Capitalism, Socialism and Communism

Capitalism, Socialism & Communism:
What They Are, Why They Don’t Work, What Works Better

A Progressive Living Essay

Since the abandonment of communism by the former Soviet Union, the notion that capitalism is the only successful economic system has often been aggressively marketed. The view is lent apparent credibility by the fact that communism largely failed in its aims, and was corrupt, grossly inefficient, and totalitarian.

We believe, however, this thesis concerning the triumph of capitalism is for the most part confused, and to the exent that it isn’t confused is actually quite false. The case is confused because the essential nature of each of these economic systems is almost universally misunderstood, and perhaps the most confused understanding of all concerns the nature of capitalism. It is also confused because the criteria of genuine economic success are never clearly or persuasively stated, rendering contentions of this nature meaningless. And the thesis is false because it is a matter of historical fact that laissez-faire capitalism has always been both grossly unjust and an economic failure. Nevertheless, other forms of capitalism could be better.

In support of these views, we will pursue the following aims in this essay: (1) setting forth clear definitions of capitalism, socialism, and communism; (2) setting forth clear criteria of true economic success; (3) briefly evaluating each of the principal economic systems in light of these criteria; (4) stating some of the primary reasons why these systems have failed in their most familiar forms; and, (5) pointing the way to a better economic system, centered on a better primary economic institution.

What is capitalism?

In order to understand the nature of capitalism, one must first understand the nature of capital, and especially how profit derived from capital is different from profit derived from labor. Perhaps the best way of clarifying these concepts is with an example.

Consider the novel “Robinson Crusoe”, the familiar story of a man who is shipwrecked on an uninhabited island, and who is forced to make a life for himself equipped initially with nothing but a few basic tools.

On the island on which Crusoe finds himself nothing readily accommodates the basic requirements of human life. Because of this, Crusoe, is faced with the necessity of feeding, clothing, and sheltering himself. He is able to salvage a few tools from the wreckage of his ship, and sets out to provide these basics for himself. When economists speak of “production”, they are most fundamentally referring to this sort of Crusoe-like effort to provide for oneself (and perhaps for one’s family) because human needs cannot normally be met without toil.

These simplified circumstances make it easy to observe the principal elements of economics. The first of these elements is appropriate natural resources. Without such resources, no amount of effort on the part of Crusoe to provide for himself could ever be fruitful. Food crops, for example, cannot be grown on bare granite. The second basic element of production is that of Crusoe’s own labor. (This is, indeed, the most fundamental economic resource of every human being.) The third element, capital, is harder to discern here, but is nevertheless present. One of the most obvious examples can be found in the tools that he manufactures for himself (by the use of other tools). For example, he hews a shovel out of wood using his axe. Why are these tools considered to be capital? Because capital is comprised of any resources, other than land or labor, that may be employed in the production of goods and services. For example, Crusoe employed his shovel in the production of shelter, which is one sort of good.

Now, Crusoe was initially the only inhabitant of his island. For so long as that was the case, he could not have become a capitalist in the conventional sense, because a capitalist of this sort is someone who profits from the economic employment of his capital, even though he does no work with that capital himself. However, if Crusoe had rented the use of the shovel to a later inhabitant of the island, the man known as “Friday”, he would then have become a capitalist as we usually understand that term. That is, economic benefit would have accrued to him from the employment of his capital (the shovel) without further labor on his own part.

At this juncture we should note that implicit in two of the three basic factors of production we have noted here (natural resources, labor, and capital) are the two fundamental sorts of economy: the labor-centric economy, and the capital-centric economy. (In a rare, third form, which we might call the “paradise” economy, nature is sufficiently provident and benign for human beings to survive without much effort at cultivation.) In the labor-centric economy, most forms of production involve a great deal of manual labor. By contrast, in a capital-centric economy, most forms of production involve the deployment of a great deal of capital, most often the use of machinery or other manufactured goods. (Money is often spoken of as capital, but is actually a symbolic medium of exchange that stands in for the real goods that comprise the actual capital.)

