More About Economic Systems

A comment posted to yesterday’s blog noted that I had not defined capitalism. Fair point.

The following description is from my last book, Talking Politics? What You Need To Know Before Opening Your Mouth, in which I included the following descriptions/comparison of capitalism and socialism.

Capitalism is defined as an economic and political system in which a country’s trade and industry are controlled by private owners for profit. It is characterized by free markets, where the prices of goods and services are determined by supply and demand, rather than set by government. Economists often define the ideal of free trade as a transaction between a willing buyer and a willing seller, both of whom are in possession of all information relevant to that transaction.

Understanding the importance of free trade to capitalism is important, because it defines the proper role of government in a capitalist system—as an “umpire” or referee, ensuring that everyone plays by the rules. For example, Teddy Roosevelt reminded us that monopolies distort markets; if one company can dominate a market, that company can dictate prices and other terms with the result that those transactions will no longer be truly voluntary. If Manufacturer A can avoid the cost of disposing of the waste produced by his factory, by dumping it into the nearest river, he will be able to compete unfairly with Manufacturer B, who is following the rules governing proper waste disposal. If Chicken Farmer A is able to control his costs and gain market share by failing to keep his coops clean and his chickens free of disease, unwary consumers will become ill. Most economists agree that in order for markets to operate properly, government must act as an “umpire,” assuring a level playing field.

This need for government is a response to what economists call “market failure.” There are three situations in which Adam Smith’s “invisible hand” doesn’t work: when monopolies or corrupt practices replace competition; when so-called “externalities” like pollution harm people who aren’t party to the transaction (who are neither buyer nor seller); and when there are “information asymmetries,” that is, when buyers don’t have access to information they need to bargain in their own interest. Since markets don’t have built-in mechanisms for dealing with these situations, most economists argue that regulation is needed.

Economists and others often disagree about the need for particular regulations, but most do agree that an absence of all regulatory activity undermines capitalism. Unregulated markets can lead to a different system, sometimes called corporatism. In corporatist systems, government regulations favoring powerful corporate interests are the result of lobbying by corporate and monied special interests that stand to benefit from them. You might think of it as a football game where one side has paid the umpire to make calls favorable to that team.

Socialism is the collective provision of goods and services. The decision whether to pay for certain services collectively rather than leaving their production and consumption to the free market can be based upon a number of factors. First, there are some goods that free markets cannot or will not produce. Economists call them public goods, and define them as both “non-excludable” –meaning that individuals who haven’t paid for them cannot be effectively kept from using them—and “non-rivalrous,” meaning that use by one person does not reduce the availability of that good to others. Examples of public goods include fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. If we are to have these goods, they must be supplied by the whole society, usually through government, and paid for with tax dollars.

Not all goods and services that we provide collectively are public goods. Policymakers have often based decisions to socialize services on other considerations: we socialize police and fire protection because doing so is generally more efficient and cost-effective, and because most of us believe that limiting such services only to people who can afford to pay for them would be immoral. We socialize garbage collection in more densely populated urban areas in order to enhance the livability of our cities and to prevent disease transmission.

Getting the “mix” right between goods that we provide collectively and those we leave to the free market is important, because too much socialism hampers economic health. Just as unrestrained capitalism can become corporatism, socializing the provision of goods that the market can supply reduces innovation and incentives to produce. During the 20th Century, many countries experimented with efforts to socialize major areas of their economies, and even implement  socialism’s extreme, communism, with uniformly poor results. Not only did economic productivity suffer, so did political freedom. (When governments have too much control over the means of production and distribution, they can easily become authoritarian.)

Virtually all countries today have mixed economies. The challenge is getting the right balance between socialized and free market provision of goods and services.


  1. “President Donald Trump’s 2020 budget proposal will include $100 million for a global women’s fund spearheaded by his daughter Ivanka Trump.

    The White House said the budget, expected to be released Monday, will include the funding for the Women’s Global Development and Prosperity Initiative. The administration last month launched the government-wide project, which she leads.

