“The problem with socialism is that you eventually run out of other people’s money.”
Famously spoken by legendary 1980’s British Prime Minister, Margaret Thatcher, these words continue to ring true today.
One would expect a few decades (or centuries) of history to be a fairly good learning aid, but alas, history persists to repeat..
This week’s South African mid-term budget speech by Finance Minister, Tito Mboweni (sha sha) once again illustrated the veracity of the famous quote.
The populace finds the promise of “free stuff” – whether it be education, health care, money, or BMW’s– quite appealing. Despite history’s gruesome evidence, the populace remains oblivious to the true cost of the “free stuff” – the destruction of their economic future, their children’s future and their freedom.
The classic definition of socialism is the ownership of the means of production by the State. Modern socialism has, however, evolved beyond such narrow means to achieve the ostensible end of “income equality”.
Socialists can deploy a strategy of overtly nationalising private property; or more effectively and insidiously, deploy a strategy of destroying free enterprise by way of taxes, regulation, inflation, capital controls and other forced interventions in the natural functioning of the free market; or both.
Socialism & Economic Growth
As we’ve learned in previous articles, economic growth is achieved by the process of 1) saving, then 2) investing those savings, and 3) producing real goods and services from the invested savings.
The real goods and services are then available to be consumed and enjoyed by everyone, raising the general standard of living for all in society.
In other words, we know that economic growth happens when you allow the free market to save and produce.
Now, once you understand this process, it is abundantly clear that it is impossible for the State itself to create economic growth. The State can only expropriate the savings and production of others; it cannot save and produce itself as it does not own anything.
In the case where the State does, in fact, own something (like when it again expropriates private property for itself), it is not subject to the natural market forces of competition and bankruptcy that drive limited resources to its most valued uses. It is only private enterprise that is subject to these natural market forces.
In the private sector, entrepreneurs take risks to combine limited resources to create value for the consumer and society. Those entrepreneurs that do so effectively are rewarded with profits and, in turn, more capital to multiply for the benefit of society. Those that don’t, are punished with losses, diminishing capital and eventually bankruptcy.
The State, of course, cannot go bankrupt; it has the taxpayer, its “printing presses” and a monopoly on violence to keep it going. As such, natural market forces are not applicable to the State and economic value is destroyed at will – the opposite of economic growth.
And then there is also the problem of calculation. The prices we see in the economy are not simply arbitrary numbers – but rather, are signals that convey key information about the scarcity and wants for the limited resources in society.
Under socialism, the State’s intervention (by whatever means) in the economy forcibly distorts these vital pricing signals that are normally the result of millions of daily voluntary economic interactions between consumers and producers.
As soon as these pricing signals are distorted (akin to radio signals being distorted by noise interference), there is no way to understand the scarcity of resources and wants of consumers in society. Resources are then channeled inaccurately, and are subsequently misallocated and malinvested, setting the stage for shortages, oversupplies, recession and economic collapse.
It is truly a wonder that people continue to look to the State for the creation of economic prosperity. In reality, there is only one thing the State can do to aid economic growth – to get out of the way of private enterprise!
Household Finance 101 and Budget Speeches
We know that socialism is politically popular – people like the notion of free stuff, and will likely continue to vote for those promising them free stuff.
But how does socialism affect a national budget?
You do not require a PhD in economics or an Honorary Doctorate Degree to understand that if you spend more than you earn, you’re heading for some trouble – this is something that’s intuitively understood by households across the world.
Well, despite what the pundits may want you
to believe, the intuitive answer is the correct one..
Remember all the free stuff that we were promised? Well, it turns out that free stuff isn’t actually free. Somebody has to pay for it.
So, when you sum all the promises of free stuff made during the election campaigns, the total price tag gets up there. Then, add a few zombie State owned companies to the mix, and you’ve got quite the bill to pay.
… which, of course, is totally fine, if you can pay for it.
We’ve established that the State doesn’t have any productive capacity of its own, and even if it does, it cannot be especially productive.
The State’s primary mechanism of revenue generation is, therefore, one of expropriation – of the savings and production (read: money) of private citizens and enterprise.
The problem comes in when the State makes it really hard for those private citizens and enterprise to save and produce, with its taxes, regulations, inflation and so forth (read: socialism).
The erosion of the capital base through socialistic policies means that the private sector no longer produces at the capacity required to keep up with the expropriation and transfer of wealth by the State.
Household Finance 101 will tell you you’re heading for an uncomfortable intersection.
And the State’s solution will come out of the Socialist Playbook –debt; some more debt; more taxes and higher taxes; regulation; and inflation.. a whole lot more inflation!
So, in the wake of a budget speech, self-serving pundits will always implore the populace to have hope, confidence and to work together to make for an economic recovery.
The harsh reality is that this is political doublespeak and false exhortations will do exactly nothing to change the mechanics of how economies actually grow and why they fail.
The only genius of socialism is a tragic one in that it is the only system that convinces those whom it will harm the most into fighting ferociously, loudly and diligently for their own subjugation.
Mr Mboweni may try to rearrange the deck chairs on the Titanic, but the tragic reality is that unless real, structural changes are made to how the State treats private enterprise and property (in all forms) in South Africa, the destination of this ship has already been proven by history.
We need ultra-low taxes; zero capital controls; sound money; mass deregulation; and privatization. Get that State out of the production and money game. Allow people to freely produce. That, or bust.
Finance ministers all eventually run out of other people’s money. The real tragedy though is the enormous cost to human life, liberty and the pursuit of happiness.