Socialism or Capitalism

Once you assume a nation with a democratic form of government, the broadest brush used for describing the style of economic management seems to be a choice between Socialism and Capitalism. This is a false choice. Socialism and Capitalism are not alternates, they are extremes. Any functioning democracy will have an economic system which is both socialistic and capitalistic, in different circumstances or to different degrees. The question is which of these to choose, but how much of each to include into the mix.

The issue which these two “isms” address is the ownership of the means of production. Socialism suggests that society as a whole should own it, while Capitalism suggests that individuals, or individual corporations, may own it. In a working democracy, ownership is shared, and the degree of sharing has a substantial effect on economic outcomes. To being to think about the sharing, we need to be sure that we understand two things: What the “mean of production” are, and what it means to “own” something.

Adam Smith in his “Wealth of Nations” identifies three ingredients necessary for the production of wealth: Labour, Stock, and Capital.

  • Labour is the contribution made by humans, whether physical or mental or otherwise. In societies where slavery has been abolished (or never permitted), labour is owned by the labourer.
  • Stock is raw materials (or materials that are more raw that the final product), which are transformed by the labour (or by other means) into something of greater value. To make an omelet you need eggs, as well as someone to crack them.
    Ownership of stock is normal where any personal property is allowed. Many nations have laws against monopolising any particular sort of stock, and possibly against excessive stockpiling. They also may have laws allowing the community (via the government) to requisition any stock as might be needed to meet an emergency. But generally ownership of stock is not particularly interesting
  • Captial is anything that is needed by the labourers to convert the stock into the valued good. For making an omlet, the capital would be the frying pan and the oven. Capital is as varied in nature as stock, or even the skills of a labourer, but of all the different sorts of capital, land is probably the most interesting. While it might be possible to make a new frying pan or a new stove, land is a limited resource – we cannot just make more. This makes ownership of capital particularly interesting.

This analysis of production is unsurprisingly incomplete. It isn’t hard to find factors that influence production which don’t neatly fit in these categories. Customer loyalty is one, and though it doesn’t directly affect productivity, it does affect the value that can be gained from the product which is really the ultimate goal. It is not something that ownership is meaningful for, so it isn’t particularly interesting here.

A more important omission is Social Capital. This term refers to all the value that the society makes available to members without them having to pay for it. So while trips of public transport wouldn’t count as they are paid for, the existence of a good public transport network can greatly improve the circumstances of an individual. Opportunities, relationships, environment and many other factors contribute to the general well being of members of a society, beyond their basic needs for food, clothing, shelter, and Internet. When labours have access to this social capital, they are more likely to be happy and healthy and so their labour is likely to be of greater value in the long term.


With this general understanding of the means of production (Labour, Stock, Captial, and others) we can turn to ownership. There seem to be two aspects of ownership that affect the economy: control and reward. Who gets to control a resource, and who gets the reward for what is produce.

Control will always be delegated by the community to small groups or individuals, but not completely. Even the most socialistic community could not thrive if a central committee micromanaged the use of all resources, and even the most capitalistic community could not afford to allow owners to do whatever they want at the expense of their neighbours. So we have local councils, and zoning rules and land-use regulations and other structures which allow the society as a whole some control – particularly of safely – and allow local authorities the freedom to get stuff done by responding to local conditions.

Reward can approach the extremes more closely. The goal of “From each according to ability, to each according to need” suggests that all the reward from any endeavour should go to a community-wide pool, and from there be shared out among those in need. Without such mandated sharing, you might expect that those who control the labour, the stock, and the capital might end up sharing the reward equally as they all need each other. A key result of Smith’s Wealth of Nations inquiry was that this doesn’t happen, but that those who control the capital eventually gets the largest share of the rewards. So without government intervention to enforce some sharing, the owner of a resource, and particularly the owner of capital, gets most of the profit

Governments do, however enforce sharing – at least a little. At the very least a government must get funding from somewhere, but must rule (at least in theory) for all. This funding typically comes from taxation of those who have money, and it used to provide rule-of-law even for those who don’t.

How much to intervene?

The question of what government intervention is appropriate can only be answered in the context of an understanding of what the goals of the economy are. In a previous post I suggested maximum productivity, minimum hardship, and long term stability.

Each of these have many facets and I will only consider them briefly here. Future posts might expand on the details.

Maximum productivity requires, among other things, motivation. Being productive requires effort and involves risks. Most people avoid effort or risks that isn’t rewarding. So to encourage productivity, the rewards of that productivity must go, to some extent, to the person putting in the effort, or taking the risk. This argues against absolute socialism, but still allows a substantial degree of socialism. It depends on how much reward is needed to encourage that extra effort.

Maximum productivity also requires that individuals get opportunities to improve, and then apply, their skills. While it makes good business sense for an endeavour to spend money on training, it doesn’t if that might result in creating a competitor. This suggests that the society as a whole needs to invest in making people more productive, and to do that they would need to collect some of the rewards from successful businesses, and invest that in new skills and opportunities.

Long term stability requires, among other things, that businesses don’t collapse to often, and particularly not many at once. Businesses can be expected to insure against near-term threats there are threats that cannot be guarded against, such as a global pandemic. To provide stability, the society much provide some insurance against calamity.

Minimizing hardship also has costs. This includes providing services that are needed but might not be profitable, providing basic necessities for those who cannot contribute, and a host of other activities.

It seems clear that for a society to function, it must collect some of the produce of the members of society and spend that on ensuring that the society continues to produce, and gets better at producing.

I think that together, these make it clear that unregulated capitalism will not achieve our goals either economically or socially, and pure socialism will not drive the economy very well either. Some balance is needed. Where in the enormous spectrum we should aim is a question of another days, or another few days.

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