    In a statement to The Associated Press, Ivanka Trump noted that Friday was International Women’s Day and stressed the initiative was “working towards our goal of economically empowering 50 million women in developing countries by 2025.” She says the budget includes “a new $100 million commitment” for the fund.”

    The above is copied and pasted from an ABC news item on Facebook; is this capitalism, socialism or an early Trump inheritance to Ivanka paid for with our tax dollars? Isn’t it adding to our already overloaded deficit?

    “Understanding the importance of free trade to capitalism is important, because it defines the proper role of government in a capitalist system—as an “umpire” or referee, ensuring that everyone plays by the rules.”

    I can only assume the United States is not considered a “developing country” so women who are paying taxes to fund Ivanka’s endeavor will not benefit by her “economic empowering” of women. Will those in the “developing countries” receive one of Ivanka Trump’s costly handbags as an enticement to become part of her tax funded Trump empire to add to their already lengthy list of scams? Nepotism is still against the “rules”…or has that been repealed by hiding it in one of Trump’s Executive Orders? Trump is blatantly “…failing to keep his coops clean and his chickens free of disease…” But will his “chickens come home to roost”?

    IMO Ivanka’s receipt of $100 MILLION does not fall under either heading of socialism or capitalism but is part of our current Trump monarchy. Another “entitlement” handing our tax dollars to the wealthy.

  2. Above graffiti raises this question: which system does the least harm, capitalism or socialism? Which does the most good, for those at the bottom of the economic ladder. Which reduces avarice and greed? Which ameliorates these evils the best?

  3. “Understanding the importance of free trade to capitalism is important, because it defines the proper role of government in a capitalist system—as an “umpire” or referee, ensuring that everyone plays by the rules.”

    Trump, being our current “umpire” or referee, backed by immovable McConnell, is removing regulations otherwise known as “rules”, threatening ridiculous tariff levels after lowering tax rates to the wealthy, turning the capitalist playing field into a free-for-all. Literally!

    An elected Robber Baron; Robin Hood in reverse? How much of our current capitalist (corporation) system under Trump falls under RICO guidelines?

  4. Everyone agrees to contract themselves out. Whether through labor, ideas or production of goods. I’ve never thought of paying teachers, policeman, fireman, or other government workers that aid in the overall good of the community as socialist. Never has it been known as a failure of markets to supply such services that we elect offficials to vote and agree upon. Where government grows beyond the bounds of collectively providing basic services and reaches further into the pockets to garnish property either through wages earned or thru investment gains begins the call of libertarians to call it socialism. To say that we already have services that we collectively agree upon means that we should therefore expand government beyond basic services is crazy. Realize whatever we do collectively we have to pay for it. The average citizen was given a larger bill, bigger than ever before over the last twelve years.- because according to many economists, the housing crises generated by providing housing in the early 21st century to the underprivileged without correct government intervention where President Bush was warned about Congress failure in this venture to protect new homeowners ultimately led to an economic collapse in 2008.
    Where market failures have been ignored is in the signing of NAFTA and many families lost incomes as corporations moved overseas as lower wages elsewhere and higher corporate taxes took away opportunities.
    Recently politicians are identifying themselves as socialists as it is becoming more popular without people really understanding that a large government and society cannot withstand the market interference like small countries the size of Scandinavia. Many economists are stepping out trying to warn us about how devastating it will become to our mixed economy if we move too much further in this direction.
    I will restate that at $6 trillion of national debt I was a little more than concerned, but nearing $21 trillion I have become more cautious of politicians who have wanted to expand government to take on even more debt.
    Increasing socialism in our mixed economy may save taxpayers money according to some economists. But who is writing their paycheck. There are a lot of wealthy corporate execs who would like to unload their responsibility of healthcare costs on the government and then who picks up the tab? The middle class WORKER, the family where both parents pay the tab.
    We need to look further into how we can provide safety nets.

  5. I’m confused. Unregulated markets are bad (A), so we need regulations to fix that (B), so those regulators can be captured (C). If A +B=C, then why not eliminate B.

    Please find an actual example of a non-government granted or provided monopoly.

