Believe it or not, 45% of Americans aged 18 to 45 years old believe that socialism is the ideal economic system for the United States.
Well, as a result of my recent travels, I think I might’ve discovered a fix for that attitude. I just came back from my second trip to Cuba in six years and it’s been fascinating. Frankly, I was shocked by the extent of the decay in just six years. I was surprised when I saw what are called “power ships” in the harbor. These are ships from Turkey that have generators and fuel, to generate power and sell it to Cuba because Cuba’s generation system, Cuba’s transmission system, Cuba’s governance, has pretty much come to complete failure.
Those who know a little bit about Cuba just know affectionately that the clock stopped in 1959, and a lot of the cars are pre-1959, a lot of the buildings are pre-1959. Though that’s quaint at first, you get to see wow, when the U.S.-backed dictator Batista, who was certainly no saint, was kicked out, it was the beginning of the end of economic growth for the Cuban state.
Now, they were helped for many decades by the patronage of Russia and then after Russia, Venezuela. But as those two countries have failed in their own right, they’re now trying to make it on their own, and as a socialist society, it is not working.
One of the thoughts I had as I was thinking about this is it reminded me of England in the 1970s when I lived there. They talked about the great summer of discontent. In the mid-1970s inflation in the United Kingdom hit 25% as they flirted with what was admittedly democratic socialism. There was trash piling up in the streets. There were general strikes, and only when Margaret Thatcher came in controversially and pretty much cut the unions off at the knees and started making reforms that were pro-small business, that the economy really came into its own. Most people, they look back affectionately at that time because of the music, but it wasn’t so nice. Inflation was at 25%, unemployment hit 12%, youth unemployment in North of England hit 25%. These are stunning numbers. So what these young people fail to understand is the most basic of human principles and how you can get a four-year degree and not get this is beyond me. But incentives matter and that which you tolerate, you encourage.
Much more relevant today though, is China let the free-market genie out of the bottle. Now it’s feeling it’s losing control of the society and it’s having to make a trade-off between authoritarian dictatorship and free markets and the sanctity of contracts. It’s fairly clear which way they’re coming down. The China Communist party is struggling to balance this under Xi Jinping, and of course, there are entirely foreseeable results. We’ve seen a $2 trillion stock market route in China. The real estate sector is absolutely disastrous. Arguably, the largest real estate developer in the world, Evergrande, has been liquidated in bankruptcy by a court. This real estate implosion threatens the global economy, because unlike with Cuba, when China sneezes, much of the world can catch a cold. What has China lost? What have they damaged? They are losing trust in the sanctity of contracts and we’ll come back to why this is important.
How do we fix these idealistic young people? I think I came upon the idea when I was there. Anyone who’s considering socialism as a viable alternative to free markets, as flawed as those free markets can be, needs to spend three months in Cuba and see what it’s like surviving in an economy where people who aren’t receiving remittances are living on $50 a month. Even with that, they can’t get the bare essentials because the country doesn’t have the dollars to import those essentials. It may help them to understand that markets are really about human behavior. Markets are about trust and incentives. The price signal is a signaling mechanism that make markets work, and that there is no government smart enough to replace the dynamism of the entrepreneurial nature of the free market economy.
We wish you the best of investing success. Thank you.
Socialism as Popular as Capitalism Among Young Adults in U.S. (gallup.com)
Cuba welcomes 7th powership to its fleet in struggle to keep lights on | Reuters
Today’s inflation and the Great Inflation of the 1970s: Similarities and differences | CEPR
World Report 2022: Cuba | Human Rights Watch (hrw.org)
‘Uninvestable’: China’s $2tn stock rout leaves investors scarred (ft.com)
Has Xi Jinping lost control of the markets? (The Economist)
Paul is the founder and CEO of Avion Wealth, LLC. He leads a team of wealth managers in building and executing financial plans for high net worth individuals and families. Contact Avion Wealth to speak with a financial advisor.