Capitalism & Socialism

Economic Models and Games

• Though economics might be considered a game, economic
systems when actually implemented are not games.
• Frequently, economics is studied as if it had nothing to do
with people, it was simply the study of abstract concepts,
such as supply and demand, money, price, and profits.
• However, economic systems are ways in which people are
related. Their relations are mediated by money and
commodities, prices and wages, and supply and demand.
• Economic systems are not, ultimately, morally neutral;
they should be closely examined from a moral point of
view.
 Capitalist Model
• There are three defining features of the model
of classical capitalism:
– an available accumulation of industrial capital,
– private ownership of the means of production, and
– a free-market system.

• The model of classical capitalism includes

industrialization and capital.
 Capitalist Model
(Accumulation of Industrial Capital)
• Capitalism derives its name from the fact that
it is a system based on accumulated industrial
capital.
• In a barter economy there is no accumulation
of capital. Goods are exchanged for goods of
equal value; there is no residue.
 Capitalist Model
(Private Ownership)
• The distinguishing characteristic of capitalism is
sometimes said to be private ownership of the means
of production (Land, Labor, Capital).
• But this does not mean that everyone owns the
means of production.
• The majority of people in model of capitalism do not
individually own the means of production that they
use; they are employed by others and work for wages.
• Wages are the dominant source of income for the vast
majority in our capitalist model.
 Capitalist Model
(Free-Market System)
• A free market is one that is not controlled either by
government or by any small group of individuals.
• In a free market, government does not:
– set the price of goods
– set wages or
– control production.
• Competition is also vital to a free-market system.
• In order to try to achieve greater returns on investment,
perhaps by taking more risk, resources must be free to
move within the system to whichever portion of it
someone believes will bring the greatest return.
 The “Invisible Hand”
• The invisible hand is a metaphor used by the
Scottish moral philosopher Adam Smith
• Describes the incentive a merchant has to
keep his capital at home, thereby increasing
the domestic capital stock and enhancing
military power,
• Both are in the public interest and neither of
which the merchant intended.
 The “Invisible Hand”
• The idea of trade & market exchange automatically
channeling self-interest toward socially desirable ends is
a central justification for the laissez-faire economic
philosophy
• Part of neoclassical economics
• The central disagreement between economic ideologies
can be viewed as a disagreement about how powerful
the "invisible hand" is.
• In alternative models, forces that were nascent during
Smith's lifetime, such as large-scale industry, finance,
and advertising, reduce its effectiveness
 The “Invisible Hand”
• Contention whether Smith considered the Invisible
Hand to be a positive feature of market economics,
• Texts contained strong critique and colorful
language about unchecked self-interest
• Interpretations of the term have been generalized
beyond the usage by Smith and some academic
sources claim that the modern understanding of
the concept was invented much more recently
by Paul Samuelson to back up spontaneous order.
 The “Invisible Hand”
• Spontaneous order, also named self-organization in the hard
sciences,
• It is the spontaneous emergence of order out of seeming chaos.
• The term "self-organization" is more often used for physical
changes and biological processes,
• "spontaneous order" is typically used to describe the emergence
of various kinds of social orders in human social networks from
the behavior of a combination of self-interested individuals who
are not intentionally trying to create order through planning.
• Proposed examples of systems which evolved through
spontaneous order or self-organization include the evolution of
life on Earth, language, crystal structure, the Internet, Wikipedia,
and a free market economy.
 Socialist Model
• There is no classical model of socialism as a purely economic
system. Historically, a number of very diverse societies have
been, or are called, socialistic.
• To the extent that socialism involves government ownership,
it is very difficult, if not impossible, to separate socialism as
an economic system from socialism as a political system.
• At the same time, socialism should not be identified with or
confused with communism. Communism, as an economic
system, has never been achieved, though some countries,
such as the former Soviet Union, claimed to have been
developing such an economy.
 Socialist Model
• A partial model of socialism which is restricted
to socialism as an economic system could be
characterized by three features:
– an industrial base,
– social ownership of the means of production, and
– centralized planning.
 Socialist Model
• In some socialist economic models, worker
cooperatives own and operate the primary
means of production.
• A worker cooperative is a firm that is owned
and self-managed by its workers.
• Other socialist economic models allow
individual ownership of enterprise and
property, albeit with higher taxes and a higher
degree of government controls.
 Socialist Model
• Primary concern of the socialist model of
economics is an equitable distribution of
wealth
• An equitable distribution of wealth is meant to
ensure that all members of a society have an
equal opportunity to attain certain economic
outcomes.
• To achieve this, the state intervenes in the
labor market
 Capitalism VS. Socialism
• Capitalism & Socialism describe economic and
political systems.
• On a theoretical level, both of these terms
