John Locke Update / Research Brief

Islands of Socialism In a Sea Of Capitalism

posted on in Economic Growth & Development
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When confronted with the reality that socialism is sweeping the Democratic Party, many pundits on the left simply dismiss the charge as trivial or no big deal. It is becoming common for progressive pundits to point to socialist programs that are currently in place that have widespread public support. Social Security and Medicare are their two favorite examples. In a recent column from The Hill titled “America Warms up to Socialism,” Fox News commentator and progressive Juan Williams notes that,

Nearly two-thirds of the federal budget goes to ‘socialist’-type programs — Social Security, Medicare and Medicaid. These programs are wildly popular and politicians who threaten them are punished by the voters.

The point seems to be that if socialism is such a terrible idea, why have we embraced it to achieve such important goals as providing retirement security and health care for the elderly? And if it “works” in these areas, why wouldn’t it work in other important areas of our life like health care or paying for a college education?

Leaving aside the fact that both Social Security and Medicare are operating in the red, with Social Security cashing in IOUs from the U.S. Treasury to write retirees’ checks, these massive government programs can exist only because they are islands of socialism in a sea of capitalism. Without that relationship, programs like Social Security and Medicare would have no resources.

Margaret Thatcher was famous for uttering the truism that “the problem with socialism is that you eventually run out of other people’s money.” The “other people’s money” that is necessary to keep these programs – these islands of socialism – operational is generated in that sea of capitalism that surrounds them.

These socialist programs, like all of those that are being proposed by today’s progressive movement – Medicare for All, free college education, a guaranteed basic income, etc. — cannot be self-sustained, either individually or collectively strictly within a framework of socialism. They all require a system of market-based transactions that occur “off the island.”  That is because real wealth (that is, wealth that benefits not just the those who become wealthy but society more generally) can only be generated through a system of production for exchange, which is the crux of capitalism. This is wealth that is earned by providing, in free exchange for money, the goods and services that are desired by others. Bill Gates or Jeff Bezos are examples of people whose efforts have generated real wealth.

This can be contrasted with what might be called zero-sum or negative-sum wealth, that is, wealth generated through coercively transferring money from those in the sea who create real wealth to those who operate on the socialist islands. For example, a commissar of the Medicare for All system may receive a very high salary and become very wealthy. But because this island of socialism cannot generate income itself, the commissar’s income or wealth must come from a coercive transfer from those who have real wealth through production and exchange in the sea of capitalism.

Talking heads like Juan Williams, who point to Medicare or Social Security as (rightly or wrongly) socialist success stories, are actually attesting to capitalism’s ability to support not only itself but those on the islands of socialism who are draining the real wealth that is generated elsewhere. The problem is that, as Margaret Thatcher noted, eventually you run out of other people’s money. The islands cannot expand without the sea shrinking. It is why a society that continuously expands its socialist islands, with new and more ambitious programs, is doomed to failure.

Roy Cordato is Senior Economist and Resident Scholar at the John Locke Foundation. From January 2001 to March 2017, he held the position of Vice President for Research at the Locke Foundation. He also holds the title of Lecturer at… ...

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