Capitalism vs. Socialism

We often hear the two isms, capitalism and socialism, mentioned in current political discussions.  In spite of their frequent reference, it has occurred to me that many of us may have rather limited understanding of the true meaning and implications of these two economic philosophies.  Thus, I thought a rather concise description of each might be useful in assessing the range of opinion we are likely to hear from political candidates as we approach next year’s elections.

Concise Definitions:

Capitalism: An economic system where the means of production and distribution of goods and services are privately owned and are controlled by free market factors of supply and demand.

Socialism: An economic system where the means of production and distribution of goods and services are either state owned or commonly owned and are controlled cooperatively.

While you can find much more extensive definitions than the above, I believe that the concise definitions provided above offer a clear description of how these economic systems differ.  Capitalism is based on the concept of economic freedom while Socialism is based on the concept of a controlled economy.

Capitalists believe that “economic freedom is the fundamental right of every human to control his or her own labor and property.  In an economically free society, individuals are free to work, produce, consume, and invest in any way they please, with that freedom both protected by the state and unconstrained by the state.  In economically free societies, governments allow labor, capital and goods to move freely, and refrain from coercion or constraint of liberty beyond the extent necessary to protect and maintain liberty itself.”  In contrast, Socialists do not believe in economic freedom.  Rather, they believe in central or state control of labor, capital and goods.

In the final analysis, under Capitalism, wealth will distribute itself unevenly, based on individual ability and effort.  Those who work hard and contribute most to the society will acquire the most wealth while those who contribute less will acquire less.  It’s just like being in school.  If you work hard, you will end up with an A.  If you coast through the course, you will end up with a lower grade.

In the final analysis, under Socialism, wealth will be distributed evenly.  Those who work hard and contribute most to the society will not be rewarded with any more wealth than those who contribute less.  It’s like being in a school where everyone ends up with the same grade regardless of how much they study, how much they learn or how well they perform when tested.

At this point, I would have to say that most people who are ambitious and willing to work hard for their living are repulsed by the concept of Socialism.  However, those who advocate Socialism try to sugarcoat the concept by claiming they are actually advocating “social justice”.  This very admirable sounding term in essence means assuring everyone in the society an equal outcome regardless of how much effort they put in.  In order to accomplish “social justice”, the socialist government focuses on income redistribution, i.e., taking from the producers and giving to the takers.

In reality, most economies are not purely capitalistic or socialistic but rather somewhere along a continuum where pure Capitalism is depicted at the right hand end of the continuum and Socialism at the left hand end of the continuum.  Communism is more of a political concept where extreme Socialism is totally in the control of the government, which also is often severely suppressive of human rights.

History leaves little doubt that Capitalism has been far more successful than Socialism in leading to prosperity of nations.  Studies conducted by The Wall Street Journal and The Heritage Foundation have tracked the Index of Economic Freedom since 1995.  The index was calculated on the basis of ten measures of economic freedom.  Results from 183 economies (2009 – 2011) show a clearly positive correlation (0.78, R² = 0.61) between the index of economic freedom and economic prosperity of nations.  Furthermore, a clearly negative correlation was observed (-0.52, R² = 0.27) between government spending and national GDP.  Thus, we don’t need to limit our conclusion to comparing pure Capitalism to pure Socialism.  Socialism in any dose appears to have a negative influence on the prosperity of the nation.  The following is a firsthand account of how socialism has worked in Hungary and how it is now working (to a more limited degree) in Canada.

Gabriella Megyesi

I have been in Canada for just two weeks and already I feel at home. I feel at home not because of the landscape or climate. Nor do I have any family here. But public policy in Canada reminds me of growing up under a communist regime in Hungry during the 1970s.

I recently looked at The Fraser Institutes Economic Freedom Index, which measures the economic freedom of 122 countries (based on the ingredients of personal choice, protection of private property, and freedom of exchange). It revealed that Hungary has been doing quite well since its transition from a command economy to a market-driven economy. Its rating, after stagnating for a long time in the 1980s at 4.8 out of 10, suddenly jumped up to 7.4 in the 1990s due to massive deregulation, privatization, and a free market economic structure that made it possible to have wage incentives. I have seen these changes at work in Hungarys economy and witnessed the beneficial results.

A key reason for Hungarys success and growing prosperity and living standard (5% growth is expected this year) is that people can now own property. The private sectors contribution to GDP has jumped from 10 percent during socialism to 70 percent today due to privatization and massive investments. (Much of this investment comes from abroad, proving that without globalization, we wouldnt be anywhere.)

But Hungary was not always governed by a communist system. Hungary had built a free market system by the end of the nineteenth century. The communist regime, which took power in 1948, confiscated 90 percent of all private property by 1953. This established the communists complete political and economic control.

