Capitalism rests on socialist foundations.

Yesterday I noticed that one of my colleagues, Dr. George Lehman, will be giving a presentation entitled, “Having it both ways: Costa Rica as an alternative to the capitalism-socialism debate.” George always gives interesting presentations and whereas I’ll probably agree with the content of the presentation, I don’t like the title.  If we define socialism as government production and capitalism as private-sector production, then capitalist systems have always relied upon some amount of socialism.  There is no pure capitalism without socialism.  The only argument is about how far socialism should go.

This is because capitalism is inherently fragile, particularly the kind of capitalism that produces a high median income.  Even primitive capitalism (which doesn’t create a prosperous median income) relies upon the private ownership of capital which is much easier to destroy than to create and that makes it fragile because anyone with a weapon can hold up the people who control capital.  Advanced capitalism requires banking, insurance, copyright, and property transactions and these institutions rely upon contracts and laws which are easier to break than to agree upon.  Without government to prevent vandalism and enforce contracts and laws, there is very little capital, much less capitalism.

George’s title does accurately reflect the popular perception that there is a dichotomy between libertarian capitalists and socialists. Libertarians want to reduce socialism and the socialists want to increase it, but both are already “having it both ways.”   Socialists (with a few communist exceptions) don’t want to eliminate capitalism.  They want to use capitalism to help generate wealth that can be used by government for social ends. And libertarians (with a few anarchist exceptions) don’t really want to completely eliminate socialism/government.  They just want to use socialism for the purpose of maximizing private production (capitalism) rather than for social welfare purposes like health care for the elderly.  There are a few anarchist libertarians out there who truly do wish to eliminate all socialism, but the big problem with anarchist ideology is that all examples of anarchy in history have had extremely little capitalism (private production). Anarchists have to imagine that anarchy could somehow permit prosperous capitalism even though it hasn’t ever existed anywhere at any scale.

Anarchist libertarians would agree with George’s title which implies that capitalism doesn’t rely upon socialism and there is a grain of truth to that depending upon how they define government.  I would argue that there is no pure anarchy without government because in the absence of formal governements, warlords and criminal gangs rapidly emerge and adopt some of the functions of government.  For example, they try to monopolize the use of force in their territory. Many people don’t define the violent organizations that arise in anarchy as primitive governments because they are so injust and inefficient that they don’t have much legitimacy and formal governments don’t recognize their sovereignty.  I subscribe to Mancur Olson’s definition of government as an organization that at least partially succeeds at monopolizing violent force within its domain and I place warlords at worst end of the spectrum of governments.

Anarchists imagine that anarchy would be just and peaceful.  The big problem with the anarchist dream is that there are many real examples of anarchy and they are all places where people are poor and life is nasty, brutish, and short because of bad management by warlords who produce too little socialist law and order, roads, and schools.  Although most people probably don’t think of the warlords of anarchy as producing a bit of socialism, most people don’t define anarchy as capitalistic either because markets are so limited and people are soo poor in anarchy.  There is little point in having markets when there is no effective governments to rein in criminals who can just steal rather than buying. Anarchy doesn’t look anything like modern paragons of socialism nor capitalism.

Anarchy isn’t really the complete absense of socialism, and at the other extreme, communism isn’t really the complete absense of private production (capitalism) either. In communism there are always some amount of black markets of private production and distribution that help make the system tolerable.  Communist economies even produce money which helps facilitate private production and markets.  Why bother to produce money if not to facilitate market exchange?  Pure communism without any private production would be difficult to achieve.

Realistic libertarians are not anarchists.  They recognize that some government production (socialism) is necessary for capitalism because a precondition for capitalism is the establishment of secure property rights which are created by socialism. Some libertarians also accept additional socialism for producing infrastructure like roads and sewage systems, education, and national defense because they recognize that without socialist funding and management, not enough would be produced to enable the level of capitalist prosperity that they desire.

Most of the leaders of our capitalist businesses are not libertarians because they want more socialist  production of criminal justice, infrastructure (roads etc.), education, healthcare, and national defense than people who identify as libertarians.  None of them would use the word socialism to describe government, but a substantial amount of socialism is what they want. The mainstream business community is already at a middle way between people who identify with libertarianism and those who identify with socialism.  In fact, the business community is one of the main political forces that has historically promoted socialist involvement in producing roads, schools and military bases. The white-collar business demographic generally oppose the people who call themselves socialists and the might not prioritize healthcare for the elderly and the homeless as much as the average citizen, but they also tend to oppose the hard-core libertarians.  Most of the business community wants a middle way between maximizing capitalism (libertarianism) and maximizing socialism (communism).

Whereas George echoes the popular sentiment that capitalism and socialism are two ends of a dichotomy, that isn’t realistic.  A more realistic scale would put anarchy at one extreme with minimum government and communism at the other extreme with minimum private business:

  • Anarchism
  • Libertarianism (maximal capitalism as a share of production)
  • Capitalism as represented by the US business community’s preferences (the system the US would have if only white-collar US business people could vote)
  • Capitalism as represented by the European business community’s preferences (the system Europe would have if only white-collar European business people could vote)
  • Socialism in the 21st century which is typically espoused by people who reject communism.
  • Communism (maximal socialism as a share of production).

Everyone already has it “both ways” with a mix of both socialism and capitalism.  Even anarchy and communism have at least a bit of both.  Costa Rica is an interesting mix that I’d rank somewhere around European business preferences, but I’m not sure which side.

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Posted in Development, Managerial Micro, Public Finance
2 comments on “Capitalism rests on socialist foundations.
  1. […] but anarchy. Capitalism is somewhere in the middle between communism and anarchy because capitalism cannot exist without some amount of socialism. Zero socialism is anarchy and capitalism cannot survive for long under anarchy. Capitalism can […]

  2. […] that strong corporate governance is essential to modern capitalism, but national government is too. Capitalism cannot exist without a strong national government providing a minimum set of regulations so that courts can arbitrate disputes: Successful stock […]

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