Sunday, September 30, 2012

Socialism Social-democratic Style II

As should be recalled, the effect of the former on the formation of personality types was twofold, reducing the incentive to develop productive skills, and favoring at the same time the development of political talents. This precisely is also the overall consequence of social-democratic socialism. As social-democratic socialism favors nonproductive roles as well as productive ones that escape public notice and so cannot be reached by taxation, the character of the population changes accordingly. This process might be slow, but as long as the peculiar incentive structure established by redistributive policies lasts, it is constantly operative. Less investment in the development and improvement of one’s productive skills will take place and, as a consequence, people will become increasingly unable to secure their income on their own, by producing or contracting. And as the degree of taxation rises and the circle of taxed income widens, people will increasingly develop personalities as inconspicuous, as uniform, and as mediocre as is possible—at least as far as public appearance is concerned. At the same time, as a person's income simultaneously becomes dependent on Politics, i.e., on society’s decision on how to redistribute taxes (which is reached, to be sure, not by contracting, but rather by superimposing one person’s will on another’s recalcitrant one!), the more dependent it becomes, the more people will have to politicalize, i.e., the more time and energy they will have to invest in the development of their special talents for achieving personal advantages at the expense (i.e., in a noncontractual way) of others or of preventing such exploitation from occurring.
The difference between both types of socialism lies (only) in the following: under Russian-type socialism society’s control over the means of production, and hence over the income produced with them, is complete, and so far there seems to be no more room to engage in political debate about the proper degree of politicalization of society. The issue is settled—just as it is settled at the other end of the spectrum, under pure capitalism, where there is no room for politics at all and all relations are exclusively contractual. Under social-democratic socialism, on the other hand, social control over income produced privately is actually only partial, and increased or full control exists only as society’s not yet actualized right, making only for a potential threat hanging over the heads of private producers. But living with the threat of being fully taxed rather than actually being so taxed explains an interesting feature of social-democratic socialism as regards the general development toward increasingly politicalized characters. It explains why under a system of social-democratic socialism the sort of politicalization is different from that under Russian-type socialism. Under the latter, time and effort is spent nonproductively, discussing how to distribute the socially owned income; under the former, to be sure, this is also done, but time and effort are also used for political quarrels over the issue of how large or small the socially administered income-shares should actually be. Under a system of socialized means of production where this issue is settled once and for all, there is then relatively more withdrawal from public life, resignation, and cynicism to be observed. Social-democratic socialism, on the other hand, where the question is still open, and where producers and nonproducers alike can still entertain some hope of improving their position by decreasing or increasing taxation, has less of such privatization and, instead, more often has people actively engaged in political agitation either in favor of increasing society’s control of privately produced incomes, or against it.46
With the general similarity as well as this specific difference between both types of socialism explained, the task remains of presenting a brief analysis of some modifying forces influencing the general development toward unproductive politicalized personalities. These are effected by differing approaches to the desirable pattern of income distribution. Russian and social-democratic socialism alike are faced with the question of how to distribute income that happens to be socially controlled. For Russian-type socialism it is a matter of what salaries to pay to individuals who have been assigned to various positions in the caretaker economy. For redistributive socialism it is the question of how much tax to allocate to whom. While there are in principle innumerable ways to do this, the egalitarian philosophy of both kinds of socialism effectively reduces the available options to three general types.47 The first one is the method of more or less equalizing everybody’s monetary income (and possibly also private, nonproductively used wealth). Teachers, doctors, construction workers and miners, factory managers and cleaning ladies all earn pretty much the same salary, or the difference between them is at least considerably reduced.48 It does not need much comment to realize that this approach reduces the incentive to work most drastically, for it no longer makes much difference—salary-wise—if one works diligently all day or fools around most of the time. Hence, disutility of labor being a fact of life, people will increasingly fool around, with the average income that everyone seems to be guaranteed constantly falling, in relative terms. Thus, this approach relatively strengthens the tendency toward withdrawal, disillusionment, cynicism, and mutatis mutandis, contributes to a relative reduction in the general atmosphere of politicalization. The second approach has the more moderate aim of guaranteeing a minimum income which, though normally somehow linked to average income, falls well below it.49 This, too, reduces the incentive to work, since, to the extent that they are only marginal income producers with incomes from production only slightly above the minimum, people will now be more inclined to reduce or even stop their work, enjoy leisure instead, and settle for the minimum income. Thus more people than otherwise will fall below the minimum line, or more people than otherwise will keep or acquire those characteristics on whose existence payment of minimum salaries is bound, and as a consequence, again, the average income to which the minimum salary is linked will fall below the level that it otherwise would have reached. But, of course, the incentive to work is reduced to a smaller degree under the second than the first scheme. On the other hand, the second approach will lead to a relatively higher degree of active politicalization (and less of resigned withdrawal), because, unlike average income, which can be objectively ascertained, the level at which the minimum income is fixed is a completely subjective, arbitrary affair, which is thus particularly prone to becoming a permanent political issue.
Undoubtedly, the highest degree of active politicalization is reached when the third distributional approach is chosen. Its goal, gaining more and more prominence for social democracy, is to achieve equality of opportunity.50 The idea is to create, through redistributional measures, a situation in which everyone’s chance of achieving any possible (income) position in life is equal—very much as in a lottery where each ticket has the same chance of being a winner or a loser—and, in addition, to have a corrective mechanism which helps rectify situations of “undeserved bad luck” (whatever that may be) which might occur in the course of the ongoing game of chance. Taken literally, of course, this idea is absurd: there is no way of equalizing the opportunity of someone living in the Alps and someone residing at the seaside. In addition, it seems quite clear that the idea of a corrective mechanism is simply incompatible with the lottery idea. Yet it is precisely this high degree of vagueness and confusion which contributes to the popular appeal of this concept. What constitutes an opportunity, what makes an opportunity different or the same, worse or better, how much and what kind of compensation is needed to equalize opportunities which admittedly cannot be equalized in physical terms (as in the Alps/seaside example), what is undeserved bad luck and what a rectification, are all completely subjective matters. They are dependent on subjective evaluations, changing as they do, and there is then—if one indeed applies the equality of opportunity concept—an unlimited reservoir of all sorts of distributional demands, for all sorts of reasons and for all sorts of people. This is so, in particular, because equalizing opportunity is compatible with demands for differences in monetary income or private wealth. A and B might have the same income and might both be equally rich, but A might be black, or a woman, or have bad eyesight, or be a resident of Texas, or may have ten children, or no husband, or be over 65, whereas B might be none of these but something else, and hence A might argue that his opportunities to attain everything possible in life are different, or rather worse, than B’s, and that he should somehow be compensated for this, thus making their monetary incomes, which were the same before, now different. And B, of course, could argue in exactly the same way by simply reversing the implied evaluation of opportunities. As a consequence, an unheard of degree of politicalization will ensue. Everything seems fair now, and producers and nonproducers alike, the former for defensive and the latter for aggressive purposes, will be driven into spending more and more time in the role of raising, destroying, and countering distributional demands. And to be sure, this activity, like the engagement in leisurely activities, is not only nonproductive but in clear contrast to the role of enjoying leisure, implies spending time for the very purpose of actually disrupting the undisturbed enjoyment of wealth produced, as well as its new production.
But not only is increased politicalization stimulated (above and beyond the level implied by socialism generally) by promoting the idea of equalizing opportunity. There is once more, and this is perhaps one of the most interesting features of new social-democratic-socialism as compared with its traditional Marxist form, a new and different character to the kind of politicalization implied by it. Under any policy of distribution, there must be people who support and promote it. And normally, though not exclusively so, this is done by those who profit most from it. Thus, under a system of income and wealth-equalization and also under that of a minimum income policy, it is mainly the “have-nots” who are the supporters of the politicalization of social life. Given the fact that on the average they happen to be those with relatively lower intellectual, in particular verbal capabilities, this makes for politics which appears to lack much intellectual sophistication, to say the least. Put more bluntly, politics tends to be outright dull, dumb, and appalling, even to a considerable number of the have-nots themselves. On the other hand, in adopting the idea of equalizing opportunity, differences in monetary income and wealth are not only allowed to exist but even become quite pronounced, provided that this is justifiable by some underlying discrepancies in the opportunity structure for which the former differences help compensate. Now in this sort of politics the haves can participate, too. As a matter of fact, being the ones who on the average command superior verbal skills, and the task of defining opportunities as better or worse being essentially one of persuasive rhetorical powers, this is exactly their sort of game. Thus the haves will now become the dominant force in sustaining the process of politicalization. Increasingly it will be people from their ranks that move to the top of the socialist party organization, and accordingly the appearance and rhetoric of socialist politics will take on a different shape, becoming more and more intellectualized, changing its appeal and attracting a new class of supporters.
