The Centre for Research into Post-Communist Economies


CRCE Briefing Paper

From Social Democracy to Liberal Socialism: A Property Rights Analysis of the Transition in Europe

by Svetozar Pejovic

Price for print edition: £7.50

About the Author

Steve Pejovich, PhD Texas A&M University, USA, Professor Emeritus Svetozar (Steve) Pejovich is a professor Emeritus of Economics at the Texas A&M University and senior research fellow at the International Centre for Economic Research, Turin, Italy. Before joining TAMU as a professor of economics Steve was a professor of economics from University of Dallas where he hold numerous positions (he was Head of Economics Department, Dean of the School of Management and the Acting President of the University of Dallas). He was also Professor from Ohio University, Visiting professor from Ohio State University, and still is a Visiting Professor from University of Donja Gorica in Montenegro. During the 1967-1968 he was a Director of the Graduate Programs in Economics from TAMU. Steve served as an associate editor at the Review of Social Economy, editorial advisor at the Modern Age and is in editorial board at the Journal of Bio-economics. In 1987 he was awarded a Faculty Distinguished Teaching Award (TAMU) and his name may be found in Blaug's encyclopedia Who's Who in Economics. Pejovich has served in numerous advisory boards and was a scholar at the Hoover Institution and still is a fellow at the Goldwater Institute and Heritage Foundation. His articles appeared in numerous peer journals and he has written or edited many books. He earned his PhD in Economics from Georgetown University. This paper was presented by Svetozar Pejovich when he gave the Wieser Memorial Lecture at the Prague Conference on Political Economy in 2009.

First published April 2010

© Svetozar Pejovic & Centre for Research into Post-Communist Economies

All Rights Reserved


The problem with socialism is that you eventually run out of other people's money.

- Margaret Thatcher

A defining feature of the 20th century was the struggle between capitalism and socialism. Three major applications of the socialist doctrine: Fascism, National-Socialism and Communism waged this fight against capitalism. Consistent with the socialist doctrine, as it developed in the eighteenth and nineteenth centuries, fascism, national-socialism and communism blamed the economic and social inequalities of capitalism on the behavioral consequences of private property rights and competitive markets.

All three types of socialism shared a major premise that their respective visions of a "just" society should replace the spontaneous order of capitalism. This premise provided fascists, national-socialists and communists with the political justification to replace the rule of law and individual liberties with the rule of men. Hence, all three types of socialism were equally unconstrained by law, customs and morality. The individual was a mere instrument for the achievement of the ends as defined by the ruling elite. Communism was openly hostile to the right of ownership, whereas fascism and nationalsocialism settled for controlling and directing the use of resources nominally owned by individual citizens. Like the competing families of underworld, fascism, nationalsocialism and communism went to war (hot and cold) with each other as well as with the rest of the world.

While all three types of socialism were equally oppressive, fascism and nationalsocialism played a relatively minor ideological role in the century long competition between socialism and capitalism. Communism, on the other hand, was a major player in the last century. By promising salvation on this side of haven, Marxism-Leninism gave socialism a pseudo religious content. This pseudo-religious content of Marxism-Leninism justified the dictatorship of the communist party as the self-appointed avant-garde of the self-proclaimed laws of history.

Two important lessons of all socialist experiments to date are: (1) socialism has repeatedly failed to duplicate the accomplishments of capitalism, and (2) socialism refuses to die. Every time one type of socialism failed, the critics of capitalism have been quick to come up with a new one. And there has been no shortage of the White Knights riding into the town to salvage socialism. Central economic planning in Stalin's Russia, self-management in Tito's Yugoslavia, the Red Guard in Mao's China, Che's crusade in South America, Ho's re-education in Vietnam and Castro's rape of Cuba had the same objective of making the economic performance of socialism superior to capitalism. And they have all failed to accomplish that objective.

At the turn of 21st century, socialism is on the march once again. Western Europe is in the process of transition from social democracy to socialism. Socialists and pro-collectivists parties in Central and Eastern Europe are recovering after the collapse of communism. What in the early 1990s was supposed to be the transition from socialism to capitalism is slowly turning into the transition from socialism to socialism. The European Union is helping the transition to socialism via numerous regulations supportive of "fair trade", wealth redistribution, environmentalism, global warnings, multiculturalism and all other movements that require government controls of the allocation of resources. In the United States, the Obama Administration is using the economic crisis that began in 2008 as an excuse to initiate the process of "spreading the wealth around".

Given the lesson of history, there is no compelling reason to assume that this new type of socialism that is emerging on the European continent, I call it liberal socialism,1 will not, like its predecessors, fail to duplicate the economic efficiency of capitalism. The purpose of this paper is to show why and how the emerging liberal socialism in Europe is more dangerous than its predecessors, even though, like its predecessors, liberal socialism is equally incapable of duplicating the accomplishments of capitalism.

However, a few remarks about the United States seem in order. President Obama is using the current economic crisis to open the gates for the import of liberal socialism into the United States. His three major programs, socialized medicine, federalized education and federal government energy policy will, if implemented, transfer decisions on winners and losers from competitive markets to Washington D.C. However, the importation of socialism and even social democracy into the United States is going to be more difficult enterprise for Obama than for his European counterparts because the United States has neither the tradition of social democracy, a close relative of socialism, nor have American intellectuals ever shared the fascination of Western intellectuals with various socialist doctrines. Obama and his advisors have also repeatedly said that the current crisis has proved that "unrestrained" free markets do not work. Their remarks are misleading because they are not telling us which system has done better than Anglo-American capitalism; what is the system they want to replace the free-markets, private-economy with, and on what evidence?

The paper has four sections. The introductory section reviews a few elementary characteristics of private property rights, free exchange and economic efficiency that are relevant for analysis of the economic performance of liberal socialism. The second section discusses the meaning of liberal socialism, its causes and consequences, and the role of the European Union in supporting the institutions of liberal socialism. The last section of the paper focuses on the behavior of business firm in liberal socialism. Except for occasional references, the paper is about liberal socialism in Western and Eastern Europe. The United Kingdom, the United States and the rest of the world are left out of analysis.

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