A Non-Economist’s View of Capitalism and Socialism/Communism

[Time for change]

In the 20th Century arguments over the relative merits of capitalism and socialism routinely went way beyond stridency – they resulted in immeasurable amounts of violence and deaths, especially during the Cold War along with the numerous hot wars that it spawned. With the demise of the Soviet Union in 1989 the proponents of capitalism claimed complete and permanent victory for their preferred economic system, claiming further that that victory was inevitable and due to the inherent superiority of capitalism over all forms of socialism.

But there were several problems with that claim. The economic system that a country practices is only one of numerous traits that characterize the nations of the world. World history is full of examples of collapsing empires that are explained by factors other than Communism or socialism. Furthermore, the Soviet Union practiced one variant of socialism, and an extreme variant at that. Even if their economic system was the sole reason for their collapse, that wouldn’t prove that other, less extreme variants of a similar economic system are inherently unsustainable.

Arguing the relative merits of capitalism vs. socialism can be a very frustrating undertaking because of the extreme emotionalism frequently associated with both sides. Frequently, if not the good majority of the time, such arguments have an all or none quality that refuses to recognize solutions that involve a combination of the two systems. That’s a shame because – in my humble opinion – the argument should not be at all about which system is better, but rather, what combination of the two, in what circumstances, makes for a better system. For the fact of the matter is (I believe) both pure capitalism and pure socialism are myths that have not and cannot work in reality.

I do not intend in this post to argue for the superiority of one system over the other. Rather, my intention is to describe a framework for discussing the issue, along with some thoughts about the relative weaknesses and strengths of each. It could be that economists on both sides of the issue will consider my ideas to be too simple minded. Perhaps they are. But still, I think that they represent an improvement over the stridency with which this issue is often discussed.


Definitions and goals

For the purpose of this discussion, capitalism is a system whereby economic transactions are handled individually, without interference by government or any other entity. Socialism (Communism being the most extreme variant of socialism) is a system where economic transactions are governed instead by the community – which generally would mean the government. (How responsive the government is to the people that it represents is another issue, which I won’t go into at this time.) Those two definitions aren’t very different, as far as I can tell, from the definitions of socialism and capitalism provided by Wikipedia, though Wikipedia goes into considerably more detail to define them.

Before arguing about the relative benefits and detriments of a system people should define what they believe the system is supposed to accomplish. For example, if a person believes that the virtues of an economic system should be defined entirely by how that system benefits him, then obviously he is going to argue for a different kind of system than he would if he had a more altruistic attitude towards the subject.

My personal opinion, boiling it down to the bare essentials, is that an economic system should be judged on two goals: 1) Fairness – that is, the extent to which people receive relative benefits from the system according to what they deserve; and 2) Total wealth creation – that is, the total benefits (or wealth) that the system creates.

There is probably at least some tension between those two qualities, such that too much of an increase in one necessarily results in a decrease in the other. People vary in the relative importance that they attach to those two qualities. In discussing this issue I encountered one person, for example, who felt that fairness (or perhaps evenness is a better word in his case) was the only quality that was important. In other words, if benefits are measured on a scale of 1 to 10, he felt it would be better that everyone gets a value of “1” out of the system than that the benefits vary from 2 to 10. My opinion is that that is an extreme and unfortunate position to take on the matter, since that would cause everyone to suffer. Rather, I believe that if we can’t have a system that is completely fair and results in maximum productivity at the same time (which is obviously the case) it is best to strike some sort of reasonable balance between the two.


A few words on capitalism and fairness

I have in numerous different DU posts quoted the 431 to 1 income ratio between the average CEO in the United States today and the average employee, as a severe criticism of our economy and our country under Republican leadership. I quote that figure as a criticism because I very much doubt that such a wide disparity in income is morally right or deserved by CEOs relative to their employees. In other words, I very much doubt that the average CEO works or produces 431 times as much as his average worker.

Republicans will tell you, in order to justify the tremendous income disparities that we see in our country today, that I am wrong about that. They will claim, in other words, that such a system works to the benefit of all, because of the increased wealth that it produces, or that it is fair because CEOs provide an invaluable service that few others could provide. Or they will claim both. Since I pride myself in having an open mind and in being able to judge things without the aid of ideology, I try to have an open mind on this subject. But that’s hard to do because the Republican position on this seems rather absurd to me.

