Socialism in Theory and Reality

Most people use the terms ‘praxis’ or ‘practice’ as antonyms (opposites) for ‘theory’, however, from a point of view of scientific terminology, that would be incorrect. Praxis is the application or implementation, the actual performance of something, which has first just been imagined or studied. So, the correct antonym to ‘practice’ would be ‘imagination’ or ‘fantasy’ or perhaps ‘studying’. In science, the antonym to ‘theory’ is ‘reality’. Scientists develop theories about reality. They then perform experiments or make observations about the part of reality to which their theory refers. They describe what they observe in so-called protocol sentences. If the protocol sentences do not contradict their theory, they consider the theory relatively corroborated, but not verified.

Karl Marx claimed that his projection of ‘Communism” was a scientific theory, which he had verified. However, Marx made a crucial mistake, which typically only a non-scientist would make. His theory was about the future development of mankind, i.e. about future history. He maintained that he had discovered the developmental law that would inevitably lead to a classless communist society, i.e. to a society without social classes and without any private property of the means of production. He ignored the fact that history is a singular event. It happens only once. History does not repeat itself (which is probably, why we do not learn from it). History does not happen twice or several times. Unless we achieve true time travel, we cannot re-do any historic event. Like: “Oh, let’s redo the French Revolution, but this time without all the beheadings.”

If you watch a caterpillar mutate into a butterfly only once, you would not be justified to formulate a scientific law about the development of caterpillars into butterflies. To have a reasonable statistical basis for predicting that caterpillars always develop into butterflies, you must have observed this change several times – at least twice. It is therefore impossible for science to formulate a developmental law for a singular event. Predicting the course of history can therefore never be science, because it is divination. It’s magic thinking, not science. This voodoo thinking is Marxism’s birth defect and it has influenced the minds of Marxists ever since.

According to Marx, Socialism is a pre-stage of Communism. It is a classless society without private ownership of the means of production but with central government. Communism is socialism without government. Today’s socialists like to say that socialism has never failed because it has never been tried. Socialists also claim that those who tried socialism, did it all wrong. They left out democracy and that combining socialism with democracy would ultimately bring about paradise on earth. But socialism has been tried and failed with and without democracy, which in and of itself does not guarantee freedom. There is such a thing as “dictatorship by majority rule”. Remember that the Russian communists called themselves “Bolsheviks”, which means “the majority people”.

Socialism also goes against the most basic instincts of humans, like self-preservation, survival, betterment, and self-determination. People do not easily ignore or act against these instincts unless they are forced to do so. In truth, Socialism has been tried in approximately 40 countries and has failed in every one of them. Here is not the place to analyze all this but let us look into three countries that tried Socialism big time and rejected it because it failed: Israel, India, and the United Kingdom.

There were major differences between the totalitarian rule of the Soviets and the more or less democratic politics of Israel, India, and the U.K., but all three of the latter countries adhered to socialist principles, nationalized their major industries and placed economic decision-making in the hands of the government bureaucrats.

The Soviet failure has been well documented by historians. After 70 years of Marxism, Soviet farms were unable to feed the people, factories failed to produce essential and necessary goods, people had to stand in line a mile in Moscow and other major cities for bread and other basic food.

The economies of the COMECON Block controlled by the Soviet Union were equally inefficient, because they functioned in large measure as colonies of the Soviet Union. With no incentives to compete or modernize, the industrial sector of Eastern and Central Europe became a monument to bureaucratic inefficiency and waste, a technological museum, and a major polluter of the environment. Singapore, an Asian city-state of only 2 million people, exported 20 % more machinery to the West in 1987 than all of Eastern Europe.

And yet, many Western intellectuals and politicians are still convinced that a bureaucracy could make better informed decisions about the welfare of a people than the people themselves. They believe, with John Maynard Keynes, that “the state is wise, and the market is stupid.” Reality appears to teach otherwise.

Israel, India, and the United Kingdom all adopted socialism as an economic model following World War II. The preamble to India’s constitution begins with the words “We, the People of India, having solemnly resolved to constitute India into a Sovereign Socialist Secular Democratic Republic . . .”

The original settlers of Israel were East European Jews with a socialist orientation who sought and built a socialist society. The founder of Israel, Ben Gurion, called himself proudly and publicly “a Bolshevik”.

