An Economic Review

Last week, I spoke to the Shepherd’s Center at North United Methodist Church. I had been asked to address the differences between capitalism and socialism. Here’s what I said. (Warning: it’s longer than my usual posts.)

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We are in a hot and heavy political season, facing an extraordinarily important election. The outcome of that election will depend, in large part, on the ability of voters to understand the foundational premises of American government –to have what I define as a minimum level of civic literacy—and an understanding of the essential elements of America’s economic system.

Why is agreement on definitions and documented facts important? Look at the interminable debates about the Affordable Care Act—aka “Obamacare”—as an example. People may have very different opinions about the wisdom of the policy choices involved, but a decision to repeal, implement or amend the Act depends upon understanding what it actually says and does—not on hysterical accusations that it constitutes a “socialism,” that is always, and presumably self-evidently, a bad thing.

Or take the ongoing battles over religion in the nation’s schools. There are genuine arguments to be made about the proper application of the Establishment Clause in the context of public education. But we can’t have those reasoned disputes with people who insist that the First Amendment doesn’t require separation of church and state.

Basing our arguments on verifiable fact and accepted history actually helps people make more persuasive cases for their own points of view. We all encounter people who have a legitimate point worth considering, but who—because they are basing their argument on erroneous facts or demonstrating a lack of understanding of important basic concepts—get dismissed out of hand. Credibility requires verifiable evidence. You might want to use that perfect quote from Thomas Jefferson that you saw on the Internet, but if it is bogus, you’ve just undermined your own position. Defending alternate realities is like arguing about whether a fork is a spoon—it doesn’t get you any closer to a useful resolution.

A few years ago, I wrote a brief pamphlet called “Talking Politics” that contained basic facts about the U.S. Constitution, economic concepts and systems, and the nature of science and the scientific method—basic facts that every citizen should know, and that should serve as solid starting points for reasoned arguments. Among other things, that booklet defined government, the provisions of the Bill of Rights, and the major differences between economic systems. It was the elements of those economic systems that I was asked to address today—especially what we mean when we talk about the differences between capitalism and socialism.

Capitalism is defined as an economic and political system in which a country’s trade and industry are primarily 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 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 if markets are to operate properly, government must act as an “umpire,” assuring a level playing field.

This need for government regulation is a response to what is called “market failure.” There are three primary 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 what we call “information asymmetries,” that is, situations where 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—conservative and liberal alike– argue that regulation is needed.

Economists and others will often disagree about the need for particular regulations, but most agree that an absence of necessary 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 the 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.

The word socialism, on the other hand, simply means 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 is based upon a number of factors. First, there are some goods that free markets simply cannot 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. Some examples of public goods include things like fresh air, knowledge, lighthouses, national defense, flood control systems and street lighting. If we are going to have these things, they have to be supplied by the whole society, usually through government, and paid for with tax dollars.

Of course, not all goods and services that we socialize—that we provide collectively– are public goods. Policymakers often base 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 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 20^th 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, because when governments have too much control over the means of production and distribution, they can easily become authoritarian.

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

In our highly polarized politics today, words like Capitalism, Socialism,  Fascism and Communism are used more as insulting labels than descriptions. There are numerous disagreements about the essential characteristics of these systems, probably because the theories underlying them were so different from the actual experiences of the countries that tried them.

Socialism is probably the least precise of these terms. It is generally applied to mixed economies where the social safety net is much broader and the tax burden somewhat higher than in the U.S.—Scandinavian countries are an example.

Communism begins with the belief that equality is defined by equal results; this is summed up in the well-known adage “From each according to his ability; to each according to his needs.” All property is owned communally, by everyone (hence the term “communism”). In practice, this meant that all property was owned by the government, ostensibly on behalf of the people. In theory, communism erases all class distinctions, and wealth is redistributed so that everyone gets the same share.  In practice, the government controls the means of production and most individual decisions are made by the state. Since the quality and quantity of work is divorced from reward, there is less incentive to innovate or produce, and ultimately, countries that have tried to create a communist system, like the USSR, have collapsed or, like China, moved toward a more mixed economy.

Fascism is sometimes called “national Socialism,” which is confusing, especially because people throwing these terms around rather clearly don’t understand them. Actually, fascism differs significantly from socialism. The most striking aspect of fascist systems is the elevation of the nation—a fervent nationalism is central to fascist philosophy. There is a union between business and the state; although there is nominally private property, government controls business decisions. Fascist regimes tend to be focused upon a ( supposedly glorious) past, and on the upholding of traditional class structures and gender roles, which are thought to be necessary to maintain the social order.

Understanding the differences among these different political philosophies is important for two reasons: first, we cannot have productive discussions or draw appropriate historical analogies if we don’t have common understandings of the words we are using. Second, we cannot learn from history and the mistakes of the past if the terms we are using are unconnected to any substantive content.

When activists accuse an American President of being a Fascist or a Communist simply because they disagree with a position that President is taking, it trivializes the crimes committed by the Nazis and the Soviets and it makes it difficult, if not impossible, to engage in reasoned discussion about—or persuasive criticism of—whatever the President is doing that led to the charge.

On the other hand, when we fail to see very real analogies between American political actors and the fascists who ushered in very dark historical eras, we run the risk of falling into a similar abyss. I believe it was Santayana who said “Those who don’t know history are doomed to repeat it.”

As I said in my opening remarks, we live in a pivotal time. We can choose to educate ourselves and choose to embrace the philosophy of America’s Constitution and Bill of Rights. We can continue to fine-tune our mixed economy in response to the evolution of new technologies, or we can do what so many seem to do: forego fact-checking and education, and just find sites on the Internet that confirm our existing biases.

That’s the thing about liberty and democracy. We have a choice. I’m not usually a praying person, but I’m praying that Americans choose the Constitution and democracy when they go to the polls next month.