Monday, February 28, 2011

Elements of socialism part of free enterprise economy

Vijay K. Mathur

Published in Standard-Examiner, February 28, 2011, Ogden, Utah

We hear a lot of negative talk about socialism from Utah legislators and other conservative groups like the Tea Party Express. However when it comes to their actions and/or proposals for legislation, they forget that their agendas can also be deemed socialistic.
Let me first explain socialism. In socialism the government controls means and quantities of production, as opposed to communism where, in addition to production, government also determines quantities of consumption. Just like the U.S. economy, Utah is a mixed economy where private markets, by and large, function in most private goods (a generic term which includes services as well), but the government plays a significant role in the provision of public goods and in other areas. For example, it fosters competition in markets, regulates damage and promotes beneficial spillover effects.
Private goods are those goods in which consumption primarily benefits the consumers who pay for those goods (no externality of benefits in consumption). But public goods, if provided in the market by some, benefit all, even those who do not pay for them (externality of benefits in consumption); hence no one will have the incentive to provide those goods. Therefore, economic efficiency requires that public goods be provided collectively (by government) using taxes to pay for them. That is not socialism, because the price system in markets fails to allocate resources and output. National defense and environmental quality are examples of public goods.
Even the 19th century intellectual and a classical British economist John Stuart Mill, the greatest defender of free markets, liberty, property rights and a severe critic of socialist thought, recognized the important role of government. Robert Ekelund, Jr. and Robert Hebert, in their book on the history of economic thought, state that Mill considered administration of justice, establishment and enforcement of property rights including environmental protection, protection of interests of minors and incompetents and provision of public goods like roads, canals, dams and other infrastructure projects as necessary functions of government. Mill also favored equal distribution of wealth (not income). In his view people are entitled to the income they earn from their own labor, but wealth is not an "end of itself."
Even Andrew Carnegie, according to David Nasaw in his book on Carnegie, an ardent supporter of capitalism, believed in and practiced wealth redistribution. Warren Buffet, Bill Gates and many others are also following the footsteps of Andrew Carnegie. Perhaps lawmakers, working on estate taxes, should read "Gospel of Wealth II," an article by Andrew Carnegie published in 1906 in North American Review.
In modern times, as Ekelund and Herbert state, "Every capitalist economy today possesses some socialist elements or institutions and vice versa." In fact we even have some programs that do not meet pure free enterprise test. For example, subsidies to ranchers, farmers, oil and gas producers, as well as many other spending and tax incentive programs do not meet the pure free market test, but we have them, supposedly, for the general welfare of the people. In fact, Article I, Section 8 of the Constitution even recognizes the role of government in promoting general welfare of the people.
In Utah, legislators are proposing legislations to control curriculum, giving control of public schools and higher education to the governor, to teach that the U.S. is a constitutional republic and not a pure democracy, and to eliminate tenure at public universities. Are these examples of socialism? In one sense such legislations do interfere with freedom of thought of educators and organizations, which Mills strongly defended. The irony is that the same politicians and conservative groups cry socialism when the federal government passes regulations that the state has to comply with, while ignoring socialistic leanings of state regulations.
Appropriate rules and regulations are a significant part of the free enterprise system. Food safety regulations benefit both producers and consumers, drug regulations are essential part of markets in pharmaceutical products, patent laws and enforcement protect innovations and hence businesses, financial regulations protect financial industry and consumers from fraud, environmental regulations protect people and businesses from health hazards and environmental damage. There are a host of other regulations that are essential for smooth operation of markets. Bloomberg Government Insider, Winter 2011, reports, "In a Bloomberg poll in December, that found 70 percent said government regulation is needed 'in most cases to protect public interest'..." But surprisingly 53 percent "of the respondents agreed that 'most American businesses' can not be trusted to act in public interest."
It seems that many media pundits, political leaders, bloggers, and media talk show hosts misguide the people when they label federal and state programs as products of socialistic agenda without understanding socialist thought and intent of regulations and laws in a mixed economy. Perhaps they need to be educated in the workings of the market economy, its limitations and the role of government.

Mathur is former chairman of the economics department and professor emeritus of economics at Cleveland State University, Cleveland, Ohio. He also posts original blogs for the Standard-Examiner at .

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