6. A Socialist Revival To Meet Major Global Challenges
A revival of socialist ideas is taking place today because of several extreme challenges to the further development and sustainability of the world economy under current domestic and global policies:
- The management of globalization of trade and investment: losses from globalization are difficult to compensate by tapping gross benefits, though net benefits are positive, leading to costly trade wars and the rise of new protectionism;
- Mass migrations of labor, that are in practice unrestricted and also lead to the same re-distributive problems of benefits and costs associated with other forms of globalization. In a world without borders the net benefit from migrations has been often over-estimated but even the more sober assessments are still appreciable: Docquier et al. (2012) estimated that liberalizing migration would increase world GDP by between 7.0 and 17.9 per cent, equivalent to 11.5–12.5 percent in the medium term. But the gains of migrants and of their employers, and workers’ gains in the country of origin, cannot be tapped to overcompensate the losers, i.e. workers in the host country and employers in the origin country, without international transfers which are not feasible or transfers from the poorer to richer subjects which are undesirable. A socialist alternative will have to distinguish between refugees and economic migrants and be capable of containing and controlling migratory flows within the limits of the various countries’ willingness and ability to welcome them and finance their integration – either directly or thanks to the financial contribution of countries that prefer to pay instead of taking on an obligation, sanctioned by the UN and not accidental, to take them.
- The need of massive investment in public infrastructure, in developed countries for the maintenance of decaying public works as well as new ones, in developing countries mostly for new infrastructure, as well as everywhere for investment in new housing, considering that one quarter of the 4 billion urban population of the globe is currently living in slums and is poised to reach half in 2050.
- The development of digitalization technology, including Robotics, the Internet of Things, Blockchain (for cryptocurrencies and other secure transactions), Artificial Intelligence, Big Data, as well as fields as diverse as cloud computing, 3-dimensional printers (or additive manufacturing, with associated biotechnology developments), driverless cars and drones, wearables and vocal interfaces (see UNCTAD, 2017). Digitalization will generate extraordinary opportunities, especially in the longer run, but in the shorter run it raises great dangers of mass unemployment, re-structuring needs, large scale retraining and re-distribution. For instance, Frey and Osborne (2017), investigating 702 professional qualifications in the US, estimate that as many as 47 percent of US employees are at risk of being replaced by machines; similar risks are envisaged by recent studies of the International Labor Organization (ILO).
- The reclamation of accumulated pollution and more generally the conservation of non-reproducible natural resources, which at present are being consumed at non-sustainable rates;
- The reduction of “greenhouse gases” that have contributed to global warming (euphemistically labelled “climate change”); such a need is controversial but increasingly less so, and the downside implications of such conjecture being right are so catastrophic that countervailing measures are worth undertaking even under some residual doubt.
It is true that past doomsday predictions have all proven wrong, from Irving Fisher’s depletion of world coal reserves to the Club of Rome’s Limits to Growth or the demographic predictions of a global population explosion. But never before have there been so many and so serious causes for concern. Moreover, Stein’s Law (1976) is bound to operate: “If something cannot go on forever, it will stop”. Failure to handle these challenges is raising further income and wealth inequality, thus exacerbating the risks involved.
7. European countries
In the EU additional problems arise because of the malfunction of European policies and institutions, especially in the eurozone. Fault lines are exemplified by Brexit; the disintegration trends between North and South and between East and West, as well as internal centrifugal forces within states; trade policy (with a democratic deficit that allows 3.5m Wallonians to block a treaty affecting 545m European citizen, or the imposition of a Comprehensive Economic and Trade Agreement CETA with Canada after seven years of secret negotiations on terms particularly favorable to international investors offered ISDS Investor State Dispute Settlement provision protecting their profits from regulatory legislation). Then there is the abolition of internal EU borders (Schengen) without strengthening external EU borders, and without adopting a common migration policy, thus practically allowing migrations without borders; a ridiculously tiny budget of the order of 1 percent of GDP, always balanced ex-post, compared with the US federal budget of over 20 percent; the “stupid” (Prodi’s verdict) austerity constraints to public deficit and debt; tax competition between member countries. There is the divergence of welfare policies (with wide dispersion across countries of the Social Justice Index, computed by the Bertelsmann Foundation on the basis of poverty prevention, equitable education, labor market access, social cohesion and non-discrimination, health, intergenerational justice – that reached its lowest point in 2012-14 and is still below the pre-crisis level); the tolerance of illiberal regimes of Member States, as well as candidates for membership and allies; the lack of a common foreign policy and a common defense policy.
