Friday, December 9, 2016

Capitalism V Socialism

By Andrew Atkin

What's the difference?

Capitalism versus socialism is a wrong way of looking at the debate. It's really a question of a free economy (capitalism) versus a controlled economy (socialism), because what we call capitalism is at base nothing more than free trade among the populace. We call the free economy 'capitalist' simply because it allows for capital investment coming from private individuals, which drives its development.

Socialism, in practice, means a controlled economy - a centrally planned economy. It's called 'socialism' because that is its rationale. It's embraced to the end of achieving equal prosperity and eradicating poverty.

With socialism, capital investment in industry comes from the government, so you have collective ownership of the means of production. And with it, comes strict controls on how the people within the system can live and invest their personal resources, including how they can invest in themselves as a human resource.

The ultimate expression of socialism is what I would describe as a militarised economy, where the entire society functions like the military with regimented control. Every economy is to a degree socialist and capitalist. Ultimately we are talking about degrees.

Historic success and failure.

Very few people believe in the socialist system as an ideal, because socialism has been a failure wherever it has been tried from over the last 200 years, and now. And it has indeed resulted in the opposite of what it was originally set up to achieve. Socialist systems achieve economic development very poorly, and their inability to adapt to changing conditions historically leads to devastating scenarios.

A good example today is with Venezuela. Unlike New Zealand, which rapidly reformed to a much more free market system in the 1980's (as urgently required), Venezuela did not. Many people are beginning to starve now in Venezuela, and civil unrest has become serious.

There's no doubt about it. Free market economies make people richer and can adapt quickly to changing circumstances. And due to their strength, they have proven to be far more proficient in helping the needy who cannot help themselves.

Free market systems provide the best social security in practice. Mainly because a prosperous society will not tolerate the sight of people starving on their streets, and due to their prosperity they simply do not have to.

How capitalism generates wealth.

Take a man with a lot of money. He wants to invest his wealth into some kind of industry to get richer still. He sees an opportunity when he comes across a small group of 10 men cutting down trees for firewood for sale - with handsaws. The rich man then goes into town and buys 10 new chainsaws (that's capital investment), and employs the group of men to cut down more trees with the chainsaws, where they then achieve 5x the productivity.

The rich man gets richer as he makes a huge profit on the woodworkers labour. The woodworkers get a 10% increase in their earnings as well, but at first the gains mostly go to the capitalist.

However, as the supply of wood increases from the greatly amplified productivity, the cost of wood goes down. In this way, everyone benefits from the increased capital investment and likewise productivity - rich and poor.

As time goes on further, the rich capitalists start to run out of cheap labour to amplify the profits from their capital investments. This naturally forces a bidding war for available workers, amongst the capitalists. The workers wages then get bid up, over time even dramatically, and in this way the spoils are progressively shared throughout the maturing economy.

This process of free markets and its accompanying capital investment, has had such a powerful impact on the Western world that the living standard of even the poorest western people towers above what most people had just 100 years ago, when most people were lucky to see anywhere near their 80th birthday. It has also served the developing world extremely well. We have seen radical reductions in poverty rates, worldwide, from capital investment and economic development in the industrialising world.

How socialism generates wealth.

Socialism tries to generate wealth in the same way capitalism does (by capital investment), though the investment comes from the state.

One problem. The incentives and price signals in socialism are a mess. Contrasting, in free markets people know how to invest their money.

For example: If you get a particularly cold winter then the people will want more wood to burn. That extra demand naturally drives the price of wood up, and that in turn means that those who supply the wood make more money. This, in turn, gives us the *price signal* to incentivise those with capital to invest in more wood production, as naturally they want some of those greater yields for themselves. Then, as more wood gets produced, the price comes down to more normal levels (matching production costs + reasonable profit) as you no longer have an under-supply of wood.

Hence, capital investment is driven by price signals. Those price signals are erroneously called "the invisible hand". Erroneous, because there's nothing really invisible about it. The supply-demand-investment process is quite transparent.

So socialism, which responds to state dictates, controls the supply and inevitably does so badly. And not only does it force the supply, but those that make the decisions on investment have no personal skin in the game. Meaning, they do not spend the state's money carefully because it makes no difference to them, personally, if the investment proves either good or bad. Not only that, but in socialism the people in general are unmotivated, and in many ways unaccountable, leading to a lack of energy and public apathy towards progress and industriousness.