CEOs determine their own salary to a very large extent today. Do they make that determination based on the value that they create, or do they make it based on how much money they want. Common sense tells me that the latter is the case. And when I look at people like Ken Lay or the elites of Exxon Mobile, who go to extra-ordinary lengths to prove that global warming is a myth, it is extremely difficult for me to look at the “value” that those CEOs produce a positive light.


Some problems with unfettered capitalism

The extreme proponents of capitalism claim that unfettered capitalism results in a distribution of wealth that maximizes total wealth and is almost completely fair at the same time. It seems evident to me that that claim is based much more on their ideological point of view than it is on actual evidence. Here are some facts and issues that I believe dispute their claim:

The need for government regulation
Pure capitalism presupposes the complete absence of government regulation on how people make their money. But we live in a world where industry has a great potential to impinge upon and harm the lives of other people. For example, industrial processes have the potential to degrade the quality of the water, air and soil that people need to live decent lives. Other assaults on our environment, while not affecting today’s inhabitants of our country, may have the potential to profoundly impair the quality of life for future generations. Why should an influential minority of our population have the right to do that at the expense of millions of other people?

Services that only government can (or should) provide
There are many services that people need that cannot (or should not) be provided by the private sector. It is so important that these kinds of activities be performed well, that making a profit from them should be either of no consideration at all, or at the very most it should pale in comparison to the need to do the job right. Take public health services, for example. Threats to the public health may affect whole populations. If government contracts out such services to the private sector, the corporations who get the contracts might be tempted to cut corners in order to make a larger profit. When government contracts out our elections to the private sector, those corporations may be tempted to manipulate the vote count in order to get their friends elected. Can we afford to risk our democracy in that manner? And consider our prison system. Lobbyists for the prison industry actually lobby Congress for laws that increase our prison population and provide them with a source of slave labor. All of these things border on turning our government from democracy to tyranny.

Monopolies
It has long been recognized that corporations have a tendency to form monopolies, which reduce competition and raise prices. When that happens, the “free-market” principles that purportedly work to give corporations the incentive to provide quality products or services at fair prices go out the window. Where is the fairness in that? The only entity that can prevent that from happening is government.

Situations where free markets can’t operate well because of lack of information
In the ideal “free-market” corporations are motivated to provide good quality products because people are willing to pay more for good quality. But there are many instances where the public doesn’t have the information to adequately judge crucial aspects of quality, so they must rely upon government to help them out. Examples include the Food and Drug Administration to ensure the safety of foods and drugs and the Consumer Product Safety Commission to ensure the safety of consumer products.

Scarce resources that are essential to people
One particular scarce resource that is essential to American democracy is the public airwaves. Essential information is transmitted through the public airways, and therefore their use is intimately tied up with our First Amendment rights to a free press, which is essential for the workings of democracy. This fact was recognized as early as 1934, with the enactment of the
Federal Communications Act and the Fairness Doctrine in 1949, which required that radio and television stations must act in the public interest in return for being granted free licenses to use the public airways. Given the fact that democracy itself depends upon the free flow of information, it should be obvious that control of the airways must remain open to public use and not allowed to be taken over by powerful corporations with no public obligations. Government should have an obligation to ensure that use of the public airwaves is conducted in the public interest.

Unemployment
Unemployment is a well known, common and tragic plague of capitalistic societies. How can unemployment improve the wealth of society? Worse yet, how can it be fair for a person (especially a child) to go hungry, lack education or medical care, or be homeless when that person is willing to work if given the chance?

Democracy
Vast disparities in wealth lead to a situation where the wealthy have disproportionate political influence. Essentially, they pay money to our elected representatives, and in return those representatives enact laws that favor those who bribe them… I mean donate to their campaigns. It’s actually legal in our country to do that, as long as it isn’t too obvious. Perhaps this issue has more to do with politics than economics, since it is theoretically possible to have a system where disproportionate wealth does not translate into disproportionate political influence. But though that may be theoretically possible, it is not likely to transpire anytime soon. As it stands now in the United States, wide disparities in wealth create a vicious cycle whereby the wealthy buy political influence, which they then use to increase their wealth even further.

