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Capitalism vs Socialism

I recently heard a pod cast extolling the promise of libertarianism and anarcho-capitalism. Supposedly the free market economy will thrive as the excessive government regulations and union power are curbed. While I agree with the many problems with government, I definitely take issue on the benefits to society of free market capitalism.

In a capitalist system, the owners control the means of production. When a person is newly hired into a company, he or she will be told about the goods and services produced by the company and how everyone works together to satisfy the customers.

If the company has more than a handful of employees, then this introduction for the new employee is very misleading. As the company grows in size, there will be layers of management to deal with the various problems of running a business. The owner of the company has the business goal of maximizing profits. Therefore the new hire will get the lowest possible wage and the minimum benefits that can still entice the commitment to work for the company.

The purpose of the bottom layer of management is to keep the actual workers motivated to achieve corporate goals even as the workers get little or no extra compensation for any achievements. Their reward is simply they get to keep their job if the company succeeds. The middle layers of management provide the direction to the bottom supervisors on the priorities for the daily work.

The benefits to society from this capitalist system arise only when there is a shortage of labor. For example in the 1940's and 1950's, the American economy boomed. After the war, there was a huge demand for new houses, for the new appliances for comfort in those homes, and for the schools to educate the many children during this prosperous time. Wages rose because companies needed more workers to produce those goods and services; these were years of relatively low unemployment where people could readily find work suited to their skills. Unions were more common so the largest companies were sharing more of their profits with their workers; companies that did not pay suitable wages would find it more difficult to keep their workers.

I recently visited a relative in Houston, Texas, and found a booming economy. Many old houses are being demolished and replaced by new houses, with the turnaround limited by the shortage of workers in construction. Many companies, especially in energy sector, are paying premium wages because there are not enough workers to sustain the growth in business.

The unwanted (by economic leaders) possibility of a labor shortage is at least partially responsible for the recent economic policies involving 'free trade' arrangements and immigration mismanagement. Even after unemployment rose after so many jobs were pushed outsourced to third world countries, these policies force remaining American workers to compete against workers in poor third world countries or against poor immigrants who live under the threat of deportation (so are willing to submit to poor living and working conditions). There is no real effort by the government (raise taxes on companies who offshore jobs to create an incentive) or by companies (bring back facilities and their jobs) to raise employment in this country.

The downside to this system is apparent when the overall economy is not booming. The wasteful military spending on the Vietnam War followed by the OPEC oil crisis caused a downturn in the economy. To sustain the flow of profits, management in the big companies began to turn on their workers. At first companies could contract out some of their work, to local companies that paid their workers less. Later, manufacturing was moved to the South, where there were few unions, to find workers willing to work for less, and eventually facilities were moved to Mexico, and some companies even moved facilities to the Far East. The unions in the big 3 automakers had made those companies very powerful, with huge numbers of automobiles and trucks being sold, but they were just a resource to be replaced by someone far away willing to work for much less.

Each year from about 1880 to about 1970, roughly 40% of the American economic output was generated by the manufacturing segment. Since 1970, this has been steadily declining to only about 25% now. Of course over that time, the wages of workers are also being squeezed barely keeping up with inflation as companies attempt to maintain their profits.

In a socialist system, the workers control the means of production. When a person is newly hired into a company, he or she will be told about the goods and services produced by the company and how everyone works together to satisfy the customers. However, unlike the capitalist system where the worker gets just the wage, here the worker becomes a part owner in the enterprise. As the company does better with its products and services, the workers get a share of those profits.

Every human being has unique skills, tendencies, and deficiencies. The wage scale of each employee must be based on their individual contributions, as most people can see the inherent unfairness of not being compensated according to one's work. The slogan in the 1800's labor movement was 'a fair day's wage for a fair day's work' and for many people that seems a 'fair' expectation (though what wage is too high or too low is of course subject to debate). Most people understand the concept of specialization of labor because that is so easily observed in most sports teams, where the respective individual's skills suit their roles on their team and every player is not paid the same. The efficient combination of diverse talents will bring success to the team. (Most people can see the inherent unfairness in a communist system where everyone gets paid the same regardless of contribution.)

Unlike the capitalist system where workers are striving to meet corporate goals as directed by management, here the workers are striving to meet corporate goals to their own benefit, as they get a payback on success.

In the capitalist company hierarchy, top managers delegate tasks to lower managers, who eventually find the workers to do the required tasks. In the socialist system, the workers are still doing the same job as before. The difference is the worker teams need to hire managers to deal with running the business, like facilitating between teams and dealing with banks. However in this system the managers must actually do the jobs tasked to them, rather than just collecting huge wages to delegate tasks to subordinates. Companies in the capitalist model can accept incompetence or inefficiency as long as corporate goals are being met. The Peter Principle in management was noted long ago.

Companies in the socialist model have the focus on the business from the workers and so incompetence cannot be tolerated; the workers should discover when someone is not doing their job effectively and they will be managed appropriately.

