The rise, fall and future of socialism

The rise, fall and future of socialism


The topic of my lecture is ambitious and daunting and may sound like a provocation in a country that attempted and developed a socialist model that eventually failed. However today there is still a market-led demand for socialist institutions and policies, which is what I intend to explore.

Capitalism, as it is acknowledged unreservedly in the Communist Manifesto, brought about economic growth, technical progress and unprecedented prosperity to the world. However, it also generated unemployment, fluctuations and crises, frequently and on an increasingly large scale, thus creating over time an ever-increasing inequality, especially in the last post-War period. The rise of socialism is rooted in these drawbacks of capitalism.

Meanwhile, the Soviet system was incapable of adapting to the challenges raised by its own successes, reform attempts failed, and eventually it was brought down by its inefficiency, instability, internal and external imbalances, shortages and a crushing debt, and by loss of popular support. Soviet socialism suffered greatly from an original sin: the belief that economic laws would not operate at all in the socialist economy (Rosa Luxemburg, Bukharin, Hilferding and other Bolshevik thinkers).

The transition was expensive, in terms of a deep and prolonged recession, even in the few countries like Poland that have succeeded in rapidly reducing their gap in GDP per head with respect to advanced capitalist economies.

The revival in the demand for socialism today derives from the multiple challenges facing our planet, concerning globalization, mass migrations, infrastructural investment, digitalization, robotics and Artificial Intelligence, climate change, environmental pollution and resource conservation. Additional challenges are faced by EU member states and especially the eurozone, given their dysfunctional nature and disintegration trends. All these problems have been generated or exacerbated by capitalism, which therefore cannot be relied upon to solve them. Failure to tackle them is raising inequality intolerably, with devastating consequences.

The new socialism should not replicate Soviet, Chinese or Yugoslav models, but will be a social democratic market economy, differing from existing capitalism only in institutions and policies, but these involve fundamental differences in the range and intensity of economic policy instruments used, which make up a distinctive new system.

Seven Types Of Socialism
Socialism is a relatively recent economic and political system. The word socialism, as an economic organization set up in the interests of workers, first appeared in 1827 in the writings of followers of Robert Owen.

I define socialist systems as a combination of four major components: 1. public ownership of the means of production; 2. equality; 3. economic participation and democracy; 4. effective social control over the main macroeconomic variables.

On the basis of different dosages of these ingredients I identify seven major models of “realized” socialism:

1. Soviet-type central planning (1928/32-1990), with dominant state ownership and enterprise, a commitment to equality diluted in practice by privileged access to low-priced goods in excess demand; “democratic centralism”, in practice the political monopoly of the Communist Party; central planning achieving varying degrees of macroeconomic control. After the last War this system was effectively replicated in Eastern Europe and other parts of the world.

2. China in 1978-end 1990s: “socialism with Chinese characteristics”, growth and equality, dominant public ownership of state enterprises and territorially based cooperatives (Town and Villages Enterprises), moderate authoritarianism. Privatizations began in 1997 and accelerated in 2007.

3. China’s economic system from 2001 (when China joined the WTO) to date. Public ownership is no longer dominant (since 2005) and the system is subject to domestic and international market competition, but central powers exercise a strong influence on economic processes through extensive and deep use of traditional instruments of economic policy.

Contemporary China seems to defy classification: it has been variously described as capitalism (Kornai 2013); “political capitalism” (Milanovic 2018, following Max Weber 1904 and 1922, i.e. “the use of political power to achieve economic gains”); “state socialism” (The Economist 6/10/2012, Coase and Wang 2012, 2015, Naughton and Tsai 2015; Lenin had considered state capitalism a transitional stage, but there is nothing transitional or temporary about China); a unique system combining elements of capitalism and socialism but not conforming to either (“Chinism”, Kolodko 2018).

Contrary to common practice I propose to treat contemporary China as being very close to the Soviet-type system, for many reasons: land is still entirely state owned, though subject to long, transferable leases; over half of the capital stock excluding private housing ownership is public (Piketty et al. 2017); Town and Village enterprises vanished from a late 1990s peak of over 40% of GDP probably through their easier registration as private. I expect that the larger part of China FDI ownership is also in public hands; the banking system is predominantly public and credit access and interest rates are actively used to control all investment. China exercises an effective indirect control on macroeconomic variables through active economic policy, much more successful than Soviet direct central planning. There is political monopoly of the Communist Party, there are no Trade Unions, strikes are illegal, there is an authoritarian, repressive regime, with internal residence restrictions and extensive spying; corruption is rampant and inequality of income and wealth is greater than in the United States.

