Capitalism v. Socialism? - Part I

Are capitalism and socialism opposites of one another? Can one have a capitalist, socialist nation? This series will launch into a discussion as to whether politics can embrace the concept of both capitalism and socialism functioning within the same sphere.

First, there must be some definitions. In economic thought, capitalism is opposed by communism. Capitalism is commonly defined as an economic and social system marked by four features: (1) private ownership of the means of production; (2) goods, labor, and services traded in a market; (3) profits distributed to owners or invested in capital; and (4) wages of production paid to the workers. Socialism is commonly defined as a series of theories of economic organization, usually demarked by what Wikipedia calls "state, worker or public ownership and administration of the means of production and distribution of goods, and a society characterized by free and equal access to resources for all individuals with an egalitarian method of compensation." According to the same source, though: "Socialism is NOT a political system; it is an economic system distinct from capitalism."

On the one hand, I agree; socialism is not a political system. Political regimes are described by terms such as "totalitarian" and "democratic"; the focus of a political system is on who (or what) controls the political power. On the other hand, I disagree; socialism is not an economic system distinct from capitalism. Where political systems focus on the source of political power, economic systems are concerned with source of economic power. Absolute capitalism places economic power with the private individual or company. The opposite of this would be to place economic power with the public, whose primary body of power is the government; that means that absolute communism is on the other end of the scale from absolute capitalism. Where does "socialism" fit on that scale?

Wikipedia moves on to say the following:

"Socialists mainly share the belief that capitalism unfairly concentrates power and wealth among a small segment of society that controls capital through exploitation, creates an unequal society, does not provide equal opportunities for everyone to maximize their potentialities and does not utilize technology and resources to their maximum potential nor in the interests of the public. Therefore socialists advocate the creation of a society that allows for the widespread application of modern technology to rationalize the economy by eliminating the anarchy in production of capitalism, allowing for wealth and power to be distributed more evenly based on the amount of work expended in production, although there is considerable disagreement among socialists over how and to what extent this could be achieved."

Assuming the above to be true, the issue that socialism tries to address is inequality among the members of society. Socialism does not address interests such as the ownership of property, or how goods and services are traded. Rather, socialism is concerned with the third and fourth part of capitalism: the distribution of profits from production, and the wages of production.

Of all the critiques of capitalism, most of the focus is upon the distribution of profits. Smith recognized that income earned from rents or other non-productive sources should be taxed heavily, as the taxes would be placed upon perceived or speculative value, rather than the actual value derived from resources and labor. Smith also mentioned that taxes should be collected proportionally from those who benefit from the protections of government. Nonetheless, laissez-faire economists argue that income earned -- however it is earned -- should be retained by those who have an interest in that income, either through investment or other means. Socialist theories would be those that advocate for the re-distribution of that income; however, it is not true that the opposite theories are "capitalist." This is because capitalism already posits that wages are paid to workers out of production; that means that capitalism recognizes that workers should be paid from the fruits of production, or the profits enjoyed by a corporation. Hence, socialist theories and capitalism can survive in the same breath.

It is important to remember that Smith's treatise on capitalism was written as a critique of mercantilism. Mercantilism was the prevailing economic system during the late-18th Century, where the strength of a nation's economy was based upon the wealth of its treasury. The treasury retained wealth through the taxation of goods produced and traded between nations; government policies, then, acted to protect the wealth of the country through interventionist trade barriers and taxation of foreign interests. The purpose of Smith's The Wealth of Nations was to demonstrate the fallacy of this thinking, and to advocate for a more open economic system. A key tenet of this open system was ensuring that economic wealth remained in the hands of private individuals, rather that a nation's treasury.

The redistribution of wealth is not the same as mercantilism because the latter implies the leeching of wealth from the open market. Socialist theories promote the redistribution of wealth because, within the framework of neoclassical economics, an increase in income will result in an increase in demand for goods and services, which, in turn, creates an increase in price that pushes supply (and production) up. Socialist theories are not the same as mercantilist theories, and are, in fact, consistent with what Smith wrote about capitalism. Consequently, socialism and capitalism are not necessarily enemies.

That being said, why is it that socialism and capitalism are placed as opposites? This has to do more with opinion and politics than it does economics.

(To be continued ... )