Tag: marxism

Econ 101: Capitalism and Socialism

The popularity of socialism seems on the rise. Is it justified?

Starting from the top, the difference between capitalism and socialism is who decides how our resources (capital and labor) are allocated. Under capitalism the private owners of a country’s resources decide how to use what they own. They are driven by the desire to maximize profit. Under socialism public owners (government) of our resources decide how to deploy them. They are driven by…. Well let’s see.

Capitalists (company shareholders and the management they employ) seek out the goods and services the public want and the cheapest way to provide them. Entrepreneurs develop new products and services they hope the public will want and will pay for. The government’s role is to protect private property, enforce freely-agreed contracts, provide infrastructure that facilitates trade, and enforce law and order (including defense from potential foreign invaders). Freely negotiated prices reflecting supply and demand provide capitalist with essential information in their search for maximum profits.

While capitalists own the capital they deploy, they must attract and hire the labor who work with it. Consistent with their pursuit of maximum profit they seek the most productive (skillful) workers at the lowest cost (wages). While a worker’s wage is a very important part of their willingness to accept a particular job, every other aspect of the conditions of their employment is important as well. Thus, their employer has a profit incentive to establish with employees the least-costly way of satisfying those demands. These incentives (private ownership and profit maximization) have maximized the incomes of capitalist economies. https://wcoats.blog/2026/08/02/econ-101-profits/

The incomes of the average person hardly changed from poverty levels for thousands of year. But with the advent of capitalism and the industrial revolution average income in the United States over the last 250 years increased 50 to 60 times.

Some capitalists have become very rich. For seventeen years Bill Gates was the richest man in the world. Was that a bad thing–a price we had to pay for the benefits of capitalism? I have always and continue to think that I have benefited from Gates’ Microsoft products (Windows, Word, Excell, PowerPoint to name a few) far more than I have paid for them. But that is the nature of capitalist free market transactions: win-win.

In Socialist economies, the “government” owns much of the economy’s capital (e.g., government grocery stores, or airplane factories), and determines how to allocate much of its resources (what to build and produce—e.g., silicon chip factories). While the government might seek to determine what the public wants, it will also determine what it thinks it should have.

But who is the government and what are the incentives it faces when making its decisions? The government consists of elected politicians (in democracies) with the power to make laws, the public officials they appoint to various agencies to implement them, and the workers those officials employ. The primary incentive for politicians is to get elected and reelected. Presumably that depends on supporting (and actually implementing) the policies most voters in each congressional district want. Voters might support policies they think are in the country’s best interest or in their own personal best interest.

Many of the voters in the state of Washington work for Boeing aircraft and might favor government programs that direct tax money to that company. Boeing has a large complex a few blocks from where I live in Pentagon City Virginia (half a mile from the Pentagon). It builds nothing there but seems to keep its workers busy.

Unlike the profits from sales by private firms to their customers, which result from the voluntary purchases of satisfied customers, the goods and services provided to the public by governments are rarely paid for by the recipient. Nor are their costs paid for by the politicians or officials who provide them. Therefore, the incentives of governments (politicians, officials, employees) are very different than those of private firms.  This is true of any government but the scale of what is directed by socialist governments is significantly greater.

Consider the implications of these incentives for the workers hired by socialist governments. By the way, in 2024, the US federal government employed just over 3.0 million people (excluding 1.3 active-duty military personnel). State and local governments employed an additional 20 million, or a combined 7.1% of the total population.  As government officials are not spending their own money, their incentives for choosing workers can be quite different than are those for private capitalists. Hiring friends and relatives may be more rewarding to public sector bosses than those who are most qualified and hard working.

The incentives for corruption in large governments are significant. Thus, the American constitution provides checks and balances between the congress, executive, and courts. Moreover, congress has established additional oversight of executive branch agencies in an effort to keep them honest. Unfortunately, in January 2025, President Trump abruptly fired at least seventeen presidentially appointed inspectors general from major cabinet departments and federal agencies without providing the 30-day advance notice or substantive rationale required by the Inspector General Act. And by the way, Trump’s net worth and business revenues have surged during his second term, with financial analysts estimating he brought in roughly $2.2 billion to $2.4 billion during his first year back in office alone, pushing his overall net worth to an estimated $6.5 billion. This does not include our tax money he has used to put his name, picture, and gold all over the place. This is a failed businessman who declared bankruptcy six time. Just sayin.  

Even if a Socialist government is led by honest people truly committed to the general public’s interest, they lack the market prices that guide capitalists when deciding what would be “best.” Moreover, they are not likely to offer multiple options when choosing policies to impose on the public. It is unlikely that a socialist government will establish a range of different policies to satisfy different tastes. The top-down decision making of socialist governments is more likely to impose uniform approaches to the provision of goods and services and rules. In capitalist economies we are freer to choose among a wide variety of e.g., stores following different approaches to satisfying their customers.

