I get a worrying sense that socialism is becoming cool again. You can see it all over social media where people brag about joining the Democratic Socialists of America, and in the popularity of the socialist magazine Jacobin. If Trump fails terribly, I worry that left populism will be what replaces it and the end result will be a more socialist U.S. That’s bad because socialism is bad. Given the growing popularity of socialism, I think it’s worth talking about why socialism is bad specifically.
Matt Bruenig has written a useful piece on socialism that I think is a jumping off point. As usual with Matt, it’s written with clarity and specificity that is appreciated. Unlike a lot o vague paeans to how socialism is good and we should have it, Matt offers specific plans for how we could get to government ownership of business.
The plan calls for the gradual socialization of existing companies, and Matt tells me on twitter that this would apply only to large firms. It may be appealing to think of a massive, centralized company like Apple and assume that it wouldn’t matter whether the government slowly became the sole shareholders. After all (ignoring the importance of options in executive compensation for the moment) the shareholders aren’t doing the innovating, the employees are. What does it matter who the dividend checks go to?
One issue is that the government would not just own but control companies, and this plan doesn’t tell us what they would do with that control. And yes, Matt does see this control as a benefit and not a cost to be avoided. Would Apple be free to innovate with the government controlling it? Or would they be forced to onshore all their production? It would be a lot easier for Trump to push Ivanka’s clothing line if the government owned and controlled Nodstrom, Sears, and K-Mart. It is hard to both desire control presumably as a means to some unspecified end and also to assume this control won’t have negative consequences for productivity.
Second, even if we could easily socialize every large company in the U.S. without negatively affecting them, this does not tell us about the future large companies who don’t exist yet. If socialism was in place in 1995 would we have Google today? If we were socialist in 1975 would we have Apple today? Why would small business founders grow their businesses knowing that this would cause them to be socialized? This is especially true given that you can’t socialize the globe at once and companies on the cusp of growing large enough to be socialized would be free to locate in, say, New Zealand.
Fast growing, small companies are a very important source of new job creation and innovation. More productive firms are more likely to grow, and less productive ones more likely to exist. Telling firms to stay small or be socialized is going to give small, successful companies incentive to avoid the important growth dynamics that are essential to a productive economy. To take one recent example for how costly inefficiencies like this can be, Garicano, Lelarge, and Van Reenan examine laws in France that affect only firms with 50 or more workers. They find that this creates more small firms than would otherwise be the case, and the distortions lower GDP by 3.5% by increasing unemployment and keeping productive firms below their optimal size.
Indeed, a broad literature shows that the inability of small successful companies to grow is an important factor that holds back economic development. Hsieh and Klenow show that in the U.S., as manufacturing firms age they get bigger. The effect can be seen in the graph below, from Charles Jones “The Facts of Economic Growth”. Hsieh and Klenow estimate that if U.S. firms expanded as slowly as they do in India and Mexico, total factor productivity in the U.S. would be 25% lower.
Because he is Matt Bruenig, I know exactly how he will reply to this: if reducing firm size along some margin is bad, then making firms be bigger must be good so let’s just mandate all firms be large somehow. Of course this ignores the fact that it is not arbitrary size that is good, but a system that incentivizes the most productive firms to grow and the least productive to shrink or exist. It is the productivity increasing selection mechanism of capitalism that matters, and not just the mere outcome of firm size that should be mandated by politicians like some kind of dial to turn up or down.
Socialism is bad and it is bad that socialism is becoming cool again. Nevertheless I enjoy reading Matt Bruenig and other new socialists who clearly lay out their ideas for how it all would work. I think entrepreneurship, productivity, dynamism, and reallocation are first order factors for economic growth and socialists should address these issues. There are many other reasons why socialism is bad, but I think this is an important place to start.