Socialism on Wall Street

Occupy Wall Street

As the Occupy Wall Street campaign gathers momentum the drumbeat of populist argument has swelled in an attempt to make capital by labelling what appears to be largely a democratic grassroots protest as both “un-American” and “socialist”. Of the former there’s no real rebuttal possible or necessary: that John Bogle was labelled un-American for inventing the humble index tracker tells you all you really need to know about the intellectual underpinning of what is essentially an unsubstantiatable slur.

Socialism, though, is a harder issue to shake off. Whether this matters or not is an question of personal conviction; but it does rather seem that the people making the accusation don’t actually know what they’re talking about. Nor, probably, do the protesters themselves.  Let's face it, they probably don't care: but they really ought to, because Karl Marx could teach both sides a lesson or two; although probably not in the way he originally intended.

The Atlantic Divide

“Socialism” is a phrase that doesn’t cross the Atlantic particularly well. If you were to accuse a European of being a socialist they’d more than likely take it as a compliment. Many of the most successful European nations have socialist political parties taking an active role in government and, for the most part, these countries have a view of social welfare that regards human needs such as healthcare, pensions and basic subsistence as the responsibility of governments: and, for the most part, their electorates agree with them.

Even here in the free-market led UK the degree of attachment to our National Health Service (NHS) in which treatment is free at the point of delivery to everyone is entrenched to the point that no party, socialist or not, dare tamper with the essential service model. The genesis of the NHS and, indeed, of the modern welfare state beloved of socialism, came out of the work of William Beveridge in his report on Social Insurance and Allied Services published in 1943. That such a document was issued in the middle of the Second World War is remarkable but it was part of the contract between the British government and its people: war now, reward later.  As Andrew Marr writes in A History of Modern Britain:

"Within a month, 100,000 copies had been bought; eventually six times as many were sold.  It was distributed to British troops, snapped up in America and dropped by Lancaster bombers over occupied Europe as propaganda ... A detailed analysis of the Beveridge report was discovered in Hitler's bunker at the end of the war."

When normal government resumed in 1945 the electorate rejected Winston Churchill’s Conservatives in favour of a socialist Labour party which introduced wide ranging social reforms, including the NHS, state pensions and a minimum set of welfare benefits. For better or worse we’ve largely been stuck with this ever since.

Liberty, Fraternity, Socialism

In fact socialism can trace its roots back to the French Revolution – which, incidentally, is where the terms right-wing and left-wing for free market and managed market political groups emanated from; the radical left wingers sat to the left of the President's chair in the newly formed French parliament.  However, socialism really found its roots in England during the Industrial Revolution.

This was the one place and time where unfettered free market capitalism genuinely had its day. The migration of the population from the countryside to the cities in search of work led to claims of an decline in male adult lifespan of  a decade or more. Technology often made things worse rather than better, the development of gas lighting had the effect of allowing employers to work their child labour forces for even longer hours … working conditions were often horrific, at least to modern eyes.

Socialism, at this point, was in its infancy but it was spurred on by some of the more obvious inadequacies of the laws: it took until 1847 to limit the working hours of children, for instance. This heinous restriction on laissez-faire capitalism limited children's working hours to a mere 13 hours a day. Unsurprisingly most of the employers – whose wealth ensured they controlled significant parts of government – put up a long battle against these ridiculously restrictive measures which were "obviously" calculated to increase unemployment.  As the reformer William Cobbett put it:

"It had formerly been said that the Navy was the great support of England; at another time that our maritime commerce was the great bulwark of the country; at another time that our colonies; and it had even been whispered that the Bank was; but now it was admitted, that our great stay and bulwark was to be found in three hundred thousand little girls, or rather in one eighth of that number. Yes; for it was asserted, that if these little girls worked two hours less per day, our manufacturing superiority would depart from us."

Or, in a more modern context, if our corporations don't export labor to low-cost economies they're doomed. Although, of course, if they do their ex-employees won't be able to afford to buy their products.

Marxism

Out of socialism arose the first genuinely new set of economic theories since Adam Smith and David Ricardo: what we now refer to as Marxism, the ideas of Karl Marx and Frederick Engels. The originality of these ideas is somewhat lost in the history of twentieth century communism, a failed economic experiment if there ever was one, but they contain a powerful and original concept which hasn’t gone away: the idea of economic cycles.