When choosing capitalist or socialist economies, we want to know which has been more successful in allocating our resources to their most productive and desired uses. Given the differences in the incentives faced by each outlined above, have socialist governments been better at “choosing winners” than capitalists? The answer from the real world is overwhelmingly clear.

Given the different incentives faced by each, it should not be surprising that the economic well-being of capitalist and socialist economies has been dramatically different. The most dramatic comparison of the economies of two otherwise similar countries are the former East and West Germany and North and South Korea. In 1989, the year before East and West German merged into the Federal Republic of Germany, percapita income of West Germany was about double that of East German. The differences are much more dramatic between North and South Korea. In 2024 percapita income in North Korea was only 3.4% of South Korea’s.

Perhaps those promoting socialism do so thinking that it would better service the poor. This has not been true, but it does suggest that capitalist societies need to provide well-considered safety nets for those who stumble. The U.S. does not have a perfect set of safety net policies by any means. I advocate a Universal Basic Income and a government financed by a consumption (rather than income) tax. These maximize the freedom of choice and incentive to work. https://wcoats.blog/2023/01/15/fair-tax-act-of-2023/

Are Venture Capitalists racists?

Shifting sovereignty from Kings to the people, was the beginning of human flourishing. In the United States, in its constitution the people returned only those powers to their government necessary to protect their wellbeing. The right to and protection of ones honestly acquired property is an essential aspect of this arrangement. This includes, of course, the right to invest our property anyway we choose.

Venture capitalists are those wealthy people who choose to take great risks in the prospect of large gains by investing in “startups” that have not yet established their profitability.  Put differently venture capitalists are prepared to finance an unproven idea/product/service that might gain public approval, i.e. might become profitable, though most of them fail.  As consumers we have benefited enormously from goods and services my parents never would have even imagined that a few wealthy investors took a chance on.

So the idea that the government might need to enact laws to insure that a venture capitalist’s investments do not reflect racial bias is shocking at several levels. “In the clubby world of venture capitalists, who spent $130 billion in the United States last year and helped anoint the world’s four most valuable companies and countless other successful start-ups, there is effectively no legal backstop that ensures people of color have an equal opportunity to share in its wealth creation.”   “Black-entrepreneurs-venture-capital”

First of all is the right of these investors to their property. They can give it all to their daughters if they want to.  Marxists and other egalitarians reject such a right but that would throw away the whole basis of the wealth our capitalist system has created that Marxists would like to redistribute.  But I want to focus on why capitalism minimizes the role of bias in our economic decisions.  This was explored long ago by Nobel Lauriat Gary Becker in his famous 1976 book on the Economics of Discrimination.

Becker’s basic point is that if your economic decision is influenced by racial or sexual or any other non-economic bias it will cost you money, i.e. you will make less than you otherwise would have.  If you hire a man when a woman was better qualified, he will contribute less to your company’s income than would have the woman, thus you pay a financial price for your bias. The same is true if you hire a white person when a black one was better qualified, etc.

The purpose of venture capitalist investments is to make a bundle by funding the next great idea. Most will fail but one or two turn into Facebook, or Amazon.  It may well be that a venture capitalist systematically under rates the potential of black entrepreneurs, i.e. that he suffers racial bias.  But in that case he will be less successful in his investments.  Capitalism will punish him for his prejudices and diminish his importance as a venture capitalist because it will diminish his wealth. None the less, an Irish venture capitalist may well bias her investments toward fellow Irishmen and a black venture capitalist may risk an extra break for a fellow black. But the profit motive of capitalism will discourage departures from objective evaluations of investment prospects.

The idea that a law should forbid or discourage racial or sexual bias when venture capitalists decide in what to invest is without merit.  Moreover, it is hard to imagine what such a law would look like and/or on what basis a government bureaucrat would overrule and direct the placement of a private investor’s chose of investments.

To peak briefly at the other–entrepreneurial–side of the equation, the unbiased opportunity provided by capitalism has attracted many foreigner entrepreneurs to our shores.  Steve Jobs (Apple, NeXT, Pixar), who was adopted at birth, was the son of Joanne Schieble who was Swiss-American and Abdulfattah “John” Jandali who was Syrian.  Steve Wozniak, Apple cofounder, was the son of Polish and Swiss-German parents.  Sergey Brin cofounder of Google/Alphabet escaped from the Soviet Union.  The famous architect, I.M. Pei, immigrated from China.  “How-12-immigrant-entrepreneurs-have-made-america-great”