The Difference between Capitalism and Socialism

The difference between capitalism and socialism is easy to explain, capitalism creates wealth and socialism distributes wealth. But of course, this would be a very short commentary if it was all that simple. A society without wealth would be impoverished and the lives of the denizens would be misery. So a society, any society needs some wealth in order to survive. Our ancient hunting and gathering ancestors had very little wealth and depended on the abundance of the land to supply their needs. But drought, winters, other natural disasters as well as the predation of other tribes of humans constantly threatened that abundance. Little of that natural abundance could be stored for future consumption so most was consumed immediately and shared relatively evenly amongst the tribe.

The development of agriculture provided greater abundance but the distribution of that abundance became a problem. Control of arable land and the ability to store agricultural products meant that the natural abundance could be accumulated for use in the future. But the power of certain individuals or families meant that some members of those primitive societies had abundant resources and others only meager resources. In primitive times that stored abundance was considered wealth. The landed aristocracy was wealthy and the peasants were poor.

And that was the way of the world for many thousands of years. In the eighteenth century 90% of all people were still agricultural workers. Land was wealth and monarchs dispensed property and land to loyal supporters. But the Industrial Revolution created new opportunities to accumulate wealth. The landed aristocracy disdained such mundane activities so many of the new industrialists were commoners. With many new entrepreneurs and many new avenues to create wealth, the Industrial Revolution transformed England, the United States and eventually the entire world.

So, yes, capitalism creates wealth. It also distributes wealth, but it distributes wealth unevenly. And as Adam Smith wrote in his book The Wealth of Nations, capitalism does not distribute wealth out of the goodness of the capitalists’ hearts. This new system of capitalism and free markets allowed individuals to use their hard work and ingenuity to better themselves. It was in their self-interest to do so. But these new industrial processes needed the inputs of a wide range of market participants such as suppliers of raw materials, teamsters to haul the products and workers to increase productivity. Not everybody can be a capitalist or entrepreneur but everybody has a self-interest and some people can best serve their self-interest by working for others. So some of the wealth being created by our capitalists will be distributed among workers, suppliers and others in the economy (the butcher and the baker according to Smith) who directly or indirectly supply the needs of the capitalist.

The unequal distribution of wealth in a capitalist society creates two problems. One is that the distribution could be so unequal that an unacceptably large proportion of the population lives in absolute poverty, as was the case in the initial stages of the Industrial Revolution. This gave rise to new schools of thought on how to redistribute the wealth of the capitalists such as Fabian Socialism and Marxist communism. But the demise of capitalism as foreseen by these early socialists never happened as workers, after many struggles, were able to appropriate a sufficient portion of the capitalists’ wealth to live a middle-class life. But the balance between capitalist wealth and socialist distribution is never easy and we seem to be in a period where many people believe that the balance is too much in the favor of the capitalists.

The second problem of the unequal distribution of wealth is envy. The lavish wedding of billionaire Jeff Bezos to his second wife in Venice is said to cost many millions of dollars and has generated large protests on the streets (and canals) of that ancient town. It does not matter that all that money goes to pay local workers and artisans which is a boon to the local economy. The envy of the protestors is not driven by their desire to improve the lives of the people in Venice but to bring down Mr. Bezos. Their desire is for an egalitarian society where no one person has greater wealth than any other.

This desire for an egalitarian or socialist society (driven by envy disguised as social justice) is what caused the recent upset victory of the admittedly socialist Zohran Mamdani in the Democratic primary to be the next mayor of New York City. But socialist societies also suffer from two problems. The first, and biggest problem, is that socialist societies do not create wealth, they only distribute wealth. Read John Rawls book, A Theory of Justice, and you will discover that he writes only about the just distribution of goods. There is no discussion of the just production of goods. Mr. Mamdani won the primary (which in heavily Democrat NYC is tantamount to the general election) by promising free bus rides, free child care and a $30 minimum wage along with government grocery stores, rent freezes and public housing. But free bus rides still cost money. Busses are expensive and drivers need to be paid. No problem. Tax the wealthy and large corporations. But then what are you going to do when the wealthy New Yorkers and the corporations lining Fifth Avenue join all the Californians in Florida and Texas? The owner of Gristede’s grocery store chain, John Catsimatidis, has said that he will relocate if Mamdani follows through on government owned groceries where prices are set by politics instead of competition. Those citizens remaining in New York will all be equal – equally poor.

The other problem with egalitarian societies is government power. The wealthy, along with the not-so wealthy, do not willingly give up their hard-earned wealth easily. Force is required and that force requires government power. However, the exercise of that government power will not be limited to just taxing the wealthy. Good progressives would never let all that government power to go to waste. Power to control rents. Power to make taxpayers pay for free-riders on busses. Power to force small businesses to pay distracted or inept workers $30 an hour but not allowing owners to pass the cost on to consumers. They will make your life better whether you want it or not.

There is one more advantage that capitalist societies have over socialist societies despite the unequal distribution of wealth. The inequality of wealth distribution in a capitalist society is, to an extent, voluntary. Poor people willing to work hard and study hard can begin to increase their wealth. And when their circumstances improve due to their own drive and initiative they can feel proud of what they accomplished. That’s why America, even though incomes are not equal, is known as the Land of Opportunity and not as the Land of Equality. That opportunity is the reason so many people want to immigrate to our country that they are willing to endure unbearable hardships to try to get here. People in socialist countries lack the opportunity to gain that sense of accomplishment. Remember, the Berlin Wall separating capitalist West Germany from communist East Germany (of which I have a piece in my study) wasn’t designed to keep opportunity seeking immigrants out, as is the case here in the US, it was built to keep depressed and discouraged East Germans in.

So that, folks, is the difference between capitalism and socialism.