Shades of Grey: economist explains complexity of “social market system”

Published 9:22 am Monday, March 21, 2016

Amid finger pointing in the presidential election season, supporters of candidate Bernie Sanders (D-Vt.) have been called socialists, among other things. Sanders himself appears to accept the term, calling himself a “democratic socialist,” and promoting “social democracy.”
He does not advocate socializing the means of production, and says he interprets the term “socialism” as a modern means of accomplishing democracy in an environment rife with what he calls “income inequality.”
“I think [socialism] means the government has got to play a very important role in making sure that as a right of citizenship, all of our people have health care; that as a right, all of our kids, regardless of income, have quality childcare, are able to go to college without going deeply into debt; that it means we do not allow large corporations and moneyed interests to destroy our environment; that we create a government in which it is not dominated by big money interest,” Sanders said in an interview on Democracy Now. “I mean, to me, it means democracy, frankly. That’s all it means. And we are living in an increasingly undemocratic society in which decisions are made by people who have huge sums of money. And that’s the goal that we have to achieve.”
Though Sanders’ platform is not considered “pure socialism” by many economists, his use of the term “social democracy” leads some to inquire about the nature of the American economy, which has both a private business sector and public institutions.
Dr. David Campbell, associate professor of economics at Milligan College, said it incorporates qualities from different economic structures. He listed four: capitalism, free market, socialism and communism, and described the characteristics and efficacy of each.
Capitalism asserts that the means of production are open to private ownership, while free market says they are open to private ownership with some degree of government intervention. Socialism allows the state to control the means of production while communism allows the means of production to be jointly owned by the proletariat, or the wage workers. Both socialism and communism are considered “statist.”
“America would fall under the free market category,” said Campbell. “A lot of times, these are discussed as absolutes — as blacks and whites. Historically, and today, we see that it’s all shades of grey.”
He said American economy is actually more of a social democracy than a free market, because it allows for a bit more government intervention. To further clarify, he said it is a “social market system,” meaning it is based largely around markets, but it has a strong social safety net built in.
He used the American business model as an example, explaining businesses must innovate and compete to allocate resources, but they must also pay into social security, unemployment insurance and Medicare.
“Even in America,” which ranks 11th in the global Index of Economic Freedom for 2016, Campbell said, “We have a high degree of government intervention since the New Deal with Franklin Delano Roosevelt.”
FDR sought to regulate capitalism, while reducing inequality and poverty and recovering the nation from the Great Depression. He implemented the Civilian Conservation Corps, Tennessee Valley Authority, Works Progress Administration, Social Security, and the Rural Electrification Administration, among other social-democratic initiatives.
“We implemented a strong social safety net – so the ideal was an economy based on markets and market activities, but to include some safeguards,” said Campbell.
However, Campbell said it is wise to be cautious about government policy that by definition redistributes resources from the productive part of the economy and either consumes them itself or reallocates them to another portion of the economy.
“The question becomes whether government is both competent and honest enough to accomplish this task. While some inefficiency and corruption is tolerated, it can quickly snowball into some of the statist economic disasters witnessed in the 20th century,” said Campbell. “In the end, it boils down to how deep the shade of gray should be.”
While some consider taxation and social programs of any sort to be statist constructs, Campbell said it is not so cut and dry.
He said various classifications of government provisions of goods exist, like public goods (national defense, public education, infrastructure, public parks), social safety net programs (Medicare, Medicaid, Social Security), and economy boosters (like New Deal programs).
Each of these classifications, he said, may not be considered socialist, per se, but that some, like social safety net programs are considered egalitarian. Economy boosters would be fully integrated into a statist economy, but are considered an addendum to market economy.
“Public goods and externalities are issues that are not easily resolved by a market/capitalist system,” he said. “A government will generally need to provide for them in any economic system.”
When comparing statist (pure socialist or communist) societies to capitalist constructs, Campbell said capitalism has two key benefits: information and incentives.
“Markets work because they take vast sums of decentralized information —of the ways we value something — and they consolidate it into usable metrics (prices), which function as signals that coordinate resources across an economy,” Campbell explained. “The socialist and communist constructs have no ability to do that, so there is no way to allocate resources properly.”
Similarly, he said markets create incentives for people to act in ways that are socially beneficial, productive and efficient. They also create incentives for businesses to innovate and combine resources to focus prices and profit.
In a pure market economy, he said, “The very least you would need is what’s called a “night watchmen state government” that provides property rights, police and either a state or national judicial system.”
He said a pure statist economy has never succeeded; even the Soviet revolutionary Vladimir Lenin had to introduce market reforms because people were starving. Many similar experiments with central planning and socialism have ended poorly, he said.
“They have mostly gone to the market system or dissolved or are miserable places to be,” he said. Examples included the dissolve of the Soviet Union, the market reform of communist China, and the disparity of North Korea, which remains statist.
The relationship between the market and the government is complex, Campbell said, explaining that sometimes one takes the blame for the other’s deficiencies.
“Markets, at times, get a bad name like the housing boom and subsequent market fall, but some of that resulted from the Federal Reserve dropping interest rate and other government intervention,” Campbell said. “The government plays a huge role in education, healthcare and finance, and in some instances, more than it probably gets credit for, but it also causes some problems that get laid at the door of the free market.”
He said a stereotype exists that America is the free market ideal and that countries like Sweden are the socialist ideal. “In truth, we are really much closer in grey area than we realize,” he said.
Neither Sanders’ definition of social democracy or his advocacy of tax-funded services like senior pensions, job insurance, universal national health insurance or student aid are new. FDR promoted the same concepts, even suggesting a Second Bill of Rights in 1944 to guarantee them.
Similar concepts, including social security, were also introduced by the American revolutionary author Thomas Paine in the 1790s, who wrote that since God ha​d​ provided the earth and the land upon it as a collective endowment for humanity, those who have come to possess the land as private property owe the dispossessed an annual rent for it.
Though simplifying the complex interrelationships and “greyness” within a social market system is no easy task, Cambell said it has marked differences from pure socialism.
The greyness, correlated with complexity and lack of transparency are what he said he believes make it hard for people to understand the government and regulations.
“It is very difficult to argue shades of grey, and it gets easier to argue black and white,” said Campbell. “A lot of it comes down to rhetoric, and when trying to make an argument to compare greys, it’s easier to say, ‘Look how terrible black or white is.’”

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