Capitalism vs. Socialism: Two Competing Schools of Thought

We are in a period in American, and indeed global, history where the Teutonic struggle of capitalism and socialism are being played out. Most people have a fair understanding of these differing theories of economics, but this SBG Cast will attempt, as difficult as that is in a five minute broadcast, to introduce this debate and shed light on the differing systems.

Our goal as it always is, is to remain non-political so this SBG cast is not going to be a political statement of these two systems. Keeping that balance is difficult enough, but especially in light of the political and social climate worldwide. But here you go. Oh, and yes, I know, I’m oversimplifying. But, what can you do in five minutes ?.

Fundamentally, the different systems are rooted in the conflict of individual liberty against social need. Pure capitalism, which by the way, we are nowhere near in the United States, provides an environment in which people make individual choices about how they allocate their resources including time, money, talent, etc. Socialism on the contrary provides an environment when the resources of the individuals including time, money and talent are allocated by society in general for the benefit of society in general.

Capitalism will lead to unequal distribution of financial wealth because fundamentally people are not equal in their time, talent, work ethic, creativity, education, attitude , etc, etc. To some, this isn’t “fair”. Socialism, on the other hand attempts to make everyone equal in their financial wealth so that no one has more than another. And by the way, just as the United States isn’t capitalist, neither is it socialist.

Both systems require an individual to produce wealth. Whether it’s its intellectual property like the development of a new technology, or direct labor like the construction of a house, wealth creation comes down to the individual. Companies (and I’ll say governments) only work as an aggregator of these individual efforts. So, in a capitalist system, the productive thoughts and labor of the individuals are put up to the marketplace to determine their value. In a socialist system, society (that is government) determines the relative value of an individual’s production. Here then, is one of the core differences.

Now, another difference is how capital is allocated. In a capitalist system, individuals are free to retain the product of their labor. Thus, individuals are able to save money (or capital), and allocate that capital as they see fit. Some individuals for example will choose to spend their money on non-essentials others may choose to fund a new business. Now, understand that this individual determination of capital investment may lead to further inequality. First, some save more than others. Second, some who invest make better decisions than others.

In a socialist system, the government retains the capital and makes the allocations based on its’ perceived needs of the society. So, rather than individuals deciding what they want for their own needs, the needs of society are considered superior to the needs of the individual.

Let me give you a personal story. When I worked for Wharton Econometrics, one of our clients was Belarus Machinery. Belarus Machinery was a tractor company in the Soviet state of Belarus. I had the privilege of meeting with the head of the company as they were beginning to attempt to understand American economics, distribution systems, etc. We went to a grocery store and that highlighted many of the differences between capitalism and socialism. We visited the breakfast isle and looked at the dozens of competing brands of cereal. My guest, the head of the Soviet company, couldn’t understand how it could possibly be efficient to have so many brands of cereal. Wouldn’t it be more efficient to have one brand that everyone bought and then reallocate the resources to other important things? He also couldn’t understand how we had such low prices, and such abundant supplies. Well, that’s the strength of the capitalist system. When many people freely compete for a consumer who makes free choices, they are forced to continually improve the product and reduce the price. Otherwise, the free consumer will choose the other guy. This seems like such a simple concept, but it was lost to my counterpart.

Now there are important middle grounds, at least theoretically. If you think about it on a sliding scale, on hand you put socialism, and other capitalism. The argument is that there is a balance of the need for capitalism because of its’ strength in creating wealth, but also some need for socialism to somewhat level the field. In the United States for example, we have modified capitalism to impose social security, Medicare, now health care, and we significantly regulate the markets with everything from the food & drug administration, the federal communication commission, the Securities and Exchange Commission and the list goes on and on.

In addition, we employ a progressive tax policy that implies that person pays more to societal needs based upon the amount they earn. To some, this is seen as fairness, to others, it’s seen as unfair and de-motivating.

The profit motive which serves at the core of capitalism has proven itself in history to best utilize the innate qualities of the individual. People are most highly motivated when they benefit from their efforts. You can’t make a value judgment on this (well I guess you can), but people being individual motivated to serve their own needs is a fact, no matter what system you have.

The question that we as a society have to answer is how are people best served? The position of the Steve Beaman Group is that people are best served when they become aware of their journey on the five paths for a transformed life, and then begin a conscious journey down those paths. This is statement on the need for individual responsibility. Your life is UP TO YOU. Whether the government stays out of it and thus we have more capitalism, or the government gets more into it and thus we have more socialism, your life and your financial path belong only to you.

Your financial path starts with YOU. Your recognition for example of the difference between wants and needs. Your recognition of where you are emotionally, spiritually, physically. Then, you build a financial plan that meets YOUR individual needs.

Capitalism, by virtue of its marketplace determinations of value offer great financial incentive to individuals to produce their very best work. Socialism, in its’ purest form, negates this incentive and relies on the person producing to meet societal needs based on their desire to benefit society.

So, there you go. That’s the two minute version of the different points of view. Adam Smith is often times thought to be the father of capitalism when in his book, The Wealth of Nations, he outlined much of this and referred to the “invisible hand” of the marketplace. Karl Marx is often thought of us as the father of socialism when his book “Das Kapital” outlined much of the socialist ideas.

We’ll explore this further in our financial literacy program, but for today, I’m Steve Beaman and Thanks for listening.