With this I have reached the stage in the analysis of social-democratic socialism where only a few remarks and observations are needed which will help illustrate the validity of the above theoretical considerations. Though it does not at all affect the validity of the conclusions reached above, depending as they do exclusively on the truth of the premises and the correctness of the deductions, there unfortunately exists no nearly perfect, quasi-experimental case to illustrate the workings of social-democratic socialism as compared with capitalism, as there was in the case of East and West Germany regarding Russian-type socialism. Illustrating the point would involve a comparison of manifestly different societies where the ceteris are cldearly not paribus, and thus it would no longer be possible to neatly match certain causes with certain effects. Often, experiments in social-democratic socialism simply have not lasted long enough, or have been interrupted repeatedly by policies that could not definitely be classified as social-democratic socialism. Or else from the very beginning, they have been mixed with such different—and even inconsistent—policies as a result of political compromising, that in reality different causes and effects are so entangled that no striking illustrative evidence can be produced for any thesis of some degree of specificity. The task of disentangling causes and effects then becomes a genuinely theoretical one again, lacking the peculiar persuasiveness that characterizes experimentally produced evidence.
Nonetheless some evidence exists, if only of a more dubious quality. First, on the level of highly global observations, the general thesis about relative impoverishment brought about by redistributive socialism is illustrated by the fact that the standard of living is relatively higher and has become more so over time in the United States of America than in Western Europe, or, more specifically, than in the countries of the European Community (EC). Both regions are roughly comparable with respect to population size, ethnic and cultural diversity, tradition and heritage, and also with respect to natural endowments, but the United States is comparatively more capitalist and Europe more socialist. Every neutral observer will hardly fail to notice this point, as indicated also by such global measures as state expenditure as percent of GNP, which is roughly 35 percent in the United States as compared to about 50 percent or more in Western Europe. It also fits into the picture that the European countries (in particular Great Britain) exhibited more impressive rates of economic growth in the nineteenth century, which has been described repeatedly by historians as the period of classical liberalism, than in the twentieth, which, in contrast, has been termed that of socialism and statism. In the same way the validity of the theory is illustrated by the fact that Western Europe has been increasingly surpassed in rates of economic growth by some of the Pacific countries, such as Japan, Hong Kong, Singapore, and Malaysia; and that the latter, in adopting a relatively more capitalist course, have meanwhile achieved a much higher standard of living than socialistically inclined countries which started at about the same time with roughly the same basis of economic development, such as India.
Coming then to more specific observations, there are the recent experiences of Portugal, where in 1974 the autocratic Salazar regime of conservative socialism (on this type of socialism see the following chapter), which had kept Portugal one of the poorest countries in Europe, was supplanted in an upheaval by redistributive socialism (with elements of nationalization) and where since then the standard of living has fallen even further, literally turning the country into a third world region. There is also the socialist experiment of Mitterand’s France, which produced an immediate deterioration of the economic situation, so noticeable—most conspicuous being a drastic rise in unemployment and repeated currency devaluations—that after less than two years, sharply reduced public support for the government forced a reversal in policy, which was almost comic in that it amounted to a complete denial of what only a few weeks before had been advocated as its dearest convictions.
The most instructive case, though, might again be provided by Germany and, this time, West Germany.51 From 1949 to 1966 a liberal-conservative government which showed a remarkable commitment to the principles of a market economy existed, even though from the very beginning there was a considerable degree of conservative-socialist elements mixed in and these elements gained more importance over time. In any case, of all the major European nations, during this period West Germany was, in relative terms, definitely the most capitalist country, and the result of this was that it became Europe’s most prosperous society, with growth rates that surpassed those of all its neighbors. Until 1961, millions of German refugees, and afterwards millions of foreign workers from southern European countries became integrated into its expanding economy, and unemployment and inflation were almost unknown. Then, after a brief transition period, from 1969 to 1982 (almost an equal time span) a social-democratically led socialist-liberal government took over. It raised taxes and social security contributions considerably, increased the number of public employees, poured additional tax funds into existing social programs and created new ones, and significantly increased spending on all sorts of so-called “public goods, “thereby allegedly equalizing opportunities and enhancing the overall “quality of life.” By resorting to a Keynesian policy of deficit spending and unanticipated inflation, the effects of raising the socially guaranteed minimum provisions for nonproducers at the expense of more heavily taxed producers could be delayed for a few years (the motto of the economic policy of former West German Chancellor Helmut Schmidt was “rather 5% inflation than 5% unemployment”). They were only to become more drastic somewhat later, however, as unanticipated inflation and credit expansion had created and prolonged the over- or rather malinvestment typical of a boom. As a result, not only was there much more than 5 percent inflation, but unemployment also rose steadily and approached 10 percent; the growth of GNP became slower and slower until it actually fell in absolute terms during the last few years of the period. Instead of being an expanding economy, the absolute number of people employed decreased; more and more pressure was generated on foreign workers to leave the country and the immigration barriers were simultaneously raised to ever higher levels. All of this happened while the importance of the underground economy grew steadily.
But these were only the more evident effects of a narrowly defined economic kind. There were other effects of a different sort, which were actually of more lasting importance. With the new socialist-liberal government the idea of equalizing opportunity came to the ideological forefront. And as has been predicted theoretically, it was in particular the official spreading of the idea mehr Demokratie wagen (“risk more Democracy”)—initially one of the most popular slogans of the new (Willy Brandt) era—that led to a degree of politicalization unheard of before. All sorts of demands were raised in the name of equality of opportunity; and there was hardly any sphere of life, from childhood to old age, from leisure to work conditions, that was not examined intensely for possible differences that it offered to different people with regard to opportunities defined as relevant. Not surprisingly, such opportunities and such differences were found constantly,52 and, accordingly, the realm of politics seemed to expand almost daily. “There is no question that is not a political one” could be heard more and more often. In order to stay ahead of this development the parties in power had to change, too. In particular the Social Democrats, traditionally a blue-collar workers’ party, had to develop a new image. With the idea of equalizing opportunity gaining ground, it increasingly became, as could be predicted, the party of the (verbal) intelligentsia, of social scientists and of teachers. And this “new” party, almost as if to prove the point that a process of politicalization will be sustained mainly by those who can profit from its distributional schemes and that the job of defining opportunities is essentially arbitrary and a matter of rhetorical power, then made it one of its central concerns to channel the most diverse political energies set in motion into the field of equalizing, above all, educational opportunities. In particular, they “equalized” the opportunities for a high school and university education, by offering the respective services not only free of charge but by literally paying large groups of students to take advantage of them. This not only increased the demand for educators, teachers, and social scientists, whose payment naturally had to come from taxes. It also amounted, somewhat ironically for a socialist party which argued that equalizing educational opportunities would imply an income transfer from the rich to the poor, in effect to a subsidy paid to the more intelligent at the expense of a complementary income reduction for the less intelligent, and, to the extent that there are higher numbers of intelligent people among the middle and upper social classes than among the lower, a subsidy to the haves paid by the have-nots.53 As a result of this process of politicalization led by increased numbers of tax-paid educators gaining influence over increased numbers of students, there emerged (as could be predicted) a change in the mentality of the people. It was increasingly considered completely normal to satisfy all sorts of demands through political means, and to claim all sorts of alleged rights against other supposedly better-situated people and their property; and for a whole generation of people raised during this period, it became less and less natural to think of improving one’s lot by productive effort or by contracting. Thus, when the actual economic crisis, necessitated by the redistributionist policy, arose, the people were less equipped than ever to overcome it, because over time the same policy had weakened precisely those skills and talents which were now most urgently required. Revealingly enough, when the socialist-liberal government was ousted in 1982, mainly because of its obviously miserable economic performance, it was still the prevalent opinion that the crisis should be resolved not by eliminating the causes, i.e., the swollen minimum provisions for nonproducers or noncontractors, but rather by another redistributive measure: by forcibly equalizing the available work—time for employed and unemployed people. And in line with this spirit the new conservative-liberal government in fact did no more than slow down the rate of growth of taxation.