    Also, please provide examples where the regulators have not been captured.

  6. I have studied economics my whole life. This posting is one of the best, one page, descriptions
    of economic systems that I’ve encountered. Thanks Sheila.

    I would note that Teddy Roosevelt was also concerned with monopolies and other business concentrations because they also consolidated political power. See Tim Wu’s book, The Curse of Bigness.

  7. “Capitalism is defined as an economic and political system…”

    I must respectfully take issue again. Capitalism is not a political system. You are muddling economic and political together. From a post comment I made late yesterday.

    I conceptualize it better if I think of it as a graph. One axis is “political” ranging from anarchy to tyranny. The other axis is “economic” ranging from pure private property capitalism to state ownership of all property and distribution of wealth.

    The 195 nations of the world are then data points distributed within the graph. Socialism, Communism and Fascism as examples are then mere groups of data points clustered together between the axes.

    I don’t know how useful this may be to others, but it helps me think about it.
    (The U.S. is moving in the wrong direction along both axes)

  8. While we enjoy several labels for economic systems that have come from economic philosophers over the years the truth is that after the experimentation was over only one, the mixed economy, is left standing. There are no capitalistic or socialistic countries in the world anymore. The application has been found best done a market at a time not a country at a time.

    If there are changes coming up in the future they will come from a dysfunction now built into the system called advertising; it’s become too powerful over our pervasive mass entertainment media to allow free markets.

    So changes are coming not away from mixed economies but away from the current market allocation by some countries to compensate for the disruption of advertising.

    Case in point – the health care market in the US will b come socialized at some point because there is no way for it to support competition and that means that capitalistic health care is unaffordable.

    The question is how unaffordable will the country let it get before it collapses under its own weight?

  9. The battle rages on as the Reactionary Right Wing Evangelical Republicans are in full out attack mode against Democratic Socialism. Reactionary Right Wing Evangelical Republicans are attempting to smear the Democratic Socialists with the specter of the failed Soviet Communism.

    Capitalism is very adapt. Capitalism itself has no moral base in terms of humanity. The CEO’s and the High Command of the Corporations are expected to provide that humanity. Since the purpose of Capitalism at it’s core is profit, human rights, labor rights, and environmental protections are impediments to profit.

    Thus, it is not surprising that Capitalism will fit in with authoritarian or totalitarian regimes. Communist China is now one of the world’s largest economies. The list of countries that Capitalism can live in and thrive are varied, from Communist China and Communist Vietnam to the Theocratic Gulf Oil States to the Democratic Socialist states of Western Europe. The same brand automobile can be purchased in Western Europe or in China or Saudi Arabia.

    I would agree with John Neal, “Capitalism is not a political system. You are muddling economic and political together. ” Capitalism can have many points of attachment to the political system.

  10. Sheila’s blog today is one of the best definitional thumbnails I have read and has, predictably, drawn diverse commentary. These are not East India Tea times when the monarch (for a healthy cut of the proceeds) gave a monopoly to a particular company to conduct trade with India, and it is not a time when a discredited communism can work. Nor, though it resembles that age, it is not a time of the first Gilded Age and Teddy Roosevelt, a progressive trustbuster. Things have changed, and at an accelerated pace, just as the economic environment of the Industrial Revolution of Charles Dickens and Karl Marx has changed. One of the problems is that our ability to accommodate change hasn’t changed; we may be working on the wrong problems as we move into this Information Age with its sophisticated AI and human labor-supplanting robotics.

    There is no pure capitalism or socialism. The two are necessarily intermixed to care for the wants and needs of modern societies. The question, as always, is how much of one or the other should be inserted into the mix. I think that will vary with the specific wants and needs of the particular society as we move along, based on whether it works best for the common good and free from propaganda about how one or the other signals the end of the organized state. We should look at new externalities created by their intermixture not as good or bad but as instructive in how to adjust the mix in light of today’s problems.

    Right now we have moved from both isms to corporatism, and that extreme, as we are seeing, is creating a backlash among those who want more socialism in the mix which, ironically, amounts to a conservative movement back toward the center. Imagine! Socialism rescuing capitalism from the corporatist greedhogs!

