CEQLS Lecture | Tom G. Palmer

Varieties of Socialism:
Threats to Liberty & Social
Cooperation

∗ 1. State ownership of the means of production and replacement of market
allocative mechanisms based on voluntary exchange and prices with
allocation of resources by means of a general plan created and imposed by
the state
∗ 2. Social Democracy aimed at securing equality and solidarity (Welfare
States)
∗ 3. “Left-Wing” Socialism and “Right-Wing” Socialism
∗ 4. Social Conflict and Statism or Social Cooperation and Liberty?
Varieties of Socialism

∗ Following the Disaster of the
First World War, Communists
Took Power in Russia and
Attempted to Take Power in
Bavaria, Hungary, and
Elsewhere
1. Socialism as State Ownership of
the Means of Production and Central
Planning

∗ Socialists promised “a turn from an abyss of suffering,
anguish, starvation and degradation to the bright future of
communist society, universal prosperity and enduring
peace”
∗ V. Lenin, “The Chief Task of Our Day,” March 11, 1918
∗ The Viennese economist Ludwig von Mises issued a major
challenge: How would communism solve the problem of
“economic calculation”?
∗ “Valuation can only take place in terms of units, yet it is
impossible that there should ever be a unit of subjective use-
value for goods. … Judgments of value do not measure; they
merely establish grades and scales.”
∗ Ludwig von Mises, “Economic Calculation in the Socialist
Commonwealth” (1920)
Planning

∗ Mises’s critique is sometimes mis-characterized as
one of not having enough computers
∗ Or as one of “getting the prices right”
∗ That could be done either through “market socialism”
(Oskar Lange) through which managers of state firms
would be instructed to act “as if” they were
maximizing profits, or
∗ Through implementation of linear programming
models (following the brilliant insights of Leonid
Kantorovich and others) and the assessment of
optimal prices, i.e., indices that are equal to marginal
costs
Planning

Mises expanded his critique in
“Socialism” in 1922
• “The problem of
economic calculation is
a problem which arises
in an economy which is
perpetually subject to
change, an economy
which every day is
confronted with new
problems which have
to be solved.”

∗ “For a time the remembrance of the experiences
gained in a competitive economy, which has
obtained for some thousands of years, may
provide a check to the complete collapse of the
art of economy. … Yet in place of the economy
of the ‘anarchic’ method of production, recourse
will be had to the senseless output of an absurd
apparatus. The wheels will turn, but will run to
no effect.”
An inherited order of production can
be continued, but becomes
increasingly senseless

Even pro-market economists who
understood change failed to see the
problem
∗ “For the theorist this [maximum of
consumers’ satisfaction subject to
the limits imposed by the available
resources] follows from the
elementary proposition that
consumers in evaluating
(‘demanding’) consumers’ goods
ipso facto also evaluate the means
of production, which enter into the
production of those goods.”
∗ Joseph Schumpeter, Capitalism,
Socialism, and Democracy (1942)

F. A. Hayek responded in his 1945 essay “The Use of
Knowledge in Society”: Schumpeter had confused
“implication” with “imputation”
∗ Starting Point, derived from Carl
Menger:
∗ In a market economy, the value
of inputs are imputed from the
value of outputs, i.e., the values
of producer goods depend on,
i.e., are imputed from the values
of consumer goods; we value
iron ore because of the value we
place on the services yielded by
the things we can make from it,
not because of the labor that
went into it. (In fact, it is not
cost that determines price, but
price that determines cost.)

Hayek Corrected Schumpeter….
∗ “Taken literally, this statement [of Schumpeter’s] is simply untrue. The
consumers do nothing of the kind. What Professor Schumpeter’s ‘ipso
facto’ presumably means is that the valuation of the factors of
production is implied in, or follows necessarily from, the valuation of
consumers’ goods. But this, too, is not correct. Implication is a logical
relationship which can be meaningfully asserted only of propositions
simultaneously present to one and the same mind.”

