By Lee Edwards
Monday, October 14, 2019
Socialists are fond of saying that socialism has never
failed because it has never been tried. But in truth, socialism has failed in
every country in which it has been tried, from the Soviet Union beginning a
century ago to three modern countries that tried but ultimately rejected
socialism — Israel, India, and the United Kingdom.
While there were major political differences between the
totalitarian rule of the Soviets and the democratic politics of Israel, India,
and the U.K., all three of the latter countries adhered to socialist
principles, nationalizing their major industries and placing economic
decision-making in the hands of the government.
The Soviet failure has been well documented by historians.
In 1985, General Secretary Mikhail Gorbachev took command of a bankrupt
disintegrating empire. After 70 years of Marxism, Soviet farms were unable to
feed the people, factories failed to meet their quotas, people lined up for
blocks in Moscow and other cities to buy bread and other necessities, and a war
in Afghanistan dragged on with no end in sight of the body bags of young Soviet
soldiers.
The economies of the Communist nations behind the Iron
Curtain were similarly enfeebled because they functioned in large measure as
colonies of the Soviet Union. With no incentives to compete or modernize, the
industrial sector of Eastern and Central Europe became a monument to
bureaucratic inefficiency and waste, a “museum of the early industrial age.” As
the New York Times pointed out at the time, Singapore, an Asian
city-state of only 2 million people, exported 20 percent more machinery to the
West in 1987 than all of Eastern Europe.
And yet, socialism still beguiled leading intellectuals
and politicians of the West. They could not resist its siren song, of a world
without strife because it was a world without private property. They were
convinced that a bureaucracy could make more-informed decisions about the
welfare of a people than the people themselves could. They believed, with John
Maynard Keynes, that “the state is wise and the market is stupid.”
Israel, India, and the United Kingdom all adopted
socialism as an economic model following World War II. The preamble to India’s
constitution, for example, begins, “We, the People of India, having solemnly
resolved to constitute India into a Sovereign Socialist Secular Democratic
Republic . . .” The original settlers of Israel were East European Jews of the
Left who sought and built a socialist society. As soon as the guns of World War
II fell silent, Britain’s Labour Party nationalized every major industry and
acceded to every socialist demand of the unions.
At first, socialism seemed to work in these vastly
dissimilar countries. For the first two decades of its existence, Israel’s
economy grew at an annual rate of more than 10 percent, leading many to term
Israel an “economic miracle.” The average GDP growth rate of India from its
founding in 1947 into the 1970s was 3.5 percent, placing India among the more
prosperous developing nations. GDP growth in Great Britain averaged 3 percent
from 1950 to 1965, along with a 40 percent rise in average real wages, enabling
Britain to become one of the world’s more affluent countries.
But the government planners were unable to keep pace with
increasing population and overseas competition. After decades of ever declining
economic growth and ever rising unemployment, all three countries abandoned
socialism and turned toward capitalism and the free market. The resulting
prosperity in Israel, India, and the U.K. vindicated free-marketers who had
predicted that socialism would inevitably fail to deliver the goods. As British
prime minister Margaret Thatcher observed, “the problem with socialism is that
you eventually run out of other people’s money.”
Israel
Israel is unique, the only nation where socialism was
successful — for a while. The original settlers, according to Israeli professor
Avi Kay, “sought to create an economy in which market forces were controlled
for the benefit of the whole society.” Driven by a desire to leave behind their
history as victims of penury and prejudice, they sought an egalitarian,
labor-oriented socialist society. The initial, homogeneous population of less
than 1 million drew up centralized plans to convert the desert into green
pastures and build efficient state-run companies.
Most early settlers, American Enterprise Institute
scholar Joseph Light pointed out, worked either on collective farms called
kibbutzim or in state-guaranteed jobs. The kibbutzim were small farming
communities in which people did chores in exchange for food and money to live
on and pay their bills. There was no private property, people ate in common,
and children under 18 lived together and not with their parents. Any money
earned on the outside was given to the kibbutz.
A key player in the socialization of Israel was the
Histadrut, the General Federation of Labor, subscribers to the socialist dogma
that capital exploits labor and that the only way to prevent such “robbery” is
to grant control of the means of production to the state. As it proceeded to
unionize almost all workers, the Histadrut gained control of nearly every
economic and social sector, including the kibbutzim, housing, transportation,
banks, social welfare, health care, and education. The federation’s political
instrument was the Labor party, which effectively ruled Israel from the
founding of Israel in 1948 until 1973 and the Yom Kippur War. In the early
years, few asked whether any limits should be placed on the role of government.
