Capitalism and Socialism: Which Economic System Gets Your Vote?

Mathew Kuhn Economics, Making Money, Saving Money, Spending Money 3 Comments

I’ve never been super interested in politics. In the past it’s been because I was either too young to care, or because it always felt so grimy and manipulatable for me to ‘waste’ any of my time with. After all, don’t most candidates simply make promises to win all those electoral votes, only to do their own thing once in office anyways? In college, whenever we were forced to watch presidential debates, I watched grown men and women who wanted to lead an entire country bicker like children and spout off general phrases that, when dissected, didn’t actually mean anything.

Why Any of This Matters

Today things are a little different. I’m older and am seeing the political arena change. I have a son who will grow up with the consequences of our elected leaders. I’m seeing masses of Americans making what I see as crazy decisions – both politically and financially. “Water cooler” talk has changed from talking about money made in stocks or sporting events to how the stock market is tumbling and how we’ll be working from home soon because of national and global coronavirus fears. The most interesting thing I’ve seen in politics lately is a rise in socialist ideas. The fact that Bernie Sanders is currently (as of 3/7/20) one of the top two democratic candidates speaks volumes to the mental and financial state of Americans today. 

Embarrassingly enough though, I don’t actually know what most of this means. Why is this happening today? Is this a new thing or am I just paying attention and noticing it for the first time now?  Exactly how socialist are the ideas of candidates like Sanders and House Representative Alexandria Ocasio-Cortez (aka “AOC”)? Why do these ideas seem to be gaining popularity now?

This all matters because a countries’ economic policies can make or break the country. Money can lead to greed which can lead to corruption, so we have to be really careful when deciding what to do with it. History shows us patterns and we have plenty of examples to show us exactly where we’ll be headed depending on the decisions we make. Now let’s all take a look behind the curtain to replace concerns with facts.

Looking Back to See Forward – Capitalism, Communism, and Socialism

After reading lots of articles around these three economic systems, I’ve come to the conclusion that people get way too caught up in definitions. Some claim that communism means one thing, socialism is another, etc. I’m going to explain these terms in a very general sense, but as pragmatists our only concern should be the ideas behind each word. Instead of asking, “Is socialism bad?,” we should ask ourselves, “Is universal healthcare bad?” or “Should the government be in control of all consumer goods?”. People will try to mask their specific goals by generally calling themselves a socialist or capitalist, but it’s the specific ideas that matter. Also know that these three words can describe both economic and political systems. We’re going to stick with the economic systems in this post since we’re all money-minded individuals 🙂

Capitalism: Let the Market Decide

Let’s start with the country most of us are familiar with – America. Most of the world knows America as a very capitalist country. Industries (tech, food, fashion, etc.) and consumer goods (anything you need or want like food, a bike, or a microwave) are controlled by private owners rather than by the government. You can own things. Capitalism implements a free market, meaning that prices are determined by supply and demand as opposed to the government telling you what something is worth and how many should be made. The greater the demand in relation to supply, the higher prices go. And the greater the supply in relation to demand, the lower prices go. 

Capitalism means that companies and individuals make money by providing value (at least perceived value) to others. If there’s no demand for a product or service, companies won’t produce it because they won’t make money. In general this is good because it means that in order to make more money, companies need to provide more value so that people don’t run off to a competitor. This also means that companies have to constantly innovate and come up with cutting-edge ways to raise profits and lower expenses. The competition between companies makes sure that the market is super efficient. Prices match what people are willing to pay for them and products are only made when there is demand for the product.

On the other hand, private ownership creates economic classes where some people become much wealthier than others. You make more money only if your competitors make less money. Since the government doesn’t control or regulate (to an extent) the flow of wealth, people can build as much wealth as they’re able to. This leads to a wealth-inequality between those who have a good education, understand business, and are willing and able to take risks, and have good connections, versus those who don’t have these qualities or resources. This easily becomes a generational issue where rich parents raise children with these same resources and characteristics, and likewise with poor parents. Over time, the gap grows wider and wider.

