Why It’s Likely Nobody Knows What You Mean When You Talk About Capitalism or Socialism

So much passion, so little sense.

In economics and the history of economics, capitalism and socialism are discrete, amoral and relatively rational things. Certainly not the hot button, justice inflamed things that inspire passionate idealists – the folks pictured above for example – to cover us in flecks of morally righteous spittle.

Capitalism is markets, the free flow of labor and private property. In other words, you are a capitalist if you think people ought to be able to comparison shop, if you think you ought to have the ability to quit from your job (or fire your employees) and if you think the grocery store down the street ought to be privately owned.

Socialism is the ownership of the means of production by the government. You are a socialist if you think people ought to be assigned goods and services by a central authority, if you think firing and quitting jobs ought to be in a third party’s hands or if you wish that bureaucrats ran your local grocery store.

Historically, capitalism properly defined has been the most cost effective, efficient and environmentally friendly way to make most, though not all, goods and services. This is for a huge number of reasons, but in ultra-condensed form, we can point to the following:

  1. Prices are set by the entire body of the society in capitalism. We pay 1 dollar for a normal ball point pen because the entire economy has voted with its wallets to value a normal ball point pen at 1 dollar. This ultra-democratic price mechanism does a very good job efficiently setting both supply and demand.
  2. Greed is a stronger and more reliable incentive for action than altruism, ideology or tradition. Capitalism usually, though not always, aligns the greedy desires of the producers with the greedy desires of the consumer. Ford Motor Company, for example, best satiates its greedy desire for profit when it efficiently satiates my greedy desire for a comfortable, reliable car. Likewise it loses market share and thus profit when it provides me with a lemon, pisses me off and makes me into a Toyota customer. Everyone’s greed, then, is best served by providing a good product at a competitive price. Waste is punished, superfluity is punished and uselessness is punished.
  3. Because everyone votes every day with their wallets, it makes it extremely difficult for a government to bend the entire society towards any moral, justice or freedom goal. When the Nazis, for example, wished to dedicate the entire German society to the goal of genetic purity, they had to disassemble the markets first for the simple reason that the average customer could not be trusted to care more about purity than getting a better price on dog food. The Soviet Union and communist China obviously had to destroy their private markets in order to impose equality and mass murder on the citizens as well.

However, capitalism can and does suffer from serious problems. Nearly totally free capitalism is called lassez-faire and it consistently fails in practice. This topic is a lot more complicated than I can explain in a blog post, but we can cover most of the problems under these general categories:

  1. Perverse incentives. Sometimes the greed of the producer and the greed of the consumer do not align. Insurance companies are a classic example of this. They satiate their greed by denying service to paying customers who, as a consequence, are often unable to satiate their greedy desires when negotiating an insurance claim. Makers of addictive substances – narcotics, social media, etc – run counter to the common interest in similar ways. Twitter, for example, maximizes profits by making its users addicted and mentally ill since mentally ill people use social media more often, addicts cannot stop using social media and, as such, both groups spend all day fattening Twitter’s profits. Effective societies fix this with a combination of regulation and tax policy.
  2. Market failures. This is a broad category but it includes problems that make consumer choice impossible – like monopolies – irrational – like blatantly lying in your advertisements – or by forcing people to buy or sell under duress – such as when hospitals dictate pricing to seriously injured customers. In short, capitalism is only efficient when consumers can comparison shop and when they know what they’re buying. Effective societies deal with market failures through law enforcement and regulation.
  3. Nobility. Because no capitalist society has successfully stopped the practice of inheritance and because capitalism allows the winners to amass great power, capitalist economies frequently see the hereditary accumulation of wealth become so great that the high born – no matter how criminal or unsuccessful – almost cannot lose and the low born – no matter how meritorious – almost cannot succeed. This isn’t necessarily inefficient from a production standpoint, but it does make it awfully tempting for the low born to murder everyone, burn everything down and roll the dice for status in the next hierarchy. Effective societies deal with this problem through various species of nanny state.

By comparison, the public ownership of the means of production – socialism properly defined – has never been effective. It suffers from its dependence on weak incentives like public spirit, altruism and duty. It does not align consumer incentives with producer incentives and it is horribly, disastrously easy to align with moral programs like genetic purity, equality or religious faith. It’s also an unmitigated disaster for the environment because there’s usually nobody with a selfish reason to keep a forest, mountain or swamp healthy in a socialist system. The only good things to be said about real socialism – once again I am speaking of the public ownership of the means of production – is that it allows the lower classes the chance to destroy everything and start over without necessarily committing mass murder first.