4. Market socialism of the kind that prevailed in the Soviet Union in 1921-26 under the so-called New Economic Policy, with dominant private ownership and enterprise, domestic and international markets, macroeconomic stabilization, inequality of wealth and income. A similar system was implemented in Yugoslavia in 1950-1990, with social ownership subject to employees’ usufruct of the capital of self-managed enterprises, with inequalities among regions, sectors and enterprises, and ineffective macroeconomic control (as witnessed by high unemployment, emigration, fluctuations and open inflation).

5. Some post-socialist economies especially in the early years (1990-93) of their transition, including Putin’s Russia today: a dominant residual state sector, often restored after initial privatizations; high inequality; lack of participation and of economic (as well as political) democracy; high unemployment, inflation and economic fluctuations.

6. Models of social democracy in otherwise capitalist market economies, like post-war Scandinavian countries: private ownership and enterprise, a developed welfare state, social protection, socialization of consumption, high and stable employment. A similar model was introduced to a varying extent in many EU countries in the 1990s and the early 2000s (Freeman 2005), but it was never part of the obligations of membership and remained a dead letter. Of course, the welfare state has earlier foundations in 19th century mutual self-help institutions, and – from Bismarck to Macmillan – the liberal recognition of the benefits of social peace, also given the competition with socialist welfare policies and their political threat.

7. The degeneration of social democracy as a result of the adoption by social democratic parties of hyper-liberal policies of austerity, globalization, financialization, de-regulation, privatizations, labor and capital mobility in a world without borders. In the EU this process was worsened by the management of the eurozone, but it also affected the US and other countries. In the last decade this degeneration has led to electoral backlashes, with the defeat of self-styled “left” parties by political groupings usually labelled “populist” or “sovereignist” in a derogatory sense but which is simply an expression of residual democratic vitality.

2. Socialist Growth Performance Revisited
The main advantage of the traditional Soviet and early (1978-end-1990s) Chinese model was that of implementing the transition from less developed, almost feudal economies to indigenous capitalism (Milanovic, in his forthcoming Capitalism alone, Harvard UP 2019). Milanovic characterizes as ”political capitalism” China and ten other developing countries (Vietnam, Malaysia, Laos, Singapore, Algeria, Tanzania, Angola, Botswana, Ethiopia, Rwanda) all featuring one party rule for very long periods, a high level of corruption and impressively high economic growth.

In post-War Europe, however, there appears to be a negative correlation between income level at the inception of socialist policies and its subsequent growth rate relative to capitalist countries. In other words, that kind of socialism was least successful in developed industrial economies like East Germany and Czechoslovakia and most successful in poor and agricultural societies like China and Vietnam. Milanovic discusses the two most common explanations usually provided: inability to innovate and inability to substitute capital for labor. Either way, the system was less efficient the more sophisticated the economy.

Vonyó (2017), investigating socialist and capitalist European countries (including the USSR) for the entire post-War period until 1989, reports three important results. First, countries that were more developed in 1950 had lower average growth rates in the following 39 years. Second, socialist countries performed worse than capitalist countries regardless of their initial income level. Third, the gap in growth performance between the two groups of economies is increasing with respect to the initial income level.

3. Social Democracy: Scandinavia And The European Social Model
The traditional Scandinavian social-democratic model is a market economy with private ownership and enterprise, the collectivization of individual risks (old age, illness, invalidity, a large family) and social risks (poverty, unemployment), economic participation and democracy, high and stable employment obtained primarily through fiscal policies, and an egalitarian commitment implemented above all through the socialization of consumption.

A similar model was introduced to a varying extent in many EU countries in the 1990s and the early 2000s: the European Social Model was “characterized by … a high degree of social protection, by the importance of social dialogue and by services of general interest that cover activities essential to social cohesion, based today, beyond the diversity of social systems of single Member States, on a common core of values” (European Council, Nice 2000; see Freeman 2005). The model’s main weakness was the lack of a European Social Union project, and the reliance exclusively on voluntary implementation on the part of Member States. From time to time ambitious projects are announced, for instance the European Pillar of Social Rights, at the Gothenburg Summit of the European Parliament, European Council and European Commission in November 2017, only to remain a dead letter.