And immediately after the end of WWII, Britain’s Labour Party nationalized every major industry and acceded to every socialist demand of the unions.

At first, socialism seemed to work in these vastly dissimilar countries. For the first two decades of its existence, Israel’s economy grew at an annual rate of more than 10 %, leading many to term Israel an “economic miracle.” The average GDP growth rate of India from its founding in 1947 into the 1970s was 3.5 %, placing India among the more prosperous developing nations. GDP growth in Great Britain averaged 3 % from 1950 to 1965, along with a 40 % rise in average real wages, enabling Britain to become one of the world’s more affluent countries.

But the government planners were unable to keep pace with population growth and overseas competition. After decades of ever declining economic growth and ever rising unemployment, all three countries abandoned socialism and turned toward capitalism and the free market. The resulting prosperity in Israel, India, and the U.K. vindicated free-marketers who had predicted that socialism would inevitably fail to deliver the goods. As British prime minister Margaret Thatcher correctly observed, “The problem with socialism is that you eventually run out of other people’s money.”

Israel

Israel is the only nation where socialism was relatively successful—for a while. The original settlers sought to create an economy in which market forces were controlled for the benefit of the whole society. Driven by a desire to leave behind their history as victims of prejudice, they sought an egalitarian, labor-oriented socialist society. The initial, homogeneous population of less than 1 million drew up plans to convert the desert into green pastures and build efficient state-run companies.

Most early settlers worked either on collective farms called kibbutzim or in government-guaranteed jobs. The kibbutzim were small farming communities in which people did chores in exchange for food and money to live on and pay their bills. There was no private property, people ate in common, and children under 18 lived together and not with their parents. Any money earned on the outside was given to the kibbutz.

A key player in the socialization of Israel was the Histadrut, the General Federation of Labor, subscribers to the socialist dogma that capital exploits labor and that the only way to prevent such “robbery” is to grant control of the means of production to the state. As it proceeded to unionize almost all workers, the Histadrut gained control of nearly every economic and social sector, including the kibbutzim, housing, transportation, banks, social welfare, health care, and education. The federation’s political instrument was the Labor party, which effectively ruled Israel from its founding in 1948 until 1973 and the Yom Kippur War. In the early years, few asked whether any limits should be placed on the role of government.

Israel’s real GDP growth from 1955 to 1975 was an astounding 12.6 %, putting Israel among the fastest-growing economies in the world, with one of the lowest income differentials. However, this rapid growth was accompanied by rising levels of private consumption and, over time, increasing income inequality. There was an increasing demand for economic reform to free the economy from the government’s centralized decision-making. In 1961, supporters of economic liberalization formed the Liberal party—the first political movement in Israel committed to market economy.

The Israeli “economic miracle” evaporated in 1965 when the country suffered its first major recession. Economic growth halted and unemployment rose threefold from 1965 to 1967. Before the government could attempt corrective action, the Six-Day War erupted, altering Israel’s economic and political map. Paradoxically, the war brought short-lived prosperity to Israel, owing to increased military spending and a major influx of workers from new territories. But government-led economic growth came with accelerating inflation, reaching an annual rate of 17 % from 1971 to 1973.

For the first time, there was a public debate between supporters of free-enterprise economics and supporters of the traditional socialist approach. Leading the way for the free market Milton Friedman, who urged Israeli policymakers to “set your people free” and liberalize the economy. The 1973 war and its economic impacts reinforced the feelings of many Israelis that the Labor party’s socialist model could not handle the country’s growing economic challenges. The 1977 elections resulted in the victory of the Likud party, with its staunch pro-free-market philosophy.

Because socialism’s roots in Israel were so deep, real reform proceeded slowly. Friedman was asked to draw up a program that would move Israel from socialism toward a free-market economy. His major reforms included fewer government programs and reduced government spending; less government intervention in fiscal, trade, and labor policies; income-tax cuts; and privatization. A great debate ensued between government officials seeking reform and special interests that preferred the status quo.

Meanwhile, the government kept borrowing and spending and driving up inflation, which averaged 77 % for the 1978–79 period and reached a peak of 450 % in 1984–85. The government’s share of the economy grew to 76 %, while fiscal deficits and national debt skyrocketed. The government printed money through loans from the Bank of Israel, which contributed to the inflation by churning out money. (Sounds familiar?)

