Socialism in Stages

Even soft, incremental expansions of government produce poverty.

By Dan Oliver Jr.

America debated three strategies during the Cold War. The Right wanted “roll back” — dreams of Patton driving his tank into Red Square. The Left wanted détente — which is French for “surrender.” The country loosely followed containment, a program outlined by George Kennan in 1946, which argued that the political contradictions of the Soviet state would eventually cause its own demise. America had but to be patient.

Kennan may have been the first to realize that a society based on Communism would not survive politically, but it was Ludwig von Mises, in his 1922 work Socialism, who demonstrated that any such society could not survive economically.

When a collection of free individuals — the market — is willing to pay a price for a product that creates “excess” profits, it signals producers to provide more of that product. If the market does not support a given price, producers are forced to redeploy their assets for more pressing social needs. Similarly, if a factor of production, such as labor or capital, changes in price, producers instantly react, sending signals — through the prices of intermediate goods — down to the consumer. Prices effortlessly allocate society’s assets to reflect consumer preference and adjust to accommodate the ever-changing availability of scarce resources.

Mises argued that governmental interference in prices, through taxation, subsidies, and regulation, complicates this process — affecting not only the consumption of final goods, but also the economic calculations that are necessary to provide intermediate goods and services. Higher-order division of labor fails. Poverty results. For example, while Chinese and Russian central planners were busy setting quotas for steel mills, there was no method for consumers to signal that they preferred food — and millions starved to death.

If the hard socialism of Communism produces economic and societal collapse quickly, Mises theorized, the soft, incremental socialism of the West — popularized again recently as the “Third Way” by Tony Blair and Bill Clinton — would produce poverty in stages. Every bureaucratic intervention in the market reduces long-term wealth creation, even if it provides a temporary boost to the economy. In time, this reduction of wealth is blamed on the inefficiencies of the remaining “unfettered” market, which provokes calls for greater intervention, ad infinitum.

Health care is a perfect example of the incremental socialization process. Government programs such as Medicare and Medicaid began by providing limited assistance to the old and the indigent. As health-care costs rose, these programs were expanded and new ones, such as S-CHIP, were added. The government now pays 32 percent of all non-military health-care bills, up from 6 percent in 1960. The remaining private expenditures are heavily regulated, resulting in the anticipated economic chaos. Under Obamacare, the situation can only grow worse. As P. J. O’Rourke quipped: “If you think health care is expensive now, wait until it’s free.”

Housing provides another example. Today, 71 years after Fannie Mae was founded, the central government provides a stunning 90 percent of the liquidity in the mortgage market, enabled by the Federal Reserve’s repurchase of 85 percent of new mortgages with freshly printed money. Banking is next.

Ronald Reagan’s 1980 election was the zenith of the conservative movement’s attempt to defeat Communism and limit government. Internationally, deployment of Pershing II missiles in Europe and military support of anti-Communist movements gave teeth to containment. Nine years later, the Soviet Union fell. Domestically, Reagan promised to get government off our backs by reducing taxes to starve Leviathan. Instead, politicians made up the shortfall with deficits, which soared as government grew relentlessly under both political parties. Twenty-nine years after Reagan’s election, the federal government spends 37 cents of every dollar in the economy. Operation Rollback as applied to the federal government has failed.

The economic laws described by Mises that brought down Communism apply equally to the American brand of soft socialism. Market forces will soon lay waste to American central planning just as surely as they did to the Soviet version two decades ago. The crises in housing, health care, and banking, the inevitable results of government intervention, are but harbingers of greater instability in our way of life. If Republicans wish to stay relevant, they must return to their conservative roots.

— Dan Oliver Jr. is Founder of Myrmikan Capital, LLC. He has a J.D. from Columbia Law School and an MBA from INSEAD.