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Why Has Socialism Failed?
C H A P T E R
19 Why Has Socialism Failed? O U T L I N E I Introduction II Communism: Power Concentration III Socialism: Amassing Social Cost
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IV The Brexit Lessons
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V Conclusion
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I INTRODUCTION If a person were to take a birds-eye view of the world economy since the end of the Second World War, one could summarize a few crucial trends in the political economy of the world. Foremost was the ideological divide between the West and the Soviet Union, followed by the Cold War that lasted for four decades. The Cold War was tense at various times, but it was due eventually to the economic weakness of the communist Soviet Union that could not compete with the West over the political bond between US President Ronald Reagan and British Prime Minister Margaret Thatcher. After the disintegration of the Soviet Union, many former Soviet states gained independence, but subsequent Russian leaders did not change their ideological views. Secondly, the United Nations, together with a number of international institutions, was established supposedly to bring lasting peace and aid to poor countries. At the same time, a number of former colonies were given independence, and were expected to grow. The industrialized countries contributed to the funding of the international institutions. However, many poor countries did not make much progress, and their economic situation remained largely weak. There were indeed many types of conflict in poor countries that made stability a remote possibility. One really should wonder what had been going on for so long between the funding institutions and the recipient countries. There are studies that have questioned the role and effectiveness of international institutions in world development. For example, international economic institutions concentrated mainly on examining short- to medium-term forecasts of individual economies without making changes to the fundamental issues. Since the late 1970s, many world leaders and economies believe that aiding communist China could be an acceptable strategy in world development. While many western economies were attracted to China’s potential market and the low costs of production, aid from foreign governments, international institutions, and foreign direct investment to China became “one-way traffic.” It was true that the world economy benefitted from low cost production in China, and world inflation could have been lowered, China did experience unprecedented rapid growth, and by the turn of the 21st century, China’s growth escalated to have the largest trade surplus and international reserves in the world, raising China to the second largest economy in the world. China’s growth would surely be seen quantitatively, but China’s rise has also brought unwanted problems. Domestically, China focused on quantifiable factors and performance, but lacked improvement in behavior and practices. China’s rise has alarmed the world with various types of behavior, including corruption, production of fake products, and
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violation of intellectual property rights. Regionally, China is building up its military strength in the East China Sea and South China Sea. In short, while the world economy since 1978 had aided China to grow, the economic rise of China has instead imposed uncertainty on its neighbors in the region. The oil exporting countries held the key to the world supply of energy, and amassed large reserves, but there are still numerous conflicts, instability, and uncertainty in many oil exporting countries. Much of the oil revenue could have been channeled to activities conducted by extremist groups, thereby threatening the international community with different forms of terrorist attacks. Around 2014, the instability in the Middle East and North African countries had caused a massive outflow of refugees across the Mediterranean to reach southern European countries. The show of “sympathy” caused controversy among member countries in the European Union (EU), as millions of refugees fled to the more advanced countries. While there was international rescue, few asked why these fragile states were exporting refugees, and how the advanced countries could economically absorb the large numbers of refugees with welfare provision and servicing the resulting social burden. Looking at these various world features and phenomena, one could ask if the world economy has progressed or deteriorated since the end of the Second World War. Has the developed world spent too much on aid, or has aid gone to the wrong hands? Would the developed countries do a better job by providing bilateral aid to individual developing countries, instead of giving multilateral aid through international institutions? Have the officials in international institutions done their part in ensuring that assistance did lead to development? Or there is a need for more concentration on improving the domestic issues in each country in the first instance? A number of humanitarian issues have been the focus of international institutions for decades. For example, the issues of income equality and reduction in poverty have been tackled for decades and numerous resources had been committed, yet there is still inequality and poverty in the world. Should the focus be changed from poverty reduction to productivity promotion? When individuals’ productivity improves, these individuals naturally depart from the poverty pool. Similarly, should income equality be replaced by a focus on job opportunities? With more job opportunities, difference in pay and earnings would still be unequal, but individuals would have the economic ability to fulfill their own welfare needs. Has the world economy been plagued by policy decisions that imposed excessive “social costs” on industrialized countries? In short, there was an excessive amount of socialist policies in the world economy that immensely expanded the provision of “free lunches” and allowed individuals to unrestrictedly “take,” but at the same time there was no improvement or sufficient replenishment on the productivity side of the equation. As the overall “social cost” increased, there would be less and less people willing to take up their “private cost” or people are more prepared to pass their “private cost” to the society, as the rapid rise in “social cost” was so alarming that individuals might as well decide to jump on the “bandwagon.” The ultimate question is how much of their resources economies would have to mobilize to pay for the rising “social cost.” There are two groups of left-wing economies. The communist groups consist mainly of Russia and China along with a few dynastic communists states, such as North Korea and Cuba. Political ideology takes prime consideration in this group of communist countries. Claimed to have “freed” their people from imperialism and capitalism, the communist countries are the least free countries, as power is concentrated and decisions are often personality-driven. The second group of “soft socialist” countries consists of a number of world economies that have either elected socialist leaders or adopted socialist policies that have weakened their economic competitiveness considerably. Political considerations have often eaten into economic performance, and economic tools are used to satisfy political goals and ambitions. Hence, the politically distorted economy would be bogged down by the political decisions. Genuine economic goals could not be achieved, and the low performance in economic activities would further spill over to the need for more political decisions. The next two sections will discuss the drawbacks of the two types of socialist countries. Before concluding, the section on Brexit will relate the discussion to the implications and lessons for European and other world economies. With the exercise and deployment of socialist policies in numerous countries, Brexit basically conveys the message that “enough is enough,” and there will be a return to rightist economic policies and principles to rebuild and restrengthen countries’ competitiveness and capability.
II COMMUNISM: POWER CONCENTRATION The ideology of Marxism and communism provides a vivid discussion on the difference between theory and practice, between concepts and realities, and between what is said and what is done. The advocacy in communism is that a state without capitalists should be best, as there would be no “exploitation” of people by people, as
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they would become their own masters. But it turned out that a communist country would be a much stronger, more powerful, and undemocratic state that exercised close control of individuals. Visible control would be administered by the military and police, while invisible control would be undertaken by the “united front,” propaganda and media, and threats. In a communist state, different opinions could be voiced but not broadcast, while acts of opposition would be suppressed. Instead of being one’s own master, a communist state was usually ruled by a minority of party members in association with government officials, supported by a vast network of intelligence-gathering to pin down all forms of opposition that could lead to potential threats. As the Marxists argued that capitalism exploited people by people, there would not be any private business in a communist state. Hence, state provision of economic materials would be most “equal,” as no one would have any privilege, nor could employers “exploit” the workers. There would not be any employers, workers would be assigned to jobs by the state, and there would be no unemployed resources. Human beings would live with dignity, as the state would look after every individual. However, it turned out that economic materials would be allocated sufficiently to all individuals, but insufficiency would appear if there was a shortage of materials. The allocation of materials would be managed by officials, who would accept bribes if any individual wanted to be treated differently. Hence, instead of “exploitation” by employers, it would become “exploitation” by empowered officials. Workers would be provided with a job, but job satisfaction, promotion, and incentives could be considered along political lines, and did not depend on the workers’ initiative and productivity. The top down approach in job assignment and industrial production would mean workers might not have the freedom or right to change jobs. It would likely be life-time secured employment, but choice and job preference would not be guaranteed. Since workers would be paid a similarly low wage, other welfare supplies, such as housing, children’s education, and medical attention would also be provided, but might not be adequate or the provisions would be based on political hierarchies. To adhere to the principle of equality, individuals would not be allowed to hold wealth and assets. Private savings would not be required, and consumer choice would not be given. As enterprises were part of the state organ, enterprises would have to submit their surplus to the state, which would have full authority to distribute or redistribute surpluses, probably along ideological preferences. The “wealth” would be amassed at the state level, as economic power would simply be concentrated in the hands of the state and the top officials. One could ask if workers were being protected by the state, or being “exploited” by the state. The so-called “surplus” was no longer held by individuals and businesses, but would be massed in the hands of the state leaders and officials. The intellectuals and the media would be the most vulnerable people in a communist state, as the former would provide thoughts, while the latter would report things that might not align with the ideas of the state. Under a communist state, people should have a “simple” mind and just listen and trust what was told and given. Suggestions, proposals, ideas, disagreements, innovations, and initiatives might not be entertained as they could pose potential challenges to the absolute power and authority of the state. Indeed, the absence of nonstate activities would produce a “stable” society, as government officials would be the only agents that would conduct activities. Hence, to assume a stateless society in communism would be naive, as the policy decisions would all be concentrated in the hands of party members and government officials. Communism in practice produced extreme forms of inequality, with power concentration solely vested in one minority group. When compared to a capitalist market economy, the production relationship between employers and employees in a communist country would be transformed into the state-owned enterprises and workers relationship. The market wage payment and differences in earnings in businesses would be transformed into the provision of a net wage and welfare support. Consumer choice would be transformed into material rationing by the state. Personal initiatives in production and intellectual freedom would be transformed into state control and monitoring of individual deeds. Instead of freedom of expression, ownership, and adherence to intellectual property rights, communist countries would prefer not to have a reliable rule of law, as that could provide the officials with “flexibility” to deal with individual legal cases. Civic development that relied on systems would be transformed into control through the personality of the leader. There would not be any nonpolitical institutions, but party members were all-powerful while the mass was powerless. Control was achieved through personal dictatorship, rather than the establishment of a reliable system. With a lack of individualistic behavior and freedom of thought that used to propel society to move forward, people in communist countries would just have to wait to be given, and take whatever was given. The extent of immobility would effectively freeze a country in time, as people just lived to survive on state provisions. In a nutshell, the drawback in the communist ideology is that it transformed all sorts of human activities into activities with “absolute” outcomes of different extremes, making one-sided decisions, amassing of power, topdown control, and absence of choice and alternatives. In actuality, communism produces extremes of political