Israel’s economic performance seemed to confirm Keynes’s
judgment. Real GDP growth from 1955 to 1975 was an astounding 12.6 percent,
putting Israel among the fastest-growing economies in the world, with one of
the lowest income differentials. However, this rapid growth was accompanied by
rising levels of private consumption and, over time, increasing income
inequality. There was an increasing demand for economic reform to free the
economy from the government’s centralized decision-making. In 1961, supporters
of economic liberalization formed the Liberal party — the first political
movement committed to a market economy.
The Israeli “economic miracle” evaporated in 1965 when
the country suffered its first major recession. Economic growth halted and
unemployment rose threefold from 1965 to 1967. Before the government could
attempt corrective action, the Six-Day War erupted, altering Israel’s economic
and political map. Paradoxically, the war brought short-lived prosperity to
Israel, owing to increased military spending and a major influx of workers from
new territories. But government-led economic growth was accompanied by
accelerating inflation, reaching an annual rate of 17 percent from 1971 to
1973.
For the first time, there was a public debate between
supporters of free-enterprise economics and supporters of traditional socialist
arrangements. Leading the way for the free market was the future Nobel Prize
winner Milton Friedman, who urged Israeli policymakers to “set your people
free” and liberalize the economy. The 1973 war and its economic impacts
reinforced the feelings of many Israelis that the Labor party’s socialist model
could not handle the country’s growing economic challenges. The 1977 elections
resulted in the victory of the Likud party, with its staunch pro-free-market
philosophy. The Likud took as one of its coalition partners the Liberal party.
Because socialism’s roots in Israel were so deep, real
reform proceeded slowly. Friedman was asked to draw up a program that would
move Israel from socialism toward a free-market economy. His major reforms
included fewer government programs and reduced government spending; less
government intervention in fiscal, trade, and labor policies; income-tax cuts;
and privatization. A great debate ensued between government officials seeking
reform and special interests that preferred the status quo.
Meanwhile, the government kept borrowing and spending and
driving up inflation, which averaged 77 percent for 1978–79 and reached a peak
of 450 percent in 1984–85. The government’s share of the economy grew to 76
percent, while fiscal deficits and national debt skyrocketed. The government
printed money through loans from the Bank of Israel, which contributed to the
inflation by churning out money.
Finally, in January 1983, the bubble burst, and thousands
of private citizens and businesses as well as government-run enterprises faced
bankruptcy. Israel was close to collapse. At this critical moment, a
sympathetic U.S. president, Ronald Reagan, and his secretary of state, George
Shultz, came to the rescue. They offered a grant of $1.5 billion if the Israeli
government agreed to abandon its socialist rulebook and adopt some form of
U.S.-style capitalism, using American-trained professionals.
The Histadrut strongly resisted, unwilling to give up
their decades-old power and to concede that socialism was responsible for
Israel’s economic troubles. However, the people had had enough of soaring
inflation and non-existent growth and rejected the Histadrut’s policy of
resistance. Still, the Israeli government hesitated, unwilling to spend
political capital on economic reform. An exasperated Secretary Schulz informed
Israel that if it did not begin freeing up the economy, the U.S. would freeze
“all monetary transfers” to the country. The threat worked. The Israeli
government officially adopted most of the free-market “recommendations.”
The impact of a basic shift in Israeli economic policy
was immediate and pervasive. Within a year, inflation tumbled from 450 percent
to just 20 percent, a budget deficit of 15 percent of GDP shrank to zero, the
Histadrut’s economic and business empire disappeared along with its political
domination, and the Israeli economy was opened to imports. Of particular
importance was the Israeli high-tech revolution, which led to a 600 percent
increase in investment in Israel, transforming the country into a major player
in the high-tech world.
There were troubling side effects such as social gaps,
poverty, and concerns about social justice, but the socialist rhetoric and
ideology, according to Glenn Frankel, the Washington Post’s
correspondent in Israel, “has been permanently retired.” The socialist Labor
party endorsed privatization and the divestment of many publicly held companies
that had become corrupted by featherbedding, rigid work rules, phony
bookkeeping, favoritism, and incompetent managers.