Taken altogether, it is very easy to see why all of the rich democracies on earth are capitalist societies with large, activist governments and a nanny state. Capitalism provides the good incentives and efficiency, the large governments regulate the market failures and the nanny states lessen the problems of nobility. So there’s absolutely no need for controversy or passionate advocates of true justice to sprinkle us with their righteous spittle. Right?

More passion, less sense.

I’ve been asking people what they think socialism and capitalism mean and – wow. An intelligent, well educated lefty I know explained that “socialism” was defined as “you know, caring about other people.” An otherwise well informed conservative explained that “capitalism” was “freedom and independence.” I asked two activists whose jobs would seem to entail understanding economics at least somewhat and they informed me that capitalism meant “oligarchy.” None of this is even remotely true!

Both lefties and conservatives were somehow surprised to learn that capitalism and socialism were not, in fact, eternal, and had been preceded by things called mercantilism and feudalism. One conservative had somehow gotten it into his head that cavemen – people without markets, capital or employment – were capitalists. A different conservative seemed to believe that capitalism was somehow a moral system and an edgy person with an oppressed hairstyle explained that socialism – the government ownership of the means of production – would somehow deliver us to an anarchist paradise. Anarchism means no government!

And it’s not just ignorance that is causing our current trouble with passionate justice bumbling, heroic freedom nonsense and spittle all around, it’s selective ignorance.

The conservatives generally defined socialism correctly. They rightly equated it with the Soviet Union, Venezuela and Cuba. They were spot on when they argued that socialism does not work on greed and thus does not work. They were perfectly in the clear when they argued that the grocery store would be worse in almost every way if it was owned by the Supreme Court or the DMV.

However, they got absolutely goofy when it came time to define capitalism. Private property and markets somehow became a spiritual and moral imperative. Government regulations – of the kind that Adam Smith, James Madison and every serious capitalist economist on earth recommended – were somehow “socialism.” The government – utterly necessary for the maintenance of private property – was somehow constructed as the enemy of “freedom” – whatever that means – and thus “capitalism.” I’ve had numerous libertarians tell me with straight faces that the government is so dangerous it could only be trusted with running the police and military. Think about that for a second – the government is so dangerous it can only be trusted with nukes, machine guns and prisons.

Likewise my “socialist” friends are completely in accordance with modern, capitalist economics when they recommend a more robust safety net, progressive taxation and the regulation of market failures. They are perfectly, incredibly consistent with actual capitalist economic theory when they propose a carbon tax. They are calling this stuff “socialism” either because they don’t know what they’re talking about, because market fundamentalists have co-opted “capitalism” or because they want to freak out the conservatives. I honestly don’t know which.

Anyway, this is all a really long way of saying two things:

  1. Words have meanings. When we misuse words, other people are going to misunderstand us. Some of them will misunderstand us enough to go on quixotic crusades for or against “capitalism.”
  2. The “controversy” between “capitalists” and “socialists” is almost entirely nonsense. There are very few people who seriously support the public ownership of the means of production. That is to say, genuine socialists are an extreme minority and can safely be ignored in almost all of the world’s rich democracies. Likewise, there is nothing in capitalism – properly defined – that precludes a nanny state or government regulation. Y’all are mostly fighting over nothing.



  1. The problem, I think, is that, at least in the US, conservatives have been calling anyone they deem too far to the left “socialists.” I think many liberals have adopted the label primarily as a way to give a middle finger to those conservatives.

    The reality, I think, is that most societies today are mixed. We don’t think about things like firefighting, public schools, unemployment insurance, social security, or central banks as socialism, but someone from 1850 would.

    As you noted, straight socialism doesn’t work. And straight capitalism can be pretty brutal. Most developed nations today are a mix. Most of us are both capitalists and socialists. Most of the arguments are about how much of each should be in that mix.

    1. This pattern of misusing the terms is definitely present in Korea as well. I’m not sure about other countries. If it is schadenfreude, it seems like a really bad idea on strategic grounds. One of the foundational rules of persuasion is that you shouldn’t let your opponent define your positions. Idk.

      The thing about the person from 1850 – you’d be surprised. Adam Smith saw the nanny state as a necessity. Madison wanted the government to subdivide property after the passing of each generation. George Washington thought that hereditary wealth was a fundamental threat to democracy. Going back even further, the Arthrashastra argues for welfare, Augustus operated an elaborate grain dole and Kublai Khan created a public school system.

      I didn’t want to make the original post a million words long so I skipped it, but I think Bernie Sanders and Ayn Rand are responsible for a lot of this confusion. Sanders, for whatever reason, has decided he’s a socialist even though he does not advocate the public ownership of the means of production. Rand, because she was reacting to the Soviet Union and not thinking very rigorously, decided that capitalism was secretly a moral system rather than a tool. We can see their intellectual children in spades, covering us in passionate spittle, all over the US.

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