Kristian Niemietz talks about Socialism

This week on The #GSPodcast Stephen Knight talks to Kristian Niemietz (@k_niemietz). Kristian is Head of Political Economy at IEA London and the author of ‘Socialism: The Failed Idea That Never Dies’. They talk about: Classical Liberalism, defining ‘socialism’, Communism v Socialism, the ‘Nordic model’, food banks and more.

Economic calculation under socialism

From AIERvideo comes this video on economic calculation under socialism.

Let's assume socialist central planners have the best intentions. How will they decide what to produce, where to produce it, how to produce it, and for whom? These questions by Mises kicked off the "Socialist Calculation Debate".

The march of history: Mises vs. Marx - the definitive capitalism vs. socialism rap battle

Stalin: Waiting for Hitler, 1929-1941

Stephen Kotkin talks about his new book Stalin: Waiting for Hitler, 1929-1941.

In 1941, history’s largest, most horrific war ever broke out, between the Soviet Union and Nazi Germany. Some 55 million people were killed worldwide in WWII, half in the Soviet Union. Who was Joseph Stalin? Who was Adolf Hitler? Why did they clash? This lecture, based upon a book of the same name, uses a vast array of once secret documents to trace the rise of Soviet Communism and its deadly rivalry with Nazism. It analyzes why Great Powers go to war against each other, delivering lessons for today.

Joseph Stalin: Waiting For Hitler

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Stephen Kotkin about his book Joseph Stalin: Waiting For Hitler.

“If you're interested in power, [if] you're interested in how power is accumulated and exercised, and what the consequences are, the subject of Stalin is just unbelievably deep, it's bottomless.” – Stephen Kotkin

In part two, Stephen Kotkin, author of Stalin: Waiting for Hitler, 1929–1941, discusses the relationship between Joseph Stalin and Adolf Hitler leading up to and throughout World War II. Kotkin describes what motivated Stalin to make the Molotov-Ribbentrop Pact with Hitler and the consequences of his decision.

Kotkin dives into the history of the USSR and its relationship with Germany during WWII, analyzing the two leaders' decisions, strategies, and thought processes. He explains Stalin's and Hitler’s motivations to enter into the Molotov-Ribbentrop Pact even without the support of their respective regimes. Stalin’s goal was to defeat the West and he saw the pact as an opportunity to do so by driving a wedge between Germany and the capitalist West. Kotkin analyzes Stalin’s decisions leading up to the Nazi invasion of the Soviet Union and the disinformation Germany was feeding soviet spies to prevent Stalin from moving against Hitler first.

Why does Joseph Stalin matter?

Peter Robinson at Uncommon Knowledge of the Hoover Institution interviews Stephen Kotkin about Joseph Stalin and collectivisation and the great terror.

“Joseph Stalin, Soviet dictator, creator of great power, and destroyer of tens of millions of lives …” Thus begins this episode of Uncommon Knowledge, which dives into the biography of Joseph Stalin. This episode’s guest, Stephen Kotkin, author of "Stalin: Waiting for Hitler, 1929-1941", examines the political career of Joseph Stalin in the years leading up to World War II, his domination over the Soviet Union, and the terror he inspired by the Great Purge from 1936–38.

“Why does Joseph Stalin matter?” is a key question for Kotkin, as he explains the history of the Soviet Union and Stalin's enduring impact on his country and the world. Kotkin argues that Stalin is the “gold standard for dictatorships” in regard to the amount of power he managed to obtain and wield throughout his lifetime. Stalin stands out because not only was he able to build a massive amount of military power, he managed to stay in power for three decades, much longer than any comparable dictator.

Kotkin and Robinson discuss collectivization and communism and how Stalin’s regime believed it had to eradicate capitalism within the USSR even in regions where capitalism was bringing economic success to the peasants, with the potential of destabilizing the regime. This led to the Great Purge, a campaign of political repression that resulted in the exile and execution of millions of people.

A brief note for @LewSOS

This note is a brief explanation for comments I made in an interesting twitter exchange with @LewSOS.

