Capitalism vs Socialism: A Young Adult’s Guide

• In capitalism, businesses are owned by individuals and run for profit
• In socialism, businesses are owned by the state (or the workforce), with profits redistributed
• Why a car dealership? Because I like cars. No, really, that was it.

Before you skip ahead to the next post, just hold your horses there, Johnny. My number one goal with this article is to keep you interested. If I can prevent boredom, I have won. Maybe you dozed off when they taught this in school, or you’ve forgotten it, or you could use a refresher? Come on in, the water’s warm. Capitalism and socialism might be dull, but they’re secretly fun dry like a fine wine. Okay, they’re nothing like that. But they are relevant. Not just to my novel, The Initiation, but to today’s world. The raging debates about healthcare and tax cuts boil down to the differences between capitalism and socialism.  The fight for healthcare is an emotional one, but at its core is a clash of opposing economic beliefs.

Our main political ideologies, represented by Democrats and Republicans, have never seemed so far apart. They’ve diverged. Some might even say they’re DIVERGENT. In previous eras, they’d at least found ways to compromise.  When faced with conflicts today? They dig in, become purists in their philosophies. Democrats have moved to the “left” in recent years (become more socialist). Meanwhile, Republicans have moved further right (become more capitalist). Capitalist and socialist are economic terms, not political ones. They’re only one component of left wing (liberal) or right wing (conservative) politics. Obviously, many other issues like social causes encompass the full view. But let’s stay on point with economics.

It’s not just here in the United States, mind you. This philosophical battle is raging all around the world. It’s a struggle for the right economic system for humanity’s existence. Kind of a big deal, no? People will never agree, but you should have an opinion. To do so, you need to know stuff.

I may not be a political scientist, “but what I do have are a very particular set of skills; skills I have acquired over a very long career.” (If you haven’t seen the movie Taken, go rent it right now. Not that it’s so great, but that line is too much a part of pop culture not to know it. There’s 3 Taken movies, and any one will do. Pretty much everyone Liam Neeson knows keeps getting taken. That’s some luck! Supposedly in Taken 4, his dog gets taken. In Taken 5, Liam Neeson starts taking people.) Anyway, I’m not an expert, but I’ve done my homework.

Most articles on this topic state the properties of each system and their relative advantages and disadvantages.  The problem is that no country exists at those extremes. It’s good to identify the ideals, but it’s so theoretical. Each country leans one way or the other to varying degrees, but takes components of both models. So what does it look like in practice? We’ll get to that below, but first we need to knock out some brief “definitions.” Bear with me.

Capitalism and socialism are essentially opposite economic models. Not true opposites like “high and low,” but opposites like “dogs and cats,” “boys and girls,” “shirts and pants.” At issue are economic equality, and the role of government in business. Socialists believe economic inequality is bad for society, and the government must reduce it. They could impose higher taxes on the rich, free healthcare, or free public education. Rather than individual people, the state owns and controls businesses. (In some versions, the collective workforce itself owns them). So, unemployment is rarely a problem. In bad times, the government can hire people, even for menial tasks. The state redistributes profits equally among all people.

Capitalists believe private businesses are more efficient than government. Society is better off letting the free market determine winners and losers. Some succeed, others fail. Individuals own businesses and run them for profit. As a result, unemployment is common. The incentive for profit drives innovation, as corporations compete to make products that people want. It also creates wealth, and doesn’t care about equality. Inequality, in fact, is regarded as the motivator for innovation and invention. “Living the dream” is on the table. You may not achieve it, but it’s available.

Stay with me, we’re almost done with “textbook” stuff. A socialist economy is not about profit, but equality and fairness, in both opportunity and outcome. “Equality of opportunity” within socialism means what you think. Everyone deserves an equal chance to become successful. It’s not fair if one person comes from a privileged background and becomes even richer, while someone else comes from poverty and remains poor. “Equality of outcome” means it’s not fair if one person becomes rich and the other stays poor—period. Even if the one who became rich started off poor and worked her butt off. The now-rich person would have her wealth taxed away and returned to everyone else. Without that incentive for profit, socialism is considered less innovative and less productive. Lagging technology development, for example. Socialist models that do allow private business ownership force equality through high taxes.

It’s worth a mention that socialism and communism are often equated, but they’re not the same thing. For one, communism is a political model, not an economic one. Socialism would likely be the economic platform within communism. But socialism also exists in many democracies. Socialism and communism do share many similarities, though. Communism could even be thought of as an extreme form of socialism. In communism, equality is all that matters. There are no classes, the government owns all property and goods, and everything is done for the good of everyone else.

The United States is considered ground zero for capitalism. Western Europe/Scandinavia are regarded as bastions of socialism. But the United States uses a progressive tax system. It charges a higher tax rate on the rich, redistributing wealth back to the poor. That’s one of many socialist strategies within our overarching capitalist framework.

As usual, all this technopolitical jargon is best understood with an example. I like cars, so I chose a car dealership. What would it look like under capitalism and socialism?