Hayek, continued...
∗ “It is evident, however, that the
values of the factors of production
do not depend solely on the
valuation of the consumers’ goods
but also on the conditions of
supply of the various factors of
production. Only to a mind to
which all these facts were
simultaneously known would the
answer necessarily follow from the
facts given to it.”
∗ “The practical problem,
however, arises precisely
because these facts are never so
given to a single mind, and
because, in consequence, it is
necessary that in the solution of
the problem knowledge should
be used that is dispersed among
many people.”
∗ F. A. Hayek, “The Use of
Knowledge in Society,” American
Economic Review (1945)

Socialist states abolished markets and prices in producer
goods, while retaining money wages and money prices for
consumer goods
∗ The system lumbered forward, not by following the comprehensive plans
created by the authorities, but through complex evolved systems of
indirect exchange among enterprises, called “блат” (“Blat”) and carried
out by the help of “Толкачи” (“Tolkachi,” or “Pushers”)
∗ There was, in effect, a highly inefficient and hampered market economy
without the use of money prices, but the exchange of favors mediated by
complex chains of indirect exchange.

The Soviets, following Lenin’s reading of Marx and of recent
economic developments
∗ Transferred value from agriculture to factories
∗ Lowered living standards among peasants and starved millions of them to
death in the process
∗ Requisitioned grain early on during collectivization and sold it abroad for
money to buy equipment to build factories to produce steel and cement
∗ Those factories produced huge amounts of steel and cement
∗ That steel and cement was used to create factories to create
∗ Steel and Cement…..

There were, to be sure, huge advances in science
and technology
∗ But the biggest were scientific and most went into military production, not
consumer goods
∗ Those goods were used to cement the hold of the USSR over an empire that
became ever more expensive as new countries were added
∗ Agricultural production fell dramatically and what kept the system going was
the discovery of oil and gas in Siberia, which was very inefficiently extracted and
exported for money that was used to purchase food and goods that could not
be produced in the USSR (not in the sense of it was uneconomic, but it was
virtually impossible)
∗ Central planning was ultimately unable to deal with the problems of change…..

∗ A few items need to be recalled….
∗ When Gorbachev came to power, he was known for
saying “We cannot go on living like this.” He did not
envisage, however, replacing socialism with markets,
much less the dissolution of the USSR
∗ He was a confirmed Leninist
The dissolution of the Communist System you
remember

Gorbachev’s Three Slogans
∗ Acceleration
∗ Openness
∗ Restructuring
∗ The third will help us to understand how the system staggered
from one crisis to another
∗ Examples
∗The law on unearned income
∗The campaign against alcohol

The Anti-Alcohol Campaign Collapsed
the Revenues of the State
Fiscal Implications
of Anti-Alcohol
Campaign
1984 1985 1986 1987
Tax revenues in
state budget from
sale of alcohol
(billions of rubles)
36.7 33.3 27.0 29.1
Tax revenues in
state budget from
sale of alcohol
(percent of GDP)
4.8 4.3 3.4 3.5
Retail sales of
alcoholic
beverages (billions
of rubles
52.8 47.7 37.0 36.6
Retail sales of
alcoholic
beverages
(percent of GDP)
6.9 6.1 4.6 4.4
Source: Yegor
Gaidar, Collapse of

The result was the use of the “soft budget constraint” of cheap credit
from state banks to finance enterprises
∗ Massive inflation in an economy without free prices
∗ Generated the “Ruble Overhang”
∗ Everyone had money…but there was nothing to buy
∗ The ruble on the international exchanges collapsed in value
∗ The Soviet Empire became too expensive to afford and
decisions were made to cut loose the ties to the empire in
Eastern and Central Europe

The rest of the sorry story is probably better
known to you..
∗ Further economic collapse
∗ Shortages
∗ Food crises
∗ Republics declare their independence
∗ August Putsch (1991) against Gorbachev to restore Soviet
system
∗ Boris Yeltsin on the famous tank
∗ Gorbachev resigns 25.December.1991
∗ USSR dissolved 26.December.1991

∗Many people believe that there was a great
between “Capitalism” and “Socialism” and…
∗Capitalism won!
∗That debate never took place
∗There was no debate
∗One side ran out of money and collapsed….
Mises’s critique was not the cause of the collapse,
but helps to explain it

2. Social Democracy aimed at securing
equality and solidarity (Welfare States)
∗ The “welfare state” goes by various
names
∗ Sozialstaat
∗ Stato Sociale
∗ Volksstaat
∗ Welfare State
∗ Folkhemmet
∗ государство всеобщего
благосостояния
∗ Estado del Bienestar
∗ Previdência Social
∗ L'État-providence
∗ 福利制的国家
∗And it is nearly
everywhere…
∗ Because it creates advantages for
rulers and political constituencies
for its continuance

