Socialism vs. Capitalism vs. Markets vs. Central Planning

Why Capitalism ≠ Markets and Socialism ≠ Planning

Across America, there’s a particularly terrible poster plaguing school classrooms. Perhaps you’re familiar with it. 

While I always like it when political and economic concepts are simplified, this poster — and the ideology behind it — lacks importance nuance.

First, it implies ideologies are stagnant, set in stone by whichever 18th-century opium addict coined the title. This is unequivocally untrue. For example, Capitalism has morphed greatly from its post-feudal, 17th-century English form into the global system of private financing we know today. Similarly, Socialism has branched from the pre-Marx, French Utopian Socialism, to the modern Nordic model, to the reformist ideology of western politicians like Bernie Sanders.

Second (and the more significant of my complaints), is that this poster represents that all-too-common misconception that CAPITALISM IS MARKETS and SOCIALISM IS CENTRAL PLANNING. To the average person, this gives the impression that Capitalism lets you choose between Starbucks and Dunkin, while Socialism is when the government steals your morning coffee only to pour it down your throat at midnight.

This is untrue. But before we can clear the fog on the “Markets vs. Planning” debate, we must define the annoyingly amorphous terms “Capitalism” and “Socialism.” 

DISCLAIMER: Just like any other concept, whether it be religion or philosophy or sport, economic definitions vary from person-to-person. Defining “Capitalism” and “Socialism” is as difficult as defining “love” or “beauty” — definitions will vary. What follows are my definitions. You’re free to disagree.

What is Capitalism?

First, let’s hear how the experts describe it: 

Oxford Dictionary — an economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

Investopedia — an economic system in which private individuals or businesses own capital goods.

Ron Swanson — Capitalism: God’s way of determining who is smart, and who is poor.

Jokes aside, the first definitions capture a relative consensus. Capitalism is when the means of production (the things that make things — i.e. companies) are privately owned for the purpose of profit. Expanded definitions may reference something like: “the distribution of goods that are determined mainly by competition in a free market,” but its important to note the “free market” mention is usually caveated with a “mainly” or “typically” — rarely is market participation a stipulated requirement for Capitalism.

And nor should it be. Detractors and advocates agree that the United States is a Capitalist country. The majority of our economy is comprised of privately-owned companies that operate for the sole purpose of turning a profit for the owners. Yet not all of these companies operate in a market. 

Take for example Eversource, the monopolistic energy provider in the American northeast. Eversource is a privately owned Fortune 500 company that does not compete in a market, but does create profit for the owners in the form of quarterly dividends.

Were you to walk down Boston’s notoriously disorganized streets, you’d look up to see powerlines running from house to house. While Eversource worked hand-in-glove with the government to install and operate those lines, they are owned solely by Eversource, not the government. Consumers must receive electricity through these lines. They cannot call an Eversource competitor to have new lines installed. Therefore, there is no market alternative to Eversource. 

Given Eversource’s for-profit, non-market operating structure, it’s effectively capitalist and centrally planned.

As for-profit companies can operate as either market actors or centrally planned entities, my definition is as follows:

Capitalism — An economic structure where the means of production are privately owned for the purpose of profit.

Now, let’s look at the vaguer of the two terms: Socialism.

What is Socialism?

Encyclopedia Britannica — social and economic doctrine that calls for public rather than private ownership or control of property and natural resources.

Eugene Debs — Socialism is merely an extension of the ideal of democracy into the economic field.

Socialism is harder to define than Capitalism, due to both American cultural naivety and the near-infinite number of ideologies that rose to oppose 19th-century Capitalism. In the American zeitgeist, “Socialism” is a pejorative used to critique anything the ruling class dislikes, including but not limited to:

  • Taxes

  • Racial Equality

  • Public Housing

  • Big Bird

  • Catholicism

  • Lowering the Medicare enrollment age by one (1) year

  • Any government spending not contributing to Raytheon’s revenue

And while government programs such as welfare and public education are unequivocally good (and have been on Socialist party platforms for centuries), to say “Socialism = government” is incomplete. Personally, I think Mr. Debs’s simple definition (above) gets to the heart of the issue, though it can be expanded. 

Socialism - an economic structure where the means of production are owned and democratically controlled by workers or stakeholders. 

In this case, “stakeholders” refers to those impacted by an organization; either workers or, in the case of societally-necessary goods like electricity, the public. You may also notice my definition of Socialism includes the adjective “democratically” — no matter how many red flags you wave, in the words of Marxist Philosopher Rosa Luexmburg: 

“There is no socialism without democracy, and no democracy without socialism.” 

Along with the democratic control referenced by Lexumburg, Debs, and Marx, this working definition also satisfies the leftist goal to deliver workers “the full fruits of their labor.” In normal-person speak, this is the belief that the value someone (or a group of people) creates, they get to keep. (This was a key point in the mission of the British Labour Party until it was removed by Tony Blair.) In our current Capitalist system, because workers do not own their companies, profits go to the owners. But with a Socialist frame, workers are the owners, so they reap the full rewards earned by the sweat on their brow. 

Why “Markets” ≠ “Capitalism” and “Central Planning” ≠ “Socialism”

Using these definitions as our guides, we can see how the poster at the top of this post, and the larger thought of “Socialism is government planning” and “Capitalism is free markets” behind it are misguided. 

With profits as the mission, Eversource is undoubtedly capitalist, yet it isn’t subject to market competition. The same could be said for many other for-profit companies that blur into the government sphere, such as medical companies, utility providers, and defense contractors. 

And while Socialism is usually discussed as the economic system of an entire country, it already exists in the more minute form of worker-owned co-operatives. Known as “co-ops,” these businesses are democratically run by the workers who reap the full profits of their work. While there are many large co-ops around the world employing thousands of worker-owners, the quaint City Market grocer in Burlington, VT best serves our example. When deciding where to buy groceries, Burlington residents have every option from City Market’s high-quality produce, to Price Chopper’s mid-tier deli, to half-opened Slim Jims on a gas-station shelf. 

City Market, a socialist organization that gives workers the full profit and control of their labor, competes in the market.

This isn’t to say that state-run industries aren’t socialist, just that nationalization isn’t the only way to achieve the goals of leftist movements. Just as capitalist companies can be either market-driven or planned, the method is of subsequent importance to who the economy benefits: the workers or the owners.

This piece is only a surface scratch of the complex socio-economic systems that are Capitalism and Socialism, but hopefully, it’s shattered the myth of “Markets = Capitalism = Good” and “Planning = Socialism = Bad.” As it’s taken +1,000 words to only explain these systems, I’ll save my argument for why  Democratic Socialism is better than Capitalism for another time. Make sure to subscribe if you’d like to hear it.

What are your thoughts on my definitions of Socialism and Capitalism? Do you have a different perspective? Please share in the comments.

Suggested Reading:

  1. If you’re curious about Socialism and Capitalism, I suggest you read The Origin of Capitalism by Ellen Meiksins Wood or Why You Should Be a Socialist by Nathan Robinson.

  2. Reach out to me on Twitter if you want to talk about how good Foundation is!