Companies in the socialist model will deal with economic downturns differently. They must actually solve the business problems encountered, rather than the easy solutions found so often in capitalist companies: either lay off workers (mostly at the bottom, rarely from the management ranks) to cut expenses (with the expectation they can be hired back in a year or two when business is up again) or move the work to some other place where the workers are paid less.

The above simple comparison between capitalism and socialism actually applies only to private ownership. The situation for the workers is in reality much worse for the large publicly traded companies and banks. In this case, the shareholders own the enterprise, not the management within the company. With private ownership there might actually be some empathy between the owner and his/her employees, especially when the owner was the person who actually hired those employees. That connection is most certainly lost when the shareholder owners lack that personal history within the company.

When a company is publicly traded, the share holders get to elect a board of directors; this body actually runs the company. The typical result of this hierarchy is the company is run to maximize the benefit to the shareholders: either increase the stock value or maintain/increase the dividend amount, or both. Often this management approach leads to very short term planning, such as to execute to quarterly goals, which can be detrimental to the long term health of the enterprise - and so also detrimental to the employees, and even the business customers is some cases.

The recent presidential campaign of Mitt Romney brought his equity firm Bain Capital into the news, a company that was 'known for its relentless obsession with maximizing shareholder value.'

It is not unheard of in recent years for a profitable company to be shut down, putting all its employees out of work, if the level of profits is not high enough to meet the board's expectations. The members in one board of directors will often be on the board of other companies. These interlocking boards is just one more facet of our current rich, ruling class.

This web site has a number of essays about the lack of accountability in large corporate structures, common today with the continuing concentration of power through mergers and buyouts.

Capitalism is by its nature predatory, as it seeks to use/abuse workers at the lowest possible wages, to maximum income to the rich owners. This economic model is in conformance with our current predatory foreign policy model which seeks to get third world countries to submit to our demands for multinational corporation intrusion or else sanctions or bombs will follow. The Western cultures have historically been rather predatory, from the Greek Empire of Alexander the Great, to the Holy Roman Empire, to the Islamic Empire, to the British Empire, to the reign of Napoleon, to the Ottoman Empire, to the Third Reich, to the current American global empire. In the past few hundred years, the major European powers had their distant colonies to plunder in the Americas (England, France, Portugal, Spain), in Africa (Belgium, England, France, Germany, Italy, Portugal, Spain), and in Asia (England, France, Netherlands), while the American colonies and later the United States conquered the land from Atlantic to Pacific, with a genocide of the natives along the way.

I can expect someone living in the 1950's and praising the merits of capitalism during a booming economy. I cannot see someone living in our time of large wealth inequality, huge numbers of unemployed and underemployed (with many taking minimum wage or part time jobs as the last resort), many homeless or in poverty (US has second highest child poverty rate in the developed world), and still making those claims. Perhaps there is hope the economy will eventually prosper again like in the 1950's but with the structural changes since then (so many jobs now off shore, tax rates for the wealthy reduced leading to their moving huge amounts of money to offshore accounts) that optimism has no justification. Capitalism does not deliver on the promise of improving society; the number being enriched is relatively small - the rich already having the capital plus the few having a fortunate position to catch a little windfall.

Before writing this essay I googled 'capitalism vs socialism' and I found most articles use communism in place of socialism. Socialism as an economic model does not require an oppressive government (libertarian socialism) though many writers appear to believe that, just as a capitalist economic model does not require the crony capitalism so prevalent today, though that is almost to be expected (absolute power corrupts absolutely). The simple descriptions of capitalism and socialism above are my interpretations of those economic systems, that certainly do not match those presented by someone promoting capitalism.

In fact, recognizing the collusion among market players, along with government subsidies and lax regulation (no OSHA inspections for 28 years before the West Fertilizer Company explosion), makes it even more difficult now to justify 'free market capitalism' because that theoretical context cannot truly exist in our American democracy, given our representatives are now beholden to their contributors, not to the electorate, as further entrenched by recent Supreme Court decisions: Citizens United and McCutcheon. Nor does it seem possible in the less developed third world countries, where the dominance of the American global financial empire, with its WTO and IMF arms, ensure multinational corporations can interfere in local matters.

The predatory nature of capitalism will eventually lead to its demise because it naturally moves wealth toward those already wealthy, so if unchecked (which would take political reform unpopular with those in power) will lead to little wealth among those outside the top. Greece is a good example of where this is headed, as severe austerity measures are implemented on the population to maintain income to the large international banks. The American economy is now burdened by trillions of dollars in derivatives, with more trillions of dollars already removed by the rich to their offshore accounts. As the rich seek to maintain their income, acting as parasites since now they actually contribute very little to the economy, and as the economy continues to contract due to the falling purchasing power of consumers, the lower economic classes will see their quality of live continue to deteriorate, as they must take or remain in low paying jobs just to survive (wage slaves).

Human society needs accountability within its economic and political structures. That accountability has now been lost and unless the large economic and political structures are changed to introduce that missing accountability, they will continue on the path to self destruction. Socialism is an alternate economic model, where the workers have much more control over their destiny than is possible within the capitalist model.

created - July 2014
last change - 07/04/2014
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