I've talked to many socialists and understood their points of view.
Socialism has a vastly expanding influence over younger generations in the United States. With candidates such as Bernie Sanders being widely praised and admired, many Democrats have moved further to the left, from liberalism to socialism. As a young person myself, I object to socialism, as I observe many of its impractical aspects being disastrous to a country's economy.
Redistribution of Wealth
I constantly hear modern socialists rejecting state socialism; however, in principle, what they advocate will also give the state more power than it currently has. For example, increasing government control over education, healthcare, and the market are done through federal student loans or free tuition, single-payer healthcare, and price control regulations. The modern socialists typically claim that they are tired of workers being exploited and that they want workers to reap the full benefits of their labor. Ironically, this is exactly what Karl Marx said about "surplus value," which describes the exploitation of laborers by capitalists.
I'm all for workers being paid well, but what about the risk incurred by the businesses? No, I'm not talking about multi-national corporations, because most businesses are small and medium enterprises (SMEs), according to the SBA, which stated that small businesses make up 99.7% of US employer firms. In the cases of SMEs, the owner has to incur massive risk, and it is evident that higher risk equals higher reward. When socialists say that the owners must share the profits with the workers, they conveniently leave out how the risk should be properly shared too. Should the businesses fail, the owners would have to incur the debts and the workers wouldn't.
Not only that, but business owners have to do more than the workers. A well-managed business is defined by many things: compliance with tax codes, well-managed cash flow, smooth business operations, etc. However, let us take one step back. Before the company was even started, the owner has to incorporate and register the business, purchase or lease the machinery and the business premises.
Then, what about shareholders? They don't do a single thing! Well, I hear you, and there is also a very good explanation for that. The answer is still about risk. Let's be honest—small shareholders don't make a lot; dividend payouts are worth only a few cents per share. Major shareholders are the Moby Dicks, they get to participate or even control a business' operations. However, to be a major shareholder, one has to sink in tens of millions of dollars into the shares of a company or a variety of it. By doing so, if anything happens to the company, some or most of their money will be lost. The money which is acquired through years of labor will be gone. Now, I'm well aware that money can be inherited; however, the money has to be acquired at some point. Even if someone got the money from their parents, their parents didn't just receive the money from the skies. Labor has to be traded in for money at some point.
Compared to the workers, shareholders and employers incur exponentially more risk through the capital invested. If you are a worker and you happen to get fired, you'd only lose a few months of income, but that's just preventing you from getting money and not losing money. On top of that, employers also do more work. It may look easy, but they have a lot on their minds.
I'm aware a minimum wage is not something that is only embraced by socialists. Democrats are very much for the raising of minimum wages, so I will write about this as well. The majority of the public believes in the minimum wage system, but I don't. Below is a list of reasons why.
Based on my understandings, I believe that minimum wages cause unemployment. The supply and demand model proves it since the concept of minimum wages serve as a price floor. When a price floor is set, it has to be higher than the average wages employers are already paying, if it is set below the average wages, then, it will be meaningless. By having a minimum price for labor, more people are willing to work but fewer employers are willing to hire, according to Econ101. Not only that, people working on a part-time basis will have their hours reduced as employers will seek to lower labor cost. If they want to take it one step further, they can even automate certain jobs to eliminate labor costs; for instance, by replacing people who wash dishes with automated dishwashers. They can also switch the system of the workplace to eliminate certain jobs. For example, they can change the serving system to a self-service system where people order food from the counter and take it back to their table, which can eliminate the livelihood of servers.
Raised Cost of Living
According to Fee.org, when labor costs rise due to minimum wages, employers will seek to maintain their profit margin. Other than reducing cost by laying people off, they will also employ price hikes. This totally defeats the purpose of increasing their standards of living because along with the increase in income, the expenses will increase as well. This is especially true in the service industry.
