EXPLAINER: A Five Minute Guide To Understanding Socialism Vs Capitalism


‘Isms’ by their very nature can be confusing. Michael Brull breaks down two of the really important ones.

A spectre is haunting the West once again. In the United States of America, the most popular politician by a mile is Bernie Sanders. In the United Kingdom, the socialist leader of the Labour Party Jeremy Corbyn came close to overthrowing the Tory government in one election campaign.

In Greece, the major parties were tossed out one by one and replaced by Syriza. Spain saw Podemos become one of its largest parties. In France, Jean-Luc Melenchon ran an insurgent campaign from the left, threatening to possibly become a presidential candidate one day.

Since the end of the Cold War, many in the West felt that capitalism had finally triumphed. It seems that socialism is reviving in the West. I thought it might be helpful to some readers to explain: what is socialism?

Perhaps we should first ask: what is capitalism?

As we take it for granted, some readers may not be able to think of an answer. Whatever we have now is capitalism, right?

Well, not really. Like basically every country in the world, we have a mixed economy. To understand that we don’t really have socialism or capitalism, let us first try to broadly understand what comprises an economy.


The workplace: privately owned or socially owned

Firstly, there is the workplace. A workplace can be privately owned, it can be socially owned, or it can have a combination of the two. So for example, if you work in a shop, that shop may be owned by a rich person, or by a company which is owned by its shareholders. In that case, it is privately owned. That is one of the primary features of capitalism.

Another model may be one where the shop is owned by the government. In that case, the workers work for the government. A final model is one where the shop is owned by the workers.

In the three models, the conditions under which the workers operate may vary. In the third model, the workers may have the most freedom and autonomy to determine their own working conditions. In this sense, it may be considered a relatively democratic workplace.

US presidential candidate Bernie Sanders. (IMAGE: Phil Roeder, Flickr)
US presidential candidate Bernie Sanders. (IMAGE: Phil Roeder, Flickr)

If one worker mistreats another in the shop, they can sort out their disagreements equitably. This model, of worker’s control, is considered socialist.

Compare this to the privately owned shop. The boss has a lot of power over her employees, and may abuse that power. That power may be regulated by the government, which can impose limitations on how employers can treat their staff. These regulations can improve the conditions of workers. These are also considered contrary to the capitalist model.

In the case of the government owning the workplace, this can be consistent with socialist, capitalist, or even fascist economies. If the state has control over its workers, that does not necessarily entail anything about their working conditions. The state can exploit workers just the same as rich people can.

Regulating workplaces to increase the control of workers and limit the power of employers to oppress and ill-treat their workers can be regarded as a socialist reform. But it is only one part of the economy.

The point to make here is that we do not have a purely capitalist or socialist economy. We have a mixed economy, which combines private ownership, public ownership, and government regulations of workplaces.


The distribution of goods: planning versus the market

The other major component of an economy is the distribution of goods.

The capitalist model is that how goods are to be distributed is to be determined by free markets. That is, if Bill wants to buy bread, and Sam wants to sell bread, they sort it out among themselves.

Millions – or billions – of these tiny transactions each day theoretically take place in the market. People buy and sell things, and that communicates what they want, and creates the right balance between production and consumption.

An alternative model for distributing goods is through some form of planning the economy. For example, suppose Bill doesn’t have enough money to buy bread. In a free market, sucks to be Bill. He starves to death.

People with enough money buy bread. If the price of bread is too high for everyone, no one can buy it, so the bread-sellers lower their prices to a more reasonable price. If Bill is the only person down on his luck, too bad.

Thus, one element of economic planning is redistributing goods, so that the worse off get some money from the richest. This takes the form of things like welfare and progressive taxation.

Markets have other issues. For example, if Bill wants to buy bread, and Sam wants to sell bread, they are in a competitive and anti-social dynamic. Bill wants to get the bread as cheaply as he can, and Sam wants to sell it for as much as he can, even if Bill isn’t that hungry. Thus, Sam might launch an advertising extravaganza, to convince people that his bread is extremely cool, and anyone who wants to be trendy will eat his bread.

Leader of the Opposition, Labour's Jeremy Corbyn. (IMAGE: Garry Knight, Flickr)
Leader of the Opposition, Labour’s Jeremy Corbyn. (IMAGE: Garry Knight, Flickr)

This kind of distortion is one way misleading signals can be created about how goods should be distributed. Theoretically this isn’t supposed to happen in a free market, but it is what happens in practice.

Another issue is called “externalities”. Suppose Sam can make bread in an expensive way, which will be good for the environment, or a cheap way, which will poison a nearby lake and ruin a nearby park.

Under the market, Sam would be dumb to choose the expensive way. The cheaper way may be bad for the environment, but that is not his problem.

In making bread, he has to compete with other bread-makers. If he is foolish enough to be scrupulous, his competitors will get an advantage, and may use their extra revenue on creating more product, misleading advertising and so on.

The market encourages Sam – and all other bread-makers – to ignore the “external” costs, and simply focus on trying to gain personal economic advantages where possible.

This also raises the issue of market discipline. If everyone is trying to make a profit, and competing with each other to do so, this affects the nature of work and the end product.

Suppose you own Sam’s bakery. To make a living, you need the bakery to be as profitable as possible. How do you wring out a profit?

One way is through what is called efficiency. If you can streamline the work process, so that workers do the simplest, most monotonous job, with the least personal initiative, there will be less training and supervision required, which will cut down on costs.

