These 3 Countries
Tried Socialism. Here’s What Happened, by Lee Edwards, 10/16/19.
The researchers at The Heritage Foundation have put together a guide to help
you and our fellow Americans better understand the 9 Ways That Socialism Will Morally Bankrupt
America.
Socialists are fond of saying that
socialism has never failed because it has never been tried. But in truth,
socialism has failed in every country in which it has been tried, from the
Soviet Union beginning a century ago to three modern countries that tried but
ultimately rejected socialism—Israel, India, and the United Kingdom.
While there were major political
differences between the totalitarian rule of the Soviets and the democratic
politics of Israel, India, and the U.K., all three of the latter countries
adhered to socialist principles, nationalizing their major industries and
placing economic decision-making in the hands of the government.
The Soviet failure has been well
documented by historians. In 1985, General Secretary Mikhail Gorbachev took
command of a bankrupt disintegrating empire. After 70 years of Marxism, Soviet
farms were unable to feed the people, factories failed to meet their quotas,
people lined up for blocks in Moscow and other cities to buy bread and other
necessities, and a war in Afghanistan dragged on with no end in sight of the
body bags of young Soviet soldiers.
The economies of the Communist nations
behind the Iron Curtain were similarly enfeebled because they functioned in
large measure as colonies of the Soviet Union.
The demand for socialism is on the rise from
young Americans today. But is socialism even morally sound?
With no incentives to compete or modernize, the industrial
sector of Eastern and Central Europe became a monument to bureaucratic
inefficiency and waste, a “museum of the early industrial age.” As The New
York Times pointed out at the time, 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, socialism still beguiled
leading intellectuals and politicians of the West. They could not resist its
siren song, of a world without strife because it was a world without private
property. They were convinced that a bureaucracy could make more-informed
decisions about the welfare of a people than the people themselves could. They
believed, with John Maynard Keynes, that “the state is wise and the market is
stupid.”
Israel, India, and the United Kingdom
all adopted socialism as an economic model following World War II. The preamble
to India’s constitution, for example, begins, “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
of the left who sought and built a socialist society. As soon as the guns of
World War II fell silent, 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 gross domestic product 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 increasing population 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 observed, “the problem with socialism is that you eventually run out
of other people’s money.”
1. Israel - Israel is unique, the only nation where socialism was successful—for a while. The original settlers, according to Israeli professor Avi Kay, “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 penury and prejudice, they sought an egalitarian,
labor-oriented socialist society. The initial, homogeneous population of less
than 1 million drew up centralized plans to convert the desert into green pastures
and build efficient state-run companies.
Most early settlers, American Enterprise
Institute scholar Joseph Light pointed out, worked either on collective farms
called kibbutzim or in state-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 the founding of Israel 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. Then-future Nobel Prize
winner Milton Friedman urged Israeli policymakers to “set your people free” and
liberalize the economy and embrace the free market. Pictured: Friedman in 1986.
Israel’s economic performance seemed to
confirm Keynes’ judgment. 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 committed to a 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 was accompanied by 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
traditional socialist arrangements. Leading the way for the free market was the
future Nobel Prize winner 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. The Likud took as one of its coalition partners the Liberal party.
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 1978-79 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.
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 nonexistent growth and rejected the Histadrut’s policy
of resistance. Still, the Israeli government hesitated, unwilling to spend
political capital on economic reform.
An exasperated Shultz 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 just 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 featherbedding, 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.
However, political parties are agreed
that there is no turning back to the economic policies of the early years—the
debate is about the rate of further market reform. “The world’s most successful
experiment in socialism,” Light wrote, “appears to have resolutely embraced
capitalism.”
2. India - Acceptance of socialism was strong in India long before independence, spurred by widespread resentment against British colonialism and the land-owning princely class (the zamindars) and by the efforts of the Communist Party of India, established in 1921.
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; the top
personal income tax rate hit a stifling 97.75%.
Jawaharlal
Nehru adopted socialism as the ruling ideology when he became India’s first
prime minister after independence in 1947. Pictured: Nehru with Mahatma Gandhi
in 1946. (Photo: Underwood Archives/Getty Images)
Some 14 public banks were nationalized
in 1969; six more banks were taken over by the government in 1980. Driven by
the principle of “self-reliance,” almost anything that could be produced
domestically could not be imported regardless of the cost. It was the “zenith”
of Indian socialism, which still failed to satisfy the basic needs of an ever-expanding
population. In 1977-78, more than half of India was living below the poverty
line.
