Capitalism vs. Socialism

Economic Misconceptions Vol. I

Dec 19, 2020

Greetings, and welcome to the first full-length article of the Economic Justice and Progress Newsletter. As mentioned in my introductory pilot article, I want to have a discussion with my fellow Americans – and anyone else interested in a better world – about how we can make progress, and why that involves creating a more just American economy. There is nothing that we as the United States of America cannot do if we all work together, and we need to start leading by example again. However, the inability for Americans to even agree upon the meaning of basic terminology is impeding not only our progress, but also our ability to unite.

My Economic Misconceptions series is written with the hope of clarifying economic concepts and history as they pertain to political discourse and progressive policies. If we can at least agree upon the language we use to discuss economic policy, we can begin to make progress in understanding which solutions work best. Economic theory should also not be perceived as some arcane form of numerology reserved only for elite scholars; everyone who works for a living should know the basics. In my view, the better you understand the underlying economics, the more you will see that progressing to a more just economy will benefit everyone.

The first of the misconceptions I want to cover in this series is the types of labels we assign to certain policies, such as “capitalist” and variations of the terms “socialist” or “communist”. Although it is necessary to apply these types of labels in order to quickly convey complex ideas, nuance is often lost in the haste. Furthermore, arguments made in bad faith often weaponize people’s misunderstandings against themselves, potentially culminating in a person “irrationally” voting against their own interests. If more people understood how economic policies would impact their lives, misinformation would have a harder time swaying people’s votes in favor of harmful, regressive policies.

What’s more, there is a vast number of problems facing the United States’ economy that can already be explained using the language of capitalism. Even though corporate apologists love to hide behind hollow terms such as “free markets” while ignoring anti-competitive behavior, and claiming that any attempt to correct for these market failures is “socialist”, there is plenty of work to do regardless of what label or philosophy you want to associate with such corrective measures. Regardless of where you stand on these issues philosophically, I aim to inform my readers about the misconceptions surrounding these terms.

Overview – Capitalism vs. Socialism

If you’ve been following political discourse lately, you’ve recently heard excellent ideas for making progress, and rather than any meaningful discussion, the response all too frequently devolves into some variation of “but that’s socialism!” Should you hear this type of argument and suspect that it is being made in bad faith, you can often simply ask the person what they mean by “socialism” and see if they describe a particular policy. Chances are, however, that they’ll probably just repeat some talking point about Venezuela with the tacit implication that “socialism” is the sole cause of the country’s real or perceived problems.

Unfortunately, many of my fellow Americans lived through a traumatic time in our history known affectionately as the “Red Scare” during which socialism and communism were vilified in order to draw a more distinct contrast between the US and USSR. It may ultimately be futile to try and convince people with these views who have not already seen through the propaganda.

Nevertheless, if you know someone who makes these types of arguments, consider sharing this newsletter to help set the record straight. If I fail to convince you of my perspective on these topics, feel free to provide constructive criticism and point out what specifically you find unconvincing. I want to learn from this process as much as I want to help inform others.

Definitions - Capitalism

While definitions may vary depending on the source, let me establish some baseline definitions we can work with that aren’t too esoteric. When the average person refers to “capitalism” or some variation of the term, they are generally referring to a market-based economy. In a market economy, the forces of supply and demand cause buyers and sellers to interact for the purpose of exchanging resources either at an agreed-upon exchange rate when bartering, or at a price measured in a currency.

Although neither “economics” nor “capitalism” were terms formally in the English lexicon at the time of its writing, The Wealth of Nations by Adam Smith has a quote which captures the essence of the philosophical basis for such a market economy:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities, but of their advantages.

The system involves a web of interconnected individuals and businesses all working in their (at least somewhat) rational self-interests to exchange resources with one another. If there is a shortage of a resource, prices often increase to attract more producers of that resource. Conversely, surpluses or having too much of another product often lead to discounts in order to get rid of stock that may soon spoil or become obsolete. This market system of give and take that is constantly evolving, it is argued, is the best way to allocate scarce resources in a world with unlimited wants.

For example, in the case of an employer looking for help from a prospective employee, the two parties negotiate a rate of pay that works in their own best interests. Businesses want profit, while individuals want some mix of income and leisure time. Thus, holding all else equal, the employee wants to be paid as much as possible while maximizing their leisure time, whereas the employer wants to extract the most amount of value from the employee’s labor in exchange for the least possible amount of pay.

