How to Move Beyond Socialism versus Libertarianism

Harnessing markets and government together to serve the common good.

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November 17, 2020

David Sloan Wilson interview with Geoffrey Hodgson

The failure of laissez-faire and centralized planning, revealing the need for the Third Way of entrepreneurship and all other forms of positive social change, should exist at all scales of governance. This conversation with Geoffrey Hodgson focuses on the national scale. Hodgson is a foremost scholar of economics and social thought. His many books include Is Socialism Feasible? Toward an Alternative FutureWrong Turnings: How The Left Got Lost, and How Economics Forgot History: The Problem of Historical Specificity in Social Science. More specifically, he is a leading scholar of evolutionary theory in relation to economics and social thought, including books such as Conceptualizing Capitalism: Institutions, Evolution, FutureFrom Pleasure Machines to Moral Communities: An Evolutionary Economics Without Homo economicus, and Darwin’s Conjecture: The Search for General Principles of Social and Economic Evolution (with Thorbjørn Knudsen).  It would be hard to find a person better qualified to comment on the thesis of the Third Way at the national scale.

David Sloan Wilson: Welcome Geoffrey! We have had many conversations and I look forward to engaging you in this one.

Geoffrey Hodgson: Thank you, David. It is an honor and pleasure to continue our dialogue.

DSW: To begin, please comment on the Vision Statement of this series. How would you like to go about exploring the thesis at the scale of national governance?  

GH:  I am very much in agreement with your Vision Statement.  It chimes perfectly with my view that it is vital to escape the standard binary debates of state versus market or public versus private ownership. Regrettably, these two inflexible ideologies still pervade our politics today. Yet states and markets are mutually interdependent: you cannot have one without the other. The question of public versus private ownership is a pragmatic issue: we should experiment and determine what works best in particular circumstances. The crude state versus market dichotomy is misconceived. It is more vital to create a system of institutions where the freedom to experiment and evaluate outcomes is possible, where cooperation, mutual aid, and social solidarity are encouraged and celebrated, and where human rights and liberties are defended.

DSW: The need to experiment! A hallmark of the Third Way! Based on your books and other readings, I know that governance at the national scale spans the full range from an emphasis on centralized planning, an emphasis on laissez-faire, and a middle ground that at least crudely approximates the Third Way. What are some of the most extreme examples of governments that have relied upon centralized planning?

GH: In my book on Is Socialism Feasible? I show that most of the socialist movement has been biased towards centralized control. This was true of the Fabian socialism of Sidney and Beatrice Webb. It also applied to G. D. H. Cole, an influential intellectual in the British Labour Party, who paid lip-service to “guild socialism” but retained nationalization and centralization.

The goal of centralized control is not confined to Marxists or other communist revolutionaries. Even the Communist Party in the former Yugoslavia, when it tried a brave experiment of so-called “self-management” by workers in their workplaces, could not resist the imposition of central restrictions and controls, which contributed to the ultimate failure of the system. The Chavismo socialist regime in Venezuela has not nationalized the entire economy, but even its partial attempts at centralized control have had devastating political and economic consequences.

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Famous attempts at centralized planning include the Soviet Union, Mao’s China, Castro’s Cuba, and North Korea. In every case the attempt to plan everything from the center proved unworkable. Often, to get over this, their regimes would attempt to devolve decisions or to encourage limited markets and a small private sector. But then the center would fear a loss of their political control through the encouragement of markets and private entrepreneurship. They would react by reinstating central power. In the Soviet Union and China, this cycle was repeated several times over.

DSW: Amazing. If that doesn’t demonstrate the failure of centralized planning, what would? In the Vision Statement, I say that centralized planning doesn’t work because the world is too complex to be planned and executed by any group of experts. In addition, centralized planning suffers from a second flaw by concentrating power in the hands of a few elites, who end up planning for their own benefit rather than the common good. Do these always go together? Are there any examples of regimes that succeeded at trying to benefit the common good and merely failed because the problems were too complex?

GH: I fully agree with your Vision Statement on this. Problems of complexity, with devolved and often tacit knowledge, are paramount, especially in modern economies. These issues are not given sufficient emphasis in either mainstream or heterodox economics. Mainstream economists often over-simplify, because they want to put everything in a mathematical model. Many (but not all) heterodox economists have ignored these problems because ideologically they are socialists who favor planned economies.

