Thoughts on Capital for New Socialists
April 24, 2016
by William P. Meyers

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Accumulated Capital v. Consumption under Socialism

Socialism had been on the fringes of political discussions in the U.S. since about the mid-1970s, when the Vietnam War era turmoil settled down. While small groups of devoted socialists (and even communists) continued to function, most discussion of socialism was by people who wanted to get rid of what little there was in the U.S.

The extreme right wing of the Republican Party of the 1970s, though not the mainstream of the party, wanted to end Social Security, Medicare and Medicaid, unemployment insurance, food stamps, welfare payments, public housing, and even the U.S. Postal Service. However, while they sometimes chipped away at these programs, the programs have remained in place.

The Bernie Sanders for President campaign reintroduced the word Socialism into ordinary discussions in the fall of 2015. Candidate Sanders has defended the New Deal and Great Society social programs and called for extensions, including free tuition at public colleges, higher taxes on the rich to make Social Security payments higher, and national health insurance paid through the tax system.

Back in the 1960s and 1970s anyone who studied socialism would have quickly run into many variants. There were the various stripes of totalitarian socialism, aka Communism, in which the State would control most or all property. This State Socialism, as it was sometimes called, had variants often named after early leaders: Leninism, Stalinism, Trotskyism, Maoism, etc.

Another branch of socialism was less authoritarian, Democratic Socialism. But here too one could not assume that all democratic socialists were in even basic agreement. Some were Marxists, others not. Some wanted the state to own just major industries, some were closer to State Socialism. Some were closer to New Deal socialism in that they were more interested in using the state to tax the relatively rich in order to provide services to the working class and poor, rather than actual state ownership of industries.

There was also a branch influenced by anarchism that did not want a powerful state of any kind. This anarchist socialism (the main trend was called anarcho-syndicalism) wanted the workers themselves to own the business organizations they worked for.

There was also, of course, national socialism, which prioritized nations or ethnic groups, but which had been discredited by its association with the Roman Catholic Church and Fascism, and particularly with the German National Socialist Party and Adolf Hitler and the Holocaust.

In Marxist theory capitalism is a stage of social organization following feudalism, and socialism is the stage following capitalism. Clearly the world has not worked out that way.

The crucial ingredient in capitalism is, yes, capital: "wealth, in whatever form, used or capable of being used to create more wealth." There is cultural capital like education and know-how, but here I will treat capital as anything already created in the past by humans that has any ongoing use. Hence a house or a sewage system is as much capital as a factory or a positive account at a bank.

Like socialism, capitalism has a number of variants. Crony capitalism has been much discussed this political season. The ideal of economists is free market capitalism, in which all business activity is done through free markets. Unfortunately even in Karl Marx's day it was evident that the system dynamics of free market capitalism led to business monopolies, which by definition no longer operated by free market mechanisms.

The problems of free market capitalism for the actual human beings who live in such economies became increasingly evident between about 1850 and 1929, and cumulated in the Great Depression. Since that time reasonable people, including the mainstream of the Republican Party until around the year 2000, have sought to regulate free market capitalism. The arguments have been about how much regulation, and what specific regulations, are needed. Only ideologues in denial of the historical and economic facts have argued that we should go back to an entirely unregulated free market capitalism system.

The funny thing about socialism, which even Marx foresaw way back when, is that Socialism works best after a lot of capital has been accumulated. Bernie backers and other New Socialists should think long and hard about this fact and its implications.

Bernie Sanders, to boost socialism and his campaign pledges like universal healthcare and free college, points to nations like Denmark and Sweden. If he had become the Democratic Party nominee (or if Hillary had been less gentle in correcting him), his opponent would point to the low economic status of socialist countries like Cuba and Vietnam.

I don't think either side in such an argument would be objective. Sweden is not a rich country because it is (somewhat) socialist. It can afford some socialism because it was already rich. Vietnam is not poor because it is socialist (really Communist). It is poor because it never went through a period of industrialization because it was a colony exploited by France for the first half of the 20th century and then was bombed almost back to the Stone Age by the United States.

The economic development of Russia, or more properly the former U.S.S.R., can provide some insight into the importance of capital accumulation even to a socialist economy. When Lenin took over in 1917 the Russian Empire was in a state of economic development roughly equivalent to the United States just before the Civil War. There were some factories and some railroads, but most of the population was employed in farming and food processing and distribution. In Marxist theory Russia needed a bourgeois (capitalist) revolution, a democratic/republican form of government, and a period of capital accumulation before it would be ready for a socialist revolution.