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inequality, erosion of individual freedom, privilege of the powerful with corrupt practices, personality-led policies with no support from a well-established and reliable system, and political victimization on opposing views. These extremes largely reflected communism in the Soviet Union. Given that the Soviet Union was not blessed with many economic resources on the one hand, and the drive for ideological and military supremacy in the Cold War on the other, resource constraint meant that shortages of materials were common. The situation in pre1978 China was similar, as China adopted the Soviet model inappropriately after the early 1950s. The commune system stripped all aspects of individualism and introduced collectivism. Economic equality was synonymous with poverty, while party members were privileged. Power absolutism and ideological high-handedness was practiced in all communist countries. In the case of the Soviet Union, it was President Mikhail Gorbachev, whose attitude on openness had hastened the end of the Cold War, and it was argued that his decision to remove the constitutional role of the Communist Party in governing the state had led to the dissolution of the Soviet Union. While President Gorbachev was more receptive to the West, he criticized his followers in post-Soviet Russia. For example, he criticized President Vladimir Putin for “backsliding on democracy, corruption, and the dominance of security officers.” Thus, instead of moving away from communism, power in post-Gorbachev Russia was concentrated in the executive branch, and limited the rights and freedom of individuals and the establishment of civic organizations. Gorbachev commented that such was a “destructive path with no future” (Mikhail Gorbachev, Wikipedia). In the case of China, despite the rise in economic growth since the early 1980s, inequality emerged in various dimensions. Politically, power was vested firmly in the hands of the communist party, and would even be reinforced by the rising economy because the party had become the “wealthiest” institution in the world. The country was still ruled by a minority government, divided into at least two major factions. Corruption and abuse of power could commonly be found, and despite the effort to hunt down corrupt “tigers and flies” in government circles, the effort was seen more as a case of political struggle than the introduction of a reliable anticorruption system. Economic growth was transformed into a “cash rich” situation, with many ultra-wealthy individuals related to high level officials. After nearly four decades of growth, industrial production probably would have reached a bottleneck unless there was industrial restructuring. The unstructured financial development had led to rapid growth in the financial economy, which had grown disproportionately to the real economy. State-owned enterprises were replaced by state-controlled enterprises. Production of fake goods remained common, as one popular Chinese business person openly stated that “fake products were better than the real products both in quality and in price” (Financial Times, June 14, 2016; and The Wall Street Journal, June 15, 2016). The economic rise of China had led to an imbalance in regional harmony, especially in the East China Sea and the South China Sea. With China flexing its economic muscles, and together with the weaker world economy after 2008, the world economy would begin to give new consideration to their economic relationship with China. China’s economic attraction in the form of low labor costs and a large domestic market for imports would have to be reassessed, though some were still eager to kowtow to China for the export market. Given the rise in the Chinese currency, the world economy would have a choice of either investing in China or investing elsewhere and trading with China. The lesson is that given the world’s generous economic attention to China over the last four decades or so, China’s economic rise might not be considered as a good “showcase” to other developing countries, due probably to China’s ideological rigidity, and lack of political advance and alignment with the major world economies.
III SOCIALISM: AMASSING SOCIAL COST In the second group of “soft” socialist countries, proleftist policies had been instituted through the political process, such as the election of socialist leaders and/or pursuit of strong welfare and redistribution policies. Political diversity in free economies allowed differences in political views, but elections could produce leaders that looked to political goals. Such humanitarian pursuits as income equality and assistance to the minority were politically translated into economic policies. Given that, in all world economies, the number of low-endowment individuals would be larger than the quantity of high-endowment individuals, there would be a need to provide assistance to those who were faced with difficulty in economic survival, but politically oriented “redistributive” policies would have different impacts on different economies. Thus, politicians interested in achieving political goals might not be concerned with the economic cost involved, because they would not be responsible for footing the economic bills during their term of office. While political goals are usually short-term, consequences on the economy could be long-term. Given periodical elections, political leaders would have departed before the
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economic consequences of their political decisions surfaced. Hence, there is surely an agency problem between political decisions and economic consequences. A prosocialist regime in a free economy usually took a “two legs” strategy. On the one hand, there would be political pressure to reduce income inequality and poverty. This could be a political ideal, but strategy could differ. A “supply-side” policy would employ indirect means that would promote investment, improve education and training, and speed up infrastructure development with the intention of creating more job opportunities. Supply-side results could only materialize after a period of time. A left-wing leader may not welcome more investment, as that would allow businesses to make profits. Thus, a socialist leader would choose a “demandside” policy on welfare provision. Taxing the rich seemed to produce political capital to the socialist leaders, as capitalists were often made synonymous to “villains.” With high taxes, a socialist leader would think that higher revenue would be forthcoming. The demand-side policy fitted short-term political goals, as that could produce results within a short time, as taxes were raised, fiscal spending was undertaken, subsidies were given, and redistribution was achieved, thereby accomplishing the political goal. But, a few periods of short-term policies would produce long-term outcomes. Consider how demand-side policies would produce unfavorable economic results in the long-term on the part of investors, businesses, tax payers, and subsidy recipients. Of course, there could be instances where capital inflow coexisted with a high tax regime, depending on the nature of the business and the size of the market. In businesses where machines are needed more than workers, e.g., the small number of workers required could mean a saving on labor costs. In exceptional cases, investment could still be viable if the market was sufficiently large. Capital is mobile and flows to business-friendly markets. An investor always has the choice to invest or not to invest. Investors will probably gain by investing, but will not lose by not investing. Outflow of capital would mean a reduction in jobs at home. Capital mobility allows investors to have a greater choice of investments across time, markets, and countries. On the contrary, when investors found that an economy became unattractive, capital could flow out. Departed capital would be unlikely to return, but would promote the economy of the host country. In turn, the “capital-losing” economy would become less competitive, while the “capital-gaining” economy would become more competitive. Hence, there is a transfer of economic competitiveness. To the home country, that will be translated in terms of losses in jobs, output, exports, income, and growth. In a worse scenario, the capital that has gone to the host country could produce goods that would be imported back to the home country, which would suffer losses not only in investment, but also in foreign exchange and reserves, as the rise in imports will then be translated into a decline in the value of the currency. On the part of the government, the departed capital would mean lower production at home, a fall in output, jobs, and employment, and the fall in profits would lower government tax revenue. Government revenues could fluctuate, but committed fiscal subsidies and welfare spending could not be reduced. The loss of jobs and rise in unemployment would require more fiscal welfare spending. Thus, the government would be faced with the two sides of the sword: the loss of capital and jobs would result in loss of competitiveness, a rise in unemployment would require greater expenditure on welfare, and the shrinkage in business would mean less revenue will be forthcoming. On balance, the government would end up with fiscal deficits. How would a prosocialist government deal with a fiscal deficit? A demand-side policy should imply that even higher taxes would be needed, as it would be the able individuals who were “punished,” and higher taxes would be thought to bring higher revenue. This would hasten the departure of capital to business-friendly markets, resulting in a further shrinkage of the business sector, and subsequently even lower fiscal revenues. The alternative would be to issue government bonds, a decision to issue bonds usually would not receive much criticism, because the monetary authority would have the power to do so, and no one from the current generation would get hurt. It would be the future generation that would have to repay the debt. However, government bonds issued to cover fiscal deficits would not generate productivity that could provide the ability to repay, and the unpaid bonds would accumulate to become national debts. Consequently, the outcome would be a situation where “deficits-breed-deficits” and “debts-breed-debts” emerged. A prosocialist elected leader would probably have finished his or her term of office by the time these unfavorable results occurred. What about the welfare recipients? Would the provision of “free lunches” make them better off? The shortterm answer should be positive, but the dynamic nature of economics could produce other consequences. If welfare subsidies were provided on a permanent basis, the recipients would surely have lower incentives to look for productive jobs, and would become dependent on subsidy. Even if the number of welfare-dependent workers involved was small, their exclusion from the labor market would mean a fall in overall economic productivity. Incentives could include making efforts to look for jobs, learning a skill, or moving to a more job-favorable geographical location. The welfare subsidy could only cover their survival cost, but employment should provide the