At the same time, notes Indian-American
economist Arvind Panagariya, a series of external shocks shook the country,
including a war with Pakistan in 1965, which came on the heels of a war with
China in 1962; another war with Pakistan in 1971; consecutive droughts in
1971-72 and 1972-73, and the oil price crisis of October 1973, which
contributed to a 40% deterioration in India’s foreign trade.
Economic performance from 1965 to 1981
was worse than 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 adopted, at last, a more
pragmatic, non-ideological course. But as with everything else in India,
economic reform proceeded slowly.
An industrial-policy statement continued
the piecemeal retreat from socialism that had begun 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, who succeeded his mother in 1984 following her
assassination. As a result, GDP growth reached an encouraging 5.5%.
Economics continued to trump ideology
under Rajiv Gandhi, who was free of the socialist baggage carried by an earlier
generation. His successor, P. V. Narasimha Rao, put an end to licensing except
in selected sectors and opened the door to much wider foreign investment.
Finance minister Manmohan Singh cut the tariff rates from an astronomical 355%
to 65%.
According to Arvind Panagariya, “the
government had introduced enough liberalizing measures to set the economy on
the course to sustaining approximately 6 percent growth on a long-term basis.”
In fact, India’s GDP growth reached a peak of over 9% in 2005-08, followed by a
dip to just under 7% in 2017-18.
A major development of the economic
reforms was the remarkable expansion of India’s middle class. The
Economist estimates there are 78 million Indians in the middle-middle and
upper-middle-class category.
By including the lower-middle class,
Indian economists Krishnan and Hatekar figure that India’s new middle class
grew from 304.2 million in 2004-05 to an amazing 606.3 million in 2011-12,
almost one-half of the entire Indian population. The daily income of the three
middle classes are lower middle, $2-$4; middle middle, $4-$6; upper middle,
$6-$10.
While this is extremely low by U.S.
standards, a dollar goes a long way in India, where the annual per capita
income is approximately $6,500. If only half of the lower-middle class makes
the transition to upper-class or middle income, that would mean an Indian
middle class of about 350 million Indians—a mid-point between The
Economist and Krishnan and Hatekar estimates.
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 is 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. Never before in recorded history, Indian economist Gurcharan Das
has noted, 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.
3. 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.
National
Union of Railwaymen officials on picket duty outside Paddington Station,
London, during the rail drivers strike on Oct. 2, 1979. (Photo: Mike
Lawn/Evening Standard/Getty Images)
The major hindrance to economic reform
was 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.
“It’s now or never for [our] economic
policies,” Thatcher declared, “let’s stick to our guns.” The top rate of
personal income tax was cut in half, to 45%, and exchange controls were
abolished.
Privatization was a core 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.
Through privatization that leads to the
widest possible ownership by members of the public, “the state’s power is
reduced and the power of the people enhanced.” Privatization “is at the center
of any program of reclaiming territory for freedom.” She was as good as her
word, selling 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%. As she
recounted in her memoirs, about 1 in 4 Britons owned shares in the market. Over
600,000 jobs had passed from the public to the private sector. The U.K. had
“set a worldwide trend in privatization in countries as different as Czechoslovakia
and New Zealand.”
Turning decisively away from Keynesian
management, the once sick man of Europe now bloomed with robust economic
health. No succeeding British government, Labor or Conservative, has tried to
renationalize what Margaret Thatcher denationalized.
The Lesson of China - How then to explain the impressive economic success of a fourth major economy, China, with annual GDP growth of 8 to 10% from the 1980s almost to the present?
Socialism’s Fatal Conceit - As we have seen from our examination of Israel, India, and the United Kingdom, the economic system that works best for the greatest number is not socialism with its central controls, utopian promises, and OPM (other people’s money), but the free-market system with its emphasis on competition and entrepreneurship. All three countries tried socialism for decades, and all three finally rejected it for the simplest of reasons—it doesn’t work.
Socialism’s Fatal Conceit - As we have seen from our examination of Israel, India, and the United Kingdom, the economic system that works best for the greatest number is not socialism with its central controls, utopian promises, and OPM (other people’s money), but the free-market system with its emphasis on competition and entrepreneurship. All three countries tried socialism for decades, and all three finally rejected it for the simplest of reasons—it doesn’t work.