If you make your employer’s work for less money, have shorter lunch breaks, monitor how long they go to the bathroom, limit workplace conversations and so on, you can further increase the efficiency of the workplace. The work itself will become terrible, but this may help squeeze out profit.

Then there are the merits of producing the cheapest, most generic crowd-pleasing food. McDonalds makes food which is unhealthy, but it tastes the same everywhere. The market encourages McDonalds type food, in the same way it encourages trashy generic spectacles in the cinemas.

If things are produced for profit, that is not the same as if things are produced to be valuable, or beautiful. A bakery that produces food for a loyal clientele does not produce the same type of food as a franchise bakery. This is not to say that everything produced under market pressures is bad. It is to suggest that it creates a pressure that often lends itself to a familiar type of result: Starbucks, Baker’s Delight and so on.

When an economy is planned, the work dynamics are different. Government employees can be inefficient – their budget is fixed, so they don’t need to constantly search for new ways to cut corners and save costs.

Planning can take many forms. The government can decide it wants to see renewable energy take off, and pour funds into renewable energy research and businesses, to the point that it challenges competitors. The government could impose regulations on businesses, so that they don’t open on Sundays, or so that people cannot work more than a 5-hour day.

The benefits of planning an economy are obvious. Under a free market, whatever happens, happens. If someone becomes rich and someone starves, that is what the market orders. If a few people corner a market, gain a monopoly and start jacking up their prices, that too is simply something that can happen under a free market.

The idea of economic planning is changing parts of the economy in pursuit of other goods, such as environmental sustainability, or equality.

It is the view of capitalists that such planning introduces distortions that lead to disaster for everyone.

A file image of Wall Street, New York. (IMAGE: Dave Center, Flickr).
A file image of Wall Street, New York. (IMAGE: Dave Center, Flickr).

Socialists tend to agree on the value of worker’s control, but have mixed views on markets. Some wish to abolish markets completely. Others regard markets as unavoidable, but simply hope to regulate them. That is, they wish to balance markets with aspects of a planned economy, so that the goods sought under market interventions can be balanced with people buying and selling goods, under certain regulations.

In theory, right-wingers are pro-capitalism, and favour free markets. Yet a free market can produce bad outcomes, even for those with many advantages. Thus, once a person has gained enough wealth under the free market, they may then use their wealth to try to pressure the government to give their wealth proper security.

In theory, everyone’s vote is equal in a democracy. In practice, a country with a handful of billionaires will find that some people have more influence than others.

It should also be noted: businesses don’t exist in a free market. They are legal constructs, which have evolved over time. For example, corporations offer limited liability and tax concessions. These regulations wouldn’t exist in a free market. However, as they are regarded as useful by the rich, they are regarded as a natural part of capitalism, rather than a business construct with strengths and weaknesses.


A mixed economy

Australia has a mixed economy. Medicare, welfare, progressive taxation and so on are all forms of market intervention. Unions are far weaker today than they were 40 years ago. Workers rarely control their working situation. However, in some industries, workers have more power than they do in others, as they operate under the protection of relatively strong unions. We also have legislation that protects some rights of workers.

It should be noted that whilst market interventions are typically favoured by socialists, they are also supported by the right and big business. For example, Guy Pearse, Bob Burton and David McKnight estimated fossil fuel subsidies in Australia at somewhere between $9 and $12 billion.

To help the Adani megamine in Queensland get on its feet, the Queensland government is giving it a tax concession worth some $320 million. The Federal and NSW Governments have spent some $16 billion on Westconnex, a toll road whose profits will go to a private company when it is finished. In a free market, the company would have to raise its own money to build a road. Instead, the public paid for it, and when it is completed, a private business will reap the profits.


Socialism in practice

The pros and cons of who owns a workplace, or planning an economy, are relatively abstract. A case can be made about the downsides of markets, or the benefits of letting workers have control over their own lives at work. Yet in practice, the revival of socialism isn’t about abstract arguments. It is about leftist politicians connecting their ideological preferences to policies that would offer material improvements to the lives of millions of constituents.

In the US, that means Bernie Sanders talking about reducing the power and influence of Wall Street on American politics. It means talking about giving healthcare to the millions of Americans who cannot afford medical costs.

In the UK, that means Jeremy Corbyn talking about things like government investment in public housing, and free university education. It means increasing taxes on the top five per cent of income earners, and reinvesting that money on large-scale infrastructure investments. It means renationalising public utilities.

In Australia, socialism is not presently on the political agenda. On the left wing of the ALP, MP Anthony Albanese spent the last federal campaign red-baiting his Greens opponent for opposing capitalism.

Labor's Anthony Albanese.
Labor’s Anthony Albanese.

Of course, neoliberal centre-left parties were also ascendant in many other Western countries. Until they weren’t. If socialism is to revive in Australia, it will be when the right type of policies are connected to the right constituencies. People who can’t afford public housing, who live in areas with lousy infrastructure and public transport, people who can’t find reliable jobs with security and so on.

Rather than letting the market sort it all out, leftists can develop the kind of polices that can make meaningful differences in people’s lives.

Socialism isn’t on the public agenda yet. But there’s no reason we can’t put it there.


Michael Brull

Michael Brull writes twice a week for New Matilda. He has written for a range of other publications, including Overland, Crikey, ABC's Drum, the Guardian and elsewhere. His writings can be followed at his public Facebook page (click on the icon below right).