also describe specific schools of economic
thought.
• One of the most fundamental differences
between the systems of capitalism and
socialism lies in the scope of government
intervention within an economy.
 Comparison
Philosophy
• Capital (or the "means of • From each according to his
production") is owned, ability, to each according to
operated, and traded for his contribution. Emphasis
the purpose of generating on profit being distributed
profits for private owners or among the society or
shareholders. Emphasis on workforce to complement
individual profit rather than individual wages/salaries.
on workers or society as a
whole.
 Determination of Price
• In a Capitalist Economy, • In a Socialist Economy,
the demand and supply the price of goods and
forces influence the services is under the
price of goods and government’s
services. supervision and control.
 Definitions
Definition
• A Capitalist Economy is a • A Socialist Economy is an
system where private economic system where the
entities control the factors factors of production like
of production like labour, labour, natural resources or
natural resources or capital capital goods are under the
goods. control of the government.
 Comparison
Economic system
• Market-based economy • The means of production are
combined with private or owned by public enterprises
corporate ownership of the or cooperatives, and
means of production. Goods individuals are compensated
and services are produced based on the principle of
to make a profit, and this individual contribution.
profit is reinvested into the Production may variously be
economy to fuel economic coordinated through either
growth. economic planning or
markets.
 Motive of Production
• The main motive of the • The main motive of
production of goods producing goods and
and services in a services in a Socialist
Capitalist Economy is to Economy is the welfare
earn profit. of the general public.
 Role of Government
• There is minimal or no • In a Socialist Economy,
role of the government the government has
in a Capitalist Economy complete control over
when it comes to the the production and
production and distribution of goods
distribution of goods and services.
and services.
 Role of Private Sector
• The private sector • The private sector has
completely dominates no role in the
the production of goods production of goods
and services and the and services and the
distribution within a distribution within a
Capitalist Economy. Socialist Economy.
 Competition
• Competition between • In a Socialist Economy,
multiple businesses is there is no competitor
an integral part of a to the government.
Capitalist Economy.
 Distribution of Income
• The distribution of • The distribution of
income is unequal in a income is more or less
Capitalist Economy. equal in a Socialist
Economy.
 Comparision
Ideas
• Laissez-faire means to "let it • All individuals should have
be"; opposed to access to basic articles of
government intervention in consumption and public
economics because goods to allow for self-
capitalists believe it actualization. Large-scale
introduces inefficiencies. industries are collective
Free market produces the efforts and thus the returns
best economic outcome for from these industries must
society. Govt. should not benefit society as a whole.
pick winners and losers.
 Comparison
Economic coordination
• Relies principally on markets • Planned-Socialism relies
to determine investment, principally on planning to
production and distribution determine investment and
decisions. Markets may be production decisions.
free-markets, regulated- Planning may be centralized
markets, or may be or decentralized. Market-
combined with a degree of socialism relies on markets
state-directed economic for allocating capital to
planning or planning within different socially-owned
private companies. enterprises.
 Comparison
Key elements
• The accumulation of capital • Economic activity and
drives economic activity - production especially are
the need to continuously adjusted to meet human
produce profits and reinvest needs and economic
this profit into the economy. demands. "Production for
"Production for profit": use": useful goods and
useful goods and services services are produced
are a by product of pursuing specifically for their
profit. usefulness.
 Comparison
Change
• Fast change within the • Workers in a Socialist-state
system. In theory, the are the agent of change
relationship between buyer rather than any market or
and seller (the market) is desire on the part of
what fuels what is consumers. Change by the
produced. Government can workers can be swift or
change rules of slow, depending on change
conduct/business practices in ideology or even whim.
through regulation or ease
of regulations.
 Comparison
Ownership
• The means of production • The means of production
are privately-owned and are socially-owned with the
operated for a private surplus value produced
profit. This drives incentives accruing to either all of
for producers to engage in society (in Public-ownership
economic activity. models) or to all the
employee-members of the
enterprise (in Cooperative-
ownership models).
 Comparison
Social structure
• Classes exist based on their • Class distinctions are
relationship to the means of diminished.
production: the ruling class,
or "capitalists", own shares
of the means of production
and derive their income in
that way. In contrast, the
working class is dependent
on wages or salaries.
 Comparison
Property
• Private property in capital • Two kinds of property,
goods is the dominant form personal property, such as
of property. Public property houses, clothing, etc.
and state property play a owned by the individual.
secondary role, and there Public property includes
might also be a limited factories, and means of
number of collective production owned by the
property in the economy. state but with worker
control.
 Critique