Quite surprisingly for most, any economy that is capital-centric may be properly referred to as capitalistic. Thus, in nearly all cases, both socialistic and communistic economies have actually been forms of capitalism. The distinction among these three economic systems does not arise from the distinction between labor-centric and capital-centric economic orientations. It arises, rather, from differences in the ownership and control of the means of production, and in the way that these differences are rationalized. (Whether in principle any given economy should be labor-centric or capital-centric depends initially upon its resource base. Obviously, Crusoe had no choice but to begin from a labor-centric economy because of his very limited capital. Many so-called “third world” nations are in the same position.)

• Definition: Any economy that derives most of its production from the employment of capital may be said to be capitalistic. There is no true “opposite” of capitalism, but capitalism stands in most direct contrast with “laborism”, or economies that derive most of their production from human labor. In practice, there are no economies that are purely capitalistic or purely “laboristic”.

Now, before we pass on to a discussion of the implications of differing orientations to ownership and control, we should first pause to explore some of the moral consequences that would have arisen in Crusoe’s situation if he had indeed passed from a labor-centric to a conventionally capital-centric economy.

The first point to consider is that the resources of the island became Crusoe’s principally by virtue of his need of them, by virtue of the investment of his labor in their cultivation, and in the absence of competing needs and cultivation. Had someone else arrived on the island at the same time as Crusoe, and had that individual had similar needs and engaged in similar efforts at cultivation, Crusoe’s claims upon the resources of the island would have had no moral priority. That is, each of the island’s inhabitants would have had an equally legitimate claim upon these resources.

The second point to consider is that of the all-important nature of equity in this situation. Equity is ownership of a resource, less any other claim upon it. For example, a homeowner begins to gain equity in her home once she has paid off some portion of the principal owed (the money loaned to her to finance her purchase). In the case of Crusoe’s shovel, his equity is absolute, as there are no other rightful claims upon it. (Crusoe’s equity in this case is sometimes referred to informally, but rightly, as “sweat equity” because he manufactured the shovel himself with his own labor, instead of paying for a shovel manufactured by the labor of someone else.)

Now, in light of these two points, what sort of situation does Friday find himself in upon his arrival on the island? Through no fault of his, he has no tools of his own with which to make his own shovel. Let us suppose that, like Crusoe, he needs this tool to construct shelter, and that Crusoe suggests to Friday that he exchange his labor for the temporary use of the shovel. This is a nice situation for Crusoe, to be sure, because in order to gain the use of the shovel, laborer Friday will have to do some work for capitalist Crusoe; and on the face of it there is nothing immoral in Crusoe exchanging his loss of opportunity for the use of his own shovel for profit.

But if we consider this situation more closely, we will see that Friday has here been coerced by circumstances and in a sense by Crusoe as well, into making a choice contrary to his own best interests. Because his labor didn’t result in any equity in a shovel of his own, every time Friday needs to use a shovel in the future, he will have to exchange some of his labor for its use again. By contrast, because Crusoe does have equity in the shovel, whenever the shovel is used at times during which he has no need of it himself he suffers no loss, and rather enjoys pure and effortless gain. This is why, instead of renting Crusoe’s shovel, Friday should have done as Crusoe did and made a shovel of his own — if only he had been able to. Because he did not, if the pattern established here continues for long, Friday will find himself perpetually indebted, and Crusoe will find himself perpetually enjoying effortless gain. When it is sometimes said that “the rich get richer, and the poor get poorer” this is the fundamental economic reality that is being referred to.

From the standpoint of an impartial observer concerned equally with justice and the economic welfare of both Crusoe and Friday, what should be said to each? Pretty clearly, what should be said to Friday is something like this: “Instead of renting Crusoe’s shovel, you ought to have rented his axe instead and made your own shovel. It was mistaken of you to overlook the fundamental importance of acquiring equity in a shovel of your own.” And what should be said to Crusoe is something like this: “In fairness, instead of renting Friday your shovel, you ought to have recommended to him that he make his own shovel instead.