After modest expansion in the 1990s, Israel’s economic
growth topped the charts in the developing world in the 2000s, propelled by low
inflation and a reduction in the size of government. Unemployment was still too
high and taxes took up 40 percent of GDP, much of it caused by the need for a
large military. However, political parties are agreed that there is no turning
back to the economic policies of the early years — the debate is about the rate
of further market reform. “The world’s most successful experiment in
socialism,” Light wrote, “appears to have resolutely embraced capitalism.”
India
Acceptance of socialism was strong in India long before
independence, spurred by widespread resentment against British colonialism and
the land-owning princely class (the zamindars) and by the efforts of the
Communist Party of India, established in 1921. Jawaharlal Nehru adopted
socialism as the ruling ideology when he became India’s first prime minister
after independence in 1947.
For nearly 30 years, the Indian government adhered to a
socialist line, restricting imports, prohibiting foreign direct investment,
protecting small companies from competition from large corporations, and
maintaining price controls on a wide variety of industries including steel,
cement, fertilizers, petroleum, and pharmaceuticals. Any producer who exceeded
their licensed capacity faced possible imprisonment.
As the Indian economist Swaminathan S. Anklesaria Aiyar
wrote, “India was perhaps the only country in the world where improving
productivity . . . was a crime.” It was a strict application of the socialist
principle that the market cannot be trusted to produce good economic or social
outcomes. Economic inequality was regulated through taxes — the top personal
income tax rate hit a stifling 97.75 percent.
Some 14 public banks were nationalized in 1969; six more
banks were taken over by the government in 1980. Driven by the principle of
“self-reliance,” almost anything that could be produced domestically could not
be imported regardless of the cost. It was the “zenith” of Indian socialism,
which still failed to satisfy the basic needs of an ever expanding population.
In 1977–78, more than half of India was living below the poverty line.
At the same time, notes Indian-American economist Arvind
Panagariya, a series of external shocks shook the country, including a war with
Pakistan in 1965, which came on the heels of a war with China in 1962; another
war with Pakistan in 1971; consecutive droughts in 1971–72 and 1972–73, and the
oil price crisis of October 1973, which contributed to a 40 percent
deterioration in India’s foreign trade.
Economic performance from 1965 to 1981 was worse than
than at any other time of the post-independence period. As in Israel, economic
reform became an imperative. Prime Minister Indira Gandhi had pushed her policy
agenda as far to the left as possible. In 1980, the Congress party won a
two-thirds majority in the Parliament, and Gandhi adopted, at last, a more
pragmatic, non-ideological course. But as with everything else in India,
economic reform proceeded slowly.
An industrial-policy statement continued the piecemeal
retreat from socialism that had begun in 1975, allowing companies to expand
their capacity, encouraging investment in a wide variety of industries, and
introducing private-sector participation in telecommunications. Further
liberalization received a major boost under Rajiv Gandhi, who succeeded his
mother in 1984 following her assassination. As a result, GDP growth reached an
encouraging 5.5 percent.
Economics continued to trump ideology under Rajiv Gandhi,
who was free of the socialist baggage carried by an earlier generation. His
successor, P. V. Narasimha Rao, put an end to licensing except in selected
sectors and opened the door to much wider foreign investment. Finance minister
Manmohan Singh cut the tariff rates from an astronomical 355 percent to 65
percent. According to Arvind Panagariya, “the government had introduced enough
liberalizing measures to set the economy on the course to sustaining
approximately 6 percent growth on a long-term basis.” In fact, India’s GDP
growth reached a peak of over 9 percent in 2005–8, followed by a dip to just
under 7 percent in 2017–18.
A major development of the economic reforms was the
remarkable expansion of India’s middle class. The Economist estimates
there are 78 million Indians in the middle-middle and upper middle-class
category. By including the lower middle class, Indian economists Krishnan and
Hatekar figure that India’s new middle class grew from 304.2 million in 2004–5
to an amazing 606.3 million in 2011–12, almost one-half of the entire Indian
population. The daily income of the three middle classes are lower middle,
$2–$4; middle middle, $4–$6; upper middle, $6–$10.
