The Modern Application of Economic Socialism

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Abstract

This paper focuses on the modern application of economic socialism in Western economies. It describes specific actions taken by Western governments, with the main focus on US efforts to minimize the effect of the current economic recession which have many underlying characteristics of state socialism.

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In simple terms, State Socialism is used, in its widest connotation, to mean an economic system by which the control and /or ownership of the means of economic production vests with the State and not in the hands of individuals or enterprises. Advocates of state socialism are vociferous in their assertions that public wealth in the hands of individuals would, in effect, be centralized and would not inure for the public good, for which it is intended. They believed that wealth in the hands of an elected government would be handled with a greater degree of public accountability and responsibility. However, the hard truth today is that most countries, offering the socialistic pattern of economic stability are, in truth, worse off than under a capitalist or democratic pattern. But this is another story. However, many counties in the West, including France and the United Kingdom are successfully pursuing a successful socialistic pattern of society.

Coming to the aspect of economic socialism in Western economies, this paper seeks to demonstrate a recent appreciation of socialist measures by Western populations as the best ways of minimizing the effects of the financial crisis as well as taking pro-active and pre-emptive measures to prevent the occurrences of future crises from gaining precedence.

However, this paper also needs to conclude on a cautious note, reflecting on the possibility of losing the gains that have accrued to such economies in the past.

Socialism

Socialism has been one of the most detested ideologies in the Western world over the past several decades. Western Governments have opposed socialism in a variety of countries across the globe.

The Socialist Republic of Yugoslavia is one of the classical examples of state socialism across the globe. However, economically, it has not been able to fare well with a confederation of six states, Slovenia, Croatia, Bosnia-Herzegovina, Serbia, Montenegro, and Macedonia, and a heavy foreign debt burden. Finally, four of the states disintegrated and now consist of just Serbia and Montenegro. The main aspects of SRY’s disintegration could be seen in terms of economic woes which became burdensome. This was further exacerbated by wrong administrative policy-making which believed that “enormous redistribution of power and wealth” could be realized with robust state support, especially from its member states. However, this was not to be. (Mark, et. al, 19).

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Coming to the aspect of Western Governments, it is seen that countries which accede to capitalism in managing economies have been hailed and even generously rewarded by Western Governments, especially the USA and EU members countries with aid and provision of economic resources; less cooperative governments receive constant criticism and cold relations with the economically powerful Western governments in a bid to hasten their proclivity towards adopting a capitalistic form of economic society. Economic considerations, without doubt, have been the main reference point, showcasing the success of capitalism and in effect, denouncing any other form of economic patterns.

Recent developments in the world economy have changed the situation. The collapse of the financial system which started in the US has sparked renewed debate on the viability and strength of liberalized economic systems. Countries that have been viewed as the perfect models for economic and financial success and stability have had their reputations irreversibly tarnished. The confidence of their citizens has been shaken and the popularity of their economic leadership has waned (Brian, Para 6). But it would be presumptuous to believe that the economic crisis in the US has been caused by the lack of a socialistic system of governance. More than the genre of government what is more important is the quality and commitment of governors and how their policies and practices are accepted and obeyed by their general population. Economic crises of the worse kind have happened to other socialist governments around the globe, including Yugoslavia, Soviet Russia, among others.

The crisis started with the collapse of the housing markets. The collapse resulted from the mismanagement and looser controls and regulation in credit financing which led to the continued irrational upward valuation of houses over the past decade. Investors along the chain were dealing in funds that were not present. Most people took up mortgage loans believing that in an upswing housing market, they would be able to later, sell their homes at huge prices, and pay off the loans and mortgage interests. But with falling interest rates, housing prices also fell dramatically and the guys were left with a lot of mortgage bills, but no value for their homes. The snowball effect of these and other related drops impacted negatively upon the economy and led to the present crisis. When considering this from a socialistic perspective, it is necessary to observe that even in a controlled economy, there would be lesser price increases in goods and commodities and therefore the question of acquiring houses would also be a critical decision. In a controlled economy, there is very less likelihood of major price movements, especially under normal conditions. Growth of sectors would be at the risk and responsibility of the administration and admittedly, the risk of economic mismanagement could be reduced dramatically given a strong audit review system and continual internal governance check-and-balance system. In a socialistic pattern of society, preferential loans would be few and far between since all claimants would demand their share, and the Government would be constrained to bring legislation to streamline and direct the admittance of loans.

