(An audio version of this article is available to download here, or to listen online here)
I often come across the eternal debate between the supporters of capitalism and the supporters of socialism and it is almost always a very superficial debate. Although the discussion may be full of historical examples and statistics, I still consider it superficial for two reasons:
The first reason is that most times there is no consensus on what socialism is and what capitalism is. The proponents of each approach describe the competing approach using historical definitions that do not match the ideas that the supporters of each of the approaches actually support.
As a result, socialists use Europe in general and Scandinavia in particular as an example of socialism and refer U.S. and Chile as an example for capitalism, while capitalists view European countries in general and Scandinavia in particular as an example of capitalism, and refer to Venezuela as an example of socialism.
In reality, all countries that are considered as an example of a good economy that serves its citizens implement a combination of capitalism and socialism, and every economy that implements only, or primarily, one of the approaches is destined for failure, as I will explain later.
But the second, more substantial reason that makes the debate superficial, in my view, is that the debating sides are trying to directly link some approach (capitalism or socialism) to certain economic improvements, without asking what is the component of that approach that brings about this result? When does it bring about the desired result? In what cases will it lead to an undesirable result? And finally what is the desired result — that is, answering the question: what is a successful economy?
In this article, I will present a new and deeper perspective on the economy, on the socialist and capitalist approach, and on better, both familiar and new ways to create a successful economy.
1. What is a Successful Economy?
The first question to ask, in order to have any discussion regarding the best approach to a successful economy is: What is a successful economy?
Moreover, it is impossible to measure what a successful economy is without determining the purpose of the economy.
Now, I believe we can easily agree that economies are created to serve humanity. Right? There is no point in an economy that is not beneficial to people.
Therefore, for an economy to best serve humans, it is impossible to avoid asking the question: what is the goal of human beings, that is, what is the ultimate goal of life?
I will not go into the logical proof of this philosophical question right now, but the answer is very simple and, might be obvious to many even without a thorough discussion.
Every goal, every motivation, every desire that a person has in life is ultimately due to the desire to reduce his suffering and to increase pleasure and good feeling. In other words, the ultimate goal of all goals, the purpose of life, is to be happy.
Therefore, we can say that the purpose of any system designed to serve humans and their goals, including the economic system, is to make people happier.
We now have a metric that will allow us to measure the success of an economy. An economy is as successful as it allows the people who participate in it to be happier.
People are obviously happier when they have something to eat, when they have personal security, when they are healthy, when they can fulfill their dreams, and so on. In fact, the more people’s various needs are met, for example according to Maslow’s Hierarchy of Needs, we can refer to the economy as better.
When we understand this we can also understand the limitations of metrics such as GDP (Gross domestic product) or average wages for examining the success of the economy. GDP can also grow because of things that hurt people’s happiness. For example, people with serious illnesses spend a lot of money on doctors and medicines and this increases the GDP, but it cannot be said that the increase in the GDP that comes from rising illness represents an increase in overall happiness in society.
The same goes for average metrics, such as average wages. An economy in which many people live in poverty, but average wages are high because of few who earn millions and raise the average, cannot be considered a successful economy as it does not increase happiness in the population. Unlike wealth, When it comes to happiness, the law of Diminishing Marginal Utility, which is known to anyone who has studied economics, applies. This means that an additional one thousand dollars a month will result in greater increase of happiness for a poor person then for a rich one. The metric of average salary does not reflect the diminishing marginal utility, so it is an inaccurate measure for Happiness in society.
2. Advantages of capitalist and socialist approaches
When we talk about the capitalist or socialist approach, it makes no sense to me to talk about dictionary definitions of capitalism and socialism, or definitions that were defined centuries ago. I believe we should simply refer the principles that are supported by the advocates of capitalism and socialism.
The advantages of capitalism
In general, it can be said, that the principles of the capitalist approach nowadays are: free market, minimal government intervention, minimal regulation, small public sector, and low taxes.
