Socialism and Capitalism Work Together

Redistribution policies have helped to lift billions of people out of extreme poverty.

Gone but not forgotten.

Photographer: Uwe Meinhold/AFP/Getty Images

In a recent article, I gave free markets much of the credit for the explosion of human well-being that has occurred during the past three or four decades. To some, this sounds like a story of socialism’s failure. And indeed, the kinds of socialism that China tried to implement during the reign of Mao Zedong, and India before 1991, held back economic growth in those country. And more recently, revolutionary socialist experiments like the one in Venezuela haven't turned out well.

But it would be a big mistake to write off socialism. Even as free markets and technological progress have combined to increase the total amount of wealth in the world, a third trend has been extremely important for making sure that that prosperity is widely shared. Governments in many countries have been more assertive about spreading the wealth around -- and the results have been good.

One big act of egalitarianism was decolonization itself, which allowed countries around the world to keep the wealth they produced instead of sending it overseas, and freed them to implement both better industrial policies and more redistribution. If India, for example, had remained under British control, there’s a good chance it would have continued to be vulnerable to disasters like the Bengal Famine of 1943. And only once the threat of conquest by Western powers had receded could Mao’s leadership give way to the more pragmatic, reformist impulses of Deng Xiaoping.

A graph of the total number of people in absolute poverty in the world shows that the trend has reversed since colonialism ended:

Fewer Lives of Misery

Number of people in extreme poverty

Source: Our World in Data

The poverty decline has taken place all over the world, not just in China and India. In the past two decades, global inequality has also begun to decline, as poor countries have finally managed to sustain faster growth than rich ones.

Pessimists often point out that this global progress has been marred by a trend of increasing inequality within many countries. But government redistribution has played an important role in insulating society’s poorest and most vulnerable people from the negatives of concentrated wealth.

For example, consider child poverty in the U.S. Before taxes, the share of children below the poverty line has stayed roughly constant since 1970. But after government assistance is included, the share in poverty has fallen steadily since the early 1990s:

Another example is homelessness. Government programs under the George W. Bush administration managed to reduce chronic homelessness in the U.S. by about 30 percent. The Barack Obama administration extended these programs and added new ones. In recent years, the nationwide homelessness rate has continued to fall.

The U.S. experience is far from unique. Recent work by University of California-Davis economist Peter Lindert shows that governments in rich countries around the world have been redistributing more and more. Before the World War I, redistribution was minimal; since then, there has been an almost universal, unbroken trend toward a more progressive fiscal system. Now, moving income from the rich to the poor has become one of the primary jobs of governments in the developed world:

A Helping Hand

Public social transfers as a share of gross domestic product

Source" Commitment to Equity Institute

Rich countries are using their governments to redistribute enormous amounts of their total national income, through health care, pensions, poverty assistance and other measures. Sometimes, this doesn’t do much to equalize income distribution -- for example, in the U.S., Social Security payments are roughly proportional to how much people pay into the system. But as Lindert shows, these social transfers are doing a lot to equalize incomes, generally cutting the Gini coefficient -- a common measure of income or wealth inequality -- by between a fifth and a third.

Even in the U.S., Lindert finds, progressive redistribution has been steadily climbing. Tax cuts during the early years of the Ronald Reagan and George W. Bush administrations force the trend downward for a few years, but each time the climb resumed.

And even in Latin America, where market liberalization is widely considered to have had deleterious effects in the 1990s, inequality is beginning to fall:

Narrowing Gaps

Percentage decline in Gini coefficients, 2002-2012

Source: "Deconstructing the Decline in Inequality in Latin America"

A big part of the reason, economists have found, is an increase in government transfers and higher spending on education.

This successful, effective redistribution might not be what the original socialists had in mind -- government doesn’t generally own the means of production in most industries in advanced countries. But there’s no denying that national health insurance, poverty assistance and other redistributive efforts were motivated by the ideas and efforts of socialists.

So even as free markets were allowed to work their magic in China and India, much of the world was moving toward a more redistributive, socialistic approach. Eventually, as China and India get rich, there is little doubt that they too will start increasing their efforts to provide for their less prosperous citizens. 

In other words, it’s wrong to think of neoliberalism and socialism as polar opposites or inveterate enemies. The world’s recent experience shows that free markets and government redistribution can co-exist to create rich societies where no one starves. Wealth hasn’t trickled down from the rich to the poor as much as many free-marketers had hoped, but government has been effective in channeling wealth down. Chalk this up as a victory of sorts for socialism.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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