The Unexpected Contest of 2016: Free Market Capitalism v. Democratic Socialism

Written by John Biver

Supporters of free market capitalism were asking how this could be in light of the fact that no matter where socialism has been tried in the world it has failed. That is answered in part, of course, because of the sad reality that history and economics are increasingly no longer taught in the K-college school systems. (Note – that’s K-COLLEGE, not just K-12).

Others suggest that many Americans simply see capitalism as having failed. The financial crisis of 2008, the housing market collapse, unemployment, long-term anemic economic growth, excessive debt, and stagnant wages for many in the middle class all combined to give capitalism a black eye.

Free market defenders, however, blame government intervention for all of the above maladies. They say excessive and poorly designed regulations, tax policies, Fannie Mae, Freddie Mac and government spending $20 trillion beyond its means cause the black the eye. In light of this, defenders say that it is insanity to see more government as the solution.

This current divide isn’t new. Pro-free market historians argue that the unsound policies of Presidents Herbert Hoover, Franklin Delano Roosevelt and the Federal Reserve caused the Great Depression. They believe that the political left successfully sold the crash of 1929 and the dark years that followed as a failure of capitalism. As a result, FDR won public support for greatly accelerating the growth of government.

It is clear who is winning the debate in the minds of those who supported Bernie Sanders. Free market defenders are greatly outnumbered in the dominant media, TV shows, movies, and other popular culture venues, and of course in the education system. The result is that many in the millennial generation believe socialism is “cool.”

Well, not quite socialism. Supporters of Bernie Sanders are quick to correct anyone who claims their candidate is pushing “socialism.” Evidently socialism’s track record has tainted the word much as the word “liberal” (as in progressive) was a bad label to carry for many years. It’s not “socialism” they insist, but “democratic socialism.”

“Democratic socialism” proponents are said to reject government ownership of production or government running businesses, and of course all of those other horrible things that murderous dictators throughout history have brought with them.

Defining the terms can get tricky

Former Texas A&M economics professor Svetozar Pejovich has written that adding “democratic” to “socialism” doesn’t change anything in that bigger government — and thus, a lessening of individual liberty — is the goal. Here is just a partial list of things that were promised by Bernie Sanders:

• Free education including college

• Single-payer comprehensive healthcare

• Universal state-funded daycare

• Massive wealth redistribution

• Political revolution aimed at the wealthy

• A big minimum wage increase

• A hefty estate tax

• Expand Social Security

In an op ed for the Dallas Morning News, professor Pejovich wrote that “Sanders’ policies rest on three philosophical premises:”

• “A just society based on the equality of outcome exists and is desirable.”

• “Human reason can discover the rules required to bring about such a society.”

• “And the political elite should enforce those formal rules from the top down.”

“Those premises are traceable to the early French socialists,” Pejovich continued, and they “are also incompatible with the American tradition of self-responsibility, self-determination and limited government under a rule of law.”

“Of course, the lunch is not free,” Pejovich writes:

The short-run consequence of redistributive policies is erosion of the link between performance and reward, which, in turn, reduces economic efficiency and the pie available for redistribution. The long-run cost is the transformation of the American culture of self-responsibility and self-determination into the culture of dependence on the state.

“Third Way Socialism”

Bernie Sanders supporters see “third way” socialism, or the “Scandinavian model” working in countries like Denmark and Sweden and believe they can work here as well. The problem is that Sanders supporters might be unaware of how both countries got rich before socialism was enacted. Just as important, both countries have now seen the limits of socialism. Sweden’s famous reforms started in the 1990s included more deregulation and free trade, lowering taxes, enacting school vouchers, and a partial privatization of the pension system.

Here is Daniel Mitchell writing about Denmark:

Denmark has a bigger welfare state than Paraguay, but it’s much more pro-market in other respects. Indeed, it is ranked #14 in the Economic Freedom of the World, compared to #89 for Paraguay.

Bernie Sanders is not proposing the kind of pro-market policies that Sweden and Denmark trumpet to help pay for their massive welfare state.

National Review’s Michael Tanner writes:

In the 1990s, Sweden introduced school choice into elementary education, and it has even partially privatized its social-security system. Denmark recently cut the duration of unemployment benefits, and both countries have significantly reduced their corporate-income-tax rates; the Danish government has slashed the rate from 32 percent in 2000 to 23.5 percent last year.

