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Blog // Thoughts
October 31, 2008

Socialism, Reality And Lessons From A Bad Economist

Economics was my favourite subject in senior high school and the was the focus of my early university studies. Growing up in Australia I recall that a great many political debates were really debates about economic policy. So, it’s not surprising then that every few years my intellectual interest swings back to economic issues. And, […]

Economics was my favourite subject in senior high school and the was the focus of my early university studies. Growing up in Australia I recall that a great many political debates were really debates about economic policy. So, it’s not surprising then that every few years my intellectual interest swings back to economic issues.

And, this current US presidential race has been a fascinating one in terms of economics; not just because of the financial crisis, but also because of what is best described as the plasticity of language. There’s no better example than the repeated and facile accusations that Obama is a socialist and/or Marxist.

A lot of this rubbish revolves around the claim that any kind if wealth redistribution via taxes, or for that matter, taxes that place a greater burden on the wealthy are a water-tight proof of socialist ideology. Well, let’s consider this quote,

“It is not every unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”

Who said that? Marx, or Lenin or Castro? No, it was Adam Smith in The Wealth of Nations, the first major exposition of modern capitalism and a tour de force argument in favour of free markets, division of labour and the value of self-interest. In a way it is all too easy to point out the shallow mendacity of the ideologues, blowhards and talking=point reciters who have been accusing Obama of socialism (or creating the oh-so-un-clever “Cuba got change in 1959” bumper stickers, or other urban myths). The more challenging and important issue is to try to understand what taxes are really meant to do in a capitalist society and where economic policy has let us down in the last decade.

The fundamental economic problem, at least from the perspective of government is what economists call the problem of collective use, or what Smith referred to as public expense. This is all the stuff we need to make our society function but that we cannot afford to fund as individuals – roads, ports, sewage etc. By gathering together resources we are able to address these collective use problems and extend our ability to create personal wealth through these things we hold in common wealth.

Of course, this raises a number of problems – how do we build these things, how do we fund them, how do we distribute the burden for funding them and at more basic level, what do we classify as a collective use problem. If only a handful of people in a society need a thing, is it really a collective problem? Is it a collective problem if there is already a similar, but lower quality thing in place. Should we expect the same quality as we would in privately owned amenities? Should the solutions to collective use problems ever generate private profits?

Politics intersects with economics in the ways we answer these problems. Mostly in terms of what we consider viable and important and to a lesser extent in the ideas and philosophies that organise and systematise approaches to these problems. Even within a strongly capitalistic society, the collective use problem remains, the need to tax as a route to solving those problems is a constant and the benefits of common wealth are still available.

Consider the US’s 20th century economic history? How would the car industry have grown without massive governmental involvement in building a huge road infrastructure (or support of oil industries?). How would the computer industry have developed without an education system feeding a steady stream of young people into the technology sector with high skills in maths and sciences? What about the aircraft industry with sustained investment in airports and air-traffic control (not to mention military spending?)

All this is “wealth redistribution.” Not in some vague Robin Hood sense, but in a way that economists love, from lesser to greater efficiency (and efficiency again is a key issue when we consider the thing that should be run privately, or the point at which government agencies should be privatised). We never solve collective use problems by sitting back and saying – let someone pay.

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