∗ “I will consider it a great advantage when we
have 700,000 small pensioners drawing their
annuities from the state, especially if they
belong to those classes who otherwise do not
have so much to lose by an upheaval and
erroneously believe they can actually gain much
by it.”
∗ “I have lived in France long enough to know that
the faithfulness of most of the French to their
government….is largely connected with the fact
that most of the French receive a state pension.”
∗ “Many of the measures which we have adopted
to the great blessing of the country are
Socialistic, and the State will have to accustom
itself to a little more Socialism yet.”
The welfare state was created as
a political strategy
Otto von Bismarck

How are welfare state schemes structured?
PAYGO principle
Pay-As-You-Go
Fiscal Illusion
“Many of the measures which we have adopted to the
great blessing of the country are Socialistic, and the State
will have to accustom itself to a little more Socialism yet.”
-- Otto von Bismarck
Characterized as “Social Rights”

The Welfare State is also a Tragedy of the
Commons
∗ If I don’t catch the fish,
someone else will…..so
one restricts his activities of
fishing
∗ If I don’t get that
government subsidy or
favor, someone else will…..
∗ Everyone is in conflict with
everyone else….
∗ Not only the poor, but the
rich line up for their
subsidies

Socialist states of the first type
seek to substitute for decentralized
planning and coordination through the
market and other voluntary mechanisms a
comprehensive system of state planning
Socialist states of the second type
(Welfare States) seek to take responsibility
for the well-being, or welfare, of the society;
they need not systematically displace markets,
but create organs of state power to assume
responsibility for producing and/or delivering
certain services to the people

“Germany will be at its
greatest when its poorest
citizens are also its most
loyal.”
--Adolf Hitler
The Weimar Republic was the “most
advanced” welfare state of its day

∗ We have accepted, so to
speak, a second Bill of
Rights under which a new
basis of security and
prosperity can be
established for all --
regardless of station, or race
or creed.
--Franklin D. Roosevelt,
11.Jan.1944
The “Social State” model was copied almost
everywhere

PAYGO Funding Systems are
equivalent to “pyramid
schemes”
Such schemes generate large and growing
“fiscal imbalances”:
the difference in present value between
what the government is projected to
spend under current law on all
expenditure categories—entitlements,
defense, roads, and everything else—and
what it is projected to receive in taxes
across all revenue accounts.

“Since liabilities would accumulate
only gradually, this arrangement
reduced costs in the early years and
made the proposed levels of
compensation feasible after all.
Although this would be achieved at
the price of piling up problems in the
future, it allowed any consideration
of state subsidies to be put off for
the moment.”
--E. P. Hennock, The Origin of the Welfare State in
England and Germany, 1850–1914 (Cambridge:
Cambridge University Press, 2007)
The Instability of the
Welfare State Was
Evident from Its Very
Start

Some estimates (2009) of the extent
of the fiscal imbalance in Europe
For the US, the fiscal imbalance is
at least$80,000,000,000,000 ($80
trillion); for EU member states as a
whole, calculated only over a 50
year time horizon, the imbalance is
over €53,000,000,000,000 (€53
trillion; most recent estimate is $78
trillion); those are the sums that
governments would have to have
in interest-earning accounts right
now – in addition to all other
revenues they receive – just to fund
their current obligations

Percentage point increases in average tax rates and percentage point cuts to selected expenditure
programs needed -- immediately and permanently -- to eliminate fiscal imbalances in EU countries

But it’s not just the unfunded liabilities at
stake
∗ Intragenerational Transfers Get All
the Attention
∗ But Intergenerational Transfers are
Far More Significant
The consequences of not addressing
these issues are serious: the rise of
extremist movements looking for
scapegoats….

If you think that this is bad….

