socialism

I suspect that Mises may have felt somewhat restless after writing Socialism. He had taken a very good stab at describing the socialist economy and its inadequacy for the promotion of human flourishing. By 1940 fascism had arisen in both Italy and in Germany, who Mises considered the clear antagonists of World War II. Further, the communist Soviets were allied with Germany at the time of writing Interventionism.

A communist-fascist alliance may seem strange to idealogues, but it appeared quite natural to Mises that the two distasteful versions of socialism should find cooperation convenient to achieve their own ends. In America, the revelations of German atrocities had yet to arrive and there were many sympathizers with both Russia and Germany. In Britain, union leaders were promoting the idea of socialism as a reward to the public who would be bearing the costs of the war.

Mises thought that the disfunction of socialism was adequate to describe its ultimate failure as an economic system. However, socialist tendencies were pervasive in the liberal market economies among both idealogues and demagogues enough to make the transition to socialism a very real threat. After all, while socialism may not be a stable regime in a dynamic world, certain features within specific market economies may nonetheless tend toward it. What is the cause of such tendencies?

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This semester I am participating in a reading group with undergraduate students that focuses on the history and prospects for capitalism and socialism. Lately we have been reading Joseph Stiglitz, who has long argued that China’s transition to a market economy has gone much better than the former Soviet Union. Gradual transition is superior to “shock therapy,” according to Stiglitz.

There’s an extent to which this is true. If we just look at economic growth rates since, say, 1995, China has clearly outpaced Russia.

It’s hard to know exactly what year to start, since GDP figures for former planned economies immediately after transition aren’t reliable, but the start date is mostly irrelevant for everything I’ll say here (please play around with the start year in the charts to see if I’m cherry-picking years). 1995 seems a reasonable enough year to start for reliable post-transition starting point.

As we see above, while Russia has had a rough doubling of GDP per capita since 1995 (respectable, and yes, it’s all adjusted for inflation!), China has soared almost 600%. Wow! But this is something of a cheat. Despite all that growth, average income in China is still lower than Russia: only about 60% of Russia in 2020. China started from a much lower level, meaning that faster growth, while not guaranteed, is at least easier to achieve. In fact, if we go back to 1978, when China’s first reforms began, GDP per capita in the Former USSR was about 6 times as high as China (that’s according to the latest Maddison Project estimates, which will always be speculative for non-market economies, but are the best we have).

Furthermore, Russia hasn’t really transitioned to a democracy either. China clearly hasn’t, but no one doubts that. But despite having the outward symbols of democracy (elections, a legislature, etc.), Russia still scores low on most indexes of democracy and civil liberties. For example, Freedom House scores them at 19/100, a little better than China (9/100), but nothing like Western Europe.

So, did the quick transition to market economies fail? Not so fast. While it did fail in Russia, in most of Eastern Europe and the eastern part of the former USSR it seems to have been a major success. Take a look at this chart, which shows the former Soviet Republics in and near Europe (I exclude Central Asian FSRs).