Fairness
I’ve already touched on this issue. It is well known that children who come from poor families have bleaker futures, on average, than those whose parents are middle class or wealthy. Add that to the vicious cycle between wealth and political influence, and it’s difficult to see how wide disparities in income can routinely be justified as being fair.


The purported connection between capitalism and liberty

Another argument frequently used by proponents of capitalism is that capitalism is virtually synonymous with liberty. This philosophy suggests that intrusions by government into the economic affairs of its citizens constitute egregious violations of their basic freedoms.

That argument ignores some basic facts concerning the way that capitalism operates in our society. The U.S. government establishes, through its monetary system, infrastructure, laws and institutions (not to mention subsidies), a system that safeguards private property, facilitates business transactions, and enables corporations to make their profits. In the absence of those laws, infrastructure and institutions, chaos would reign and the conducting of business would be next to impossible. Under such circumstances, the contempt shown by the wealthy and powerful towards any attempt of government to help out its less fortunate citizens should be seen as highly hypocritical. And as noted above, the absence of corporate regulation often means that corporations are thereby granted license to destroy the environment or the quality of life of less influential Americans in their quest for profit.

In any event, in a democracy, ideally the people create a government to provide for their needs and wants. Typically that involves empowering government to intervene, at least to some extent, in the economic life of the nation for the benefit of its citizens. Why shouldn’t people have the right to create such a government? Why should a wealthy and powerful minority claim the right to do whatever they want, regardless of the effects on other people, in the name of what they claim to be “liberty”?


Some problems with excessive socialism or Communism

Despite all the problems that I’ve attributed to capitalism, it does have some major virtues. Most important, if properly modulated it can provide major incentives for people to produce goods and services that benefit society at the same time that they add to their own wealth. Excessive socialism can destroy those incentives, thereby inhibiting the production of needed products and services, to the detriment of all society.

We also know that some Communistic societies, the Soviet Union being the major example in the 20th Century, have been associated with very repressive and dictatorial governments. What the causal relationship is between Communism or excessive socialism and repressive government is not a question that I’m prepared to answer. There are plenty of examples of non-Communist dictatorships as well, most notably Germany under the Nazis. It could be that extreme economic systems of either the right or the left tend to lead to repressive dictatorships.

Well, I guess I had a lot more to say about the defects of capitalism than I had to say about the defects of socialism. That doesn’t necessarily mean that I believe socialism to be superior to capitalism – rather it simply means that I see the defects of capitalism as more complex and thereby requiring more words to describe adequately. Or, maybe it’s simply because I’ve lived in a capitalistic society all my life and therefore am better able to describe its defects.


The ideal economic system

The ideal economic system would provide economic rewards (incentives) sufficient to motivate people to produce the products and services that society needs and wants. But at the same time it would have safeguards to ensure that the wealthy and powerful couldn’t walk all over ordinary citizens in their quest for profits. It would ensure that corporations are prohibited from destroying our environment; it would provide government protection to consumers against the risks of dangerous products; it would ensure that all citizens had the opportunity to create a decent and healthy life for themselves; it would actively protect vulnerable population groups against discrimination; it would actively guard against disparities in wealth that are so great that they endanger democracy; and it would ensure that government provided the goods and services that its citizens need and could obtain in no other way.

I’ve spoken in generalities here, without delving into the specific policies needed to accomplish these things. I will just briefly note here that a recent article in The American Prospect, by Mark Greenberg, called “Making Poverty History”, talks about this in more specific terms. It mentions things such as federal minimum wage laws, progressive tax laws, health care, education, child care assistance, promotion of full employment, and labor laws that put workers on a more equal footing with their more wealthy and powerful employers. Greenberg’s article is part of a much larger series of articles in this month’s issue of The American Prospect, titled “Ending Poverty in America”.

What is the precise combination of capitalistic and socialistic policies that is required for the best economic system is a question that has not been answered yet, and over which tremendous controversy remains today. I do however have three things to say about that question: 1) It would certainly make use of a combination of capitalistic and socialistic principles, rather than either one in pure form; 2) It should be based on an evaluation of how these policies operate in the real world, rather than on ideological dogma; and 3) The ideal combination of policies varies from one culture to another and from one nation to another. What works in one society may be unworkable in another.

