Capitalism vs. Socialism, and Affordability
A false dichotomy and the ultimate issue
You see a lot of writing and other forms of bloviating that suggest that capitalism and socialism are opposing forces — different philosophies of government.1 Sometimes, Communism is included in this view, and the writer sets up a spectrum from Capitalism, to Socialism, on to Communism. Frankly I think this is lazy thinking that ignores reality and creates a false dichotomy that encourages stupid, almost religious, reductions like “capitalism is good, socialism is bad.”
Very very simplistically, Communism holds that the people own everything, not just property, but the means of production. The economy is driven by decisions made by the people, or their government. Socialism vests most property and means of production in the people, but allows for private ownership as well. The economy is driven by decisions made by the people, or their government, but also allows for some markets to function within regulatory frameworks. So… What is Capitalism?
The quick response to this question from most people, is that capitalism is free markets, without government intervention. But if you stop and think about it for a minute, this is obviously wrong. There is no such thing as a free market without the government. The currency people use to buy and sell things, and the entire banking system that actuates it, is created and sustained by the government. The assurance that someone stronger than me, won’t just take what I am selling, and will have to engage in a negotiated exchange, is provided by the government. The quality of the marketplace information (relatively truthful) is assured by the government. Indeed the very property I own has value, at least in part, because of the government.
Have you every purchased a home? The ownership of the land the home sits on has been tracked since the founding of the nation (or even before) by a government system of recorded deeds, establishing title to a property and any encumbrances on it. Without this system we would have chaos.
If you are an inventor, of say a new drug, your invention’s value is at least to some extent, contingent upon the government’s establishment and enforcement of patent rights. If you are an artist, the right to use your work is protected by Copyright.
A corporation, which is a form of business that limits the owner’s liability, in order to encourage new business formation, is strictly a creature of the government, created and protected by law.
We live in a relatively orderly society (much less orderly recently), in which markets can function because we have given the government the power to create and enforce laws. There is a utopian strand of libertarian thinking that ignores this obvious truth: There is no such thing as a free market without some government intervention. The value our labor and capital create can only be sustained by the rule of law.
The economy is, at its core, a function of the laws our government creates and enforces. In in a well functioning democracy, those laws are created by the representatives of the people, and to a large extent reflect the preference of the majority. The free market exists within the laws established by those majoritarian preferences.
Once you see this, the debate between capitalism and socialism is a stupid one. All markets function as a result of government, rules, and laws. It isn’t a question of capitalism or socialism. The real question is what should the rules and laws that govern our markets and our lives look like.
In general, I tend to prefer market-based approaches. The interesting thing about markets is that they are self-correcting, if they function well. Make a good product, market it effectively, make it physically available, and… if there is demand for it, it will find your supply and sales will occur. If there isn’t demand, or if your product isn’t very good, or if it is pretty good, but another is better and cheaper, or if…. you get the idea… then sales will not occur. The incentives of the marketplace encourage creating supply that meets demand, and ultimately economic growth.
Economic growth is what we want. It is how we can improve the standard of living for the people on this earth. This is the primary goal of government, to reduce misery, increase contentment and happiness, and make us all filthy stinking rich.
But market-based approaches don’t always work. For example, a market based approach to the military, or to the police, would lead to chaos. We have regulations on clean air and clean water because polluters were, at one point, largely avoiding the negative consquences of their pollution. There was no marketplace correction.
There are some functions in which a government command approach makes more sense. The principle advantage of a government command approach is uniformity. The principal disadvantage is slow error correction. If you fail in a well functioning market it happens quickly, and successful competitors rise as you fall. In government, mistakes can linger on, subject to the election cycle, and weird incentives.
When people throw out words like “Socialist” or “Communist” as if they were loathsome epithets, they are ignoring reality, and really using those terms as pretext for other feelings. Really, it’s not that someone is a socialist, it’s that they aren’t going to advantage their tribe.
Supporters of MAGA would never think of themselves as socialists, but using government power to advantage certain economic activity is exactly what Trump has been doing. I have been calling it crony capitalism, but socialism fits too. It is strange that we think that when the government helps the rich it is called capitalism, but when it helps the poor it is called socialism. This framing helps stoke division — which is deeply problematic.
The core problem with politics today is how much of it is driven by grievance, and not sympathy. We are angry and pointing fingers not reaching out with a helping hand. It isn’t enough that we are deporting good people from our country, we have to celebrate their tragic misfortune by distributing videos of them crying in chains, herding them into sub-human concentration camps, and laughing at their humiliation. There are left leaning examples too. Have you seen “serves them right” comments about the measles outbreak?
The debate on capitalism vs. socialism, among other things, enables this kind of grievance stoked behavior, and avoids the real issue. Affordability.
Affordability transcends political party, ethnic group, religion, preference, gender, etc. and is at the core of most political grievance, and how we perceive our quality of living.
For many, many reasons, the cost of living has become too high. I am going to list a few, but this is by no means complete.
We have advantaged existing home owners over future home owners by making it too hard to build new housing, especially multi-family housing. This has constrained supply and pushed prices up.
We have allow private equity to roll-up various industries, concentrating ownership, allowing for monopoly rents, and undermining the natural self correcting nature of markets.
We have created a truly bizarre healthcare system that provides less care, lower quality care, at higher costs than any other developed nation.
We de-regulated our finance industry encouraging greater fiscalization of our overall economy.
We re-wrote our antitrust laws through judicial construction, and permitted massive concentration through merger and acquisition in nearly every industry. Expanding corporate monopoly rent seeking, but also driving massive increases in compensation for C level, especially CEO level jobs.2 Greater wealth disparity allow the few to bid up the prices beyond what the many can pay. This is especially keen in housing, made worst by limits on new construction.
We have injected chaos into our economy, with tariffs, massive new deficits, and growing social unrest and police action, creating a risk premium for American investment. You can see this in rising interest rates, and the falling value of the dollar, both of which make things more expensive.
There has been lots of discussion on what the Democrat’s alternative message to MAGA should be. Abundance is interesting, and I think the left’s attacks on it are misplaced. But abundance feels one step removed from the real issue. Affordability. If we can change the rules of our marketplace to 1. Increase housing supply; 2. Reduce industry concentration; 3. Limit monopoly rent taking; 4. Encourage effective public investment; and 5. Continue the progress made by Obama on healthcare, we can bend the cost curve and make things more affordable. Do that, and I think we can pour some cold water on the fires of division that are burning all over the world.
This post was in part inspired by economist Dean Baker.
This is arguably another example of marketplace failure. There clearly isn’t a competitive marketplace for CEO pay. In many cases it is divorced from performance, and when was the last time you heard of a CEO walking away from the job because the board wouldn’t meet his or her salary demands. The fact that nobody walks away, tells you that it isn’t a competitive marketplace. Similarly when did you hear a board say, we think person X is almost as good as person Y, and they are willing to do the job for $3MM a year, not $30MM, which is meaningful to the company’s EPS? Never?