All attempts to concentrate political and economic power in the hands of the state, without suitable countervailing power and necessary checks and balances, have had devasting consequences. It is estimated that 65 million people died in China under Mao, 20 million in the Soviet Union, and about two million in Cambodia under Pol Pot.

All these regimes starting with noble intentions, with a will to serve the common good. It seems that leaders such as Lenin, Mao, and Chávez genuinely wanted a fairer and less exploitative society. A few weeks before the 1917 Bolshevik Revolution, Lenin wrote his State and Revolution, where he outlined an egalitarian and ultra-democratic socialist future. This was quickly abandoned when he came to power. This was not simply because Russia was plunged into civil war. It was also because of the devastating attempt to create a centrally planned economy, starting in 1918. Expropriations and forced labor required iron determination and the suppression of all opposition.

Lenin and Mao came to power by military and insurrectionary means. Of necessity, a revolutionary process requires ruthless leaders, lacking qualms about the absence of liberal democracy. By contrast, Hugo Chávez came to power in Venezuela through a democratic vote. Nevertheless, his enthusiasm to help the poor and build socialism led him to remove constitutional checks and balances and to stifle the press. The system slid toward dictatorship, with disastrous results.

Some socialists respond by saying that these regimes were not truly socialist, or that the mistakes were caused by adverse circumstances, or by the wrong people getting into power. Such responses are commonplace but naïve. Just as capitalism has inherent tendencies, or to use Marx’s phrase, “laws of motion”, so too have bureaucracies and centralized regimes. These “laws” inevitably limit democratic accountability and create perverse incentives for bureaucrats and planners. These adverse forces are explored, for example, in the famous book on Political Power by Robert Michels, and in the analysis of socialist regimes by János Kornai.

The “that regime was not truly socialist” response ignores both the historical precedents and the analysis of how concentrations of political and economic power lead to despotism. The respondents list the ills and defects of existing capitalism, including economic inequality, war, and environmental degradation, but ignore the defects of actually existing socialism. They compare the real world of capitalism, with all its failings, with an imaginary socialism where all defects are assumed away. Instead, they should compare real-world capitalism with real-world socialism. Although there have been tyrannies under capitalism and socialism, real-world democratic capitalist regimes have had a much better record on human rights than any real-world socialist system.

In sum, the “laws of motion” of centralized socialist regimes will always lead to despotism and abuses of power. They are an inevitable result of an over-concentration of power in the hands of the state. Socialism by definition involves widespread common ownership. The only viable socialist alternative would be a system of autonomous worker cooperatives. Unlike the system in the former Yugoslavia, this would involve cooperatives with ample legal autonomy, so that they can accumulate their own capital, set their own prices, and buy and sell with others according to contracts. Such cooperative experiments have been tried, as with the kibbutzim in Israel. But they are not popular among many socialists, because of their habitual fear of markets and competition. Yet the only humane and viable socialism requires both.

DSW: Now let’s focus on the other end of the continuum; governments that placed an emphasis on laissez-faire.

GH: Libertarian, free-market solutions, with a minimal state, are just as utopian as socialist central planning. Free-market libertarians over-emphasize the possibility of spontaneously arising arrangements in complex, large-scale economies. By contrast, the history of capitalism shows that the state has often intervened to constitute or facilitate market arrangements. Thousands of years ago, the state was involved in the creation of money and coinage. As I pointed in my Conceptualizing Capitalism, China has the earliest record of a market in around 3500 BC. Even in this ancient case the state granted permission for the market and imposed regulations.

From the end of the seventeenth century, the state has been involved in the development of some of the financial institutions at the core of capitalism, including the creation of national banks and the development of financial markets, including markets for debt, which underpinned greater borrowing to finance industrialization. In the nineteenth century, the state was crucial in the regulation of labor markets and the development of the legal templates for corporate status. These historical examples show that markets need viable and well-governed states, as Adam Smith emphasized in his Wealth of Nations.

For many liberal thinkers, including John Maynard Keynes and Michael Polanyi, the state is also necessary to curb the excesses of a capitalist economy, including the possibility of financial destabilization and the tendency to greater economic inequality.

DSW: Let’s dwell more on Adam Smith. His metaphor of the invisible hand is invoked again and again by libertarians, yet I know that he invoked the metaphor only three times in all of his writings. Who was the real Adam Smith? What would he think of the thesis of my Vision Statement?