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worker with a higher or rising wage, as experience gained could enable the worker to save or have more to spend. In other words, employed workers could accumulate their own assets over time. But when workers depend on welfare subsidies and do not equip themselves with higher individual endowments or human capital, their chance of seeking employment will be lower. Thus, the consequence would be a static labor force, high reluctance on the part of workers to seek employment, and the persistence of low wages. With welfare subsidies, workers who would be assisted permanently would not have any chance of gaining any upward mobility. In aggregate, welfare expenditures would not reduce poverty and would even restrict upward mobility. In effect, welfare spending effectively freezes society in its current status, as employment, earnings, and upward mobility would all be maintained at the current level. It looks as if the welfare recipients gained, but they could be instruments used by the politicians. Given that the quantity of low-endowment individuals would always be higher than the quantity of high-endowment individuals, prosocialist politicians could easily secure their popularity by siding with the low-endowment individuals, but whether prosocialist economic policies would be a viable policy would not be a political concern. Indeed, many low-endowment individuals would politically not object to become dependent on welfare, as “free lunches” could be preferred to employed work. In fact, welfare recipients would also face losses, as the welfare subsidy they receive takes away their chance of getting a better job in the market. The welfare subsidy would become static, but the dynamics should be that an individual working in the market could earn more with experience, or by moving up to a higher paid job, and so on. Hence, economic opportunities and the chance of upward mobility would be lost. The welfare recipient would remain “poor.” Then, who gained? The prosocialist politicians, as they would obtain power and authority through elections, have the desire to spend public funds which come from the tax payers, and behave like a “Santa Claus” when deciding on welfare policies. Demand-side policies are not only unsustainable, but also weaken the economy permanently. Capital and funds depart, jobs are lost, welfare spending is higher, higher taxes and more redistribution are required, there is loss of upward mobility and economic competitiveness, and low domestic production would mean more imports are needed for local consumption, and a weakened currency with trade imbalances results. Prosocialist politicians gain, but the entire economy suffers for the loss. Supply-side policies that involved fiscal spending on education, housing, health, social goods, and infrastructure provision should be regarded as supplementary factors to all businesses and individuals. On the contrary, fiscal spending on demand-side policies requires an understanding on the notion of social cost. The size of the “social cost” and the extent and amount of welfare provisions often become a political decision. Redistributive policies basically imply that the "private cost" of those low-endowment individuals would have to be passed on to become a "social cost" of the high-endowment individuals through the fiscal authority of the government. Likewise, by introducing more redistributive policies, the government effectively increases its size, authority, influence, and position through the need to manage the larger “social cost” burden. As more welfare spending is needed, there would be more administrative work on the part of the government, the number of government officials would have to expand, and a “big government” would emerge. By taking up all these “social costs,” the government would have stronger justification to raise taxes and engage in redistribution activities. The rise in “social costs” and the need for more redistributive policies would reinforce itself in a prosocialist government. It could even be possible that the movement between “private cost” and “social cost” is inversely correlated, as the rise of one would lead to a fall in the other. Indeed, as more welfare was given, people would be more prepared to pass their “private cost” to be shouldered by the government, and the “social cost” would rise. The shrinkage of “private cost” on the one hand, would immediately expand the size of the “social cost” on the other hand. On the contrary, when welfare spending was cut, the lower fiscal burden of the government would reduce the size of the “social cost.” In turn, with lower welfare provision, welfare recipients would have to look for alternatives, implying that they would have to take back their own “private cost.” In other words, deficit-prone or debt-prone countries would mean that their level of “social cost” had exceeded their ability to finance, and the government would have to shed their “social cost” burden by reducing welfare, so as to encourage individuals to take back their “private cost.” Socialism in many market economies failed because they had amassed excessive amounts of “social cost” that went beyond the economy’s ability to fund or finance the prolonged debts and deficits. Countries that pursued extensive prosocialist policies suffered the worst of both worlds. On the one hand, the policy of redistribution with high taxation produced unfriendly markets, and capital departure would reduce the economy’s competitiveness. On the other hand, the demand-side policies that promoted fiscal spending would result in various drawbacks: fiscal and trade deficits, a weak currency, and national debt. The disincentive on the part of
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individuals and businesses in taking up their “private costs,” and the generous welfare policy that encouraged individuals to give up their “private costs” would result in the huge accumulation of “social cost.” The final outcome would be the emergence of a vicious economic circle that restricted growth and promoted decline.
IV THE BREXIT LESSONS Many British and European citizens, international leaders, economists, and analysts were caught by surprise when the British referendum on June 23, 2016, voted that Great Britain would exit from membership of the EU, with the leave vote winning by 52% 48% (BBC News, June 24, 2016). The superficial evidence against Brexit included the loss of the bigger EU market, and such economic advantages as investment and employment for British nationals in the EU. The question, then, was if there were truly that many economic advantages, why would the majority of voters chose to leave the EU? Consider a few analytical observations. Firstly, economic activities between United Kingdom and the EU are mutual, and there is no change in their economic fundamentals. The vote was a political move, though it would create a temporary shock in stock markets. It is true that the EU is a much larger market than the United Kingdom, but the UK itself is not that a small market on its own. The United Kingdom also can reach out to the international market like any major EU country. Being a member of the EU, the United Kingdom also made financial submissions to the EU headquarters. Exiting from the EU, the UK economy could save all those official submissions. In 2015, it was reported that the UK government contributed d13 billion to the EU budget, and the EU spending on the United Kingdom was d4.5 billion, making a net contribution of d8.5 billion to the EU (The UK’s Independent Factchecking Charity, May 27, 2016; and The Telegraph, February 29, 2016). Thus, even if there was a reduction of economic activities between the United Kingdom and EU countries after Brexit, the simple calculation is whether the loss to the United Kingdom would have to exceed d8.5 billion annually. Originally, the European market comprised of a few strong industrialized countries that were backed up high technology industries with exports. Over the years, many industrialized European countries have adopted prosocialist economic policies, which often involved heavy redistribution and demand-side policies that eventually weakened their economies considerably. Furthermore, as the EU community expanded, weaker European countries were incorporated and imposed new economic burdens on the few industrialized EU members. Hence, the entire EU community was bogged down by various economic problems of the weaker EU members. The political turning point was the huge influx of refugees from the Middle Eastern, West Asian, and North African countries between 2014 and 2016. Instead of stopping the flow of refugees at their origins, German Chancellor Angela Merkel adopted an “open door” policy by openly accepting one million refugees in 2015 alone (The Guardian, December 8, 2015). The United Nations Higher Commission for Refugees (UNHCR) pledged the international community to accept refugees, but few efforts were made to stop the flow. However, it was later found that there was a security problem, as the refugee flows included a “Trojan horse,” with terrorists camouflaged among the refugees (CNN Politics, November 16, 2015). Should sympathy and fraternity be incorporated into an ideology? It is a human virtue when a person expresses sympathy for another person suffering from unfortunate circumstances. Sympathetic offerings can be in the form of personal services, and offerings in pecuniary terms are often limited to the financial ability of the giving individual. The economics of sympathy at the individual level involve only pecuniary transactions, and the receiver of the offering will not impose additional economic burdens on the giving individual. At the country level, disaster relief is provided when crises and disasters strike in certain affected areas. This could be a lump sum from government funds, depending on the extent of destruction. But, the amount would still be restricted, and there would be no extra burden on the relief providers. At the international level, when one country is faced with natural disasters or crises, international aid could come to the rescue as a humanitarian gesture and goodwill from a foreign country or the international community. Again, the relief would usually be a limited amount, and there would be no additional burden on the relief-providing country. Sympathy and fraternity should not carry any political message or implications, as it is meant to be a reflection of humanity and goodwill. However, it would be a different ballgame if sympathy and fraternity was politicized or capitalized for political purposes. Sympathy and fraternity could also be mobilized by free-ride politicians to become an instrument in reflecting a social phenomenon. It would indeed be easy to express one’s sympathy, but similar to the provision of welfare, the politician would not be responsible for the relief provision, but would pass it on to someone else, namely the tax payers. It could be worse if the amount of relief burden was not a onetime payment, but required post-event expenses. Sympathy expressed at the personal level could be escalated to
