Capitalism and Socialism: What do the Words Mean?

Capitalism and socialism are two important words used in the world of “political economy.” As a literary scholar and poet I became interested in the field’s wild variety, its rhetorical use of language and often its surprising insights. For the last thirty years or so the field became a hobby. This essay shares some of what I learned.

Let’s set aside the popular use of the words “capitalist” and “socialist” as insulting epithets meaning roughly “an evil and greedy oppressor” and “an evil and murderous tyrant.” We have perfectly good words for “evil, greedy, murderous” etc—evil, greedy, and murderous for example. Socialist and capitalist have meanings of their own that might be worth exploring.

In serious discussion “capital” is usually agreed across all shades of the political spectrum to signify the means of production, or the ways value or “utility” is created. The main argument seems to be about who should own it—individuals, individuals and voluntary groups, certain groups only, or the State. In ordinary usage, “capitalism” normally means the first two: private or private-and-corporate ownership. “State capitalism,” the ownership of the means of production by the state, is usually called socialism or communism. Absolute monarchical ownership, though it uses capital, is one extreme form of state socialism in this literal sense. If the leadership of a state is democratically elected, it is possible to claim that state ownership is ownership by the people in general, but it is hard to make this case when the current leaders already have total control over the livelihood of the voters. Ownership of capital only by limited groups, such as guilds, feudal dynasties, oligarchies, monopolies, and cartels is often identified with “mercantilism.” It is associated with colonial systems of asymmetric trade and extractive industries like mining and cash crop farming, rather than value-added industries in which the ingenious restructuring of raw materials outweighs the value of the raw materials themselves: such latter industries are characteristic of a capitalist economy.

Another popular use of the word “capital” includes the implied meaning of large, accumulated, stored and abstracted forms of the means of production, such as money, legal obligations, intellectual property, etc. In this sense no large human project, such as a highway system or electrification or a national health service, is possible without capitalism in one form or another.

“Capitalism” can mean either a set of theories about economic systems or the practice of organizing capital, including rules of ownership, contracts, property rights, etc. Theory and practice are not always the same, but they are hard to separate and the relationship changes all the time, so I’ll deal with them together.

The word is also often used to mean the marketplace itself, that spontaneous order by which demand for goods and their availability are communicated across an entire community by means of the price signal, marginal utility, and profit. The continuous feedback of buying, selling, hiring and client-making, controlled by property laws, insurance, bank rates, and stable currency, is immensely creative and adaptable, and may be humankind’s greatest gift. This system is the only one known in which competition, the creation of demand, and competitive advantage tend to create continuous innovation, the substitution of capital for brute labor, and huge increases of abundance.

Problems that often accompany such spontaneous orders fall into two main groups.

The first is that of externalities. If the inputs of an industry include clean air, clean water, a vital ecosystem, and a well-functioning civil society, and its output includes pollution, ecological harm, and social disruption, and if these factors are not added to the balance sheet, then the market can break down and the price signal becomes distorted. The “invisible hand” is crippled. Different nations have tried different legal and cultural ways of rectifying the balance and ensuring that such debts are repaid by remediation or compensation—of this more later.

The second problem is basically the mathematical power law that comes into force whenever any system is creative, that is, it grows and innovates. Advances lead to other advances, the stock of property increases by compound interest, and even very small differences in the rate of increase of wealth can exponentially magnify into huge inequality. Great increases in transportation speed, reliability, efficiency, and demand creation, and plummeting transaction costs, lead to cases where only a few really excellent providers can overwhelm local enterprises. Thousands of mom and pop stores are replaced by the discount chain, a multitude of local folk singers is replaced by a few superstars with mass record labels or streaming rights. The result is that the rich get rapidly richer, while the poor get richer more slowly, and can even in recessions, pandemics, or radical technological changes get poorer. Savage passions of envy, felt injustice, racism, hostility to immigrants, class and identity solidarity emerge. All modern nations, and even cities and states within federal nations, seek ways of redressing the balance without killing the golden goose of the capitalist marketplace.

The mildest way of redress is the enforcement of existing laws. The legal systems of most advanced nations are themselves spontaneous orders (sometimes called autopoietic systems, complex orders, self-organizing or emergent systems, etc). That is, such a system has feedbacks such as juries, appellate courts, adversarial advocacy, precedents, judicial review, critical journals, law books, law schools, etc, that dynamically alter, adapt, or improve the production of justice. (Science, with its own feedback systems of experimental protocol, statistical ana]ysis, replication, apprenticeship, science journals, peer review and professional recognition by prizes and awards, is another such spontaneous order). The law can adapt to changing conditions and mitigate privilege (“private law”) that favors the fortunate.