However, in the case of the US, no such controls were robustly enforceable.

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The resultant bubble burst with the realization that the high prices were untenable. The development of ingenious financial products such as sub-prime mortgages by financial institutions led to an uncontrolled lending spree by bank executives whose main interest was to earn the highest commissions and bonuses possible. Lending standards were almost nonexistent. Lending became outright fraud. With time, the default rate rose higher than the expectations of lenders and investors and the collapse started (Brian, Para 7).

The crisis triggered the deepest global recession since the Great Depression of the 1930s. Starting in the US, the crisis gripped Western Europe and has spread like a plague to the rest of the world. Poor nations have been hardest hit. The disproportionate effect of the crisis on the poor has raised a heated debate on the fairness of the global economic system, particularly those of the advanced economies in Europe and the Americas. Perhaps one of the main reasons for the debacle has not been the high lending without collateral. The main issue has been the repetitive securitization of these loans without underlying assets which caused economic havoc. However, it is the innate responsibility of local governments to protect their economy against risks and challenges and it is in their sphere of responsibility to cushion the adverse impact of such economic challenges in their respective countries.

India, for instance, has been a country wherein the impact of the global recession has perhaps not been so affected, even compared with her neighbors in the sub-continent. The Indian economy, nurtured along with socialistic patterns by the first prime minister of free India, late Jawaharlal Nehru, and his daughter, late Prime Minister, Indira Gandhi, herself a great champion of socialism, has been resilient enough to take the global recession in its stride. Perhaps the spate of securities-linked frauds and scams has placed the government on overdrive in dealing with economic and securities-linked transactions. Internal and external controls are been robustly enforced and nothing is being left to chance occurrences in the context of the Indian economy.

“Investors often think that India is more self-contained than other countries like China and will suffer much less in the global recession. That’s true up to a point – the economy is certainly much less dependent on making cheap goods for export.” (Heaton, Para 4).

The East has moved to take advantage of the moment. Heightened sentiments criticizing the Western model have become the norm. A series of presidential speeches in the Middle East and the former Soviet Union have continually slandered the Western capitalist system by constant reference to the failures exhibited during the downturn.

Contemporary issues

With the confidence of Western economies greatly reduced and their risk aversion increased, the relevance of the view that capitalism advances the individual as defined by early economists has received a major blow. Few can now positively relate the capitalist system to economic prosperity despite the great advances made under the system in the last century. The manifestation of overtrading in capitalist economies has scared the working class. The threat of reversing the gains made over a long period is now more real than ever. Millions are terrified by the loss of homes and the extremely uncertain futures they face. Bankruptcy rates have skyrocketed, mainly due to the mass lay-off of workers in many sectors but most severely in the financial sector.

The foregoing has resulted in greater sympathy for and appreciation of a more socialist system by the global population. Most reactions by Western governments exhibit at least some socialist tendencies. “A stimulus package worth some US $ 11 trillion has been approved by the American authorities. The majority of the Act (ARRA – American Recovery and Reinvestment Act of 2009) consists of tax cuts and transfer payments to citizens, the impact of which was felt within the first two quarters of being received. By the end of September 2009 this stimulus will have worn off, and along with it will vanish the greatest marginal impact of the entire stimulus package itself. According to economic forecasters like Moody’s, by 2010 the net impact of the stimulus package to real GDP will be barely over 1%.” (Posts Tagged ‘Stimulus Package’).

