Socialism has come to mean many different things to many people, but regardless how it is defined, in the months immediately ahead it will be put to a rigorous test. The test will be visible to everyone as countries around the globe run out of money and confront overwhelming debts that cannot be repaid as well as other wide-ranging financial promises that can no longer be met. In short, the ideological bankruptcy of socialism will be laid bare by government insolvency.

It had to come sooner or later. The reasons are not hard to understand.

The ideological bankruptcy is neatly captured by British author and advocate for individual rights, Cecil Palmer: “Socialism is workable only in heaven where it isn’t needed, and in hell where they’ve got it”. And government insolvency is explained by famed economist Frederic Bastiat, who made this levelheaded observation nearly 150 years ago about the nascent modern socialism then emerging. “The State is that great fiction by which everyone tries to live at the expense of everyone else.” More recently, Margaret Thatcher, being a sensible politician, put it pragmatically: “The problem with socialism is that you eventually run out of other people's money.”

Take Greece for example. This past week yields on its 10-year bonds surged in the wake of downgrades by the bond rating agencies, which finally recognized that Greece does not have the financial resources needed to repay its debts, which now stand near junk levels. Not far behind are Latvia, Spain, Ireland, the United Kingdom and almost every other country in Europe, even though they may still flog paper rated as “investment grade.” The reality is that the rating agencies just have not yet come to grips with the breadth and depth of widespread government insolvency, or have willingly turned a blind-eye to it. And don’t forget Iceland which of course has already collapsed.

How did we sink to this state of affairs? Nobel Laureate Friedrich von Hayek provides the answer in his brilliantly insightful and prescient book, The Road to Serfdom, penned during the waning years of the Second World War.

Hayek’s central theme is that wars expand the power of the modern state because the national planning to fight the war continues even during times of peace. This perennial government planning then expands the social-welfare state over time, with harmful results. Most importantly, economic activity is impeded by the growing state as people and resources become less productive. In other words, because the government does not create consumable goods and services, it is an economic burden to the productive sector of the economy.

Then as the government grows, interest groups become increasingly numerous and powerful, leading to political corruption. More wars or even foreign policy tensions and economic crises can propel demagogues and dictatorial leaders to expand further state powers to the detriment of each and every one of us. In Hayek’s words: “Emergencies have always been the pretext on which the safeguards of individual liberty have eroded.”

Hayek noted that the subtle damage inflicted upon the productive economy and the visible growth of the state arising from socialism become evident only over time. We have now reached that stage.

More people depend on the state than those who provide it with the money the state needs to meet its promises. Most of Europe long ago passed the 50% threshold with more people depending on government than the private sector, but even in the United States – long reigning as the bastion of capitalism, free-markets and limited government – 58% of the population derives their income from government at some level.
http://www.usnews.com/money/blogs/flowchart/2009/11/09/how-the-government-is-swallowing-the-economy

Consequently, we are now approaching a fork in the road. One way leads to more socialism, more demagogues and eventually a dictator who promises that he will make socialism ‘work’. The other leads to the capitalist society that America used to be, with free-markets, limited government and the unconditional rule of law.

Hopefully, we will choose correctly. If we don’t, we know from Winston Churchill what awaits us: “The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries.”