If capitalism is what is desired in the abstract, then two shovels can be twice as productive as one. If you had no need of the shovel yourself, the rents paid to you for use of the (otherwise idle) shovel were disproportional in value to the value of Friday’s labor. If you did have need of the shovel, then recommending the use of the axe to Friday instead would have been even more appropriate. All in all, instead of doing nothing while Friday labored, you should have continued to labor yourself instead of relying upon your capital to earn disproportional profit. There is, however, nothing wrong and indeed everything right with creating capital of future benefit to yourself, as you did when you invested your labor in the creation of the shovel for your own future use.”

Now, what about the resources of the island? Did these resources become Crusoe’s in their entirety the moment Crusoe set foot upon the island? Well, in the absence of competing claims, and if Crusoe has need of those resources, then there is no reason he should not take them for himself, because no moral harm is done in such a case. Also, ownership of the sort of good that requires cultivation, such as shelter, can also be rightfully claimed by Crusoe.

But what becomes of Crusoe’s claim when Friday arrives upon the island? To begin with, it is clear that Friday can make no rightful claim upon Crusoe’s goods. Unless he chooses to be generous, these are exclusively Crusoe’s by virtue of the labor he has invested in them. But what of the natural resources of the island? If Crusoe has no need of all of them, then what is he to found a morally justified claim to them upon? Moreover, Friday can also properly assert a right to the resources of the island, to the extent that he has need of them himself, and to whatever extent Crusoe has not invested labor in their cultivation.

A neutral observer might, then, initially be inclined to declare on behalf of Friday a potential claim of up to half of the resources of the island. (Permacultural considerations often prohibit this sort of claim, because the needs of subsequent generations must also be considered in any ethical equation.)

We are now in a position to infer a number of fundamental economic principles. Here is the first, and perhaps also the most important: a just society will always seek to encourage a capitalism oriented to the economic self-sufficiency of its citizens. It can do this by facilitating labor oriented toward the creation of equity, and by legislating other economic practices and institutions that do the same. Equally, a just society will always seek to discourage all forms of capitalism oriented toward the perpetual indebtedness of its citizens through the excessive appropriation of the value of their labor. Societies can do this by discouraging labor disassociated from the acquisition of equity, and by discouraging other economic practices and institutions that do the same.

Under conditions of “laissez-faire” (the absence of institutions of economic justice), selfishness on the part of capitalists will always trend toward debt-oriented labor and economic practices, rather than equity-oriented labor and practices. This means that “laissez-faire” economics would be better termed “no fair” economics (and to the extent that they advocate an economics of this nature, both Libertarian and Conservative economic theories are flawed — and indeed immoral — in their very foundations).

Let us then distinguish, then, two forms of capitalism that are fundamentally different in their moral implications, and therefore fundamentally different in their nature. To emphasize this fundamental moral distinction, we will strip away the false moral neutrality of the term “laissez-faire” and replace it with a term that makes plain its morally pernicious nature: we will call it, instead, injustice-premised capitalism . And to emphasize that a different and better form of capitalism is possible, provided that it encourages economic self-sufficiency and wealth-building, we will designate this form of capitalism justice-premised capitalism .

There is some danger of confusion in using these terms, however, because under some circumstances labor-centric economics can also be either injustice-premised or justice-premised. To avoid such confusion, it must always be made clear, whether by context or by explicit statement, which sort of centrism we have in mind.

Now, if it is self-evident that injustice-premised capitalism is morally wrong, and justice-premised capitalism is morally right, we must next see how differing regimes of ownership and control either facilitate or inhibit a morally-justifiable economics. In general, we will want to keep in mind that any regime of ownership and control that facilitates injustice-premised capitalism is morally illegitimate, and must therefore be dismantled as quickly as is practicable. Only regimes of ownership and control that facilitate justice-premised capitalism are morally legitimate, and therefore only such regimes deserve social sanction.

It is in context of assorted regimes of ownership and control that we will encounter all of the reasons for the controversy surrounding “capitalism”, socialism, and communism. (I hope that the reason for the quote marks here is now evident: namely, that in a moral perspective there are actually two different forms of capitalism, not just one, and they must never be confused with one another.)