“That can’t be what Bernie Sanders wants, can it?,” Tanner writes:

In the end, most of socialism’s defenders wind up defining the term down to where it is nearly meaningless. Sanders likes to describe Social Security and public schools as examples of socialism. Then again, with Social Security running almost $26 trillion in the red and the disaster that the public schools have become, maybe they aren’t the best examples to point to.

It depends upon what the definition of socialism is

Some observers, including the Cato Institute’s Daniel Mitchell and the Prime Minister of Denmark himself, claim that since Denmark is not a “planned economy,” it cannot be considered socialist.

Again, here is Daniel Mitchell:

It’s high tax, and that’s not good. There’s a huge amount of dependency on government because of redistribution programs, and that’s also not good.

But a high-tax welfare state is not the same as socialism. Indeed, nations such as Denmark and Sweden would be somewhere in between France and the United States on my statism spectrum.

So Mitchell instead refers to those who support Sanders-like policies not as “socialists” but as “statists.”

Daniel Mitchell, who has a PhD in economics, believes that while the Sanders approach may not “lead to immediate disaster” —

[I]t inevitably lures a larger share of the population into dependency over time and the higher taxes required to finance the growing welfare burden gradually erode incentives for work, saving, investment, and entrepreneurship. The combination of those factors slowly but surely dampens the economy’s growth….

Politicians have adopted bad policies that have led to stagnation and now they’re using the resulting economic malaise as an argument for even bigger government.

“Democratic Socialism”: A contradiction in terms

Sandy Ikeda, a professor of economics at the State University of New York, calls “Democratic Socialism” a contradiction in terms, and that the words “democratic” and “socialism” are not compatible: “While socialism’s goals may be lofty, its means are inherently at odds with democracy. In the end, ‘democratic socialism’ makes no more sense than ‘voluntary slavery.’”

While democracy “means different things to different people,” Ikeda writes:

I think most of us can agree that the ordinary meaning of democracy is at least tied to the concepts of political self-determination and freedom of expression. In this way, people tend to think of democracy as a shield against others more powerful than themselves.

Bernie Sanders and his supporters are attempting to sell what they see as a more “moderate version of socialism.” Professor Ikeda writes that this version envisions “a politico-economic system that places particular goals, such as ‘social justice,’ over any individual’s profit-seeking plans.”

But when you try to combine democracy with socialism, Ikeda explains, “democracy poses an insurmountable problem for socialism,” since “the idea of democracy embodies the liberal ideals of self-direction, of enabling ordinary people to meaningfully choose the policies that will rule them”:

When government is small and limited to undertaking only those policies that almost everyone agrees on…then democracy might work relatively well, because the number of areas on which a majority of voters and decisions-makers need to agree is small. But when the scope of governmental authority expands into more and more areas of our daily lives — such as decisions about health care, nutrition, education, work, and housing — as it would under socialism, agreement among a majority of all eligible citizens on every issue becomes impracticable.

“How much individual self-expression, how much self-determination can a central authority tolerate, democratic or not, when it seeks to impose an overarching economic plan?,” Professor Ikeda writes, “Planning on this scale requires the suppression of the petty plans and personal aspirations of mere individuals, and the submission of personal values to those of the collective.”

“More socialism means less real democracy,” writes Ikeda. “Democratic socialism, then, is not a doctrine designed to protect the liberal values of independence, autonomy, and self-direction that many on the left still value to some degree. It is, on the contrary, a doctrine that forces those of us who cherish those liberal values onto a slippery slope toward tyranny.”

Tax the rich and you too

Setting aside the definitions of “democratic,” “socialism,” and “statism,” how do you pay for all of those “free things” Bernie Sanders is proposing? You raise taxes — not only on the rich, but as even the liberal Washington Post admits, the middle class too.

Paul Sperry, author of “The Great American Bank Robbery,” looked at the numbers. Sperry writes that Sanders “proposes completely nationalizing our health care system and putting private health insurance and drug companies ‘out of business:

He also wants to break up ‘big banks’ and control the energy industry, while providing ‘free’ college tuition, a ‘living wage’ and guaranteed home ownership and jobs through massive public works projects. Price tag: $18 trillion. Who will pay for it all? You will. Sanders plans to not only soak the rich with a 90 percent-plus tax rate, while charging Wall Street a ‘speculation tax,’ but hit every American with a ‘global-warming tax.’

