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1
Capitalism, Socialism, and Nationalism: Lessons from History
12 Hoover Institution
purloined it for the outrageous “manifesto” they published It is no coincidence that this passage has a Wagnerian
on the eve of the 1848 revolutions. quality, part Götterdämmerung, part Parsifal. But by the time
the book was published the great composer had left the
The founders of communism, Karl Marx and Friedrich spirit of 1848 far behind. Instead it was Eugene Pottier’s
Engels, were just two of many radical critics of the industrial song “The Internationale” that became the anthem of
society. But it was their achievement to devise the first Marxism. Set to music by Pierre De Geyter, it urged the
internally consistent blueprint for an alternative social order. “servile masses” to put aside their religious “superstitions”
A mixture of Georg Wilhelm Friedrich Hegel’s philosophy, and national allegiances and to make war on the “thieves”
which represented the historical process as dialectical, and and their accomplices, the tyrants, the generals, princes and
the political economy of David Ricardo, which posited peers.
diminishing returns for capital and an “iron” law of wages,
Marxism took Carlyle’s revulsion against the industrial Before identifying why they were wrong, we need to
economy and substituted a utopia for nostalgia. acknowledge what Marx and his disciples were right
about. Inequality did increase as a result of the Industrial
Marx himself was an odious individual. An unkempt Revolution. Between 1780 and 1830 output per laborer in
scrounger and a savage polemicist, he liked to boast that his the United Kingdom grew over 25 percent but wages rose
wife was “née Baroness von Westphalen” but was not above barely 5 percent. The proportion of national income going
siring an illegitimate son by their maidservant. On the sole to the top percentile of the population rose from 25 percent
occasion when he applied for a job (as a railway clerk) he in 1801 to 35 percent in 1848. In Paris in 1820, around 9
was rejected because his handwriting was so atrocious. He percent of the population was classified as “proprietors
sought to play the stock market but was hopeless at it. For and rentiers” (living from their investments) and owned 41
most of his life he therefore depended on handouts from percent of recorded wealth. By 1911 their share had risen to
Engels, for whom socialism was an evening hobby, along 52 percent. In Prussia, the share of income going to the top
with foxhunting and womanizing; his day job was running 5 percent rose from 21 percent in 1854 to 27 percent in 1896
one of his father’s cotton factories in Manchester (the patent and to 43 percent in 1913.12 Industrial societies, it seems
product of which was known as Diamond Thread). No man clear, grew more unequal over the course of the nineteenth
in history has bitten the hand that fed him with greater century. This had predictable consequences. In the Hamburg
gusto than Marx bit the hand of King Cotton. cholera epidemic of 1892, for example, the mortality rate for
individuals with an income of less than 800 marks a year was
The essence of Marxism was the belief that the industrial thirteen times higher than that for individuals earning over
economy was doomed to produce an intolerably unequal 50,000 marks.13
society divided between the bourgeoisie, the owners of
capital, and a property-less proletariat. Capitalism inexorably It was not necessary to be an intellectual to be dismayed by
demanded the concentration of capital in ever fewer hands the inequality of industrial society. The Welsh-born factory
and the reduction of everyone else to wage slavery, which owner Robert Owen envisaged an alternative economic
meant being paid only “that quantum of the means of model based on cooperative production and utopian villages
subsistence which is absolutely requisite to keep the laborer like the ones he founded at Orbiston in Scotland and New
in bare existence as a laborer.” In chapter 32 of the first Harmony, Indiana.14 It was in a letter to Owen, written by
tome of Capital (1867), Marx prophesied the inevitable Edward Cowper in 1822, that the word “socialism” in its
denouement: modern sense first appears. An unidentified woman was,
Cowper thought, “well adapted to become what my friend Jo.
Along with the constant decrease of the number of Applegath calls a Socialist.” Five years later, Owen himself
capitalist magnates, who usurp and monopolize all argued that “the chief question … between the modern …
the advantages of this process of transformation, the Political Economists, and the Communionists or Socialists,
mass of misery, oppression, slavery, degradation and is whether it is more beneficial that this capital should be
exploitation grows; but with this there also grows individual or in common.”15 The term “capitalism” made
the revolt of the working class. . . . its debut in an English periodical in April 1833—in the
The centralization of the means of London newspaper the Standard—in the phrase “tyranny
production and the socialization of labor reach a of capitalism,” part of an article on “the ill consequences of
point at which they become incompatible with that greatest curse that can exist amongst men, too much
their capitalist integument. This integument is burst money-power in too few hands.”16 Fifteen years later, the
asunder. The knell of capitalist private property Caledonian Mercury referred with similar aversion to “that
sounds. The expropriators are expropriated.