Just wait
∗Until the base of the pyramid shrinks further
∗Promises to pay for medical care, retirement,
and other benefits are not kept
∗Taxes rise on those working to finance those not
working

It’s time to ask questions about the
sustainability of welfare states and
alternative means of providing
retirement, aid to the unfortunate,
medical care, and social solidarity
The current obligations of the state to
pensioners and others cannot be
fulfilled….and there will be default of
one kind or another
Some governments in Europe – notably Hungary and Poland – have
taken steps that reduce short-term measures of public debt, but by
doing so, they have merely confiscated private savings and increased
long-term state liabilities
For a PDF version, google:
After the Welfare State PDF

3. “Left-Wing” Socialism and “Right-Wing”
Socialism
∗ Have more in common than many
would like to admit
∗ They draw from the same roots and
the same Zero-Sum mentality

Marxism claimed “scientific status” resting on historical
materialism and the analysis of surplus value
∗ “These two great
discoveries: the materialist
conception of history and
the revelation of the secret
of capitalist production
through surplus value, we
owe to Marx. With them
socialism became a
science….”
∗ Friedrich Engels, The
Development of Socialism
from Utopia to Science
(1880)

In fact, the foundations of Marxism (actually, Engels-ism)
were laid much earlier, on the hatred of commerce and the
calculation of economic profit
∗ “You have brought about the
fraternization of the peoples –
but the fraternity is the fraternity
of thieves. You have reduced the
number of wars – to earn all the
bigger profits in peace, to
intensify to the utmost the
enmity between individuals, the
ignominious war of competition!”
∗ Friedrich Engels, “Outlines of a
Critique of Political Economy”
(1843)

The old attacks on usury and “making money from money”
were restated in more virulent form
∗ “The immorality of lending at interest, of
receiving without working, merely for
making a loan, though already implied in
private property, is only too obvious, and
has long ago been recognized for what it is
by unprejudiced popular consciousness,
which in such matters is usually right.”
∗ ….
∗ “[I]mmorality’s culminating point is the
speculation on the Stock Exchange, where
history, and with it mankind, is demoted to
a means of gratifying the avarice of the
calculating or gambling speculator.”
∗ Friedrich Engels, “Outlines of a Critique of
Political Economy” (1843)

Marx made the connection more direct: “capital” represented the spirit
of the Jews
∗ “Let us not look for the secret of
the Jew in his religion, but let us
look for the secret of his religion in
the real Jew.
∗ What is the secular basis of
Judaism? Practical need, self-
interest. What is the worldly
religion of the Jew? Huckstering.
What is his worldly God? Money.”
∗ Karl Marx, “On the Jewish
Question,” 1843

What was the worst effect of market exchange and liberalism,
according to Marx? Christians had been transformed into Jews.
∗ “The Jew has emancipated
himself in a Jewish manner,
not only because he has
acquired financial power, but
also because, through him
and also apart from him,
money has become a world
power and the practical
Jewish spirit has become the
practical spirit of the Christian
nations. The Jews have
emancipated themselves
insofar as the Christians have
become Jews.”
∗ Karl Marx, “On the Jewish
Question,” 1843

Karl Marx was especially vitriolic about “the loan-mongering
Jews of Europe”
∗The Favorite Enemy
of Socialists:
∗The Rootless
Cosmopolitans
∗ Who have no connection to
the soil
∗ Who do not share “our”
interests
∗ Who conspire behind our
backs to manipulate us
∗ “The loan-mongering Jews
of Europe do only on a
larger and more obnoxious
scale what many others do
on one smaller and less
significant. But it is only
because the Jews are so
strong that it is timely and
expedient to expose and
stigmatize their
organization.”
∗ Karl Marx, “The Russian Loan” (1856)

From Marx to Sorel, Mussolini, and Beyond
∗ The theme of class conflict and a general uprising
of those oppressed by “capitalism” was taken up
by Sorel and his follower Mussolini
∗ “Now Fascism throws the noxious theories of so-
called Liberalism upon the rubbish heap. When a
group or a party is in power it is its duty to fortify
and defend itself against all. The truth, manifest
henceforth to all whose eyes are not blinded by
dogmatism, is that men are perhaps tired of liberty.
They have had an orgy of it. Liberty to-day is no
longer the chaste and severe virgin for whom
fought and died the generations of the first half of
the past century. For the youths of to-day, intrepid,
eager, stern, who envisage the dawn of the new
era, there are other words which exercise a more
potent fascination and these words are: Order,
Hierarchy, Discipline . . . .”
∗ Benito Mussolini, The Life of Benito Mussolini (English
translation by Margherita G. Sarfatti, foreword by
Signor Mussolini, 1925)
∗
Georges Sorel
(1847-1922)
Benito Mussolini
(1883-1945)