Many would argue that the package does not imply a movement towards socialism. Nor does it intend to. The primary idea behind the stimulus package would be to inject liquidity into the economy that has been nursing on non-existent credits and dubious loans. However, the socialistic implications would arise if and when the benefits do not percolate down to their intended levels. In real terms what a country could get what its economy is what it puts into it, in terms of benefits and value addition, and it would indeed be far-fetched to expect economic booms to occur over a short period. These economic remedies need time to move inside the economy and institute needed changes in terms of restructuring and debt retirement. What needs to be done is a series of macro-economic measures that address fundamental issues of the problem and work out individualistic solutions that could preclude or arrest the down sliding in the economy. While economic cycles are inherent in every economy, the present crisis has stemmed from fiscal indiscipline, injudicious lending policies, and socio-political and socio-economic malaise that need to be remedied. Robust measures need to be taken in the right direction, smaller initially and increasing in intensity and volume over time. Further, it is also necessary to ensure that such exigencies do not occur in the future. The systems need to be revamped and reinstituted in a carefully planned and executed manner that could address the sociological aspects too, in terms of critical areas like Social Security, health care, unemployment levels, and a plethora of issues, big and small. Perhaps the way the money is spent is even more important than how it is sourced. Therefore, dollars saved are dollars earned and need to reflect in the revitalization and rejuvenation of the economy.

However, the way a significant amount of the money is spent raises eyebrows. A good proportionate is being spent on bailing out financial institutions and other severely affected industries such as the automobile industry in the US. On the face of it, the moves have been geared towards mitigating the impact of the crisis on the citizens. The bailouts have improved the standing of many institutions whose collapse would have led to the layoff of thousands of workers as well as increased panic in the entire workforce (Charles, Para 8). Thus safety and security of jobs need to be a preferred goal for the Obama government, since unemployment could cause further stress and strain on the economy, given the magnitude of its present economic woes. Moreover, it is also necessary that positive steps need to be taken to stimulate investments especially in core sectors like IT, banking, constructions, heavy industries like steel, power, and other sectors that could bring about a turnaround for smaller industries that are dependent upon these major sectors. Thus, the overall impact needs to be considered before enforcing and implementing policy executive decisions in the fiscal sectors.

Certain facts of the bailout give a different picture. Some bailout methods amount to recapitalization. This means that the government has continually gained a higher stake in the direct operations of the country’s huge businesses. In some companies, the government has gained as much as 30% interest. It is not clear what will happen to these public holdings in private industry after the crisis. Will the government recoup its money, or will it maintain the shares and use this power to influence decisions? Despite continued protests, the latter seems more probable.

Other Western nations like the UK, France, and Germany as well as capitalist Eastern nations such as Japan have moved in the same direction. The realization that massive job loss could destabilize these countries has led to the pumping of huge sums of money in the economy, with a large portion of the funds going to recapitalize failing institutions.

Interestingly the US government, which boasts of a free, liberal economic system, made a very significant move regarding the remuneration of bank executives. Any bank receiving government money has to observe a $5 million cap in remunerating its chief executives. The action came against a backdrop of pressure from civil society and the media for the government to rein in unscrupulous bank executives. The action was popular among US citizens despite its socialist appearance (Greg or Para 5).

The recent presidential elections only serve to affirm this view. President Bush left office with the lowest popularity in recent times. The defeat of the Republican Party, which advocates for a more liberalized economic system, shows the height of citizen disappointment in the system.

However, several factors accounted for the reversal of the fate of the Republicans in this context, the most obvious being the economic costs of wars in Iraq and Afghanistan. Conservative estimates place the cost of war around $1.6 trillion and the bills are mounting with each passing day. Either congress needs to initiate troops withdrawal from these wars of attrition, or demand larger budget allocation to tide over these costs which ultimately is estimated at “$ 3.5 trillion by the year 2017.” (War Costs could Total $1.6 Trillion by 2009, Panel Estimates, Para 4).

The campaigns were based around a debate that, if keenly analyzed, represents a dual between capitalist and socialist ideals. In the end, the Democrats won a clear endorsement of their socialist policies. This, however, does not imply that Democrats are socialists far from it. Their projected socialistic idealism was for mass support and winning the election on the crest of such people-centric ideals. It is however necessary to state that much would depend on which system would be ideal for the current scenario in the US, in terms of overall plan achievements and goal realizations. At the moment a mixed bag of socialism and capitalism needs to be favored that could prop up industry and also gain populist support. This would augur well for some time.