14 Hoover Institution
the cost of maintaining a family, the standard of living of Between 1830 and 1905 eight nation-states achieved either
the average Chinese worker fell throughout the nineteenth independence or unity: Greece (1830), Belgium (1830–39),
century. True, subsistence was cheaper in China than in Romania (1856), Italy (1859–71), Germany (1864–71),
northwestern Europe. It should also be remembered that Bulgaria (1878), Serbia (1867–78), and Norway (1905). But
Londoners and Berliners by that time enjoyed a far more the American Southerners failed in their bids for statehood,
variegated diet of bread, dairy products, and meat, washed as did the Armenians, the Croats, the Czechs, the Irish, the
down with copious amounts of alcohol, whereas most East Poles, the Slovaks, the Slovenes, and the Ukrainians. The
Asians were subsisting on milled rice and small grains. Hungarians, like the Scots, made do with the role of junior
Nevertheless, it seems clear that by the second decade of partners in dual monarchies with empires they helped to
the twentieth century the gap in living standards between run. As for such ethno-linguistically distinct peoples as the
London and Beijing was around six to one, compared with Roma, Sinti, Kashubes, Sorbs, Wends, Vlachs, Székelys,
two to one in the eighteenth century.21 Carpatho-Rusyns and Ladins, no one seriously thought
them capable of political autonomy.
The second mistake Marx and Engels made was to
underestimate the adaptive quality of the nineteenth- Success or failure in the nation-building game was
century state—particularly when it could legitimize itself ultimately about realpolitik. It suited Camillo Benso, count
as a nation-state. In his Contribution to the Critique of of Cavour, to turn the rest of Italy into a colonial appendage
Hegel’s Philosophy of Right, Marx famously called religion of Piedmont-Sardinia, just as it suited Otto Eduard Leopold
the “opium of the masses.” If so, then nationalism was the von Bismarck, Count of Bismarck-Schönhausen, to preserve
cocaine of the middle classes. the prerogatives of the Prussian monarchy by making it the
Nationalism had its manifestos, too. Giuseppe Mazzini was most powerful institution in a federal German Reich. The
perhaps the nearest thing to a theoretician that nationalism most famous line in Giuseppe Tomasi di Lampedusa’s 1958
produced. As he shrewdly observed in 1852, the revolution historical novel The Leopard—“If we want everything to
“has assumed two forms; the question which all have agreed stay as it is, everything will have to change”—is frequently
to call social, and the question of nationalities. The Italian cited to sum up the covertly conservative character of
nationalists of the Risorgimento: Italian unification. But the new nation-states were about
more than just preserving the cherished privileges of
struggled . . . as do Poland, Germany, and Hungary, Europe’s beleaguered landowning elites. Entities like Italy
for country and liberty; for a word inscribed upon and Germany, composites of multiple statelets, offered
a banner, proclaiming to the world that they also all their citizens a host of benefits: economies of scale,
live, think, love, and labor for the benefit of all. They network externalities, reduced transaction costs, and the
speak the same language, they bear about them the more efficient provision of key public goods like law and
impress of consanguinity, they kneel beside the order, infrastructure, and health. The new states could
same tombs, they glory in the same tradition; and make Europe’s big industrial cities, the breeding grounds
they demand to associate freely, without obstacles, of both cholera and revolution, finally safe. Slum clearance,
without foreign domination.22 boulevards too wide to barricade, bigger churches, leafy parks,
sports stadiums, and, above all, more policemen—all these
For Mazzini it was simple: “The map of Europe has to things transformed the great capitals of Europe, not least
be remade.” In the future, he argued, it would be neatly Paris, which Baron Georges Haussmann completely recast
reordered as eleven nation-states. This was much easier for Napoleon III. All the new states had imposing façades;
said than done, however, which was why the preferred even defeated Austria lost little time in reinventing itself as
modes of nationalism were artistic or gymnastic rather than “imperial-royal” Austria-Hungary, its architectural identity
programmatic. Nationalism worked best in the demotic set in stone around Vienna’s Ringstrasse.23 But behind the
poetry of writers like the Greek Rigas Feraios (“It’s better façades there was real substance. Schools were built, the
to have an hour as a free man than forty years as a slave”) better to drum standardized national languages into young
or in the stirring songs of the German student fraternities heads. Barracks were erected, the better to train the high
(“The sentry on the Rhine stands firm and true”), or even school graduates to defend their fatherland. And railways
on the sports field, where Scotland played England on St. were constructed in places where their profitability looked
Andrew’s Day, 1872, in the world’s first international soccer doubtful, the better to transport the troops to the border,
match (result: 0–0). It was more problematic when political should the need arise. Peasants became Frenchmen—or
borders, linguistic borders, and religious borders failed to Germans, or Italians, or Serbs, depending on where they
coincide, as they did most obviously in the fatal triangle of happened to be born.
