Distinguishing Socialism and Capitalism

Branko Milanovic is a celebrated author of the book Capitalism Alone (2019) and well known economists. His field of work has been in global inequality. He is one those economists who have been critiques of capitalism and favour a greater state intervention in alleviating global inequalities. He is one of those scholars who have been building on the lines of Thomas Piketty’s book on capitalism and inequality. In his book Mianovic has attempted a model to distinguish between capitalism and socialism. His model is available in his tweet here. To him, it is a basic framework which can be built upon using different adaptations. There is of course quite an interesting thread that follows this tweet. The model he has captured can be found below

Source: Branco Milanovic, Capitalism Alone, 2019

As one observes the distinction in Milanovic’s terms, it would tempting to undertake a quick analysis of the same. He quickly points out the broader sweep he has sought to analyse in his distinctions between the two systems. The debate over the two systems and their relative efficacy is not new. It has been centuries old. While capitalism in its modern owes its origins to Adam Smith (incidentally, Smith never used the word capitalism in his writings) while the socialism is often traced to Karl Marx though the ideas predated him. Karl Marx laid the foundation of what has been termed as scientific socialism. Incidentally, the variants of capitalism like mercantilism find roots much before Smith. Either way, in popular perception, capitalism has been associated with Adam Smith while socialism has been associated with Karl Marx. For the purpose of present analysis, one can take refuge in these popular notions.

Milanovic seeks to capture the distinctions between the two systems at a broader plane on four different dimensions. The dimensions he considers are ownership of means of production, nature of labour, coordination in production and resource allocation and finally investment. It would be interesting to decode his views through these four parameters. His first parameter is about the ownership of means of production. He begins with the question on who owns the production means. The means of the production can be either owned by the private sector or by the state. In a pure capitalist economy, it is the private ownership of means of production that characterises the same. In a socialist economy, the state has a larger say in means of production. Yet while he seeks to distinguish between the two on the ownership of production, they are not usually in watertight compartments. There is of course a continuum that exists. For instance, in India, Nehruvian state was in favour of the socialist forms of production, yet private sector continue to occupy significant spaces in the economy for many years. Banks were nationalised for instance in 1969 and despite the same, many private banks did continue to operate. While public sector did occupy commanding heights in the economy, the private sector too carved out its space. In the typical capitalist countries too, the government sector did occupy quite a bit of space as evident from Britain or France in their burgeoning public sector enterprises. In real terms, the approach must be on a scale rather than through a matrix based model.

The second factor which Milanovic posits is on labour. To him, labour is legally free in both forms. While it is predominantly hired by private means in the capitalist sector, labour is hired by the state in the socialist sector. To Marx, the labour employed private sector becomes the means of production to produce capital thus the roots of capitalism. Yet the notion of labour being free can be questioned in both forms. In the private sector, labour while theoretically free is bounded by the firm. As evidence points out from China, the slave labour or at least its manifestations in varying degree dispel the notion that private sector treats labour as free-willing. Ironically, the roots of capitalism in the US lay in slave labour which was anything but free. The notion of free labour too is at odds with the idea of communism. Forced labour either as punishment or as Hobson’s choice was variably present in the erstwhile Soviet Union. The labour on its own had little free will in determining its choice of employment. The barriers to entry in manifesting free will in labour markets were high and little free will could be exercised for most part of human mankind.

The third element that is under discussion would be coordination. It is the question of co-ordinating production and consumption activities. In general capitalist firms are decentralised in coordination activities in both production and consumption. A query might be raised of the centralised nature of production decisions within a firm. Yet this would be misleading. A firm no matter how large it is, only exists as a part of a larger economy. Within a firm, there might be centralisation of production decisions or even purchase decisions. But firm in a larger ecosystem is a decentralised entity making its own choice of what it should produce, for whom it should produce and how it should produce. These factors are absent in a pure socialist economy. In the Soviet Union for instance, the production decisions were in the hands of the party apparatchiks sitting in Moscow without awareness or knowledge about ground realities. Therefore the notion of coordination would perhaps be a good distinguishing factor in extreme cases of the two systems while it is better described as continuum in most of the cases.

Investment obviously is a private activity in the capitalist state while it is a government activity in the communist state. One again finds a continuum in this instance too. State driven investment is not absent in the capitalist countries while many non-Communist socialist countries did allow significant private investment in their countries. What Milanovic has sought to do is the project them as compartments with little mobility on the face of it. He however acknowledges the mobility in the discussions around this model. The model what he can encapsulated is better represented as perhaps a scale continuum on which varying degrees of the above factors are plotted than a matrix underpinned analysis. Having said the same, the model is no doubt a key starting point in the commencement of discussion on the distinguishing characteristics of the two systems.