Comparative Government: A Thought Experiment

The news has been filled recently with stories like minimum wage jumping 70¢, or California banning trans-fats in restaurants, all ostensibly for the sake of the common employee/consumer. Things which sound nice and warm and fuzzy on the surface – who doesn’t want to help out the bottom rung of society, or to make Californian children healthier? – until you consider the long-term consequences of this kind of thinking.

Let’s assume that for the foreseeable future there will be legal competition in the world – that is, more than one country. In fact, for the sake of the argument and to make things simple, let’s say there are just two countries: a socialist country with the entire set of touchy-feely employee-and-consumer protection laws, and a libertarian country with a minimalist government and little legislation, a good police force, and (why not) a public school system and antitrust laws. Let’s also assume that these countries are identical in population and natural resources, so that we can isolate how people respond to government. We’ll also assume that both governments are initially well liked and supported by their people, and that immigration is completely open.

Cut loose from these starting conditions, the socialist country would initially enjoy a much better aggregate standard of living. Each person is, of course, guaranteed a job and a minimum wage and standard of living, while in the libertarian country nothing but rule of law is guaranteed. Though everyone is not necessarily perfectly equal, the spoils of the economy are well distributed across the entire population through multitudinous social benefits. Each person is reasonably happy, and the leaders are satisfied at the achievement of their goal.

But as happy as the most people are, all is not well in Socialist land. The more productive among the populace are not happy sharing their spoils with the unemployed and unproductive, and the more ambitious are not happy with all the regulatory hoops they have to jump through with their companies. Two things will soon begin to happen: The egalitarian wealth redistribution in the form of public benefits has created a moral hazard for the productive. Why be productive if I can live well being unproductive? If I’m guaranteed a certain standard of living, why excel? The smart, talented, and hardworking individuals of the socialist country will begin to disappear into mediocrity. The ambitious, meanwhile, fed up with being stifled and lured by perhaps less than altruistic reasons, will begin an exodus to the libertarian country in search of purer profits.

Thus the dichotomy between the two systems emerges. Nature itself favors the ambitious and productive, and the libertarian government even more so, because it takes out much of the element of uncertainty with rule of law. The socialist country favors the common man. Thus just as the ambitious flee from the socialist nation to the libertarian, the unambitious and impoverished will flee to the socialist nation in search of benefits and an easier life. The libertarian country will have a perpetual labor shortage, while the socialist will have a perpetual labor surplus.

At this point, the socialist government has several options. With its jobs leaving, it can do one or more of the following:
1) Nationalize all industry and become fully Marxist, thus preventing the further flight of industry.
2) Lock down the borders, preventing the ambitious from leaving and the freeloaders from entering.
3) Cut social benefits. Because the freeloaders now so outnumber the ambitious, there is less productivity and thus less money to hand out.
4) Go into debt and keep the benefits coming.

Each of these is strongly undesirable. Nationalizing industry removes the element of competition, making everyone less productive and further diminishing economic growth. Locking the borders creates political unrest, which could potentially be more damaging than anything economic. Cutting social benefits defeats the purpose of socialism, and could also potentially lead to political unrest. Finally, going into debt is unsustainable, and because there’s only one other country, it means their fate is in the hands of the other nation.

Meanwhile in libertarian land, the cutthroat Capitalist environment has settled down. Because of the labor shortage and the flock of new industries moving in, businesses must give benefits in order to attract employees – benefits comparable to those handed out by the socialist government. Because of the flock of new industries, competition is high, thus productivity is high, and thus the standard of living continues to increase as the socialist government collapses under the weight of its handouts.

But how does this stack up to reality, you ask? Has any of this ever happened? Certainly industrial flight wouldn’t happen on such a devastating scale. Rewind to the Soviet Union of the 1980s and 90s. After a series of Gorbachev’s reforms denationalizing government industries and opening the borders for trade, this is exactly what happened. The ambitious either sold the industries to foreigners or moved themselves, leading to the collapse of the Soviet Union.

The United States is facing a choice between options 3 and 4 right now with the social security predicament. No one will talk of cutting benefits, so we continue to rack up astronomical debt to countries all over the world, with whom our relationship is becoming increasingly strained. Furthermore nearly every country in the world restricts its borders to some degree, from both incoming and outgoing immigration: much of the immigration debate in the US comes from the flood of alleged freeloaders coming in.

Marx was more correct than modern Communists give him credit for in that socialism can only exist if the entire world is socialist – that is, if there is no competition. People respond to incentives. Though it is obviously better in the long run to reward productivity and ambition than complacency and laziness, no one is willing to try a pure libertarian system, because the intermediate years of weaning society from the government’s teat would be much too difficult.