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an ideological level, requiring prolonged fiscal commitment that would simply impose extra burdens on the size of the “social cost.” The problem of the refugees was that even though it was Germany which was keen to open its doors to the refugees, once they obtained EU status they would travel to the English speaking United Kingdom for jobs and welfare. Hence, it was Germany who was keen to express sympathy and get the political capital from shouldering the burden of the refugees, but the burden of the high “social cost” would fall onto UK tax payers. On the other hand, low-skilled British workers would face strong competition from incoming refugees as the supply of workers increased. Hence, other than the British tax payers who would see that their interests were hurt by the influx of refugees, ordinary workers, including earlier immigrants who had managed to find employment in Britain, would definitely feel threatened by the incoming refugees as competition in the labor market could reduce their chance of employment. Thus, the preference to leave the EU came from tax payers and salaried workers. There is also the social dimension in receiving illegal refugees. In addition to welfare expenses, how easily and quickly would these refugees integrate into the local economy, or would they form small ethnic colonies inside the host country? Hence, welfare assistance may not just include the amount of entitlement, but also the impact on schools, hospitals, and housing would add to the required resources. In some cases, these refugees would send the welfare back to their home country for families in need. In addition, there is also the cultural, ethical, racial, religious, and language divide, especially when crimes, violence, and acts of terrorism are committed by these refugees. Hence, one can imagine the risk involved in the security of the host country and its people. There was also the political side in the lessons of Brexit, when British politicians looked forward to the next general election. While the Conservative Party, led by Prime Minister David Cameron, who advocated for “remain,” the Labor Party in Britain also chose to support the “remain” ticket. What the British Labor Party failed to see was the sentiment of the workers who were uncomfortable with the influx of refugees competing for jobs. Hence, the Conservative Party would likely win the next British election, whatever the outcome of the referendum would be. Should the referendum have voted to “remain,” the Conservative Party would have benefitted from the political capital from the referendum, as both the Conservative Party and Labor Party advocated for “remain.” With the referendum result of “leave,” and subsequent resignation by Prime Minister David Cameron, the new Conservative Prime Minister Teresa May would have to steer the “exit” policy, and that would provide credibility for the Conservative Party to win the next election. Thus, the Brexit referendum was an excellent political strategy on the part of the Conservative Party in improving their chance to win the next general election in the United Kingdom. Although the stock market all over the world experienced some shocks and the British pound depreciated, the shocks soon settled as the value of the British pound revived, and the international stock markets returned to normal. Investors and speculators usually look for events like Brexit to give them an opportunity to trade and gain in the stock markets. Hence, it would not have any long-term impact after some initial shocks in the international stock markets. It would indeed be simple-minded to think that the British economy would suffer from leaving the EU. Politically, as Boris Johnson, the former London Mayor, advocated repeatedly, the United Kingdom could regain its own autonomy in dealing with various issues without interference or concern with the EU community (RealClear Politics, June 21, 2016). In many ways, it would be easier to revise the economic competitiveness in the single UK economy than the collective EU member countries. The strategy would have to come from the supply-side factors, such as tax reduction that boosted business confidence and attracted investment from the EU (Mail Online, July 3, 2016). Should the post-Brexit British government decide to adopt more business-friendly policies, such as a lowering of profit tax, investment could even leave the EU and come to the United Kingdom. Thus, with Brexit, the chance of regaining its economic competitiveness will be high for the UK economy. The first lesson of Brexit is that the British voters were not prepared to shoulder the economic “social cost” of refugees, as the UK government might not have control over the influx once these refugees entered from other EU countries. By departing from the EU which has taken up numerous prosocialist policies, the UK economy could look for fresh policies that could lead to new economic directions and pathways. The favorable outcomes of Brexit should be seen in 3 5 years’ time, when the new policies in the UK lead to a recovery of economic competitiveness, while countries in the EU probably will remain stagnant and stay unchanged. The end result should be a stronger UK economy, partly because the United Kingdom will be able to get away from the “social cost” burden of the EU, and partly because it will give the United Kingdom new opportunities to plan its own economic path. It is even possible that the UK economy will lead the economies of other EU members.
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Would Brexit lead to more “Eurexit”? As the size of the EU’s “social cost” was jumping, other EU members could see the advantage of, or the need for exiting, especially those EU countries which were not keen to adopt prosocialist policies. The implications of Brexit should relate more to other EU members than to the United Kingdom. Indeed, the EU should rethink its strategies in relation to its refugee policy, and question whether extensive demand-side policies are appropriate and sustainable. The refugee issue and Brexit could serve as a “wake up” call to the EU. If there was the desire to reduce its “social cost” burden, the EU would have to revise its policy orientations. Instead of “demand-side” policies, the EU would have to adopt “supply-side” policies, in order to revitalize and reenergize its economic competitiveness by restricting further decline and encouraging growth. Indeed, there are a number of EU countries that could be revitalized easily if prosocialist and prowelfare “demand-side” economic policies were replaced by “supply-side” policies promoting business-friendliness. Such medium-sized EU countries as Spain and Portugal could gradually replace their redistributive policy by promoting more entrepreneurship and reintroducing a low tax environment, in order to attract business and investment. Indeed, the ultimate objective is to regain economic vigor in these countries through marketfriendliness, and individuality through creativity and innovation. The prolonged adoption of prosocialist policies in many EU countries has limited regional growth considerably, the lack of growth in turn has contributed to economic decline. And the economic decline in the EU would comparatively culminate in the economic rise of other countries through “push” and “pull” effects in investment and other economic activities. The implication of Brexit would be the extent of accumulated economic weakness brought about by prosocialist economic policies, and the desire to regain a country’s economic strength through cutting the excessive “social cost” burden and reinstituting the role of individuals being responsible for their “private cost.” The lesson of Brexit is that the EU has taken up too many socialist policies, and it is time to look for answers elsewhere, probably from the “rightist” ideology and from “supply-side” economics.
V CONCLUSION Have world leaders mixed up personal sympathy and fraternity with political ideology? It is necessary to provide economic assistance to people with low endowments in all economies, but assistance should be structured in such a way that it will stimulate the recipients, and not make the recipients dependent on the assistance. Assistance should only be given within the economic ability of the giver. An agency problem exists in the provision of economic assistance, as the policy decision-makers are not the actual funders of the assistance, as the spending decisions made by officials are separated from the financiers who are the tax payers. Socialists tend to complain about the extent of economic exploitation by capitalists. This assumes the dichotomous nature between employers and workers. The logic is that employers create jobs, and workers should be free to move between jobs. Hence, employers need workers, and vice versa. Thus, their relationship should be complementary. Economic activity produces “relative” outcomes, whereas political activity generates “absolute” outcomes or extremes. Political inequality is worse than economic inequality, because political relationships are often “oneway,” while choices and alternatives are often available in economic relationships. Communism failed because it generated extreme and absolute political inequality and a privileged minority, and individual freedom was severely restricted and suppressed. Socialism failed because the large government reinforced itself by amassing the increasing “social cost” that demoted growth and promoted decline. The economic spillovers from socialist economic policies included the possible departure of capital funds and loss of domestic jobs, and the loss in output led to economic shrinkage. The fall in economic competitiveness would not only contain a loss that would spread across the entire economy, but the economic opportunity of the future generation would also be restricted as national debts hurt the economic potential of the younger generation. Consider the analysis of some humanitarian issues, such as poverty reduction and attainment of equality. Numerous studies (e.g., Huidrom et al., 2016) by the United Nations and other international institutions have for decades called for poverty reduction and elimination of inequality. If there were effective policies to deal with poverty and inequality, how come these issues are still vividly alive in many developing countries today? How would all these international institutions explain such an outcome after spending so much on their studies, research, and consultancies? The emphasis could depend on how policies have been recommended and executed. Demand-side policies would encourage more spending to aid the poor. Supply-side policies would improve productivity through education and the creation of job opportunities. Productivity improvement would reduce poverty, but inequality could remain.
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However, which world economy has ever achieved economic equality? Differences in endowments, differences in education provision, differences in earnings and rewards, and differences in many other input factors suggest economic outcomes are diverse. Economists would use the term “difference,” while politicians would use the term “inequality” to indicate the extent of diversity among economic activities. Given that economic activities produce “relative” outcomes, it would be natural for the emergence of diversity, differences, or inequality. Political inequality is more damaging and “absolute,” while economic inequality can be improved. Economic differences should not be politicized. Economic growth and development through supply-side policies are the effective answers to poverty reduction. Politics often turn out to be the obstacle to genuine economic progress. Brexit should not be considered as a protectionist policy, but an attempt to reduce the country’s vast “social cost” imposed by other EU members and refugees from fragile states. Economic vitality has been given a higher priority than fraternity. Indeed, it is the promotion of productivity and growth that allows an economy to have the resources to help others. On the contrary, it would not be viable for a country to accept an economic burden that was not generated by its own people. Fraternity does not mean that one economy’s ability is constrained by the problems originated in another country. Brexit symbolized the failure and unsustainability of prosocialist economic policies. The weakness in economic competitiveness in many European and world economies has to come to an end, and political efforts have to concentrate on revitalizing the country’s economic strength. The UK referendum has shown that there is no change in the economic fundamentals between the United Kingdom and EU, but the UK economy would be brought down by the burden of the “social cost.” Hence, instead of spending the UK’s resources shouldering the “social cost,” the same amount of resources could be productively used to expand the UK economy, making it more competitive and regaining its vitality through a different set of principles and policies. Given that there is no change in economic fundamentals, the political argument of Brexit was only superficial. Brexit serves as the precedent to show that socialist economic policies are not sustainable, and other European and world economies should start to think about the undesirability of socialist economic policies, and make comparisons with capitalist economies. The voters in democratic countries should start making political assessments when looking at the numerous problems arising from the adoption of socialist economic policies, such as rising national debt, falling economic competitiveness, loss of individual economic control but increase in the size of the government, losing export markets and falling investment attractiveness resulting from redistribution policies, and growing economic dependence with lack of opportunities. Politically, there is every possibility that “right wing” parties will be elected in democratic countries in the post-Brexit years, as voters in democratic countries would like to regain their economic vitality, recover their competitiveness, and expand their economic capability.