The negotiations for a wage therefore become a process of these opposing interests battling it out and generally settling somewhere in the middle. However, what happens when one party has all the negotiating power, and the other party must merely accept any offer or risk foregoing any access to necessary resources? What if the alternative to accepting this offer means going without shelter, without food, without access to healthcare? Is the market still free? If one party is essentially negotiating at gunpoint, is it a fair negotiation? Should something be done? Should competition be restored to the market by legislative intervention?

These types of questions, whether they pertain to the labor market, the healthcare industry, or any other part of the economy, have been debated for hundreds of years – because these types of market failures are not new – but there still is a lack of consensus about what should be done to fix these problems.

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Socialism as an Ambiguous Pejorative

Just as few agree on what to do about classic market failures that every informed capitalist knows about, so too does the term “socialism” get thrown around in virtually every context you could imagine, making consensus increasingly difficult. Is it socialism when, as Mitch McConnell claimed on the Senate floor, proposing that election day should be a national holiday, so that workers of all types can have plenty of time to perform their civic duty on a Tuesday? I suppose if you want to define “socialism” as any intervention in an otherwise “free” market – where the majority of the “free” market clearly does not currently decide to magnanimously give workers time off to vote – then sure, making it illegal to force someone to work on a national holiday would meet that definition. Perhaps Mitch thinks weekends are socialist as well.

How about when various countries nationalize certain industries, effectively making it illegal for private companies to compete with the public entity in that industry? Norway nationalized its extraction industries to help support its social safety nets, but most other industries remain relatively free markets. Did the US invade Norway to stop the “domino effect” of spreading socialism or communism? It did not. However, when Iranians voted for a leader who wanted to nationalize their extraction industries, the US and UK organized a coup to overthrow their democratically elected prime minister for fear of a Communist takeover which never materialized. Is it socialism when McDonald’s employees in Denmark receive roughly $22 per hour and benefits in exchange for their labor, despite the products of their labor still being sold for profit? Of course not.

But nuanced policy discussion and the consistent application of definitions are not among the goals of those who would use “socialism” as a pejorative. It certainly was not McConnell’s goal when he claimed that national holidays and other various Democratic party proposals amounted to socialist power grabs. Generally, the terms “socialism” or “communism” frequently get used to mean any number of different things, regardless of any actual definitions, and often merely serves the rhetorical purpose of a political bogeyman.

This rhetorical use of “socialism” is not new, either. During a now famous speech from 1952, President Truman famously said:

Socialism is a scare word they have hurled at every advance the people have made in the last 20 years. Socialism is what they called public power. Socialism is what they called social security. Socialism is what they called farm price supports. Socialism is what they called bank deposit insurance. Socialism is what they called the growth of free and independent labor organizations.
Socialism is their name for almost anything that helps all the people.
When the Republican candidate inscribes the slogan "Down with Socialism" on the banner of his "great crusade," that is really not what he means at all. What he really means is "Down with Progress--down with Franklin Roosevelt's New Deal," and "down with Harry Truman's Fair Deal." That's all he means.

Some things never seem to change. If the government hands out golden parachutes to the rich, they were just “too big to fail”. If the government tries to help everyone, though, well that’s socialism, and we can’t have that.

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Definitions - Socialism

While opponents of progress will throw around these terms without regard to any consistent definition, not even proponents of socialism can always agree on what the most idealized form of socialism or communism looks like, although you can look to organizations like Democratic Socialists of America for an idea of what their policy stances are. Still, virtually everyone acknowledges that no country has succeeded in fully achieving the ideal form of a democratic socialist nation yet. Norway and Denmark are often hailed as good examples of transitionary systems, which have market economies supported by strong social safety nets. For the purpose of this discussion, though, let us simply focus on how the planned economic structure functionally differs from a market-based economy.

Communist and socialist countries typically adopt a planned economy where either central planners or more decentralized collectives decide what should be produced, and then send resources where they are needed. Ideally, the end result would theoretically be a classless, stateless utopia collectively owned by the people, but ultimately someone would still be in charge of the planning. Another way to think of this concept of collective ownership is the notion of democratizing the workplace, where not just the owners and managers have a say, but also the labor and other stakeholders.