Hitler adopted Marxist ideas of conflict as the foundation for his own
worldview, merely adding a “racial” dimension to Marx’s own anti-
semitism
∗ “The racial world view is
fundamentally distinguished from the
Marxist by reason of the fact that the
former recognizes the significance of
race and therefore also personal
worth and has made these the pillars
of its structure. These are the most
important factors of its world view. If
the National Socialist Movement
should fail to understand the
fundamental importance of this
essential principle, if it should merely
varnish the external appearance of
the present State and adopt the
majority principle, it would really do
nothing more than compete with
Marxism on its own ground.”

National Socialism as Fulfillment of Marxism
∗ “Fundamentally, these new means of
political struggle can be traced back to
the Marxists. I only needed to adopt
and further develop them, and I
essentially had what we needed. I just
had to continue, with greater resolve,
where the Social Democrats had failed
ten times over because they insisted on
trying to achieve their revolution within
the framework of democracy. National
Socialism is what Marxism could have
been if it had freed itself from its
absurd, artificial connection with the
democratic system.”
∗ Quoted in Hermann Rauschning,
Gespräche mit Hitler (1939)

For Socialists of Left and Right, the world is divided up
into “us” and “them,” and “we” are defined by our
enmity with “them”
∗ “the specific political
distinction…can be reduced to
that between friend and
enemy”
∗ “The enemy is not merely any
competitor or just any partner
of a conflict in general. He is
also not the private adversary
whom one hates. An enemy
exists only when, at least
potentially, one fighting
collectivity of people confronts
a similar collectivity.”

Struggle (“inherent antagonism”) permeates
collectivism of the left and the right
∗ “is not the relationship to an
external Other as the enemy a
way of disavowing the internal
struggle which traverses the
social body? In contrast to
Schmitt, a leftist position
should insist on the
unconditional primacy of the
inherent antagonism as
constitutive of the political.”
∗ Slavoj Žižek

Self Help
Friendly Societies/Mutual Aid
Commercial Insurance
Charity
4. Social Conflict and Statism,
or Social Cooperation and Liberty?
∗ If we desire to live in peace, we
must embrace the practices and the
institutions of peace and prosperity
∗ Well defined and voluntarily
transferrable property rights
∗ Free market economy
∗ Limited Government
∗ Freedom of Trade

The classical liberal response: the right to one’s
modest peculiarities
∗ "Human groupings have one main
purpose: to assert everyone's right to be
different, to be special, to think, feel and
live in his or her own way. People join
together in order to win or defend this
right. But this is where a terrible, fateful
error is born: the belief that these
groupings in the name of a race, a God, a
party, or a State are the very purpose of
life and not simply a means to an end. No!
The only true and lasting meaning of the
struggle for life lies in the individual, in his
modest peculiarities and in his right to
those peculiarities.”
∗ Red Army Colonel Pyotr Pavlovich Novikov’s
thoughts as he inspects soldiers assembled
under his command, in Vasily Grossman’s
novel of the Battle of Stalingrad, Life and
Fate
Vasily Grossman (1905-1964) as a
correspondent for
, Red Star, the newspaper of
the Red Army

Liberalism is not only the philosophy of
prosperity and progress, but of peace and
respect
correspondent for , Red
Star, the newspaper of the Red Army,
and later novelist of Soviet terror

Liberalism is not only the philosophy of
prosperity and progress, but of peace and
respect • "Human groupings have one main purpose: to
assert everyone's right to be different, to be
special, to think, feel and live in his or her
own way. People join together in order to
win or defend this right. But this is where a
terrible, fateful error is born: the belief that
these groupings in the name of a race, a God,
a party, or a State are the very purpose of life
and not simply a means to an end. No! The
only true and lasting meaning of the struggle
for life lies in the individual, in his modest
peculiarities and in his right to those
peculiarities.”
• Red Army Colonel Pyotr Pavlovich Novikov’s
thoughts as he inspects soldiers assembled under
his command, in Vasily Grossman’s novel of the
Battle of Stalingrad, Life and Fate
correspondent for ,
Red Star, the newspaper of the Red
Army

CEQLS Lecture | Tom G. Palmer

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