Traditional social democracy, through various stages characterized by varying degrees of commitment to such a model, has performed well in terms of growth, employment, equality. The Scandinavian model was diluted by de-regulation and blander forms of state interventions than originally intended, as well as globalization and immigration. The European Social Model never really took off in view of its voluntary nature; it was diluted by European enlargement to hyper-liberal Eastern Europe, and by the budgetary cuts required by the austerity policies with which the EU dealt with the crisis that began in 2008 and is still in operation.

4. Perverted Social Democracy: Globalist, Austerian, Unequal
Towards the end of the 1990s the fall of the Berlin Wall and the victory, seemingly definitive at the time, of hyper-liberalism, provoked a late and exaggerated conversion of social democracy to that ideology.

This happened first in the transition countries on the part of right and left governments alike, then in western Europe under the leadership of Tony Blair’s New Labour and his Third Way, replicated by the German Neue Mitte of Gerhard Schroeder. A similar strategy was followed by President Bill Clinton in the United States (Meeropol 2000).

Blair and Schroeder (1999) reaffirm their commitment to uphold traditional socialist values: “Fairness and social justice; liberty and equality of opportunity; solidarity and responsibility to others: these values are timeless. Social democracy will never sacrifice them” (p. 2).

However, their social democratic project differed drastically from traditional social democracy in three major respects.

1. The acceptance of the primacy and desirability of internal and international markets, fully recognizing their global nature in the modern world. “The market is part of the social organization we desire, not just a necessary means which we reluctantly admit that we need and need to master” (Karlsson 1999). Thus, they were oblivious to the national and global adverse distribution implications of market allocations.

International trade liberalization undoubtedly involves net benefits, but at the same time it inflicts losses on some of the national subjects affected. The overcompensation of losers on the part of the gainers would require international transfers that are impractical and/or transfers from poorer gainers to richer losers that are undesirable. Potential overcompensation is not sufficient, it needs to be actual. The belief that globalization benefits everybody, a tide that lifts all boats, whose benefits in any case “trickle down” from the initial gainers to the rest of the population, is unfounded: “trickle up” is most likely. Finally, the advantages of trade liberalization do not extend to the liberalization of financial capital movements and labor migrations, nor to trade agreements regulating standards, competition and jurisdictions (Rodrik 2018).

2. The rejection of public ownership and enterprise, in support of private entrepreneurship, and a decisive and continued privatization of state assets. Privatizations have involved the abdication of the entrepreneurial role of the state in research and innovation (Mazzucato 2011, 2013), the neglect of essential public services and the diffusion of public private partnerships (PPPs) that collectivize risk and privatize profit, the destruction of building societies and of the entire sector of mutual societies, through the privatization of capital that belonged to their members and was not for the government to give away.

3. Affordability, in the sense of fiscal discipline and a restrictive monetary policy, rejecting therefore both Keynesian policies of public deficits financed by debt, and inflationary monetary expansion. “A healthy public finance should be a reason of pride for social democrats”. “… deficit expenditure cannot be utilized to overcome the structural weaknesses of the economy which are an obstacle to faster growth and higher employment. Social democrats, moreover, should not tolerate excessive levels of public debt, which imposes an excessive burden on future generations and could have other undesired distributive effect. All the money spent for the service of a high public debt is not available for other priorities [sic]among which an increase in investment in education, formation or transport infrastructure”. (Blair and Schroeder 1999, p.10). These astounding propositions rule out anti-cyclical interventions regardless of the phase of the business cycle, take for granted adverse intergenerational effects that are inexistent or exaggerated or at the very least questionable, they confuse objectives with “priorities” and presume that the most important objectives should necessarily be sacrificed to fiscal and monetary discipline.

Such fiscal restraint initially found strong support in economic theories of the 1990s and 2000s, on presumed “expansionary fiscal consolidation” (for instance Giavazzi and Pagano 1990, 1996) and on the alleged existence of a public debt threshold of 90% of yearly GDP, beyond which debt would exercise a negative impact on GDP growth (Reinhart and Rogoff, 2010). Such propositions have been falsified by subsequent research and they are rejected in official IMF documents (see Nuti 2013).

The supporters of this degraded brand of social democracy claim to uphold its values but – apart from the spectacular reversal of social democracy’s pacifist traditions in Iraq – take away from government every single traditional instrument of economic policy needed to implement it: fiscal policy is constrained by balanced budgets, monetary policy is delegated to a Central Bank that is not only independent of the government but is totally disconnected from fiscal policy; privatizations remove the government’s ability to influence distribution and growth through the price and investment policy of public enterprises; direct controls are replaced by market parameters. In practice the only instruments left to government economic policy are so-called “reforms”, and in particular the alleged “structural reforms”.