When innovations in technology and economic efficiency threaten the natural and social environment and lead to runaway increases in economic inequality, and the existing laws cannot keep up, the political process reaches crisis proportions and there is a demand for radical change. One kind of change is a constant lure and tropism: toward various levels of state interference. And here the crucial word “socialism” enters the picture. Socialism as a theory generalizes the staggeringly complex landscape of an economy (in its dynamic setting of other economies), together with its even more complex culture, and all the individuals and groups and ideologies within it, under the term “society.” It largely dismisses the yet more complex biological makeup and natural predispositions of the population, assuming that these are socially constructed, and seeks to control the harms by more or less direct and/or coercive means.

As a practice socialism tends to be activist (while capitalism is often more laisser-faire). Thus socialism suffers the disadvantage of being held responsible for its experiments and innovations, its “dirigiste” attitude of taking charge to fix abuses and injustices, while capitalists can escape the blame for developments it did not directly cause. But socialism by the same token is always in the situation of interfering with an entity much larger and more complicated and unpredictable than its own resources can handle, that wants to go its own way, and that produces much that is desirable.

Nevertheless, given the huge environmental and cultural dangers of uncompensated externalities and the inevitable gravitation of a creative economy toward a power-law distribution of capital with extremes of wealth and poverty, emergency changes in ownership and control may be plainly indicated, as they are in natural disasters and pandemics. Revolution is a worse-than-natural disaster that must be anticipated and avoided. Sometimes non-state means of damping its flames are possible: nineteenth century industrial Britain, for instance, had the extreme good luck of having John Wesley and his religious message of love and peace, and a tradition of great art that was shared by high and low alike. It managed to avoid the worst atrocities that took place in the French Revolution. American religious traditions fulfilled the same function, especially in the case of the Black churches. But the religious buffer postpones rather than eliminates the problem. So it gets left to government. When we cannot rely on cultural luck to provide enough patience to let the system right itself, state means may be necessary.

The available interventionist strategies fall into four general categories: state regulation of the economic and ecological consequences of progress, state control of the economy, state ownership of the “commanding heights” of the economy, and full state ownership of the means of production. The term “socialism” in these terms is applied very differently according to one’s ideology. Only extreme right-wingers and anarchistic libertarians would label state regulation—against breach of contract, theft, etc—as socialism. The business-friendly Right would call some state regulations “socialism” but attempt quite rationally to use others to legally rent-share or create monopolies (socialism for the rich!). The moderate Right would accept some state control but describe most forms of state ownership as socialism. The moderate Left would save the term “socialism” for state control of the economy, hoping for or fearing a transition to “commanding heights” state ownership, and reserving “communism” for full state ownership. The far left would ultimately desire full state ownership, termed by them “socialism,” to be followed by a dreamed-of “withering away of the State,” true communism.

Socialism in the sense of full state ownership of the means of production has a disastrous history, one rightly called out by the Right. I should not need to argue this. East Germany and North Korea are good examples. On both major counts, negative externalities and distribution of power and money, they were disasters. They were hell on earth according to survivors and escapees. “Commanding heights” state ownership has often been a failure too, given the fact that the parts of the economy that are not state owned and that participate in the dynamism of the market fairly soon render the commanding heights obsolete, leaving them as a crippling drag on the rest and a center of oppressive bureaucratic power and surveillance, as has happened in China and India.

The problem for most advanced nations is to figure out where state regulation leaves off and becomes market-chilling state control under which the price signal no longer operates, and where state control in turn becomes state ownership. Generally speaking, if the government controls more than half the Gross National Product it effectively owns the means of production and, since the population relies on it for employment, the regime can perpetuate itself by holding the people’s jobs for ransom by the vote. Is there a slippery slope? Plainly Sweden felt there was in the 1990s when in a prolonged decline it turned its back on socialism and committed itself to a policy of free market capitalism with high redistributive taxes, an attractive position taken up by other Scandinavian countries and by American liberal opinion.

Some would argue that the heavy burden of taxes saps creativity and competitiveness in such nations. Others argue that their ethnic homogeneity, leading to a more general spirit of trust and cooperation, is a luxury that disqualifies them as models and that more multi-ethnic societies cannot achieve. Others too would point out that such countries must rely on the military protection and economic markets of a world power, the USA. Germany has managed what looks like a good balance under the moderate liberal-conservative wing of Angela Merkel—another capitalist free-market economy with high taxes and good social services. But the dangerous populist reaction to Syrian immigration there indicates how fragile that balance can be; and as a member of the European Union it has had to lead a divisive policy of anti-free market austerity that looks sometimes like creeping mercantilism.

