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.

Scary Thoughts For Halloween 2011

As we approach another Halloween season, recent behavior of our federal government brings to mind scary thoughts from the past.  It’s said that history repeats itself and the following actions by our government are much too reminiscent of actions by other governments during some of darkest moments of human history.   Tyrants like Adolph Hitler, Joseph Stalin and Saddam Hussein intimidated, threatened and punished real and imagined political foes.  No actions were out of bounds or too extreme to feed insatiable egos and to assure iron grip control of their countries.

I’m not suggesting that our current government even approaches the evil represented by these tyrants and their corrupt regimes but the very fact that some recent, highly questionable, activities makes one think of such things is disturbing.

Consider the following four current government scandals:

• Fast and Furious
• Boeing
• Gibson Guitar
• Solyndra

In the cases of Boeing and Gibson, the government has employed “strong arm” techniques in an attempt to silence political foes, i.e. Republican supporters and to shore up Democrat supporters, i.e., labor unions.  In both cases their actions are almost certainly harassment if not outright unconstitutional bullying.  In any case, if the government prevails in crippling the legitimate business activity of either this large corporation or this relatively small musical instrument company, the net result will be not only a loss of jobs but, more importantly, fear struck in the hearts of other companies that they better toe the line.  It’s ironic that this is occurring at the hands of an administration attempting to convince the public that it is pro-job growth.

The “Fast and Furious” and Solyndra cases are both the result of incredibly poor decisions made by the administration, and that’s putting it in the nicest possible terms.  Considering the recent revelations that billions of dollars have been wasted in providing illegitimate unemployment benefits and that nearly one trillion dollars were wasted in the last “stimulus program” that didn’t stimulate anything except the bank accounts of the administration’s political allies,  you have to question the administration’s true goal, particularly since they seem to show no real concern for the fact that our country is hurtling along the road to bankruptsy as our national debt soars above $14 trillion.

I don’t like scary thoughts but maybe we had better heed the ghosts of the past.

Phantom Jobs Bill

Last night President Obama addressed a joint session of congress and the nation and implored Congress, multiple times, to pass his jobs bill immediately.  Usually, presidential addresses before joint sessions of Congress are reserved for the most serious issues such as acts of war or other national emergencies.  Not many would disagree that our current economic situation including the high unemployment rate is a serious national issue and repeatedly Mr. Obama  instructed Congress to “pass his bill now”, “pass this bill immediately”, “pass this bill now”.   The only problem is that Congress was not presented with a bill.  In the past, before a President would initiate a nationwide campaign to have Congress pass a bill, Congress would have had the opportunity to view an actual written bill complete with all the details, not simply general ideas read from a teleprompter.

Many of the members of Congress feel that the current Executive Branch has not always acted in a respectful way in dealing with Congress, and they are correct.  In fact, in recent years, there has not been much respect shown in either direction.  It would be far better if all members of government demonstrated more respect for each other.  According to our Constitution, the Legislative Branch of our government has equal standing to the Executive Branch and it is not appropriate that they be lectured to and reprimanded like disobedient school children by the President.   In addition to the present case , Mr. Obama’s arrogance in bypassing the will of Congress with a deluge of Executive Orders and leading an army of czars to impose his will on the country, this President is behaving more like King Obama than like President Obama.

Nevertheless, this is the environment within which this serious issue must be addressed.  My feeling is that jobs will follow, if government can successfully deal with the following three key impediments to economic growth.

• First and foremost put an end to our growing national debt.  Stop the debt clock from advancing and put in place a detailed plan to shrink that debt to a level where the U.S. can actually afford to pay the interest.  I feel that this will require passage of a Balanced Budget Amendment to the Constitution.

• Totally revamp our tax system to make it more simple, inclusive and fair.  A system that allows nearly half the population to escape paying income tax altogether while also allowing the richest and most powerful to benefit from massive loopholes is flawed at both ends of the spectrum.  Combining a flat tax with a small consumption tax is an example of the kind of restructuring that might be considered.

• Dial back the size of our Federal Government.  Retain only the essential controls but get government of the backs of business.  It’s Free Market Capitalism that has made this country great not Socialism and it’s Free Market Capitalism that is needed to lead our country back, not Big Government.

The Trouble With Big (revisited)

Back in April of this year I presented my original discussion on “The Trouble With Big” and, at that time, I indicated that I planned to return to the subject at a later date to more fully discuss big government.  The reason I put off this discussion for some four months wasn’t because I felt it was of little interest and importance but rather because it is of such critical importance and I needed sufficient time to accumulate the relevant facts to support what I am about to say.

Throughout history, a general trend has been that governments tend to grow with time, regardless of what form of government it is or who is in control.  The reason for this is that governments are not inanimate entities but rather are groups of humans who have an inherent interest in expanding their influence.  The basic function of government is to guide and manage societies.  As such, governments or more specifically those people who comprise the government, have a degree of power over the governed.  From my previous discussion of human nature, you may recall that it was suggested that the most basic of all biologic drives is that of survival.  Survival above all else provides the motivation for human activity as well as the activity of all other life forms.  This motivation is expressed in humans through behavior that allows them to acquire things which enhance survival.  Food and shelter are obvious.  However, even more basic in our society is wealth and power.  If we have sufficient wealth and power, we can acquire most anything we might need to enhance survival.  Thus, for people in government, winning the next election is synonymous with survival and the more influence and power one has, the easier it will be to win the next election.  On the other hand, in totalitarian states, those governing have acquired enough power that they no longer need to risk elections, they simply demand continued control.