territory between the Baltic, the Balkans, and the Black Sea.
16 Hoover Institution
Why, then, has socialism come back into vogue in our portrayed as an extremist for the democratic socialist views
time—and in America, of all places? that she espouses. However, survey data show that her views
are close to the median for her generation. The Millennials
To answer this question, it is helpful to turn back to and Generation Z—that is, Americans age eighteen to
Schumpeter. It will be remembered that he argued, first, thirty-eight—are burdened by student loans and credit card
that capitalism’s propensity for “creative destruction” was debt. Millennials’ early working lives were blighted by the
also a source of weakness; second, that capitalism tends financial crisis and the sluggish growth that followed. In
towards oligopoly, not perfect competition; third, that later life, absent major changes in fiscal policy, they seem
capitalism “creates, educates and subsidizes a vested interest unlikely to enjoy the same kind of entitlements enjoyed by
in social unrest,” namely intellectuals; and, finally, that current retirees. Under different circumstances, the under-
socialism is politically attractive to bureaucrats and (many) thirty-nines might conceivably have been attracted to the
democratic politicians. All four tendencies are visible in the entitlement-cutting ideas of the Republican Tea Party
United States today. Although policy makers have been (especially if those ideas had been sincere). Instead, we have
successful in reducing the volatility of output and the rate of witnessed a shift to the political left by young voters on nearly
unemployment since the financial crisis—and very successful every policy issue, economic and cultural alike. As figure 5
in raising the prices of financial assets above their pre-crisis shows, it is the youngest voters in America who are most
level—the relative losers of the past decade have been attracted to socialism, to the extent that those under twenty-
succumbing in alarming numbers to what Case and Deaton five profess to prefer it to capitalism. This must be a matter
have called “deaths of despair.”29 A number of authors have of serious concern for Republicans, as ten years from now,
noted the decline in competition that has afflicted the United if current population trends hold, Gen Z and Millennials
States in the recent past, most obviously—but by no means together will make up a majority of the American voting-
only—in the information technology sector, which has come age population. Twenty years from now, they will represent
to be dominated by a handful of network platforms.30 The 62 percent of all eligible voters (see Figure 5).
American academy is now skewed much further to the left
than it was in Schumpeter’s time. And, just as Schumpeter Of course, it depends what is meant by “capitalism.”
might have anticipated, a new generation of “progressive” According to a 2018 Gallup poll, just 56 percent of all
politicians has come forward with the familiar promises Americans have a positive view of capitalism. However, 92
to soak the rich to fund new and bureaucratic entitlement percent have a positive view of “small business,” 86 percent
programs. It is noteworthy that younger Americans—nine have a positive view of “entrepreneurs,” and 79 percent have
out of ten of whom now pass through the country’s left- a positive view of “free enterprise.” It also depends what is
leaning college system—are disproportionately receptive to meant by “socialism.” Asked by Gallup to define socialism,
these promises. a quarter of Democrats (and Republicans) said it meant
equality; 13 percent of Democrats saw it as government
A fear that Hayek raised in The Constitution of Liberty was services, such as free health care; around the same
that of future generational conflict. “Most of those who will proportion thought that socialism implied government
retire at the end of the century,” he wrote, “will be dependent ownership. (About 6 percent believed that socialism meant
on the charity of the younger generation. And ultimately being social, including activity on social media.)