Theory of Socialism and Capitalism, A

Saturday, September 29, 2012

Socialism Social-democratic Style

In the last chapter I analyzed the orthodox Marxist version of socialism—socialism Russian-style, as it was called—and explained its effects on the process of production and the social moral structure. I went on to point out that the theoretically foreseen consequences of relative impoverishment proved to be so powerful that in fact a policy of socializing the means of production could never actually be carried through to its logical end the socialization of all production factors, without causing an immediate economic disaster. Indeed, sooner or later all actual realizations of Marxist socialism have had to reintroduce elements of private ownership in the means of production in order to overcome or prevent manifest bankruptcy. Even moderate “market” socialism, however, cannot prevent a relative impoverishment of the population, if the idea of socialized production is not abandoned entirely, once and for all.
Much more so than any theoretical argument, it has been the disappointing experience with Russian-type socialism which has led to a constant decline in the popularity of orthodox Marxist socialism and has spurred the emergence and development of modern social-democratic socialism, which will be the concern of this chapter. Both types of socialism, to be sure, derive from the same ideological sources.34 Both are egalitarian in motivation, at least in theory,35 and both have essentially the same ultimate goal: the abolishment of capitalism as a social system based on private ownership and the establishment of a new society, characterized by brotherly solidarity and the eradication of scarcity; a society in which everyone is paid “according to his needs.” From the very beginnings of the socialist movement in the mid-nineteenth century, though, there have been conflicting ideas on the methods best suited for achieving these goals. While generally there was agreement on the necessity of socializing the means of production, there were always diverging opinions on how to proceed. On the one hand, within the socialist movement there were the advocates of a revolutionary course of action. They propagated the violent overthrow of the existing governments, the complete expropriation of all capitalists in one stroke, and the temporary (i.e., until scarcity would indeed, as promised, be eradicated) dictatorship of the proletariat, i.e., of those who were not capitalists but who had to sell their labor services, in order to stabilize the new order. On the other hand there were the reformists who advocated a gradualist approach. They reasoned that with the enlargement of the franchise, and ultimately with a system of universal suffrage, socialism's victory could be attained through democratic, parliamentary action. This would be so because capitalism, according to common socialist doctrine, would bring about a tendency towards the proletarization of society, i.e., a tendency for fewer people to be self-employed and more to become employees instead. And in accordance with common socialist beliefs, this tendency would in turn produce an increasingly uniform proletarian class consciousness which then would lead to a swelling voter turnout for the socialist party. And, so they reasoned, as this strategy was much more in line with public opinion (more appealing to the mostly peacefully-minded workers and at the same time less frightening to the capitalists), by adopting it, socialism's ultimate success would only become more assured.
Both of these forces co-existed within the socialist movement, though their relationship was at times quite strained, until the Bolshevik Revolution of October, 1917 in Russia. In practice, the socialist movement generally took the reformist path, while in the field of ideological debate the revolutionaries dominated.36 The Russian events changed this. With Lenin in the lead, for the first time the revolutionary socialists realized their program and the socialist movement as a whole had to take a stand vis à vis the Russian experiment. As a consequence, the socialist movement split into two branches with two separate parties: a communist party either more or less in favor of the Russian events, and a socialist or social-democratic party with reservations, or against them. Still, the split was not over the issue of socialization; both were in favor of that. It was an open split over the issue of revolutionary vs. democratic parliamentary change. Faced with the actual experience of the Russian revolution—the violence, the bloodshed, the practice of uncontrolled expropriation, the fact that thousands of new leaders, very often of questionable reputation or simply shady, inferior characters, were being swept to the political helm—the social democrats, in their attempt to gain public support, felt they had to abandon their revolutionary image and become, not only in practice but in theory as well, a decidedly reformist, democratic party. And even some of the communist parties of the West, dedicated as they were to a theory of revolutionary change, but just as much in need of public support, felt they had to find some fault, at least, with the peculiar Bolshevik way of implementing the revolution. They, too, increasingly thought it necessary to play the reformist, democratic game, if only in practice.
However, this was only the first step in the transformation of the socialist movement effected by the experience of the Russian revolution. The next step, as indicated, was forced upon it by the dim experience with Soviet Russia’s economic performance. Regardless of their differing views on the desirability of revolutionary changes and equally unfamiliar with or unable or unwilling to grasp abstract economic reasoning, socialists and communists alike could still, during a sort of honeymoon period which they felt the new experiment deserved, entertain the most illusory hopes about the economic achievements of a policy of socialization. But this period could not last forever, and the facts had to be faced and the results evaluated after some time had elapsed. For every decently neutral observer of things, and later for every alert visitor and traveler, it became evident that socialism Russian-style did not mean more but rather less wealth and that it was a system above all, that in having to allow even small niches of private capital formation, had in fact already admitted its own economic inferiority, if only implicitly. As this experience became more widely known, and in particular when after World War II the Soviet experiment was repeated in the East European countries, producing the very same dim results and thus disproving the thesis that the Soviet mess was only due to a special Asian mentality of the people, in their race for public support the socialist, i.e., the social-democratic and communist, parties of the West were forced to modify their programs further. The communists now saw various flaws in the Russian implementation of the socialization program as well, and increasingly toyed with the idea of more decentralized planning and decision-making and of partial socialization, i.e., socialization only of major firms and industries, although they never entirely abandoned the idea of socialized production.37 The socialist or social-democratic parties, on the other hand, less sympathetic from the beginning towards the Russian model of socialism and through their decidedly reformist-democratic policy already inclined to accept compromises such as partial socialization, had to make a further adaptive move. These parties, in response to the Russian and East European experiences, increasingly gave up the notion of socialized production altogether and instead put more and more emphasis on the idea of income taxation and equalization, and, in another move, on equalization of opportunity, as being the true cornerstones of socialism.
While this shift from Russian-type socialism towards a social-democratic one took place, and still is taking place in all Western societies, it was not equally strong everywhere. Roughly speaking and only looking at Europe, the displacement of the old by the new kind of socialism has been more pronounced, the more immediate and direct the experience with Russian-type socialism for the population in which the socialist and/or communist parties had to find supporters and voters. Of all the major countries, in West Germany, where the contact with this type of socialism is the most direct, where millions of people still have ample opportunities to see with their own eyes the mischief that has been done to the people in East Germany, this displacement was the most complete. Here, in 1959, the social democrats adopted (or rather were forced by public opinion to adopt) a new party program in which all obvious traces of a Marxist past were conspicuously absent, that rather explicitly mentioned the importance of private ownership and markets, that talked about socialization only as a mere possibility, and that instead heavily stressed the importance of redistributive measures. Here, the protagonists of a policy of socialization of the means of production within the social-democratic party have been considerably outnumbered ever since; and here the communist parties, even when they are only in favor of peaceful and partial socialization, have been reduced to insignificance.38 In countries further removed from the iron curtain, like France, Italy, Spain, and also Great Britain, this change has been less dramatic. Nonetheless, it is safe to say that today only social-democratic socialism, as represented most typically by the German social-democrats, can claim widespread popularity in the West. As a matter of fact, due partly to the influence of the Socialist International—the association of socialist and social-democratic parties—social-democratic socialism can now be said to be one of the most widespread ideologies of our age, increasingly shaping the political programs and actual policies not only of explicitly socialist parties, and to a lesser degree those of the western communists, but also of groups and parties who would not even in their most far-fetched dreams call themselves socialists, like the east coast “liberal” Democrats in the United States.39 And in the field of international politics the ideas of social-democratic socialism, in particular of a redistributive approach towards these-called North-South conflict, have almost become something like the official position among all “well-informed” and “well-intentioned” men; a consensus extending far beyond those who think of themselves as socialists.40
What are the central features of socialism social-democratic-style? There are basically two characteristics. First, in positive contradistinction to the traditional Marxist-style socialism, social-democratic socialism does not outlaw private ownership in the means of production and it even accepts the idea of all means of production being privately owned—with the exception only of education, traffic and communication, central banking, and the police and courts. In principle, everyone has the right to privately appropriate and own means of production, to sell, buy, or newly produce them, to give them away as a present, or to rent them out to someone else under a contractual arrangement. But secondly, no owner of means of production rightfully owns all of the income that can be derived from the usage of his means of production and no owner is left to decide how much of the total income from production to allocate to consumption and investment. Instead, part of the income from production rightfully belongs to society, has to be handed over to it, and is then, according to ideas of egalitarianism or distributive justice, redistributed to its individual members. Furthermore, though the respective income-shares that go to the producer and to society might be fixed at any given point in time, the share that rightfully belongs to the producer is in principle flexible and the determination of its size, as well as that of society’s share, is not up to the producer, but rightfully belongs to society.41
Seen from the point of view of the natural theory of property—the theory underlying capitalism—the adoption of these rules implies that the rights of the natural owner have been aggressively invaded. According to this theory of property, it should be recalled, the user-owner of the means of production can do whatever he wants with them; and whatever the outcome of his usage, it is his own private income, which he can use again as he pleases, as long as he does not change the physical integrity of someone else’s property and exclusively relies on contractual exchanges. From the standpoint of the natural theory of property, there are not two separate processes—the production of income and then, after income is produced, its distribution. There is only one process: in producing income it is automatically distributed; the producer is the owner. As compared with this, socialism social-democratic style advocates the partial expropriation of the natural owner by redistributing part of the income from production to people who, whatever their merits otherwise, definitely did not produce the income in question and definitely did not have any contractual claims to it, and who, in addition, have the right to determine unilaterally, i.e., without having to wait for the affected producer’s consent, how far this partial expropriation can go.
