15 Apr 2016

Socialism versus Social Democracy: A Question of Economics

Hello readers! I am currently occupied with editing, having taken on an editor. I will be blogging on that in the next few days; in the meanwhile I’ve bumped up this essay on Social Democracy, which has proven quite popular among the readership.

Previously, dear readers, I promised an essay on ‘Socialism versus Social Democracy’. I can now fulfill this promise; the following will detail a number of things—the meaning of the words in modern day parlance, and the economics that distinguish them, being two key examples. I’ll also answer the question: ‘Which is better suited to the modern world?’


First off, let’s clarify what we mean by the terms. Political language is often debased with lazy or ambiguous usage of the political vocabulary; and, even if it were not for this, the nature of politics is such that as ideologies adapt and morph according to different times and circumstances, the language does likewise.

Socialism has been used to mean many different things. The Bolsheviks were often called Socialists; and not entirely inaccurately, either. Certainly, Bolshevik ideology developed as a response to the injustices faced by the Russian population at the time. It fought against the poor wages and conditions experienced both by industrial workers and peasants in the countryside. It fought against the grotesque inequality and extravagant lifestyle of the Tsars.

Of course the complexities of the movement are discussed at length by historians. Some of these questions are very fascinating—why, for example, did such a movement not develop earlier? Serfdom existed in mediaeval Russia up to the 19th century. And there were a great many brutal and extravagant Tsars throughout Russian history; indeed many were much worse than the poor Romanovs.

Anyway, let’s not get derailed by all this. What Socialist ideologies and movements all have in common is that they respond to social injustice; to poverty, inequality, and the heartless and selfish leadership of monarchs, Tsars, and the elite.

Where Socialism and Communism differ—aside from the more utopian pretensions of the latter—is in their response to these injustices. The Soviets tried to bring changes more fundamental than simply improving the life of the workers or tackling systemic inequality; they tried to change the nature of economics and human behaviour at a much deeper level.

Because of this, I prefer to think of the early Soviets as more Communist than Socialist. Though, in fairness, the Soviets did not abolish all markets and often operated under quasi-market systems.

Speaking of markets, Socialists, it must be known, are not necessarily command-economists. Indeed, many Communists are not command-economists; ask many a theoretical Commie and they’ll tell you that a real Communist system doesn’t have a state (or other populus mechanism) controlling and commanding resources. These utopian Commies really believe in the structures of human life that predate agrarianism. They dream of tribal structures, where no one has exclusive ownership of goods, and everything is done collectively—including leadership.

Socialists do tend to favour certain elements of command-economies; the NHS, education, and council housing are good examples of such things. But they don’t take it to an extreme: they don’t want to nationalise every pub in England, for instance!

What really distinguishes a Commie from a Socialist is not their penchance for command economies, but their pragmatism. Ultimately the goal of Socialism is to empower the masses and make life better for everyone; anything that achieves this, goes.

But what, then, is Social Democracy?

One rather trivial point of distinction is that Social Democracy is, by definition, democratic. Socialism can still be Socialism if it is implemented by someone at the top (like Lenin). Of course Socialists are usually very keen on democracy, due in part to the history of the Soviet movement and how the elites came to be as bad as the regime they replaced, and also simply because a lot of Socialists—though not all Socialists—like democracy in principle.

There are two more significant differences. The first lies in the means of achieving the stated goal above. Socialists have a strong belief that, while markets may have their place, ultimately it falls to the institutions of the state (be they national, regional or municipal) to implement many of the key foundations underneath a Socialist state.

Social Democrats used to believe the same thing. In fact I’d say that the earlier 20th century Social Democratic movements—such as those in Germany, Sweden, Austria, and other European nations—were Socialists in all but name. Likely this was in order to avoid being confused with the Soviet movement; which, as I’ve said, was a movement that was both more authoritarian and more extreme than were the Social Democratic parties.

But I believe it is fair to say that some Social Democratic parties have morphed since their inception. In particular this occurred after the 1980s, when the neoliberal project was born.

The Social Democratic parties became… more neoliberal. While they never quite adopted it in full, there is little to doubt to my mind that they were influenced by it; partly this was as a result of the intellectual arguments put forward by the neoliberals, but also because—ironically—the economic system that brought prosperity to Europe for 30 years was the very one that allowed the upper and middle classes to become complacent and foolish.

Anyway: one key difference between Socialism and Social Democracy today is that while the former believes the state inevitably needs a strong role in the economy, the latter believes the state need only correct the flaws inherent in capitalism. This seemingly minor distinction can have major repurcessions for policy.

The second difference is that Social Democracy these days places less emphasis on equality, social justice and democratic control of the economy (ironically!) than does Socialism. Both ideologies believe in the prosperity of the many, but Social Democracy really only cares about the poor if they’re suffering. Not so if they are merely getting the short end of the stick.

To conclude this section, let’s take home the following short definitions.

Socialism: an economic system based on the concept of partial ownership of the means of production (by the state or vassals of the state) in order to deliver prosperity for the many; a good standard of living for the worse off; and income equality to the highest degree feasible.

Social Democracy: an economic system based on the idea that capitalism, with specific backing and input from the state, is the ideal. It focuses on prosperity for the many more than it does on prosperity for the worse off (unless the need is truly dire) or for equality.

Economic Axioms

The key distinguishing axioms between the two can be surmised in the following ways.

Modern Social Democratic parties—like Labour under Blair, but more widely in the Greek and Spanish ‘Socialists,’ and to less degree the SD parties of Scandinavia—accept one very neoliberal diktat:

The market will always produce and allocate goods better than the state, unless very specific social or environmental outcomes are required.