It also seems important for me to mention, that most of the supporters of capitalism I met did not support capitalism from an altruistic or compassionate motive. I mean, I didn’t feel that they supported the capitalist approach with the aspiration that as many people would be happy, but more with an aspiration to increase self-happiness. In fact, Adam Smith’s invisible hand principle argues that in a free market, when everyone takes care of themselves, everyone gets better.
Therefore, even if the motive is indeed selfish, it does not contradict the fact that the capitalist approach can contribute to the happiness of the public, so it is important to examine how it is carried out and what the advantages of this method are.
The driving force — The most important thing to understand is that the driving force in the capitalist method is maximizing self-profit. The good of the consumer does not interest companies **, but to the extent that it contributes to profit. This is the reason that the consumer benefits from a competitive market, as companies are making efforts to benefit the consumer in order to earn more.
The necessary condition for converting the need to maximize profits to an advantage of the consumer is competitiveness. Once the market is not competitive, companies will stop improving for the customer and even cut back on their quality of service, as these will no longer be needed for profit maximization.
Another necessary condition is the availability of information. A market that has many options, but which the public has no information about, whether it is for lack of advertising or for hiding, or because the information in its possession is incorrect, for example, because it was deceived by misleading advertising — this market cannot be fully competitive, because it prevents competition or it creates fraudulent competition which is not based on the quality of the services and products but on the psychological traits that were attributed to them.
Freedom of choice — The free market operates following the public’s will. In the free market, a person cannot be forced to buy a product or a service that he does not want. Suppose the public is not interested in eggplant cheese, so the market will not produce them as the public does not want them. In socialism, the government chooses to spend public money, taxes, on services that citizens did not necessarily choose and therefore it compels them to indirectly purchase products that do not necessarily meet their needs. For this reason, for everyday goods and services, such as clothing, food, entertainment and the like, the capitalist method, in which the public decides for itself, is better than if the decisions were made by the government.
Efficiency and Professionalism — Usually the private market does things more professionally and efficiently than the government and the public sector. The need for profit pushes the players in the free-competitive market to optimize, improve, speed up and invest their resources, which come out of their pockets, with caution and wisdom. Also, every player in the market specializes in the field where he has the advantage.
The government and the public sector, on the other hand, are considered slower and cumbersome. Their main motive is not profit so they lack the incentive to improve, to be more efficient or to make haste. The finances of the Government and public sector come from the public. They do not come out of the pockets of decision-makers, so they are used less cautiously and less wisely.
** The exception is when it comes to self-employed or small businesses whose owners meet directly with the clients. In these cases, the driving motive is often not only to maximize profit, since they see the customer as a person and not just as a consumer.
The advantages of socialism
At the heart of socialism, as it is perceived by its supporters, stands the idea of increasing happiness in society by mutual responsibility. This mutual guarantee is reflected in taking some of the personal wealth (taxes) and dispersing them back to society in a way that better serves the public in general and the disadvantaged populations in particular.
In general, we can say that these principles are: government intervention in areas where the private market does not meet the needs of the public, and regulation aimed at preventing the private market from utilizing their power in a way that harms the public. Socialism also supports worker unions and civil associations that balance the power of citizens and consumers against the power of business and corporations.
The driving force — The driving motive behind government intervention is to serve the public, as it understands it. This is because government services, whether they are postal services, electricity, public transportation, or social security, are not created to maximize profits, but to give the public access to a certain service.
The essential condition that makes sure that the government is actually acting in the public interest is the lack of corruption. Corruption in public institutions means that decisions and distribution of resources are made by narrow interests and serve those who are close to the government or limited groups in the population.
Collective level services — One of the benefits of the socialist approach is that there are services and products that the private citizen will not pay for, but are required for the full functioning of the collective. Military, police, fire department, roads, infrastructure and the like are services that usually would not be created by the free market and would not be funded without forcing the public to pay for them, and therefore to initiate those services government initiative is required.