To start lets us define a socialist economy. I will follow those, on both sides, involved in the socialist calculation debate and define socialism as the state ownership of the means of production. Nothing strange in this.

This raises the question of what is ownership? Here I follow Grossman and Hart (1986) in defining ownership in terms of control rights. You "own" an asset insofar as you have control rights over that asset. As Grossman and Hart put it

We define a firm to consist of those assets that it owns or over which it has control; we do not distinguish between ownership and control and virtually define ownership as the power to exercise control.

This terminology seems consistent with standard usage. For example, Oliver Wendell Homes (1881) writes,

But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits of policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one but him.

Clearly, in fact by definition, under socialism the state has residual control rights. Who then had control rights under the Nazi government? In particular, did private individuals have control rights over "their" assets? Adam Tooze in his book “The Wages of Destruction: The Making and Breaking of the Nazi Economy” (well worth reading, all 800 pages of it!!) makes a number of comments with regard to state involvement in the economy and control over business: to take a few examples,

Now capitalism's deepest crisis left German business powerless to resist a state interventionism that came not from the left but the right

and

The first years of Hitler's regime saw the imposition of a series of controls on German business that were unprecedented in peacetime history.

and

As we have already seen, the New Plan, which effectively regulated the access of each and every German firm to foreign raw materials, created a substantial new bureaucracy, which controlled the vital functions of a large slice of German industry.

and

Managing this burdensome system of controls was the primary function of a new framework of compulsory business organizations imposed by Schacht between the autumn of 1934 and the spring of 1935. In each sector, the existing multiplicity of voluntary associations was fused together into a hierarchy of Reich Groups (for industry, banking, insurance, and so on), Business Groups (Wirtschaftsgruppen, for mining, steel, engineering and so on) and Branch Groups (Fachgruppen, for anthracite as opposed to lignite mining, and so on). Every German firm was required to enrol. Each subdivision in each Business Group was headed by its own Fuehrer. These men were nominated by the existing associations, vetted by the Reich Group and appointed by Schacht. The primary role of the Business Groups was to act as a channel between individual firms and the Reich Ministry of Economic Affairs. Decrees came down from the Ministry via the Business group. Complaints, suggestions and information travelled upwards from the firms, via the Business Groups to Berlin. The organization was tireless in the production of publications, guidelines and recommendations for the best practice. On the basis of emergency decrees first issued during the latter stages of World War I, the Business Groups were also empowered to collect compulsory reports from their members, establishing an unprecedented system of industrial statistics. After 1936 they were authorized to penetrate even further into the internal workings of their members, with the introduction of standardized book-keeping systems.

and

So far-reaching were the regime's interventions in the German economy - starting with exchange controls and ending with the rationing of all key raw materials and the forced conscription of civilian workers in peacetime - that one is tempted to make comparisons with Stalin's Soviet Union.

and

[...] though there clearly was a dramatic assertion of state power over business after 1933, naked coercion was applied selectively [...]

What this points to is a high level of state control over business. While control over business was widespread, ownership was not taken over by the state in the manner of the Soviet Union. In Germany “ownership” formally remained in the hands of private individuals. But while it is true that "formal" ownership remained with private individuals, a question has to be asked as to what happened to "real" ownership. As Aghion and Tirole (1997) point out for the case of organisations, there is a difference between formal authority (the right to decide) and real authority (the effective control over decisions). Formal authority need not confer real authority.

A similar situation can occur with ownership when the state regulates business activity. Formal ownership (the right to decide) may not confer real ownership (the effective control over decisions) in so much as many of the control rights normally associated with ownership are not in the hands of the formal owners. Formal owners may be left with only residual income rights and a limited range of control rights. Given the level of regulation of the Nazi economy, many of the rights usually thought of as making up (real) ownership had been effectively usurped by the state. Avraham Barkai writes in his book "Nazi Economics: Ideology, Theory, and Policy", Oxford: Berg Publishers Ltd., 1990.

