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May 29, 2010

The End of Democratic Socialism

By Monty Pelerin
The end of democratic socialism is at hand. The welfare states of the U.S. and Europe are financially out of control, spent and unsustainable. They have reached the point that Margaret Thatcher defined as the end of socialism: They have run out of other people's money. These areas of the world are about to change dramatically.

Victor Davis Hanson has a piece in National Review Online focused on Europe. His comments, while directed at Europe, are also applicable to the United States. Hanson states:

Five years ago, the European Union's account of itself resonated with end-of history triumphalism. In organic fashion, democratic socialism would spread eastward and southward, recivilizing the old Warsaw Pact and the Balkans through cradle-to-grave entitlements, state unionism, radical environmentalism, and utopian pacifism.

How quickly the dreams of just a short time ago have been shattered. Now the once-smug EU struggles desperately to survive. The financial problems of Greece and several other countries threaten its very existence. Incredibly, in spite of this experience, the U.S. marches in double-time toward the goal that Europe is now being forced to abandon.

The myth of Socialism should have been abandoned long ago. In the 1920s, Ludwig von Mises demonstrated that Socialism and its close relative, Interventionism, were not capable of long-term management of an economy. The Soviet Union and a host of other highly socialized economies provided subsequent empirical support for Mises' theoretical argument.

Despite overwhelming evidence, Socialism does not go away. Like a vampire, it reappears and seemingly cannot be terminated. Like the vampire, it sucks the life out of each economy it touches. Despite experience, each new generation seems to produce gullible people lured by the siren song of socialism. Each generation seems destined to battle these false promises anew.

It was evident that Europe was heading for trouble long before Greece imploded. As Hanson states, the problems were apparent for at least a decade but apparently ignored because of a presumed better quality of life:

That Europe's socialist model had led to relatively modest growth over the last decade in comparison with other advanced economies, that unemployment in Europe was likewise chronically high, and that worker productivity was static were always downplayed or at least balanced by "quality of life" counterpoints. Who cared that, over the last decade, much of Europe saw economic growth at only 50 to 75 percent the U.S. rate per annum, or that it struggled with 10 percent unemployment, or that it discouraged start-up companies, when the quality of life there was so much better for so many more people than anywhere else?

The "there's-no-such-thing-as-a-free-lunch" axiom applies in both free markets and socialist economies. Quality of life is a function of many things. While it means different things to different people, the common denominator is wealth creation. Even if you have little interest in wealth per se, wealth provides the options that enable one to select his own version of quality of life. Economies that do not create wealth provide few options. Economies that do not create wealth cannot improve the quality of life on any sustainable basis.

Europe, like the U.S. from the late 1970s forward, pretended that choices were independent of wealth creation. Monetary stimulus and government transfers were utilized to produce temporary choices without wealth creation. For a time, it appeared that lifestyle could be independent of both wealth and effort. Eventually, the "lunch bill" was served.

When the debt expansion collapsed under its own weight, so did the options for both governments and individuals. Expansion of the welfare state produced temporary but unsustainable "life-style" options. When the welfare state ran out of magic, the system was seen to be as naked as the emperor overseeing it.

Nature and life are not easy. Thomas Hobbes correctly described life as "poor, nasty, brutish, and short." He incorrectly believed that government could remove these conditions. To the extent that government is able to enforce property rights, aggression can be reduced. However, government is incapable of solving the natural problem of scarcity. Government produces no wealth. Thus, life as described by Hobbes is pretty much the same, with or without his central government. The developed world appeared to ignore this truth.

Reallocation of resources can shift wealth around, but it creates adverse incentives for both producer and receiver. Wealth creation is reduced when coerced redistribution is imposed. Producers have less incentive to produce when they are unable to dispose of their product as they see fit. Likewise, providing unearned benefits to people makes them soft and dependent. It destroys their incentive and need to become productive. As stated long ago by Benjamin Franklin:

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. ... I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.

After several generations of such policies, both Europe and the U.S. have portions of their populations that have become dependent upon their "entitlements." In the U.S., we have several generations of some families for whom welfare has become a way of life. They have no skills and no incentive to obtain skills. For them, it is and has been normal to be supported. Describing Europe, Hanson states:

An entire generation nursed on socialism as a birthright - with no direct memory of the hardship of the Depression, World War II, the postwar rebuilding, or the fault lines from left-right violence in Spain, Italy, and Greece - will very soon be "asked" to give much of it up.

Unfortunately (or fortunately, depending upon your viewpoint), we are no longer able to sustain the welfare state either here or in Europe. Recognition of this reality is not yet widespread among the bulk of the population. Whether recognized or not by the political class, the end is near and inevitable. 

No amount of spin, politicking, or legislation can avoid what is coming. The world is changing forever, at least for those of us alive today. The political class has as much chance of altering what is happening as they do of repealing the law of gravity.

Brace yourselves. Our impending transition will not be quick, easy, or pleasant. We may soon learn the real meaning of "poor, nasty," and "brutish," but perhaps not "short." Welcome to "The Real, New Normal."

on "The End of Democratic Socialism"