Capitalism v Socialism
I woke up this morning feeling particularly discouraged and pessimistic, largely because I read some Facebook posts and comments just before I went to sleep last night which reminded me, as they usually do, of how incapable many people are of making rational judgments and/or holding and expressing values that I believe are critical to the survival of our society. My last couple of posts have dealt primarily with the first cause of my distress - irrationality, as manifested by inattention to facts, sources of facts and the qualifications and biases of people who purport to present facts and rational conclusions. I want to come back to that in a moment, specifically in the context of a discussion about competing economic theories, but first I want to briefly riff on the subject of values.
Some time has passed since my last post, in part because my last attempt to write a post on the subject of values was inadvertently deleted before I could post it. That’s just as well because as I neared the end of my overly-long essay on values I realized I could boil it down to a few sentences. The most critical values that I hold dear - those which bear heavily on my voting decisions - are empathy and pragmatism. It should be apparent from my previous posts that those are my core values - they are deeply embedded in my reflections on every issue. The primary reason why I sometimes feel so discouraged about American culture is that I observe large segments of our population that seemingly do not share those values and I have a difficult time accepting that. Adding to my discouragement is an observation that many of the people who display lack of empathy and nonpragmatic approaches to solutions for social problems seem to be entirely convinced that they ARE empathetic and pragmatic. And some people are just blatantly and unapologetically unempathetic and oblivious to the notion of pragmatism.
At the end of day, most of us are strongly influenced - in our voting decisions and most aspects of living - by others with whom we affiliate in groups, which are both formal and informal in nature. Susceptibility to group influence varies considerably among individuals but it’s fundamental to human nature. Consequently, if one consciously wants to influence someone else, it may be important to be perceived as being part of the other’s group. Compromise, which is a form of pragmatism, hinges on the ability of persons with different perspectives to agree on a common group goal. The point I want to make here is that perceptions, including unconscious ones, about group affiliation WILL have an effect on sociopolitical behavior of individuals, and that needs to be understood. But if and when it is understood, then the ability to communicate successfully across our group boundaries will finally depend on whether persons striving to communicate can do it rationally and empathetically.
That was a long digression from my stated topic - Capitalism v Socialism, but I thought it was important to establish the foundation of my approach to discussing the topic (and most other topics I intend to cover in this blog). If you cannot in fact empathize with others who are unlike yourself (e.g., different party affiliation, skin color, religion or what have you) and if you cannot in fact concede to fact-based pragmatic answers rather than ideological answers to difficult problems, then you and I hold such different values that there is little hope I can influence you or that you will do anything other than disappoint me with your opinions. If you read the words “capitalism” and “socialism” and automatically think one is good and one is bad, and if you can’t see past your biases for and against one and the other, then my appeal to your reason and your emotions will fall short.
Okay, I’ll get directly into the topic now. I spent most of my life in training for, and in practice of, capitalism. My career as a CPA was directly in service to the capitalistic system that defines the American economic system in so many ways. My primary role as an independent auditor was to provide some assurance to investors and financiers that the financial information provided to them by businesses seeking to obtain and maintain capital was sufficiently accurate to support decisions about whether to invest or provide other financing for those businesses. Under a capitalistic system, trade and industry are controlled primarily by private owners, rather than by the state. For capitalism to be effective (i.e., to create material wealth and well-being for owners and for the society as a whole), information bearing on our decisions about where to place capital needs to be reasonably reliable. In America, information systems for operating our system of free enterprise have been fundamentally reliable most of the time, and that has enabled America to create a level of material wealth that is nearly unrivaled in global history. If that sounds like an unqualified and glowing endorsement of capitalism, it is, but there are important qualifications and I’ll come back to those shortly.
Although my personal time and energies have been focused on support of our system of private ownership and free enterprise, the role of socialism in the global economy generally and in the American economy specifically has not been lost on me. Let’s look at the positive side of socialism for a moment, in the same vein as we looked at the positive side of capitalism in the previous paragraph. In contrast to capitalism, socialism advocates for an economy in which trade and industry are owned or heavily regulated by the state, rather than by private owners. In America, and even more so in most other developed countries, there are many elements of our economy that are currently operated by the government (including state and local governments) - for example, the military, public education (almost 90% of PK-12 students are in public vs. private schools), social security and Medicare, and most of our transportation infrastructure. In addition, the government regulates all businesses to some degree. Although there are objectors to some of these government-run “businesses” and many of the regulations imposed on private businesses, there are good reasons why they exist. The fundamental reason is that some economic functions and services are desirable, if not necessary, for the general welfare but do not create economic profits in a form that incentivizes private owners to allocate capital to them. Private schools exist largely because some parents have sufficient wealth to send their children to such schools and their investment enables such schools to provide, at least in theory, “better” educations (a form of profit to the owners of the schools). Most families cannot afford that level of investment and there is no direct financial profit for private sponsors; therefore if we value broad educational achievement as a precondition to the economic success of the country as a whole, a robust public school system is necessary.