Provide solutions for everyone — The free market is not designed to provide solutions to everyone, but only to those who can pay. For example, regarding the need to fly abroad: Few individuals can buy a private plane, some can buy a plane ticket, and some cannot purchase any of the above and meet their needs.
When it comes to basic needs where it is essential that every citizen will get a proper solution, especially when they are expensive, such as health insurance, the free market may not always provide this, so in these cases, it is better if the service is provided by the public sector.
Public point of view — Unlike the private market, which is only interested in personal profits, the government look at the benefit of entire economy, and therefore invests in services that wouldn’t be profitable for a private company to carry out, but are worthwhile and even profitable from a public point of view.
The education system is one example. Providing education to poor people is not profitable for a private company but it is a very profitable investment from a public point of view as educated people pay more taxes and cost less to sustain.
Another example is the train system. A project like a train, at least where I live, is in itself, not a profitable project. The passenger’s payments do not cover the large costs involved in setting up and maintaining the rail system and a private entity will not undertake such an initiative. But at the state level, this is a profitable project, as it increases the efficiency of the economy and the wealth of the state.
In addition, the government can push for public beneficial initiatives that the private market would not risk, as at the present time they are not financially viable. A good example of this is the transition to green and renewable energy. Automakers and electricity producers prefer to use fossil fuels (oil and gas), since they are cheaper at this point in time, their technology is already developed and the infrastructure for using them already exists. The government, which understands the importance of switching to green energy, can initiate investments for improving the technology and establishing the necessary infrastructure, to accelerate the transition to green energy and make it more affordable for the private market as well.
Strengthening weak populations — One of the disadvantages of the capitalist approach is that it has no mechanism (at least not that I know of*) that reduces wealth gaps in society. A free market is governed by a simple law of nature: whoever has more, progresses even faster, and therefore in a capitalist economy there is a constant movement of capital, assets, and power from the weak to the strong, resulting with increasing social disparities. The socialist approach addresses this by progressively taxing and redistributing resources in a way that strengthens the weaker members of society, and also by applying regulations on businesses, such as minimum wages and social benefits.
*I do not consider workers unions as a free market mechanism, since for the creations of unions a regulation need to be implemented, prohibiting the employers to prevent their employees to unionize, using threats and the like.
3. Which is better and when?
The private market is better than a government initiative for:
- Affordable products and services: food, clothing, telephone services, internet, banking and more.
- Expensive products and services that are not critical to the happiness level of society: villas, yachts, flights, spas, luxury products…
A government initiative is better than the private market for:
- Products and services that naturally serve the state and not the individual: police, military.
- Expensive products and services that are critical to society’s happiness and that people can avoid purchasing them: such as education, health insurance, fire department and more.
(These are services whose prices are expensive, but unlike housing, for example, a person may not purchase them if they have financial difficulties. Yet the result of not purchasing these services may be severely impairing their happiness.) - Products and services that contain a high conflict of interest between the good of the business and the benefit of the customer or the public: such as prisons, health care systems, insurance…
For example, private prisons, like in the US, are in conflict with the public interest because the more prisoners they have more they earn. So they run a lobby that promotes incarceration, and deprives prisoners of basic conditions or rehabilitation programs, and use them as a cheap working force. The same is with health care systems that earn more the more people are sick or insurance companies who earn more as they pay less compensation to their clients.
When do regulations — help the economy:
- When there is a violation of competitiveness, for example in the case of monopolies.
- When private companies cause damage to society: environmental pollution, consumer fraud, employee exploitation, selling harmful products, conducting damaging actions to the economy, such as stock buybacks and more.
When do regulations — are harmful to the economy:
- When there are unnecessary regulations and bureaucracy, whether it is old and irrelevant, or one that is superficially established without a thorough examination.
- When regulations apply to all types of businesses equally and non-progressively, small or weak businesses are hurt more.