Quick Capitalist Economics 101 

I think this is a good time to quickly summarize the economics that led to the rise in capitalism. Several centuries ago in Europe, populations started to rise. With more people needing more food, food prices went up (law of supply and demand). Most people at the time were farmers, so people and countries began to innovate and come up with ways to make more food with less time and resources so they could make more money. The greater supply brought prices back down, which led farmers to innovate more to reduce their expenses and increase their productivity. With more food, more money, and more farming productivity, people bought more consumer goods (needs and wants like clothes, food, collectibles, etc.) and had the capacity to move into creating more consumer goods rather than farming. They then began the cycle again, innovating in these other industries. 

Years later when factories started popping up, more people moved away from farming to work in assembly lines. Unfortunately, because of greed and lack of morals, many business owners took advantage of their positions and money and would make employees work in extreme conditions to make themselves more profitable, widening the wealth gap even further. They would put children to work, force employees to work extreme hours, and generally not care at all about the employees. Even today greed leads to air pollution and a general lack of regard for employee well-being. This is capitalism to the extreme (the “right” extreme) and has led to labor unions and many employee-protection laws. 

Communism: Classes are Evil

The abuses of those with money and power against the working classes led to communist theories, which took socialist ideas to the opposite extreme (the “left” extreme) of capitalism. In the mid-19th century, Karl Marx and Friedrich Engels wrote the Communist Manifesto, where they first laid out their ideas of communism. Rather than having private owners of anything, everything would be owned by everyone. In other words, there’s no more private property, money, businesses, or private anything. It would be a classless society where everyone is absolutely equal and works for the benefit of everyone. 

Marx and Engels understood that a government would be required at first to control the distribution of goods equally to the people. The government would determine the price of all the goods and how much should be produced so that everything was completely equal (called a “planned economy”). They believed that eventually the government could be abolished completely as the people better understood how to participate in a classless society. The whole population would control the means of production (the materials, factories, land, etc. needed to produce consumer goods), with everyone owning everything equally. 

At this point you’re probably thinking, “That’s great, but how would that even work? Humans aren’t sophisticated or selfless enough to self organize and share everything equally, including work.” This is why true communism has never actually been achieved. Governments are needed to distribute wealth equally to the masses. This doesn’t work in practice for at least two reasons: One, humans get greedy and people in governments eventually (or immediately in most cases) start taking money that should be going to the people, often killing or censoring anyone who disagrees in the process. And two, governments aren’t good at planning economies. I mean, look at how long it takes for our government to get anything done today. Can you imagine them having to react to demand changes for each product sold? It would be extremely inefficient compared to capitalism. 

In many cases, goods like food are underproduced. Which leads to starving populations like in the Soviet Union (which collapsed in 1991) and China, both of which lacked and are lacking basic items like toilet paper and shampoo. In 20th century China, they began exporting all their rice to show the rest of the world how great it was doing, leaving millions of its own citizens to die. China and Russia both had “communist” revolutions that didn’t end up removing classes at all. They just led to political parties becoming rich and taking money from government-owned businesses. 

These pseudo-communist economies grow at a much slower pace because the population doesn’t have money to spend, which would in turn help boost the economy. People also don’t have as much incentive to work. At the end of the day, if you’re given the same amount of resources no matter what you do, you have no reason to work harder or innovate other than fear. And fear isn’t the best stirring pot for innovation. Capitalism can and has been taken too far as well, but it uses people’s greed and desire for profit to incentivize hard work and innovation.

Socialism: “From each according to his ability, to each according to his needs”

Now we’re ready to jump into the point of this whole post – socialism! (maybe I shouldn’t use an exclamation mark for that…) Socialism is basically the goo that fills the gap between capitalism and communism. Karl Marx himself described socialism as the necessary stepping stone between capitalism and communism. Through my research, I finally understand why it’s such a heated topic in today’s world. When people argue about whether socialism is good or bad, they’re usually talking about two different things. Yep – socialism is a broad spectrum and can take many forms. 