Now let’s look at the negative side of both economic theories, starting with socialism. Conservatives often have a field day when calling our attention the catastrophic failures of socialism in countries such as Venezuela, Cuba and the former Soviet Union, where private enterprise was all but entirely eliminated. But most predominantly socialistic countries do not go to the same extremes in enforcing their economic ideologies. Even in China, which is communistic (communism is an extreme form of socialism), capitalists have been given quite a lot of rein in recent decades, apparently because the state recognized the need for innovation and incentive to drive the economy forward, resulting in an exceptional long-term economic growth rate there, with plenty of room for more improvement. China’s partial embrace of capitalism was a tacit admission that pure socialism does little to motivate individuals to work hard and especially to be creative because it takes away the rewards of doing so. Ideological rewards - serving the community rather than one’s personal self-interest - are real, to an extent, and especially in a community-oriented culture such as China’s, but a state’s slipshod assignment of round pegs into square holes does not result in an efficient allocation of human capital, which is the foundation of socioeconomic capital. Personal incentive is vital to allocating human capital to where it most naturally belongs and where it can be of greatest value to the society. Achieving personal goals in addition to communal ones is also vital to individual happiness.
As I mentioned, conservatives, who are by-and-large strong backers of capitalism, like to point to examples of extreme socialism as a basis for condemnation of socialism in general. Liberals are more eager to embrace elements of socialism, and they can point to examples of capitalism run amok. It might come as a surprise to conservatives that capitalism has ever “run amok,” but one needs to look no further than America for an example (although there are countless other examples because historically, capitalism has prevailed over socialism in practice all over the world - socialism takes a lot more organization to pull off). It is almost impossible to summarize American history on this subject within the confines of a single blog post. The evolution of capitalism in America is an exceedingly complex and multi-faceted subject covered by countless texts from historians, economists and others. I’m going to give you an orbital flyby, but one source I can suggest for a somewhat condensed and readily available treatment is on a website named “newhistory.org” - it’s called “A Short History of American Capitalism.”
To make a very long story very short, America’s founding fathers were fundamentally capitalists who successfully rebelled against the interference of the British crown in their business interests. The original Constitution and Bill of Rights, and the government institutions that emerged from those documents, were designed primarily to advance the interests of the founding capitalists, and to a lesser degree, to enable other white males to pursue their own interests without the same level of reference to noble heritage as had been the case in the old world. They and their successors were the beneficiaries of an incredible and seemingly boundless array of resources in the new land. They simply had to hobble or remove the native American inhabitants and beat back the vestiges of old world interests in order to exploit those resources, which they did. Capitalism created the government and the government’s principal role was to support capitalists.
So you might legitimately ask, what’s the problem here? American emerged as the all-time greatest economic powerhouse, so what’s the problem? Yes America did succeed, and if one assumes that accumulation of a massive amount of national material wealth (without regard to how that wealth was distributed among the entire population and to the exploitation of millions of predominantly non-white humans), it’s a gigantic success story. But it was a messy and uneven story. Suffice it to say that the enormous natural wealth that was available for exploitation made success possible, but capitalism itself often sputtered. The first problem was that there was, paradoxically, too much competition - markets were TOO free. Remember, transportation of goods was slow and unwieldy in early America; therefore economies tended to be largely localized, and industrialization was just beginning. Anyone with access to local resources could compete, but all that competition made it difficult for most capitalists to make a profit by cooperating to limit production and keep prices up. Economic contractions were frequent and deep.