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I INTRODUCTION If a person were to take a birds-eye view of the world economy since the end of the Second World War, one could summarize a few crucial trends in the political economy of the world. Foremost was the ideological divide between the West and the Soviet Union, followed by the Cold War that lasted for four decades. The Cold War was tense at various times, but it was due eventually to the economic weakness of the communist Soviet Union that could not compete with the West over the political bond between US President Ronald Reagan and British Prime Minister Margaret Thatcher. After the disintegration of the Soviet Union, many former Soviet states gained independence, but subsequent Russian leaders did not change their ideological views. Secondly, the United Nations, together with a number of international institutions, was established supposedly to bring lasting peace and aid to poor countries. At the same time, a number of former colonies were given independence, and were expected to grow. The industrialized countries contributed to the funding of the international institutions. However, many poor countries did not make much progress, and their economic situation remained largely weak. There were indeed many types of conflict in poor countries that made stability a remote possibility. One really should wonder what had been going on for so long between the funding institutions and the recipient countries. There are studies that have questioned the role and effectiveness of international institutions in world development. For example, international economic institutions concentrated mainly on examining short- to medium-term forecasts of individual economies without making changes to the fundamental issues. Since the late 1970s, many world leaders and economies believe that aiding communist China could be an acceptable strategy in world development. While many western economies were attracted to China’s potential market and the low costs of production, aid from foreign governments, international institutions, and foreign direct investment to China became “one-way traffic.” It was true that the world economy benefitted from low cost production in China, and world inflation could have been lowered, China did experience unprecedented rapid growth, and by the turn of the 21st century, China’s growth escalated to have the largest trade surplus and international reserves in the world, raising China to the second largest economy in the world. China’s growth would surely be seen quantitatively, but China’s rise has also brought unwanted problems. Domestically, China focused on quantifiable factors and performance, but lacked improvement in behavior and practices. China’s rise has alarmed the world with various types of behavior, including corruption, production of fake products, and
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violation of intellectual property rights. Regionally, China is building up its military strength in the East China Sea and South China Sea. In short, while the world economy since 1978 had aided China to grow, the economic rise of China has instead imposed uncertainty on its neighbors in the region. The oil exporting countries held the key to the world supply of energy, and amassed large reserves, but there are still numerous conflicts, instability, and uncertainty in many oil exporting countries. Much of the oil revenue could have been channeled to activities conducted by extremist groups, thereby threatening the international community with different forms of terrorist attacks. Around 2014, the instability in the Middle East and North African countries had caused a massive outflow of refugees across the Mediterranean to reach southern European countries. The show of “sympathy” caused controversy among member countries in the European Union (EU), as millions of refugees fled to the more advanced countries. While there was international rescue, few asked why these fragile states were exporting refugees, and how the advanced countries could economically absorb the large numbers of refugees with welfare provision and servicing the resulting social burden. Looking at these various world features and phenomena, one could ask if the world economy has progressed or deteriorated since the end of the Second World War. Has the developed world spent too much on aid, or has aid gone to the wrong hands? Would the developed countries do a better job by providing bilateral aid to individual developing countries, instead of giving multilateral aid through international institutions? Have the officials in international institutions done their part in ensuring that assistance did lead to development? Or there is a need for more concentration on improving the domestic issues in each country in the first instance? A number of humanitarian issues have been the focus of international institutions for decades. For example, the issues of income equality and reduction in poverty have been tackled for decades and numerous resources had been committed, yet there is still inequality and poverty in the world. Should the focus be changed from poverty reduction to productivity promotion? When individuals’ productivity improves, these individuals naturally depart from the poverty pool. Similarly, should income equality be replaced by a focus on job opportunities? With more job opportunities, difference in pay and earnings would still be unequal, but individuals would have the economic ability to fulfill their own welfare needs. Has the world economy been plagued by policy decisions that imposed excessive “social costs” on industrialized countries? In short, there was an excessive amount of socialist policies in the world economy that immensely expanded the provision of “free lunches” and allowed individuals to unrestrictedly “take,” but at the same time there was no improvement or sufficient replenishment on the productivity side of the equation. As the overall “social cost” increased, there would be less and less people willing to take up their “private cost” or people are more prepared to pass their “private cost” to the society, as the rapid rise in “social cost” was so alarming that individuals might as well decide to jump on the “bandwagon.” The ultimate question is how much of their resources economies would have to mobilize to pay for the rising “social cost.” There are two groups of left-wing economies. The communist groups consist mainly of Russia and China along with a few dynastic communists states, such as North Korea and Cuba. Political ideology takes prime consideration in this group of communist countries. Claimed to have “freed” their people from imperialism and capitalism, the communist countries are the least free countries, as power is concentrated and decisions are often personality-driven. The second group of “soft socialist” countries consists of a number of world economies that have either elected socialist leaders or adopted socialist policies that have weakened their economic competitiveness considerably. Political considerations have often eaten into economic performance, and economic tools are used to satisfy political goals and ambitions. Hence, the politically distorted economy would be bogged down by the political decisions. Genuine economic goals could not be achieved, and the low performance in economic activities would further spill over to the need for more political decisions. The next two sections will discuss the drawbacks of the two types of socialist countries. Before concluding, the section on Brexit will relate the discussion to the implications and lessons for European and other world economies. With the exercise and deployment of socialist policies in numerous countries, Brexit basically conveys the message that “enough is enough,” and there will be a return to rightist economic policies and principles to rebuild and restrengthen countries’ competitiveness and capability.
II COMMUNISM: POWER CONCENTRATION The ideology of Marxism and communism provides a vivid discussion on the difference between theory and practice, between concepts and realities, and between what is said and what is done. The advocacy in communism is that a state without capitalists should be best, as there would be no “exploitation” of people by people, as
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they would become their own masters. But it turned out that a communist country would be a much stronger, more powerful, and undemocratic state that exercised close control of individuals. Visible control would be administered by the military and police, while invisible control would be undertaken by the “united front,” propaganda and media, and threats. In a communist state, different opinions could be voiced but not broadcast, while acts of opposition would be suppressed. Instead of being one’s own master, a communist state was usually ruled by a minority of party members in association with government officials, supported by a vast network of intelligence-gathering to pin down all forms of opposition that could lead to potential threats. As the Marxists argued that capitalism exploited people by people, there would not be any private business in a communist state. Hence, state provision of economic materials would be most “equal,” as no one would have any privilege, nor could employers “exploit” the workers. There would not be any employers, workers would be assigned to jobs by the state, and there would be no unemployed resources. Human beings would live with dignity, as the state would look after every individual. However, it turned out that economic materials would be allocated sufficiently to all individuals, but insufficiency would appear if there was a shortage of materials. The allocation of materials would be managed by officials, who would accept bribes if any individual wanted to be treated differently. Hence, instead of “exploitation” by employers, it would become “exploitation” by empowered officials. Workers would be provided with a job, but job satisfaction, promotion, and incentives could be considered along political lines, and did not depend on the workers’ initiative and productivity. The top down approach in job assignment and industrial production would mean workers might not have the freedom or right to change jobs. It would likely be life-time secured employment, but choice and job preference would not be guaranteed. Since workers would be paid a similarly low wage, other welfare supplies, such as housing, children’s education, and medical attention would also be provided, but might not be adequate or the provisions would be based on political hierarchies. To adhere to the principle of equality, individuals would not be allowed to hold wealth and assets. Private savings would not be required, and consumer choice would not be given. As enterprises were part of the state organ, enterprises would have to submit their surplus to the state, which would have full authority to distribute or redistribute surpluses, probably along ideological preferences. The “wealth” would be amassed at the state level, as economic power would simply be concentrated in the hands of the state and the top officials. One could ask if workers were being protected by the state, or being “exploited” by the state. The so-called “surplus” was no longer held by individuals and businesses, but would be massed in the hands of the state leaders and officials. The intellectuals and the media would be the most vulnerable people in a communist state, as the former would provide thoughts, while the latter would report things that might not align with the ideas of the state. Under a communist state, people should have a “simple” mind and just listen and trust what was told and given. Suggestions, proposals, ideas, disagreements, innovations, and initiatives might not be entertained as they could pose potential challenges to the absolute power and authority of the state. Indeed, the absence of nonstate activities would produce a “stable” society, as government officials would be the only agents that would conduct activities. Hence, to assume a stateless society in communism would be naive, as the policy decisions would all be concentrated in the hands of party members and government officials. Communism in practice produced extreme forms of inequality, with power concentration solely vested in one minority group. When compared to a capitalist market economy, the production relationship between employers and employees in a communist country would be transformed into the state-owned enterprises and workers relationship. The market wage payment and differences in earnings in businesses would be transformed into the provision of a net wage and welfare support. Consumer choice would be transformed into material rationing by the state. Personal initiatives in production and intellectual freedom would be transformed into state control and monitoring of individual deeds. Instead of freedom of expression, ownership, and adherence to intellectual property rights, communist countries would prefer not to have a reliable rule of law, as that could provide the officials with “flexibility” to deal with individual legal cases. Civic development that relied on systems would be transformed into control through the personality of the leader. There would not be any nonpolitical institutions, but party members were all-powerful while the mass was powerless. Control was achieved through personal dictatorship, rather than the establishment of a reliable system. With a lack of individualistic behavior and freedom of thought that used to propel society to move forward, people in communist countries would just have to wait to be given, and take whatever was given. The extent of immobility would effectively freeze a country in time, as people just lived to survive on state provisions. In a nutshell, the drawback in the communist ideology is that it transformed all sorts of human activities into activities with “absolute” outcomes of different extremes, making one-sided decisions, amassing of power, topdown control, and absence of choice and alternatives. In actuality, communism produces extremes of political