Moreover, the creation of a common currency was premature (ahead of political, fiscal and banking integration), handicapped by central bank inability to act as lender of last resort to the Union (let alone to Member States), distorted by progressive divergence between members, due both to the neglect of parameters that should have been verified on admission and were not, and to the divergence generated by failure to coordinate national policies and to observe statutory obligations (such as the maximum trade surplus of 6 percent of GDP).
Brexit and more
Disentangling a member country from the Union is hard enough for Britain that kept its own currency; it is particularly difficult for a eurozone member, given the threat of adverse financial speculation at the slight hint of a possible exit or even suggestions of reasonable reform. There are possible remedies, such as the exclusion of public investment from the computation of the public deficit; the exclusion from that deficit of the payment of government arrears owed to households and to enterprises, which involves a change in creditor and not an increase in public debt; the adoption of a different methodology along OECD lines for the calculation of potential income, leading to a more flexible determination of permissible deficit; the penalization of trade surpluses above the maximum ceiling (preferably reduced to 4 percent of GDP symmetrically with the maximum permissible trade deficit) not with a token fine as it is now but with the obligation to run a fiscal deficit at least as large as the excess surplus; the issue by member countries of debt indexed to their growth rate, that would enable an EC agency investing in a balanced stock of them to subsidize countries growing less than the average out of the profit made on debt issued by countries growing faster than the average; finally, the retirement of outstanding public debt of all ECB shareholding countries in proportion to their shares, funded out of current seigniorage or the securitization of future seigniorage revenues, which would reduce all members’ indebtedness without implementing a “Transfer Union”, because there would not be transfers from stronger to weaker members.
The trouble is that the voices of the Southern members of the Eurozone are unlikely to be well received, and their insistent requests for reform may unleash a financial crisis. The only way out of this impasse seems to be a consistent refusal, by at least two member countries, to implement common policies (for instance on the EU budget, or trade agreements) no matter how advantageous: the removal of voting powers from a member state requires unanimity of all others, therefore a coalition of two or more unwilling member states can paralyze further European integration, thus persuading or forcing the Nordic-German coalition to taking a more cooperative approach towards a more functional working of the EMU.
General and diffused concern about these problems has generated political opposition to current policies and institutions, leading to the constant, spectacular rise of opposition parties and movements, usually labelled as “populist”, but in truth representing the workings of representative democracy.
These “populist” parties have occasionally succeeded in forming governments, as in Italy, but are unlikely to succeed in implementing radical changes capable of facing the problems listed here, because these parties represent different sections of the population, are inspired by different ideologies, and have conflicting objectives that come up against biting fiscal constraints.
Over time, it can be hoped that “populist” successes might favor movements and parties of traditional social democratic inspiration, also aided by the progress of internet communications. In Germany, for instance, the appearance of the Aufstehen (Stand Up) movement is a Green and Left alliance, eurosceptic and anti-immigration and with domestic social concerns about schools, housing and poverty. Other initiatives of this kind, less controversial and more promising, might arise.
8. What future socialism?
What kind of socialism might be suitable to deal with the challenges and problems raised here?
Not the “really failed socialism” of Soviet-type central planning, political monopoly of the Communist Party, privileged nomenklatura and officials, and a basically autarkic, shortage economy. Or the equally failed Cuban socialism that Che Guevara saw as depending on the creation of a new Socialist Man: the system will have to take human beings as they are.
