Capitalism vs Socialism

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"The artificial schism of capitalism (free and empowered individual citizen) and socialism (collective support safeguarding all citizens) is the most divisive misdirection of the modern world. Small wonder it's been conditioned so deeply into the minds of the population. The ruling class knows reality is a complex tapestry of regulations blending both economic systems in a way that profits the wealthy and gives as little freedom and security as is unavoidable. The main role of modern democracy is to balance public and private interests so society stays stable with as little disruption to extant wealth and power distribution as possible. Stability, as a government mandate, is biased towards ring-fencing lineage wealth and the power of elites. This creates a natural excess of conservative exploitation, always pushing the limits of how far the citizen can be bled. Elections are used as a litmus for these limits. It's a short-sighted dynamic that's not only retarding society's progress and slowly impoverishing most of the population but ultimately risks trapping power and wealth in a moribund cannibalistic dynamic. This is a sure-fire recipe for a degraded future - for the elite and the proletariat alike." - Buzz Aldrin, astronaut


ARTIFICIAL SCHISM

The artificial schism of capitalism (free and empowered individual citizen) and socialism (collective support safeguarding all citizens) is the most divisive misdirection conditioned into the minds of the population.

The ruling class knows reality is a complex tapestry of regulations blending both ideals and one of the key roles of modern democratic government is to manage a balance of public and private interests so society stays stable with as little disruption to extant wealth and power dynamics as possible.

Stability, in this case, is biased towards ring-fencing lineage wealth and the power of elites. This creates an excess of conservative exploitation that's not only retarding society's progress and slowly impoverishing most of the population but ultimately risks trapping power and wealth in a moribund cannibalistic dynamic. This is a sure-fire recipe for a degraded future - for the elite and the proletariat alike.

Capitalism. Socialism. The Market. The People.

Capitalism versus Socialism.

CAPITALISM

Capitalism designates an economic system with all of the following features:

  • The means of production are, for the most part, privately owned;
  • People own their labor power, and are legally free to sell it to (or withhold it from) others;
  • Production is generally oriented towards profit rather than use: firms produce not in the first instance to satisfy human needs, but rather to make money; and
  • Markets play a major role in allocating inputs to commodity production and determining the amount and direction of investment.

An economy is only socialist if it rejects private ownership of the means of production in favor of public or community ownership. There's a world of misdirection - often self-serving, deliberate - in the definitions of socialism and capitalism beyond this point.

Consider:

  • Must an economic system reject any of features 2-4 to count as socialist?
  • Is rejection of private property necessary, optional, essential?

There is a spectrum of socialist ideologies. The “market socialists” hold that socialism is compatible, in principle, with wage labor, profit-seeking firms, and extensive use of markets to organize and coordinate production and investment. More fundamentalist “orthodox” or “classical” socialists, contend that an economic system with these features is scarcely distinguishable from capitalism; true socialism, on this view, requires not merely social ownership of the means of production but also planned production for use, as opposed to “anarchic”, market-driven production for profit. The planned production element brings sociopolitical institutions into the picture and the most absolute form of common ownership plus planned production earns its own name: "communism".

CAPITAL AND TIME

The concept of capital is inextricably tied up with that of time. From Jacques Turgot (1769), we already have the notion of capital is a "fund", an advance that tides the producer over the interval of waiting until his own product is ready for use. The concept of "time" as being one of the determinants of production is, thus, quite an old one. Already, we find writers such as David Ricardo (1817: p.20-1) conceiving of time as being one of the costs of production. Even more explicitly, William Nassau Senior (1767) had referred to "abstinence" as being a "cost" of production which ought to be compensated for - thus justifying the rate of profit on capital. James Mill, McCulloch and John Stuart Mill followed suit.

For the Neoclassicals, the concept of a time-dependent theory of capital came jointly with the birth of marginalist theory - namely, in the work of William Stanley Jevons (1871).

JEVONS

William Stanley Jevons (1871: Ch. VII) was one of the first to conceive of capital as being characterized as time. More specifically, capital is "the aggregate of those commodities which are required for sustaining labourers of any kind or class engaged in work...The single and all-important function of capital is to enable the laborer to await the result of any long-lasting work, -- to put an interval between the beginning and the end of an enterprise" (Jevons, 1871: p.223). Thus, for Jevons, capital is merely a subsistence fund that goes into maintaining the labor inputs working on the production of goods whose fruit will only emerge in a later time.

Jevons (1871: p.229) distinguishes between "the amount of capital invested" and the "amount of investment of capital". The difference between these two concepts is subtly worded but nonetheless substantial. The "amount of capital invested" is the "physical quantity" of inputs into the production process while the "amount of investment in capital" is that physical quantity of inputs multiplied by the length of time in which each input has been in the production process.