It should be clear from this description that, contrary to the impression which socialism social-democratic style is intended to generate among the public, the difference between both types of socialism is not of a categorical nature. Rather, it is only a matter of degree. Certainly, the first mentioned rule seems to inaugurate a fundamental difference in that it allows private ownership. But then the second rule in principle allows the expropriation of all of the producer’s income from production and thus reduces his ownership right to a purely nominal one. Of course, social-democratic socialism does not have to go as far as reducing private ownership to one in name only. And admittedly, as the income-share that the producer is forced to hand over to society can in fact be quite moderate, this, in practice, can make a tremendous difference as regards economic performance. But still, it must be realized that from the standpoint of the nonproducing fellowmen, the degree of expropriation of private producers’ income is a matter of expediency, which suffices to reduce the difference between both types of socialism—Russian and social-democratic style—once and for all to a difference only of degree. It should be apparent what this important fact implies for a producer. It means that however low the presently fixed degree of expropriation might be, his productive efforts take place under the ever present threat that in the future the income-share which must be handed over to society will be raised unilaterally. It does not need much comment to see how this increases the risk, or the cost of producing, and hence lowers the rate of investment.
With this statement a first step in the analysis that follows has already been taken. What are the economic, in the colloquial sense of the term, consequences of adopting a system of social-democratic socialism? After what has just been said, it is probably no longer altogether surprising to hear that at least as regards the general direction of the effects, they are quite similar to those of traditional Marxist-type socialism. Still, to the extent that social-democratic socialism settles for partial expropriation and the redistribution of producer incomes, some of the impoverishment effects that result from a policy of fully socializing means of production can be circumvented. Since these resources can still be bought and sold, the problem most typical of a caretaker economy—that no market prices for means of production exist and hence neither monetary calculation nor accounting are possible, with ensuing misallocations and the waste of scarce resources in usages that are at best of only secondary importance—is avoided. In addition, the problem of overutilization is at least reduced. Also, since private investment and capital formation is still possible to the extent that some portion of income from production is left with the producer to use at his discretion, under socialism social-democratic style there is a relatively higher incentive to work, to save, and to invest.
Nonetheless, by no means can all impoverishment effects be avoided. Socialism social-democratic style, however good it might look in comparison with Russian-type socialism, still necessarily leads to a reduction in investment and thus in future wealth as compared with that under capitalism.42 By taking part of the income from production away from the owner-producer, however small that part may be, and giving it to people who did not produce the income in question, the costs of production (which are never zero, as producing, appropriating, contractings always imply at least the use of time, which could be used otherwise, for leisure, consumption, or underground work, for instance) rise, and, mutatis mutandis, the costs of nonproducing and/or underground production fall, however slightly. As a consequence there will be relatively less production and investment, even though, for reasons to be discussed shortly, the absolute level of production and wealth might still rise. There will be relatively more leisure, more consumption, and more moonlighting, and hence, all in all, relative impoverishment. And this tendency will be more pronounced the higher the income from production that is redistributed, and the more imminent the likelihood that it will be raised in the future by unilateral, noncontractual societal decision.
For a long time by far the most popular idea for implementing the general policy goal of social-democratic socialism was to redistribute monetary in come by means of income taxation or a general sales tax levied on producers. A look at this particular technique shall further clarify our point and avoid some frequently encountered misunderstandings and misconceptions about the general effect of relative impoverishment. What is the economic effect of introducing income or sales taxation where there has been none before, or of raising an existing level of taxation to a new height?43 In answering this, I will further ignore the complications that result from the different possible ways of redistributing tax money to different individuals or groups of individuals—these shall be discussed later in this chapter. Here we will only take into account the general fact, true by definition for all redistributive systems, that any redistribution of tax money is a transfer from monetary income producers and contractual money recipients to people in their capacity as nonproducers and nonrecipients of contractual money incomes. Introducing or raising taxation thus implies that monetary income flowing from production is reduced for the producer and increased for people in their roles as nonproducers and noncontractors. This changes the relative costs of production for monetary return versus nonproduction and production for nonmonetary returns. Accordingly, insofar as this change is perceived by people, they will increasingly resort to leisurely consumption and/or production for the purpose of barter, simultaneously reducing their productive efforts undertaken for monetary rewards. In any case, the output of goods to be purchased with money will fall, which is to say the purchasing power of money decreases, and hence the general standard of living will decline.
Against this reasoning it is sometimes argued that it has been frequently observed empirically that a rise in the level of taxation was actually accompanied by a rise (not a fall) in the gross national product (GNP), and that the above reasoning, however plausible, must thus be considered empirically invalid. This alleged counterargument exhibits a simple misunderstanding: a confusion between absolute and relative reduction. In the above analysis the conclusion is reached that the effect of higher taxes is a relative reduction in production for monetary returns; a reduction, that is, as compared with the level of production that would have been attained had the degree of taxation not been altered. It does not say or imply anything with respect to the absolute level of output produced. As a matter of fact, absolute growth of GNP is not only compatible with our analysis but can be seen as a perfectly normal phenomenon to the extent that advances in productivity are possible and actually take place. If it has become possible, through improvement in the technology of production, to produce a higher output with an identical input (in terms of costs), or a physically identical output with a reduced input, then the coincidence of increased taxation and increased output is anything but surprising. But, to be sure, this does not at all affect the validity of what has been stated about relative impoverishment resulting from taxation.
