Walter Molano | Socialism 101: Adding light to the discourse

The rise of Alexandria Ocasio-Cortez, and the introduction of her controversial New Green Deal, has convulsed both sides of the political aisle in Washington.

She has been attacked with slurs of being socialist and communist – words that carry enormous weight in American politics.

The problem is that most people don’t even know what they mean or how these ideologies started. Like children in a schoolyard hurling curse words for the first time, all they know is that they are bad. Yet, how did they start?

Capitalism may seem as old as time, but it is a form of economic organisation that started less than 300 years ago with the advent of the Industrial Revolution. Prior to that, there were only two factors of production – land and labour.

Countries that wanted to increase their output needed to invade another territory to get more land and workers. This was why countries were constantly invading each other, and why the establishment of distant empires was so in vogue.

However, the practical application of the scientific research that flourished during the Enlightenment led to the invention of machines, such as the steam engine, which could scale up the output of labour. These machines came to be known as capital. Textiles were one of the first sectors to benefit, where a worker on a spinning loom could produce the output of multiple individuals. As a result, a new factor of production was introduced, which completely revolutionised economic organisation.

As technology led to the creation of additional machines across more sectors, it led to the emergence of a whole new class of individuals, capitalists, who disrupted the social order across Europe.

The first scholar to identify the new form of organisation was Scottish doctor Adam Smith, who wrote The Wealth of Nations in 1776. It was no coincidence that it was written at the same time as the American Revolution.

In reality, the United States was a creature of the Industrial Revolution, when the colonists realised that their fledgling industries could not progress under the shackles of British mercantilism.

Capitalism was welcomed as a way to expand output and diffuse wealth by breaking the old social order. Landed aristocracy was replaced by meritocracy. It led to the rise of finance, given that money was important in accumulating physical capital.

The problem occurred when there was much more output than demand. At that point, the losses incurred by the owners of the operations forced them to cut production and fire workers. This process of adjustment was prolonged because the excess inventory needed to be eliminated and relative prices, principally wages, needed to decline in order for the operation to become profitable again

The problem, as Argentina is currently experiencing, is that wages are sticky on the way down. Workers are loath to accept lower wages, and the adjustment period tends to be long.

With people out of work and hungry, social and political unrest exploded into the Revolution of 1848 and the Paris Commune of 1871. This was when scholars began thinking about ways to fix the capitalist system. The new theories became known as neoclassical, which meant a variation of the classical concepts.

Karl Marx was the first neoclassical economist. Building on the Utopian Movement that had gained ground earlier in the 19th century, Marx argued that the problem with capitalism was that the means of production – capital – were owned by individuals. Instead, he advocated that they should be owned by the state, which is not motivated by profitability, and where it is accountable to the body politic.

His concepts eventually evolved into two different directions. The first was by hardcore communist countries, which used Marxism as a justification to seize all the means of production and put it under control of a narrow group of people, usually a political party, such as Russia, China, North Korea and Cuba. The objective here was not a search for a better form of economic organization, instead it was the concentration of power – and it ended in disaster.

The second direction was European socialism, whereby natural monopolies, such as telecommunications, electricity and energy, came under the hands of a democratic state. There were plenty of instances of mismanagement and abuse, but nothing to the extent of the communist states.

Even the United States, whose birth coincided with the rise of capitalism, used heavy regulation that bordered on state ownership to tame natural monopolies.

The point here is that socialism and communism forces were responses that were created to attend to some of the darker aspects of the capitalist model.

Today, we are witnessing another technological revolution that is disrupting the organisation of economic activity. Large swaths of the society are being marginalised, creating social and political tensions.

It is only natural that people are going to look for ways to address the situation. Therefore, pundits need to think before they hurl invectives they don’t understand.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.wmolano@bcpsecurities.com