GH: Adam Smith was a much more nuanced thinker than some market libertarians presume. In both his Moral Sentiments and The Wealth of Nations, Smith argued that while economies harness the self-interest of agents, they cannot work by self-interest alone. Also, a state is needed, guided by principles of justice, to regulate markets and provide some services where markets are unable or inadequate. The invisible hand metaphor signifies the important idea of spontaneous and undesigned order, but Smith never relied on that alone.

DSW: Let’s also spend some time on two other libertarian heroes, Friedrich Hayek and Milton Friedman. I’ve learned enough about them to know that they developed very different—even diametrically opposed—theoretical edifices. Hayek’s spontaneous order is nothing like Friedman’s rational actor model. Yet, both are usually mentioned in the same breath because they support minimal government oversight of markets. What’s that about and what has been the impact of libertarian policies—in the USA under Reagan, in the UK under Thatcher, and worldwide?

GH: You are right to point out that while Hayek and Friedman supported similar policies, the theoretical underpinnings of their arguments are different. But together they have inspired a global initiative to reduce the economic role of the state, to reduce taxes, and to deregulate the economy. In practice, while Thatcher and Reagan reduced the tax burden for the rich in the UK and US respectively, overall tax levels and state revenues did not decrease. Reagan increased military spending, having the Keynesian effect of stimulating effective demand through state activity. When Thatcher came to power in 1979, she slashed public expenditure, but this led to a severe recession in the early 1980s. The policy was quietly abandoned, and she moved her focus onto privatization instead – a proposal that was not even mentioned in her 1979 manifesto.

Globally these ideas have remained influential. In the 1990s, even more, moderate leaders such as US President Bill Clinton and UK Chancellor Gordon Brown were persuaded by policies of “light touch” regulation of the financial sector. These added to the volatility of financial systems and to the subsequent severity of the Great Financial Crash of 2008. We are still reaping the consequences of these mistakes.

DSW: I’ve read that the nation of Chile became a testing ground for Milton Friedman’s ideas in the 1970’s. How did that go?

GH: In 1973 General Augusto Pinochet seized power and overthrew the democratically elected government of Chile. He imposed a vicious dictatorship that killed and tortured thousands, and he adopted Chicago-style free-market policies. He privatized (mostly inefficient) state enterprises and pushed down wage levels. State support for health, education, and housing were also cut. The distribution of income and wealth became much more unequal. The Chilean rich and large international companies were the principal beneficiaries. Military expenditure was maintained. Pinochet’s political and economic policies were far from successful in terms of human welfare.

To his credit, Friedman stated in 1991 “I have nothing good to say about the political regime that Pinochet imposed. It was a terrible political regime.” Yet Hayek failed to condemn its abuses of human rights. Both visited the regime with the excuse that they were merely giving technical advice. I do not think that “technical advice” and (tacit) moral endorsement cannot be so easily separated, especially when dealing with dictatorships.

DSW: OK! We’ve covered the two policy paradigms that don’t work. Now I’m excited to learn from you about governments that have done the best job approximating the Third Way.

GH: The best examples we have of countries that have harnessed markets and government together to serve the common good are the Nordic countries, namely Denmark, Finland, Iceland, Norway, and Sweden. These are social-democratic mixed economies. They are not socialist in the classical sense: they are driven by financial markets rather than by central plans, although the state does play a strategic and guiding role in the economy. They have systems of law that protect personal and corporate property and help to enforce contracts. They are liberal democracies with checks, balances, and countervailing powers.

Nordic countries show that major egalitarian reforms and substantial welfare states are possible within prosperous capitalist countries that are highly engaged in global markets. Their success undermines the view that the most ideal capitalist economy is one where markets are unrestrained. They also show that humane and egalitarian outcomes are possible within capitalism, while full-blooded socialism has always in practice led to disaster.

The Nordic countries are among the most equal in terms of the distribution of income. They do less well in terms of wealth inequality, but they are more equal in that respect than the US. They have scored very highly in terms of major welfare and development indicators. Norway and Denmark have ranked first and fifth in the United Nations Human Development Index. Denmark, Finland, Norway, and Sweden have been among the six least corrupt countries in the world, according to the corruption perceptions index produced by Transparency International.