Another objection that enjoys some popularity is that raising taxes leads to a reduction in monetary income, and that this reduction raises the marginal utility of money as compared with other forms of income (like leisure) and thus, instead of lowering it, actually helps to increase the tendency to work for monetary return. This observation, to be sure, is perfectly true. But it is a misconception to believe that it does anything to invalidate the relative impoverishment thesis. First of all, in order to get the full picture it should be noted that through taxation, not only the monetary income for some people (the producers) is reduced but simultaneously monetary income for other people (nonproducers) is increased, and for these people the marginal utility of money and hence their inclination to work for monetary return would be reduced. But this is by no means all that need be said, as this might still leave the impression that taxation simply does not affect the output of exchangeable goods at all—since it will reduce the marginal utility of money income for some and increase it for others, with both effects cancelling each other out. But this impression would be wrong. As a matter of fact, this would be a denial of what has been assumed at the outset: that a tax hike, i.e., a higher monetary contribution forced upon disapproving income producers, has actually taken place and has been perceived as such—and would hence involve a logical contradiction. Intuitively, the flaw in the belief that taxation is “neutral” as regards output becomes apparent as soon as the argument is carried to its ultimate extreme. It would then amount to the statement that even complete expropriation of all of the producers’ monetary income and the transfer of it to a group of nonproducers would not make any difference, since the increased laziness of the nonproducers resulting from this redistribution would be fully compensated by an increased workaholism on the part of the producers (which is certainly absurd). What is overlooked in this sort of reasoning is that the introduction of taxation or the rise in any given level of taxation does not only imply favoring nonproducers at the expense of producers, it also simultaneously changes, for producers and nonproducers of monetary income alike, the cost attached to different methods of achieving an (increasing) monetary income. For it is now relatively less costly to attain additional monetary in come through nonproductive means, i.e., not through actually producing more goods but by participating in the process of noncontractual acquisitions of goods already produced. Even if producers are indeed more intent upon attaining additional money as a consequence of a higher tax, they will increasingly do so not by intensifying their productive efforts but rather through exploitative methods. This explains why taxation is not, and never can be, neutral. With (increased) taxation a different legal incentive structure is institutionalized: one that changes the relative costs of production for monetary income versus nonproduction, including nonproduction for leisurely purposes and nonproduction for monetary return, and also versus production for nonmonetary return (barter). And if such a different incentive structure is applied to one and the same population, then, and necessarily so, a decrease in the output of goods produced for monetary return must result.44
While income and sales taxation are the most common techniques, they do not exhaust social-democratic socialism's repertoire of redistributive methods. No matter how the taxes are redistributed to the individuals composing a given society, no matter, for instance, to what extent monetary in come is equalized, since these individuals can and do lead different lifestyles and since they allocate different portions of the monetary income assigned to them to consumption or to the formation of nonproductively used private wealth, sooner or later significant differences between people will again emerge, if not with respect to their monetary income, then with respect to private wealth. And not surprisingly, these differences will steadily become more pronounced if a purely contractual inheritance law exists. Hence, social-democratic socialism, motivated as it is by egalitarian zeal, includes private wealth in its policy schemes and imposes a tax on it, too, and in particular imposes an inheritance tax in order to satisfy the popular outcry over “unearned riches” falling upon heirs.
Economically, these measures immediately reduce the amount of private wealth formation. As the enjoyment of private wealth is made relatively more costly by the tax, less wealth will be newly created, increased consumption will ensue—including that of existing stocks of nonproductively used riches—and the overall standard of living, which of course also depends on the comforts derived from private wealth, will sink.
Similar conclusions about impoverishment effects are reached when the third major field of tax policies—that of “natural assets”— is analyzed. For reasons to be discussed below, this field, next to the two traditional fields of monetary income and private wealth taxation, has gained more prominence over time under the heading of opportunity equalization. It did not take much to discover that a person's position in life does not depend exclusively on monetary income or the wealth of nonproductively used goods. There are other things that are important in life and which bring additional income, even though it may not be in the form of money or other exchange goods: a nice family, an education, health, good looks, etc. I will call these nonexchangeable goods from which (psychic) income can be derived “natural assets.” Redistributive socialism, led by egalitarian ideals, is also irritated by existing differences in such assets, and tries, if not to eradicate, then at least to moderate them. But these assets, being nonexchangeable goods, cannot be easily expropriated and the proceeds then redistributed. It is also not very practical, to say the least, to achieve this goal by directly reducing the nonmonetary income from natural assets of higher income people to the level of lower income people by, for instance, ruining the health of the healthy and so making them equal to the sick, or by smashing the good-looking people's faces to make them look like their less fortunate bad-looking fellows.45 Thus, the common method social-democratic socialism advocates in order to create “equality of opportunity” is taxation of natural assets. Those people who are thought to receive a relatively higher nonmonetary income from some asset, like health, are subject to an additional tax, to be paid in money. This tax is then redistributed to those people whose respective income is relatively low to help compensate them for this fact. An additional tax, for instance, is levied on the healthy to help the unhealthy pay their doctor bills, or on the good-looking to help the ugly pay for plastic surgery or to buy themselves a drink so that they can forget about their lot. The economic consequences of such redistributive schemes should be clear. Insofar as the psychic income, represented by health, for instance, requires some productive, time and cost-consuming effort, and as people can, in principle, shift from productive roles into nonproductive ones, or channel their productive efforts into different, non- or less heavily taxed lines of nonexchangeable or exchangeable goods production, they will do so because of the increased costs involved in the production of personal health. The overall production of the wealth in question will fall, the general standard of health, that is, will be reduced. And even with truly natural assets, like intelligence, about which people can admittedly do little or nothing, consequences of the same kind will result, though only with a time lag of one generation. Realizing that it has become relatively more costly to be intelligent and less so to be nonintelligent, and wanting as much income (of all sorts) as possible for one’s offspring, the incentive for intelligent people to produce offspring has been lowered and for nonintelligent ones raised. Given the laws of genetics, the result will be a population that is all in all less intelligent. And besides, in any case of taxation of natural assets, true for the example of health as well as for that of intelligence, because monetary income is taxed, a tendency similar to the one resulting from income taxation will set in, i.e., a tendency to reduce one’s efforts for monetary return and instead increasingly engage in productive activity for nonmonetary return or in all sorts of nonproductive enterprises. And, of course, all this once again reduces the general standard of living.
But this is still not all that has to be said about the consequences of socialism social-democratic-style, as it will also have remote yet nonetheless highly important effects on the social-moral structure of society, which will become visible when one considers the long-term effects of introducing redistributive policies. It probably no longer comes as a surprise that in this regard, too, the difference between Russian-type socialism and socialism social-democratic style, while highly interesting in some details, is not of a principal kind.

Theory of Socialism and Capitalism, A

Friday, September 28, 2012

Socialism Russian Style

We have defined socialism as an institutionalized policy of redistribution of property titles. More precisely, it is a transfer of property titles from people who have actually put scarce means to some use or who have acquired them contractually from persons who have done so previously onto persons who have neither done anything with the things in question nor acquired them contractually. For a highly unrealistic world—the Garden of Eden—I then pointed out the socio-economic consequences of such a system of assigning property rights were then pointed out: a reduction of investment in human capital and increased incentives for the evolution of nonproductive personality types.
I now want to enlarge and concretize this analysis of socialism and its socio-economic impact by looking at different though equally typical versions of socialism. In this chapter I will concentrate on the analysis of what most people have come to view as “socialism par excellence” (if not the only type of socialism there is), this probably being the most appropriate starting point for any discussion of socialism. This “socialism par excellence” is a social system in which the means of production, that is, the scarce resources used to produce consumption goods, are “nationalized” or “socialized.”
Indeed, while Karl Marx, and like him most of our contemporary intellectuals of the left, was almost exclusively concerned with the analysis of the economic and social defects of capitalism, and in all of his writings made only a few general and vague remarks about the constructive problem of the organization of the process of production under socialism, capitalism’s allegedly superior alternative, there can be no doubt that this is what he considered the cornerstone of a socialist policy and the key to a better and more prosperous future.17 Accordingly, socialization of the means of production has been advocated by all socialists of orthodox Marxist persuasion ever since. It is not only what the communist parties of the West officially have in store for us, though they become increasingly reluctant to say so in order to seize power. In all of the Western socialist and social-democratic parties a more or less numerous, outspoken, and eloquent minority of some influence also exists, which arduously supports such a scheme and proposes socialization, if not of all means of production, then at least of those of big industry and big business. Most importantly, smaller or bigger sectors of nationalized industries have become part of social reality even in the so-called “most capitalist” countries; and of course an almost complete socialization of the means of production has been tried out in the Soviet Union and later in all of the Soviet-dominated countries of Eastern Europe, as well as in a number of other countries all over the world. The following analysis should thus enable us to understand the economic and social problems of societies, insofar as they are characterized by nationalized means of production. And in particular, it should help us to understand the central problems that plague Russia and its satellites, as these countries have carried a policy of socialization so far that it can justly be said to be their dominant structural feature. It is because of this fact that the type of socialism under investigation is called “Russian” style.18
As regards the motivational forces pushing socialization schemes, they are avowedly egalitarian. Once you allow private property in the means of production, you allow differences. If I own resource A, then you do not own it, and our relationship to this resource is thus different. By abolishing private ownership everyone’s position vis à vis means of production is equalized with one stroke, or so it seems. Everyone becomes co-owner of everything, reflecting everyone’s equal standing as human beings. And the economic rationale of such a scheme is that it is supposedly more efficient. To the untrained observer unfamiliar with the action-coordinating function of prices, capitalism as based on private ownership of means of production simply appears chaotic. It seems to be a wasteful system characterized by duplicating efforts, ruinous competition, and the absence of concerted, coordinated action. As Marxists call it depreciatively, it is an “anarchy of production.” Only when collective ownership is substituted for private does it seemingly become possible to eliminate this waste by implementing a single, comprehensive, coordinated production plan.
