There are different forms of socialism but for this blog will use the form of democratic socialism advocated by Socialist parties in Western Europe. For example, Nordic countries where government spending is between 40-50% of GDP. This brand of socialism believes in:
- Redistribution of income and wealth through a progressive tax system and welfare state.
- Ownership of key public sector utilities, such as gas, electricity, water, railways.
- Private enterprise and private ownership of other industries.
- Free health care and free public education provided by direct taxation.
- Support for trade unions / minimum wages/labour market regulations to protect workers
- Government regulation of monopolies, housing market, environment.
Pros of socialism
- Reduction of relative poverty. A welfare state which provides a minimum basic income for those who are unemployed, sick or unable to work maintains a basic living standard for the poorest in society and helps to reduce relative poverty.
- Free health care. Free health care at the point of use means everyone is entitled to basic health care. This increases the living standards of those who cannot afford to pay private doctors. By improving the nation’s health it also contributes towards increased labour productivity and higher economic growth in the long-term. In the US, there is no universal health care and uninsured workers can slip through the net and either not be entitled to health care or go bankrupt trying to pay bills. According to CNBC (2019) ‘[in the US], An estimated 530,000 families turn to bankruptcy each year because of medical issues and bills.]
- Diminishing marginal utility of income. From a utilitarian perspective, a redistribution of income and opportunity from the very rich to the very poor can increase total utility [happiness] in society. A millionaire who pays a marginal income tax rate of 50% still has the ability to buy most goods they need. If an unemployed person gains an extra £50 it leads to a very large increase in utility because they can afford to buy basic necessities. See: diminishing marginal utility of income/wealth
- A more equal society is more cohesive. A society which has equality of opportunity and limited inequality is likely to be more cohesive. If people perceive they live in a very unequal society – exploited by monopsony employers and earning significantly less than their bosses, it can lead to frustration and resentment. If everyone feels they have a fair stake in society, it can help create a more harmonious society where workers are committed to the success of the firm which they work.
- Socialist values encourage selflessness rather than selfishness. Capitalism encourages attitudes to make profit – even if it is at the cost of other individuals or the environment. A socialist society does not pursue profit as its highest goal, but social cohesion and the common good.
- Benefits of public ownership. The benefit of public ownership is that companies can be run in the public interest rather than just for the benefit of shareholders. For example, industries like railways and water have significant externalities, which are ignored in a profit-oriented company. Public ownership of water and the railways allows the companies to target goals such as long-term investment, low prices for the consumer and improved safety.
- Environment. An economy which is regulated to work towards the long-term welfare will place a higher value on environmental concerns, such as limiting pollution – even if it lowers profit.
- Reduced hidden taxes. An economy with no public health care will have lower tax rates. However, individuals and firms will pay for health care in a different form. In the US both firms and individuals pay significant sums for private insurance. Therefore, although there is less tax, there is the ‘hidden’ tax of private health insurance. Furthermore, because the US health care system is for-profit with fewer constraints to limit spending, the US pay significantly more on health care (17.6% of GDP) than other countries (e.g. UK 9.6% of GDP) (See: Health care spending)
Cons of socialism
- Lack of incentives. If an economy has high rates of progressive taxation, it could cause disincentives to work and setting up business. Entrepreneurs may feel that if the government is taking a high percentage of their profits, they would prefer not to take the risk or work abroad. In the modern world, it is easier for the super-rich to live abroad in tax havens and free-ride on others who pay tax. If tax rates are too high, they can be self-defeating and fail to significantly increase tax revenues. The Economist states that:
- “Ms Ocasio-Cortez has floated a tax rate of 70% on the highest incomes, but one plausible estimate puts the extra revenue at just $12bn, or 0.3% of the total tax take” – Millenial socialism, (2019)
- Another example is the experiment of French President Hollande, who imposed a top rate of income tax of 75% on incomes over €1m, however, the tax raised only meagre sums as many sought to avoid paying and it was later dropped (1).
- Government failure. In an ideal world, the government would be successful in regulating firms, labour markets and running public industries. However, government intervention is prone to government failure and an inefficient allocation of resources. For example, labour market regulations such as high minimum wages or maximum working week could lead to unemployment and a lack of flexibility which firms need to deal with a sudden increase in demand. If firms are highly regulated, it is an extra cost which may discourage investment and lead to lower economic growth.
- Welfare state can cause disincentives. If a welfare state is too generous, it is argued it may create a disincentive to get a job and therefore it can reduce the labour force and individual effort. See more: Poverty trap
- Powerful unions can cause labour market antagonism. Ideally, socialism aims at a more harmonious society. However, if the socialist policies are geared towards strengthening trade unions and aiming for perfect equality, it can lead to antagonistic labour relations with a ‘them and us’ mentality – workers against owners. This attitude can cause time lost to strikes and unproductive factories. For example, in the 1970s, the UK labour market was characterised by poor labour relations due to distrust between unions and owners of companies. Even public ownership is not guaranteed to solve industrial relations. The ownership doesn’t matter to workers if they feel they are getting a bad deal from their government employers.
- Rationing of health care. In a publically-funded health care system like the UK, doctors usually face greater financial constraints, some non-urgent operations will be rationed and there are longer waiting lists than in a private system.
- Difficult to remove subsidies/government benefits. Milton Friedman argued that that “nothing was so permanent as a temporary government subsidy”. A good example is farming subsidies. In the late 1920s and 1930s, US agriculture was in crisis so the Federal government agreed to give temporary support. However, over the years, government subsidies to farming in US has continued to grow. In 2019, US farmers got a record $22.4 bn in subsidies (NPR) Farming subsidies are not really seen as ‘socialism’ but it is a form of big government intervention giving money to a certain group.
Tejvan Pettinger, Oxford, UK, www.economicshelp.org, 13 Sep 2019