Paul Sperry contends that even such draconian taxes would not suffice to fund Sander’s schemes. A “President Sanders would eventually soak the middle class he claims to champion.” Raising taxes on those whose income is over $1 million a year would not even cover the annual federal budget deficit. And as has been chronicled often, the confiscation of all the wealth from America’s millionaires and billionaires could not even fund the federal government for an entire year. With Sanders’ proposed growth, the middle class will have to fork over a painful percentage of that $18 trillion in new taxes.

The perfectibility of man v. human freedom

Much of the free market capitalism v. socialism debate comes down to a difference of opinion regarding human nature.

In an article titled “The Ideal of Perfection in Faith and Politics,” David Solway writes:

The quest for the ideal is a human predisposition that shapes every social movement, political program, and religious communion. … The socialist ideal of human perfectibility has failed everywhere it has been tried, and is currently failing wherever we look.

“The Judeo-Christian ideal in its various forms, religious and secular,” Solway writes, “has enjoyed considerable success in providing for human happiness and prosperity.” Why? Here is Solway:

Is there a single factor that distinguishes the philosophies that enable human flourishing from those that inevitably produce mass misery and political disarray? To simplify in the interests of clarity, we can say that acceptance of human limitation is key to the avoidance of totalitarianism.

Free market capitalism, on the other hand, rejects the possibility of the “socialist ideal.” “In Judaism,” Solway writes, “the ideal of perfection falls beyond the grasp of fallible man.”

For Christians, the ideal of perfection exists in Heaven and is incarnated in Jesus, whose example can be approximated but never literally incorporated.

Leftist politics values an ideal, Solway writes, that of “equality of outcome regardless of input, redistribution of wealth, leveling of social and personal distinctions, communal ownership of resources, infallible guidance of a managerial elite…” Unfortunately, Solway explains, that dream “does not exist in the realm of human possibility, and the attempt to realize and impose it is always doomed to failure and the unleashing of monstrous perversions.”

Economist Daniel Mitchell calls himself “a proud advocate and defender of capitalism for the simple reason that it is a system that is consistent with human freedom while also producing mass prosperity that was unimaginable for much of human history.”

“Jurisdictions that embrace capitalism enjoy great progress,” Mitchell explains, “while nations that veer in the other direction suffer economic decline, as vividly demonstrated by comparisons such as the relative performance of Hong Kong and Argentina.”

So the debate goes on — over which economic system works better – and even about the definitions of the often-used and misused words. Nima Sanandaji at the Foundation for Economic Education provides a nice closing summary for us to use from his article “Nordic Socialism Isn’t the Answer for America”:

Is it likely that the US will become more equal, prosperous, and better prepared to face social challenges if democratic socialism is introduced? Will the American Dream of social mobility be strengthened in such a system? Will Americans benefit from longer life spans and lower poverty if they adapt Nordic-style welfare models? … [A]s I show in my new book Debunking Utopia – Exposing the myth of Nordic socialism, much of this is built upon misconceptions about Nordic societies:

Here are excerpts of just three of the bullet points that follow:

• Yes, it is true that Nordic societies combine high living standards with large welfare states. However, numerous studies show that the high tax systems significantly impede the living standard in these countries. Nordic countries compensate for large public sectors by having strong working ethics and adapting market-friendly reforms in other fields. The lesson for America certainly isn’t that higher taxes will create more prosperity, but rather the opposite.

• The root of the high levels of equality, the economic prosperity, the high levels of trust and other advantageous social features of the Nordics seem to be a unique culture rather than unique policies. After all, Spain, Italy, and France also have large welfare states, built upon the ideals of democratic socialism. Why doesn’t the American left believe that US society would evolve to resemble Southern Europe after introducing a large welfare state?

• [W]hile the idea of Nordic-style democratic socialism is all the rage among the left in the US and other countries, in the Nordic countries themselves social democracy has never been weaker than today. In Denmark, the social democrats themselves have introduced massive market reforms and called for a much slimmer welfare state.

With the election of Donald Trump, free market capitalism and individual liberty has at least for now, won the day. If President Trump and the Republican controlled U.S. Congress can implement enough effective pro-free market policies, the advantages of liberty may well result in a lot fewer proponents of the failed statist models.

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