Under capitalism is how it currently works. Let’s call it Chris Babu Chevrolet. It would have an owner (Chris Babu), employ salespeople, and operate for profit. The dealership buys cars from Chevrolet at one price, and sells them to consumers at a higher price. The salespeople earn commission on sales—the more cars they sell, the more money they make. They’re incentivized to be the best salespeople they can be. If they kill it, they could be promoted, perhaps to a manager. If they excel at that job, maybe they’ll open their own dealership one day. Become a business owner. Chevrolet is also incentivized to make great cars, so people will buy theirs instead of Ford’s. If a salesperson is crappy at their job and doesn’t sell any cars, Chris will likely fire them. If the economy is poor and consumers aren’t buying cars, the dealership may fire many salespeople, even good ones. In a bad recession, the dealership may go out of business.

What would it look like under socialism? There’s a few possibilities. But in the extreme version, a person wouldn’t own the dealership; the government would. The existence of competing car companies like Chevrolet and Ford wouldn’t make sense. The government would control them all anyway. There might only be one car producer. Maybe it would be called Chord, or Fovrolet. Without competition to make the best cars, they might suck. The salespeople would receive a fixed salary, not commission. Whether they were excellent or terrible, if they hustled or slacked, they’d all get paid the same amount. (You don’t need to be a psychologist to know that means they’d likely slack). Yet they would never be fired, even if nobody was buying cars. Even if they were terrific at their job, they might not be promoted. Consumers would either buy a car or they wouldn’t, and the price or quality of the car would not be a major factor.

Now, based on my example, the socialist system sounds kinda horrible. And many people do consider it fatally flawed. But hold on a sec. Bernie Sanders, if you’re reading, calm down, I’m about to make this gray instead of black and white. Let’s return the capitalist dealership. The owner, Chris Babu, has one concern: profit. Namely, his own. Let’s say the dealership makes $1 million in profit per year. He needs 8 salespeople, but he’s cheap so he only employs 4. Each makes roughly $30,000/year, leaving Chris with the other $880,000 (simplifying the math here). Maybe Chris comes in for an hour each day to make sure everything is in order, but otherwise does no work. Meanwhile, the four salespeople bust their butts from 7am till 7pm. One day the owner decides they can survive with only two salespeople, so he fires the other two. He doesn’t raise the pay of the remaining ones, though, he just expects them to do twice as much work. Now he earns $940,000 per year. Let’s say $30,000/year is not enough for the salespeople to live above the poverty line. Does this seem fair?

Many people, including progressives, socialists (often Democrats), don’t think so. One proposed solution would spike taxes on the owner, so he keeps less of that money and it returns to society. Others suggest letting the government regulate the pay of management or business owners. Say, limiting them to 10 times the salaries of their lowest paid employees. (Here the owner makes over 31 times what the salespeople make). Others prefer raising the wages of low paid workers, forcing the owner to have a heart attack share the profits more fairly with the employees. These are socialist ways to make the car dealership fairer to the employees. All involve government intervention in the otherwise free market. These ideas share significant popular support, as people are likelier to be workers than owners.

However, capitalists, free-market supporters (often Republicans), don’t think anything should be done. The market would handle it through competition, and do so more efficiently. Here’s the big problem, though. The above government intervention would reduce the incentive for people to become business owners. Those socialist strategies create a “moral hazard.” Starting a dealership is entrepreneurial, and generates economic value. It creates jobs and goods for sale. But if the government can barge in and take your money away, why should anyone ever start a business? The owner in our case is a bad boss (Chris Babu sucks!). His remaining salespeople could quit and go work at a different dealership. Chris would have to shutter his business or hire new salespeople. In an efficient market, nobody would work for this jerk. He would be forced to raise the pay of salespeople to a level high enough to attract people to work there. If the “fair” pay for a salesperson was $60,000, nobody would take the job until the pay reached that level. If he raised it to $80,000, salespeople from other dealerships would try to switch to his. That would force other dealerships to raise their pay as well to attract them back. Or, more people would become car salespeople, in which case owners could lower pay again. But in that scenario, more salespeople would mean less workers in another industry, raising their pay. Either way, the free market would determine the fair pay for everyone.

In other versions of socialism, the workers themselves would own the dealership and share profits equally. The state could own the dealership, or could direct ownership. I used one version, but others would have worked, too. I hope my illustration clarified the difference between the two economic systems. But I also hope it demonstrated why people disagree about them. The point of the article was not to endorse one system, but to inspire thought and debate about them.  They are at the heart of the battles taking place on Capitol Hill as I write this. Capitalism and socialism do represent starkly different beliefs about how humans should coexist. It’s complicated, and relevant. As such, it features prominently in The Initiation.

Which economic model do you prefer?

Sources and further links:

http://www.investopedia.com/ask/answers/020915/what-are-differences-between-capitalism-and-socialism.asp

https://www.thebalance.com/the-characteristics-of-capitalism-and-socialism-393509

http://study.com/academy/lesson/capitalism-vs-socialism-differences-advantages-disadvantages-the-underground-economy.html

http://www.diffen.com/difference/Communism_vs_Socialism

http://www.diffen.com/difference/Capitalism_vs_Socialism

http://keydifferences.com/difference-between-capitalism-and-socialism.html

http://www.huffingtonpost.com/henryk-a-kowalczyk/capitalism-socialism-and-_b_8523486.html