When the socialists were in charge, we kept hearing nice promises that EVERYONE would get FREE (or cheap) and GOOD QUALITY goods and services. The only problem was that the three features never worked at the same time.

If something was FREE and AVAILABLE FOR EVERYBODY, it was not good quality (e.g., health care, garbage collection, telephone lines, roads, public transport, media, education, etc.). Anyone who has driven an East European car, or worn clothing made in Eastern Europe knows what I am talking about.

If something was FREE and GOOD QUALITY, it was not AVAILABLE FOR EVERYBODY. It was only available to those who had good links to the government, belonged to the party, or skipped sleep to be the first in the line the next day. However, even in the latter case, chances were high that those in line would find only empty shelves. You could get much better quality goods in the communist partys shops, not to mention the leaders houses. Good connections also meant better quality cars, vacations, access to good quality health care and other services.

If something was GOOD QUALITY and AVAILABLE FOR EVERYBODY then it wasnt free or cheap. Instead, you had to pay a high price or a bribe for it. Putting some cash into your doctors pocket in an envelope, for example, was an accepted practice which exists even today, since the majority of the health care provision is still in government hands.

Shortages and queues were ubiquitous, prevailing in every government sector. Hungarians had to wait up to 6 years for a car, up to 7 years for an apartment, and up to 12 years for a telephone. On October 12, I read an article in the National Post about the long waiting lists for health care provided by the Canadian government. Medical specialists were particularly concerned; 67 percent of Canadian specialists surveyed saidtheirability to provide quality care has worsened since 1995, compared with 60 percent of specialists in the US, 49 percent in Britain, 42 percent in New Zealand, and 41 percent in Australia. Yet medicare in Canada consumes more and more money.

Many people must be wondering why, if government pumps more and more money into health care, shortages and long waiting lists are not decreasing. The answer is that incentives to provide quality goods and services are missing in every walk of government-provided life.

I hear people in Canada complaining about the gap between rich and poor, pointing at the greed of the rich, and crying for fairer or more equal distribution of wealth. Well, examples abound under communism where people had more or less equally cheap housing, cheap vacations, cheap cars, cheap telephones, and even cheap refrigerators. (Maybe this is why Hungarian governance in the 70s was called "refrigerator socialism" or "Goulash communism.") People earned more or less the same, both women and men worked similar hours and for more or less similar wages. Of course there was no incentive for anyone to put their full effort into their work, since no one could earn higher wages by achieving more. People took it easy at work; they had two lunch breaks, five coffee breaks, and 10 cigarette breaks. Absenteeism and "work-shirking" abounded. Guaranteed employment also resulted in the careless attitude so often seen in shops or in the bureaucracy where customers should have been served, or helped, or just treated as human beings. I remember government-owned shops all over Hungary and Eastern Europe that seemed to have more shop assistants than goods, and customers had no hope of being greeted with a smile. There was a saying: "We pretend to work; they pretend to pay us."

And Hungary is now indeed paying the price: a US $35 billion debt which the socialist government accumulated.

Hungarys example should serve as a warning to everyone that prosperity depends on economic freedom. Like Canadians today, Hungarians during the 40 years of socialism were promised socialism and prosperity. Interestingly, though, the socialist parts did not prosper and the prosperous parts were not socialist!

Gabriella Megyesi is a Hungarian economist and high school teacher. She is spending the fall term at, and teaching in, The Fraser Institutes Student Seminar program.( Frasier Forum, 11/2000)

People need the freedom to either succeed or fail and it’s living the reality of that freedom that provides the necessary incentive for people to become the best that they can be.  The United States has enjoyed a free market economy since it’s inception and that has produced the strongest and most successful country the world has known. No economic system or government run by humans is free of cheating, greed, corruption or any of the other negative aspects of human behavior but that’s another story to be further probed in a future article.  Suffice it to say, at this point, that the checks and balances in a free market democratic system do a far better job of controlling this than are seen in many of the socialist countries where the ruling elite often denies basic human rights.  US Capitalism has also produced the most compassionate country on earth.  Yes, we have poor people in the U.S., but they are far better off than the poor anywhere else in the world.  Private enterprise has resulted in many billions of dollars going, voluntarily, to charity.  The world knows that when they have trouble, the U.S. is the one country they can rely on for help.  I don’t want to see our country destroyed.  We’ve successfully repulsed every threat from the outside but, unless we are vigilant, I’m afraid we may be headed for defeat from within.  I believe that our $4+ trillion national debt poses a greater threat than either Iranian nuclear weapons or terrorism.

Note: The quantitative data discussed here was taken from "Promoting Economic Opportunity & Prosperity, The 2011 Index of Economic Freedom", http://www.heritage.org/index.