The surging popularity of Bernie Sanders in the 2016 Presidential election led to a substantial increase in the number of Democratic Socialists. The impact of this movement is real and we’re seeing it in recent elections with Alexandria Ocasio-Cortez winning a huge upset in New York. But what is Democratic Socialism and is this movement good for the country?
Democratic Socialism is a political philosophy that advocates the social ownership of the means of production in a manner that is consistent with democratic values. Democratic socialists believe that democracy and capitalism are incompatible as capitalism will tend to result in a state of inequality in which the majority are not being best served.
I think it’s important to make a distinction here between Communists/Socialists and Democratic Socialists. Democratic Socialists are not advocates of authoritarian regimes with social control of the means of production. Instead, they want the economy to better reflect the values of the majority through a more democratic process.
The “democratic” part of this movement is interesting in the context of the USA since the USA is not a democracy. Our system is designed as a Constitutional Republic which was an intentional design with the goal to combat the tyranny of the minority AND the tyranny of the majority.
The “socialism” part of this movement is interesting in the context of the USA since the USA is a particularly capitalist/individualist country. This again is not a mistake as US culture has always been measured as a particularly individualistic culture. Socialism is a dirty word in American culture because it is antithetical to so much of the individualistic culture that developed America.
Of course, cultures are dynamic. And while our individualistic nature served us well throughout history it’s worth considering if the culture is changing or could benefit from change?
In the context of capitalism it’s important to note that capitalism does indeed tend towards financial inequality. It is not a system that is designed to distribute financial equality. Capitalism is much like a poker game where the chips disproportionately flow towards the most productive members of the game. But it’s important to note that living standards do not necessarily decline as this is occurring. In fact, inequality has always been a feature of American capitalism and yet living standards have increased substantially. Financial inequality can increase AND all the players can be benefitting from the improved goods and services that leads to the financial benefit for the big stack players.
On the other hand, when the small stacks have barely enough chips to buy those goods and services it can indeed put a strain on the system, reduce living standards and have negative social ramifications. This can become a positive feedback loop if the small stacks are only able to remain in the game by borrowing more and more money to keep playing.
So it’s important to understand that capitalism does tend towards financial inequality, but the degree to which this occurs is largely the result of how our representatives enact policy and how they decide to redistribute chips from the big stacks to the other players in the game so the game can continue at a pace that serves not only the big stacks, but all the players involved. After all, if we bankrupt all the small stacks then the small stacks overthrow the big stacks in a political coup and we are all worse off for it. Keynes knew this was the central risk in a capitalist economy and he advocated a degree of redistribution because of it.¹
Okay, I think that’s probably enough for one day. If I write conclusions here we’ll end up at about a million words and I can already tell that half of your heads are internally combusting and the other half are falling asleep.
¹ – Keynes, contrary to popular mythology, was not a socialist and was in fact a devout capitalist. As an investment manager he was thoughtfully engaged in the practice of risk management and because of this was gravely concerned with the risk that inequality in a capitalist economy could lead to a social overthrowing of the capitalist system in place.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.