Capitalism, Socialism and Democracy in 2020

Excessive concentration of power in large corporations and lobby groups under capitalism can do a lot of harm. Excessive concentration of power in big government under socialism can also do a lot of harm. Between these two extremes lies what Aristotle called “the golden mean”.

I have celebrated my birthday for 77 years without thinking about Joseph Schumpeter – until this year.  I was born in 1942, the year he published his famous book “Capitalism, Socialism and Democracy” (nicely summarized here).  This book was required reading when I studied economics at McGill in 1962.  But I was not persuaded by Schumpeter’s prediction that because of its successes, capitalism would eventually evolve into what he called socialism.  Schumpeter has proven to be right, but what he called socialism 1942 is the actual economy in 2020. 

Today, in most developed countries, much of the real economic and political power lies with large government bureaucracies, not with capitalist billionaires.  In the US in 2018, government expenditure amounted to 35% percent of the gross domestic product; in Canada, 44% [Source: MLI]. Governments that spend that much money, and also write laws, and also grant or deny approvals to private sector projects, have a lot of power. Public sector employees represent 1 of every 5 employed Canadians [Source: Fraser Institute].

The differences between capitalism and socialism, as actually practised in most developed countries are matters of degree, not kind.  Most developed countries have large government bureaucracies – federal, state/provincial and municipal. They administer laws that regulate many aspects of economic activity.  All these countries have varying degrees of income redistribution and social safety nets.  The relevant debate today, therefore, is not whether we should smash capitalism and replace it with socialism, or end socialism and return to free markets.  The relevant debate is what degree and kind of regulation should a country have.

There is no perfectly fair economic system.  Every system creates winners and losers, with varying degrees of mobility up or down the income ladder. If you are told that the level of income inequality is unfair, ask what level of income inequality would be fair; and how we could achieve that level without making everyone on average poorer.  There are always more complaints than there are solutions.

The Problem of “isms” and other Labels.

If you ask 10 different people to define capitalism you will get 10 different answers; likewise socialism.  Famous US economist Milton Friedman defined socialism as meaning that the government owns the means of production.  Many others would define this as communism.  Other commentators would define countries with government provided healthcare systems, such as the Scandinavian countries and Canada, as being socialistic despite their private ownership of the means of production.

One sees similar definition problems with other isms: feminism, populism, climate alarmism, climate denialism, totalitarianism, etc.  These are broad-brush labels, often used to evoke approval or disapproval rather than to convey information.  Other such emotional buttons would include Conservative and Progressive.   

In Canada one major political party is called Progressive Conservative, a square circle. Another is called Liberal, which has different meanings in different countries.

I doubt that Americans worry that if the Republican Party changed its name America would no longer be a republic, but would return to being a monarchy; or if the Democratic Party changed its name the country would no longer be a democracy.  Party labels are brands, not ideas.

Capitalism: The Promise and the Reality

The Free-market Myth

“Free-market capitalism”, as it is often described, is actually a cartoon description.  No country totally trusts free markets to operate properly.  Consider the global airline industry.  In a totally free market system there would be no regulation of airlines.  The airlines that selected the safest aircraft and the safest pilots would have the best safety records.  The other airlines would kill more passengers.  Eventually, only the safer airlines would survive.  Eventually, the free-market would work.  But no one wants to have the free market in deaths gradually determine which airline survives. The selection and maintenance of aircraft and the training and certification of pilots are regulated by governments not determined by capitalists.    

Similarly, automobile safety and gas mileage have been increasingly regulated, even in that bastion of free enterprise, the USA.  And for air pollution, the US pioneered the Clean Air Act, copied in Canada and elsewhere, leading to many other environmental regulations. Does this mean that the USA and countries with similar environmental protections have become socialist?  That depends on your definition of socialism.

Freedom and Prosperity

The Austrian school of economists (e.g. Schumpeter) and the Chicago school (e.g. Friedman) praised capitalism because its incentives for innovation and profit permitted the greatest degree of personal freedom and prosperity.  But what kind of freedom?  And whose prosperity?

In his influential 1958 article, Oxford philosopher Isaiah Berlin described positive and negative concepts of liberty.

“’Freedom for the pike is death for the minnows’; the liberty of some must depend on the restraint of others…..