Marx believed that capitalism contained the seed of its own downfall: that as profit margins increased and wealth became concentrated in the hands of the rich then economic collapse would become inevitable. In essence the mass of working people wouldn’t earn enough to afford the underlying commodity cost of the  items being produced and so downturns would inexorably follow booms. As he writes in Theories of Surplus Value:

"The market expands more slowly than production; or in the cycle through which capital passes during its reproduction—a cycle in which it is not simply reproduced but reproduced on an extended scale, in which it describes not a circle but a spiral—there comes a moment at which the market manifests itself as too narrow for production.  This occurs at the end of the cycle.  But it merely means: the market is glutted." 

Certainly Marx seems to have been correct about economic cycles – they're part and parcel of the path of capitalism. However, he went on to suggest that eventually the concentration of wealth would result in a revolt by the mass of working people followed by the inevitable death of capitalism and the rise of communism, where no one owned anything and everyone lived in blissful happiness.

Schumpeter to the Rescue

Of course, like many economists Marx was an idiot who understood nothing about human behavior. An economic theory that fails to take account of self-interest is bound to fail, as Adam Smith could have told him.  So, in the meantime, we figured out, for the most part, how to introduce safety values to allow the pressures to be released. Schumpeter’s creative destructionism works to ensure that wealth is created and then re-distributed from generation to generation through economic cycles. We also saw what happened in the Soviet Union in a truly managed economy. That’s not somewhere any of us should want to go again.

However, there does seem to be something in Marx’s idea that as the wealth gap between the average person and the wealthiest widens then social unrest increases, in part because the man in the street can no longer afford what the wealthy are producing.  The effects seem to be socially mediated but the general idea is that extreme levels of inequality seem to reduce economic growth.  However, the same effect is achieved by extreme levels of egalitarianism: so if societies are too equal there's no reason for the underachievers or the overachievers to strive for better results: see Inequality, Growth and Poverty in the Era of Liberalization and Globalization by Giovanni Andrea Cornia and Julius Court:

"At very low levels of inequality (as in some socialist economies in the 1980s), growth is affected negatively because an overly compressed wage distribution may not adequately reward different capabilities and efforts, erode work incentives and increase labour shirking and free-riding behaviour. Loss of incentives can also occur if workers are subject to very high marginal tax rates, either via the state or within-community mechanisms.

The impact on growth may also be negative when the gap between the rich and the poor widens excessively. Rent-seeking and predatory activities tend to rise and the work incentives of the asset-less poor wane."

The Occupy Wall Street protesters appear to be unconsciously echoing this, venting a commonly held feeling that the people most responsible for the current economic downturn have manipulated the political process to their own benefit, securing government bailouts to maintain and even enhance their personal fortunes and then failing to invest this money in the American economy, leading to a widening wealth gap, persistently high unemployment and a continued migration of jobs to lower wage economies accompanied by widespread corporate tax avoidance.

Fairness

None of this has much to do directly with socialism, although it’s richly ironic that the current behaviours seem to be predicted by Marxist economic theories. As ever, when any powerful group of people adopt a one-sided ideology – whether that be communism or capitalism or any other -ism you might care to mention – and ruthlessly follow this through to its illogical conclusions, it leads to a reaction based as much on feelings as rational thought. And the dominant feeling at the moment is that there’s something fundamentally unfair about the operation of modern capitalism.

All governments and nations are built on the basis of a mixed economy, partly free-market and capitalist and partly managed and socialist. Different countries will manage this balance differently. It’s just odd that the American and British governments have chosen to implement a free market based version by providing government funds on a vast, socialist scale to bail out imprudent free market bankers without demanding very much in return.

That, of course, is the real issue for the Occupy Wall Street protesters. In the main they’re neither un-American nor socialist, they just feel that something is wrong about the current system. Rightly or wrongly this is inevitable when governments are in thrall to one lobby group above all others, because people will no longer trust the justifications presented when their own self-interest is at stake.  Which is a shame because, when all is said and done, capitalism is still the best economic system we've yet managed to create.

Related articles: Gross National Happiness, Adam Smith's Monkey Business, The Malthusian Prophesy, Time for Shiva and Schumpeter, Moral Corporations - An Oxymoron?