The above scenario suggests why, throughout history, countries have followed a rather predictable life cycle characterized by build up toward greatness (climbing to the top of the hill) and eventually followed by decline as they are replaced by a new “king of the hill”. Archeologists have uncovered a number of empires of the ancient world such as the Mayans and the Incas, which apparently achieved remarkable advancements in science, math and social structure.  All experienced a “golden age” only to be followed by decline and, in some cases, total extinction.  In more recent history, Greece, the Roman Empire, the Persian Empire and the British Empire all followed similar life cycles.  In most if not all of these cases, the build up was characterized by strong individual determination, ingenuity and hard work.  Once the society achieved the pinnacle of success, people invariably fell into a period of complacency when they rested on their laurels and the achievements of former generations.  In such an atmosphere, young people as well as the less industrious begin to believe that all the benefits of their advanced society are their birthright and have little appreciation for the hard work of earlier generations in creating their utopia.  In such situations large segments of the population can become increasingly complacent and fall easy prey to politicians who offer them endless entitlements in exchange for their votes.  We are currently seeing this unfold in the U.S.  An enormous, snowballing, bureaucracy already exists.  Along with the willing assistance of elected politicians, continued growth of government is all but guaranteed as a result of feeding the benefit hungry populace more and more but, unfortunately, at the expense of future generations.

Consider the following information documented by Mark Steyn in his recent New York Times Bestselling book, “After America”:

The 111^th Congress (2009-2011) ran up more debt than the first one hundred Congresses (1789-1989) combined.¹

The Obama administration took the average Bush deficit for the years 2001-2008 and doubled it, all the way to 2020.²

In 2010, about half our debt was owned by foreigners, and somewhere over a quarter of that was held by the Chinese (officially). ³  By 2015 or so, the People’s Liberation Army of China, which is the largest employer on the planet, will be entirely funded by U.S. taxpayers.

By 2020, the government will be paying between 15 and 20 percent of its revenues in debt interest.⁴

The CBO (Congressional Budget Office) numbers foresee net interest payments rising from 9 percent of revenues to 36 percent in 2030, then to 58 percent in 2040, and up to 85 percent in 2050.⁵

According to CBO projections, by 2055 interest payments on the debt will exceed federal revenues.⁴

A very sad picture of a once great nation emerges in 2055 if the CBO projections are correct.  The U.S. would be reduced to a bankrupt, weak, debtor nation.  We would not be able to meet the interest payments on our debt much less fund any federal programs – Social Security, Medicare, disaster relief, etc. nor would we be able to mount any significant military effort in our defense.  Given such a scenario, is it reasonable to expect that China or any other foreign country would forgive our debt or otherwise bail us out?

This is the most critical issue that the American people need to face and we can’t depend on help from the politician’s (of either party).  As I pointed out in “A Path To The Gold” and in several more recent “Stuart’s Thoughts”, in spite of what the politicians say, they are, first and foremost, out for themselves.  Prior to the 2008 elections, I expressed the opinion that Barack Obama was a “pied piper” charming people with his rhetoric of “hope and change” while soft peddling his true ideological agenda of dragging the U.S. into socialism.  His actions and selective leadership leave no doubt in my mind that this assessment was correct.

I stress again that I am neither a conservative nor a liberal but rather an unlabeled individual who prefers to address issues from a rational perspective rather than a political ideology.  I see this enormous, out-of-control, national debt as the most serious problem our country has ever faced.  It may not have the instantaneous impact of a Pearl Harbor or a 2011 attack but it is on a fast track to destroy our nation.

In applying “probabilistic rationalism”, we need to establish a clear plan to effectively address the issue.  In my view, our goal must be to immediately, if not sooner, halt the growth of the federal debt.  In order to do that, the people of the U.S. must insist that our government operate on a balanced budget now, not beginning in 2014 or some other year in the future.  We need to insist that congress draft a balanced budget amendment that will require them to exercise this essential level of fiscal responsibility.  Provisions could be included for large, unexpected expenses much like each of us do with respect to our personal household budgets.  It should be made clear that the people will no longer stand for deficit spending or increases in the federal debt.  In fact, we need to put in place additional plans for eventually paying down our debt to more manageable levels.

The tiny spending cuts agreed to when the debt limit was recently raised won’t cut it.  They are far too little and too far off in the future.  We need to demand immediate bold action by our leaders before irreparable damage is done.  Remember, we the people are the employers and the elected officials, including the President and Congress, are our employees.  It’s time they shape up and do the job we expect of them.  Dragging our country down to third world status is not the direction we want to go.  The so-called “super committee” idea is almost certainly headed for political spin and little substance.  The entire Congress should be called into session and charged with the responsibility for coming up with a balanced budget and passing a balanced budget amendment.  This will, no doubt, require serious tax reform, serious reform of the large entitlements such as Social Security and Medicare/Obamacare, and of great importance, significant shrinking of our bloated federal government.  We’ve recently heard of billions of dollars of waste due to duplicate federal programs, superfluous agencies and corrupt or unethical diversion of funds at many levels.  Congress should give high priority to solving these kinds of problems.

The question of how big our federal government should be depends on how much we wish it to do for us.  The most conservative would say only the essentials such as national defense thus requiring a relatively small government, while the most liberal would prefer a ”nanny state” where a necessarily large government protects us from all of life’s potential hardships.  I plan to address this question in a future article but will only hint at this time that rationalism will again prevail.

Notes:

1.    Terrence P. Jeffrey, CNSNews.com, 12/27/2010.

2.    Brian Riedl, The Heritage Foundation, 2/11/2009.

3.    U.S. Treasury, 3/15/2011

4.    CBO Report, June, 2010

5.    Niall Ferguson, The Australian