not morals but the fact that the young supply the police and
the army will decide the issue: concentration camps for the Asked by television journalist Anderson Cooper to define
aged unable to maintain themselves are likely to be the fate socialism, Ocasio-Cortez replied: “What we have in mind
of an old generation whose income is entirely dependent and what my policies most closely re-resemble are what
on coercing the young.”31 Things have not quite worked we see in the UK, in Norway, in Finland, in Sweden.” But
out that way. A significant portion of older Americans are just how socialist is Sweden today? The country is 9th in the
well provided for with substantial shares of total household World Economic Forum’s competitiveness ranking, 12th in
wealth—much larger shares than younger generations seem the World Bank’s Ease of Doing Business table, and 19th
likely to accumulate in the prime of life. Nor do the police in the Heritage Foundation’s Economic Freedom ladder.
and army look likely to be agents of generational warfare. Many young Americans seem to have in mind the 1970s,
Nevertheless, the recent intergenerational divergence of rather than the present, when they wax lyrical about Swedish
attitudes toward economic policy suggests that he may have socialism.
been right to worry about the young.32
So what does American socialism amount to? According
New York Representative Alexandria Ocasio-Cortez is often to a Harvard poll, 66 percent of Gen Z members support
18 Hoover Institution
A considerable part of the total work done by lawyers Allen, Robert C., Jean-Pascal Bassino, Debin Ma, Christine
goes into the struggle of business with the state and Moll-Murata, and Jan Luiten van Zanden. “Wages,
its organs. It is immaterial whether we call this Prices, and Living Standards in China, Japan, and
vicious obstruction of the common good or defense Europe, 1738–1925.” Working paper, 2005.
of the common good against vicious obstruction.
In any case the fact remains that in socialist society Applebaum, Anne. Iron Curtain: The Crushing of Eastern
there would be neither need nor room for this Europe, 1944–1956. London: Allen Lane, 2012.
part of legal activity. The resulting saving is not
satisfactorily measured by the fees of the lawyers Berger, Helge, and Mark Spoerer. “Economic Crises and the
who are thus engaged. That is inconsiderable. But European Revolutions of 1848.” Journal of Economic
not inconsiderable is the social loss from such History 61, no. 2 (2001): 293–326.
unproductive employment of many of the best
brains. Considering how terribly rare good brains Bockman, Johanna. Markets in the Name of Socialism: The
are, their shifting to other employments might be Left-Wing Origins of Neoliberalism. Stanford, CA:
of more than infinitesimal importance.33 Stanford University Press, 2011.
Conspicuously, Schumpeter did not subsequently Carlyle, Thomas. Past and Present. London, 1843.
acknowledge that defending business against the state is in
fact an economically beneficial activity, insofar as it upholds Case, Anne, and Angus Deaton. “Mortality and Morbidity
the rights of private property and makes it difficult to in the 21st Century.” Brookings Papers on Economic
violate them. Perhaps he did not feel that he needed to state Activity, Spring 2017: 397–476.
something so obvious. Yet sometimes it is the responsibility
of a public intellectual to do just that. Courtois, Stéphane, Nicolas Werth, Jean-Louis Panné,
Andrzej Paczkowski, Karel Bartošek, and Jean-
What makes socialism pernicious is not so much the Louis Margolin. The Black Book of Communism:
inefficiency that invariably attends state ownership of any Crimes, Terror, Repression. Translated by Jonathan
asset as the erosion of property rights that tends inevitably Murphy and Mark Kramer. Cambridge, MA:
to be associated with the state’s acquisition of private assets. Harvard University Press, 1999.
Where—as in Sweden in the 1950s and 1960s—socialists
acquired a dominant political position without overthrowing Dikötter, Frank. Mao’s Great Famine: The History of China’s
property rights in pursuit of direct state ownership, it proved Most Devastating Catastrophe, 1958–1962. New
possible to roll it back, once the inefficiencies of state control York: Walker & Co., 2010.
became apparent.34 But where—as in China or Venezuela—
the rule of law has essentially ceased to exist, such self- _____. The Tragedy of Liberation: A History of the Chinese
correction becomes almost impossible. The socialist economy Revolution, 1945–1957. London: Bloomsbury, 2013.
can then go down only one of two possible paths: toward
authoritarianism, to rein in the oligarchs and carpetbaggers, Economic Report of the President, together with the Annual
or toward anarchy. This is a lesson that young Americans Report of the Council of Economic Advisers.
might have been taught at college. It is unfortunate that, as Washington, DC: US Government Printing Office,
Schumpeter predicted, the modern American university is March 2009.
about the last place one would choose to visit if one wished
to learn the truth about the history of socialism. Evans, Richard J. Death in Hamburg: Society and Politics
in the Cholera Years, 1830–1910. Oxford: Oxford
University Press, 1987.
