Ch 5. Socialism vs. Capitalism: Key Concepts and Differences

Socialism

An economic system where the state socializes (spreads) costs and/or benefits among society, rather than letting individuals bear private costs or receive private benefits.

Goal

Promote the good of society over individual well-being.

Marx's Principle

From each, according to his ability; to each, according to his need.

Socializing costs

Making society pay for an individual's cost (e.g., education funded by taxes).

Socializing income

Redistributing individuals' earnings through taxation or forced labor.

Market system

Reflects individuals' private values through voluntary exchange.

Authoritarian choice

Economic decisions made by the state (dictator, elected body, or majority vote).

Calculation problem

Central planners lack the information to efficiently allocate resources.

Incentive problem

When income is separated from production, motivation to produce decreases.

Exploitation Rationale

Firms have more power than workers and exploit them.

Fairness Rationale

Society should eliminate unfair class systems.

Redistributive socialism

Taxing one person's income to benefit another.

Marxist Socialism

Government takes title to the means of production (factories, land, etc.).

Predicted sequence of Marxist Socialism

Machines replace workers → unemployment → revolution.

Externalities Rationale

Some costs/benefits 'spill over' naturally (e.g., pollution, national defense).

Negative externalities

Pollution—costs imposed on others.

Positive externalities

National defense—benefits everyone, so costs are socialized (tax-funded).

Maintaining the Socialist Order

To maintain socialism, the state must either allow freedom (which weakens socialism), or use force to compel compliance.

Forms of Socialism

Communism, Economic Fascism, Redistributive Socialism.

Communism

State takes all property rights.

Economic Fascism

Individuals keep title, but state dictates use 'for society's good.'

U.S. Socialism Examples

Economic Fascism, Eminent Domain, Civil Forfeiture, Industrial Policy.

Eminent Domain

Property taken for public use with compensation (roads, parks).

Civil Forfeiture

Property seized without conviction if 'suspected' of involvement in crime.

Industrial Policy (Economic Planning)

State funds production through subsidies (e.g., CHIPS Act for microchips).

U.S. government spending

≈ 36% of GDP + 11% compliance costs = 47% socialist economy.

Frédéric Bastiat

Key thinker who stated, 'Money creates an illusion: asking for taxes is the same as forcing labor for the state.'

Capitalism

An economic system based on private property, voluntary exchange, and free markets.

Goal of Capitalism

Promote individual freedom and wealth creation through private enterprise.

Private Property

Individuals own and control resources.

Voluntary Exchange

Trade benefits both parties.

Incentive System

Individuals act in self-interest, benefiting society ('invisible hand').

Limited Government

Role of state: protect life, liberty, and property.

Declaration of Independence

Governments exist 'to secure these rights' — Life, Liberty, and the pursuit of Happiness (including property and contracts).

Advantages of Capitalism

Encourages innovation and productivity.

Incentives Alignment

People produce what others value.

Poverty Reduction

'Commerce takes more people out of poverty than aid.' — Bono

Standard Oil

Controlled 88% of market, but lowered prices by 55%.

Vanderbilt

Cut shipping costs drastically, expanded trade.

Microsoft

Accused of monopoly; ruled not guilty for including free apps.

Market Monopolies

Often benefit consumers and lose power over time due to competition.

True Monopolies

Occur when government grants monopoly rights (e.g., electricity utilities).

Modern Examples of Dominance

Amazon, Apple, Google, Meta: Dominant firms under scrutiny for political bias or size.

Capitalist View

Markets evolve — innovation displaces dominance.

Dunbar's Number

Humans can only maintain ~150 relationships → we can't love or be fair to everyone.

Fairness Fable

Poet (Jones): $20,000/year, high leisure. Doctor (Smith): $400,000/year, little leisure. Lesson: Fairness can't be measured only by money.

Socialism vs. Capitalism

Ownership: State/social ownership vs. Private ownership.

Decision-making

Central planners vs. Individuals/markets.

Incentives in Socialism

Weakened (disconnected from effort) vs. Strong (tied to effort/profit).

Efficiency Comparison

Low (calculation problem) in socialism vs. High (price signals) in capitalism.

Fairness Goals

Equality of outcomes in socialism vs. Equality of opportunity in capitalism.

Examples of Economic Systems

Soviet Union, Cuba, Welfare States for socialism vs. U.S., Singapore, early U.K. for capitalism.