Returning for a moment to market-based systems, the goal of democratizing the workplace has also been achieved in decidedly capitalist countries. Despite most public U.S. companies being owned by wealthy shareholders, worker-owned cooperative businesses and private companies illustrate how alternative systems might look in practice. In Germany, workers frequently have representatives sitting on corporate boards of directors who provide labor’s perspective in the decision-making process. Perhaps there is an argument to be made about the degree to which workers have rights being what constitutes a socialist system, but workers’ rights and capitalism are not mutually exclusive.

But beyond simply having a say in how the workplace operates, socialism also aims to alleviate material conditions that prevent labor markets from truly being free. Although the concept of socialism predates Marx, I always think of this quote from the Critique of the Gotha Program which summarizes the goal of such a system:

From each according to his ability, to each according to his needs!

If the basic needs of people are met, they can contribute to the world in ways they find meaningful and impactful, while having the security to change jobs if those needs are not met, and do so without losing access to food, shelter, and healthcare in the process. Otherwise, an employer always has the implicit threat of effectively restricting access to these resources from their employee, which obviously tips the scales in the employer’s favor.

Access to food, shelter, and other essential resources – which are crucial for a person’s unalienable right to pursue happiness – are also addressed in FDR’s Second Bill of Rights. These rights would guarantee all Americans such necessities as a job with a decent wage, a decent home, medical care, education, and economic protection from old age, sickness, accidents, and unemployment. We currently have some, but not all, of these rights in the United States, and yet these rights did not destroy our market economy like detractors have argued for decades. Although some degree of central planning would be inherent in certain aspects of guaranteeing such rights, other industries could remain decentralized, competitive markets.

Whether the planning is led by democratically elected officials or dictatorially commanded by an autocrat or oligarchs is a separate issue, which is why many people will specify that they are “democratic socialists” to avoid misunderstanding. Idealistic forms of socialism would also differ from historic and current communist examples – which is a topic beyond the scope of this article, so I will cover certain theoretical differences between communism and socialism in a later article – but for the purpose of comparing capitalism and socialism in this article, I will discuss the distinction in terms of a spectrum. On the socialist end of the spectrum, economic planners decide what to produce and where to send resources; on the capitalist side, market forces guide the flow of resources.

Critics of these ideas often say that the economy is too complex to be managed through any type of centralized or decentralized planning, democratic or otherwise. But if the alternative capitalistic system is such a strong, reliable system with its own self-correcting mechanisms, why have people been advocating for alternatives to the system for centuries? Why do we have any laws that regulate what constitutes legal and illegal business practice? Why don’t we let children go off into the coal mines for “honest pay” rather than attending school anymore? Why don’t we just let the five largest corporations combine into a single entity? Instead of having a handful of billionaires, why not just let one trillionaire rule over the entire economy?

Democracies are predicated upon the notion that the consolidation of power in a single monarch is disastrous for their citizens due to the corrupting nature of power. Capitalism is no different when economic power consolidates. Just as alternative economic systems have existed for hundreds of years, so too has the crucial knowledge of capitalism’s market failures. Even Adam Smith noted several examples of market failure, and let his criticisms of the capitalists of his lifetime be known throughout his writing; he just argued that government intervention was a subpar method for correcting these market failures. Perhaps it is imperfect, but what other options do we have? Clearly, certain business practices must be made illegal, but which?

Capitalism and Market Failures

Some people often assume or imply some degree of lassiez-faire or absence of government intervention in capitalistic markets, but this is a separate concept from the market economy, or capitalism, itself. However, this often ignores the fact that, even in the most basic of high school economics courses, a core problem of capitalism is addressed: monopoly or monopolistic power. If a single company dominates an entire market, they no longer must worry about a competitor offering better or cheaper products or services, and thus can charge a profit-maximizing price without the same fear of losing customers that competitive markets face. Duopolies where two companies dominate an industry, and oligopolies where a handful do so, present similar risks to undermining competition.

Much of the prevailing sentiment that markets should be virtually free from any constraints arguably stems from the ascent of Milton Friedman who wrote defenses of unfettered capitalism in books and articles such as The Social Responsibility of Business is to Increase its Profits. There is disagreement surrounding whether Friedman was incorrect about corporations’ sole responsibility to society being to generate profits, or if others were incorrect about the role government should play in markets, but there is a general consensus that the Gordon Gekko type of “greed is good” ethos embraced during the Reagan-Thatcher era is having disastrous effects on the world.

