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Socialism, Ten Years Later

September 27, 1999

[Appeared in the Wall Street Journal, September 27, 1999]

      Socialist government in France sells off more state-owned companies than did its Conservative predecessor. The British Labor Party, steeped in socialism, wins a general election without ever mentioning the "S" word. And the Chinese Communist Party says "to get rich is glorious."

        What's wrong with this picture? Plenty, if you're a dyed-in-the wool Marxist. But there aren't many of them around anymore, which just goes to show how much the world has changed since the end of World War II. In fact, all of this would have been unthinkable not just 50 years ago but as recently as a decade ago.

       The spectacular collapse of communism proved beyond a doubt what free-market economists like Ludwig von Mises and F.A. Hayek had said many years earlier: that central planning couldn't deliver the goods. Moreover, the overthrow of communism happened to coincide with a process that was well under way in many noncommunist countries: economic liberalization, including privatization of state-owned enterprises, deregulation of industry, and less government interference in the economy.

Reform Moves Left

       Ten or 15 years ago, these kinds of reforms were associated almost exclusively with conservative governments, such as those of Margaret Thatcher in Britain or Ronald Reagan in the U.S. Now, even socialist or left-wing governments have taken steps to free their economies. That even includes countries in the developing world that used to be sympathetic to Moscow or Beijing.

       Result: a resurgence in economic liberalism, in which there's a vibrant market economy, private ownership, property rights and limited government intervention. Free-market thinkers like Hayek and Mises were "liberals" in the classical, European sense of the word. They advocated limits on government power and were incensed that "liberal" came to mean exactly the opposite in the U.S.: an activist government that pushed social spending and redistribution of incomes.

        To be sure, governments still intervene in the economy, especially by imposing social or environmental regulations on business, figuring out new ways to spend tax revenue, or engaging in trade disputes. For example, France plans to mandate a 35-hour workweek. The European Union seeks to "harmonize" some taxes among its member nations, which will mean increases, not reductions. An argument rages in the U.S. Congress over whether to make modest tax cuts or spend budget surpluses to "save" Social Security.

        "Of course politicians are meddlesome. It's in their nature," says Llewellyn H. Rockwell Jr., founder and president of the free-market Mises Institute in Auburn, Ala. "They have a grab bag of dumb ideas they are constantly trying out, from new environmental controls to mandatory trigger locks on guns to new schemes for trade sanctions."

      Some even argue that socialism, far from being dead, survives by reconstituting itself in different forms. "State-run enterprises are now frowned upon, but the ever-expanding volume of regulation -- financial, environmental, health and safety -- serves to empower the state by other means," says John Blundell, general director of the free-market Institute of Economic Affairs in London.

       Even so, wrangling over regulations is a far cry from the titanic intellectual battles that raged earlier this century. That's because the majority of the world's people now live in some kind of market economy -- even in countries with authoritarian governments. "The large debates, such as central planning vs. free markets, are today no longer in play," says Donald J. Boudreaux, president of the Foundation for Economic Education in Irvington-on-Hudson, N.Y.

Steering the Market

       Central planning was a hallmark of communist countries, where just about everything was owned by the state and the state attempted to control all aspects of economic life. Even non-communist countries like Britain and the U.S. attempted some kinds of economic planning. While Western democracies largely had market economies, plenty of politicians and economists advocated far-reaching government intervention.

      Perhaps the most prominent advocate was the British economist John Maynard Keynes. In the 1920s, he favored large-scale public-works programs to eradicate unemployment, an idea later embraced by the Roosevelt administration during the Great Depression of the 1930s. Keynes's greatest contribution to economic thinking was his 1936 book, "The General Theory of Employment, Interest, and Money." He argued that governments could avoid boom-and-bust cycles by varying the levels of spending and taxation.

       Policy makers in many Western countries embraced Keynes's ideas, especially after World War II, when "faith in capitalism and free markets was at an all-time low," in the words of the late economist Gottfried Haberler. But not everyone advocated more government intervention in the economy. Some saw it as the problem rather than the answer. In fact, Hayek was in such despair that he wrote what later became one of the most famous tracts in the history of free-market ideas, "The Road to Serfdom," in 1944. He warned that increasing government intervention in economic and political life could lead to tyranny and that socialism was not compatible with individual freedom.