Capitalism Socialism
• unfair and inefficient • socialist economic and
distribution of wealth and political models are
power; inefficient or incompatible
• irrational in that production and
with civil liberties.
direction of the economy is
unplanned, creating many • transmit information about
inconsistencies and internal prices and productive
contradictions. quotas due to the lack of a
• requires continual economic price mechanism, and as a
growth, and will inevitably result it could not make
deplete the finite natural rational economic decisions.
resources of the earth
EVALUATING ECONOMIC SYSTEMS
 Relationship Between Government and
Economic System
• The economic system can operate only in a broader social
system of reasonable security and stability. Government has
traditionally provided security and stability for the people.
• Over time, at least five other needs arose, which the
government sought to meet:
– Development of a Welfare Safety Net
– Provision of Common Goods
– Control of Economic Cycles
– Correction of Unfair Tendencies and of Market Failures Within the
Free-Enterprise System
– Taxation
 Economic Systems and Justice
• We cannot be moral and choose or espouse an inherently
immoral economic system.
• But there is no moral imperative mandating that we choose one
rather than another.
• Distributive justice—that is, justice in the social allocation of
benefits and burdens—is frequently thought to be the most
important moral component of any economic system.
• In the capitalist system, justice demands equality of
opportunity; it does not demand equality of results.
• Justice in a socialist system consists not only in equality of
opportunity, although it also allows proportionality of
differential rewards. It guarantees that all receive some reward,
but it tends to limit the amount of the reward anyone may get.
 Critique
• Socialism is most often criticized for its
provision of social services programs requiring
high taxes that may decelerate economic
growth.
• Capitalism is most often criticized for its
tendency to allow income inequality and
stratification of socio-economic classes.
 The Marxist Critique
(Exploitation of the Workforce)
• Capitalism is based on exploitation of the worker
—that is, not paying him what he truly deserves.
• The basis for the claim of necessary exploitation is
Marx’s labor theory of value.
– argues that the economic value of a good or service is
determined by the total amount of "socially necessary
labor" required to produce it.
– quantification of past labor,
– labor needed to create the tools (capital) that might
be used in producing a commodity
 The Marxist Critique
(Alienation of the People)
• Capitalism is inherently immoral because it
alienates human beings.
• It does not treat them as ends in themselves;
it separates them into antagonistic camps and
sets one against another; it stultifies the
workers; it involves domination of some by
others; and it produces other negative effects
on all those who live within the system.
 The Marxist Critique
(Vested Interests)
• Capitalism defends the vested interests of the
few and prevents the vast productive forces of
society from truly serving the masses.
• The natural tendency of the productive
process is toward social ownership instead of
private ownership of the means of production.
 Non-Marxist Moral Critiques
• There are 4 non-Marxist criticisms :

(1) Capitalism creates waste and false needs;

(2) capitalism feeds the military/industrial complex at the

expense of the general population;

(3) capitalism creates gross and unjust inequalities.

