a person. But centralized as an instrument of political power it creates a degree of dependence scarcely distinguishable from slavery."  (Pg 166)

Hayek's one line summary of what created Nazism:

"It was the union of the anti-capitalist forces of the Right and of the Left, the fusion of radical and conservative socialism, which drove out from Germany everything that was liberal." (Ch. 12 The Socialist Roots of Naziism, pg 182)

Hayek also covers the tendency of statists to believe that their planning is justified by scientific evidence or intellectual superiority.  He felt that scientists helped enable the rise of Nazism.

"The influence of these scientist-politicians was of late years not often on the side of liberty: the 'intolerance of reason' so frequently conspicuous in the scientific specialist, the impatience with the ways of the ordinary man so characteristic of the expert, and the contempt for anything which was not consciously organized by superior minds according to a scientific blueprint were phenomena familiar in German public life for generations before they became of significant in England...It is well known that particularly the scientists and engineers, who had so loudly claimed to be the leaders on the march to a new and better world, submitted more readily than almost any other class to the new tyranny [of National Socialism]."  (Ch 13:The Totalitarians In Our Midst)

He felt that scientists have a tendency toward statism because they believe people obey scientific laws the same way inanimate objects do:

"Those who argue that we have to an astounding degree learned to master the forces of nature...[are mistaken when they] argue that we must learn to master the forces of society in the same manner in which we have learned to master the forces of nature.  This is not only the path to totalitarianism but the path to the destruction of our civilization and a certain way to block future progress.   Those who demand it show by their very demands they they have not yet comprehended the extent to which the mere preservation of what we have so far achieved depends on the coordination of individual efforts by impersonal forces." (Ch 14 Material Conditions and Ideal Ends, Pg 212)

Hayek understood human society.  It is true that the rise of Eurosocialism has yet to create a repeat of Nazi Germany. But to a degree, every one of Hayek's observations has been born out again and again.  Canadians face penalties for bypassing state health care.  Green-lobby scientists push for greater government control of energy use around the world.  Americans are being told when and how much health insurance to buy.  Expanding governments have distorted housing markets, healthcare markets, and debt markets.  Regulatory barriers impede business creation and reduce competition.  Interest groups control the tax code for special treatment.  Hayek's work foresaw all of this.  Hayek has something to teach us about our contemporary political and economic challenges.

Alexander Hamilton: the greatest founding father you never knew

"If Washington was the father of the country and Madison the father of the Constitution, then Alexander Hamilton was surely the father of the American government"-- Ron Chernow

This last year I was richly rewarded by reading Ron Chernow's "Alexander Hamilton". I will never look upon American history the same. Alexander Hamilton is greatly under appreciated. Hamilton's importance easily matches that of Washington, Franklin, Jefferson, Adams, et al. Hamilton was key to winning the Revolutionary War. He was key to getting the Constitution ratified. He was key to establishing a successful national government. He laid the foundation for modern American capitalism. He wrote volumes on law, government, and finance. Too much cannot be said of his accomplishments.

From Chernow's well written book, we obtain great insight into the founding of the Republic. I was fascinated by his ability to lay bare the imperfections of our founding fathers. These men were gifted, but regular people. Our heritage is that these individuals balanced out the excesses of one another to forge a new government based on citizen participation and freedom.

I was fascinated with the politics of the new American government. Hamilton is peculiar in that today's Left and Right can both find much to love and hate about him. As a "High Federalist" he is known for having expanded the role of government early on. He was hated by the Anti-federalists and the Republicans (not be confused with today's GOP) for creating a national bank and for strengthening the central government. That would seem to make him a "liberal" by today's standards. But Hamilton did not believe that government programs could fix people. He believed in creating a strong financial system which honored contracts and property rights. He also deplored the secularism and the mob rule of the French Revolution. He understood that people are imperfect and always will be. That makes him a conservative.

Chernow's account of Jefferson might surprise contemporary students of politics who are accustomed to putting him on a pedestal. Jefferson was conniving and back stabbing. He was hypocritical. Despite his shortcomings, his idealism was a major contribution to American freedom. Politically, he is a mixed bag. His humanist side makes him a liberal, but his distrust of centralized power makes him a conservative. I think he would turn in the grave to know that liberalism has morphed into a socialism that has brought us the centralized oppressive bureaucracy he so feared.

One thing that really jumped out at me after reading Alexander Hamilton was: why isn't there a movie!? Exotic locales, war, dramatic courtroom scenes, the adulterous affair and subsequent extortion, internecine battles, and of course...the duel. It doesn't get any better than this. When is Hollywood going to figure out that there is a blockbuster here?

If you only read one book about the Founding Fathers, this should be it!
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Random Quotes from the book:
"Tis by introducing order into our finances--by restoring the public credit--not by gaining battles that we are finally to gain our object". -Hamilton on the economic side of national security

"A national debt, if it is not excessive, will be to us a national blessing. It will be a powerful cement of our union." -Hamilton on the benefits of public debt. (bold type added by me)

"Financial embarrassments led to those steps which led to the overthrow of the government and to all the terrible scenes which have followed." -Hamilton on how excessive debt led to crises in France

"The law is whatever is successfully argued and plausibly maintained" --Aaron Burr

"He was not a politician seeking popularity but a statesman determined to change minds." -Chernow on Hamilton's rigorous defense of an unpopular Tory. (Reminds me of John Adam's defense of the Boston Massacre soldiers)

"The rancor ushered in a golden age of literary assassination in American politics. No etiquette had yet evolved to define the legitimate boundaries of dissent. Poison pen artists on both sides wrote vitriolic essays that were overtly partisan, often paid scant heed to accuracy, and sought a visceral impact. The inflamed rhetoric once directed against Britain was now turned inward against domestic adversaries." -Chernow on the partisan politics of new nation. (Remarkable how little things change)

"The future secretary of state [Jefferson], now sailing home, was to strike Hamilton as just such a 'philosophic politician' ignorant of human nature. Hamilton later explained to a political associate that Jefferson in Paris 'drank deeply of the French philosophy in religion, in science, in politics' " -Chernow on Jefferson's infatuation with the French Revolution

"Owing in part to Hamilton's generous construction of [the general welfare] clause, it was to acquire enormous significance, allowing the government to enact programs to advance social welfare." -Chernow on Hamilton's eventual influence on modern social welfare programs.

"The superstructure of credit is now too vast for the foundation...It must be gradually brought within more reasonable dimensions or it will tumble." -Hamilton on the bank scrip bubble of 1792. (Again, how little times have changed.)

"[Hamilton] learned a lesson about propaganda in politics and mused wearily that 'no character, however upright, is a match for constantly reiterated attacks, however false.' If a charge was made often enough, people assumed in the end 'that a person so often accused cannot be entirely innocent.' " -Hamilton on the effectiveness of negative politics

"The period of John Adam's presidency declined into a time of political savagery with few parallels in American history, a season of paranoia in which the two parties surrendered all trust in each other. Like other Federalists infected with war fever, Hamilton increasingly mistook dissent for treason and engaged in hyperbole" -Chernow on party polarization. (We saw a close repeat during the last decade)

"Hamilton had intuited rightly that Jefferson, once in office, would be reluctant to reject executive powers he had deplored in opposition" --Chernow on Jefferson's flip flop regarding executive power once he was president.

"Hamilton never believed in the perfectibility of human nature and regularly violated what became the first commandment of American politics: thou shalt always be optimistic when addressing the electorate." --Chernow on Hamilton's conservative view of human nature.