On the side closer to communism, the government still plans the economy and all production is controlled by the government, so they’re able to distribute out wealth and resources to everyone equally. The difference here is that although the means of production is technically controlled by everyone (through the government), there can be some private ownership in the form of consumer goods and usually even property. This is the form of socialism that most “communist” countries adhere closest to (ie. China, Venezuela, Cuba, etc.). Unfortunately, allowing the government to control everything leads to corruption, ironically at the expense of the people that the economic system is supposed to help. 

I think it’s important to understand that this form of socialism puts more emphasis on the time an employee works rather than the overall economic value they’re providing. Capitalism, on the other hand, values a CEO who works 4 hour days and employs hundreds of workers more than the employee who works 12 hour days but doesn’t provide economic value beyond their own salary. Socialism (how it’s meant to be implemented) is all about workers working together and decreasing the class divide between the rich and the poor, the employers and the employees.

On the other side of the spectrum, closest to capitalism, is a form of socialism called a “social democracy”. Some also call this “democratic socialism”, although democratic socialism is technically just a little further from capitalism. Social democracy is basically a capitalist society, with private ownership and all. The difference here is that the government helps close some of the gaps between wealth classes by making sure that people have the same access to important resources through services like free education and universal healthcare. The government provides wider safety nets for people in the form of social security and other benefits.

If you’re wondering why some of these “socialist” principles sound familiar, it’s because America isn’t actually a pure capitalist economy. It’s a mixed economy that follows a very conservative form of social democracy. Higher minimum wages come from socialist ideas. Even our 8 hour work days have underlying socialist roots to help protect workers from the wealthier classes. 

The craziest thing of all is that the happiest countries in the world (Finland, Denmark, Norway, Sweden, etc.) are all social democracies – capitalist countries that provide benefits to their citizens like universal healthcare and free education. These benefits are typically paid for through taxes – shared by all, but most heavily distributed to the wealthy. After all, the point of socialism is to remove barriers between classes.

I’m not saying more social democracy would be good or bad. After all, the United States became a world power as a mainly capitalist country and it doesn’t seem like Finland or Sweden hold nearly as much weight in the world as a whole. Also, there’s the argument that higher taxes on the wealthy means that rather than taking pay cuts, they simply hire fewer employees, thus hurting the working class and the economy. But the more we know and are able to think through our opinions, the more we can steer the world toward a better place. The next time someone calls out a socialist on TV or in the office, figure out what kind of socialism they’re talking about. They probably don’t even know.

Applying All of This to Today

Today we have two major democratic candidates running – Joe Biden and Bernie Sanders. On the other side is Donald Trump. Bernie is known for his more socialist, left views. As pragmatists, we know that these ideas aren’t inherently bad. He’s pushing for a form of social democracy, similar to what the nordic countries like Sweden and Finland have implemented. Trump has pushed for a more capitalist society by lowering taxes on the wealthy and middle class. Whether either is good or bad is up to you.

If you worked hard to pay off your student loans, you may find it offensive that Bernie wants to simply forgive student loans for graduates who were probably far less responsible than you. On the other hand, if you’re currently drowning under student debt, you probably think it’s a great idea. As a middle-class entrepreneur you may hate anything that involves more taxes on the wealthy. But as a 9-5 worker with a lower paying job, you’d probably love to see the wealthy get taxed if it helps you to rise up.

There’s a balance in everything. Too much socialism and we end up with a government with too much power and with people without the resources to do anything about it. Consequence – most people end up poor. Too much capitalism and we end up with worker abuse and low pay. Consequence – most people end up poor. At the center of both outcomes is greed. But at the same time, it’s not just the wealthy or government’s greed that leads people to being poor. It’s also your greed. When you start wanting everything to be provided for you, you vote for socialist leaders who eventually give a government too much power. When you start wanting to get rich one day and vote for extremely capitalist leaders, you help the wealthy gain too much power.

I realize that it’s impossible for me to capture every pro and con of every economic system in this post. But I feel I’ve given enough context for you to at least think things through on your own. Do your research and make the best decision you can for the country. Not just for today, but for many years to come:

What are your thoughts on all this? Anything I missed? Comment below!!

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