Ownership & Control: The Locus of Controversy

As we have said, any economy in which the principal means of production are highly reliant on capital is properly called capitalistic. Thus, communism, mixed economies, socialism, and the form of capitalism that we find in the US are all capitalistic. Where these three systems so widely diverge is in differing conceptions of ownership and control. Communism is state capitalism, in which only the state owns the means of production, and no means of production are in private hands.

Individualistic capitalism is the reverse: all means of production are in private hands — and typically, most means of production are in the hands of a wealthy few — and no means of production are owned by government. In mixed economies, ownership of the means of production is in one way or another, and to a greater or lesser extent, owned in part by the government and in part by private individuals.

• Definition: Communism is state capitalism, in which all or most means of production are owned and controlled by “the state”, and few or no means of production are owned and controlled by individuals.

Subdivisions among these three principal regimes of ownership arise from two sources. The first source of subdivision arises from concerns about economic justice, or, to put it another way, economic ends. The degenerate economic elitist abandons the concept of economic justice altogether and grasps for as much ownership as possible for himself by any means available (though he will virtually never acknowledge such ambitions), while the slightly more principled elitist typically seeks some rationale to justify sharp extremes of wealth and poverty.

The degenerate populist has no interest in justice, but wants the good life without effort, while the principled populist believes strongly in the value of work, but seeks to eradicate extremes of wealth and poverty because they almost invariably derive from injustice-premised economic principles or practices and strip away from the individual most of the fruit of his own labor. (In the US the average value of an hour of labor is around $150, while the average pay for that same hour of labor is around $15.)

The second source of subdivision arises from different conceptions concerning economic means or, to put it another way, the exercise of political power (or control) over the economy and/or workplace.

The authoritarian opposes democracy, and wishes to concentrate political power in the hands of a few. (The previous Bush administration and his Supreme Court appointees perfectly exemplify this objective.) The egalitarian democrat opposes authoritarianism and wishes to give everyone as nearly equal a share of political power as possible (this is the principle behind the slogan “one person, one vote”).

Strictly speaking, issues of this nature are more properly political than economic (and lead to the widespread, but confused notion that capitalism and communism are, of themselves, political systems); but because in practice systems of economics are always instruments of political regimes, and always also have political consequences, a sharp division cannot be drawn.

I should perhaps digress for a moment here. The differences between “the left” and “the right” are typically portrayed in the US plutocratic media as lying along an ideological spectrum ranging from tradition-based cultural conservatism to reason-based cultural liberalism. However, it is important to grasp that this cultural spectrum is neither political nor economic in nature; moreover, accommodation between the cultural left and cultural right can be reached much more readily than most Americans suppose, because for the most part both share similar political and economic views.

Specifically, the vast majority of Americans whether liberal or conservative believe in both political democracy and in some form of mixed economy, both of which degenerate authoritarian economic elitists such as George Bush abhor (despite much disingenuous rhetoric to the contrary). The differences between the cultural left and the cultural right are constantly and deliberately emphasized in the elitist mass media as an expression of the “divide and conquer” strategy worked out largely by racist Strom Thurmond and his aide Harry Dent, together with political hatchet man Harvey Leroy “Lee” Atwater, and his devotee Karl Rove.

To return to our characterization of economic systems, the diagram below should more clearly present the principal economic systems and their subdivisions.

The Means of Production:
Is production of economic goods accomplished primarily via labor or via capital?

Is ownership of the means of production relegated to the state or to the individual?

Is ownership of the means of production narrow (in the hands of a few), or broad (in the hands of many)?

If economic production is accomplished primarily via capital, we have a capitalistic economy (which, surprisingly to many, may be capitalistic in the corporate sense, socialistic, or communistic). If via labor, the economy is “laboristic” (and may also be corporate capitalistic, socialistic, or communistic) .

If ownership of the means of production is relegated to the state we have Communism. If relegated to individuals, we have economic individualism.

If distribution of ownership is narrow (the means of production are owned and controlled by only a wealthy few individuals), we have economic elitism. If distribution of ownership is broad (the means of production are owned and controlled by many individuals), we have economic democracy (or, more commonly, socialism, which has sometimes also been called “distributism”).

