What's the best "ism" for the economy?
Published April 25, 2019
As a nation, we’re now engaged in a new version of a debate I’ve heard many times in my 68 years of life, and which actually goes back several hundred years. It’s the debate over how we should organize the economy. And – to get to the point – specifically it’s the debate between capitalism and socialism.
The question about the best structure of an economy frequently arises during times of economic stress. Many during the Great Depression of the 1930s (actually before my time!) wanted a new economic foundation. Cries for fundamental change in the economy reemerged during the 1970s when rapid inflation was making us poorer.
Fast forward to today. While the economy has been expanding for a decade, two factors are creating apprehensive about the future. One is the overhang from the Great Recession of 2007-2009. Not all households have fully recovered from that economic downturn, and even among those who have, many worry it could happen again.
The second worry is about the rapidly changing job market. The ratcheting up of educational requirements, the disappearance of numerous middle-income jobs, and the emergence of technology as a potential replacement for a variety of occupations are worries.
So what exactly are capitalism and socialism? The hallmark feature of capitalism is private control. Resources – like labor, machinery, technology, and land - are privately owned, and owners control decisions about use of those resources. The prices paid to use resources are also privately determined through the interaction of supply (quantity available) of the resources and the demand (willingness to pay) for the resources.
A socialist economy takes the opposite approach. In pure socialism, all resources are publicly owned, with the government being the representative of the government. The government determines what and how much is produced, sets all prices for outputs and inputs -including wages for workers - and develops plans for the long-run growth of the economy.
Both capitalism and socialism have fans and detractors. Supporters of capitalism say its focus on private ownership and decision-making is consistent with individual freedom and liberty. They say the setting of prices in the marketplace through negotiation between buyers and sellers is fair. The process is also quick to eliminate shortages or surpluses with fast movements in prices. Furthermore, competing sellers are constantly motivated to innovate and use resources more efficiently so they can lower their price and – at least temporarily – take business and profits away from competitors.
The pursuit of profits by capitalists is the major sore point for capitalism’s critics. Detractors of capitalism worry the system puts profits above all else, including the welfare of workers and care of the environment. Those questioning capitalism say the system’s intense competition results in winners and losers and ultimately greater income inequality.
A concern for worker welfare, a clean environment, and greater income equality are goals the promoters of socialism say can be better achieved by this system. Without the worry for maximizing individual profits, socialist supporters believe the government can take a broader view and consider all aspects of what makes for a successful economy for all. In particular, advocates say socialism can better consider the impact advances in technology will have on workers’ lives, and therefore can manage the introduction of labor-saving technology so as to minimize disruptions and displacements.
Of course, like capitalists, socialist supporters attract a long list of complaints. At the top is the charge government bureaucrats can’t expect to have the knowledge and information necessary to set millions of prices in the economy. Furthermore, because governments are accountable to voters, critics say socialist micro-managers will have an incentive to set prices too low, which can result in chronic shortages and bare shelves.
And although powerful interests attempt to influence governments in capitalist systems, those questioning socialism say the same will happen in socialism – and perhaps even more so because socialist governments have more influence over the economy.
There is an alternative to pure capitalist and pure socialist economic systems. It is a “mixed system,” which many say our country has had for decades. The notion is to keep capitalism but try to use the government to ease the system’s rough edges. So they’re still be the private incentives to businesses and workers that encourages innovation, self-improvement, and delivering products and services to consumers at the lowest cost. Prices and wages will still be set in the marketplace, and there will still be people succeeding and those not.
But those not succeeding won’t be forgotten and tossed aside. Instead, the government will have a broad “safety net” that catches people when they fall. However, the challenge is to have programs and plans in place that make the “safety net” actually a “success net,” where people can bounce back and ultimately be successful on their own.
So, you decide – capitalism, socialism, or the mixed system – which is the best way to structure our economy? This is one of the most fundamental choices we collectively make, and one that will likely be revisited frequently in the future.
Walden is a William Neal Reynolds Distinguished Professor and Extension Economist in the Department of Agricultural and Resource Economics at North Carolina State University who teaches and writes on personal finance, economic outlook, and public policy.