To understand this, consider Figure 1 where we have plotted time against increments of input additions. Consider a process of production which begins at time t0 and ends at time t8. This is what Ragnar Frisch (that lord of economic nomenclature!) called a "flow-input, point-output" situation: where inputs are added over time to a production process until a particular final time period, when all the output is realized at once. The histogram in Figure 1 represents the "lumpy" addition of inputs into this process over (discrete) time. The addition in any period is represented by the lightly shaded rectangles. Thus, at t0, we implement amount I0 of inputs into the process, at time t1, we add I1 worth of inputs, and so on until the final time period t8 where we add I8 worth of inputs and our production process ends. Time t8, the final time period, is when output is finally realized.

If we were in continuous time, then our addition of inputs would be continuous until the final time period. This is represented heuristically in Figure 1 by the straight diagonal line stretching from the origin (not perfectly drawn). We begin at time t = 0 and end at time t = T, adding inputs continuously and, in the final time period, have I* worth of inputs "stored" in the production process.

What is the quantity of capital? According to Jevons, the "amount of capital invested" is merely the sum of all the inputs during the production process - or the sum of the heights of the lightly-shaded rectangles in our figure. In Figure 1, this adds up to I*, i.e. I* = I1 + I2 + .. + I8 in discrete time. In general, for discrete time production process from an initial time period t = 0 to a final time period t = T:

amount of capital invested = å Tt=0 It = I*

However, what Jevons called the "amount of investment of capital" is the sum of the inputs multiplied by the length of time of production - thus it is the entire area of the histogram, or the entire area of the triangle formed by the production process. Thus:

amount of investment of capital = å Tt=0 (T-t)It

which is the area of the histogram in Figure 1.

What about in continuous time? In this case, the amount of capital invested is simply I* = ò 0T I(t) dt where I(t) is the investment rate. For the amount of investment in capital, it is useful to appeal to what Jevons called the "average time of investment" (Jevons, 1871: p.231) which is simple the average of the production period, which can be defined in continuous time as q = T/2 as shown in Figure 1. With the average time of investment so defined, then the "amount of investment of capital" can be expressed as q I* = TI*/2 - which is, as we see, the precisely the area of the triangle depicted in Figure 1. This "amount of investment of capital" is, quite simply, the measurement of the quantity of capital for Jevons - a concept quite similar to that derived from the "average period of production" of Eugen von Böhm-Bawerk (1889).

MACROFLUCTUATIONS

However, it was in Eugen von Böhm-Bawerk's (1889) theory where the idea of capital as "time" itself gained greatest renown and the "Austrian" approach to capital was solidified. This was followed up by Knut Wicksell (1893, 1901) who, at the same time, attempted to clarify and extend Böhm-Bawerk's sometimes clumsy exposition. A few American authors, such as Thomas N. Carver (1893, 1903) and Frank A. Fetter (1902, 1914), while seduced by the Austrian concept, was still critical of Böhm-Bawerk's treatment. Naturally, John Bates Clark (1893, 1895), had a competing theory, was considerably more opposed to it.

Since the turn of the century, the Austrian theory of capital has come under varying degrees of scrutiny, notably in the 1930s. On the positive side, Friedrich von Hayek (1928, 1929, 1931) and, to a simpler extent, Irving Fisher (1930), attempted to embed Austrian concepts in a more general theory of macrofluctuations - with Hayek significantly attempting to extend the original theory of capital to take account of disequilibrium situations. On the negative side, Frank H. Knight (1934, 1936) picked up where Clark left off and launched a sustained attack on the Austrian concept of "average period of production" which did much to reduce its appeal.

The Keynesian Revolution short-circuited the rise of the capital-macroeconomic link that was being forged by Hayek and his contemporaries. With the exception of the work on the Keynesian investment function, the theory of capital was largely ignored in macroeconomics during this period (in America; the British followed the "Oxbridge" program which incorporated more serious treatments of capital). When capital theory re-emerged in the late 1950s and 1960s in the context of Neoclassical growth theory, it was the Clarkian rather than the Austrian conception that ruled the day. In more recent years, perhaps only Friedrich Lutz and Vera Lutz (1951), Ludwig Lachmann (1956) and, most significantly, John Hicks (1973) have attempted to restore some of the polish on the Austrian theory of capital. Hicks, in particular, attempted to work fixed capital into Austrian theory and to generalize it to flow input-flow output.

"Those, who are strongly wedded to what I shall call "the classical theory", will fluctuate, I expect, between a belief that I am quite wrong and a belief that I am saying nothing new. It is for others to determine if either of these or the third alternative is right." - John Maynard Keynes, The General Theory, 1936
"The impression of Keynes that one gains [from Neo-Keynesians] is that of a Delphic oracle, half-hidden in billowing fumes, mouthing earth-shattering profundities whilst in a senseless trance -- an oracle revered for his powers, to be sure, but not worthy of the same respect as that accorded to the High Priests whose function it is to interpret the revelations." - Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes, 1968

JOHN MAYNARD KEYNES

"The old century ends in a storm, the new one begins with a murder..." wrote Friedrich Schiller at the end of the 18th Century. Had he written those words in 1936, they could not have been more appropriate: the old Neoclassical orthodoxy had wallowed clueless in the storm of the Great Depression and with one swift blow, the publication of John Maynard Keynes's General Theory of Employment, Interest and Money in 1936, their theory was murdered and the "New Economics" began.