Finally, in January 1983, the bubble burst, and thousands of private citizens and businesses as well as government-run enterprises faced bankruptcy. Israel was close to collapse. At this critical moment, a sympathetic U.S. president, Ronald Reagan, and his secretary of state, George Shultz, came to the rescue. They offered a grant of $1.5 billion if the Israeli government agreed to abandon its socialist rulebook and adopt some form of U.S.-style capitalism, using American-trained professionals.

The Histadrut strongly resisted, unwilling to give up their decades-old power and to concede that socialism was responsible for Israel’s economic troubles. However, the people had had enough of soaring inflation and non-existent growth and rejected Histadrut’s policy of resistance. Still, the Israeli government hesitated, unwilling to engage in economic reform. Finally, Secretary Schulz informed Israel that if it did not begin freeing up the economy, the U.S. would freeze “all monetary transfers” to the country. The threat worked. The Israeli government officially adopted most of the free-market “recommendations.”

The impact of a basic shift in Israeli economic policy was immediate and pervasive. Within a year, inflation tumbled from 450 % to 20 %, a budget deficit of 15 % of GDP shrank to zero, the Histadrut’s economic and business empire disappeared along with its political domination, and the Israeli economy was opened to imports. Of particular importance was the Israeli high-tech revolution, which led to a 600 % increase in investment in Israel, transforming the country into a major player in the high-tech world.

There were troubling side effects such as social gaps, poverty, and concerns about social justice, but the socialist rhetoric and ideology, according to Glenn Frankel, the Washington Post’s correspondent in Israel, “has been permanently retired.” The socialist Labor party endorsed privatization and the divestment of many publicly held companies that had become corrupted by government subsidies, rigid work rules, phony bookkeeping, favoritism, and incompetent managers.

After modest expansion in the 1990s, Israel’s economic growth topped the charts in the developing world in the 2000s, propelled by low inflation and a reduction in the size of government. Unemployment was still too high, and taxes took up 40 % of GDP, much of it caused by the need for a large military. There was also a price to be paid for the transition from Socialism to market Capitalism. The Marxist Deep State agreed to the change only under the condition that they would not lose their jobs and their pensions. However, the political parties agree that there would be no turning back to the economic policies of the early years—the debate is now about the rate of further market reform. The world’s most successful experiment in socialism ended by embracing free-market capitalism.

India

The Communist Party of India was established in 1921 and Jawaharlal Nehru adopted socialism as the ruling ideology when he became India’s first prime minister after independence in 1947.

For nearly 30 years, the Indian government adhered to a socialist line, restricting imports, prohibiting foreign direct investment, protecting small companies from competition from large corporations, and maintaining price controls on a wide variety of industries including steel, cement, fertilizers, petroleum, and pharmaceuticals. Any producer who exceeded their licensed capacity faced possible imprisonment.

As the Indian economist Swaminathan S. Anklesaria Aiyar wrote: “India was perhaps the only country in the world where improving productivity . . . was a crime.” It was a strict application of the socialist principle that the market cannot be trusted to produce good economic or social outcomes. Economic inequality was regulated through taxes— with a top personal income tax rate of 97.75 %.

Economic performance from 1965 to 1981 was worse than at any other time of the post-independence period. As in Israel, economic reform became an imperative. Prime Minister Indira Gandhi had pushed her policy agenda as far to the left as possible. In 1980, the Congress party won a two-thirds majority in the Parliament, and Gandhi finally adopted a more pragmatic, non-ideological course. But economic reform proceeded slowly.

Retreat from socialism began in 1975, allowing companies to expand their capacity, encouraging investment in a wide variety of industries, and introducing private-sector participation in telecommunications. Further liberalization received a major boost under Rajiv Gandhi. As a result, GDP grew by 5.5 %.

Rajiv Gandhi was free of the socialist baggage carried by an earlier generation and he put economy over ideology. His successor Rao put an end to licensing and opened the door to wider foreign investment. Finance minister Manmohan Singh cut the tariff rates from 355 % to 65 %. In In 2005-2008, India’s GDP growth reached a peak of 9 %, followed by a dip to just under 7 % in 2017–18. As a result, India developed a new and strong middle class of approximately 600 million people with an average daily income of $5.

