The Socialism Trap: An examination of one of history’s most destructive economic theories

Socialism remains, to this day, one of history’s most controversial and problematic ideologies. Romantic and appealing in nature, this economic and political principle, immortalized notably by the works of German philosopher Karl Max has been implemented and attempted in dozens of countries, with the likes of the Soviet Union, Cuba and the People’s Republic of China being perhaps the most famous examples. Even now in the present, despite the catastrophic failures of socialist countries, culminating in death tolls numbering the millions and a negligible success rate, there are still those who continue to tout socialism as an answer to our problems. With the more recent example of Venezuela and its crumbling economy still fresh in the modern world, I sit down with my father, Daniel Lacalle (PhD) respected Spanish economist and author of Life In The Financial Markets, Escape From The Central Bank Trap and The Energy World is Flat: Opportunities from the End of Peak Oil to break down and discuss the fundamentals, dangers and pitfalls of the socialist ideology, and shed light on the danger it presents to a modern economy.

Socialism traces its roots as far back as the French Revolution. Would you mind expanding on this point?

Socialism starts as a doctrine in which groups of intellectuals from the medium levels of education in society adopt the structures of the feudal and regal states with the objective of transforming society from a “top-to-bottom” hierarchy to an enforced equal system. Socialism is not a doctrine which comes from lower or working classes but from a privileged elite that appoints itself as a defender of the poor.

There are those who argue that communism and socialism are different concepts. Would you agree on this?

Communism and socialism are basically the same concepts. We tend to put communism and socialism as different because we ignore the fact that socialism is simply a previous step to communism. And sometimes, particularly in modern society we tend to call socialism a social-capitalist democracy, and that is extremely dangerous, as it whitewashes the totalitarian objectives of the real socialists. The first thing that I contend is that what many people call socialism today is not socialism but simply a capitalist welfare state, thus its extremely dangerous to hold that as an equivalent to socialism, as the totalitarians use that open door to implement massive interventionism and limiting economic and civil liberty.

From an economic standpoint, why does socialism fail as an ideology?

Socialism always fails, because it denies the basic principles of economics, which are the adequate allocation of resources and the importance of a profit based economy in order to achieve prosperity and a sustainable level of welfare.

In your views, what are perhaps the most dangerous elements of socialism?

The most dangerous elements of socialism are to convert the state which in reality is simply the political class, into an almost religious and regal figure. So, in essence socialism destroys the basic elements of individual freedom and with the excuse of an alleged greater good, elevates a political ruling class as governors and deciders of everything. To me, the biggest risk of socialism is that it uses the subterfuge of welfare and appealing to the benign instincts of humans to make societies give up their freedom in exchange for an alleged security that the socialist system simply cannot provide. And once it does not provide that kind of “heavenly welfare” that it promises, the only way in which it survives as a system is by imposing restrictions on freedom and on individuals.

There are many who claim that the Nordic countries are a successful implementation of socialist policy. Would you agree?

It is a complete fallacy and again, it comes from the evidence of the failure of all socialist regimes, that socialists need to find a model that has actually worked. However, point by point, the Nordic countries are global leaders in economic freedom, global leaders in every ranking of economic freedom. That is not just not socialist at all, but socialism is explicitly and actively against economic freedom. Secondly, Nordic countries have high levels of government spending because they have high levels of economic freedom and wealth. So, government spending is not the prime objective. More importantly Nordic countries public spending is not controlled, directed or managed by the state. For example, they have school checks in education-it is the citizen who decides which education be it private or public that he or she wants, but it is not administered or dictated by the government. The same is true for health-care.

Nordic countries are global leaders as well in the privatization of inefficient sectors. They have privatized electricity, mail, water, telecommunications etc. Furthermore, for example, in Sweden, two-thirds of the roads are private. Nordic countries are completely capitalist systems. They are leaders in private banking, leaders in private investment in oil services (for example) so the difference between socialism and the Nordic system is that socialism puts the resources and the economy under the control, management and direction of politicians whilst in Nordic countries civil society directs public spending. Moreover the Nordic countries are global leaders in ease of doing business, according to the world bank. That goes completely against what socialism defends. It is impossible from the perspective of socialist ideology to take away the power of the state and politicians and give it to individuals and the civil society as the Nordic countries do. In fact, Nordic countries did try socialist policies, and the failure of what was called the “Third way” of socialism led to those countries taking extremely dramatic changes and implementing free market policies. What the Nordic countries are, are capitalist societies with a complete defence of private property and a level of public spending that is completely detached from politicians and the government.

Perhaps one of the most striking examples of socialism in recent times is Venezuela. How exactly has socialism contributed to Venezuela’s hardship?

Venezuela was a very rich country with high levels of inequality. The arrival of socialism made the country poor, and with higher levels of inequality. Venezuela did two things that show the failures of socialism in all its unfortunate glory. The Chavez regime entered into a massive process of nationalization of industries, businesses and expropriation of property. Of all the companies that the regime intervened and expropriated, none of them survived. They made the most profitable oil company in the world, PDVSA, the most un-profitable whilst oil prices multiplied by ten! To sink an oil-company whilst oil prices multiply so far (because when Chavez arrived oil was almost at 13 dollars, then went up to 130) to bankrupt a country and an oil company expropriating successful businesses in a period of rising commodity prices shows how massively destructive socialism is. The first thing that they did was expropriation, and the second thing they did was to destroy the meritocracy in the economic system. So, by appointing business and economic leaders from their ideological perspective they brought the entire economy to its knees.