Because of this potential for competitive markets to become monopolized by a single firm, the US has historically regulated certain markets with “antitrust” or anti-monopoly legislation. Currently, the Department of Justice is investigating large tech companies like Google and Facebook for anti-competitive practices related to their market power, such as the ability to prioritize their own products over their competitors’ products on their platforms. Labor markets can also have similar problems, but instead of a single seller, there might be a single buyer of labor, a single employer, or a “monopsony” which alone holds all the bargaining power when establishing wages.

Another market failure is evident in the healthcare industry, where consumers of products like insulin face what economists call “inelastic demand” or an unchanging amount of demand for the product: regardless of what price is charged, diabetics require a certain amount of insulin determined by their biological needs. These consumers can’t simply delay these purchases or ration their insulin; they have to pay whatever price is asked in order to continue living a healthy life. In markets with these types of products, it is unconscionable to allow profiteering by corporations with limitless power, the power over their customers’ lives, when these people effectively have no bargaining power.

Besides, we already intervene in several markets in order to encourage certain activities. For example, we subsidize the fossil fuel industry to make it profitable; is that still a free market? Is the fossil fuel industry now socialist because the government intervenes in the market? Is it socialism when the US government bailed out Wall Street after their own fraudulent practices led to their ultimate demise? Arguably, yes it is. As the Reverend Dr. Martin Luther King, Jr., a democratic socialist himself, said during a speech in 1968:

Whenever the government provides opportunities in privileges for white people and rich people they call it “subsidized” when they do it for Negro and poor people they call it “welfare.” The fact that is the everybody in this country lives on welfare. Suburbia was built with federally subsidized credit. And highways that take our white brothers out to the suburbs were built with federally subsidized money to the tune of 90 percent. Everybody is on welfare in this country. The problem is that we all [too] often have socialism for the rich and rugged free enterprise capitalism for the poor. That’s the problem.

The United States government already intervenes in otherwise “free” markets, for better or for worse. Still, examples of market failures abound, but what should we do to fix the problems?

Fixing Capitalism vs. Transitioning to Socialism

To recap our previous discussions, capitalism is an economic system featuring markets in which the forces of supply and demand guide the flow of resources between consumers and producers, or buyers and sellers. However, we also saw that there are several circumstances in which market failures can occur, markets cease to be free, and people suffer unnecessarily. On the other hand, socialism generally involves economic planners who direct resources towards those who need them, but the details of such a system are not always clear. Furthermore, centralized planning power in the hands of few always carries the inherent risk of corruption. So, what should we do?

Ultimately, the argument that the status quo is acceptable is becoming less and less defensible; something needs to change. But how exactly should we fix these problems? Should Congress intervene in our economy by passing new laws, or should the Department of Justice file criminal charges against certain companies? Should we nationalize certain industries and remove profit motives when that industry generates its profits by harming people? Should we stop bailing out companies who sow the seeds of their own destruction and instead focus on helping the victims of their greed?

At this historic point in time, when we need a strong response to multiple overlapping crises, we should be willing to consider most options that will effectively help people, regardless of their label, whether or not such a label is accurately applied by proponents or detractors. Whatever solutions we eventually propose, whether they are market-based, correct existing market failures, or involve central planning, detractors will call them “socialist” anyway. Given the inevitability of this disingenuous labelling, we might as well go with the best solutions if they’ll be labelled socialist regardless of reality.

We can fix market failures such as monopolies and monopsonies under capitalism; we can nationalize certain industries to increase access and remove problematic profit motives by enacting social policies. It doesn’t ultimately matter what label you want to assign to the school of thought – what matters is the impact the policy has on people’s lives. Labels are a quick way to convey complex ideas, but in reducing such complex ideas to a single phrase, nuance is often lost.

It is a lot to ask, but I humbly ask you to educate yourself about multiple perspectives surrounding possible policies in the coming years. I intend to do my part in educating my readers to make the process easier, but we all must do our part to make the world a better place. In order to maintain this supposed democracy, if we the people are to rule, then we need to be informed, engaged rulers, not passive onlookers who engage in political theater quadrennially.

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