While this is extremely low by U.S. standards, a dollar goes a long way in India, where the average annual per capita income is approximately $6,500. Such an enormous middle class confirms the judgment of the Heritage Foundation, in its Index of Economic Freedom, that India is developing into an “open-market economy.”

In 2017, India overtook Germany to become the fourth-largest auto market in the world, and it was expected to displace Japan in 2020. That same year, India overtook the U.S. in smartphone sales to become the second-largest smartphone market in the world. Usually described as an agricultural country, India is today 31 % urbanized. With an annual GDP of $8.7 trillion, India ranks fifth in the world, behind the United States, China, Japan, and Great Britain. India is also the world’s largest steel manufacturer. Never before in recorded history have so many people risen so quickly.

All this has been accomplished because the political leaders of India sought and adopted a better economic system—free enterprise—after some four decades of fitful progress and unequal prosperity under socialism.

United Kingdom

Widely described as “the sick man of Europe” after three decades of socialism, the United Kingdom underwent an economic revolution in the 1970s and 1980s because of one remarkable person—Prime Minister Margaret Thatcher. Some skeptics doubted that she could pull it off—the U.K. was then a mere shadow of its once prosperous free-market self.

The government owned the largest manufacturing firms in such industries as autos and steel. The top individual tax rates were 83 % on “earned income” and a crushing 98 % on income from capital. Much of the housing was government owned. For decades, the U.K. had grown more slowly than economies on the continent. Great Britain was no longer “great” and seemed headed for the economic dust bin.

A major obstacle for economic reform were the powerful trade unions, which since 1913 had been allowed to spend union funds on political objectives, such as controlling the Labour party. Unions inhibited productivity and discouraged investment. From 1950 to 1975, the U.K.’s investment and productivity record was the worst of any major industrial country. Trade-union demands increased the size of the public sector and public expenditures to 59 % of GDP. Wage and benefits demands by organized labor led to continual strikes that paralyzed transportation and production.

In 1978, Labour prime minister James Callaghan decided that, rather than hold an election, he would “soldier on” to the following spring. It was a fatal mistake. His government encountered the legendary “winter of discontent” in the first months of 1979. Public-sector workers went on strike for weeks. Mountains of uncollected rubbish piled high in cities. Bodies remained unburied and rats ran in the streets.

Newly elected Conservative prime minister Margaret Thatcher, the United Kingdom’s first female PM, took on what she considered her main opponent—the unions. “Flying pickets”, the ground troops of industrial conflict who would travel to support workers on strike at another site, were banned and could no longer blockade factories or ports. Strike ballots were made compulsory. The closed shop, which forced workers to join a union to get a job, was outlawed. Union membership plummeted from a peak of 12 million in the late 1970s to half that by the late 1980s. Thatcher cut the top rate of personal income tax in half, to 45 %, and abolished exchange controls.

Privatization was at the heart of the Thatcher reform. Not only was it fundamental to the improvement of the economy. It was “one of the central means of reversing the corrosive and corrupting effects of socialism,” she wrote in her memoirs. She did as she had said and sold off government-owned airlines, airports, utilities, and phone, steel, and oil companies.

In the 1980s, Britain’s economy grew faster than that of any other European economy except Spain. U.K. business investment grew faster than in any other country except Japan. Productivity grew faster than in any other industrial economy. Some 3.3 million new jobs were created between March 1983 and March 1990. Inflation fell from a high of 27 % in 1975 to 2.5 % in 1986. From 1981 to 1989, under a Conservative government, real GDP growth averaged 3.2 %.

By the time Thatcher left government, the state-owned sector of industry had been reduced by some 60 %. No succeeding British government, Labour or Conservative, has tried to renationalize what Thatcher denationalized.

Yeah, but how about Sweden? Does Sweden not prove that socialism works if combined with democracy? Well, Sweden is a thoroughly capitalist country with strong social laws. If anything, it proves that capitalism and democracy can be combined to form a society that excels both in the economic and in the social sector. But ultimately, it’s a value choice: total equality or equity require a centralized planned economy and are incompatible with individual liberty and a market economy. There is a simple reason for this: in order to eliminate capitalism, you must introduce a centrally controlled command economy run by bureaucrats; in order to plan centrally controlled production successfully, you must also control consumption successfully. And this you can only do with an oppressive authoritarian system.