In an off-the-record talk with a newspaper editor in 1931, Hitler defined the basic principle of his economic project: "What matters is to emphasize the fundamental idea in my party's economic program clearly-the idea of authority. I want the authority; I want everyone to keep the property he has acquired for himself according to the principle: benefit to the community precedes benefit to the individual ["Gemeinnutz geht vor Eigennutz"]. But the state should retain supervision and each property owner should consider himself appointed by the state. It is his duty not to use his property against the interests of others among his people. This is the crucial matter. The Third Reich will always retain its right to control the owners of property.

So while formal ownership remained with the private sector, this was little more than just an empty shell since real ownership had been (mis)appropriated by the state.

At the Fraser Institute economics professor Steven Horwitz has a brief essay on Fascism. On the topic of the economics of fascism, Horwitz writes,

What emerged as the fascist economic system then was a combination of the socialist rejection of capitalism and the nationalist rejection of internationalist socialism. It’s not coincidental that “Nazi” was short for National Socialist German Workers Party. The very name suggests that the fascists started from a socialist premise (including the emphasis on being a “workers” party), but added the “nationalist” (and specifically “German”) twist.

Rather than have full-blown socialism as we saw in the early years of the Soviet Union, the fascists generally preferred hybrid forms that often maintained the appearance of elements of capitalism but with a much larger role for the state in allocating resources. A look at the Nazi Party platform of 1920 shows the very strong influence of socialism in the economic planks, including objections to the earning of interest, the desire to nationalize industries, the confiscation of profits, and land reform. Not all of these were put into place when Hitler gained power, but the Nazis’ antipathy toward capitalism is quite clear, even as they often co-opted big business into their power structure in during their reign. The trappings of private ownership were often preserved, but the Nazis used the power of the state to try to ensure that private ownership was used as a means toward the national ends that they defined.

The Italian model was similar in its broad outlines, though different in its execution. The Italians were more clear than the Germans about the way in which market competition was destructive of national goals. They didn’t see Russian socialism as a solution for the reasons noted above. Instead, they argued for industry-level partnerships among labor, capital, and the political class. The idea was that by working collectively, these cartel-like organizations could resolve questions of what to produce, what price to charge, what wage to pay, and the like all without the need for cut-throat competition among firms or workers, or the use of strike threats between workers and capitalists. By putting national interests first, these collectives could plan out production industry by industry and ensure a cooperative peace among Italians. So, once again, the system kept some of the trappings of capitalism, such as nominally private ownership, but set them in a system where collective planning of a limited, and nationalistic, sort was the overarching structure.

Both of these systems are probably most accurately called “corporatism.” In such a system, we get these sorts of private-public collaborations in which private ownership is combined with state control and privileges for labor, and where all are expected to serve some larger national goal. It looks like private ownership, which is often the source of the claim that fascism is a form of capitalism, but the degree of distrust of the unplanned order of free markets and the de facto power that falls into the hands of the state to set goals both point to it as being more accurately a form of socialism or planning.

In short, I would argue that you can reasonably see the Nazi economy as being socialist.

Refs.:

• Aghion, Philippe and Jean Tirole (1997). ‘Formal and real authority in organizations’, “Journal of Political Economy”, 105(1): 1-29.
• Grossman, Sanford J. and Oliver D. Hart (1986). ‘The costs and benefits of ownership: a theory of vertical and lateral integration’, “Journal of Political Economy, 94(4): 691-719.
• Holmes, Oliver Wendell (1881). “The Common Law”, Reprint. Boston: Little, Brown, 1946.

You know your economy is in trouble when ......

you get paid in eggs!

A Wall Street Journal report on the situation in Venezuela tells us

One U.S. dollar now fetches around 236,000 bolivars on the street, around 80 times what it bought at the start of last year. Five years ago, that could buy a small apartment; now it barely covers an appetizer at lunch.

“The authorities have lost control, they can’t stop creating bolivars even if they wanted to,” said Omar Zambrano, a former economist for the Inter-American Development Bank. “This ends in two ways: Either we adopt the dollar or we go back to bartering.”

That’s what Marina Fernandez, a professor of architecture at a Caracas university, has done, finding out that some people will take, yes, the humble egg. When she didn’t have enough cash to pay for parking, she handed over two eggs. Her university department, short of cash, paid a computer programmer with a carton of eggs.