In Singapore, they do not have a minimum wage system. Yet, according to CNBC, Singapore is ranked as the world's number one most competitive economy. The reason is simple, the wage offered has to be agreed by both the employer and the employee before establishing employment. According to Archibiz.com, Singapore’s Ministry of Manpower stated that Singapore does not enforce a minimum wage and wages are subject to mutual agreement and negotiation between an employer and an employee.
According to Nomad Capitalist, countries without minimum wages are also prospering. This includes Sweden, Norway, Denmark, Switzerland, and Iceland, the fourth happiest country in the world.
According to the Bureau of Labor Statistics of the United States, minimum wage workers tend to be young and are unlikely to be supporting a family and tend to work part-time. It is also illogical to think that the minimum wage should be able to sustain a family with two kids. Suppose that the cost to sustain a family of that size is $2,500 a month. Does every individual really have to be paid more than that? What a minimum wage does is decrease the amount of work to go around, and therefore, people are unable to gain experience.
It is worth noting that minimum wage jobs are often entry-level, and workers will begin to develop experience and get out of being paid the bare minimum.
There is no difference between communism and socialism, except in the means of achieving the same ultimate end: communism proposes to enslave men by force, socialism—by vote.
— Ayn Rand
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Socialists often talk about how the rich are hoarding their money and are only spending a tiny portion of it. Spending money means recirculating the money back into the economy.
But the rich don't just hoard their money and let it hold still. They actually invest their money to generate returns so they will buy stocks and bonds. By doing this, they are financing companies to expand their operations and that stimulates the economy. The companies will spend the money to take on more projects, expand their businesses, and purchase more properties and machinery
Even if the rich do not invest their money, they will keep it in the bank. Obviously, most of the money in the banks are deposited by the rich. Thus, the money will still be loaned out by the bank to earn interest income; that is the business model of the banking industry.
Keynesian economics is very popular among people who lean left. According to Khan Academy, Keynes believed in large government spending to stimulate the aggregate demand and improve the economy. The left agrees with him on this.
Furthermore, Keynes also believed in lowering taxes to also stimulate aggregate demand. Yes, Keynes believed that lowering taxes will stimulate the economy and pull it out of a recession. At this point, the people on the left have to pick their narrative and decide whether they believe in all of what he said or none of what he said.
Socialism is impractical and can be refuted by basic theories of economics and finance. In summary:
- The sharing of profit is not coupled with the sharing of risk, which violates the risk-return trade-off principle. The main thing socialists conveniently leave out is the risk taken.
- The minimum wage model is ineffective because it causes unemployment among youths and this can be explained by the supply and demand model.
- The rich do not hoard their money, as the monies are stored in banks which serve as financial intermediaries to link the lenders (people with money) and the borrowers (people who need money).
- Keynes specifically said that cutting taxes and increasing government spending is necessary to stimulate the economy. The question still remains, is the left going to believe all of Keynes' theory or none of it?
1. SBE Council, retrieved from https://sbecouncil.org/about-us/facts-and-data/
2. Econ101, retrieved from https://econ101help.com/show-in-a-supply-and-demand-diagram-how-minimum-wage-can-increase-unemployment/
3. Fee.org, retrieved from https://fee.org/articles/what-the-minimum-wage-does-to-food-prices-and-job-hiring
5. Archibiz, retrieved from https://achibiz.com/ufaqs/is-there-a-minimum-wage-in-singapore/
6. Nomad Capitalist, retrieved from https://nomadcapitalist.com/2019/03/24/countries-no-minimum-wage/
7. Bureau Labor of Statistics, retrieved from https://www.americanexperiment.org/2018/03/earns-minimum-wage/
8. Khan Academy, retrieved from https://www.khanacademy.org/economics-finance-domain/macroeconomics/income-and-expenditure-topic/macroeconomics-keynesian-economics-and-its-critiques/a/aggregate-demand-in-keynesian-analysis-cnx
This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.
© 2019 Godwin Light