Traditional economic liberalism is represented by mixed ownership of the means of production and, much more weakly, distribution of ownership of the means of production among many. However, genuine economic liberalism would reverse this emphasis, so that broad ownership of the means of production would be a primary objective.

Traditional economic conservatism is represented by individual ownership/distribution among many; but contemporary conservatism (pseudoconservatism) actually signifies individual ownership with distribution limited to a (hyperwealthy) few.

Contemporary pseudoconservatism in the US exhibits strong trends toward both theocracy and facism, in a form of authoritarian rule in which state authority and economic control are merged under one leader with consolidated control of both. (Leaders of this kind may claim to rule in the name of God, yet constantly emphasize militaristic and “patriotic” themes so as to obtain a maximum of personal power).

A less democratic orientation, and one more completely destructive of individual freedoms, can hardly be imagined.

Why Communism and “No Fair” Capitalism Both Inhibit a Morally Justifiable Economics

Communism, or state capitalism, failed for many reasons. While in principle “the state” owned the means of production what this meant in practice was that individuals highly placed in the Communist party controlled the means of production, and these individuals tended strongly toward corruption.

Disassociated from his own self-interest, and dominated by the corrupt and bureaucratic apparatus of the Communist party, the average individual found himself politically powerless and poorly motivated economically, unable to enjoy most of the fruits of his own labor.

In addition to being corrupt, the size and inertia of the state bureaucracy made for inefficiency of administration. And exacerbating all of this, a number of pathological personalities, such as Stalin and Khruschev, rose to the top of the power structure and acted against the common good.

Laissez-faire capitalism failed flagrantly to produce economic stability and economic justice in the 19th century following the Civil War, and its harsh excesses were felt again when, under Calvin Coolidge, it led to the Great Depression and when, under Herbert Hoover, it failed utterly to provide desperately needed economic sustenance to working Americans.

Decades of reform followed, which ameliorated its defects sufficiently for many Americans to forget just how bad it really was. (Previously, under the Bush administration, the US is lapsing quickly back into the worst of the excesses.)

Ironically, “no fair” capitalism has revealed tendencies to many of the same problems as communism, though the failures are superficially different. The large corporation, which is perhaps the ultimate expression of “no fair” capitalism, is the locus of many of the problems.

Corresponding to the privileged elite of the Communist party is the privileged corporate elite. Just as the privileged elite of the Communist party rendered the political system useless for the average individual by promoting political corruption, the privileged elite of corporate capitalism has also rendered the political system useless for the average individual by promoting political corruption.

But in a way worse than this, corporate capitalism, like communism, leaves the individual almost powerless politically. Moreover, under corporate capitalism, the individual is wrongly motivated (through fear of loss of employment rather than the desire to build equity), and is unable to enjoy the fruits of his own labor, since most of the value of that labor is appropriated by the corporation. (If he or she invests in the market system as it currently exists, he merely provides additional resources to “no-fair” capitalists.)

That the political and economic outcomes have been so similar under both communism and corporate capitalism should hardly be surprising, given that the underlying problem is the same in both cases: too great a concentration of ownership and control in too few hands. In the perspective of morality the problems of the two systems are also the same: neither system allows the average individual to enjoy most of the fruits of his own labor.

What About Socialism?

We must begin here by being clearer about what socialism actually is, since in the US it is typically, and quite falsely, confused with Soviet-style Communism.

To begin with, socialism does not represent a fundamentally different basis for production as capitalism and “laborism” do. It follows that all socialisms must be either forms of capitalism or forms of “laborism”. Do socialisms then differ in their attitude toward the ownership and control of the means of production? Yes, they do, but in a way that isn’t generally understood, even by most socialists.

It is true that the economic systems referred to as socialistic are typically mixed economies in which the state owns and controls some means of production and the private sector others. But the real difference between socialism and both capitalism and communism should lie in opposition to injustice- premised economics.

In light of our analysis above what this should mean, in turn, is that socialism should focus on dispersing the ownership and control of the means of production as widely as possible, so as to promote the enjoyment by the individual of the fruits of his own labor. To put this another way, socialism should promote equity-building capitalism or equity building “laborism”.