Ms. Fernandez said onions or bananas, for some reason, just won’t do. “If you’re going to receive food as payment, the people want it to at least be a protein,” she said. “The egg is perfect.”

Barter is really, really inefficient but sometimes its the best you can do. Hyperinflation means money is worthless so people go back to barter. Or they start to use a new medium of exchange. But eggs seem a bit too breakable to be a totally satisfactory replacement for money.

Such is the crazy, sad world of Venezuela today.

Venezuela officially enters the not-REAL-socialism stage

Writing at the IEA blog Kristian Niemietz says,

Now we’ve finally learned what went wrong in Venezuela: it wasn’t real socialism. At the World Economic Forum summit in Davos, Shadow Chancellor John McDonnell explained:

“It’s not that the issue is socialism vs capitalism. […]

All the objectives of Chavez […] would have been successful if they had mobilised the oil resources to actually invest in the long term […]

I think in Venezuela they took a wrong turn, a not particularly effective path, not a socialist path.”

McDonnell is in good company. Quite a few prominent figures on the left, such as Noam Chomsky and Slavoj Žižek, are now explicitly disputing Venezuela’s socialist credentials.

So Venezuela joins the very long list of countries that at some point are held up as role models of "socialism" by Western intellectuals but which, once they start failing, became an embarrassment to the socialist cause. When the problems become so obvious and undeniable socialism in these countries ceases to be ‘real’ socialism, which of course why it fails. Or so we are told. But every socialist country seems to suffer the same fate. Why is this I wonder.

What is a Marxist Libertarian?

Yes that is a serious question.

Brendan O’Neill (Editor of Spiked Online) joins Dave to discuss why he defines himself as a ‘Marxist Libertarian,’ his views on the pursuit of happiness, self censorship in the U.S., the issue with Bill of Rights only existing in writing and not in the hearts of Americans, the debate surrounding tearing down monuments, and more.

Why do planning economies fail? The economic calculation problem and how markets solve it ....

To appreciate why market prices are essential to human well-being, consider what a fix we would be in without them. Suppose you were the commissar of railroads in the old Soviet Union. Markets and prices have been banished. You and your comrades. Passionate communists all. Now, directly plan how to use available resources.

You want a railroad from city A to city B, but between the cities is a mountain range. Suppose somehow you know that the railroad once built. Will serve the nation equally well. Whether it goes through the mountains or around. If you build through the mountains, you'll use much less steel for the tracks.

Because that route is shorter. But you'll use a great deal of engineering to design the trestles and tunnels needed to cross the rough terrain. That matters because engineering is also needed to design irrigation systems, mines, harbor installations and other structures. And you don't want to tie up engineering on your railroad if it would be more valuable designing those other structures instead.

You can save engineering for other projects. If you build around the mountains on level ground. But that way you'll use much more steel rail to go the longer distance and steel is also needed for other purposes. For vehicles, girders, ships, pots and pans and thousands of other things.

Which route should you choose for the good of the nation? To answer, you would need to determine which bundle of resources is less urgently needed for other purposes. The large amount of engineering and small amount of steel for the route through the mountains, where the small amount of engineering and large amount of steel for the roundabout route.

But how could you find out the urgency of need for engineering and steel in other uses?

You know your country is in trouble when

you get these kind of things happening,

In a hastily organized plebiscite on July 16, held under the auspices of the opposition-controlled National Assembly to reject President Nicolás Maduro’s call for a National Constituent Assembly, more than 720,000 Venezuelans voted abroad. In the 2013 presidential election, only 62,311 did. Four days before the referendum, 2,117 aspirants took Chile’s medical licensing exam, of which almost 800 were Venezuelans. And on July 22, when the border with Colombia was reopened, 35,000 Venezuelans crossed the narrow bridge between the two countries to buy food and medicines.

Voting with your feet is a real thing.