While this is extremely low by U.S. standards, a dollar
goes a long way in India, where the annual per capita income is approximately
$6,500. If only half of the lower middle class makes the transition to
upper-class or middle income, that would mean an Indian middle class of about
350 million Indians — a mid-point between The Economist and Krishnan and
Hatekar estimates. Such an enormous middle class confirms the judgment of the
Heritage Foundation, in its Index of Economic Freedom, that India is developing
into an “open-market economy.”
In 2017, India overtook Germany to become the
fourth-largest auto market in the world, and it is expected to displace Japan
in 2020. That same year, India overtook the U.S. in smartphone sales to become
the second-largest smartphone market in the world. Usually described as an
agricultural country, India is today 31 percent urbanized. With an annual GDP
of $8.7 trillion, India ranks fifth in the world, behind the United States,
China, Japan, and Great Britain. Never before in recorded history, Indian
economist Gurcharan Das has noted, have so many people risen so quickly.
All this has been accomplished because the political
leaders of India sought and adopted a better economic system — free enterprise
— after some four decades of fitful progress and unequal prosperity under
socialism.
United Kingdom
Widely described as “the sick man of Europe” after three
decades of socialism, the United Kingdom underwent an economic revolution in
the 1970s and 1980s because of one remarkable person — Prime Minister Margaret
Thatcher. Some skeptics doubted that she could pull it off — the U.K. was then
a mere shadow of its once prosperous free-market self.
The government owned the largest manufacturing firms in
such industries as autos and steel. The top individual tax rates were 83
percent on “earned income” and a crushing 98 percent on income from capital.
Much of the housing was government-owned. For decades, the U.K. had grown more
slowly than economies on the continent. Great Britain was no longer “great” and
seemed headed for the economic dust bin.
The major hindrance to economic reform was the powerful
trade unions, which since 1913 had been allowed to spend union funds on
political objectives, such as controlling the Labour party. Unions inhibited
productivity and discouraged investment. From 1950 to 1975, the U.K.’s
investment and productivity record was the worst of any major industrial
country. Trade-union demands increased the size of the public sector and public
expenditures to 59 percent of GDP. Wage and benefits demands by organized labor
led to continual strikes that paralyzed transportation and production.
In 1978, Labour prime minister James Callaghan decided
that, rather than hold an election, he would “soldier on” to the following
spring. It was a fatal mistake. His government encountered the legendary
“winter of discontent” in the first months of 1979. Public-sector workers went
on strike for weeks. Mountains of uncollected rubbish piled high in cities.
Bodies remained unburied and rats ran in the streets.
Newly elected Conservative prime minister Margaret
Thatcher, the United Kingdom’s first female PM, took on what she considered her
main opponent — the unions. Flying pickets, the ground troops of industrial
conflict who would travel to support workers on strike at another site, were
banned and could no longer blockade factories or ports. Strike ballots were
made compulsory. The closed shop, which forced workers to join a union to get a
job, was outlawed. Union membership plummeted from a peak of 12 million in the
late 1970s to half that by the late 1980s. “It’s now or never for [our]
economic policies,” Thatcher declared, “let’s stick to our guns.” The top rate
of personal income tax was cut in half, to 45 percent, and exchange controls
were abolished.
Privatization was a core Thatcher reform. Not only was it
fundamental to the improvement of the economy. It was “one of the central means
of reversing the corrosive and corrupting effects of socialism,” she wrote in
her memoirs. Through privatization that leads to the widest possible ownership
by members of the public, “the state’s power is reduced and the power of the
people enhanced.” Privatization “is at the center of any programme of
reclaiming territory for freedom.” She was as good as her word, selling off
government-owned airlines, airports, utilities, and phone, steel, and oil
companies.
In the 1980s, Britain’s economy grew faster than that of
any other European economy except Spain. U.K. business investment grew faster
than in any other country except Japan. Productivity grew faster than in any
other industrial economy. Some 3.3 million new jobs were created between March
1983 and March 1990. Inflation fell from a high of 27 percent in 1975 to 2.5
percent in 1986. From 1981 to 1989, under a Conservative government, real GDP
growth averaged 3.2 percent.
By the time Thatcher left government, the state-owned
sector of industry had been reduced by some 60 percent. As she recounted in her
memoirs, about one in four Britons owned shares in the market. Over 600,000
jobs had passed from the public to the private sector. The U.K. had “set a
worldwide trend in privatization in countries as different as Czechoslovakia
and New Zealand.” Turning decisively away from Keynesian management, the once
sick man of Europe now bloomed with robust economic health. No succeeding
British government, Labour or Conservative, has tried to renationalize what
Margaret Thatcher denationalized.