• Definition: The term “socialism” properly refers to any economic system, whether capitalistic or “laboristic”, that adopts as its objective the greatest economic good of the greatest number.

Experience makes it clear that this requires dispersing the ownership and control of the means of production as widely as possible. The opposite of socialism is economic elitism (or degenerate economic conservatism), which is any economic system that seeks maximum good for a tiny elite at the expense of the majority. (This is the system which is in place in the US today.)

Thus far the various socialisms have not primarily sought to promote equity-building capitalism or equity-building “laborism”. For the most part, they have instead “tinkered around the edges”, employing such means as progressive taxation and the imposition of various regulatory regimes in an attempt to produce more equitable outcomes after individuals have already had most of the value of their labor stripped away, and without addressing the problem of skewed equity. In short, this approach has not addressed the root cause of the problems at hand, with the result that all of the old pathologies are now back with a vengeance in the US, and can be found at work even in the mixed economies of Europe.

What is “economic success”?

We noted at the outset of this essay that, absent a clear understanding of the meaning of “economic success”, no meaningful comparison of the various economic systems is possible. We are now in a better sense to understand the meaning of this elusive concept.

There are, broadly speaking, two separate yet related poles to genuine economic success. An economic system that was just, yet resulted in universal poverty, would be a dubious achievement indeed. It could always be argued with some force that economic justice has been thwarted when the end result is the misery induced by poverty. On the other hand, an economic system that is unjust, but that produces great wealth for a few is also a dubious achievement (which, again, is the very system Americans currently have). And no system is likely to be either just or to produce much wealth if it is inefficient and poorly-motivating of the individual.

What we mean, then, by “economic success” is minimally something like this: an economic system that is sufficiently and properly motivating to be sufficiently efficient to produce at least some modicum of wealth, but which is at the same time just. In practical terms, it cannot be just if it results in grossly disparate incomes because great concentrations of wealth in the hands of a few invariably lead to political corruption. Furthermore, no credible, moral rationale for enormous differences in compensation has ever been advanced.

Almost by definition, only some form of genuine socialism can satisfy all of these criteria, and the socialism in question must also be one which has at its economic core institutions that maximize to the greatest extent possible the capture of equity in exchange for labor. Among capitalistic institutions, the Mondragon cooperative is the best known of those that can fulfill these objectives; however, in the United States, the rather watered-down form that has most often actually been adoped is the corporation organized as an ESOP (“Employee Stock Ownership Plan”).

An ESOP is set up as a trust that receives and holds stock on behalf of employees who own (and often control) the corporation so organized. In the US there are presently some 11,000 ESOPs, with assets valued at some $400 billion. Employee pay in ESOPs as currently organized averages some 12% greater than traditionally organized corporations; but, more tellingly, one study found that ESOP equity accounts averaged almost $40,000. Moreoever, ESOPs organized in such a way that employees are actually participants in decision making have shown impressive productivity gains, in some cases more than 50%. The disadvantage of the ESOP as opposed to the Mondragon cooperative is that participants in the Mondragon cooperative are owners and also control the cooperative, while ESOPs may or may not be organized in this fashion.


We have now seen that nearly all definitions of capitalism, socialism, and communism are grossly misleading and confusing. We have also seen that clear criteria of true economic success preclude genuine success from being claimed for any corporate capitalist system and for any communist economy. We also saw that all of the economic systems so far described as “socialistic” are (1) falsely characterized when conceived as forms of Soviet-style Communism, and (2) have so far largely failed to properly organize around an appropriate, equity-building economic institution, so that it is far from obvious they should even be called socialistic.

We have briefly surveyed the primary reasons why communism and corporate capitalism have failed, and identified a common root: extreme concentrations of ownership and control. We saw that both corporate capitalism and communism are anti-democratic and prone to corruption, and that both systems appropriate most of the value of the labor of the individual and place it in the hands of the already wealthy and powerful (which allows them to become more wealthy and powerful still). Finally, we have pointed the way to a better economic system (genuine socialism) strengthened by a better core institution, the Mondragon cooperative or worker-controlled ESOP.



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