    I agree that we need to adjust the mix today as the old mix is not working for the common good, or in the medium or long run, for the greedhogs themselves.

  11. Great article, Sheila. I’m going to pass it along…

    ML writes, “Since the purpose of Capitalism at its core is profit, human rights, labor rights, and environmental protections are impediments to profit.”

    Albert Einstein called capitalism, “Evil.”

    Basically because of what it does to the human instincts–we are comprised of both individual and social instincts. Capitalism ignores our social instincts completely. Within capitalism is competition…it’s maybe NOT such a good thing. He said it was even built into our educational system.

    What about a ‘collaboration’ for the greater good where we all work to make it happen–versus deprive one another so we can have more and them less. Our planet is telling us to change our systems before you go extinct.

    You toss in Ayn Rand’s “objectivism” of the free marketers (selfish to the extreme) and Einstein’s point is drilled home with colossal stakes!!

    Einstein advocated for a planned economy which was not yet socialism. I believe the Nordic countries are using his system today and they are described as democratic socialists. Their educational systems are outstanding compared to the USA.

  12. Gerald said:”Right now we have moved from both isms to corporatism, and that extreme, as we are seeing, is creating a backlash among those who want more socialism in the mix which, ironically, amounts to a conservative movement back toward the center. Imagine! Socialism rescuing capitalism from the corporatist greedhogs!”

    Maybe a little more capitalism, via market reforms, might also help ? Breaking up oligopolies, requiring price transparency, honest product representation, addressing externalities etc.

  13. John Neal; isn’t this the original definition of capitalism? “Capitalism is defined as an economic and political system…” And hasn’t it become political corporatism thanks to Citizens United plus the years of tax cuts for the millionaires who own and operate the corporations?

    I said before and will say again; President Obama’s biggest mistake during his eight year administration was NOT to allow George W’s tax cuts for the wealthy to end on the date George W himself set. Those tax cuts continued after his end date on the same day the Republicans took over Congress; January 1, 2010, and we are still paying for that mistake.

  14. JoAnn,

    Economics is about the ownership and means of production, resource allocation and distribution of goods and services that occurs in a society. Capitalism is one broad description (with many subsets) of a type of economy that relies on private property, competition and profit. Ms. Kennedy rightly asserts that almost all nation states today are “mixed economies”, with some different measures of market capitalism and command economies. I like to think of it along an axis ranging from pure private party to state ownership and control

    The political government axis is about how state policy is made and enforced. It too has many forms: democracy (direct and representative), aristocracy, monarchy, plutocracy etc. I like to think of it along a perpendicular axis ranging from anarchy to autocratic tyranny. Our representative democracy (if it can be still called that) lays between the extremes along that continuum.

    So States have various forms of economic and political systems in combination. The two, of course, are interactive. Therefore, I assert that “capitalism” is not “defined as an economic and political system…” capitalism being merely the economic component.

    I am just pointing out that part of the trouble with the various labels we use is that we are muddling systems that are interactive but have quite conceptually and real world distinction.

    Sorry for the length of my response to your question.

  15. Tax cuts are the government’s prime tool to spur a sluggish economy by empowering consumption. The middle of The Great Recession would have been the worst time to end the Bush’s tax cuts.

    Just like now in the good times is the wrong time for cutting taxes and driving up the deficit.

  16. This country has socialism for the rich, rugged individualism for the poor.”
    – The Reverend Dr. Martin Luther King Jr.

    “A basic principle of modern state capitalism is that costs and risks are socialized to the extent possible, while profit is privatized.”
    – Noam Chomsky

  17. There is no such thing as a free market. All information and knowledge is never available equally to both sides of a transaction. I do not understand starting a definition of capitalism with free markets. Capitalism could more accurately be described as an organized conspiracy by those in power to destroy free markets.

    I do not believe capitalism is mentioned in the constitution. John Neal is right. It is not part of the definition of a political system. Those systems would be democracies, or oligarchies or dictatorships or some mixture thereof.

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