And lastly I want to note that, among the Democratic candidates for President, John Edwards and Dennis Kucinich have discussed in detail plans for dealing with some of these issues, as I extensively discuss in this post.

[Selatius]

1. I am generally more favorable to dynamic forms of socialism

Specifically, market socialism, whose ideology is somewhat based upon mutualist anarchistic concepts of property ownership but also draws upon other areas of thought. In light of the collapse of the Soviet Union, the idea of incorporating the pricing mechanism found in free markets into the socialized ownership of capital has started to gain traction where it was previously only limited to more anarchist tendencies on the socialist spectrum. With the Soviet Union, state monopolies seemed to be the norm.

In short, what happens in market socialism is a public banking or investment mechanism is established that operates somewhat like the SBA, offering to capitalize firms and provide other services. The big difference though is this mechanism exists to establish primarily worker co-op firms, firms that are both owned and operated by workers where the distribution of pay is determined by workers in collective fashion. These firms would be free to bring their goods to market and set the prices according to what they believe is fair. As a result, competition ensues between these firms on price but also on other areas such as quality of product or service.

Unemployment should be lower in co-ops as workers invariably vote to give themselves pay cuts or cuts in hours rather than fire themselves if there should be economic downturns, so it seems sensible to encourage wide spread penetration of co-ops into the market with the public banking mechanism serving as the premier vehicle by which to bring this order about.

Because this public banking mechanism works to capitalize existing co-ops firms, establish new co-op firms, buy out willing traditionally structured firms to be reorganized into co-op firms, and provide financial services to these firms, it also has a fair amount of leverage over co-ops in general, which could also give it a regulatory function in terms of ensuring against abuses of the market and of workers.

While the purpose of such a scheme isn't necessarily to eliminate all capitalists, it does provide an opportunity, a real opportunity, for workers to either work for themselves collectively to enjoy the fruits of their labor or to work in traditionally structured firms where they work at the leisure of their employer. It is hoped that such a scheme would ensure that while there may be capitalism, it need not be the total dominator in determining the collective direction of the people.

As it stands, it should be obvious that such a notion is not possible without strong democratic participation and institutions. The Soviet Union lacked that by the time of Gorbachev.

[Time for change]

4. Interesting concept -- Do you know if it's been tried anywhere

and how successful it's been?

[Selatius]

11. The closest anyone has been to doing it on a large scale is former Yugoslavia

Even though it was a single-party state, one thing that made it peculiar from the rest of the Eastern Bloc was not that it wasn't really aligned with the rest of the Bloc (Stalin ordered an embargo on Yugoslavia for "antisovietism") but because it allowed workers to practice co-management, something not seen in the Soviet command economy. In other words, they let workers set production levels with the implicit deal that they don't also challenge the primacy of the Communist Party.

Living standards, compared with the rest of Eastern Europe, tended to be higher, and people were free to move in and out of the country in 1967, unlike in other Eastern Bloc nations. The Communist Party in Yugoslavia felt that allowing workers a degree of self-management and a guaranteed job was more than enough incentive to keep workers from fleeing the country once a policy of free movement was implemented. Living standards amounted to something like 2/3rds of that seen in Italy next door, an impressive feat for an economy with no true free market, much less political freedom, and in what would become Slovenia when Yugoslavia disintegrated, the living standards matched that of Austria.

As an aside, the end came for Yugoslavia when the Party decided to follow the IMF/World Bank neoliberal "shock therapy" to change the country into something resembling the United States economy. The economic chaos that ensued led to the firing of over a quarter of the nation's workforce. With the economic fabric that held the nation together shredded, old nationalistic feelings were reawakened. People were angry, and scapegoats in the form of other ethnic/religious groups were found. The civil war began, and Yugoslavia and their experiment in worker self-management disappeared in a bloodbath of misery.

But that's one piece of the puzzle. The other piece is functioning examples of co-ops today. The Mondragon Cooperative Corporation in Spain is perhaps the largest worker co-op operating anywhere in the world, with a workforce of now almost 80,000 people.

The idea of a public financing mechanism mentioned in the previous post is largely inspired by the large credit union Mondragon established named the Caja Laboral Popular ("the People's Worker Bank) to capitalize existing co-ops and start new co-ops and provide financial services to members of the credit union. Mondragon also established a polytechnic college with three campuses to teach not only skills needed in the workforce but also the theory behind co-ops, how to establish co-ops, and how to run them.