Other nations like Singapore and Taiwan have managed to have long-booming capitalist economies with low taxes and good public services. The world is wondering how: perhaps it is residual Confucian civil service ethics, which may dissipate with a new generation. China and India have become booming free-market capitalist societies, even while carrying state-owned non-market sectors on their backs, but with much corruption and huge future demographic and ecological problems. The US is currently the pioneer in fully confronting these issues, bitterly divided along partisan lines, but in the process breaking new intellectual ground; and the outcome is in doubt.

Without a full and, I would argue, an impossible understanding of a whole country, state-imposed means of mitigation for externalities and inequality are always haphazard, and often result in unforeseen consequences. (Think by comparison of early psychopharmaceutical attempts to deal with psychological distress and illness in a brain almost completely unknown except for broad statistical measurements.) A good example would be Lyndon Johnson’s Great Society programs and their later additions using the same body of theory. Jane Jacobs showed us the horrors of urban renewal; the war on drugs resulted in the imprisonment and disenfranchisement of about a tenth of the black male population; Bill Clinton had to ditch large parts of the welfare system that had broken up the Black family and created a plague of illegitimacy and hapless single parents. Unlike Mao Zedong’s Great Leap Forward, an even more ambitious and astoundingly bloody attempt at rectification, the Great Society did have its successes too, but its history should be a grave corrective to wilder “woke” hopes and simplistic economic phrenology.

It should be obvious by now that what most of the US candidates on the moderate left are calling for is not state ownership (socialism in the most used sense) and only very partial ownership or control of the means of production, limited to education and health care. The moderate right believes that intelligent and flexible regulation, together with minimum bureaucracy and modest redistribution might work better. Both sides—or rather all sides—of the debate are necessary, lest in our ignorance and unhampered enthusiasm we make old or new mistakes and squander the huge progress already made. Or get on a slippery slope that will take us to the annoyingly proverbial Venezuela or to robber-baron Russia.

Given a better understanding of the terms “capitalist” and “socialist,” how might a classical free-market liberal or commonsense libertarian respond to capitalism’s problems of redistribution and externalities?

Modestly redistributive policies to deal with inequality are already in place, but are highly wasteful and inefficient. More might or might not help. Exciting possibilities mooted among the people themselves include an entirely unlegislated further expansion of corporate concepts of worker ownership, stock sharing, cooperatives on the Spanish Mondragon model, well-paid gig systems, and in the aftermath of COVID, work at home and the renewal of cottage industry. If the current social services programs could be replaced by a universal basic income, as some argue, many current distortions of the marketplace would disappear. Starving and ill-educated people make poor workers and poor consumers. Education is crucial, but much of the current state system is obviously broken and people are turning to alternative schooling of various types: home, charter, cooperative, private, and virtual. The ideological battle for local environmentalism has been more or less won. The efficiency of capitalism, seeking higher profits by exploiting renewable energy sources and former waste products, and by the miniaturization and customization of industry, is gradually reducing the ecological burden in many parts of the northern hemisphere. The northern forests are returning.

The free-market liberal or moderate libertarian I have postulated might in this light come to some odd insights. One might be that the current administration has adopted several radically anti-capitalist policies characteristic of left-wing and socialist governments: restrictions on immigration and the free flow of labor; the suppression of minority populations; protectionist restrictions on trade; mercantilist economics; nationalism and group identity politics; attacks on the Press; blatant philistinism; and the custom of mass rallies and enthusiastic propaganda. Its support is demographically similar to Lenin’s during the Russian revolution. “Populism” is in a sense the new socialism.

The libertarian argument might be that we should let civil society itself sort out the problem of inequality; many of the extremely rich in the US are convinced of its evil, culturally committed to reversing it, and actively supporting ameliorative efforts in medicine, education, media, etc. The Law is now fully alerted to the problems that our racist human nature has created by mass incarceration and the war on drugs. Trump and the far Left, not-so-strange bedfellows, could hamper the indigenous emergence of better forms of voluntary redistribution, and the evolution of the law and economic system to correct the ill effects of inequality and externalities.

Progressives would clearly take a different view. But a clear understanding of the linguistic struggle over the meaning of key terms like socialism and capitalism could help find a common vocabulary so that the debaters would not be speaking past each other. Perhaps the traditional humanities might be useful after all.

By Frederick Turner

Professor, poet, lecturer, black belt, and more.

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