Socialism on the March

"THE Cold War is over, and we won," proclaimed the Doonesbury comic strip. Countless op-ed columns and political speeches rely upon the same assumption: capitalism has triumphed, and Eastern Europe is about to become the next outpost of Reaganstyle laissez-faire.

The American Right giggles that the disintegration of Eastern European communism has discredited the agenda of everyone who ever sought to ameliorate the human costs of unbridled capitalism.

Conservative economics columnist Warren T. Brookes succinctly captured this sentiment when he recently wrote, "If the so-called American 'liberal' left had any real self-respect, they would now be engaged in agonized reflection and collective head-banging over the appalling errors of their own pusillanimous predelictions for the impoverishing hand of statism, and their long contempt for freedom's economic agenda."

In other words, all of us who thought that there is a positive role for government intervention in a market economy were shamefully mistaken. To Brookes and his ilk, the failure of communism means that any government intervention in the interest of social justice is economically and morally bankrupt.

It's an inspiring thought for conservatives. It's also dead wrong.

The failure of Stalinist central planning to provide for the demands of a modern consumer economy proves only two things: that democracy is better than totalitarianism, and that a market-based economy is the only efficient way to match factory output to people's wants.

No liberal ever questioned those two truths. What liberals question is the ethics of the notion that the market should make decisions of life and death--by determining the allocation of food, housing and medical care.

The transformation of Eastern Europe is not an indictment of this view, but a vindication. It is true that Eastern Europeans tossed out the communists, a move that everyone should applaud. But as they look for alternatives, they aren't looking to Reaganism or Thatcherism. The most commonly cited models for a post-Stalinist Eastern Europe are corporatist Austria and social democratic Sweden.

Brookes writes that "In Budapest and Prague, they are now reading [Milton Friedman's] Capitalism, Freedom and Democracy."

But are they? Imre Pozsgay, the most popular politician in Hungary and the leader of the democratic New Socialist Party, is a democratic socialist. So is Jens Reich, founder of the East German opposition front New Forum. And so is Zhelyu Zehlev, leader of the Bulgarian opposition group Union of Democratic Forces. And Solidarity, you will recall, is a labor union, not the Polish Chamber of Commerce.

BUT these inconvenient facts don't discourage conservatives. Eastern Europe's flirtation with social democracy, they believe, is just a symptom of their inability to wean themselves from welfare statism. After the Hungarians and Czechs learn a few tough lessons about the economic infeasibility of welfare, conservatives say, they will see that the only way to true prosperity is the American way--a sink-or-swim economy.

A recent editorial in the conservative National Review smugly dismissed the popularity of social democracy in Eastern Europe with "We know what has made us prosperous and powerful for 200 years. We should let the world know."

Conservatives disapprove of state actions to ensure distributive equity because they believe in the universal truth of the "efficiency-equity tradeoff." In the words of Baker Professor of Economics Martin S. Feldstein '61, any attempt to redistribute the pie results in a smaller pie. Welfare creates perverse incentives not to work and reduces the efficiency of business--the so-called "leaky bucket." Baird Professor of History Richard Pipes is fond of calling redistribution a "parasite" on the body of a healthy capitalist economy.

But the people of Eastern Europe don't see it that way. Nor do the people of Western Europe, for that matter. The relationship between efficiency and equity is not as simple as Ec 10 would have you believe. In many cases, government-sponsored social security programs can actually improve the efficiency of a market-based economy, by reducing people's resistance to the structural changes and economic dynamism necessary for a robust economy.

TAKE the case of the Swedish ship-building industry. Twenty years ago, it was one of Sweden's largest industries. Today, it is almost nonexistent. The Swedes realized that the long-term competitiveness of ship-building was at risk, so they switched to making other things. That's how the free market is supposed to work.

But try telling American workers that the American automobile industry has got to give way to other things. Auto workers would never go along with such a move. For American workers, losing a job is a recipe for financial ruin--inadequate unemployment compensation, no re-training and lost health insurance. Thus, they resist adjustment, innovation and dynamism.

The Swedish shipbuilders, on the other hand, are confident that the natural workings of a market system will not leave them exposed to ruin. Thus, they are more willing to allow the system to do its productive thing.

As of 1982, there were five countries in the world with a higher per capita Gross Domestic Product--the best indicator of national prosperity--than the U.S. Four of those countries, Sweden, Norway, Denmark and West Germany, are, in varying degrees, social democracies. The fifth, Japan, succeeds because it has the sort of interventionist industrial policy that conservatives loathe.

America's best effort at social welfare provision is its programs for the elderly. Social Security and Medicare are two of the largest items in the federal budget. But compare the U.S. to Sweden. In the U.S., about one in eight elderly persons are poor. In Sweden, the figure is a little less than one in 1000.

And that's America's best effort at fighting poverty. When you start comparing figures for children in poverty, the disparities are positively scandalous.

And what sort of loss of efficiency have the Swedes had to suffer for all this equity? For starters, they have suffered unemployment of a whopping 1.6 percent and an economy that has grown 17 out of the last 19 years.

Of course, not all is perfect in the Northern European social democracies. Job growth is weak, and even Sweden is attempting some supply-side tax cuts and welfare state streamlining. But few Swedes question the fundamental proposition that government should protect people from the vagaries of the market.

And of course, not everything is bad in the U.S. Our recent record of growth and job-creation should not be dismissed, although it should be viewed with some skepticism until we make our fiscal balances sustainable.

But for all of its successes, the American model is not the inspiration for economic reform in Eastern Europe.

Nor should it be. Not while one-fifth of American children live in poverty. Not while 37 million Americans are shunted out of the medical care market for lack of insurance. Warren Brookes and National Review notwithstanding, East Europeans look to America for blue jeans and rock music, not an economic model.

In the words of an old Polish proverb, "Under capitalism man exploits man, whereas under communism, the reverse is true." The solution for Eastern Europe lies somewhere in between, in a system with private ownership of capital, private capital markets, active labor markets, social security and government by the people. In other words, the answer is social democracy.