Taste of Socialism

         Many countries got a taste of socialism after the war. France and Britain, for example, nationalized great swaths of their economies and put extensive welfare systems into place, paid for with increased taxes. The Chinese Communists came to power in 1949 and started building a totalitarian state. Eastern Europe fell under the sway of the Soviet Union and quickly lost its economic and political freedoms. Most of the developing world, with some exceptions in Asia and Latin America, had strongly interventionist governments that nationalized industry and imposed high protective tariffs.

       Yet some countries helped to revive economic liberalism. Take Germany, where free-market economics had been dead for a long time, a victim not only of the Nazis but also of Bismarck, who in the 1880s imposed compulsory social insurance. In 1948, Germany introduced a new currency, exchanging 10 old Reichsmarks for one new Deutsche mark. Price controls were lifted, shortages ceased and economic confidence returned. Mostly due to the efforts of one man, Ludwig Erhard, the German economic miracle was born.

       While many European countries were increasing public spending, raising taxes and enacting social legislation at home, they were also taking steps in the international field to promote prosperity. David Henderson, the former head of the economics department at the Organization for Economic Cooperation and Development in Paris, cites liberalized cross-border transactions beginning in 1947.

         In his book "The Changing Fortunes of Economic Liberalism," Mr. Henderson says Europe largely dismantled import quotas in the late 1940s and 1950s. Moreover, European countries made "dramatic advances" toward free trade and introduced convertibility of their currencies. In Asia, Hong Kong, Singapore and Malaysia maintained open economies, helping to spur rapid economic growth.

      These kinds of measures on the international front helped many nations to prosper. But the economic climate deteriorated in the early 1970s as inflation surged and growth faltered throughout the industrialized world. Instead of relying on market forces in these years of "stagflation," governments tried a variety of interventionist measures, including wage and price controls, company bailouts and "voluntary" export restraints.

Turning to Marlets

      Through most of the 1970s, economic liberalism suffered one setback after another. But things began to change late in the decade as many governments concluded that economic intervention was counterproductive. Mr. Henderson puts the turning point at 1978, when the industrialized countries agreed to free energy prices, and the U.S. embarked on wide-ranging airline deregulation. In addition, China under paramount leader Deng Xiaoping started to experiment with open markets. In 1979, Britain elected Mrs. Thatcher's Conservative Party, which abolished exchange controls, rolled back the privileges and began an ambitious program of privatizing state-owned companies. The following year brought the "Reagan Revolution," which ushered in personal and corporate tax cuts. And for the first time in many decades, an American president was openly scornful of government and urged restrictions on its power.

         Many other nations were inspired to deregulate industry and to sell off plodding, loss-making state-owned companies. For instance, France's Socialist government has become one of the leaders of privatization -- even though a previous Socialist government nationalized banks and other enterprises in 1981.

      The collapse of communism 10 years ago removed a strong anti-liberal force from the world scene. Not all countries of the former Soviet empire have fully embraced free-market economics, but most are taking steps in that direction. Moreover, the utter failure of central planning makes it unlikely that anyone anywhere will try it again anytime soon.

      A victory for economic liberalism? Perhaps, at least in the battle of ideas. Free-marketers are savoring the advances of the last two decades. They've got hundreds of think tanks and Internet sites promoting free-market ideas. Books like Ayn Rand's "Atlas Shrugged" and Carl Snyder's "Capitalism the Creator" have achieved cult status.

      "Fifty years ago, 10 big shots could get together in a room and redesign the world economy and political system," says the Mises Institute's Mr. Rockwell. "They were busy carving up spheres of influence. They were planning production, prices and wages. Today, all this is unthinkable."

* * * * *

       Mr. Leger is deputy chief of The Wall Street Journal's London bureau.

THE CASE FOR CAPITALISM

A selection of influential books by 20th-century free-market thinkers

F.A. Hayek

The Road to Serfdom (1944)
The Constitution of Liberty (1960)
The Fatal Conceit: The Errors of Socialism (1988)

Henry Hazlitt

Economics in One Lesson (1946)
The Failure of the "New Economics" (1959)

Ludwig von Mises

Socialism (English edition, 1936)
Human Action (1949)
Liberalism (English edition, 1962)
The Anti-Capitalistic Mentality (1956)

Ayn Rand

The Fountainhead (1943)
Atlas Shrugged (1957)
Capitalism: The Unknown Ideal (1966)

Carl Snyder

Capitalism the Creator (1940)

c) 1999 The Wall Street Journal


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