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inequality, erosion of individual freedom, privilege of the powerful with corrupt practices, personality-led policies with no support from a well-established and reliable system, and political victimization on opposing views. These extremes largely reflected communism in the Soviet Union. Given that the Soviet Union was not blessed with many economic resources on the one hand, and the drive for ideological and military supremacy in the Cold War on the other, resource constraint meant that shortages of materials were common. The situation in pre1978 China was similar, as China adopted the Soviet model inappropriately after the early 1950s. The commune system stripped all aspects of individualism and introduced collectivism. Economic equality was synonymous with poverty, while party members were privileged. Power absolutism and ideological high-handedness was practiced in all communist countries. In the case of the Soviet Union, it was President Mikhail Gorbachev, whose attitude on openness had hastened the end of the Cold War, and it was argued that his decision to remove the constitutional role of the Communist Party in governing the state had led to the dissolution of the Soviet Union. While President Gorbachev was more receptive to the West, he criticized his followers in post-Soviet Russia. For example, he criticized President Vladimir Putin for “backsliding on democracy, corruption, and the dominance of security officers.” Thus, instead of moving away from communism, power in post-Gorbachev Russia was concentrated in the executive branch, and limited the rights and freedom of individuals and the establishment of civic organizations. Gorbachev commented that such was a “destructive path with no future” (Mikhail Gorbachev, Wikipedia). In the case of China, despite the rise in economic growth since the early 1980s, inequality emerged in various dimensions. Politically, power was vested firmly in the hands of the communist party, and would even be reinforced by the rising economy because the party had become the “wealthiest” institution in the world. The country was still ruled by a minority government, divided into at least two major factions. Corruption and abuse of power could commonly be found, and despite the effort to hunt down corrupt “tigers and flies” in government circles, the effort was seen more as a case of political struggle than the introduction of a reliable anticorruption system. Economic growth was transformed into a “cash rich” situation, with many ultra-wealthy individuals related to high level officials. After nearly four decades of growth, industrial production probably would have reached a bottleneck unless there was industrial restructuring. The unstructured financial development had led to rapid growth in the financial economy, which had grown disproportionately to the real economy. State-owned enterprises were replaced by state-controlled enterprises. Production of fake goods remained common, as one popular Chinese business person openly stated that “fake products were better than the real products both in quality and in price” (Financial Times, June 14, 2016; and The Wall Street Journal, June 15, 2016). The economic rise of China had led to an imbalance in regional harmony, especially in the East China Sea and the South China Sea. With China flexing its economic muscles, and together with the weaker world economy after 2008, the world economy would begin to give new consideration to their economic relationship with China. China’s economic attraction in the form of low labor costs and a large domestic market for imports would have to be reassessed, though some were still eager to kowtow to China for the export market. Given the rise in the Chinese currency, the world economy would have a choice of either investing in China or investing elsewhere and trading with China. The lesson is that given the world’s generous economic attention to China over the last four decades or so, China’s economic rise might not be considered as a good “showcase” to other developing countries, due probably to China’s ideological rigidity, and lack of political advance and alignment with the major world economies.
III SOCIALISM: AMASSING SOCIAL COST In the second group of “soft” socialist countries, proleftist policies had been instituted through the political process, such as the election of socialist leaders and/or pursuit of strong welfare and redistribution policies. Political diversity in free economies allowed differences in political views, but elections could produce leaders that looked to political goals. Such humanitarian pursuits as income equality and assistance to the minority were politically translated into economic policies. Given that, in all world economies, the number of low-endowment individuals would be larger than the quantity of high-endowment individuals, there would be a need to provide assistance to those who were faced with difficulty in economic survival, but politically oriented “redistributive” policies would have different impacts on different economies. Thus, politicians interested in achieving political goals might not be concerned with the economic cost involved, because they would not be responsible for footing the economic bills during their term of office. While political goals are usually short-term, consequences on the economy could be long-term. Given periodical elections, political leaders would have departed before the
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economic consequences of their political decisions surfaced. Hence, there is surely an agency problem between political decisions and economic consequences. A prosocialist regime in a free economy usually took a “two legs” strategy. On the one hand, there would be political pressure to reduce income inequality and poverty. This could be a political ideal, but strategy could differ. A “supply-side” policy would employ indirect means that would promote investment, improve education and training, and speed up infrastructure development with the intention of creating more job opportunities. Supply-side results could only materialize after a period of time. A left-wing leader may not welcome more investment, as that would allow businesses to make profits. Thus, a socialist leader would choose a “demandside” policy on welfare provision. Taxing the rich seemed to produce political capital to the socialist leaders, as capitalists were often made synonymous to “villains.” With high taxes, a socialist leader would think that higher revenue would be forthcoming. The demand-side policy fitted short-term political goals, as that could produce results within a short time, as taxes were raised, fiscal spending was undertaken, subsidies were given, and redistribution was achieved, thereby accomplishing the political goal. But, a few periods of short-term policies would produce long-term outcomes. Consider how demand-side policies would produce unfavorable economic results in the long-term on the part of investors, businesses, tax payers, and subsidy recipients. Of course, there could be instances where capital inflow coexisted with a high tax regime, depending on the nature of the business and the size of the market. In businesses where machines are needed more than workers, e.g., the small number of workers required could mean a saving on labor costs. In exceptional cases, investment could still be viable if the market was sufficiently large. Capital is mobile and flows to business-friendly markets. An investor always has the choice to invest or not to invest. Investors will probably gain by investing, but will not lose by not investing. Outflow of capital would mean a reduction in jobs at home. Capital mobility allows investors to have a greater choice of investments across time, markets, and countries. On the contrary, when investors found that an economy became unattractive, capital could flow out. Departed capital would be unlikely to return, but would promote the economy of the host country. In turn, the “capital-losing” economy would become less competitive, while the “capital-gaining” economy would become more competitive. Hence, there is a transfer of economic competitiveness. To the home country, that will be translated in terms of losses in jobs, output, exports, income, and growth. In a worse scenario, the capital that has gone to the host country could produce goods that would be imported back to the home country, which would suffer losses not only in investment, but also in foreign exchange and reserves, as the rise in imports will then be translated into a decline in the value of the currency. On the part of the government, the departed capital would mean lower production at home, a fall in output, jobs, and employment, and the fall in profits would lower government tax revenue. Government revenues could fluctuate, but committed fiscal subsidies and welfare spending could not be reduced. The loss of jobs and rise in unemployment would require more fiscal welfare spending. Thus, the government would be faced with the two sides of the sword: the loss of capital and jobs would result in loss of competitiveness, a rise in unemployment would require greater expenditure on welfare, and the shrinkage in business would mean less revenue will be forthcoming. On balance, the government would end up with fiscal deficits. How would a prosocialist government deal with a fiscal deficit? A demand-side policy should imply that even higher taxes would be needed, as it would be the able individuals who were “punished,” and higher taxes would be thought to bring higher revenue. This would hasten the departure of capital to business-friendly markets, resulting in a further shrinkage of the business sector, and subsequently even lower fiscal revenues. The alternative would be to issue government bonds, a decision to issue bonds usually would not receive much criticism, because the monetary authority would have the power to do so, and no one from the current generation would get hurt. It would be the future generation that would have to repay the debt. However, government bonds issued to cover fiscal deficits would not generate productivity that could provide the ability to repay, and the unpaid bonds would accumulate to become national debts. Consequently, the outcome would be a situation where “deficits-breed-deficits” and “debts-breed-debts” emerged. A prosocialist elected leader would probably have finished his or her term of office by the time these unfavorable results occurred. What about the welfare recipients? Would the provision of “free lunches” make them better off? The shortterm answer should be positive, but the dynamic nature of economics could produce other consequences. If welfare subsidies were provided on a permanent basis, the recipients would surely have lower incentives to look for productive jobs, and would become dependent on subsidy. Even if the number of welfare-dependent workers involved was small, their exclusion from the labor market would mean a fall in overall economic productivity. Incentives could include making efforts to look for jobs, learning a skill, or moving to a more job-favorable geographical location. The welfare subsidy could only cover their survival cost, but employment should provide the
