All Commentary
Monday, February 1, 1988

The New Socialism

The Reverend Dr. Williams is a noted speaker and author based in North Melbourne, Australia.

Flive years ago my native country of Australia elected a socialist government. A perusal, however, of legislative measures taken by that government leads one to ask precisely what the label “socialist” today means, at least in Australia.

The socialist government floated the Australian dollar, thereby partially entrusting the nation’s currency to market forces rather than to political control. It deregulated banking and numerous other industries. It cut marginal tax rates. It froze, and in some cases actually cut, social security benefits and tightened eligibility requirements for welfare. It is now planning to sell government-owned enterprises to the private sector. Our socialist Prime Minister and Treasurer regularly speak of the importance of incentives, the significance of market forces, the necessity for capital formation, and the crucial role of private property rights in achieving prosperity.

This, on any showing, is extraordinary. Australia embraced the welfare state very early in the twentieth century, well before the United States. The socialist party, traditionally, has defended and sought to expand the welfare state. Yet here is a socialist government cutting back on the welfare state and implementing policies one might expect from a conservative government.

This “new-look” socialism is not unique to Australia. The most startling manifestations of socialists flirting with freer markets are those emerging in the Soviet Union and China. Speculation is rife as to the significance of Mikhail Gorbachev’s drastic reforms of the Soviet economy, but the nature of these reforms is clear. Factory managers, not socialist planners in Moscow, are to determine what is produced and in what quantities, and this determination is to be related to consumer demand. Profits and incentives are being lauded as the key to economic efficiency. Tony Benn, one of the radical left-wingers of British politics, bluntly stated, after a recent trip to Moscow, “What Gorbachev is saying is that the old revolutionary centralism has ended up in a nightmare, that it has paralyzed initiative. I think he’s right.” (The New York Times, July 19, 1987)

China’s experiments with freer markets are further developed. A volume of essays by Chinese economists (D. Xu, et al., China’s Search for Economic Growth [Beijing: New World Press, 1982]) anticipated in theory what recent practice has implemented. The essayists without exception stressed the importance of capital, the need for incentives, and the significance of a system of property rights which approximates in many respects what we would call private property. “Authentic” socialism is given a new definition: “From each according to his ability; to each according to his work.”

And so the story goes. Austria is debating selling off 49 per cent of many state-owned businesses to the private sector. Britain under Margaret Thatcher has privatized British Telecom, Rolls-Royce, and other state- owned firms with a total value of more than ten billion dollars. France, with a socialist President, has sold off four of the largest socialist enterprises and plans to privatize 65 companies in all. Regardless of the alleged political commitment of whatever party happens to be in power, the trend seems to be toward freer markets and away from old-style socialism.

Why this trend? Let me offer four answers and sketch them by reference to Australia’s experience.

First, the socialists began to question a question! For years Australian socialists asked, “Why poverty?” They assumed, as most of us assume, that material abundance is the norm, the state of affairs to be taken for granted. Laden shelves and groaning freezers in supermarkets came to be expected; the oddity requiring explanation and remediation was poverty.

Yet historically the vast majority of people who have walked this earth have known only grinding, soul- destroying destitution. The historical oddity crying out for explanation is not poverty, but material abundance and prosperity.

Australian supporters of socialism and the welfare state had for decades taken wealth creation for granted and concentrated on how wealth should be redistributed. But historical and economic reality have now forced them to ask a different question: How is wealth created?

Focusing on that question has forced them to look toward the free market economy. There is still, of course, a desire to redistribute wealth. All that Australian socialists have realized is that goods that do not exist—goods that have not been created—cannot be distributed at all! They are hoping that somehow they can trust the free market economy to create wealth, and then intervene to redistribute that wealth.

Yet that hope turns, I suggest, on a dubious presupposition: that it is possible to separate the way the free market creates wealth from the way this market process distributes goods and services. The catch is that in the free market, private property system, there are no unowned goods to be distributed. Machinery is owned. Tools are owned. Goods are owned at every stage of the production process. A redistribution of goods must be preceded by a forced expropriation of those goods. By definition, that involves a drastic modification of private prop-erty rights—the key to the market’s creative genius, as free market economists long have insisted and the brightest of contemporary historians are confirming.

Second, a preoccupation with the redistribution of wealth inexorably led Australia to progressive taxation and high marginal tax rates. But it was discovered that, like it or not, the simple equation, “High taxation rates yield large taxation revenues” had ignored one vital factor: A high marginal tax rate constitutes a low cost of leisure, and if the cost of leisure is low more people will choose leisure than paid, productive employment.

It makes sense. Suppose you earn $100 a day. On Monday you pay tax at the rate of 20 per cent. Should you choose not to work and opt instead for leisure, you surrender $80. That $80 is the cost to you of choosing leisure. And it’s high. On Tuesday you pay tax at the rate of 40 per cent. That means you retain $60 Of the $100 you earn. The cost to you of not working—that is, of choosing leisure—has dropped from $80 to $60. On Wednesday you pay tax at the rate of 60 per cent. A day of leisure now costs you a forg0ne $40. Imagine that on Friday you pay tax at the rate which applied in pre-Thatcher Britain: 98 per cent! Choosing leisure now costs you a mere $2! One would be crazy not to choose that bargain-priced leisure! But when sufficient people so choose, a community’s productive output drops.

