Capitalism vs. Socialism, The Great Confrontation
Over Simplifying Things: Capitalism vs. Socialism As Ideologies
As we’ve seen, the growing popularity of socialism, the rising wealth of capitalism, and the frequent crises of capitalism set the stage for monumental confrontations in the 20th century. These confrontations changed the economic system of virtually every country on the planet at some point. For some countries, they have changed multiple times. We have also seen there have actually been several different types of systems. Yet to many, especially non-economists, any discussion or classification of economics systems is limited to a simple choice: Capitalism vs. Socialism. In political discussions and in high school social studies courses, society’s need to have a system that answers the fundamental questions is usually characterized as a simple choice between Capitalism on one side vs. Socialism on the other. A few decades ago during the Cold War, the choice was more often characterized as either Capitalism or Communism.
Of course, this simple division of economic systems into Capitalist vs. Socialist/Communism is far too simplistic. It also tends to bring heavily political overtones to the discussion. Therefore, many principles of economics principles and economists prefer to classify economic systems into a simple Market system vs. Command/Planned system.
Either of these simple dichotomies is a drastic oversimplification. Every country’s economic system has features that are unique to it. Further, there is not now and has never been any country that had a “pure” economic system. What most people describe as an “economic system” is in fact an ideology – a statement of their theoretical desire. So with this disclaimer in mind, let’s venture into a simple characterization of what is involved in these ideologies.
A Market System
A market system is one where individuals are free to trade goods and resources with each other. Typically all property, goods, and resources (or most) are privately owned. Further, individuals are free to make their own decisions about whether and what to trade based on their own objectives. Typically these objectives are to maximize utility, profit, and their own individual welfare. Substantial theory and experience exists to support the idea that competitive markets are powerful institutions capable of achieving enormous efficiency and growth under certain circumstances.
Among extreme market ideologues, government is seen as an undesirable. Government power and actions in the economy are to be minimized. Market advocates are more concerned with efficiency and growth than with fairness of the distribution of wealth. Such a viewpoint is expressed in phrases such as: “a rising tide lifts all boats” and “make the pie bigger instead of fighting over how it’s sliced”.
What goods are produced and in what quantities is a decentralized decision made by various different producers, typically businesses. These producers get their signals from consumers via prices. The distribution of goods is according to wealth and income.
In modern industrialized societies, markets are a pervasive feature of the economic system. In the U.S., for example, markets help determine the allocation of many resources and markets coordinate the decisions of millions of individuals. Even in the U.S., though, markets are not the only way to allocate resources, coordinate decisions, and answer the four fundamental economic questions. At least 40% (and some would argue over 50%) of U.S. economic resources are allocated according to government or political processes, not market processes. Also, the markets that do exist, vary greatly in how free they are and how competitive they are.
Command/Centrally Planned Systems
A command economy or centrally planned system involves having the government or some government agency consciously make most of the economic decisions. An extreme example is from the former USSR where a central agency called Gosplan made annual and 5-year plans. These plans decided what products each factory made, in what quantities. The plans also determined what wages workers would get and what all prices of goods would be. Transactions not in the plan were illegal and prohibited.
The defining feature of capitalism is private ownership and management of productive capital: factories, equipment, investment monies, hospitals, etc. Along with this ownership comes the ability of the private owners to reap profits. Often Capitalism is combined with a market system so that the power to decide what goods to produce and in what quantities is also made by the owners of the businesses. In many people’s minds, Capitalism is often associated with competition in markets, but there is no reason why Capitalism must be competitive. Indeed, the history of most capitalist economies indicates a tendency towards monopoly in many industries. In other cases, such as Fascist Italy or National Socialism in Germany, capitalist ownership and management of businesses was combined with central planning by the government.
Under Socialism/Communism, the ownership of at least the critical key productive resources such as major factories is owned by society, a government agency, or perhaps the workers themselves. Typically, the owning group is the government. At other times, such as the early years of the USSR, the ownership and management of factories was controlled by the councils of workers themselves called “Soviets”. In socialism, the intent is often to redistribute the rewards or wealth or income of the nation to achieve greater fairness of both opportunity and results. At other times, the dominant concern is to achieve greater stability even at the cost of slower economic growth.
Under a Keynesian system, an economy is essentially a mixed or free market capitalist system. However, the government takes an active role in the economy to try to stabilize the ups and downs of capitalism. The typical tools by which Capitalism is stabilized in a Keynesian system involve: a) changing the government budget (taxes and/or spending), b) establishing regulations for safety or information, and c) changing interest rates or the availability of credit from banks. This does require a degree of “economic planning” by the government, but far short of the kind of detailed planning involved in a command economy. It’s more of setting the right conditions for Capitalism to thrive.
Combinations of Systems
In reality, all economies today have a Mixed Economic System with strong Keynesian features. A mixed system has features of all of these above systems. However, some countries and systems tend towards one or another of these ideologies.
The following table, which is subject to dispute, is an attempt to characterize some examples of the different possible systems. Keep in mind that the countries listed are in fact mixed economies, but what I’m portraying is what was the guiding ideology of the government of the time.
Free Market – Capitalist
some European countries
some oil export countries
some aspects of China today
Command/Planned – Socialist/Communist