The "New Socialism" J.K. Williams

This, on any showing, is extraordinary. Aus tralia 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. SpecThe Reverend Dr. Williams is a noted speaker and author based in North Melbourne, Australia. ulation 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 revolu tionary 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 Chi nese economists (D. Xu, et aI., 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 signifi cance of a system of property rights which ap proximates 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 Te lecom, 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 70 THE FREEMAN. FEBRUARY 1988 and plans to privatize 65 companies in all. Re gardless 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 ex perience. First, the socialists began to question a ques tion! 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 super markets came to be expected; the oddity re quiring explanation and remediation was pov erty. Yet historically the vast majority of people who have walked this earth have known only grinding, soul-destroying destitution. The his toricaloddity crying out for explanation is not poverty, but material abundance and pros perity. Australian supporters of socialism and the welfare state had for decades taken wealth cre ation 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 cre ated? 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 redistribu tion of goods must be preceded by a forced ex propriation of those goods. By definition, that involves a drastic modification of private property rights-the key to the market's creative genius, as free market economists long have in sisted and the brightest of contemporary histo rians are confirming. Second, a preoccupation with the redistribu tion of wealth inexorably led Australia to pro gressive 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 forgone $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 com munity's productive output drops. And that is but the tip of the iceberg. Not only do high marginal tax rates discourage pro duction, 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 in vested is pleading for drastically reduced pro ductivity. 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 de cades of the welfare state, and the high mar ginal 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 eco nomically weakest members of a community are also the politically weakest.

In this context, it is worth noting that a mas sive study in 1980 by the Joint Economic Com mittee 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 "po~ erty 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 re ceived if not working. The disincentives to pro ductive 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 ab sorbing 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 al most entirely overlooked. Those who, from the sixteenth century onTHE "NEW SOCIALISM" 71 wards, defended the free market in a free so ciety, 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 so cialists in Australia and elsewhere to look with new openness at a market economy. Yet I am convinced that until there is a fervent commit ment 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 dis cover that it is impossible efficiently to coordi nate 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 ef ficiency. The have belatedly realized that non existent goods and services cannot be redistri buted, and that a concentration upon wealth distribution and an indifference to wealth cre ation 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 distri bution 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 distin guished. 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 72 THE FREEMAN. FEBRUARY 1988 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-styIe socialism may more suc cessfully fetter liberty than the notoriously in efficient, 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 lib erty of all-is more than empty rhetoric. 0 Summer Seminars at FEE THE FOUNDATION FOR ECONOMIC EDUCATION Irvington-on-H udson New York 10533 Attention: Summer Seminars $500. Fellowships (including partial travel grants) will be made available.

High school and college teachers or ad ministrators are given special consider ation. Individuals, companies, and founda tions interested in furthering this educa tional enterprise are invited to attend or otherwise investigate the program and to assist with the financing of the fellow ship grants. The formal announcement, giving de tails of the seminars as well as informa tion about fellowships, wjJI be sent im mediately on request. For the 26th consecutive summer, FEE will conduct its noted seminars in the freedom philosophy and the economics of a free society. Here, in the company of like-minded individuals, with experi enced discussion leaders, and in a set ting ideal for the cal,m exchange of ideas, is an opportunity for those who believe that the proper approach to eco nomic problems is through the study of individual human action. These seminars continue to attract individuals from all walks of life wh~ seek a better under standing of the principles of a free so ciety and are interested in exploring ways of presenti ng the case more con vincingly.

Each seminar will consist of 40 hours of classroom lectures and discussions in economics and government. In addition to the regular FEE staff, there will be a number of distinguished visiting lec turers. The FEE charge for a seminar-tu ition, supplies, room and board-is First session: Second session: June 19-25 August 7-13 73 Howard Dickman's Industrial Democracy in America by Robert James Bidinotto O f the enduring myths of economic his tory, few have hung on as tenaciously as the necessity and desirability of labor unions. Consider a recent editorial in my hometown newspaper, typical of the conven tional wisdom: "While unions today have a somewhat tar nished reputation, most historians generally concede that they played a key role in Amer ican economic and social advancement. Unions fought for higher wages and improved benefits for workers, allowing them to participate in the American dream. More money also meant workers could purchase more goods, fueling a consumer economy.