“Structural Reforms”
These reforms in practice are a misleading euphemism for precarious employment, the ease of dismissing dependent workers even without just cause, the destruction of the trade unions, the dismantling of collective bargaining and the reduction and privatization of the welfare state. The IMF has confirmed the ineffectiveness of these measures for relaunching the economy, but nevertheless hyper-liberal governments – whether or not social democratic – have adopted such instruments with an enthusiasm worthy of better causes.

At the same time the Third Way supporters did not move fast enough or far enough on the road they had chosen: they still talked of “priorities” instead of discussing trade-offs between alternative objectives, proposed the reduction of the working week to 35 hours without corresponding wage reductions, wanted to reduce pensionable age in an ageing society, proposed a Tobin tax on financial transactions unenforceable without its universal adoption and virtually impossible in the cyber age. Instead, they all went much too far in endorsing hyper-liberalism (Nuti 1999) and unconditional globalization, including free movement of capital and labor in a world without borders, unleashing in 2007-08 the worst economic, financial and political crisis in the modern age, whose disastrous effects we are still suffering today.

Populism Versus Democracy
In the last few years this perversion of the social democratic project has been rejected by the electorates of a large number of countries, from the Brexit referendum to Donald Trump’s election as US President, to many European countries independently of their EU membership (as in Germany, Sweden, France, Spain, Austria, recently followed by Italy and Sweden) and in Commonwealth countries (the UK, Australia, New Zealand, Canada). In post-communist Europe today, seven countries have “populist” parties in power, two have them as members of a coalition, and in another three they are the major opposition force. Hodgson (2018) writes of Wrong Turnings – How the Left Got Lost; Kennedy and Manwaring (2017) ask Why the Left Loses. There are multiple causes: the reduction of the electoral base of industrial and manual workers; the emergence of parties more committed to the left (for instance Die Linke) or to the right (like the Rassemblement National or the AfD); the increasing lack of confidence in political parties, often leading to electors’ abstentionism; the discontent and disaffection due to economic crisis. Significantly, the phenomenon is particularly marked in countries governed by social democrats in a coalition with the right, characterized by high immigration, the reduction and worsening of social services and the welfare state, and more generally the absolute or relative impoverishment of the middle classes: Germany is the best but not the only example.

Often, the loss of electoral consensus on the part of social democratic parties is attributed to “populism”, in a pejorative sense. Rodrik (2018) distinguishes between political populism, that compromises pluralism and the liberal democratic rules, and economic populism which on the contrary finds justification in the policy failures of governments, including progressive ones, and can be a necessary and sometimes the only way to avoid political populism.

In general, we can define populism as the promise of impossible or unsustainable policies, accompanied by the appeal to selfish sentiments of the electorate. In truth this populism is indistinguishable from democracy, being simply the expression of electoral dissent from government policies even if supported or tolerated by social democrats, and even when it encourages unjustified but legitimate prejudices of the electorate (for instance xenophobia, which as simple fear of the foreign or the different is an inalienable citizen right). This populism might be stirred up or literally bought with concessions and promises by unprejudiced political leaders; the danger of the majority dictatorship feared by de Tocqueville cannot be avoided without limiting democracy or destroying democracy outright.

The current débâcle of social democracy is not due to the rejection of the social democratic model as such but to its perversion in following hyper-liberal, austerian and globalist tendencies, not only in trade but also in capital movements, foreign direct investments, output de-localization to low-wage emerging economies, and labor migrations. These tendencies favor large multi-national companies, dry up fiscal revenues by encouraging fiscal competition between states, facilitate tax avoidance and evasion with the proliferation of fiscal paradises and greatly reduce the policy space of national governments. This is the perverted social democracy that today has lost electoral consensus in the greater part of the whole developed world.

This is the edited/abridged text of a lecture given at the European Association for Comparative Economic Systems, Warsaw, 6-8 September 2018. Part 2 follows.

The full text of the lecture will be available shortly on the website of the “Dialogue of Civilisations” Research Institute, Berlin.

About Mario Nuti
Domenico Mario Nuti is Professor Emeritus at the University of Rome ‘La Sapienza’, Italy.

source: Social Europe


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