Nor a contemporary Chinese model, supremely successful economically but increasingly less so, undemocratic, authoritarian and repressive, congenitally corrupt in view of the necessary discretion in the application of the law to keep private capitalists under control. Although certainly one would have to replicate the full panoply of instruments of economic policy successfully employed by the Chinese government to maintain macroeconomic control over their economy in spite of its exposure to domestic and international market competition.
Nor a Yugoslav type of a self-managed “micro-socialist” market economy, due to its inequality between regions, sectors, enterprises, its replication of most of the drawbacks of capitalism also in terms of unemployment, inflationary pressures, fluctuations, migrations. Of course, there will be room for self-management institutions like German Mitbestimmung, for co-operative enterprises, non-profit organizations and employee participation in enterprise ownership and results, but not in a dominant role and without the inflated expectations raised for instance by Weitzman (1984) for a “Share Economy”.
What I have in mind in my recommendations is a social-democratic economic model, characterized by its institutions and policies rather than by a specific allocative “system”. Fundamentally, this would be a market economy, fully furnished however with all the traditional instruments of economic policy (à la Tinbergen 1952 and 1956): fiscal policy through the determination of the level and structure of public revenues and expenditures; monetary policy through the management of the level of credit, the interest rate and the exchange rate (preferably floating), acting as a lender of last resort to commercial banks and to the government, co-ordinated with fiscal policy and responsible for the management of national debt; the use of the price and investment policies of state enterprises, though limited to sectors of strategic national importance; whenever necessary, direct controls as a last resort.
Such a model would be characterized by a policy of high and stable employment, a fully-fledged welfare state, with provisions for unemployment insurance, poverty relief, health insurance at least for basic treatments (the cost of unrestricted medical assistance is prohibitive and higher treatments would have to be contributory or subject to expensive insurance), free primary education, secondary and university education provided at cost except for generous allowances for deserving students, public provision of low-cost housing (in place of subsidies for owner-occupied house purchases). Pensions might be provided either on a contributory basis or a distributive basis but with a minimum pension guaranteed by the state and without ever facing the costs of moving from the distributive (Pay As You Go) basis to the contributory even if the latter was regarded as preferable at full regime.
There would be generous facilities for public consumption (libraries, swimming pools, gyms, parks, hospitals, in preference to a Universal Basic Income, which raises the prospect of its being wasted by recipients, the danger of forcing citizens to buy social services from privatized institutions, and may be unaffordable anyway). There would be an industrial policy, with the state not “picking winners” arbitrarily among individual enterprises, but facilitating technical progress and innovation in general, and encouraging activities characterized by high value-added-per-man, and export-oriented.
International trade policy would be accompanied by compensation measures for the losers of whatever policy is adopted (whether trade opening or protectionism). In the almost certain absence of compensatory international transfers, additional revenues would have to be raised by the government for the purpose. These might be raised by possible and desirable concerted efforts to tap the potential tax revenue obtainable from multinational companies (that usually minimize their tax liability through arbitrary transfer prices in international transactions with their own subsidiaries abroad), and from their web operations (which are gradually being successfully tapped, often voluntarily, in the case of trillion dollars companies like Apple and Amazon). A concerted effort to end fiscal paradises would have to be implemented in a drastic manner.
You should not think that I am an optimist, I am deeply pessimistic: the alternative to this conjectured systemic evolution is too dismal to even contemplate: it involves the certainty of our children, if not ourselves, facing a monumentally unjust inequality of income and wealth; a conflictual world with warring regions, religions and ethnic groups; a depleted, desertified and unviable planet, dominated by squalor, ignorance, want, idleness and disease.
This is the edited/abridged text of a lecture given at the European Association for Comparative Economic Systems, Warsaw, 6-8 September 2018. The full text of the lecture, complete with bibliographical references, will be available shortly on the website of the “Dialogue of Civilisations” Research Institute, Berlin
Author’s text on The Rise and Fall of Socialism is freely available here
Listen to the audio version of this article