Why socialism often ends-up in dictatorship

In contrast to a capitalist system, socialist regimes invariably transform into authoritarian or totalitarian political regimes; regardless of whether they reached power through popular vote or revolution.

That revolution often ends up in non-democratic regimes is an historical fact that can be explained by the revolutionaries desire to cling to power, regardless of whether they are pro or anti-socialists and anti-democracy.

What needs explaining is why socialists who were voted into power and promised to respect democracy also turned into non-democratic regimes. We can find two different routes.

First, when socialism evolves into communism. Then, it necessarily abandons its pro-democracy ideals because communism was based on the concept of a class (proletariat) dictatorship later renamed popular democracy.

Whether socialism will inevitably degenerate into communism was already debated in the XIX century. For instance, in Bastiat’s Law (1850), the author claimed that “men will resort to plunder whenever plunder is easier than work… As soon as the plundered classes gain political power, they establish a system of reprisals against other classes. They do not abolish legal plunder”.

Indeed, one hundred years later, a similar pessimism about human nature was the basis for Schumpeter’s (1942) prediction that capitalism would degenerate into a form of corporatism to be replaced by socialism.

Fortunately, history has shown that socialism does not always evolves into national socialism or communism and sometimes reverses into social-democracy, which accepts both capitalism and democracy. However, as the Scandinavian experience shows, this reversion has to be substantial otherwise the regime will not survive.

There is another possibility for socialism to survive temporarily within a democracy by exploring what we may call Latin-American populism.

The most emblematic example is found in Venezuela, a country with the oldest bipartisan democracy in the region. Former President Hugo Chavez was elected with the support of a largely impoverished population which was “bribed” to re-elect him through state sponsored social programs paid by the middle classes and the un-economic exploitation of the rich natural resources of the country for the benefit of a small group of trusted cronies.

However, this model of socialism is inevitably doomed for two main reasons: 1) the economic inefficiency of the system is so high that even the dilapidation of natural resources is not to enough to hide a generalized economic decline, and 2) the demands of its supporters on the welfare state rises with any new benefit so that public finances soon collapse.

These two factors are abundantly seen in Venezuela, where the socialist rulers, faced with growing opposition, have introduced all sorts of paranoiac prohibitions and persecutions in order to hang on to power, including the prohibition of travelling abroad for media directors and the detention of the opposition leader.

In conclusion, socialism will inevitably send democracy to a kind of limbo, from which it is only possible to exit by reversing its path towards social-democracy or by evolving towards state capitalism or communism and dictatorship.

We’re all capitalists now

The six pillars of capitalism – private property, profit motive, free markets, rule of law, joint ownership and limited liability – allowed this economic system to be the most productive as well as the most equalitarian system ever tried by humanity. Nevertheless, this result was neither procured nor foreseeable from the outset.

For example, one of the widest off the mark forecasts in history was Marx’s prediction that under capitalism the greater part of the middle-class would constantly sink into the proletariat leaving the population divided into a small bourgeoisie and a large proletariat. Indeed, exactly the opposite has happened. Although the wealthiest one percent has increased its share of total income the number of proletarians (those without any assets other than their labor) dwindled to a small number. So, instead of all becoming proletarians now we are all capitalists.

The explanation for Marx’s failure resides in his erroneous theory of wages and employment and from unforeseen developments in terms of labor organization (unionization), welfare state and compulsory savings through retirement, unemployment and health insurance.

Furthermore, apart from the number of capitalists in society, there were other developments that also changed the perception and the role of capitalists.

In fact, under capitalism the social structure no longer is based on breeding but on work and merit. Social mobility is now achieved mostly through education while the social standing of business people as well as that of wealthy and poor capitalists is now at par with the traditional higher classes of nobility and clergy.

Popular capitalism, a term used to describe the rise in shareholding by individual investors, may occasionally hit the headlines but it should not be confused with the process through which people are now simultaneously workers and capitalists. Whether people choose to own shares in a company directly or indirectly through institutional investors depends simply on their perception about which is the best way to manage their capital.

The role of the capitalists investing in equity has also changed in the sense that most of them do not participate in the life of the company into which they invested or simply monitor its development. Indeed, some do not even want to know much about the company where they invested except its price so that they do not become sentimentally attached to the stock.

Nevertheless, although day trading based in technical analysis is a popular approach among some investors, the majority of investors still follow an investment approach based on event or portfolio investing which require a good knowledge about the company. Thus the signs they transmit through their buy and sell orders cannot be ignored by company managers, even when they are not part of the small group of investors that have or might exercise the control of the company.

So, although trading plays an increasing role in today’s capitalism, we cannot identify the kids gesticulating in a modern trading room with a Rothschild standing at the door of the London Exchange in the XIX century. Mostly because they are just agents, while Rothschild was simultaneously agent and principal. So, traders cannot be used to symbolize modern capitalism. Nor should the wealthy be confused with capitalists whenever they invest only in government debt.

As I said elsewhere, 100% leveraged companies cannot exist in the capitalist sector. In this sector, shareholders are indispensable to preserve the profit motive and profit maximization indispensable to a capitalist system. So, although consumers are the main beneficiaries of capitalism with an unequivocal interest in free markets (another pillar of capitalism) they cannot play the role of capitalists and force managers to pursue profit maximization because they would have an interest in securing lower prices at the expense of profits.

Then, since most people are simultaneously consumers, workers and capitalists, how can they achieve at the same time lower prices, higher wages and more profits? This is a false conundrum easily solved in a capitalist system through competition and profit maximization. To pursue profit maximization firms have to optimize their labor/capital mix while investing more in physical and human capital to increase productivity and wages. Through free and competitive markets corporations are at the same time forced to take good care of their customers and try to offer the best service at a lowest price.

In conclusion, as more people becomes capitalist they improve their wealth and income, and, most importantly, they play a role in keeping the system alive and efficient.

In general, most of us, including those with more than a million invested in securities, cannot live on capital earnings alone. Therefore we do not recognize ourselves in the old stereotype of an idle capitalist with a top hat living on investment income and spending only a few hours a month monitoring or trading his securities. But, generally, now we are all capitalists (whether directly or indirectly) despite not fitting into a stereotype. This is clearly an important civilizational advancement of capitalism.