And that is but the tip of the iceberg. Not only do high marginal tax rates discourage production, they also discourage capital formation—the investing of assets in machinery, tools, and so on. The key to any people’s prosperity is the capital invested per worker. A people failing to replenish or increase its capital invested is pleading for drastically reduced productivity.

The Fall of Australia

At the turn of the century Australia was among the three wealthiest nations on earth in terms of that admittedly dubious measure, Gross Domestic Product per person. Seven decades of the welfare state, and the high marginal tax rates such necessitates, have seen Australia plummet to about thirtieth! Capital invested per worker is at an all-time low. And the poor have suffered the most—for the economically weakest members of a community are also the politically weakest.

In this context, it is worth noting that a massive study in 1980 by the Joint Economic Committee of the United States Congress concluded that the key variable in wealth creation is the capital/labor ratio. The report further notes that this ratio has been falling in recent years, and is far below that of Japan. A crucial factor leading to this fall has been taxation policies to transfer wealth from the allegedly rich to the allegedly poor. (Special Study on Economic Change, volume 10, Productivity: The Foundation of Growth [Washington D.C.: Government Printing Office, 1980])

Third, wealth transfers have created “poverty traps” for the poorest. A family on welfare in Australia receives approximately $230 a week in money and in kind. (The Australian dollar is worth about 70 U.S. cents.) Accepting a part-time job at less than $230 actually results in a decrease in family income. Even accepting a job at a wage above $230 a week may make little economic sense. A person accepts a job at, say, $250 per week. He or she works forty hours simply to acquire $20—the difference between the wage and the welfare payments received if not working. The disincentives to productive enterprise are there—and they are working very well.

Fourth, the bureaucracy and veritable army of professional welfare workers presiding over our welfare state continue to grow, and are absorbing resources at an alarming rate. Indeed, if one calculates the total monies devoted to Australia’s “war against poverty” and divides that sum by the number of people below the so-called “poverty line,” one comes up with a wealth transfer of some $30,000 (Australian dollars) per poor person. Clearly, the poor do not receive that money. It goes essentially to the middle-class overseers of the system.

Many other factors could be cited in the worldwide move toward more market-oriented economies. I am convinced, however, that one critical factor has been all but missing, and almost entirely overlooked.—

Those who, from the sixteenth century on-wards, defended the free market in a free society, defended the market not simply because it led to material abundance, but because it rested firmly upon the liberty of all men and women peacefully to exercise their skills as they saw fit. What mattered was that people were free to dream their own dreams and strive to make these dreams come true. That such a social order led to unprecedented material abundance, witnessing the conquest of the dread specters of famine and destitution, was a staggering bonus.

I rejoice that economic reality has forced socialists in Australia and elsewhere to look with new openness at a market economy. Yet I am convinced that until there is a fervent commitment to the freedom the market order enshrines, our liberty—and the abundance we dare not take for granted—are tenuously grounded at best.

Mugged by Reality

To be mugged by economic reality—to discover that it is impossible efficiently to coordinate a people’s productive activities by political decrees and a master plan—is one matter. To embrace the liberty of all men and women, to formulate their own visions of the good life and to pursue those visions is an entirely different matter.

What the authoritarians want is economic efficiency. The have belatedly realized that nonexistent goods and services cannot be redistributed, and that a concentration upon wealth distribution and an indifference to wealth creation ill serves their vision of an allegedly just society.

Yet they still cling to the belief that a just society would display a pattern of wealth distribution that they have coercively imposed. They still embrace a disastrous distinction drawn by John Stuart Mill, that the productive capacity of the market, and the allocation of goods and services effected by the market, can be distinguished. Hence the ongoing search for that will-o’-the-wisp, the “neutral” tax, and a level of taxation that will simultaneously maximize taxation revenues without grossly modifying the behavior of productive individuals.

The crucial point is that the new socialists are not committed to individual liberty and to private property rights as a necessary condition for the realization of that liberty. Indeed, it is more than conceivable that an economically “efficient” new-style socialism may more successfully fetter liberty than the notoriously inefficient, centrally planned socialist states of yesteryear.

Perhaps the most important moral to be drawn is that lovers of liberty must get their priorities right. Admittedly the market works, making material abundance a reality. Yet our primary defense of the market must be that only a market economy takes seriously the liberty of all men and women to dream their own dreams and peacefully to strive to make those dreams a reality.

When the focus moves from principle to pragmatism, from the moral rightness of the free market to the economic efficiency of the market, trade-offs between liberty and material abundance are to be expected. The moment such trade-offs in principle are allowed, they are destined to become realities. With them, however, comes the fading of the dream that matters most: the dream of a world in which no person is a pawn to be manipulated by another, and in which talk of the dignity of all people—a dignity rooted and grounded in the equal liberty of all—is more than empty rhetoric.

  • The Reverend Dr. John K. Williams has been a teacher and is a free-lance writer and lecturer in North Melbourne, Victoria, Australia. He was resident scholar at FEE from April to October of this year.