Capitalism vs Socialism vs Communism: The Real Issue of the 2020 Election

I never thought that I, or anyone for that matter, would be writing a post pitting the merits of capitalism against those of socialism, and worse, communism. But he we are, and we can’t blame Covid either.

Terms like “income inequality” and “wealth disparity” are nothing new. They’ve been around for decades, even centuries. The difference is that one of the two major parties, along with help from the media, has made it part of their platform. That party’s solutions would have the Kremlin smiling from ear to ear. The citizens of this country? Not so much.

I will try not to make this a post about politics. It is, after all, a blog about making money. But since many people vote with their pocket books, that may be difficult to do.

We’ll start by defining capitalism. You’ll be surprised to know that the three have a lot in common. It’s the differences that stand out like a sore thumb.

What is Capitalism?

In its simplest form, capitalism is individuals taking ideas and putting them into production to meet consumer and market needs. Supply and demand determine the market for products and services. How does one do this? This is where the capital part comes in.

Capital has many components. Many believe it is just physical capital, i.e. cash. But it is more than that. Much more. Sure, you need cash. Cash comes in several forms, mainly as equity or debt. What is this cash used for? If you are producing a physical product, you need a place to make it (a plant or warehouse). You also need materials to put it together. If you are providing a service, while you may not have a huge cash outlay, you’ll still have overhead and infrastructure needs. Then you’ll need someone with skills to put the products together and actually provide the service. It’s this human capital that is the main difference between the systems, which we’ll get to in a minute.

The key to the success of any system is incentive. The risk-reward payoff for capital markets, which is driven by technological innovation, is by far superior in a capitalistic society than any other on earth. No sane, rational person is going to take any sort of substantial risk if the payoff isn’t worth it.

The people who are willing to take these risks are called entrepreneurs. An entrepreneur is someone who takes economic risks to provide products and services that generate value to some other person. Every single business on earth was started by someone like this. Every one. If there is no value to someone, that business will fail. These multi-billion dollar companies didn’t get that way because they cheated, gamed the system somehow, or ripped someone off. They got there by creating products and providing services that people were willing to trade their money for.

No one is claiming that capitalism is perfect. There are winners and there are losers. A system that benefits the few, is called crony capitalism, or “crapitalism.” But it is the best system in the world that offers the most opportunity for people like you and me to succeed.

What is Socialism/Communism?

Socialism and communism have many of the same attributes as capitalism, believe it or not. Under both systems, products are produced, services are provided, workers are paid, materials are used, and so on. The main difference is who controls the means of production and owns the property. With capitalism, individuals control the means of production and own the property. In a socialistic society, the state controls the means of production, but individuals own the property. In a communistic one, the state owns both the means of production and the property. The state gives “to each his need”. The problem with this is the state determines who needs what, not the individual.

You may be asking why someone would accept such a system, or how it even started in the first place. The reason is that it sounds good, especially to those who can’t, or won’t work. It promises equality and prosperity, but results in scarcity because the producers stop producing. Remember when I mentioned human capital earlier? That is how socialism/communism started. Karl Marx’s book Das Kapital is mostly about human capital. He says that the “capitalist” does not own the parts of production the worker contributes, where someone like Adam Smith says the worker trades his services for payment of some sort. Socialism and communism is solely based on workers’ rights. In fact, the even have their own holiday called “May Day.”

There are some that think the only difference between socialism and communism is that the socialist hasn’t found a way seize the means of production, usually by gunpoint, like the communist has. There may be some truth to that.

Conclusion

Why is all of this important to you? The answer is because the election could very well determine which system the United States gravitates towards. Will it be the traditional way of the past 200 plus years, or a new direction like the one they have in Europe and other parts of the world?

Let me know your thoughts.