….  if a man is too poor to afford something on which there is no legal ban–a loaf of bread, a journey round the world, recourse to the law courts–he is as little free to have it as he would be if it were forbidden him by law. If my poverty were a kind of disease, …. as lameness prevents me from running, this inability would not naturally be described as a lack of freedom, least of all political freedom. It is only because I believe that my inability to get a given thing is due to the fact that other human beings have made arrangements whereby I am, whereas others are not, prevented from having enough money with which to pay for it, that I think myself a victim of coercion or slavery. In other words, this use of the term [freedom] depends on a particular social and economic theory about the causes of my poverty or weakness….”

Communism and Socialism: The Promise and the Reality

The Equality Myth of Communism

Karl Marx predicted that socialism would arise when the proletariat (workers) would revolt against the bourgeoisie (capitalist owners of the means of production) and create the dictatorship of the proletariat – under which everyone would be equal.  Government by the proletariat would then own the means of production communally.  Eventually, the state would wither away because it would become unnecessary. 

Socialism as Marx described it has never arisen anywhere.  The Bolshevik revolution in Russia (an agrarian monarchy rather than a manufacturing capitalist country) was led by middle-class intellectuals like Lenin, not by workers, and soon became a brutal dictatorship with millions of deaths under Stalin.  Eventually the Soviet Union collapsed.  Russian, Eastern European, Cuban and Chinese communism, from the beginning, created an oligarchy of Party people who were more equal than others.

Marx versus Schumpeter

Unlike Marx, Schumpeter’s view was that socialism would arise through evolution, not revolution, because capitalism had actually benefited workers, not just the wealthy:

“Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.”

In a collection of Schumpeter’s writings, Essays on Entrepreneurship, Innovations, Business Cycles, and the Evolution of Capitalism, he recognized that: 

“Government control of the capital and labour markets, of price policies and, by means of taxation, of income redistribution is already established and needs only to be complemented systematically by government initiative …. to transform … regulated, or fettered, capitalism into a guided capitalism that might, with almost equal justice, be called socialism. Thus, the prediction of whether the capitalist order will survive is, in part, a matter of terminology.”

Even the rapid growth of the Chinese economy in the last three decades, and its raising from poverty of hundreds of millions of Chinese citizens, was not because the Communist Party of China smashed capitalism but because it embraced markets and international trade.

The Mixed Economy: the Regulatory State

Regulated capitalism is now the global norm.  It varies only in degree and the techniques government uses for regulation. 

In the early part of my law practice in the 70s and 80s Air Canada was a nationalized airline competing with only one or two smaller, privately-owned Canadian airlines.  Government regulated almost every aspect of the airline business.  Airlines had to apply to the Canadian Transport Commission, in a public hearing, for permission to raise or lower fares, to increase or decrease the number of flights between city pairs and to add or delete any city pairs from its service territory.  That regulation is gone today. 

Although these airline hearings kept me busy they also greatly increased the cost of airfare, reducing both demand and supply.  Eventually, the deregulation policies implemented by UK Prime Minister Margaret Thatcher and US President Ronald Reagan led to Canada following suit. Air Canada was privatized, its prices and service offerings were deregulated, and airfares were greatly reduced. And the airline industry is but one example of the deregulation during that era. 

Today,  whether the issue is transportation, pollution, healthcare, climate change, approving a Covid-19 vaccine or almost anything else, the meaningful debate is not about capitalism or socialism but about the proper role of government and the optimal government regulatory technique (e.g. carbon taxes versus emissions regulation).

The Capitalism and Socialism Debate Today

Capitalism promises individual freedom and prosperity; socialism promises equality and protection from exploitation. In their pure forms, neither capitalism nor socialism keeps its promises.  Both exaggerate the benefits and understate the disadvantages. 

Many countries’ so-called free-market economies have monopolies and oligopolies that dominate entire industries — social media, online delivery to home, software, beer, airlines, utilities like electricity and gas, and many others.  Schumpeter’s famous description of the “creative destruction” of older ways by entrepreneurs explains why former economic powerhouses are replaced by newer innovations. How many people had used Zoom meetings a year ago, or considered its future impact on airline trips to conferences or the demand for office space?

What developed democracies need today is a reasonable balance between excessive concentration of power in large corporations and lobby groups and excessive regulation by large government.  That balance will change with changing circumstances.  Now, while we are all struggling to overcome a pandemic, governments need more power.  As the risk of the pandemic decreases, governments must be willing to give up some power to provide greater opportunity for the economy to recover through innovation and entrepreneurship.

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