China
How then to explain the impressive economic success of a
fourth major economy, China, with annual GDP growth of 8 to 10 percent from the
1980s almost to the present? From 1949 to 1976, under Mao Zedong, China was an
economic basket case, owing to Mao’s personal mismanagement of the economy. In
his avid pursuit of Soviet-style socialism, Mao brought about the Great Leap
Forward of 1958–60, which resulted in the deaths of at least 30 million and
perhaps as many as 50 million Chinese, and the Cultural Revolution of 1966–76,
in which an additional 3 million to 5 million died. Mao left China backward and
deeply divided.
Mao’s successor, Deng Xiaoping, turned China in a
different direction, seeking to create a mixed economy in which capitalism and
socialism would coexist with the Communist Party monitoring and constantly
adjusting the proper mix. For the past four decades, China has been the
economic marvel of the world for the following reasons:
It began its economic ascent almost from ground zero
because of Mao’s ideological stubbornness. It has engaged in the calculated
theft of intellectual property, especially from the U.S., for decades. It has
taken full advantage of globalism and its membership in the World Trade
Organization, while ignoring the prescribed rules against such practices as
intellectual-property theft. It has used tariffs and other protectionist
measures to gain trade advantages with the U.S. and other competitors.
It created a middle class of some 300 million people, who
enjoy a decent living and at the same time constitute a sizable domestic market
for goods and services. It continues to use the forced labor of the laogai to
make cheap consumer goods that are sold in Walmart and other Western stores. It
allows an enormous black market to exist because Party members profit from its
sales.
It permits foreign investors to buy into Chinese
companies, but the government — i.e., the Communist Party — always retains a
majority interest. It operates an estimated 150,000 state-owned enterprises
that guarantee jobs for tens of millions of Chinese. It depends on the energy
and experience of the most entrepreneurial people in the world, second only to
Americans.
In short, the People’s Republic of China was an economic
failure for its first three decades under Mao and Soviet socialism. It began
its climb to become the second-largest economy in the world when it abandoned
socialism in the late Seventies and initiated its experiment, which so far has
been successful, in capitalism with Chinese characteristics.
There are clear signs that such success is no longer
automatic. China is experiencing a slowing economy, is ruled by a dictatorial
but divided Communist Party clinging to power, faces widespread public demands
for the guarantee of fundamental human rights, and suffers from a seriously
degraded environment. History suggests that these problems can best be solved
by a democratic government ruled by the people, not a one-party authoritarian
state that resorts to violence in a crisis, as Beijing did at Tiananmen Square
and is doing in Hong Kong.
Conclusion
As we have seen from our examination of Israel, India,
and the United Kingdom, the economic system that works best for the greatest
number is not socialism with its central controls, utopian promises, and OPM
(other people’s money), but the free-market system with its emphasis on
competition and entrepreneurship. All three countries tried socialism for
decades, and all three finally rejected it for the simplest of reasons — it
doesn’t work.
Socialism is guilty of a fatal conceit: It believes its
system can make better decisions for the people than they can for themselves.
It is the end product of a 19th-century prophet whose prophecies (such as the
inevitable disappearance of the middle class) have been proven wrong time and
again.
According to the World Bank, more than one billion people
have lifted themselves out of poverty in the past 25 years, “one of the
greatest human achievements of our time.” Of those billion, approximately 731
million are Chinese, and 168 million Indians. The main driver of this uplift
from poverty has been the globalization of the international trading system.
China owes most of its success to the trade freedom offered by the U.S. and the
rest of the world. The latest edition of Index of Economic Freedom from the
Heritage Foundation confirms the global trend toward economic freedom:
Economies rated “free” or “mostly free” enjoy incomes that are more than five
times higher than the incomes of “repressed economies” such as those of North
Korea, Venezuela, and Cuba.
Israel’s socialist miracle turned out to be a mirage,
India discarded socialist ideology and chose a more market-oriented path, and
the United Kingdom set an example for the rest of the world with its emphasis
on privatization and deregulation. Whether we are talking about the actions of
an agricultural country of 1.3 billion, or the nation that sparked the
industrial revolution, or a small Middle Eastern country populated by some of
the smartest people in the world, capitalism tops socialism every time.
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