Leninism essentially asserted that a socialist dictatorship could accumulate capital just as well as a free market capitalist economy could. For the most part he and his followers, including Stalin, proved he was right in practice. The communists loved nothing so much as building factories. This industrialization process was brutal, approximately as brutal as it had been in the U.S., but it worked. The U.S.S.R. industrialized in the 1920s, then kept growing the economy in the 1930s while the rest of the world endured the Great Depression. That was one reason communism and socialism were popular in the U.S. in the 1930s. Anti-communists have always avoided those economic statistics from the 1930s.

Eventually the Soviet economy ran out of steam, which corresponded largely with the aging out of the first generation of revolutionary socialists. Just as the problems of free-market capitalism were exposed by the Great Depression, the problems of having everything owned and planned by the Government began to appear in the soviet economy of the 1970s and 1980s. The economy lost its dynamism and stagnated. Even so, Russia (after the breakup of the U.S.S.R.) emerged as one of the world's wealthier nations, if not so wealth as the U.S., western Europe, and Japan.

With that background in practical economics, it is time to consider the problem of wealth redistribution in the United States.

Capitalists, by definition, are people who have accumulated capital. That might include anyone with a savings account at a bank, or equity in their home. The usually-derogatory term petite bourgeoisie was used to categorize people with a bit of capital, like a small store owner. And of course anyone in the U.S. with a 401K or pension fund effectively owns some capital. At this point I'll be looking at capital on a larger scale, say the size of a set of factories, of office buildings, chain store corporations, or large financial institutions.

Generally speaking, capital is not used as spending money. Capital can produce profits, which can be spending money. There is some flexibility in any great business organization about what expenses are really necessary to run a business. More such expenses mean less profits. That is why you sometimes hear shareholders (who are capitalists themselves) complain of high CEO pay. Workers may think that the CEO pay would be redirected towards higher wages, but shareholders want higher profits (often paid out as dividends).

It is possible to destroy a capitalist enterprise by making bad management decisions, and it happens all the time. That is a key point I will come back to. Enterprises are also often destroyed by competition and by changing technologies or consumer preferences. As I write both a major coal mining company and a major solar power company are in bankruptcy proceedings. The coal mining company was hit mainly by a switch to a preference for natural gas. The solar power company also had problems competing with natural gas, but mainly was mismanaged. So in addition to capital accumulation we can have capital destruction, and it can be measured on a national or global basis. When capital is destroyed so is the spending money that would have come from it, both the profits that would have gone to the investors, as well as the wages that would have gone to workers, and even the money that would have gone to suppliers.

One common way to destroy capital is when the stockholders start living off the capital rather than the profit. This is pretty common in family-owned firms, so for this example I will use a family owned firm, rather than one with public stockholders. A capitalist dies leaving a firm with $10 million of capital to her four children, all of whom are spendthrifts. The firm's managing CEO reports that it generates $1 million per year, and mom was already crushing the workers and customers as best she could, so that can't be easily increased. But the kids have already run up debts. $250,000 each per year is not going to satisfy them.

There are a couple of ways for individual people to lose their ownership of capital without the physical capital disappearing. In our example one is to just sell the stock. Each kid could sell their stock for $2.5 million, but the firm is still there, its equipment is still there. Typically in a few years the kids have spent all that money. I've seen it happen. It is so typical that rich families often put the capital in a trust so that when parents die the children can only spend the dividends, not sell their rights in the capital. When we talk about socialist management of industry this will be important, so don't ignore it just because you don't expect an inheritance.

Another way to transfer money between capitalists without necessarily destroying the physical capital is the bank loan. In this decade this method has typically been used on Wall Street to allow companies to boost their share prices by buying their own stock, but it is easier to understand in my family example. The manager, under pressure, borrows $5 million from a bank. That way he can give each of our four greedy incompetent children $1.25 million immediately (as a one-time dividend) and still run the company. But now the company has the added expense of the interest on the bank loan, and usually needs to make some payments on the principle as well. Instead of $1 million per year in profit, it only generates $400,000. As soon as the kids run through $1.25 million (easy for rich kids to do), they are down to $100,000 a year, which no rich kid could possibly live on. Repeat until the kids and company are bankrupt.

But the worst case scenario for society is not the transfer of money from one set of brats to another, but the actual destruction of the capital. It could happen like this. The manager was putting $300,000 per year into maintaining the physical capital, call it replacing machine parts as they wear out. He was also putting $200,000 per year to upgrade or replace machines to keep up with competitors. The smartest, most diligent of the brats goes over the books and announces that by charging consumers slightly more, laying off some workers, and cutting all but $100,000 from the repair and upgrade budget, the brats can squeeze out another $600,000 per year from the business, or $150,000 each.