The earliest super-capitalists were folks like J.P. Morgan, whose control of the railroads enabled the extraction and manufacturing industries to become regional and eventually national in scale. He and others who were able to develop and utilize emerging technologies were extremely successful, exerted enormous control over the government by buying influence, and started the trend toward monopolization, wherein a relative handful of extremely wealthy entrepreneurs claimed a gigantic share of the economic rewards. The problem was that the millions of laborers necessary to operate those businesses had little to no power to claim any more share of the rewards than what the capitalists deigned to give them, which usually wasn’t much. In addition, whereas too much competition (ostensibly the foundation of a free market system) was once the bane of capitalists (and continued to be the bane of farmers), now the collapse of competition due to monopoly power led to a winner-takes-all outcome in many industries and suppressed the aspirations of newly-minted capitalists. At the same time, the established winners used their government influence to prevent the working class, on whose backs the capitalists’ fortunes were built, from collectively organizing for better working conditions and higher wages. The long-running suppression of the working class was very violent - literally a war, with numerous deadly battles. The vast majority of Americans had a low standard of living and little or no income security. A small number of Americans lived like bandit kings (little wonder they were called “robber barons”) and the middle class was small. If you believe that capitalism wasn’t running amok at that time, then I suggest you do not value empathy, because very little empathy was being shown to the veritable serfs who actually constructed and operated the vast machinery of the American economy. It was hard to distinguish from feudalism.
These days there are millions of red hats emblazoned with the slogan “Make American Great Again.” When was America “great” exactly? If you read between the lines of the ultra-conservative narrative underlying the slogan, you’d probably be right to infer that America was “great” in the period from WWII to sometime in the 1960′s (unless you were brown-skinned or not heterosexual). In that period America enjoyed a staggering share of global manufacturing output, technological innovation and military might, among other achievements, along with a relatively uniform and stable culture. But more important to America’s standing as a beacon to the world than even its international dominance was that the American middle class was at its all-time height. It’s a quaint thought that free markets can regulate themselves and provide the best overall outcome, but in reality it was the rise of socialism - first in the form of labor unions and a gradual, broader recognition that democratic privileges should be shared with ALL citizens, then through New Deal programs such as social security and extensive regulation of banks and financial markets, including anti-trust laws that broke up many monopolies - that actually enhanced the performance of capitalism by corralling its excesses and providing a much broader sharing of the rewards. The rise of the middle class fueled the consumer economy that we still enjoy today, albeit with serious environmental side effects and diminishing economic benefits to the shrinking middle class and growing lower class.
In my career I worked very long hours, made many personal sacrifices and took on a lot of responsibility to advance capitalism, and for that I was quite well-rewarded, which is how the game is supposed to be played, or so I was always taught. I would be entirely hypocritical to denounce capitalism. However, I realize two important things that many capitalists, and the portion of the working class that buys into their rhetoric, don’t seem to fully grasp. First, winners need to share. Who likes to hear a talented pro athlete on a winning team claim the victory entirely as his own and horde all the spoils for himself? An empathetic person doesn’t want to hear that, because an empathetic person wants the supporting cast to share the glory and to be on solid economic footing. There are people working as many hours as I did and under conditions that are just as stressful, if not more so, who remain in or near poverty, even though they are often providing services we now recognize as “essential.” The fact that those people aren’t earning a livable minimum wage while the share of wealth given to the top tier of earners is drifting back towards 19th century levels is a reason why America doesn’t feel as “great” as it once was to many people. Second, as a pragmatic matter, when enough sharing doesn’t happen, the capitalist system doesn’t operate as effectively as it can and should. An engine needs all of its parts to operate efficiently. The 19th century economy sputtered much more frequently and severely than the economy has in my lifetime, but the Great Recession and the Covid Recession suggest that economic upheaval is again becoming a greater threat. As I write this, the stock market is booming (which is great for the socioeconomic upper tier, including me), but a higher percentage of people are unemployed and economically stressed than at any time since I was born. The profound discrepancy between what’s happening at the top and the bottom of the food chain is a giant red flag.
In future posts I hope to revisit in greater detail some of the specific ways in which capitalism and socialism are present in government policy - their merits and demerits. For now I want to wrap up by noting that there is a widely accepted myth that America leads the world in terms of opportunity for upper mobility - that is, the likelihood that a person born to parents in a lower socioeconomic stratum will rise to a higher socioeconomic stratum as an adult. I say “myth” because in fact America ranks somewhere around 25th compared to all countries regarding upper mobility. The number one predictor of one’s ultimate socioeconomic position in America is the position of one’s parents. That is not a healthy sign and it calls into question how effectively our economic system, including both the public and private elements of our system, are working. Bear in mind that America is less socialistic than most, if not all, the other countries where opportunity for upward mobility is greater. The bottom line (as we accountants often like to say) is that a good marriage of capitalism and socialism is a key to success. Every developed country follows that pattern. Americans will be foolish to let their pride in their heritage blind them to understanding how other countries have achieved greater success in some areas, sometimes due to socialistic policy, and to emulate the success stories without regard to ideological labels.