Drawing the Wrong Lessons from Socialism

October 25, 2018

I have just forced myself to read the CEA report on "The Opportunity Costs of Socialism." Personally, I rather prefer Francis Spufford's Red Plenty for a palatable introduction to actually existing socialism. But a couple of observations.

Somewhat surprisingly for an economic analysis, the CEA report confuses the costs of transition to socialism (e.g., collectivization-induced famine) with the efficiency losses associated with the consolidated, "classical" socialist system. Assuming, as the authors do, that "democratic socialists" don't mean to go so far and anyway couldn't hurt a flea, the latter costs are more relevant to any institutional comparison. But one of the big lessons of socialism is that its incentive problems generalize. Capitalist economies are not immune, for example, to the ratchet effect or soft budget constraints. The question is whether institutions exist to minimize those problems.

This leads to the second error in analysis. It is not enough to study socialism. One also needs to study the transition from socialism. For if the big lesson of socialism is that state ownership and bureaucratic coordination do not work (well), the big lesson of postsocialist transition is that markets do not work (well) without supportive state institutions and regulation. The CEA report thus falters in situating economies along a single dimension of more or less "freedom." One can have more market and more state at the same time. Or less of each (see, e.g., Ukraine).1

Frankly, it is disspiriting to think that "socialism" may be the frame within which economic debate takes place in coming years. But if that is to be the case, we would do well to draw the right lessons from the socialist, and postsocialist, experience. In the meantime, if the CEA is going to return to the debates of the 1930s, it would do well to remember the maxim that Roosevelt saved capitalism from the capitalists.