From 1949 to 1976, under Mao Zedong,
China was an economic basket case, owing to Mao’s personal mismanagement of the
economy. In his avid pursuit of Soviet-style socialism, Mao brought about the
Great Leap Forward of 1958-60, which resulted in the deaths of at least 30
million and perhaps as many as 50 million Chinese, and the Cultural Revolution
of 1966-76, in which an additional 3 million to 5 million died. Mao left China backward and deeply divided.
Mao’s successor, Deng Xiaoping, turned
China in a different direction, seeking to create a mixed economy in which capitalism
and socialism would coexist with the Communist Party monitoring and constantly
adjusting the proper mix.
For the past four decades, China has
been the economic marvel of the world for the following reasons:
It began its economic ascent almost from
ground zero because of Mao’s ideological stubbornness. It has engaged in the
calculated theft of intellectual property, especially from the U.S., for
decades. It has taken full advantage of globalism and its membership in the
World Trade Organization, while ignoring the prescribed rules against such
practices as intellectual property theft. It has used tariffs and other
protectionist measures to gain trade advantages with the U.S. and other
competitors.
It created a middle class of some 300
million people, who enjoy a decent living and at the same time constitute a
sizable domestic market for goods and services. It continues to use the forced
labor of the laogai to make cheap consumer goods that are sold in Walmart and
other Western stores. It allows an enormous black market to exist because Party
members profit from its sales.
It permits foreign investors to buy into
Chinese companies, but the government—i.e., the Communist Party—always retains
a majority interest. It operates an estimated 150,000 state-owned enterprises
that guarantee jobs for tens of millions of Chinese. It depends on the energy
and experience of the most entrepreneurial people in the world, second only to
Americans.
A
poster is displayed in late 1966 in Beijing’s street featuring how to deal with
so-called “enemy of the people” during the Great Proletarian Cultural
Revolution. Since the May 1966 launch of the Cultural Revolution at Beijing
University, the Red Guards were instrumental in Mao’s recapture of power after
the failure of the Great Leap Forward. The movement was directed against “party
leaders in authority taking the capitalist road.” The Red Guards went on
rampage in Chinese towns, terrorizing people, particularly older ones.
In short, the People’s Republic of China
was an economic failure for its first three decades under Mao and Soviet
socialism. It began its climb to become the second-largest economy in the world
when it abandoned socialism in the late 70s and initiated its experiment, which
so far has been successful, in capitalism with Chinese characteristics.
There are clear signs that such success
is no longer automatic. China is experiencing a slowing economy, is ruled by a
dictatorial but divided Communist Party clinging to power, faces widespread
public demands for the guarantee of fundamental human rights, and suffers from
a seriously degraded environment.
History suggests that these problems can
best be solved by a democratic government ruled by the people, not a one-party
authoritarian state that resorts to violence in a crisis, as Beijing did at
Tiananmen Square and is doing in Hong Kong.
Socialism is guilty of a fatal conceit:
It believes its system can make better decisions for the people than they can
for themselves. It is the end product of a 19th-century prophet whose
prophecies (such as the inevitable disappearance of the middle class) have been
proven wrong time and again.
According to the World Bank, more than 1
billion people have lifted themselves out of poverty in the past 25 years, “one
of the greatest human achievements of our time.” Of those billion,
approximately 731 million are Chinese, and 168 million Indians.
The main driver of this uplift from
poverty has been the globalization of the international trading system. China
owes most of its success to the trade freedom offered by the U.S. and the rest
of the world.
The latest edition of Index
of Economic Freedom from
The Heritage Foundation confirms the global trend toward economic freedom:
Economies rated “free” or “mostly free” enjoy incomes that are more than five
times higher than the incomes of “repressed economies” such as those of North
Korea, Venezuela, and Cuba.
Israel’s socialist miracle turned out to
be a mirage, India discarded socialist ideology and chose a more
market-oriented path, and the United Kingdom set an example for the rest of the
world with its emphasis on privatization and deregulation.
Whether we are talking about the actions
of an agricultural country of 1.3 billion, or the nation that sparked the
industrial revolution, or a small Middle Eastern country populated by some of
the smartest people in the world, capitalism tops socialism every time.
With the demand for
socialism at an all-time high among our young people—our future leaders and
decision makers—the experts at Heritage stopped and asked a question that not
many have asked: Is
socialism really morally sound?
Lee Edwards
is the distinguished fellow in conservative thought at The Heritage
Foundation's B. Kenneth Simon Center for Principles and Politics. A leading
historian of American conservatism, Edwards has published 25 books, including
"Just Right: A Life in Pursuit of Liberty."
Norb
Leahy, Dunwoody GA Tea Party Leader
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