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worker with a higher or rising wage, as experience gained could enable the worker to save or have more to spend. In other words, employed workers could accumulate their own assets over time. But when workers depend on welfare subsidies and do not equip themselves with higher individual endowments or human capital, their chance of seeking employment will be lower. Thus, the consequence would be a static labor force, high reluctance on the part of workers to seek employment, and the persistence of low wages. With welfare subsidies, workers who would be assisted permanently would not have any chance of gaining any upward mobility. In aggregate, welfare expenditures would not reduce poverty and would even restrict upward mobility. In effect, welfare spending effectively freezes society in its current status, as employment, earnings, and upward mobility would all be maintained at the current level. It looks as if the welfare recipients gained, but they could be instruments used by the politicians. Given that the quantity of low-endowment individuals would always be higher than the quantity of high-endowment individuals, prosocialist politicians could easily secure their popularity by siding with the low-endowment individuals, but whether prosocialist economic policies would be a viable policy would not be a political concern. Indeed, many low-endowment individuals would politically not object to become dependent on welfare, as “free lunches” could be preferred to employed work. In fact, welfare recipients would also face losses, as the welfare subsidy they receive takes away their chance of getting a better job in the market. The welfare subsidy would become static, but the dynamics should be that an individual working in the market could earn more with experience, or by moving up to a higher paid job, and so on. Hence, economic opportunities and the chance of upward mobility would be lost. The welfare recipient would remain “poor.” Then, who gained? The prosocialist politicians, as they would obtain power and authority through elections, have the desire to spend public funds which come from the tax payers, and behave like a “Santa Claus” when deciding on welfare policies. Demand-side policies are not only unsustainable, but also weaken the economy permanently. Capital and funds depart, jobs are lost, welfare spending is higher, higher taxes and more redistribution are required, there is loss of upward mobility and economic competitiveness, and low domestic production would mean more imports are needed for local consumption, and a weakened currency with trade imbalances results. Prosocialist politicians gain, but the entire economy suffers for the loss. Supply-side policies that involved fiscal spending on education, housing, health, social goods, and infrastructure provision should be regarded as supplementary factors to all businesses and individuals. On the contrary, fiscal spending on demand-side policies requires an understanding on the notion of social cost. The size of the “social cost” and the extent and amount of welfare provisions often become a political decision. Redistributive policies basically imply that the "private cost" of those low-endowment individuals would have to be passed on to become a "social cost" of the high-endowment individuals through the fiscal authority of the government. Likewise, by introducing more redistributive policies, the government effectively increases its size, authority, influence, and position through the need to manage the larger “social cost” burden. As more welfare spending is needed, there would be more administrative work on the part of the government, the number of government officials would have to expand, and a “big government” would emerge. By taking up all these “social costs,” the government would have stronger justification to raise taxes and engage in redistribution activities. The rise in “social costs” and the need for more redistributive policies would reinforce itself in a prosocialist government. It could even be possible that the movement between “private cost” and “social cost” is inversely correlated, as the rise of one would lead to a fall in the other. Indeed, as more welfare was given, people would be more prepared to pass their “private cost” to be shouldered by the government, and the “social cost” would rise. The shrinkage of “private cost” on the one hand, would immediately expand the size of the “social cost” on the other hand. On the contrary, when welfare spending was cut, the lower fiscal burden of the government would reduce the size of the “social cost.” In turn, with lower welfare provision, welfare recipients would have to look for alternatives, implying that they would have to take back their own “private cost.” In other words, deficit-prone or debt-prone countries would mean that their level of “social cost” had exceeded their ability to finance, and the government would have to shed their “social cost” burden by reducing welfare, so as to encourage individuals to take back their “private cost.” Socialism in many market economies failed because they had amassed excessive amounts of “social cost” that went beyond the economy’s ability to fund or finance the prolonged debts and deficits. Countries that pursued extensive prosocialist policies suffered the worst of both worlds. On the one hand, the policy of redistribution with high taxation produced unfriendly markets, and capital departure would reduce the economy’s competitiveness. On the other hand, the demand-side policies that promoted fiscal spending would result in various drawbacks: fiscal and trade deficits, a weak currency, and national debt. The disincentive on the part of
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individuals and businesses in taking up their “private costs,” and the generous welfare policy that encouraged individuals to give up their “private costs” would result in the huge accumulation of “social cost.” The final outcome would be the emergence of a vicious economic circle that restricted growth and promoted decline.
IV THE BREXIT LESSONS Many British and European citizens, international leaders, economists, and analysts were caught by surprise when the British referendum on June 23, 2016, voted that Great Britain would exit from membership of the EU, with the leave vote winning by 52% 48% (BBC News, June 24, 2016). The superficial evidence against Brexit included the loss of the bigger EU market, and such economic advantages as investment and employment for British nationals in the EU. The question, then, was if there were truly that many economic advantages, why would the majority of voters chose to leave the EU? Consider a few analytical observations. Firstly, economic activities between United Kingdom and the EU are mutual, and there is no change in their economic fundamentals. The vote was a political move, though it would create a temporary shock in stock markets. It is true that the EU is a much larger market than the United Kingdom, but the UK itself is not that a small market on its own. The United Kingdom also can reach out to the international market like any major EU country. Being a member of the EU, the United Kingdom also made financial submissions to the EU headquarters. Exiting from the EU, the UK economy could save all those official submissions. In 2015, it was reported that the UK government contributed d13 billion to the EU budget, and the EU spending on the United Kingdom was d4.5 billion, making a net contribution of d8.5 billion to the EU (The UK’s Independent Factchecking Charity, May 27, 2016; and The Telegraph, February 29, 2016). Thus, even if there was a reduction of economic activities between the United Kingdom and EU countries after Brexit, the simple calculation is whether the loss to the United Kingdom would have to exceed d8.5 billion annually. Originally, the European market comprised of a few strong industrialized countries that were backed up high technology industries with exports. Over the years, many industrialized European countries have adopted prosocialist economic policies, which often involved heavy redistribution and demand-side policies that eventually weakened their economies considerably. Furthermore, as the EU community expanded, weaker European countries were incorporated and imposed new economic burdens on the few industrialized EU members. Hence, the entire EU community was bogged down by various economic problems of the weaker EU members. The political turning point was the huge influx of refugees from the Middle Eastern, West Asian, and North African countries between 2014 and 2016. Instead of stopping the flow of refugees at their origins, German Chancellor Angela Merkel adopted an “open door” policy by openly accepting one million refugees in 2015 alone (The Guardian, December 8, 2015). The United Nations Higher Commission for Refugees (UNHCR) pledged the international community to accept refugees, but few efforts were made to stop the flow. However, it was later found that there was a security problem, as the refugee flows included a “Trojan horse,” with terrorists camouflaged among the refugees (CNN Politics, November 16, 2015). Should sympathy and fraternity be incorporated into an ideology? It is a human virtue when a person expresses sympathy for another person suffering from unfortunate circumstances. Sympathetic offerings can be in the form of personal services, and offerings in pecuniary terms are often limited to the financial ability of the giving individual. The economics of sympathy at the individual level involve only pecuniary transactions, and the receiver of the offering will not impose additional economic burdens on the giving individual. At the country level, disaster relief is provided when crises and disasters strike in certain affected areas. This could be a lump sum from government funds, depending on the extent of destruction. But, the amount would still be restricted, and there would be no extra burden on the relief providers. At the international level, when one country is faced with natural disasters or crises, international aid could come to the rescue as a humanitarian gesture and goodwill from a foreign country or the international community. Again, the relief would usually be a limited amount, and there would be no additional burden on the relief-providing country. Sympathy and fraternity should not carry any political message or implications, as it is meant to be a reflection of humanity and goodwill. However, it would be a different ballgame if sympathy and fraternity was politicized or capitalized for political purposes. Sympathy and fraternity could also be mobilized by free-ride politicians to become an instrument in reflecting a social phenomenon. It would indeed be easy to express one’s sympathy, but similar to the provision of welfare, the politician would not be responsible for the relief provision, but would pass it on to someone else, namely the tax payers. It could be worse if the amount of relief burden was not a onetime payment, but required post-event expenses. Sympathy expressed at the personal level could be escalated to