The third piece is post-war Japan. The features of the modern Japanese economy generally differ greatly in several respects compared to the US economy. One, it features often heavy state intervention usually in terms of investment decisions. This is why they feature one of the most advanced mass transit systems in the world, world class health care, and one of the most demanding public education systems in the world. Two, it has almost two economies divided up between large conglomerates called "keiretsu" and the rest being many smaller firms often linked together through sub-contracting arrangements to one of the keiretsu and to each other. Finally three, within the keiretsu sector of the economy, industrial relations between workers and their employers is characterized with lifetime guarantees of employment, wages tied tightly to seniority, large bonuses linked to company earnings, and a large degree of worker input into the decision-making process. All of this helps convince workers to do their best because their compensation partly depends upon it through their bonuses and because it also gives them a sense that they are apart of the process and not something being exploited for somebody else's gain. Contrast that with American executive attitudes towards bonuses for workers.

Incidentally, the last point is one of the biggest reasons why automakers like Toyota have no labor unions in Japan (none that I've heard of anyway), not that there is anything wrong with labor unions but that there seems to be a relationship between the amount of autonomy and decision-making power workers are given and the level of unionization.

String all these together, and you have yourself a rough outline of where to go from there with Mondragon serving as perhaps the heart of the blueprint towards transitioning to a more democratic economy.

These examples are real-world examples, tried and true examples as opposed to theoretical drawings on a board. The only task, in my mind, is to string together these lessons given to us by people all over the world into a coherent, magnificent design that could serve as a new way of living.

[Time for change]

13. Wow -- Sounds very impressive, especially what you describe for Japan

I can't say that I fully understand how it works, but it sounds like systems like that could help a lot of people over here. The number of people over here in poverty, without health care, and without homes is a national disgrace. And so is the paucity of mass transit systems. We have a number of people in our country who are extremely wealthy and influential, whose main goal in life it seems is to maintain the status quo so as to avoid any risk to their wealth. And those are the people who own our national news media. Major change is very difficult in this country.

[Mojambo]

7. I read a plan similar to this put forth by Gar Alperovitz (sp?)

It was in Dollars and Sense a couple years back.

I think he dubbed it a "Pluralist Commonwealth."

It made a heck of a lot of sense to me, but as you mention, it requires a degree of democratic participation that is unheard of in this country.

[eridani]

14. Agreed. Time to delink the question of how markets should work--

--from the question of who should own the means of production. I don't favor the state owing all means of production as was the case in the former Soviet Union or Eastern Europe. What about just stipulating that no one may own anybody else's means of production? And if that sounds weird, remember that it wasn't all that long ago that we were arguing about whether it is OK to own other human beings. This could cover anything from sole proprietorships to publicly owned utilities. No matter what sort of ownership an enterprise has, it will still need public oversight.

[Time for change]

15. I don't understand how that would work

If nobody was allowed to own a means of production (I don't know what you mean by anyone else's means of production - how would that be defined?), then how would anything much get produced? I'm not saying I don't agree with you, but I don't understand it.

[eridani]

19. You could own your own means of production

You wouldn't be allowed to have employees, though, only other co-owners.

[eridani]

21. I said you can't own OTHER PEOPLE'S means of production--

--not your own. You can own your own business, but if you need more than one person running it, you have to bring them on as co-owners, not employees.

[OHdem10]

2. Thank you!!!

Such a thoughtful post.

We Democrats need to do more of this sort of thinking
and writing.

Say what you will about the Republican Party, they have
spent the time and effort grounding their members in
knowlege and understanding of the principles of their
ideology. Thus, when they appear on TV, etc. they almost
always appear more prepared and in control of the subject.
I do not agree with their ideolgy but recognize their
committment to spreading it.

Surveys and Studies have shown that the Democratic
Party on the whole is the more educated of the two
parties--yet we permit them to "beat us up".

I agree totally with you premise that it is a combination
of Capitalism and Socialism (principles from these two
systems) that in the end will best serve our country.