Within the next few years, there were several important developments. The most crucial was the introduction of the IS-LM representation of Keynes's theory by John Hicks (1937). This was to have a very deep impact in both economic theory and the conduct of economic policy. Hicks's representation provided a useful and efficient pedagogic device to popularize the Keynesian Revolution. However, by treating a subset of Keynes's theory as a system of simultaneous equations, Hicks's IS-LM was also the beginning of what has been called a "Neoclassical-Keynesian Synthesis" or "Neo-Keynesian" school of thought, the dominant form of Keynesianism which took hold in America and, for the most part, the rest of the world.

Hicks's system of simultaneous equations was completed by Franco Modigliani (1944) who subsequently set the dominant "Synthesis" view that Keynes was merely doing Neoclassical economics with "sticky wages". The race was then on to formalize the major Keynesian relationships in a manner compatible with Neoclassical theory. In this endeavor, the now-converted Alvin H. Hansen, the idiosyncratic Abba Lerner and a brilliant parade of (mostly) American youngsters - Franco Modigliani, Seymour Harris, Lawrence Klein, James Tobin, Paul Samuelson, James Duesenberry, Robert Mundell, Robert Eisner, Robert Solow and numerous others - took instrumental roles.

In Britain, in the meantime, Roy Harrod, John Hicks, Joan Robinson, Nicholas Kaldor and the "Cambridge Keynesians" continued on what they perceived to be the next logical step: namely, the extension of the General Theory into the longer run, the "dynamic" economy. By the time they looked up from their work sometime in the 1960s, the American "Neoclassical-Keynesian Synthesis" was already firmly in place and virtually immovable. Much to their chagrin, it seemed as if the "Keynesian Revolution" had now become synonymous with the Neo-Keynesian synthesis. Some, such as Joan Robinson, went on the attack - taking hold of Neoclassical capital theory and methodology as the corner of a rug by which she hoped to shake the whole edifice down. Others, such as Robert Clower and Axel Leijonhufvud, sought to draw it onto a different "disequilibrium" track, advocating a "Walrasian-Keynesian" synthesis instead.

However, it was to be another challenge, that of Milton Friedman's "Monetarism" and, more fundamentally, its New Classical incarnation, that would finally bury the mainstream Neo-Keynesian construction - and, some could argue, all vestiges of Keynes's original influence with it.

"After the war, Keynes's theory was accepted as a new orthodoxy without the old one being rethought. In modern text-books, the pendulum still swings, tending toward its equilibrium point. Market forces allocate given factors of production between different uses, investment is a sacrifice of present consumption, and the rate of interest measures society's discount of the future. All the slogans are repeated unchanged. How has this trick been worked?" - Joan Robinson, 1979, Collected Economic Papers, Vol. V
"The "Keynesian revolution" went off at half-cock...The equilibrists, therefore, did not know they were beaten; or rather...they did not know that they had been challenged. They thought that what Keynes had said could be absorbed into their equilibrium systems; all that was needed was that the scope of their equilibrium systems should be extended. As we know, there has been a lot of extension, a vast amount of extension; what I am saying is that it has never quite got to the point....I must say that that diagram [IS-LM] is now much less popular with me than I think it still is with many other people. It reduces the General Theory to equilibrium economics; it is not really in time. That, of course, is why it has done so well." - John Hicks, "Time in Economics", in Evolution, Welfare and Time in Economics, 1976


SOCIALISM

EQUALITY AND TIME

A socialist economy features social rather than private ownership of the means of production. It also typically organizes economic activity through planning rather than market forces, and gears production towards needs satisfaction rather than profit accumulation. Socialist ideology asserts the moral and economic superiority of an economy with these features, especially as compared with capitalism. More specifically, socialists typically argue that capitalism undermines democracy, facilitates exploitation, distributes opportunities and resources unfairly, and vitiates community, stunting self-realization and human development. Socialism, by democratizing, humanizing, and rationalizing economic relations, largely eliminates these problems.

Socialist ideology thus has both critical and constructive aspects. Critically, it provides an account of what’s wrong with capitalism; constructively, it provides a theory of how to transcend capitalism’s flaws, namely, by transcending capitalism itself, replacing capitalism’s central features (private property, markets, profits) with socialist alternatives (at a minimum social property, but typically planning and production for use as well).

How, precisely, socialist concepts like social ownership and planning should be realized in practice is a matter of dispute among socialists. One major split concerns the proper role of markets in a socialist economy. Some socialists argue that extensive reliance on markets is perfectly compatible with core socialist values. Others disagree, arguing that to be a socialist is (among other things) to reject the ‘anarchy of the market’ in favor of a planned economy. But what form of planning should socialists advocate? This is a second major area of dispute, with some socialists endorsing central planning and others proposing a radically decentralized, participatory alternative.

FURTHER READING