(I think neoliberalism has become more extreme than that, but it is the key assumption that began it.)

The justification for this boils down to the following:

  1. Consumers always know what they want better than the state.
  2. Command economies leave no choice.
  3. Command economies fail, as in the Soviet Union, resulting in chaos.
  4. (Free) markets are self-regulating and tend to equilibrium: over the long term supply equals demand, firms compete and consumers are happy.

Debunking these half-truths and factoids would take considerably more words than I’ve at liberty right now. If you are interested in understanding these problems, I would recommend Debunking Economics by Steve Keen as a good resource. Authors like Thomas Picketty, Hajoon Chang and Yanis Varoufakis have also written numerous compelling critiques.

Social Democrats typically make exceptions for the following:

  1. Negative externalities—e.g. pollution and climate change as harmful spillover effects which cannot be internalised in a market pricing mechanism without state intervention.
  2. Social need; the NHS and benefits for the disabled are good examples.
  3. Health and safety, anti-discrimination laws, etc.

It is these economic axioms which led to ‘marketisation’ of schools—such as with PFI schemes, where private companies built schools and now charge the government vast amounts of money for doing so—along with the privatisation of rail, utilities, the post office and many more; it was also what led to speculative finance and the 2007 crash.

A Socialist takes a rather different view. The NHS is not merely a service provided by the state to give poor people healthcare; it is a more efficient institution than any privately-run market, costing half as much as the private alternative—and frequently getting better outcomes to boot.

Markets often fail to deliver on their lofty neoliberal goals. Uncompetitive oligopolies and monopolies do not compete and shaft the customer; monopolies don’t give you choice; firms try to destroyer-price competing firms; and even competitive markets can be erratic, with badly informed consumers making poor choices (especially where branding is involved).

Socialism’s economic axioms are actually very complex; no serious 21st century Socialist applies such simplistic and dogmatic economics as in the case of the above. Rather:

  1. Every industry has its own specific conditions that leave it better suited to private control, public control, or a mix of the two. No system—public, private, or hybrid—will ever be more than the best compromise. Perfection is unattainable.
  2. Markets are products of entwined human desires; these are often irrational and unpredictable.
  3. Market systems are inherently at disequilibrium.
  4. What makes sense for every individual considered separately often doesn’t make sense for individuals taken as a whole.
  5. Everything you produce in a modern post-agrarian world will, in some way, rely on other people. Be it writers being taught how to write by their teachers; moving companies who rely on the roads built and maintained by (state-hired) construction workers; and all of us who rely on a functioning legal system, military, and political structure to live our daily lives. Nothing is strictly yours; you merely hold ownership of certain goods made at an aggregate level.

The above do of course rely on a number of complex arguments, but I’ll briefly detail a few.

Firstly, consider a supermarket. You, according to standard economic models, are to make a rational, informed decision of what basket of goods will give you the greatest possible utility. You have to know exactly how every good in the supermarket will taste, how long it will last, and how it was made; you then have to ‘utility maximise,’ deciding—from thousands of goods and millions of possibilities—exactly which combination is best for you.

But of course, this is patently absurd. In reality consumers make choices on the basis of branding, (limited) personal experience, aesthetics and product placement. And price, of course. The conclusion, then, is not that the market knows best but that the market probably doesn’t know best and is fair game to criticism.

Another interesting example is how personal wealth impacts spending decisions. A rich person may buy ludicrously expensive and frivolous items—and, guess what? Those choices may be perfectly rational considering their personal circumstances.

A poor person may buy low quality goods that break, and ultimately cost more than the somewhat more expensive, but more reliable goods. Why? Because they struggle to afford the upfront cost.

In such a market utility maximising decisions are not made when the aggregate is considered.

As Steve Keen points out in Debunking Economics, economic models assumed that the distribution of income was socially optimal when making predictions. As we can see, though, this assumption is absurd.

Even more worryingly, it seems that markets—under this assumption—would tend against the most optimal allocation of resources, more or less by definition. This is because the purchasing decisions made by consumers changes the distribution of income; the distribution of income changes consumer decisions; and so a vicious cycle is born.

I’m a bit sceptical of this line of argument, but now is not the time to go into it.

Instead I’ll simply say this: Social Democracy and Socialism clearly do have good intentions. They want to make life better for people. The problem, then, boils down to economics.

Which is Better in the Modern World?

I suspect you know what my answer to this is going to be. Socialism—of course. Social Democracy in the 21st century has become no more than ‘welfare capitalism’; a less cruel version of free market Conservative ideology, but ultimately still hobbled by the same bad economics.

I will caution my answer with some caveats. Firstly, some aspects of how markets function are still hotly debated and not well established. Secondly, some Socialists do have a tendency to be overly optimistic with regards to the limitations of Socialism (or indeed any system). Finally, current-day politics is a minefield for Socialist thinking: while numerous people find it agreeable and electable, the economics of the right, and the scapegoating populism of the anti-immigrant parties (I’ll refrain from calling them Conservative or neoliberal parties since they’re more complex that than) can prove to be substantial obstacles.

Nonetheless, I wouldn’t want to be on the wrong side of history. 2008 taught us that markets can and do fail catastrophically. It is a lesson we’d do well to heed.

This article was recently corrected; previously, it stated that PFI schemes were about NHS hospitals being run by private companies. This is not in fact correct, as the revised article makes clear. Thanks to Roger Manvell for spotting it.

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