More important, though, than motivation and promises is what a socialization of means of production really amounts to. 19 The property rules that are adopted under a socialization policy and which constitute the basic legal principles of countries like Russia are characterized by two complementary features. First, nobody owns the socialized means of production; they are “socially” owned, which is to say precisely: no person, or no group of persons, or all taken together is allowed to either acquire them or sell them and keep the receipts from their sale privately. Their use is determined by people not in the role of an owner but of a caretaker of things. And secondly, no person or group of persons or all taken together is allowed to engage newly in private investment and create new private means of production. They can neither invest by transforming the existing, nonproductively used resources into productive ones, by original saving, by pooling resources with other people, nor by a mixture of these techniques. Investment can only be done by caretakers of things, never for private profit, always on behalf of the community of caretakers with whom the possible profits from investments would have to be shared.20
What does it mean to have such a caretaker economy? What, in particular, does it imply to change from an economy built on the natural theory of property to a socialized one? In passing, two observations should be made, which will already throw some light on the above-mentioned socialist promises of equality and efficiency. Declaring everybody a co-owner of everything solves the problem of differences in ownership only nominally. It does not solve the real underlying problem: differences in the power to control. In an economy based on private ownership, the owner determines what should be done with the means of production. In a socialized economy this can no longer happen, as there is no such owner. Nonetheless, the problem of determining what should be done with the means of production still exists and must be solved somehow, provided there is no prestabilized and presynchronized harmony of interests among all of the people (in which case no problems whatsoever would exist anymore), but rather some degree of disagreement. Only one view as to what should be done can in fact prevail and others must mutatis mutandis be excluded. But then again there must be inequalities between people: someone’s or some groups’ opinion must win over that of others. The difference between a private property economy and a socialized one is only how whose will prevails in cases of disagreement is to be determined. In capitalism there must be somebody who controls, and others who do not, and hence real differences among people exist, but the issue of whose opinion prevails is resolved by original appropriation and contract. In socialism, too, real differences between controllers and noncontrollers must, of necessity, exist; only in the case of socialism, the position of those whose opinion wins is not determined by previous usership or contract, but by political means.21 This difference is certainly a highly important one, and our discussion will return to it later in this chapter and again in later chapters, but here it suffices to say that—contrary to socialism’s egalitarian promises—it is not a difference between a nonegalitarian and an egalitarian system as regards power of control.
The second observation is intimately connected with the first and concerns socialism’s allegedly superior coordinating capabilities. Again closer inspection reveals that the difference is merely illusory, created only by semantics: to say that an economy of private owners is supplanted by a nationalized one creates the impression that instead of a multitude of decision-making units, all of a sudden there is only one such unit. In fact, nothing has changed at all. There are as many individuals with as many different interests as before. Just as much as capitalism then, socialism has to find a solution to the problem of determining how to coordinate the uses of different means of production, given the fact of differing views among people on how this should be accomplished. The difference between capitalism and socialism is again one of how coordination is achieved, and not between chaos and coordination, as the socialist semantic insinuates. Instead of simply letting individuals do what they want, capitalism coordinates actions by constraining people to respect previous user-ownership. Socialism, on the other hand, instead of letting people do whatever pleases them, coordinates individual plans by superimposing on one person’s or group of persons’ plan that of another disagreeing person or group regardless of prior ownership and mutual exchange agreements.22 It hardly deserves comment that this difference, too, is of the utmost importance. But it is not, as Marxist socialism would like us to believe, a difference between social planning and no planning at all; on the contrary, as soon as the coordinating mechanisms of socialism and capitalism are brought into the open and reconstructed, socialism’s claim to greater efficiency immediately begins to lose much of its credibility, and the opposite thesis appears to be more convincing.
How well-founded this thesis indeed is, and exactly why it is that capitalism’s, and not socialism’s, coordinating mechanism proves to be economically superior will become clear when one turns away from apparent differences and concentrates on real ones instead, and looks at the redistribution of property titles, and hence of income, which is implied in giving up capitalism in favor of a caretaker economy, as characterized above. From the standpoint of the natural theory of property—the foundation of capitalism—the adoption of the basic principles of a caretaker economy means that property titles are redistributed away from actual producers and users of means of production, and away from those who have acquired these means by mutual consent from previous users, to a community of caretakers in which, at the very best, every person remains the caretaker of the things he previously owned. But even in this case each previous user and each contractor would be hurt, as he could no longer sell the means of production and keep the receipt from the sale privately, nor could he privately appropriate the profit from using them the way they are used, and hence the value of the means of production for him would fall. Mutatis mutandis, every nonuser and noncontractor of these means of production would be favored by being promoted to the rank of caretaker of them, with at least partial say over resources which he had previously neither used nor contracted to use, and his income would rise.
In addition to this redistributive scheme there is another one, implied by the prohibition of newly created private capital or by the degree of hampering (dependent as it is on the size of the socialized part of the economy) under which this process must now take place: a redistribution away from people who have forgone possible consumption and instead saved up funds in order to employ them productively, i.e., for the purpose of producing future consumption goods, and who now can no longer do so or who now have fewer options available, toward nonsavers, who in adopting the redistribution scheme, gain a say, however partial, over the saver’s funds.
The socio-economic consequences of a policy of socialization are essentially implied in these formulations. But before taking a more detailed look at them, it might be worthwhile to review and clarify the central features of the real world in which this socialization scheme would purportedly take place. It should be recalled that one is dealing with a changing world; that man, in addition, can learn with respect to this world and so does not necessarily know today what he will know at a later point in time; that there is a scarcity of a multitude of goods and that accordingly man is pressed by a multitude of needs, not all of which he can satisfy at the same time and/or without sacrificing the satisfaction of other needs; because of this, man must choose and order his needs in a scale of preferences according to the rank of urgency that they have for him; also, more specifically, that neither the process of original appropriation of resources perceived as scarce, nor the process of production of new and the upkeep of old means of production, nor the process of contracting, is costless for man; that all of these activities cost at the very least time, which could be spent otherwise, e.g., for leisure activities; and in addition one should not forget that one is dealing with a world characterized by the division of labor, which is to say that one is not talking about a world of self-sufficient producers, but one in which production is carried out for a market of independent consumers.
With this in mind, then, what are the effects of socializing the means of production? To begin with, what are the “economic” consequences, in the colloquial sense of the term? There are three intimately related effects.23 First—and this is the immediate general effect of all types of socialism—there is a relative drop in the rate of investment, the rate of capital formation. Since “socialization” favors the nonuser, the nonproducer, and the noncontractor of means of production and, mutatis mutandis, raises the costs for users, producers, and contractors, there will be fewer people acting in the latter roles. There will be less original appropriation of natural resources whose scarcity is realized, there will be less production of new and less upkeep of old factors of production, and there will be less contracting. For all of these activities involve costs and the costs of performing them have been raised, and there are alternative courses of action, such as leisure-consumption activities, which at the same time have become relatively less costly, and thus more open and available to actors. Along the same line, because everyone’s investment outlets have dried up as it is no longer permissible to convert private savings into private investment, or because the outlets have been limited to the extent to which the economy is socialized, there will therefore be less saving and more consuming, less work and more leisure. After all, you cannot become a capitalist any longer, or your possibility of becoming one has been restricted, and so there is at least one reason less to save! Needless to say, the result of this will be a reduced output of exchangeable goods and a lowering of the living standard in terms of such goods. And since these lowered living standards are forced upon people and are not the natural choice of consumers who deliberately change their relative evaluation of leisure and exchangeable goods as the result of work, i.e., since it is experienced as an unwanted impoverishment, a tendency will evolve to compensate for such losses by going underground, by moonlighting and creating black markets.