But where socialism fails worst, is when circumstances absolutely demand change. When a socialist economy receives a 'shock' and needs to adapt, it can't. People start to starve and riot. In the name of creating social security socialism ironically does the opposite.

The evils of capitalism.

For the most part, the evils that we see in capitalism are not actually capitalism at all. They are the socialist (centrally controlled) components in a capitalist system, rearing their ugly heads.

We've all heard of crony capitalism. What is it? It's when private capitalists get into bed with governments to skew free markets (via anti-competitive regulations) in their favour. So crony capitalism is basically a kind of privately-driven socialism.

The dirtiest expression of crony capitalism, in my opinion, can be seen in this thing we call schooling. Schooling was invented 200 years ago in Prussia to produce obedient military personnel. It was later embraced by governments backed by industrialists, who liked the kind of citizenry (corporate drones) that the Prussian system tended to create. This is not capitalism - it's socialism. Forced schooling as we know it is a socialist intervention, and a deeply intrusive version at that.

But there is another component of capitalism that might be seen as toxic. In free and (inevitably) competitive markets, the bottom-line is the only line. Any 'love' an employer gives to his employees is given only to the end of maximising the bottom-line. Which is a bit creepy if I may say so as the love is not real, and the truth behind it all (which is the never-ending threat that you will lose your job, as soon as you don't make economic sense) makes for an undercurrent of constant low-level intimidation. It's not natural, and probably not healthy, for humans to live like this ahead of a more community mindset.

To a degree, we try to mitigate against these effects by employing government to create laws to avoid the worst of this. But this has a somewhat impotent and double-sided effect, I believe. Government regulations on human conduct can too often do more harm than good, as intrusive laws originally meant to protect are notorious for being used as weapons, and likewise undermine goodwill. From my observation, we end up playing politics and find ourselves walking on eggshells, rather than communicating openly and sorting our differences that way.

However, again, I believe that at base this is a created problem not of the free market system, but of government interference in it. Because in a real free market the people, as a function of natural demand, would have largely solved this problem on their own - because they could.

If people did not want to live in "corptopia" then that demand would turn into new products, all on its own. You would end up with various forms of reclusive "micro-socialism" of the type that is manageable and effective (which in practice means small scale*) being supplied and sold under the umbrella of a national free market system. And indeed, alternative developments like this would hold the wider job climate to account. Respect that people only tolerate an unhealthy work climate when they feel that they have to.

But, I would argue that this secondary evolution that we might expect to see within a developed society, is being suppressed. Suppressed first through status-quo cultural indoctrination via forced schooling, and second through national laws that don't allow for private communities that are truly of their own design to be created.

But again, these evils are not really born out of free markets, but a lack of them. The natural demand for more community is being choked off through crony capitalism and the subsidised state sector (meaning socialist sector) of the economy. And the politically-engaged people who want more community are confused about how to get it. They need to understand that the evolution of community must be bottom up - not top down.


Since the 2008 financial crises the US government, in particular, has been inflating their economy with cheap money (super low interest rates), which in itself suggests that the 2008 crisis was never solved, and that instead we've been operating on borrowed time with money printing. This will demand an economic correction in the future, as the game of money printing and deficit spending can't go on forever.

The great danger is that people, in feeling pain from a correction, start demanding change but without knowing what to change to.

The solution to a financial crisis is to let the bad investments take their losses, with bankruptcies and tears, and to in turn let the machines of production keep turning after their *rapid* price corrections. And then to enforce a stable monetary system, where the money supply can't be so easily inflated.

The solution will not be socialism, though no doubt many opportunistic ideologues will try to tell us that it is. And this is what I have tried to show, because nothing is more dangerous than a populace demanding change yet not knowing what to change to - yet thinking that they do. Stress-driven revolutions can be good - or tragic!


*Think of a household economy expanded out to the size of a club. Go beyond a couple of hundred people and the social body loses awareness of its managerial head, and accountability and market-responsiveness will begin to collapse. I believe that if any form of socialist type system is to be effective, then it must operate on a strictly human scale.


Extended: Good video which further looks at the differences:

And more, on Adam Smith:

Part 2:

Serious example of crony capitalism today (New Zealand relevant):

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