Tag: philosophy

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/

National Science Foundation

On Friday, April 24, President Trump fired all 24 members of the National Science Foundation Board without saying why their staggered six year terms were not honored. Unlike executive branch departments, such as Treasury, Defense (now called Dept of War), Education, etc., which rightly should reflect the policy preferences of the President, the NSF, like the Board of Governors of the Federal Reserve, was carefully designed to be nonpartisan for good reason. A Forbes article by John Drake nicely explains the purpose of such design.

“Most people outside the research enterprise have never heard of the NSB, so it’s worth saying what it is. The National Science Foundation Act of 1950 created NSF with two heads: a director and a board. Jointly they set the strategic direction of an agency that now distributes roughly $9 billion annually in federal research funding, approve its budget submissions, and authorize new major programs. The board’s members are nominated for their distinguished records in science, engineering, education, and public affairs, drawn from industry and universities, and confirmed to staggered six-year terms so that scientific research priorities are set by the long arc of scientific progress rather than the election cycle. The statute requires that members be chosen “solely on the basis of established records of distinguished service.”

“That last phrase is the one I keep returning to.

“American scientist, inventor and administrator Vannevar Bush (1890 – 1974), whose ‘differential analyser’ was a forerunner of the computer, served as director of the Office of Scientific Research and Development throughout World War II and authored an influential report that led to the founding of the National Science Foundation. More American scientific preeminence is often discussed as if it were a product of talent or funding. It is really a product of institutions, the unglamorous architecture of boards, charters, terms of service, peer review and statutory independence that the postwar generation built deliberately. The structure traces to Vannevar Bush’s 1945 report Science, the Endless Frontier, which argued that federal science required governance insulated from political pressure and stability of support beyond any single budget cycle. The five-year fight to translate Bush’s vision into law turned largely on questions of independence and accountability, and the staggered six-year terms were part of the resulting compromise. Six-year terms exist for a reason. Staggered appointments exist for a reason. “Solely on the basis of distinguished service” is in the founding statute for a reason.

“The board’s function has been contested before, but always on the existing terms. As recently as 2022, scholars were debating how to modernize the board’s role, proposing to reduce its management duties and make NSF look more like other federal agencies. But other federal agencies are precisely the ones most exposed to political control. Their leaders serve at the pleasure of the president. Their priorities shift with each administration. The whole reason NSF’s structure is unusual is that the postwar designers did not want science funding to work that way. Even the would-be reformers recognized this: they proposed keeping the board’s staggered terms and statutory independence intact.

“These structures depend on a shared understanding, across administrations and across parties, that some institutions are worth preserving even when they constrain you. When that understanding lapses, the structures themselves do not survive long.

“On May 5, the National Science Board is scheduled to meet. There is no agenda, and at the moment, no board. That absence is the thing worth attending to, beyond the news of any particular firing. The question is not who sits on the board. The question is whether the kind of board the 1950 Act envisioned still exists in practice, and what American science looks like if it does not.” 2026/04/25/ “Trump fired the entire national science board-here’s why that matters”

At a minimum, when the President takes such action, the public should be given an explanation for why he thought it was justified. Ideally such a dramatic step should be preceded by a public discussion of the pros and cons of doing so.  This is not Trump’s style.

It my opinion Elon Musk’s DOGE downsizing of government (9% reduction in Federal employees before some had to be rehired and reducing the federal budget by claimed savings between roughly 160–215 billion dollars, counting job cuts, contract and lease cancellations, asset sales, and grant reductions) did more harm than good. Musk initially talked about cutting “at least 2 trillion dollars” from the federal budget, later revising goals down to around 1 trillion and then still lower, but actual savings fell far short of any of those targets.

A CBS‑covered analysis by a nonpartisan research group estimated that while DOGE claimed about 160 billion dollars in gross savings, its actions would also impose roughly 135 billion dollars in additional costs in the same fiscal year (for example through deferred‑resignation pay, disruption, and lost enforcement/revenue), implying a net savings nearer 25 billion dollars in that window.

But the real tragedy is that the opportunity to carefully evaluate and publicly debate whether government agencies were performing beneficial functions and doing so as efficiently as possible was totally missed. I offer the example of USAID, with whom I have worked both as a contractor and across the table as a collaborator. In my experience they have done an outstanding job serving America’s foreign policy interests:  https://wcoats.blog/2025/02/17/usaid/

The Trump administration has not operated in the traditional manor of our best (or even mediocre) Presidents. Even Kings are usually more careful in justifying and explaining their dictates.