Five years later the customers won't buy the poor quality products at any price and the machines are good for only scrap. The physical capital is destroyed and the brats begin to physically withdraw from their recreational drugs of choice.

Enlarge the scale to a nation. A nation that on the whole accumulates capital will be better off in the future than one that, on the whole, destroys capital. But in the short run people have more to spend the less quickly they accumulate capital.

I already discussed the causes of differences in wealth of both capitalist nations (U.S.A. vs. Haiti) and socialist nations (Russia vs. Vietnam). Now, given what we understand about the importance of capital creation and destruction, regardless of whether a nation has a capitalist, socialist, or mixed economy, let's look at Germany and Greece.

Both Germany and Greece have economies that would be described by American Republican Party thinkers as socialist. In reality they are mixed economies. They have different histories, too, so they are not strictly comparable. But I will use Germany as an example of a culture where capital creation is highly regarded, and Greece as a culture where spending today is more highly regarded.

Assuming you have been paying any attention to global economics since 2008, you should know that Greece, largely through its government, but also through businesses, borrowed large sums of money, much of it from Germany. Germany could lend money because it has a long history of capital accumulation. It still has a vibrant manufacturing sector precisely because it is well-managed and keeps it up-to-date. German manufacturing is still globally competitive. Now, keep in mind that Germany has its spendthrifts and Greece has its business families that accumulate capital over time; we are talking about national averages. The socialist Greek government facilitated spending. It was great for workers for a while. They got nice pensions and, if still working, were promised nice pensions later. They got social services and low rates of taxation. But the economy did not grow its capital base proportionately. When the music stopped, pensions and services had to be cut, unemployment became massive, and taxes had to be raised. The Greek economy is still in serious trouble.

You have likely figured out for yourself by now that: (1) the fundamental economic problem of free market capitalism is that it concentrates so much capital and income in the hands of a few people that it robs workers of buying power, thus leading to recessions and depressions (2) the fundamental economic problem of the various socialist economic arrangements is the tendency to spend too much money, the failure to create new capital, and even the destruction of capital.

That is why the case can be made that mixed systems work best. The U.S. has had a mainly capitalist system, with some regulation and socialist components, since the New Deal. At the end of World War II we had more physical and financial capital than any nation in the world, and we've managed the capital pretty well, all things considered.

I believe the most fundamental question socialists need to answer is not how the income of the nation will be divided, though that is an important question. The fundamental question is: how will capital be managed so that it accumulates at a reasonable rate?

The most common answer, for democratic socialists anyway, is to just let capitalists do their thing, and tax them appropriately. Since the "democratic" in democratic socialists refers to how decisions are made, not who owns the capital, I would call this redistributive socialism. What we have now is in a spectrum. We could redistribute less by, say, eliminating the food stamp program. We could redistribute more by raising taxes on the rich and giving more free things to everyone else, as per the Sanders' laundry list.

The anarchist solution is to transfer the ownership of capital to the workers. Traditionally the workers own their own factories and other workplaces, but it would be possible to give each family a trust containing stock in all the major companies. Again, it seems like a nice idea if you are a worker, but without capital accumulation, and the work and sacrifice that takes, the system would degrade over time.

The other common solution is government ownership of industry. Usually governments are smart enough to appreciate the importance of capital, but there are historic counterexamples besides Greece. My impression is that on the whole government run industries are run about as badly as privately run industries.

Sadly, much of this comes down to human wisdom. Just as, back a few centuries ago, there were well-run monarchies and poorly run monarchies, you can't ignore the human factor. As early political scientists predicted, in many cases a socialist party that came to power gradually morphed into a new ruling class that came to allocate most of the fruits of the economy to itself. Other socialist ruling parties ate into the capital, ruining whole nations (several nations in Africa would serve as examples).

Not only do you need good people with an overview of the economy to keep things running well, you need good decision makers at every level. Right down to the workers. When workers drink up or snort up their paychecks, no system is going to help them much without being pulled down the vortex with them. Thrifty, honest, smart, hard workers are the core of any system, whether capitalist, socialist (of any stripe), or mixed.

This essay has boiled down a very complicated world into a few sentences. There is much room to debate. The individual histories of nations that have tried socialism give us ample room for more detailed studies. Rules that are generally true are often found to be wrong in specific situations in the real world. So advocate for socialism if you like, but be aware of the complexities both in debate and in the potential real world consequences.