Shrinking Economy, Expanding State

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It is useful to go back and read what analysts and experts have said about the future of the free market system. Many of the greatest thinkers and writers of the last 120 years thought capitalism would succumb to socialism. For example, Gustave Le Bon and Joseph Schumpeter suggested that socialism was inevitable. According to Le Bon, “Before the hour of its triumph, which will be quickly followed by that of its fall, socialism is destined to widen its influence….”  Le Bon did not believe that civilization could adopt socialism permanently. After all, what was socialism? Le Bon wrote: “The immediate fate of the nation which shall first see the triumph of socialism may be traced in a few lines. The people will of course begin by despoiling and then shooting a few thousands of employers, capitalists and members of the wealthy class … Intelligence and ability will be replaced by mediocrity.” Eventually, Le Bon predicted, an “equality of servitude” will prevail everywhere. Far from being a paradise, he explained, “It will be a hell, a terrible hell….” Le Bon wrote these words in 1898, almost two decades before the Bolshevik Revolution.

Le Bon was the first to explain that modern socialism is not so much a doctrine as a mental state. As such, it ultimately promises effects consistent with its inner orientation. “A man is not a socialist without hating some person or thing,” wrote Le Bon. “Servitude, misery, and Caesarism are the fatal precipices to which all the roads of the socialists lead. Nevertheless, the system would appear to be inevitable.” What parades as idealism is actually an expression of hatred, despite an apparent façade of benevolence. The final result of hatred is violence, and violence is the state. 

As in the Soviet Union, the socialists of the West will soon learn – if they don’t know already – that eating the rich will not produce a bounty. When shooting speculators (i.e., businessmen) failed to improve the economy in the Soviet Union after little more than three years of Bolshevik rule, Lenin adopted his New Economic Policy (March 21, 1921). Because nobody knew how to build a socialist economy, Lenin explained, the Soviets must retreat into “state capitalism.” A similar retreat occurred in the People’s Republic of China after the failure of the Cultural Revolution. Again, the Union of the Soviet Socialist Republics (USSR) was totally abandoned in 1991 in favor of an updated version of Lenin’s “state capitalism,” with an outward show of democracy, so that foreign investment could be encouraged and technology acquired. This has always been the tendency of socialism: first, to increase the power of the state; second, to devolve into fascism.

Since the much-heralded success of the Reagan-Thatcher counter-revolution in the 1980s, many supposed that socialist ideas were discredited. In his book on socialism, Ludwig von Mises offered a more far-seeing analysis. “It is a mistake to think that the lack of success of … Socialism … can help to overcome Socialism,” he wrote. “Facts per se can neither prove nor refute anything.” The reason for this was explained by Joseph Schumpter, who said socialism was a new kind of religion. You cannot argue someone out of their religion. When people believe, they believe. Arguments are ineffective. Therefore, socialism is not defeated when it turns out to be a form of dictatorship, or when the economy is ruined under social democracy. It carries on, and mobilizes fresh explanations for paradise delayed. Referring to Karl Marx as a “Prophet,” Schumpeter explained how modern socialism offers “a system of ultimate ends … which implies a plan of salvation….” When a belief system has a religious character, it spreads to those who are susceptible. Insofar as “socialism” and “communism” signify the same thing, the notion that “communism is dead” is merely a conceit. Ideas do not die.

When Le Bon said that socialism’s triumph would signal the beginning of its demise, he was drawing a logical conclusion. He foresaw the failure of the socialist formation as such, as in the failure of the Soviet Union or Communist China under Mao. The totalitarian state, however, is not necessarily socialist. It may continue decades or centuries – outlasting the socialist ideal that gave it birth. In a sense, “state capitalism” is real and effective totalitarianism.

In May 1950 Joseph Schumpeter published an article with the title, “The March Into Socialism,” which was based on an address he gave before the American Economic Association on 30 December 1949. Unlike Lenin, Schumpeter did not think of a retreat into “state capitalism” as a retreat from socialism. According to Schumpeter, the “march into socialism” basically signifies “the conquest of private industry and trade by the state.” In America, this has been preceded by the conquest of education by the state. The state educational bureaucracy has grown tremendously in the last half century. American public education, overall, is not only socialist in terms of philosophy and rationale, it is socialist in the example it offers to impressionable young minds. If there is a sense of entitlement in America today, one may trace it back to the educational doctrine that every child is entitled to a “free education” if not a “free lunch.” Of course, economic reality being what it is, the term “free” signifies untold billions. Entitlements of all kinds are expensive, and the taxpayer must foot the bill. Then there is health care, and social security. As the state promises more and more benefits, the burden of high taxation falls on the producers and builders of the economy. According to the Heritage Foundation, entitlement spending has begun to crowd out defense spending. While domestic social programs have increased 104 percent since 1990, defense and homeland security spending has only increased 51 percent (during a war, no less). Even more telling, anti-poverty spending has jumped 89 percent since 2000. Joseph Schumpeter’s prediction of state conquest of private production has merit. We are indeed marching into socialism. The money to pay for such programs will be taken out of “private production” one way or another – either through inflation, taxation, or naked expropriation. Eventually, the state will eat up the private sector altogether.

Writing more than 60 years ago, Schumpeter allowed that America’s prosperity might last fifty years or so, and this would give capitalism a further lease on life. The advent of socialism, he said, would then be delayed by roughly half a century (after 1950). Through this long period of prosperity, however, “atrocious mismanagement” of national resources would be inevitable. Schumpeter wrote of the problems of bureaucracy, politics and a “flight from labor.” Calculating the damage in terms of government regulation, debasing of the currency, and the piling up of debt, the resulting decline in prosperity would nonetheless be blamed on the free market (i.e., on “greedy” businessmen). This would be the signal for the state to finalize its conquest of private production. This seems to be the position we are at today. As storm clouds gather we may expect to see more and more state intervention in our ailing economy; accompanying this will be a further debasing of the currency, more regulation and growing scarcity. To retain one’s wealth under such circumstances will not be easy. It may even be dangerous. We live in a time when government is expanding. This is not a problem as long as the economy also expands. But the economy is no longer robust.

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About JR Nyquist

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