Friday, September 17, 2010

Socialism versus Capitalism

Britannica defines socialism as "a system of social organization in which private property and the distribution of income are subject to social control". It is based on the idea that in the world beyond subsistence farming many people contribute to the production of goods and services, and on the theory that everyone who contributes to the production of something should profit from the revenue it generates, in proportion to the value of their contribution.

Socialism goes off the rails when those who determine what represents an "appropriate" distribution of profits allot themselves a disproportionate share simply because they can. This tends to create a bureaucratic class that sustains itself by feeding off the efforts of both the executives and the workers.

Capitalism is a system in which "most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets". When everything is in balance it is market forces that determine the appropriate distribution of revenue in a given enterprise.

Capitalism begins to run amok as certain private enterprises become powerful enough to be largely immune to market forces in the context of determining compensation. At this point the executives in these enterprises will often overvalue the worth of their contributions, thus depriving their workers.

Socialism was a reaction to the excesses of capitalism that in the 19th century produced fabulously wealthy industrialists (the so-called robber barons) supported by impoverished workers. As is often the case the cure for this situation proved to be worse than the disease as socialism in places like the Soviet Union and China produced parasitic bureaucracies that fed voraciously on their entire citizenry.

Capitalism tends to promote a greater separation between the top and bottom of a society while socialism tends to promote a smaller separation. This means that in essence capitalism is the more hierarchical system while socialism is the more egalitarian one.

From a socialistic perspective capitalism is a system that encourages a tendency for a select few to profit disproportionately from the work of many. From a capitalistic perspective socialism is a system that encourages a tendency for negligible contributors to profit disproportionately from the unique skills of a select few. Both systems persist because both systems have a point.

For the foreseeable future most modern societies will cycle back and forth between their capitalistic and socialistic tendencies as the weaknesses of the currently dominant system lead to a public backlash that will push it to the margins for a time as the other system is embraced until its weaknesses become intolerable to the citizens and they bring the first system back. This cycle will only be broken when either the entire system collapses or a new system emerges that encompasses the strengths of socialism and capitalism while addressing their weaknesses. Fasten your seat belts it’s going to be a bumpy night.


John Stoner said...

Yeah... My (shallow) critique of the current way folks talk about this stuff is this:

When free market advocates rail about government and advocate private enterprise, they talk about the wrong distinction. A better distinction would be 'competitive environment vs. monopoly/monopsony power.' Government's pathologies have more to do with their role as monopolies of certain forms of power. We don't know how to introduce competition to those forms of power, so we have to find other ways to deal with the pathologies in those cases.

John Stoner said...

oh, and my favorite economics podcast talked to a real live socialist:

Captain Rational said...

Excellent insights John! And where is your favorite economics podcast? (I'd like to hear it)

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