And

The most frequently used indicator to compare recessions is GDP. According to the International Monetary Fund, Venezuela’s GDP in 2017 is 35% below 2013 levels, or 40% in per capita terms. That is a significantly sharper contraction than during the 1929-1933 Great Depression in the United States, when US GDP is estimated to have fallen 28%.

Two opposing literary critiques of socialism

You can be forgiven for thinking that most authors of novels are supports of some form or another of socialism. But not all authors are mindlessly pro-socialism/anti-capitalism, a few have offered literary criticisms of socialism.

The most famous may be Orwell's famous books, Animal Farm and Nineteen Eighty-Four which criticised the totalitarian forms of socialism. But he is not the only one.

A new working paper looks at the critiques of socialism offered by George Orwell, Eugen Richter and Henry Hazlitt. The abstract of the paper, Two Opposing Literary Critiques of Socialism: George Orwell Versus Eugen Richter and Henry Hazlitt by Michael Makovi, reads:

Orwell's famous fictions, Animal Farm and Nineteen Eighty-Four criticized totalitarian forms of socialism from a Public Choice perspective, assuming that socialism would work as an economic system as long as the proper political institutions were in place to curb the potential for the abuse of power. This is contrasted with two novels by others who took the opposite approach: Richter's Pictures of the Socialistic Future and Hazlitt's Time Will Run Back. These two assumed that the political implementation of socialism would be perfect but that socialism would necessarily turn totalitarian because of the problem of economic calculation. These novels assumed away the Public Choice problem of institutions and the abuse of power and focused on the political implications of socialism as a purely economic system. Contrasting these two sets of novels shows how the Austrian and Public Choice schools criticize socialism in two entirely different ways.

Casey Mulligan visits Cuba

Economist Casey B. Mulligan went to Cuba and earlier in the year posted some observations on his trip:

On boats:

Government permission is needed to have a boat. The fishermen’s boats are smaller than a normal rowboat and therefore too small to take far from shore (e.g., to another country). Most seafood has to be imported. This is a clear case where the regime has sacrificed productivity in order to exercise control over its people.

On paper:

In order to make opposition more difficult, paper is scarce throughout the country. This is another clear case where the regime has sacrificed productivity in order to exercise control over its people.

On livestock:

Cows are still government owned. They cannot be killed for beef; all beef is imported. It is also illegal to sell beef in some situations. I believe that Cubans can own chickens and other birds. Urban dwellers may even be encouraged to own chickens. I do not know who owns the horses.

On residences:

Until recently, Cubans could own their home but could only sell a home to the government. In other words, it was more like living as a tenant for zero rent and being paid something for vacating. Now Cubans tell me that they have a right to buy and sell homes (since 2011; even now Cubans cannot own more than two homes), and that Cubans typically live in a home owned by a family member. They do not pay property taxes and often do not have mortgages, but they do pay for metered electricity and gas. For multi-unit buildings, it has never been clear who has the property rights (does the roof of an apartment building belong only to those who live on the top floor?).

The urban residences are densely populated. They were originally constructed in the 1920s or 1950s with tall ceilings and room sizes that would be familiar to Americans. But since the Revolution the rooms and hallways have been subdivided many times, including vertical subdivisions known as barbeques. Not much lighting is used. [...]

The disrepair and proliferation of subdivisions are to be expected when quality housing is prohibited from commanding a price or rent premium in the marketplace and when property rights are lacking, as during the half-century before 2011.

But

There are families who are permitted to rent out space in their homes to tourists. A blue emblem marks such homes. These homes are nicely maintained.

On shopping:

Cuban families receive a ration book that allows them to obtain food (for ten days a month?) at regulated prices in quantities according to the size and composition of their family.

We were told not to take pictures in the food stores. I visited one of them and was encouraged to leave because “it was not for tourists.” I sat outside another as customers came and went.

The stores sell less than two dozen distinct items in large quantities. E.g., large containers of canned mangos, three-liter bottles of soda, three-liter bottles of water, eggs in trays of 30. There was no refrigeration, even though it was hot. There are plenty of flies and stockouts. [...]