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an ideological level, requiring prolonged fiscal commitment that would simply impose extra burdens on the size of the “social cost.” The problem of the refugees was that even though it was Germany which was keen to open its doors to the refugees, once they obtained EU status they would travel to the English speaking United Kingdom for jobs and welfare. Hence, it was Germany who was keen to express sympathy and get the political capital from shouldering the burden of the refugees, but the burden of the high “social cost” would fall onto UK tax payers. On the other hand, low-skilled British workers would face strong competition from incoming refugees as the supply of workers increased. Hence, other than the British tax payers who would see that their interests were hurt by the influx of refugees, ordinary workers, including earlier immigrants who had managed to find employment in Britain, would definitely feel threatened by the incoming refugees as competition in the labor market could reduce their chance of employment. Thus, the preference to leave the EU came from tax payers and salaried workers. There is also the social dimension in receiving illegal refugees. In addition to welfare expenses, how easily and quickly would these refugees integrate into the local economy, or would they form small ethnic colonies inside the host country? Hence, welfare assistance may not just include the amount of entitlement, but also the impact on schools, hospitals, and housing would add to the required resources. In some cases, these refugees would send the welfare back to their home country for families in need. In addition, there is also the cultural, ethical, racial, religious, and language divide, especially when crimes, violence, and acts of terrorism are committed by these refugees. Hence, one can imagine the risk involved in the security of the host country and its people. There was also the political side in the lessons of Brexit, when British politicians looked forward to the next general election. While the Conservative Party, led by Prime Minister David Cameron, who advocated for “remain,” the Labor Party in Britain also chose to support the “remain” ticket. What the British Labor Party failed to see was the sentiment of the workers who were uncomfortable with the influx of refugees competing for jobs. Hence, the Conservative Party would likely win the next British election, whatever the outcome of the referendum would be. Should the referendum have voted to “remain,” the Conservative Party would have benefitted from the political capital from the referendum, as both the Conservative Party and Labor Party advocated for “remain.” With the referendum result of “leave,” and subsequent resignation by Prime Minister David Cameron, the new Conservative Prime Minister Teresa May would have to steer the “exit” policy, and that would provide credibility for the Conservative Party to win the next election. Thus, the Brexit referendum was an excellent political strategy on the part of the Conservative Party in improving their chance to win the next general election in the United Kingdom. Although the stock market all over the world experienced some shocks and the British pound depreciated, the shocks soon settled as the value of the British pound revived, and the international stock markets returned to normal. Investors and speculators usually look for events like Brexit to give them an opportunity to trade and gain in the stock markets. Hence, it would not have any long-term impact after some initial shocks in the international stock markets. It would indeed be simple-minded to think that the British economy would suffer from leaving the EU. Politically, as Boris Johnson, the former London Mayor, advocated repeatedly, the United Kingdom could regain its own autonomy in dealing with various issues without interference or concern with the EU community (RealClear Politics, June 21, 2016). In many ways, it would be easier to revise the economic competitiveness in the single UK economy than the collective EU member countries. The strategy would have to come from the supply-side factors, such as tax reduction that boosted business confidence and attracted investment from the EU (Mail Online, July 3, 2016). Should the post-Brexit British government decide to adopt more business-friendly policies, such as a lowering of profit tax, investment could even leave the EU and come to the United Kingdom. Thus, with Brexit, the chance of regaining its economic competitiveness will be high for the UK economy. The first lesson of Brexit is that the British voters were not prepared to shoulder the economic “social cost” of refugees, as the UK government might not have control over the influx once these refugees entered from other EU countries. By departing from the EU which has taken up numerous prosocialist policies, the UK economy could look for fresh policies that could lead to new economic directions and pathways. The favorable outcomes of Brexit should be seen in 3 5 years’ time, when the new policies in the UK lead to a recovery of economic competitiveness, while countries in the EU probably will remain stagnant and stay unchanged. The end result should be a stronger UK economy, partly because the United Kingdom will be able to get away from the “social cost” burden of the EU, and partly because it will give the United Kingdom new opportunities to plan its own economic path. It is even possible that the UK economy will lead the economies of other EU members.
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Would Brexit lead to more “Eurexit”? As the size of the EU’s “social cost” was jumping, other EU members could see the advantage of, or the need for exiting, especially those EU countries which were not keen to adopt prosocialist policies. The implications of Brexit should relate more to other EU members than to the United Kingdom. Indeed, the EU should rethink its strategies in relation to its refugee policy, and question whether extensive demand-side policies are appropriate and sustainable. The refugee issue and Brexit could serve as a “wake up” call to the EU. If there was the desire to reduce its “social cost” burden, the EU would have to revise its policy orientations. Instead of “demand-side” policies, the EU would have to adopt “supply-side” policies, in order to revitalize and reenergize its economic competitiveness by restricting further decline and encouraging growth. Indeed, there are a number of EU countries that could be revitalized easily if prosocialist and prowelfare “demand-side” economic policies were replaced by “supply-side” policies promoting business-friendliness. Such medium-sized EU countries as Spain and Portugal could gradually replace their redistributive policy by promoting more entrepreneurship and reintroducing a low tax environment, in order to attract business and investment. Indeed, the ultimate objective is to regain economic vigor in these countries through marketfriendliness, and individuality through creativity and innovation. The prolonged adoption of prosocialist policies in many EU countries has limited regional growth considerably, the lack of growth in turn has contributed to economic decline. And the economic decline in the EU would comparatively culminate in the economic rise of other countries through “push” and “pull” effects in investment and other economic activities. The implication of Brexit would be the extent of accumulated economic weakness brought about by prosocialist economic policies, and the desire to regain a country’s economic strength through cutting the excessive “social cost” burden and reinstituting the role of individuals being responsible for their “private cost.” The lesson of Brexit is that the EU has taken up too many socialist policies, and it is time to look for answers elsewhere, probably from the “rightist” ideology and from “supply-side” economics.
V CONCLUSION Have world leaders mixed up personal sympathy and fraternity with political ideology? It is necessary to provide economic assistance to people with low endowments in all economies, but assistance should be structured in such a way that it will stimulate the recipients, and not make the recipients dependent on the assistance. Assistance should only be given within the economic ability of the giver. An agency problem exists in the provision of economic assistance, as the policy decision-makers are not the actual funders of the assistance, as the spending decisions made by officials are separated from the financiers who are the tax payers. Socialists tend to complain about the extent of economic exploitation by capitalists. This assumes the dichotomous nature between employers and workers. The logic is that employers create jobs, and workers should be free to move between jobs. Hence, employers need workers, and vice versa. Thus, their relationship should be complementary. Economic activity produces “relative” outcomes, whereas political activity generates “absolute” outcomes or extremes. Political inequality is worse than economic inequality, because political relationships are often “oneway,” while choices and alternatives are often available in economic relationships. Communism failed because it generated extreme and absolute political inequality and a privileged minority, and individual freedom was severely restricted and suppressed. Socialism failed because the large government reinforced itself by amassing the increasing “social cost” that demoted growth and promoted decline. The economic spillovers from socialist economic policies included the possible departure of capital funds and loss of domestic jobs, and the loss in output led to economic shrinkage. The fall in economic competitiveness would not only contain a loss that would spread across the entire economy, but the economic opportunity of the future generation would also be restricted as national debts hurt the economic potential of the younger generation. Consider the analysis of some humanitarian issues, such as poverty reduction and attainment of equality. Numerous studies (e.g., Huidrom et al., 2016) by the United Nations and other international institutions have for decades called for poverty reduction and elimination of inequality. If there were effective policies to deal with poverty and inequality, how come these issues are still vividly alive in many developing countries today? How would all these international institutions explain such an outcome after spending so much on their studies, research, and consultancies? The emphasis could depend on how policies have been recommended and executed. Demand-side policies would encourage more spending to aid the poor. Supply-side policies would improve productivity through education and the creation of job opportunities. Productivity improvement would reduce poverty, but inequality could remain.
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However, which world economy has ever achieved economic equality? Differences in endowments, differences in education provision, differences in earnings and rewards, and differences in many other input factors suggest economic outcomes are diverse. Economists would use the term “difference,” while politicians would use the term “inequality” to indicate the extent of diversity among economic activities. Given that economic activities produce “relative” outcomes, it would be natural for the emergence of diversity, differences, or inequality. Political inequality is more damaging and “absolute,” while economic inequality can be improved. Economic differences should not be politicized. Economic growth and development through supply-side policies are the effective answers to poverty reduction. Politics often turn out to be the obstacle to genuine economic progress. Brexit should not be considered as a protectionist policy, but an attempt to reduce the country’s vast “social cost” imposed by other EU members and refugees from fragile states. Economic vitality has been given a higher priority than fraternity. Indeed, it is the promotion of productivity and growth that allows an economy to have the resources to help others. On the contrary, it would not be viable for a country to accept an economic burden that was not generated by its own people. Fraternity does not mean that one economy’s ability is constrained by the problems originated in another country. Brexit symbolized the failure and unsustainability of prosocialist economic policies. The weakness in economic competitiveness in many European and world economies has to come to an end, and political efforts have to concentrate on revitalizing the country’s economic strength. The UK referendum has shown that there is no change in the economic fundamentals between the United Kingdom and EU, but the UK economy would be brought down by the burden of the “social cost.” Hence, instead of spending the UK’s resources shouldering the “social cost,” the same amount of resources could be productively used to expand the UK economy, making it more competitive and regaining its vitality through a different set of principles and policies. Given that there is no change in economic fundamentals, the political argument of Brexit was only superficial. Brexit serves as the precedent to show that socialist economic policies are not sustainable, and other European and world economies should start to think about the undesirability of socialist economic policies, and make comparisons with capitalist economies. The voters in democratic countries should start making political assessments when looking at the numerous problems arising from the adoption of socialist economic policies, such as rising national debt, falling economic competitiveness, loss of individual economic control but increase in the size of the government, losing export markets and falling investment attractiveness resulting from redistribution policies, and growing economic dependence with lack of opportunities. Politically, there is every possibility that “right wing” parties will be elected in democratic countries in the post-Brexit years, as voters in democratic countries would like to regain their economic vitality, recover their competitiveness, and expand their economic capability.
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