Secondly, a policy of the socialization of means of production will result in a wasteful use of such means, i.e., in use which at best satisfies second-rate needs and at worst, satisfies no needs at all but exclusively increases costs.24 The reason for this is the existence and unavoidability of change! Once it is admitted that there can be change in consumer demand, change in technological knowledge, and change in the natural environment in which the process of production has to take place—and all of this indeed takes place constantly and unceasingly—then it must also be admitted that there is a constant and never-ending need to reorganize and reshuffle the whole structure of social production. There is always a need to withdraw old investments from some lines of production and, together with new ones, pour them into other lines, thus making certain productive establishments, certain branches, or even certain sectors of the economy shrink and others expand. Now assume—and this is precisely what is done under a socialization scheme—that it is either completely illegal or extremely difficult to sell the collectively owned means of production into private hands. This process of reorganizing the structure of production will then—even if it does not stop altogether—at least be seriously hampered! The reason is basically a simple one, but still of the utmost importance. Because the means of production either cannot be sold, or selling them is made very difficult for the selling caretaker or the private buyer or both, no market prices for the means of production exist, or the formation of such prices is hindered and made more costly. But then the caretaker-producer of the socialized means of production can no longer correctly establish the actual monetary costs involved in using the resources or in making any changes in the production structure. Nor can he compare these costs with his expected monetary income from sales. In not being permitted to take any offers from other private individuals who might see an alternative way of using some given means of production, or in being restricted from taking such offers, the caretaker simply does not know what he is missing, what the foregone opportunities are, and is not able to correctly assess the monetary costs of withholding the resources. He cannot discover whether his way of using them or changing their use is worth the result in terms of monetary returns, or whether the costs involved are actually higher than the returns and so cause an absolute drop in the value of the output of consumer goods. Nor can he establish whether his way of producing for consumer demand is indeed the most efficient way (as compared with conceivable alternative ways) of satisfying the most urgent consumer needs, or if less urgent needs are being satisfied at the expense of neglecting more urgent ones, thus causing at least a relative drop in the value of the goods produced. Without being able to resort unrestrictedly to the means of economic calculation, there is simply no way of knowing. Of course one could go ahead and try to do one’s best. That might even be successful sometimes, though one would have no way of assuring oneself that it is. But, in any case, the larger the consumer market is which one has to serve, and the more the knowledge regarding preferences of different groups of consumers, special circumstances of historical time and geographical space, and possibilities of technology is dispersed among different individuals, the more likely it is that one will go wrong. A misallocation of means of production, with wastes and shortages as the two sides of the same coin, must ensue. In hampering and of course even more so, in making it outright illegal for private entrepreneurs to bid away means of production from caretakers, a system of socialized production prevents opportunities for improvement from being taken up to the full extent they are perceived. Again, it hardly needs to be pointed out that this, too, contributes to impoverishment.25
Thirdly, socializing the means of production causes relative impoverishment, i.e., a drop in the general standard of living, by leading to an over-utilization of the given factors of production. The reason for this, again, lies in the peculiar position of a caretaker as compared with that of a private owner. A private owner who has the right to sell the factors of production and keep the money receipts privately will, because of this, try to avoid any increase in production which occurs at the expense of the value of the capital employed. His objective is to maximize the value of the products produced plus that of the resources used in producing them because he owns both of them. Thus he will stop producing when the value of the marginal product produced is lower than the depreciation of the capital used to produce it. Accordingly, he will, for instance, reduce the depreciation costs involved in producing, and instead engage in increased conservation, if he anticipates future price rises for the products produced and vice versa. The situation of the caretaker, i.e., the incentive structure which he is facing, is quite different in this respect. Because he cannot sell the means of production, his incentive to not produce, and thereby utilize the capital employed, at the expense of an excessive reduction in capital value is, if not completely gone, then at least relatively reduced. True, since the caretaker in a socialized economy also cannot privately appropriate the receipts from the sale of products, but must hand them over to the community of caretakers at large to be used at their discretion, his incentive to produce and sell products at all is relatively weakened as well. It is precisely this fact that explains the lower rate of capital formation. But as long as the caretaker works and produces at all, his interest in gaining an income evidently exists, even if it cannot be used for purposes of private capital formation, but only for private consumption and/or the creation of private, nonproductively used wealth. The caretaker’s inability to sell the means of production, then, implies that the incentive to increase his private income at the expense of capital value is raised. Accordingly, to the extent that he sees his income dependent on the output of products produced (the salary paid to him by the community of caretakers might be dependent on this!), his incentive will be raised to increase this output at the expense of capital. Furthermore, since the actual caretaker, insofar as he is not identical with the community of caretakers, can never be completely and permanently supervised and thus can derive income from using the means of production for private purposes (i.e., the production of privately used, non- or black-marketed goods) he will be encouraged to increase this output at the expense of capital value to the extent that he sees his income dependent on such private production. In any case, capital consumption and overuse of existing capital will occur; and increased capital consumption once more implies relative impoverishment, since the production of future exchange goods will, as a consequence, be reduced.
While implied in this analysis of the threefold economic consequences of socializing the means of production—reduced investment, misallocation, and overutilization, all of which lead to reduced living standards—in order to reach a full understanding of Russian-type societies it is interesting and indeed important to point out specifically that the above analysis also applies to the productive factor of labor. With respect to labor, too, socialization implies lowered investment, misallocation, and overutilization. First, since the owners of labor factors can no longer become self-employed, or since the opportunity to do so is restricted, on the whole there will be less investment in human capital. Second, since the owners of labor factors can no longer sell their labor services to the highest bidder (for to the extent to which the economy is socialized, separate bidders having independent control over specific complementary factors of production, including the money needed to pay labor, and who take up opportunities and risks independently, on their own account, are no longer allowed to exist!) the monetary cost of using a given labor factor, or of combining it with complementary factors, can no longer be established, and hence all sorts of misallocations of labor will ensue. And third, since the owners of labor factors in a socialized economy own at best only part of the proceeds from their labor while the remainder belongs to the community of caretakers, there will be an increased incentive for these caretakers to supplement their private income at the expense of losses in the capital value embodied in the laborers, so that an overutilization of labor will result.26
Last, but certainly not least, a policy of the socialization of the means of production affects the character structure of society, the importance of which can hardly be exaggerated. As has been pointed out repeatedly, adopting Russian-type socialism instead of capitalism based on the natural theory of property implies giving a relative advantage to nonusers, nonproducers, and noncontractors as regards property titles of the means of production and the income that can be derived from using of these means. If people have an interest in stabilizing and, if possible, increasing their income and they can shift relatively easily from the role of a user-producer or contractor into that of a nonuser, nonproducer, or noncontractor—assumptions, to be sure, whose validity can hardly be disputed—then, responding to the shift in the incentive structure affected by socialization, people will increasingly engage in nonproductive and noncontractual activities and, as time goes on, their personalities will be changed. A former ability to perceive and to anticipate situations of scarcity, to take up productive opportunities, to be aware of technological possibilities, to anticipate changes in demand, to develop marketing strategies and to detect chances for mutually advantageous exchanges, in short: the ability to initiate, to work and to respond to other people’s needs, will be diminished, if not completely extinguished. People will have become different persons, with different skills, who, should the policy suddenly be changed and capitalism reintroduced, could not go back to their former selves immediately and rekindle their old productive spirit, even if they wanted to. They will simply have forgotten how to do it and will have to relearn, slowly, with high psychic costs involved, just as it involved high costs for them to suppress their productive skills in the first place. But this is only half the picture of the social consequences of socialization. It can be completed by recalling the above findings regarding capitalism’s and socialism’s apparent differences. This will bring out the other side of the personality change caused by socializing, complementing the just mentioned loss in productive capacity. The fact must be recalled that socialism, too, must solve the problem of who is to control and coordinate various means of production. Contrary to capitalism’s solution to this problem, though, in socialism the assignment of different positions in the production structure to different people is a political matter, i.e., a matter accomplished irrespective of considerations of previous user-ownership and the existence of contractual, mutually agreeable exchange, but rather by superimposing one person’s will upon that of another (disagreeing) one. Evidently, a person’s position in the production structure has an immediate effect on his income, be it in terms of exchangeable goods, psychic income, status, and the like. Accordingly, as people want to improve their income and want to move into more highly evaluated positions in the hierarchy of caretakers, they increasingly have to use their political talents. It becomes irrelevant, or is at least of reduced importance, to be a more efficient producer or contractor in order to rise in the hierarchy of income recipients. Instead, it is increasingly important to have the peculiar skills of a politician, i.e., a person who through persuasion, demagoguery and intrigue, through promises, bribes, and threats, manages to assemble public support for his own position. Depending on the intensity of the desire for higher incomes, people will have to spend less time developing their productive skills and more time cultivating political talents. And since different people have differing degrees of productive and political talents, different people will rise to the top now, so that one finds increasing numbers of politicians everywhere in the hierarchical order of caretakers. All the way to the very top there will be people incompetent to do the job they are supposed to do. It is no hindrance in a caretaker’s career for him to be dumb, indolent, inefficient, and uncaring, as long as he commands superior political skills, and accordingly people like this will be taking care of the means of production everywhere.27