Large containers are probably not what people would pay for in a market setting, given that so few of them have cars (although I saw a couple of customers pull up in horse-drawn carts) and the small size of their living places. But packaging, availability, variety, and refrigeration are all good examples of non-price product attributes that can be expected to disappear when prices are regulated (Mulligan and Tsui 2016).

Clothing and electronics are, and market exchange rates, cheaper in the U.S. than in Cuba. Many of these items are obtained when Cuban-American family members visit. I don’t know if or how they were obtained prior to 2009, when the family visits began to be permitted.

On politics:

To be blunt, my overall impression is that Fidel Castro is like an abusive father with several million “children” that he abused. Many of them ran away from home and still hate him many decades later (you can meet them here in America). Others stayed, continue to take the abuse, and focus on a few apparently good things that he does/did. To put it another way, the Cubans still in Cuba obtain a significant amount of some kind of psychic value from Castro and the Revolution that partly offsets the large tax they implicitly pay in terms of foregone freedom material goods and services.

On labour

Cubans own their labor in the sense that they get wages for most of their work.[10] However, their employer is typically the government and those wages are far below their productivity (which is itself low). Government employees were paid about $20 per month in 2014, whereas national income per worker was $839, which suggests that government employees keep about five percent of the value of what they produce.

John Roemer on workable socialism

John E. Roemer recently published a paper in Analyse & Kritik on "Thoughts on Arrangements of Property Rights in Productive Assets". The abstract reads,

State ownership, worker ownership, and household ownership are the three main forms in which productive assets (firms) can be held. I argue that worker ownership is not wise in economies with high capital-labor ratios, for it forces the worker to concentrate all her assets in one firm. I review the coupon economy that I proposed in 1994, and express reservations that it could work: greedy people would be able to circumvent its purpose of preventing the concentration of corporate wealth. Although extremely high corporate salaries are the norm today, I argue these are competitive and market determined, a consequence of the gargantuan size of firms. It would, however, be possible to tax such salaries at high rates, because the labor?supply response would be small. The social-democratic model remains the best one, to date, for producing a relatively egalitarian outcome, and it relies on solidarity, redistribution, and private ownership of firms. Whether a solidaristic social ethos can develop without a conflagration, such as the second world war, which not only united populations in the war effort, but also wiped out substantial middle-class wealth in Europe?thus engendering the post-war movement towards social insurance?is an open question.

Peter Boettke at the Coordination Problem blog makes a good point about Roemer's paper,

Roemer seems to be suggesting that if the population could coordinate around a solidaristic social ethos, then the social-democratic model, perhaps even the market socialist model, might be workable. I have always found these arguments weak whether they are made by libertarians, conservatives, progressives, or socialist. It amounts to arguing that the entire system turns of the moral character of the individuals who populate the system. If everyone was a libertarian (socialist), then we could have a libertarian (socialist) world. But think about that for a second, the more everyone coordinates around the norm, the greater the potential scope for gain by opportunistically violating that norm.

Roemer's argument  looks like a version of the idea that "the world would be perfect if only we could make people perfect", which may be true but I don't like your chances of making people perfect.

Boettke continues,

So rather than rely on moral character to make the argument work, I have always been more attracted to instituitonal solutions that do not require for their working improved moral character let alone a fundamental change in human nature. Instutitional problems demand institutional solutions. Human beings do have the Smithian propensity to truck, barter and exchange, as well as Smithian sentiments about others --- that is our better nature --- but human beings are also haunted by the Hobbesian propensity to rape, pillage and plunder, and sentiments such as envy, jealousy, resentment, and loathing of the other. Which propensity manifests itself is a function of institutional environment in which we interact with each other and with nature. The logic of the situation rules, not a sense of solidarity. Solidarity, instead, is a by-product of institutions. So back to the test --- is a proposed system coherent -- are the means chosen consistent with the ends sought? --- and is a proposed system vulneralbe --- can opportunistic actors disrupt the ability of the system to achieve its goals?

One of the great things about competitive markets is that they harness the Hobbesian propensities and often create social good out of them, As Keynes noted,

It is better that a man should tyrannize over his bank balance than over his fellow-citizens and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative.