Socialism, Competition and Politicians

This piece is a brief response to a twitter exchange I had last month.

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In his tweet, Mr @falleneconomist questions my assertion that socialism impoverishes countries. He implies that my claim cannot be correct and lists two facts (no doubt limited to only two because of the 140-character twitter limit) to support his contrary position: first, that China is doing well despite it being a socialist country; and second, “most politicians in capitalist USA are fabulously rich.”

It’s true that China is a socialist country. It has been socialist/communist ever since Mao Zedong established the People’s Republic of China in Oct 1949. His Communist Party of China (CPC) undertook “The Great Leap Forward” between 1958 and 1961 to transform China’s agrarian economy into an industrialized one through collectivization. The result was the horror of mass starvation that is known as “The Great Famine.” Chinese government statistics put excess death during that period at 15 million but independent observers estimate the death toll to be between 20 and 43 million.

Communism is not kind to people. Here’s an eye-witness account by a Chinese government official.

I went to one village and saw 100 corpses, then another village and another 100 corpses. No one paid attention to them. People said that dogs were eating the bodies. Not true, I said. The dogs had long ago been eaten by the people.

The communist mismanagement of the economy kept China desperately poor — so poor that it was even slightly below impoverished India as late as 1978. Then something happened to China. Deng Xiaoping. Deng led China’s revival with market-economy reforms. To the extent that China moved away from socialism, it has prospered. China’s story underlines the importance of freeing an economy from the shackles of socialist centralized command and control. Although China is not a market economy, to the degree that it has adopted a free-market attitude, it has prospered. By 2015, China’s economy has left India’s socialist economy in the dust because India steadfastly refuses to reform.

So in short: The steps that helped China climb part way out of extreme poverty were steps away from socialism.

Mr @falleneconomist’s second point was about the fabulously rich politicians in the US. Fabulously rich politicians are not uncommon. But the norm is that fabulously rich politicians go hand in hand with extremely impoverished countries. Which makes it unlikely that the US will have fabulously rich politicians, considering that the US is not an impoverished country. Let’s examine the evidence.

For a start, let’s agree what “fabulously rich” means in the context of the US and other developed nations. Buffet, Gates, et al, with their net worth counted in the tens of billions are fabulously rich. Others with net worth in the hundreds of millions are rich but not fabulously so. No politician makes the fabulously rich club. Moreover, even for those politicians who are rich by whatever standards, we need to ask if they were rich before or after they attained political office.

Some politicians in the US are rich but not fabulously so. Rich politicians in the US have always been rich first and then become politicians. Take Michael Bloomberg, for example. By the time he became the mayor of New York City in 2002 (re-elected in 2005 and 2009), he was already a wealthy man, having been the CEO of his own company for over 20 years. It is true that by 2013, Bloomberg’s $33 billion (estimated by Forbes) made him the 13th richest man in the world. But the perks of political office had nothing to do with his wealth.

This is not to imply that political power does not confer some financial benefits; it does. There are laws against blatant misuse of political privilege and on the rare occasion when greed does overcome prudence, the punishment is almost always guaranteed. This provides sufficient barriers to considering political power as the road to fabulous riches. The plain fact in the US is that there are ample opportunities for becoming wealthy but being a politician is not one of them. Want to be wealthy in the US? Build a successful business.

So, there are no fabulously rich in the US who became so as politicians. Perhaps you mean some third-world socialist country. India, for example.

In India, in contrast to the US, being a politician is a sure-fire method of becoming wealthy. Even municipal corporators in two-bit towns rake in the moolah through public works contracts. They are the small fry. Average MLAs and MPs make hundreds of crores. Ministers and chief ministers of states take the stuff away in truckloads. One ex-chief minister of a large state is reported to be worth tens of billions of dollars. One chief of a major political party was reported to be among the top 10 wealthiest politicians in the world. One ex-prime minister from the same party had a few billion dollars in a foreign bank account. He was definitely not an exception.

We have heard stories of immense wealth being stashed in “Swiss banks.” Let’s think about who the owners of these accounts could be. Could they be people who made their money in business? Unlikely. Because if some rich businessman had a spare billion or two, he would put it in his business or in property. He would make the money work for him. Putting it in a foreign bank does him no good. Certainly, he may keep some spare change abroad. But the bulk of a businessman’s wealth is tied up in his business.

The people who keep their wealth abroad are the kind who made their money through political means, not business. In India, the way to make your billions is through “crony capitalism.” The economy is specifically designed and structured for wealth extraction using political means. Here’s the short-form narrative of how this works.

The Indian government is mandated to control the economy for “public interest” reasons. That gives those in government immense discretionary powers to hand out licences, permits, quotas, subsidies, commercial contracts, etc., to companies it favors — its cronies. Controlled markets means that competition is limited, which lead to super-normal profits (“rents” as economists call them.) Part of these profits are shared with the politicians and bureaucrats.

On a side note, I have a conjecture which I call the “conservation of competition.” In free-markets, there’s a certain amount of competition in various sectors. If free entry is allowed, the competition in the market segment leads to normal economic profits (which means zero economics profits or zero rents). But if free entry is not allowed, then it gives rise to rents. Competition then shifts up one level: competition for the market. That’s called “rent-seeking”. My conjecture is that the less competition there is in the market, the more competition there is for the market. Hence the conservation of competition.

To make the idea a little more concrete, imagine that in a free-entry regime, firms will compete for the market for cars until all rents are competed away. But if the government restricts entry into the market and gives only two firms the license to serve the auto sector, and assigns quotas on how many cars each firm can sell in the market, then these firms will make super-economic profits. Automotive firms will then compete for the license and quota to serve the market. This competition is resolved in favor of those firms that will pay the most for the privilege. This allows the licensing authority — politicians and the associated bureaucrats — to become wealthy.

The story does not end there. By shifting the competition from in the market to competition for the market, it leads to yet another higher level competition: the competition for being the licensing authority. That is, suppose being the “Minister of Industries” gives one the opportunity to make, say, billions of dollars a year. That attracts the greediest to compete in the political race. So they would be willing to spend quite a bit — hundreds of millions — to win the political race so that they can make the billions.

In functional notation:

(Competition for the market) + (Competition in the market) = Constant . . . (1)

(Competition for political office) = increasing function of (Competition for the market) . . . (2)

It follows from (1) and (2),

(Competition for political office) is a decreasing function of (Competition in the market.)

In a sense, the absence of free markets (which for brevity we will define here as markets with free entry and exit) leads to competition for the market, which leads to competition for political office, which leads to the corruption of politics. That’s the basic story of crony capitalism — a side-effect of socialism.

Here ends my brief response to Mr @falleneconomist.

11 thoughts on “Socialism, Competition and Politicians

    1. The fact is that socialism is crony capitalism. Capitalism is the base position. It degenerates into socialism with cronyism.

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  1. Though i agree with the theory about the system in India there are a couple of points that i find incorrect –

    1) >But the perks of political office had nothing to do with his wealth
    This is untrue in US politics unless you ignore the revolving door. Latest example, paraphrasing Matt Taibbi, Eric Holder went from being the top cop of US to the lobbyist for the very same corporations. Clintons (father/mother and daughter trio) raked in millions why? definitely not because they have valuable things to say but for lobby groups/vested interests to have an IOU. The NSA chief (admittedly a technocrat not a politician but nevertheless) went from top spy to working for company that monetizes defense against vulnerabilities. Can you honestly say his prior work exp had nothing to do with the current job?

    2) >The people who keep their wealth abroad are the kind who made their money through political means, not business
    Not necessarily true. even big corps like apple has stashed $140 billion cash reserves in tax friendly places. This doesnt mean they have stopped investing or buying back their own shares, they are by taking out loans enabled by cheap money, just that bringing it into the mainland is more costly due to the tax regime. Same is the case with indian politicians, bringing in money and investing here is more costly than parking it in tax heavens

    The way things are heading I am turning more of a pessimist by the day and however cynical i may sound I believe irrespective of whether a system is capitalist or socialist or barter-based a good number of people are dishonest and always look for more power/wealth. Socialism just gives an easy path for the incompetent to achieve these goals. Capitalism denies this path for the incompetent. Only the smart and competent get to be corrupt.

    The main difference between politicians in developed countries vs those in India is that in India it is a more in-your-face corruption but in the US they use more sophisticated means like –
    1) legalizing insider trading for congressmen
    2) having better propaganda control though MSM
    3) backroom/close door settlement deals by DOJ for criminality by corporations without the oversight of judges (JP morgan $13 billion fine)

    4) gaining fast track trade authority that overrides democratic principles by giving representatives 83 seconds (…ish) to voice their opinion and no more

    Give the indian politicians some time to chisel their ugly (natural?) side (we are a 70 ish year young democracy, US is 250 ish yrs old), with the amount of illiteracy and lack of awareness in india and the sheer incompetence of the media, we wont know what hit us.

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    1. Our definition of “wealthy” appears to be different.

      Certainly, US politicians get financially rewarded for their power to influence policy. But that reward is indirect and not in the billions of dollars which is what counts as wealth in a very wealthy country. At best, US politicians make a few millions: which is not much to write home about because there are millions of multi-millionaires in the US.

      Indian politicians, by contrast, make hundreds of millions of dollars: in a country where there are hundreds of millions of abjectly poor people.

      There are quantitative differences between India and the US. And in most cases, those quantitative differences amount to qualitative differences.

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      1. >But that reward is indirect
        indirect only in the sense that there is a time gap not in the sense of a quid pro quo. year x -> work for pvt firm, year x+5 -> gov regulatory body, year x+10 -> back to pvt firm. How can one resolve the inherent conflict of interest here?

        if you are arguing that politicians in US are richer by a smaller degree wrt the avg. population than politicians in india that, IMO, is a moot point. It nevertheless means politicians or people in general get to be corrupt irrespective of a capitalist or a socialist ecosystem.

        if your thesis is “socialism enables corruption to a much greater and more absurd degree than capitalism” then i have no issue with that and it is patently obvious looking at the license-quota-raj and your wonderful explanation of competition-in-market vs competition-for-market

        but if it is that “socialism enables corruption but capitalism is a self-correcting system” i completely disagree.

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      2. Let’s get back to the original point that initiated my piece. The claim was that US politicians also become wealthy, even though they are in a capitalist society. I attempted to respond to that by writing that accumulation of wealth by politicians is not the norm in the US, unlike in India.

        I don’t disagree with you regulators sometimes (perhaps often) go on to become lobbyists for industries they were regulating as government officials. They enjoy pecuniary benefits for certain but that is not the same as becoming fabulously wealth (the term that provoked my piece.)

        I am not naive enough to think that any society or economy is immune from corruption. But the degree of corruption, the social acceptance of corruption, the prevalence of corruption differs from society to society.

        In socialist economies, the only avenue open to people for wealth accumulation is through political power and influence. How can it be otherwise? It is not as if ambitious people in socialist economies can create businesses and amass vast fortunes.

        In capitalist economies, the people with real wealth are the ones who have at some point created wealth for the society and a part of that wealth that they create they get to retain for themselves. Steve Jobs was a billionaire not because he got the government to transfer wealth to him but because he created stuff that people forked over their money to buy. The profits that Apple made is a small percentage of the wealth that Apple created for society at large.

        (For the record, am an Apple anti-fanboy. I find Apple products unusable even though I admit that their hardware and packaging is slick. I have never bought Apple and will never ever buy anything from them.)

        About your last point: I cannot comment on it till I know what you mean by “capitalism.”

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      3. > that is not the same as becoming fabulously wealth

        I guess “fabulously” is a subjective term. “median household net worth in the U.S. was $68,828 as of 2011. The median of all Congress members’ average net worth… was slightly more than $1 million as of 2012” [source:
        http://www.usnews.com/news/blogs/data-mine/2014/01/09/let-them-eat-cake-members-of-congress-14-times-more-wealthy-than-average-american%5D. I consider this fabulous enough 🙂

        Unfortunately I do not have data on the declared median net worth of indian citizens and politicians. It would be interesting to see how far apart they are.

        >till I know what you mean by “capitalism.”

        will respond in your AMA post

        editing to add –
        >In socialist economies, the only avenue open to people for wealth accumulation is through political power and influence.
        Agree, what i call “access capitalism” (TM)

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  2. 1. If Bill Gates is your standard of fabulously rich in US then Ambanis should be the corresponding standard in India. How many politicians in India have the kind of wealth/economic power as that of the Ambanis?

    2. Politicians in US are just as corrupt (if not more) as the Indian ones. The corruption in US is simply much more sophisticated – it takes the form of speaking fees, the revolving door (getting a job in big business after a stint in govt and back again and back again) with massive conflicts of interest, unlimited campaign finances (the orwellian citizens united) etc.

    3. It is true that China prospered after it moved towards market economy. In India too, we saw a somewhat increased prosperity after liberalization in 90s. But you always have to look at such things in context. You have to understand that China, India were in financial crisis and needed investments. Both being poor, that meant outside investments. The forces of capitalism are overwhelmingly strong in the world and both China and India were forced to move towards market economy in order to get aid. The situation in Greece today is very similar. Greece elected a socialist govt but because they need foreign aid, they have to comply with the foreign demands for ‘austerity’. Once they get aid, naturally things will be better at least for a while – simply because no money/economy is worse than some money/economy.

    So, rather than socialism impoverishing the countries and market economies being the emancipation, it is usually the case that the overwhelmingly dominant capitalist forces in the world simply refuse to do business or trade with specially third world countries unless those countries toe the big business’ line. That is the truth of it. So, at best you can say that because global capitalist forces are so overwhelmingly powerful, it makes sense to have a somewhat capitalist economy so that we don’t isolate ourselves.

    4. There are socialist countries in the world that have been quite successful and which you rarely mention – Scandinavian countries, France and Germany though not completely socialist are quite socialist by US standards. In fact, these countries have consistently topped most of the development and human indices for years and decades and fare much better than US in various areas from healthcare to education to internet connectivity to crime and so on. Did you know that US alone has close to 25% of the whole world’s prisoners?

    5. Your whole “in-market vs for-market competition” argument doesn’t hold. US is dominated with monopolies or duopolies in many sectors without having the licensing environment like in India. The best examples are telephone/cellphone, cable, internet service providers. There are usually at most 2 or 3 choices in any area and they absolutely suck. In the developed world, the US has one of the worst internet connectivity. Of the couple of remaining ISPs, they still want to merge and it is the govt regulator that is preventing such a merger (at least for now).

    Cronyism in US is just as bad as in india. The revolving door takes care of that. Govt regulators are often hired from the industries or the lobbies for the industries that they regulate and often go back to those same businesses after their stint in the govt, examples of which are numerous.

    6. The reasons for the success of US are varied and their choice of crony capitalism for their economy is more or less incidental. Starting from the 20th century, because of various world events and because america is safely separated by the atlantic and the pacific from most of the rest of the world, was a top choice for migration – the brightest european scientists and engineers fleeing europe in the first half of 20th century, and more recently best minds migrating from china, india, west asia and so on. they have all given an immense edge to the technological superiority of US. After the 2 world wars, Europe was devastated (Germany was even paying reparations until a few years ago). The rest of the world was still in the grips of colonialism or just getting out of it. US was bound to succeed almost entirely because of that.

    There are many things to be learnt from US but we should guard ourselves against
    hyperbole. Promoting capitalism as the ultimate panache or slandering socialism as an evil will only cause us harm. If we don’t we’ll only have unrealistic expectations and our dreams will come down crashing sooner or later. There are things to be learnt from both capitalism and socialism and a balanced approach is the best.

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    1. your understanding of what socialism is is flawed as is your understanding of Scandinavian countries.

      http://www.libsdebunked.com/socialism/scandinavian-socialism-argument/

      The wealth amongst private citizens in the US is considerably ahead of politicians. We can exclude the top 100 people in the US and it would still hold true. In contrast if we exclude Ambani (and even with him the wealth of the Maino family as well as Sharad Pawar etc would easily rival that of the Ambanis) then the wealth of the Indian politicians would land them on the Forbes Four Hundred list

      The dynamism of the US results in no one being a monopolist for long. Look at the median and standard deviation of companies in the S and P 500. I recall in 200o the four horse men of the Internet were Sun, Oracle, Cisco and EMC. Today the four horsemen seem to be Google, Facebook, Apple and Amazon.

      Ultimately trust the people. Where do you think the bulk of the people would choose to live if the could live anywhere? Why not replicate that destination country’s environment?

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      1. Ultimately trust the people. Where do you think the bulk of the people would choose to live if the could live anywhere?

        I totally agree.

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