Terra Incognita: Socialism and nepotism

Six months ago the The New York Times came under a sophisticated cyber attack that lasted for months. Passwords of numerous Times employees were stolen and access was gained to dozens of computers and accounts. The attacks were eventually traced back to China. The motivation for the attack was apparently a major story the newspaper broke in October 2012.

The investigative report had revealed that “many relatives of Wen Jiabao [the prime minister], including his son, daughter, younger brother and brother-in-law, have become extraordinarily wealthy during his leadership.” According to the data the family has amassed more than $2.7 billion. Just one investment, in the name of the prime minister’s mother, had a value of $120 million.

The Times noted, “As prime minister in an economy that remains heavily state-driven, Mr. Wen... has broad authority over the major industries where his relatives have made their fortunes.”

This could be just an isolated story of a family using its connections to become wealthy.

But let’s pause a moment and ponder whether, if China was not emerging from the tight controls of Communism, but was rather a capitalist free-market economy, would his family have been able to amass such wealth? The key to the Wen family’s wealth seems to have little to do with business acumen.

Yang Zhiyun, the mother, didn’t have excellent business training at top state schools.

Rather, the prime minister has claimed that his family were poor pig farmers. However, the family hasn’t gotten wealthy from leveraging a family business and know-how to global proportions.

Rather, the origins of the money, as reported, are industries that were either state controlled or have some state connections. In a socialist economy this is typical, especially as such an economy liberalizes and privatizes itself. Large state-owned behemoths need to have boards of directors appointed by the state, and as those large financial beasts lumber along, with all their subsidiaries, each requires connections with the state bureaucracy to secure lucrative contracts. Lack of competition breeds the need to be connected to the state, rather than to simply be better at doing business.

It is in this way that socialism breeds nepotism, because people in the employ of the state appoint their friends and relatives to positions that the state has influence over.

Most people think of socialism as a system that champions equality and workers’ rights.

The socialist system provides a welfare net, it restricts private industry and regulates it in order to help the common man and the “masses.” The socialist system requires high taxes in order to pay for extensive social programs, such as health care and low tuition.

But what socialism has never quite provided an answer to is what to do about the notion of equality at the top.

Consider a simple question: What was the essential difference in the opportunities provided to the children of the elite in Soviet Russia and the children of the elite in America under the two very different financial systems? Answer: There was no essential difference.

Both had a major head start over their peers; in America due to money and in Soviet Russia due to state connections. Despite all the talk about equality, socialist and communist systems never solved the problem of how to create a society that was socially and economically mobile. For this reason numerous Communist states ultimately become the personal preserve of a single family; the Castros in Cuba and the Kims in North Korea, for instance.

Socialist states such as Hugo Chavez’s Venezuela increasingly become personal fiefdoms.

Chavez’s father was the governor of Barinas state, and his brother, Adan, was also governor of that state, while his other brother, Anibal, is mayor of his hometown. Another brother, Adelis, is a senior banker at Banco Sofitasa, a bank that does business with the government. Another brother, Narciso, just happened to land jobs at several diplomatic posts after Chavez became president. Adan Chavez, coincidentally, was appointed ambassador to Cuba and then education minister.

Chavez’s brother-in-law is the country’s science minister. And yet this is still called the Bolivarian “revolution,” and is praised by some leftists in the West as a model of “socialism in practice.” But is it socialism in practice, or just state nepotism in practice – and is there a difference? OBVIOUSLY NEPOTISM is not an invention of the Left. The Bush family in the US can hardly be called socialists and yet the father and two brothers did quite well in politics. Not unlike the Kennedys, who were also not exactly socialists, despite what some may say. Certainly many large American fortunes have been in the hands of several families, such as the Fords, where generation after generation finds work either at a family trust or with the parent company.

The difference between capitalistic nepotism and socialist nepotism is that nepotism in a free market necessitates merit, and absence of merit leads to financial ruin. Consider a company that becomes a family fiefdom, where the sons and daughters and brothers-in-law of the owner are all placed in upper management. While some families produce excellent leaders for successive generations, eventually the employment of too many family members will result in the advancement of incompetents into critical positions. At this point the company will begin to fail against its rivals (excepting those rivals also run by family dead wood).

Most American business empires do not employ large numbers of kin at the top; there are no legions of Gateses at Microsoft, or relatives of Steve Jobs at Apple. The great American investor Warren Buffet doesn’t have his children on the payroll.

Socialism necessitates the massive expansion of government, and with it the employment of numerous people. Because government, by definition, has no competition, there is no good measure for the failure of government managers. There is therefore no incentive not to employ people’s family members, colleagues and associates in government work. In a more socialist economy the size of government and large salaries of government employees mean that the elites will gravitate toward government work, and bring their families with them.

In Israel this is a serious problem which often flies under the radar. Every few months there are allegations that someone received a plush position due to connections. In one Haaretz article it was asserted that Prime Minister Binyamin Netanyahu’s attorney (and distant relative) had worked as an $18,000-amonth adviser for the Plant Board (a public board that combines the oh-so-important Fruit Board, Vegetable and Citrus Board and Flower Board). The media preferred to focus on the political side of this issue to harm Likud, Netanyahu’s party, but the real question should have been “what else goes on at the Plant Board?” Who are these doyens of Israeli society who serve on obscure “boards” where public salaries can be 18 times minimum wage? For instance it turns out Boaz Toporovsky, now an MK for Yesh Atid, made NIS 232,000 “for working nine months in a half-time position in 2011” as chairman of ISSTA, the student union-owned travel agency. Toporovsky was formerly the chairman of the student union at Tel Aviv University.

There is no issue of nepotism here, but where there are high salaries associated with companies that are in some way connected to the public (i.e. their directors are appointed by public officials), there is a danger of connections playing a bigger role than merit.

It is often said that government salaries need to be higher in order to compete with the private sector. There is some truth in this, but what happens in socialist economies is that government salaries are not merely higher, they are astronomical, and the main engine of salary growth is government.

Because government, oddly, has less checks and balances regarding nepotism at the highest levels (say, political appointments to foreign embassies), their is ample opportunity for all manner of “consultant” and “spokesman” positions to be infiltrated by cousins, brothers, brothers-in-law, sisters, mothers and flotsam and jetsam from the family trailer park.

Transparency can be one cure. But it alone won’t reveal, for instance, that the owner of a certain influential company has a son who just happens to clerk at the Supreme Court, or that the head of an influential NGO just happens to have a wife who’s the spokesperson of a university. Because connections can be quite broad; rather than the son of an MK being appointed to work at the embassy in Canada, for example, the son could just happen to secure a position on the board of a certain government-supported body that helps with aliya.

Break the salaries of government employees and promote a true free market and the nepotism and proteksia will wither on the vine. When the economic engines of the nation burn with competition, the dead wood is consumed in the fire.