Similarly, there are those who view Cuba as a socialist-communist success. Would you agree?

Well you cannot view Cuba as a communist or socialist success. Its one of the poorest countries in the world, with the lowest minimum wage in the world. And anyone who travels around Cuba can see the monstrous destruction of the economy that the regime has implemented. It is important to show this disaster in the context of two facts. Cuba was and remains a massively subsidized state. It received enormous subsidies from the USSR and afterwards from countries such as Venezuela, China, etc. And, Cuba always blames its failures on the blockade. However, it is, again, a fallacy. Not only is the United States one of the main trading partners of Cuba, but Cuba has bi-lateral exports and agreements with 27 nations of the world.

Cuba calls a political embargo, which has nothing to do with investment or trade, a blockade. And you can almost say jokingly “what an atrocious blockade, if you have twenty-seven trade agreements with major world economies.”

Objectively most famous socialist revolutionary is Karl Marx. What are your views on Marx’s economic philosophy and why would you consider them so harmful?

I think that the first problem is that most people who defend Marx, have not read Das Kapital. The first problem is that Karl Marx who never ran a business nor actually worked has a completely fabricated understanding of the understanding in which capital is allocated in society. The premise of Marxism is wrong. It does not understand that an inherent misallocation in capital due to personal incentives or even monopolistic practices does not survive.

I think that Marx was wrong about the Industrial Revolution, wrong about the incentives and wealth-distribution and generation of the Industrial era, and it all begins because he confused unjust distribution of wealth with private capital allocation when it mostly comes from incentives generated by government. In a free market society, it is impossible for a company or business to implement monopolistic activities and to treat workers and customers unfairly because it would fail as a business. The only way in which monopolistic or oligopolistic activities can happen is through the imposition of them by government. What Marx gets wrong is that the things that improve the situation of workers, consumers and society are mostly competition, profit and an open market. Marx does see that most of the problems of the economy come from government decisions. However, instead of understanding that the solution then is more economic freedom, more competition and a profit based economy, he assumes that ignoring the basic economic principles of wealth creation and economic progress will work by assuming something that goes against the way in which individuals behave, which is erasing competition, remuneration and merit from the economic reality.

One of the most common arguments upheld to justify the disastrous failures of communist states is that they weren’t “truly communist.” Would you view this as a valid defence?

The excuse of something not being “true socialism” or “true communism” is equivalent to me saying that the economic crisis that happen from time to time are due to “untrue capitalism.” The simple idea of purity of an ideology that shows that either it is simply impossible to implement and therefore the same as me discussing “Star Wars,” or that it was actually (as it was) perfectly implemented and therefore didn’t work. So if you say that communism or socialism have never been truly implemented, what you’re saying is that the ideology is impossible to implement. It would be the equivalent of me saying that the reason why star-ships do not explode in the middle of galaxies is because “it has never been tried.”

The reality is that it has been tried over and over again and always failed. And failure means collapse. The difference between socialism, communism and capitalism is that capitalism does not start from the premise of a dogma. Capitalism learns and develops from its mistakes, because it does not need to constantly ignore reality to impose the dogma. In the case of communism and socialism it is the opposite. When it fails, instead of developing, growing and learning from its mistakes, it denies its mistakes, exacerbates them and imposes further restrictions of freedom to the people. You can say very simply that in a capitalist society you can be socialist. In a socialist society you cannot be anything but what the government tells you to be.

There are those who claim that Bernie Sanders would have made a better president than either Trump or Clinton, with Mr Sanders particularly popular for promises such as free college education. What are your views on Mr Sanders?

This links back to the issue of “magic.” In the debates with socialists, you always have to confront reality (such as President Trump and Obama on the reality of what they’ve done) versus “magic” which is “Bernie Sanders would have.” This is a typical trait of socialism which is to use the idea that no-one is ever fully socialist. If Bernie Sanders would have been President, what would have happened is two things:

Socialists would say that all his mistakes were due to him not being a “true socialist” and as President of the most capitalist society in the world, socialists would never acknowledge that a significant proportion of his successes would come from being the leader of a capitalist nation. So in essence, I don’t know what he would do. What I do know is that the policies he wants to implement in the US have failed in Spain, Portugal, Greece, France and the Nordic countries, because none of the big, headline measures that he proposes are what those countries have. 

The title of this interview is, “The Socialism Trap.” Why do you consider that socialism still remains such an attractive ideology, and, what would you offer any advice on avoiding the “Socialist Trap?”

Socialism appeals to the solidarity, to the kindness, to the good-will of everyone, and promotes a dream. And when that dream is implemented, it becomes a nightmare. Because what it promises is impossible. It becomes a nightmare because then the state resorts to totalitarianism, terror and oppression. Socialism cannot be perpetuated without oppression. There has never been a socialist regime that was upheld by increasing freedom.

On avoiding the socialist trap, it is simple. In the same way that you don’t believe in Santa Claus, don’t believe in a “Santa” state. None of them exist.

Finally, before we conclude, are there any economists or works you would strongly recommend on the subject, or simply any economists in general?

Ludwig von Mises has an extremely good book called “Socialism” which explains the dangers of socialism very well. In terms of the typical traps that we hear from socialist politicians, Thomas Sowell’s “Economic Facts and Fallacies” is a fantastic book, and if you read it you will never fall into the socialist trap.