20 Hoover Institution
Notes
1
Schumpeter, Capitalism, Socialism and Democracy, 61, 167. 27
Applebaum, Iron Curtain.
2
McCraw, Prophet of Innovation, 307ff., 317. 28
Economic Report of the President, 381–426.
3
McCraw, Prophet of Innovation, 350ff. 29
Case and Deaton, “Mortality and Morbidity.”
4
Levy and Peart, “Fragility of a Discipline,” 131–35. 30
Tepper, Myth of Capitalism.
5
Levy and Peart, “Soviet Growth & American Textbooks.” 31
Hayek, Constitution of Liberty, 258.
6
Bockman, Markets in the Name of Socialism. 32
Ferguson and Freymann, “Coming Generation War.”
7
Bockman, Markets in the Name of Socialism 33
Schumpeter, Capitalism, Socialism and Democracy, 198.
8
On Nutter, see Magness, “Soviet Economy.” Nutter had Henrekson and Jakobsson, “Where Schumpeter
34
the distinction of being the first of Milton Friedman’s Was Nearly Right.”
doctoral students to embark on an academic career.
9
Kissinger, Years of Upheaval, 229.
10
Ferguson, “Evolutionary Approach.”
11
Carlyle, Past and Present, book 1, chaps. 1–4; book 4,
chaps. 4, 8.
12
Kaelble, Industrialization and Social Inequality.
13
Evans, Death in Hamburg.
14
Grayling, Light of Liberty, 189–93.
15
Sloane, Women in the Room, 37.
16
The Standard, April 23, 1933.
17
Oxford English Dictionary.
18
Berger and Spoerer, “Economic Crises.”
19
See, e.g., Fowler, Lancashire Cotton Operatives.
20
Allen, “Great Divergence in European Wages.”
21
Allen et al., “Wages, Prices, and Living Standards.”
22
Mazzini, “To the Italians.” Niall Ferguson
Milbank Family Senior Fellow, Hoover
23
Schorske, Fin-de-Siècle Vienna. Institution
24
Courtois et al., Black Book of Communism. Niall Ferguson, MA, D.Phil., is the Milbank
Family Senior Fellow at the Hoover Institution,
Stanford University, and a senior fellow of the
25
Rummel, Lethal Politics.
Center for European Studies, Harvard, where he
served for twelve years as the Laurence A. Tisch
Dikötter, Tragedy of Liberation; Dikötter,
26
Professor of History.
Mao’s Great Famine.
Figure 1. Paul Samuelson’s projections of US and USSR GNP, 1967 and 1970.
22 Hoover Institution
Figure 2. USSR gross domestic product as a percentage of US total (purchasing power parity basis, 1990 international
dollars), 1928–91.
Source: Angus Maddison, “Historical Statistics of the World Economy: 1–2008 AD,” spreadsheet, http://www.ggdc.net/
maddison/Historical_Statistics/vertical-file_02-2010.xls.
Figure 3. Appearance of the terms “capitalism” and “socialism” in English-language publications, 1840–2008.
24 Hoover Institution
Figure 5: Attitudes to socialism and capitalism by age cohort, United States, 2019.
Source: SurveyMonkey online poll of 2,777 US adults with a margin of error of ± 3.5. Harry Stevens/Axios.
Figure 6: Gini coefficients and effects of fiscal policy, OECD countries, c. 2014.
Source: BP.
26 Hoover Institution
SOCIALISM AND FREE-MARKET CAPITALISM:
Over the last century, free-market capitalism and socialism have provided the dominant interpretations, and conflicting visions, of political
and economic freedom.
Free-market capitalism is characterized by private ownership of the means of production, where investment is governed by private decisions
and where prices, production, and the distribution of goods and services are determined mainly by competition in a free market. Socialism
is an economic and political system in which collective or governmental ownership and control plays a major role in the production and
distribution of goods and services, and in which governments frequently intervene in or substitute for markets. Proponents of capitalism
generally extoll the economic growth that is created by private enterprise and the individual freedom that the system allows. Advocates of
socialism emphasize the egalitarian nature of the system and argue that socialism is more compassionate in outcomes than is the free market.
The Hoover Institution’s Socialism and Free-Market Capitalism: The Human Prosperity Project is designed to evaluate free-market capitalism,
socialism, and hybrid systems in order to determine how well their governmental and economic forms promote well-being and prosperity.
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