(4) Creation of political – government – business nexus

 Theory of justice & defense of Capitalism
• 1. "Each person is to have an equal right to the most
extensive total system of equal basic liberties compatible
with a similar system of liberty for all"

• 2. "Social and economic inequalities are to be arranged so

that they are both:

• (a) to the greatest benefit of the least advantaged,

consistent with the just savings principle, and
• (b) attached to offices and positions open to all under
conditions of fair equality of opportunity
 Moral Defense of Capitalist System
Freedom and Efficiency

• The free-enterprise system allows the greatest freedom of action

and choice to each person, compatible with a like freedom for all.
• Political freedom, the defenders of free enterprise insist, is possible
only when economic freedom is its concomitant.
• In terms of Rawls’s theory of justice, the American free-enterprise
system thus satisfies—at least in principle—the first principle of
justice.
• Because recognition of human freedom is an essential ingredient in
treating people morally, the free-enterprise system is morally based.
It values and enhances all aspects of human freedom, and it makes
this the centerpiece of its moral justification.
 Moral Defense of Capitalist System
The Production of Wealth

• With the introduction of the machine and the rise of the

industrial age, there has been a manifold increase in
human productivity.
• The U.S. economic system has unquestionably enhanced
human life and welfare, not only for Americans but also for
many people in other lands. All this must certainly be to
its moral credit.
• Hence, the American free-enterprise system satisfies
Rawls’s second principle of justice.
 Moral Defense of Capitalist System
Preferability to Actual Socialist Systems

• The moral defense of American capitalism

begins with the admission that it is not
perfect.
• Every system can be improved, and the moral
task of American free enterprise requires that
its immoral aspects be constantly fought and
that human welfare be further enhanced.
 Non-Socialist Alternatives to Capitalism

The Libertarian Alternative

• Only a minimalist government is compatible with liberty. Libertarians therefore

complain that government has entered the marketplace with its laws, regulations,
and taxes to the detriment of the freedom of the American citizen and
businessman.

• The libertarian view is based on the notion of the sanctity of private property.
Private property belongs to an individual. If he has worked for it, he deserves to
keep what he has earned. If he has taken risks, if he has been lucky, if he has
worked especially hard, and if he has been innovative, the market will reward him.

• The libertarian view has, therefore, a moral thrust. It champions liberty as a moral
virtue worthy of human beings. It faults government as acting immorally through
taxation, welfare, and many of its other programs.
 Non-Socialist Alternatives to Capitalism

Workers’ Democracy

• Workers’ democracy sees government as inextricably intertwined

with big business.
• Defenders of workers’ democracy point out that many of the
decisions made by the major corporations in America affect all of
our lives more than the decisions made in Congress.
• The allocation of resources, the building and closing of plants, and
the creation and termination of jobs are all decisions that directly
affect large numbers of people who have no voice in these decisions.
• Government regulation is not the answer, because government is
intertwined with big business.
 Non-Socialist Alternatives to American
Capitalism
Piecemeal Change

• The consensus in the United States is that no new system is needed.

No other system is clearly morally preferable, or waiting to be
adopted.
• Americans can and should make the morally necessary changes in
American capitalism, improve it, and work toward a yet unattained
maximal mix of freedom and justice.
• The real alternative to the present American system does not consist
in holistic change. What is most likely to succeed is piecemeal
change: correcting ills where possible, outlawing immoral practices,
and implementing structural changes that promote moral conduct.

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All Rights Reserved.
 Philanthropy
• Philanthropy on a large scale is criticized because
the system should not allow individuals to
accumulate such enormous wealth that they can
indulge in such great philanthropy.
• A more equitable society would not have any
superrich with the ability to contribute so much.
Nor would a more equitable society have the need
for individual philanthropy and charity, if the needs
of people were properly addressed by society as a
whole.
Copyright © 2011 Pearson Education.
All Rights Reserved.
 Levels of Government control
• The first is the model of laissez-faire capitalism. The
model, however, fails to take into adequate
account the good of society as a whole, opposed
simply to the good of those who enter into
economic transactions.
• The second model depicts government as the
protector of capitalists at the expense of the other
members of society.
• The third version of the model is one of
governmental protectionism.
 Capitalism and Government
• The fourth version of the model assigns to
government a variety of different tasks vis-à-
vis business, all of which are responsive to the
general interests of the citizens.
• In the fifth version of the model, government
and business cooperate for the sake of both
business and the society as a whole.
• The sixth version of the model comes closest
to socialism.