In terms of economic output (GDP) per capita (in 2016), Norway is 3 percent above the US, while Iceland, Denmark, Sweden, and Finland are respectively 11, 14, 14, and 25 percent below the US. This is a mixed, but still impressive, performance. Every Nordic country has a GDP per capita level higher than the UK, France, and Japan.

Clearly, the Nordic countries have achieved very high levels of welfare and wellbeing, alongside levels of economic output that compare well with other highly developed countries. These outcomes result from relatively high levels of social solidarity and taxation, alongside a politico-economic system that preserves enterprise, economic autonomy, and aspiration.

DSW: Whenever the Nordic countries are held up as a model of governance, there is a rush to dismiss them as not applicable to America. They are small! They are homogenous! Norway has oil! Granted that there is such a thing as path dependence, do you think that it’s possible for nations such as America and the UK to “get to Denmark”, as the political theorist Francis Fukuyama puts it?

GH: It is important to note that the Nordic countries are small and relatively homogenous – ethnically and culturally. All countries are unique and have their own histories. But this does not mean that social democratic policies cannot work elsewhere. The UK was relatively social-democratic from 1945 to 1980. Strong vestiges of social democracy, including its National Health Service, still survive. The NHS has strong public support, and it is relatively efficient and successful.

We need to learn from the positive achievements of the Nordic countries and adapt their policies to different conditions elsewhere. Although the US is much larger, there have been valuable experiments in healthcare, welfare, housing, public transport, and much else, at the state and city levels.   

In 1945 Michael Polanyi (the brother of the socialist Karl Polanyi) argued that attention had been diverted from the reduction of economic inequality because “progressive thought was misdirected … toward the idea of nationalization and took little interest in reforms under capitalism.”

This problem persists on the left, which is often besotted by public ownership and an imagined future socialist utopia. On a much more practical level, the Nordic countries show that it is possible to substantially improve human welfare within capitalist mixed economies. Nationalization should be a pragmatic rather than an ideological issue. Again, we should experiment and pursue what works best – be it public or private.

DSW: More Third Way thinking. Hooray for experimentation! In addition to comparing different nations to each other, it is possible to compare a single nation at different points in its history. This is what Peter Turchin has done for American history in his book Ages of Discord, which shows how an era of prosperity during the mid-1800s was followed by extreme inequality and social unrest of the Gilded Age, which in turn was followed by the relative equality and prosperity of the New Deal, which in turn was followed by the extreme inequality and social unrest that we are experiencing today. Have similar fluctuations existed in other nations? Can within-nation differences over time be explained in the same way as between-nation differences?

GH: This idea of long-term political fluctuations was also explored by Albert Hirschman in his 1982 book entitled Shifting Involvements: Private Interest and Public Action. I do not believe in regular, inherent long waves, of a political or an economic (Kondratiev) variety. But there is something in the claim that, without due vigilance, periods of stable liberal-democratic government can give rise to complacency, allowing the rise of populist and illiberal forces, including nationalism and versions of socialism.

The current wave of populism in several countries was prompted by a combination of external and internal factors. The Great Financial Crash of 2008 undermined confidence in markets and governments. The subsequent uprisings in Arab countries led to major political destabilizations and waves of migration, which in turn were exploited by intolerant nationalist-populist politicians in the developed West. The evolution of capitalism is always a combination of internal factors with external pressures or shocks. There are new challenges for modern liberal democracies. The rapidly increasing complexity of modern technologies and institutions is a major challenge for any democratic system. It requires levels of public education and common understanding of the physical and social sciences that are sorely lacking, including in the US and UK.

This problem is illustrated by the need to deal with the climate emergency. There are too many unqualified people – even in governments – that deny the scientific arguments. Climate change denial is also popular among free-market libertarians with a distaste for the government interventions that are necessary (along with substantial private measures) to deal with the problem.

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Alarmingly, we are entering a period when we can no longer take the institutions of liberal democracy for granted. We face a renewed struggle to defend their very existence, as well as the new challenges of climate change and techno-institutional complexity. I much appreciate the opportunity to talk to you about all these vital issues.

DSW: Likewise. The need to develop Third Way governance at the national and global scales was never more urgent.  

Originally published at This View of Life Magazine from the Third Way of Entrepreneurship initiative.

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