The Opportunity Costs of Socialism

The American Government (ahem, The Council of Economic Advisers) has just released a new paper – 72 pages in length – titled: The Opportunity Costs of Socialism. Here are the first paras from the Executive Summary to give you a sense of where it is going, but just download a copy yourself. Haven’t read it all but looks both comprehensive but also easy to understand, if you are of a mind to understand.

Coincident with the 200th anniversary of Karl Marx’s birth, socialism is making a comeback in American political discourse. Detailed policy proposals from self-declared socialists are gaining support in Congress and among much of the electorate.

It is unclear, of course, exactly what a typical voter has in mind when he or she thinks of “socialism.” But economists generally agree about how to define socialism, and they have devoted enormous time and resources to studying its costs and benefits. With an eye on this broad body of literature, this report discusses socialism’s historic visions and intents, its economic features, its impact on economic performance, and its relationship with recent policy proposals in the United States.

We find that historical proponents of socialist policies and those in the contemporary United States share some of their visions and intents. They both characterize the distribution of income in market economies as the unjust result of “exploitation,” which should be rectified by extensive state control. The proposed solutions include single-payer systems, high tax rates (“from each according to his ability”), and public policies that hand out much of the Nation’s goods and services “free” of charge (“to each according to his needs”). Where they differ is that contemporary democratic socialists denounce state brutality and would allow individuals to privately own the means of production in many industries.

In assessing the effects of socialist policies, it is important to recognize that they provide little material incentive for production and innovation and, by distributing goods and services for “free,” prevent prices from revealing economically important information about costs and consumer needs and wants. To this end, as the then–prime minister of the United Kingdom, Margaret Thatcher (1976), once argued, “Socialist governments . . . always run out of other people’s money,” and thus the way to prosperity is for the state to give “the people more choice to spend their own money in their own way.”

What went wrong in Venezuela is still my acid test which very few can pass. It’s a technical issue as much as moral, but this seems to cover both.

AND A BIT MORE ON THE SAME REPORT: Someone has looked further into the document and this is the analysis: White House Report Says Socialist Policies Could Cut GDP Nearly in Half.

“The definition of democratic socialism to me,” Ocasio-Cortez said, “is the fact that in a modern, moral and wealthy society, no American should be too poor to live.”

To capture this variation, the CEA economists looked at how socialist policies from different countries and times would affect America’s productive output. The results were uniformly less than stellar.

“An extensive economic growth literature … documents a relationship between real GDP and the degree of socialism, measured in a large sample of countries as the opposite of economic freedom,” the report notes. “The studies suggest that moving U.S. policies to highly socialist policies would reduce real GDP at least 40 percent in the long run.”

That highly socialist benchmark is based on analyzing what the United States would look like if it implemented policies similar to Venezuela, a highly industrialized country whose major industries—most notably petroleum production—are state-owned. Such policies have led to food rationinghyperinflation, and a mass exodus of the population. Similar policies implemented in the United States would cut GDP per capita by some $24,000 per person, the CEA estimated.

And do note the words, “at least”. They don’t want to exaggerate so provide a best case scenario, as in GDP per head might fall by only $24,000, but could be more. But whatever it might actually be, they will never tell you the truth.

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14 Responses to The Opportunity Costs of Socialism

  1. Empire 5:5

    Yet the failed socialist state of Venezuela can still find cash to finance the caravan.

    Socialism always exports suffering.

  2. …visions and intents…

    How about reality and outcome? There’s enough test cases throughout history.

    But when economists start talking about opportunity costs of Socialism, doesn’t that give economists a bad name?

  3. Trax

    “Where they differ is that contemporary democratic socialists denounce state brutality”

    I presume they mean until we get to the stage of Venezuela where state brutality will start to show itself with things such as crushing protests, price controls and harsh penalties.

  4. Bemused:
    Think of what Russia would be today if the Communists hadn’t won in 1917. What if a free market economy had been introduced?
    Given the Russians enormous raw materials deposits, and the extra 70 million still alive that would have now increased to 200 million, the Communist victory has been one of the greatest disasters to befall mankind.
    Now that’s an opportunity cost.

  5. Now that’s an opportunity cost.

    Or an opportunity lost. The Cold War ostensibly ended because the USSR couldn’t keep spending money on the military like the US could due to the ‘opportunity cost’ of their Socialist system.

  6. Nob

    bemused
    #2848439, posted on October 24, 2018 at 8:39 pm
    Now that’s an opportunity cost.

    Or an opportunity lost.

    That’s what “opportunity cost” means.
    Opportunities lost because energies and resources are diverted or suppressed.

  7. Jonesy

    The real question should be…
    In all this now two hundred years of capitalist social success how is it that half the population still need to be told what to do. Without these useful idiots, socialism has no cache.

  8. JohnL

    Where they differ is that contemporary democratic socialists denounce state brutality

    Bullshit!
    The socialism, or communism, cannot exist without the state brutality. The first tenant of socialism is that the means of production are owned by the whole community – that is the state. To ow it, the state must “acquire” the means of production. The socialist state does not “acquire” by purchasing the assets as it is done in civilised society. The socialist state confiscates the assets. For this, it needs the “state brutality”.
    Believe me, I know what I am talking about. I was born and raised in socialist Czechoslovakia!

  9. Entropy

    John, the state doesn’t *have* to own the means of production. It just has to be able to direct and control it. You are describing communism. There are other types of socialism, such as basis and fascist states, where the state controlled and directed the means of production without directly owning it. The point of socialism is the centralisation of decision making with the government in the belief it will generate better outcomes that a lighter touch.

  10. Percy Popinjay

    I’m just about over attempting to educate imbeciles about the perils of collectivism, let alone lunacy such as the concept of catastrophic human induced climate change. It probably is about time they suffered a very large and lengthy dose of the former, good and hard.

    Oh, look over there – it’s Teats Peanuthead, Post Turtle Bowen, Pliberserk and Albansleazey with a massive lower house majority and a compliant senate stacked with creatures form the Star Wars bar scene!

    Collectivism with a staggeringly stupid and hideously ugly face, comrades.

  11. Entropy

    John, the state doesn’t *have* to own the means of production. It just has to be able to direct and control it. You are describing communism. There have always been other types of socialism, such as nazis and fascist states, where the state controlled and directed the means of production without directly owning it. The point of socialism is the centralisation of decision making with the government in the belief it will generate better outcomes that a lighter touch. And of course, that centralised control has to be enforced to work.

  12. Entropy

    Australia already is another variety of socialism, corporatism.

  13. JohnL

    Entropy
    #2848767, posted on October 25, 2018 at 9:19 am
    John, the state doesn’t *have* to own the means of production. It just has to be able to direct and control it.

    Entropy, what is your experience with socialism, did you live in a socialist state? Apart from Australia that is.

  14. DD

    “And of course, that centralised control has to be enforced to work.”

    And just like that the dream of socialism turns into the nightmare of communism.

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