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Socialism, Competition and Politicians

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

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 2000), 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 his 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 for 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.

Atanu Dey on India's Development

Atanu Dey
Chapters
PJ O’Rourke: Every government is a parliament of whores
The Amazing Power of Technology
Swami Vivekanand: To the 4th of July
No True Islamic State
Herbert Simon — Information consumes attention
Yoga has no Religion
Hayek on “The Mirage of Social Justice”
An Open Letter to PM Shri Modi
Prefer a Functioning Economy
Political Discrimination is Socially Harmful
Markets & Competition
Ministry of Power, Coal, and New and Renewable Energy
John Stuart Mill on the Liberty of Thought and Discussion
Reading Ronald Coase
Universal Literacy
Man versus the State
What Comes Before
An ad from 1947: “The Uphill Task Ahead”
Pohela Boishakh, Vishu, and Puthandu Greetings
Rich People Spend More
Goodbye, Mr Lee Kuan Yew
Friday the 13th, Pi Day the 14th & Beware the Ides of March
Money is the root of all Evil
Warren Buffet’s Letter to the Shareholders
The Man Lee Kuan Yew Admires the Most
An Informed Citizenry is the Bulwark of a Democracy
Problems and Solutions
People I Admire – Part Doh
Nelson Mandela on Education
Criticizing Modern Indian Holy Cows Considered Dangerous
Richard Dawkins on the Monotheistic God
List of Pages on Teresa the Merciless
People I Admire
Lee Kuan Yew is under Intensive Care
On Monkeys, Cats & the Generality Principle
The Great Indian Bamboozle has to Stop
2400 hours of electricity for Delhi — every year?
Make India first to “Make in India”
Republic Day Thoughts on Reading the Constitution
A Day of Shame and National Mourning for India
The most dangerous man to any government
Socialism, Competition and Politicians
Open Thread: Ask me anything
Aakash, the “iPad Killer”, Vaporware has Evaporated
The Dreamer and the Dream
Circular Firing Squad of Flying Attack Monkeys Target Rajiv Malhotra
We need more Anandamide, not Jihadamide
Constitutions Matter in our Daily Lives
The Only Home We’ve Ever Known
Adam Smith on the Division of Labor
The Passing of Former President Mr APJ Abdul Kalam
Socialism Works its Wonders in Venezuela - also in West Bengal
Why the terrorists killed the satirists of Charlie Hebdo
Islam Poses an Existential Threat
The Wisdom of the Crowd
On Knowing Enough to Know that You Don’t Know
NITI — New Initiatives for Transforming India
Will India Recover?
The Unbearable Stupidity of Controlling Prices
Nov 14th as the “Day of Shame and Lamentations for India.”
The Indian Constitution — Part 2
Hayek on Valuing Individuals
Mr Modi goes to Washington