Democrats have throughout American history been favored towards a more controlled, more heavily taxed economy where the welfare of the poor is constantly addressed through economic redistribution – a tendency evident in the current debate on healthcare reform. Medicaid, Medicare as well as social security programs already seek to improve the welfare of the less able through government intervention. The current proposals on healthcare seek to provide universal healthcare insurance. This involves the government’s intervention in leveraging insurance costs for the poor by making the richer pay more for their health insurance while subsidizing the costs for the lower classes. Proponents of the plan downplay the socialist aspects of the plan. Consolidating the healthcare system to eliminate administration costs and improve access for all is a noble idea. However, it contradicts the liberal economic ideals of the American system.

The increasingly popular involvement of the government is unlike the past, where everyone demanded that the government be a regulatory agent with little or no direct involvement in the market. The people had great confidence in the free market economies and almost always believed that things are best when individuals are left alone to pursue their goals. That view seems to be changing. Today, pressure is on the government to intervene in the economy to ensure stability (Webloggin, Para 12).

The continued direct government involvement in the economy, no matter how good the intention may be, is a complete turnaround. The American economy has avoided this like a plague. The current economic hard times have offered the best chance for Democrats to further their socialist goals.

People feel cheated when they see the huge differences in social and economic status manifest around them. Contempt for leadership and the social elite starts building. This prevents the onset of conflicts. The lower class feels agitated and decides to disrupt the activities of the entire economy in a push for their issues to be addressed, the first being the redistribution of the nation’s wealth from the rich to the lower class. This kind of conflict is the start of a social disorder that is capable of bringing the operations of a country to a halt, resulting in untold losses and a reversal of the gains made. This is the worst imagined scenario for any authority.

Modern socialism is an outcome of the industrial revolution. It has over the past decades spread over the civilized world. The industrial revolution was a critical period where competition and innovation were the main drivers of economies. Industrialists rose and constantly exploited the workers leading to further impoverishment of the already poor as the rich took it all. This prompted the intervention of the government to curtail the blatant exploitation and improve the welfare of the poor. Interventions started with the setting of wage floors below which no worker would be paid. Some nations introduced price ceilings in a bid to curb inflation and ensure the lower class had access to basic foods and other social amenities (Webloggin, Para 12).

Taxation policies increasingly became more biased towards the rich than the poor. It needs to be more equitable and inclined to tax on just lines. The governments realized that leaving the provision of all basic services such as education, water, and energy at the hands of the private players amounted to political suicide. The same motives drive the socialist tendencies today.

However, unlike the past where the policies were due to temporary pressures, the current pressure for socialist policies is likely to be sustained and heightened for a long time. This stems from the immense pain experienced due to the ongoing recession. The bursting of the housing market bubble has left people wondering where the next bubble will burst. As explained earlier, the burst was caused by years of greed and insensitivity to risk within the capitalist system. It is only reasonable to project future movement towards more control and more involvement by the government in the economy (Rusk, pp22-35).

Indeed, various legislative actions have been proposed and passed in reaction to the financial crisis. Tighter regulations on credit access as well as the need to make further disclosures represent the starting point of the campaign. The fact that the previous US administration was caught unawares is probably the most disturbing. It means that successive governments including the current one will seek to be more proactive in responding to such a crisis. As mentioned above most of the actions tenable in averting economic crisis are largely socialist.

Conclusion

The biggest question raised by these developments is What will be the effect on the business environment? Capitalism and socialism must be practiced harmoniously each underpinning the other in terms of social commitments and public accountability. While industrial growth needs to be encouraged and financed, the State must exert a strong and durable influence on it in terms of the lines in which business and profits are made. Also, the common good of the citizens, irrespective of any variables also needs to be given topmost priority. It is believed that the good aspects of both systems need to be integrated into the economic system that could sustain the economy for a long.

Works Cited

Heaton, Cris Scholto. India Can’t Escape the Global Recession. Money Week. 2008. Web.

Mrak, Mojmir., et. al. Slovenia: From Yugoslavia to the European Union: Socialism and the Disintegration of SFR Yugoslavia. World Bank Publications. 2004. Web.

Posts Tagged ‘Stimulus Package’: Joseph Stiglitz Interview on Economic Recovery. AdvisorAnalyst.com. 2009. Web.

War Costs could Total $1.6 Trillion by 2009, Panel Estimates. CNN Politics.com. 2007.

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DemoEssays. "The Modern Application of Economic Socialism." February 18, 2022. https://demoessays.com/the-modern-application-of-economic-socialism/.