A look at Russia and other East-bloc countries in which a policy of socialization of means of production has been carried out to a considerable degree can help illustrate the truth of the above conclusions. Even a superficial acquaintance with these countries suffices to see the validity of the first and main conclusion. The general standard of living in the East-bloc countries, though admittedly different from country to country (a difference that itself would have to be explained by the degree of strictness with which the socialization scheme was and presently is carried through in practice), is clearly much lower than that in the so-called capitalist countries of the West. (This is true even though the degree to which Western countries are socialized, though differing from country to country, is itself quite considerable and normally very much underestimated as will become clear in later chapters.) Though the theory does not and cannot make a precise prediction of how drastic the impoverishment effect of a socialization policy will be, except that it will be a noticeable one, it is certainly worth mentioning that when almost complete socialization was first put into effect in immediate post-World War I Russia, this experience cost literally millions of lives, and it required a marked change in policy, the New Economic Policy (NEP), merely a few years later in 1921, reintroducing elements of private ownership, to moderate these disastrous effects to levels that would prove tolerable.28 Indeed, repeated changes in policy made Russia go through a similar experience more than once. Similar, though somewhat less drastic, results from a policy of socialization were experienced in all of the East European countries after World War II. There, too, moderate privatization of small farming, the crafts, or small businesses had to be permitted repeatedly in order to prevent outright economic breakdowns.
Nonetheless, in spite of such reforms, which incidentally prove the point that contrary to socialist propaganda it is private and not social ownership that improves economic performance, and in spite of the fact that moonlighting, illegal productive activities, bartering, and black market trade are ubiquitous phenomena in all of these countries, just as the theory would lead one to expect, and that this underground economy takes up part of the slack and helps to improve things, the standard of living in the East-bloc countries is lamentably low. All sorts of basic consumer goods are entirely lacking, in far too short supply or of extremely poor quality.30
The case of West and East Germany is particularly instructive. Here, history provides us with an example that comes as close to that of a controlled social experiment as one could probably hope to get. A quite homogeneous population, with very much the same history, culture, character structure, work ethics, divided after Hitler-Germany’s defeat in World War II. In West Germany, more because of lucky circumstances than the pressure of public opinion, a remarkably free market economy was adopted, the previous system of all-around price controls abolished in one stroke, and almost complete freedom of movement, trade, and occupation introduced.31 In East Germany, on the other hand, under Soviet Russian dominance, socialization of the means of production, i.e., an expropriation of the previous private owners, was implemented. Two different institutional frameworks, two different incentive structures have thus been applied to the same population. The difference in the results is impressive.32 While both countries do well in their respective blocs, West Germany has the highest standard of living among the major West-European nations and East Germany prides itself in being the most well-off country in the East bloc, the standard of living in the West is so much higher and has become relatively more so over time, that despite the transfer of considerable amounts of money from West to East by government as well as private citizens and increasingly socialist policies in the West, the visitor going from West to East is simply stunned as he enters an almost completely different, impoverished world. As a matter of fact, while all of the East-European countries are plagued by the emigration problem of people wanting to leave for the more prosperous capitalist West with its increased opportunities, and while they all have gradually established tighter border controls, thus turning these countries into sort of gigantic prisoner camps in order to prevent this outflow, the case of Germany is a most striking one. With language differences, traditionally the most severe natural barrier for emigrants, nonexistent, the difference in living standards between the two Germanys proved to be so great and emigration from East to West took on such proportions, that in 1961 the socialist regime in East Germany, in a last desperate step, finally had to close its borders to the West completely. To keep the population in, it had to build a system the likes of which the world had never seen of walls, barbed wire, electrified fences, mine fields, automatic shooting devices, watchtowers, etc., almost 900 miles long, for the sole purpose of preventing its people from running away from the consequences of Russian-type socialism.
Besides exemplifying the main point, the case of the two Germanys, because of its experimental-like character, proves particularly helpful in illustrating the truth of the rest of the theoretically derived conclusions. Looking at comparable social positions, almost nowhere in West Germany will one find people working as little, as slowly, or as negligently (while the working hours, higher in the East, are of course regulated!) as their East German counterparts. Not, to be sure, because of any alleged differences in mentality or work ethics, as those are very much the same historically, but because the incentive to work is considerably reduced by a policy scheme that effectively closes all or most outlets for private investment. Effective work in East Germany is most likely to be found in the underground economy. And in response to the various disincentives to work, and in particular to work in the “officially” controlled economy, there is also a tendency among East Germans to withdraw from public life and to stress the importance of privacy, the family, relatives, and personal friends and connections, significantly exceeding what is seen in the West.33
There is also ample evidence of misallocation, just as the theory would lead one to expect. While the phenomenon of productive factors that are not used (at least not continuously) but are simply inactive because complementary factors are lacking can of course be observed in the West, in the East (and again, in the German case certainly not because of differences in organizational talents) it is observed everywhere as a permanent feature of life. And while it is normally quite difficult in the West, and requires special entrepreneurial talent to point out changes in the use of certain means of production that would result in an overall improvement in the output of consumer goods, this is relatively easy in the East-bloc countries. Almost everyone working in East Germany knows many ways to put the means of production to more urgent uses than ones that are currently being used, where they are evidently wasted and cause shortages of other, more heavily demanded goods. But since they are not able to bid them away and must instead go through tedious political procedures to initiate any changes, nothing much can be or indeed is done.
Experience also corroborates what has been said about the other side of the coin: the overutilization of publicly owned means of production. In West Germany such public goods also exist, and as would be expected, they are in relatively bad shape. But in East Germany, and no differently or in fact even worse in the other Soviet-dominated countries, where all factors of production are socially owned, insufficiently maintained, deteriorating, unrepaired, rusting, even simply vandalized production factors, machinery, and buildings are truly rampant. Further, the ecology crisis is much more dramatic in the East, in spite of the relatively underdeveloped state of the general economy, than in the West—and all this is not, as the case of Germany proves clearly enough, because there are differences in people's “natural” inclination to care and to be careful.
Finally, as regards the theoretically predicted changes in the social and personality structure, complaints about superiors are, of course, quite a common phenomenon everywhere. But in the countries of Russian-type socialism, where the assignment of positions in the hierarchy of caretakers is and must be entirely a political affair, such complaints about downright incompetent, unqualified, and ridiculous superiors are, even if not more loudly voiced, most frequent, most severe, and best-founded, and decent people are most often driven to despair or cynicism as a consequence. And since a few people from East Germany still go to West Germany at an age where they are still members of the labor force, some as escapees but more frequently because a sort of ransom has been paid for them, sufficient material also exists to illustrate the conclusion that in the long run a socialized economy will reduce people’s productive capacities. Among those going to the West there is a significant number who led quite normal productive lives in the East but who, despite the absence of any linguistic and cultural barriers, prove to be incapable of, or have the greatest difficulties, adapting to Western society with its increased demand for productive and competitive skills and spirits.

Theory of Socialism and Capitalism, A