Socialism is worse than capitalism - you want a welfare state

The rise to prominence of Jeremy Corbyn and Bernie Sanders has seen a return of ‘socialism’ to the vernacular. The political movements behind these two men have frequently sought to associate popular welfare policies, notably universal health care, with socialism. Both of them seem to be suffering from a degree of conceptual confusion between socialism and the modern welfare state.

This is ironic because it is precisely the socialist as opposed to welfarist elements of their respective platforms, like rent control in Corbyn’s case and trade restrictions in Sander’s case, that are unpopular. A second irony, one that is not lost on left-leaning economists, is that free markets, the antithesis of socialism, are necessary for providing the funding for a modern welfare state.

What is the distinction between socialism and the modern welfare state? One way to think about it is in terms of market intervention vs. post- and pre-market intervention. Market interventions are those that distort prices and inhibit their ability to communicate the opportunity cost of a good. A pertinent example is rent control.

The market clearing price ensures that homes are built until the amount renters are willing to pay equals the costs associated with building dwellings. If the market price is distorted so that it is cheaper than the market clearing rate, then there will be excess demand for housing but suppliers will be unwilling to meet it because they cannot cover their costs. The end result is
a huge short fall in housing—not exactly a socially desirable outcome.

Gunnar Myrdal, a Nobel laureate in economics and an influential architect of the Swedish Labour Party’s welfare state, once quipped that: ‘in many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing’.

A post- or pre- market intervention lets the market run to ensure the efficient allocation of scarce resources, but takes action at either end of that process to protect people from the ravages of the market. An archetypal example is theDanish flexicurity system.

The Danish labour market is relatively unregulated. In particular, you can hire and fire workers easily. This reduces the risk employers face when taking on labour, which encourages them to make investments, notably in emerging products and business expansion, which creates jobs.

This encourages an environment of Schumpetarian dynamism or ‘creative destruction’. As obsolete industries become unprofitable they can easily lay off workers and downsized gradually until they close completely. Meanwhile, new firms in new sectors, which are almost invariably more productive than old sectors, can pick up the newly released labour.

Schumpetarian dynamism entrenches a fast and efficient allocation of resources to their most productive use. This is the ‘flexi’ part of the system. The ‘security’ is where the welfare state comes in. The Danes recognise that an unregulated labour market gives people very little job security. To correct this social harm, the state pays almost replacement wages to recently laid-off workers while they find new jobs, and also provides job search and education services.

The flexicurity system combines the efficiency of free markets to increase the size of the economic pie and the effectiveness of the state transfer apparatus to achieve the humanitarian goals of left-wing morality. This is typical of modern welfare states.

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http://quillette.com/2016/01/21/socialism-is-worse-than-capitalism-you-want-a-welfare-state/