Capitalism by its very nature produces a society in which
"the cream rises to the top" making for winners and losers.
By its very nature, Capitalism produces a society in
which a few at the top are exceptionally successful
and the masses left to fend for themselves. Mexico
and a lot of SA Countries. This is why there must be
government regulations and programs provided which
reflect an attempt at balance. The basic question is
which society do you desire? Some like a society
in which the small ruling class runs things. The
Wealth is concentrated with them and are not
concerned about the other 3/4 of the country. Their
attitude--It is their own fault they are not in the
top tier. Lots of food for thought.

[Time for change]

6. Thank you -- unfortunately there has been a war against socialism in the US for the past 150 years

Carried out by the wealthy and powerful, who now control our corporate media, the current atmosphere in this country is such that a politician can hardly utter the word in an approving manner without losing political viability.

It will take a lot of work to change that.

[Rydz777]

3. Excellent post. I have a friend in Poland who told me

"Marx was wrong about Communism but he was right about Capitalism." What we have now is a kind of turbo-Capitalism increasingly based on debt and consumption. We desperately need to think about what is going to come next and what we want to come next. Unless we do, we'll get some very unpleasant surprises.

[Time for change]

9. Thank you

What we have now is an especially malignant brand of capitalism, which has expanded income disparity to levels not seen since the 1920s. We presumably have good economic indicators, but they're benefiting only the rich -- and that's no accident.

I hope and believe that any of our current Democratic presidential candidates will work hard to correct that if they get elected.

[Nikia]

5. I agree with you

Liberatarian Capitalism does not work because it is unjust and often even undermines its own ideals.
Socialism does not work because it does not motivate the majority of people enough and can easily become repressive.
We must balance these issues to set good economic policies.

[Time for change]

16. Hopefully we'll start moving in that direction after a Democratic President takes office in 2009

[Mojambo]

8. Terrific post. Rec'd n/t

[Time for change]

10. From an FDR speech during the Great Depression - on the need for a new kind of economic system

Throughout the Nation, opportunity was limited by monopoly. Individual initiative was crushed in the cogs of a great machine. The field open for free business was more and more restricted. Private enterprise, indeed, became too private. It became privileged enterprise, not free enterprise.

An old English judge once said: "Necessitous men are not free men." Liberty requires opportunity to make a living-a living decent according to the standard of the time, a living which gives man not only enough to live by, but something to live for.

For too many of us the political equality we once had won was meaningless in the face of economic inequality. A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor-other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness.

Against economic tyranny such as this, the American citizen could appeal only to the organized power of Government. The collapse of 1929 showed up the despotism for what it was. The election of 1932 was the people's mandate to end it. Under that mandate it is being ended.

http://www.millercenter.virginia.edu/index.php/scripps/digitalarchive/speechDetail/24

[Gelliebeans]

12. Great Post

[Faryn Balyncd]

17. Some essential natural resources - air, water, sunlight - are by their nature owned in common....

The incentive for productivity under free markets is based upon maximizing the value of private property.

When significant costs are shifted to the public - through contamination of air, water, degradation of climate - the incentives are distorted so that economic rewards are received for activities which are, in fact, counterproductive.

In such circumstances, self interest is rewarded with profits, despite the fact that net value may have been reduced, rather than increased.

Theoretically, such distortions - which provide perverse incentives for destructive, value-destroying action - would not exist if all resources were privately owned.

But the fact is that the resources most essential for life - our air, and in most cases, our water - simply defy any attempt at private ownership: It is physically impossible privately divide our air, and confine the effects of air degradation to the owner whose actions degrade our common resources.

This is increasingly true with population growth, which magnifies the environmental impact of human activities.

The United States has, in the past, thrived, not under unfettered, theoretical capitalism (with the guidance of a benign "invisible hand"), but under a real-life MIXED economy, which has combined the productive incentives of a free market with social and/or governmental regulation of such perverse distortions.

Yet today's toxic right wing combines a denial of the reality of climate change, with the dissemination of a mythical version of our history.

[Time for change]

18. Great points

They destroy our air, water, and other resources, and they get rewarded for it. That's about as perverse as you can get, and yet they equate that with "freedom".

[iamahaingttta]

20. When I lived in the hippie commune...

... we used to say that we "make money like capitalists and spend it like socialists."

That might be a good starting point.