The perils of soft socialism

Richard Epstein explains The Problem with Soft Socialism:

(Podcast here)

The challenge to the Democratic Socialist is to develop some alternative form of social organization. But why believe that the collective ownership of social resources, or pooling resources, can promote the satisfaction of basic social needs? It can’t. The key payoff from ownership is control, and just who controls an asset that is owned by everyone? The state is an abstraction, as is the corporation. But there the similarity ceases. A corporation’s assets are owned by its investors, who can then organize a board of directors that chooses its chief executive officer. The group of founders is small and cohesive. No diffuse public body can exert that same kind of careful control over assets, and since the profit motive is ruled out of the picture from the start, the individuals that somehow take charge of the overall enterprise will do so by political intrigue. Once in control, they will have no strong incentive to economize on costs.

Nor, as Friedrich Hayek stressed long ago, do these “central planners” have any reliable information about the two things that are key to making any enterprise work: the costs of inputs on the one side and the value of outputs on the other. As the Council’s report rightly argues, socialist policies “provide little material incentive for production and innovation and, by distributing goods and services for ‘free,’ prevent prices from revealing economically important information about costs and consumer needs and wants.” When buyers and sellers agree on prices, they do not have to explain their decisions to any administrative body. These prices can move by the day or the hour, in response to market conditions, including other market actors. That is a time frame under which no administrative body can work. But even without centralized government control, everyone still labors under a powerful constraint from other market participants who will seek to economize on costs and develop new innovations. These market innovators, driven by the profit-motive, can produce novel products and services to fill market demand, knowing that they enjoy the protection of patents, copyrights, trade secrets and trade names. Will democratic socialists remove property rights in these areas? And still hope to foster innovation?

Democratic socialists understand that their collective utopia cannot function without the information and performance generated by private markets. So how does the collective we “pool” resources? Bold words notwithstanding, they sense that the abolition of all private property is a step too far. So they try to chip away at this structure in the search of higher equity. Elizabeth Warren has a hair-brain scheme to make corporations more accountable by allowing government officials to appoint some fraction of their members, without explaining how any director can simultaneously owe fiduciary duties—the highest legal obligation to act in the best interest of a party, and the rule that keeps our corporate law going— to parties with adverse interests. Bernie Sanders constantly pushes Medicare for all and free college tuition for all without ever understanding that with a price of zero dollars, supply and demand will be perpetually out of whack. Consumer demand explodes with the promise of free goodies, while the supply of goods and services shrinks given the want of revenue to cover wages and capital expenditures. When public price or wage controls ensure that supply will necessarily outstrip demands, only two responses, in tandem, occur. Queues form and quality declines.

The economic disruption will of course have political consequences. As the formal restraints on state power erode, factions will continue to vie for political advantage. In these settings, the one side can only win if the other side loses. This, in turn, ups the pressure on resources, which become ever more scarce. The tragedy is that Democratic Socialists are blind to both logic and history as they try once again to peddle to the public an experiment that has already failed far too often.

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