Is it true that capitalism is better than socialism?

To answer the question posed by the title of this article, we really have to get a clear understanding of what socialism and capitalism are. If we don’t then it’s very easy for us to fall into the trap of just believing critiques of these systems.

The worst thing that you can do is to believe the definition of an issue given by somebody who is on the opposing side. What is socialism? Socialism, at the end of the day, is all about thinking that the people collectively, in the form of the state, own everything.

Accordingly, all the riches and wealth produced by a society ultimately can be traced to this social compact. And anything from the permit system, the licensing system as well as the free operations of the markets needed to facilitate such wealth.

This is not a one way situation according to socialists. If a social system enabled you to become a billionaire, this means that you have a matching responsibility to the system that enabled you to be a billionaire in the first place.

To repay the system, you have to pay higher taxes. You have to accept regulation and you have to basically engage in a wide range of practices that would redistribute, or at least equalize or make the whole system more equitable.

Now, there is an extreme version of socialism, which says that since everything goes back to the social compact, then it necessarily follows that the state, in place of the people, own the means of production.

This is communism. And when you ask Karl Marx and Friedrich Engels what their system was, they would say that it is really just socialism taken to a whole other level. But generally speaking in the United States, socialism, as embodied in current and past proposals, really goes back to the whole social compact.

How much taxes can we raise on the rich? How much regulation can we impose on private industry? How much government control should there be in the private sector? Capitalism, on the other hand, believes that people control their lives.

People are responsible for themselves. If they’re self disciplined, if they apply themselves, they can start with nothing and build something. And since they believe that ultimately, their ability to generate wealth comes from themselves alone or from a higher power, then the state’s role should be minimal.

Capitalists believe that when otherwise greedy or self interested people compete in the open market, consumers, interestingly enough, are the ones to benefit. The idea here is that there is some sort of invisible hand guiding competition. Any by and large, when you look at a western and European as well as American economic history, there’s a lot of support for this idea.

A lot of Americas and Scandinavia’s wealth for that matter was generated during a time when there was minimal government regulation of the economy and individuals did not have to hassle with the income tax.

This was when the industrial revolution drastically changed Great Britain from a backwards third world agriculture based economy to one of the world’s richest economies. And this played out in many other countries.

And interestingly enough, countries that adopted socialism like India and China, prior to Deng Xiaoping, were very poor. This is due to the fact that there is a communication lag. And this is what a lot of capitalism boosters champion.

This is why they’re saying that capitalism is better than socialism. The famous economist Hayek said that the reason why capitalism is much better than socialism is because of market signals.

When you have a free market and you have open competition, the price of an item in the market signals to producers whether to make more or make less. It also signals to consumers whether they can afford to buy more or less.

It may seem basic. But it actually animates complex economies because when the price is unfettered, unregulated and uninfluenced by government meddling, it means that money that could’ve been wasted on unproductive ventures could be shifted to money where there’s a lot more opportunity.

This is why prices fall in open markets. For example, when computers first came out, you’d be lucky to get a very slow computer for $5,000. Now, for $5,000, you can buy 10 or more computers.

That’s how fast the market evolves and it really all boils down to the price signal. Never underestimate the power of the human need to advance ones self. You can call this greed. You can dismiss this as self interest. But everything about you from your iPhone to your laptop to the everyday amenities that you take for granted are due to market competition.

That’s why capitalism, to many of its boosters, is better than socialism.

If you’re still not convinced, please note that before capitalism, there were only three ways to get rich: you either stole it from others or your extorted or begged for it. In other words, for the vast majority of the time the human species has been on this rock called Planet Earth, there was no capitalism.

For the longest time, the only way people got ahead was to engage in some sort of transfer. You basically had to take someone else’s property. The poorer they get, the richer you get. It’s a straight zero sum game. It’s as if there is a fixed pizza pie for all of humanity’s assets and wealth. For your slice to get bigger, you have to make someone else’s pie smaller.

This is not much better than robbery. You basically relief people of their property with a weapon. Interestingly enough, the same applies to begging. You’re not offering anything of value. Instead, you are using guilt to extract what you want from people who have what you want.

Capitalism is a game changer because now you can get rich for actually helping your fellow human being. The more you help them and the better off they get, the more money they shell over to you. It’s all about value for value.