Government intervention in the macro-economy:
In general, it is important to understand that the economy is a complex system and any intervention in a complex system, without fully understanding it and without taking into account all its components, may lead to unexpected and even devastating results. On the other hand, proper intervention can lead to good results, either regularly or in times of crisis. Therefore, the real debate is not about whether government intervention in the macro-economy is beneficial or detrimental, but more about the timing and nature of the intervention.
Why does implementing a pure capitalist or socialist approach lead to a failed economy?
Implementation of a purely socialist economy, which means only an existence of a public sector without a private sector or an attempt to artificially influence market behavior will lead to an inefficient economy where there is a low correlation between what the public wants and the services and products that are provided and therefore the public’s happiness will not grow.
For the sake of illustration, we can compare it to a person who was educated from childhood through a comprehensive and rigid education. All his personality is shaped by others telling him what he needs and what he is not allowed to do. His emotional inner world degenerates because his needs and his deep desires are not met, and there is no development of potentials that comes from personal initiative. This person will not be happy.
Implementation of a pure capitalist economy, that is, without the existence of a public sector and without government intervention and oversight of the private sector, will soon lead to a non-free market controlled by monopolies, to growing socio-economic gaps, to an oligarchy where a minority of the rich dominate the poor masses, and finally to frequent financial, environmental and health crises arising from the careless operation and conduct of entities that have a significant impact on the economy, people’s lives and the environment.
Such an economy will increase the happiness of few but will hurt the happiness of the majority.
For illustration, this can be compared to a person who has grown up without any education, guidance or supervision. Such a person will only act according to his urges. As a result, he will also act in a way that will harm him, such as eating junk food, taking drugs, breaking the law and more, since he has not learned from the wisdom and mistakes of others. This person will not be happy.
This is the reason, the most successful economies today are economies that combine both approaches, and this is also why most supporters of capitalism or socialism do not support a hardcore version of these approaches, but more refined versions.
4. Additional economic approaches:
The above article tries to show the benefits of the private market versus government initiatives and to consider when and for which products and services it is best to use each.
However, it is important to remember that these two options, a private market or government initiative, are not the only options.
Combining the two options: One way to make the most of both worlds is to initiate services where the government is the one coming up with the initiative and the private market is the one who executes it. The government is launching an initiative, setting the conditions for its implementation, and issuing a tender for private companies to implement the initiative for the government. This method benefits both from the non-profit motive of the government and the professionalism of the private sector.
A parallel existence of both options: Another way to make the most of both worlds is to have a government option as one of the players in a private market. For example, in the health care sector, the existence of a state health care system and private medical systems enables important service to be available all citizens of the state, and those who want a complementary or higher quality service and have the money to pay can do so in the private health care system.
Using the Third Sector (Philanthropic/non-profit): One of the benefits of state services over private market services is that they are ideally driven by the benefit of the public and not by profit maximization as in the private market. On the other hand, one of the advantages of the private market over state services is professionalism and efficiency.
In general, the philanthropic or non-profit sector is characterized by both features. It is motivated by the good of the public (even more than the public sector), and on the other hand, it is professional in its field and more efficient.
Therefore, the government can allow third-sector entities to administer public sector services. For example, giving the management of prisons to prisoner rehabilitation organizations, or giving the environmental oversight to the management of environmental associations.
In this way, the public sector can provide the same services, with more skilled, motivated and cheaper personnel, which will increase the quality of service on one hand and reduce its cost on the other, without creating the conflict of interest that exists with a private entity that seeks to maximize profits and not necessarily to benefit the consumer.
5. In summary
In this article, I have tried to deepen the understanding of the advantages and disadvantages of the capitalist and socialist approaches and to enable a better understandings of the ways that lead to a successful economy.
The examples I brought do not cover the whole picture, and there are undoubtedly more factors, strengths, and weaknesses in each of the two approaches in particular, and the best approach to a successful economy in general.
Therefore, if you are a sincere partner in the desire to understand how to produce an economy that enhances the happiness of the collective, and your need is not just to protect, at all costs, the approach you identify with, I invite you to write further comments and perspectives that will expand, correct, deepen and enrich this discussion.
