CAPITALISM VS SOCIALISM IN THE UNITED STATES

The United States of America is the biggest economy in the world. This said, it comes as no surprise that many international economic scholars have been trying to study the internal policies that make it so. It always comes down to the two antagonistic economic systems and how they influence efficiency in America. The two economic systems are Capitalism, which is the economic system where means of production are privately owned and socialism, which refers to the economic system where means of production are commonly owned and controlled. In the book ‘Free To Choose’ by Milton and Rose Friedman, socialism is embodied as any action that involves the direct interference of the government, through its policies, in markets. Therefore capitalism would refer to the absence of interference.

Friedman uses the terms command method and voluntary cooperation to refer to socialism and capitalism respectively. According to the Author, The United States is an economic miracle made possible by translation into practice of some sets of ideas. The first of these ideas was Adam Smith’s article in the Wealth Of Nations. The key insight of Adam Smith was that two parties to an exchange can benefit and that, so long as cooperation is strictly voluntary, no exchange will take place unless both parties benefit. This shows that capitalism is a working economic system. The other set of ideas that pushed the United States to adopt capitalism, and thus its prosperous economy, was ‘The Declaration of Independence’ It proclaimed a new nation, the first in history established on the principle that every person is entitled to pursue his own values. In other words it paved the way for the proper execution of capitalism.

The authors of the book hold that the command method (socialism) has historically been proven a failure when applied to large groups. Seeing as how the United States is not ‘small’ by any means, the book looks down on the various instances of government interference in its bid to provide security and other services such as education. As Justice Louis Brandeis put it in the case of Olmstead Vs. the United States ‘ Experience should teach us to be most on our guard to protect liberty when the government’s purposes are beneficial. Men born to freedom are naturally alert to repel invasion by evil-minded rulers. The greater dangers to liberty lurk in insidious encroachment by men of zeal, well meaning but without understanding’ The book gives examples of Russia and its satellites, mainland China, Yugoslavia and India that rely on the command method in agriculture. They employ one-quarter to one-half of their workers in agriculture yet rely on the United States agriculture to avoid mass starvation.

In contrast to the earlier nineteenth century, the United States carries a much less severe form of capitalism. During the 2008 presidential campaign, Barack Obama described his proposed federal income tax cuts for the middle class as “sharing the wealth” Taxation is a form of government interference in the market. It causes some deadweight loss to occur and thus reduces market efficiency as a whole. This shows that the United States has, over the years, incorporated some socialistic ideas. The markets are not free; they are highly rcontrolled. The exchange rates and values of our currency do not float freely but are manipulated heavily through government rate-setting activities such as devaluation of currency to increase exports and revaluation to increase imports. They are incentivized or discouraged by the Internal Revenue Code.

The OPEC crisis of 1974 was a classic example of the failure of some socialistic ideals in the United States. The Government took it upon itself to dictate where and what amount of oil was needed in different places. The government completely disregarded the market and its role in efficiently organizing economic activity. The Government imposed a price ceiling on the oil leading to acute shortage in some regions. The price was kept, by command, below the level that would have equated the amount of gasoline available at the gas stations to the amount consumers wanted to buy at that price. This led to lines in gas stations in the United States, which produces much of its own oil, as compared to other countries such as Germany, which rely on imported oil.

The authors hold that in the United States both capitalism and socialism (command method) are both incorporated but with capitalism taking the lion’s share. The authors appreciate the necessity of direct interference of the government in the market but criticize the growing influence of the government in the free market. The authors claim that voluntary cooperation (capitalism) as was proven by the acclaimed father of modern economics Adam Smith is the best way to operate an economic system as opposed to a strong use of the command method (socialism)

The authors say that a capitalist system leads to an efficient price mechanism. An efficient price system, in part, simply means that the information transmitted by price gets to all that it was intended for. This opens another can of worms in that an efficient price system (which is brought about by capitalism) provides an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes. Keeping this in mind, the authors say that the government is major source of interference with the price system through tariffs, domestic action fixing, monetary and fiscal policies which lead to erratic inflation.

The book also condemns the socialistic belief held by some, especially after the great depression, that an economic system under voluntary cooperation is a recipe for disaster by giving an example of Russia.

Capitalism provides for innovation. Innovators and inventors can take advantage of the free market to profit them by creating new technology. A good example would be the boom in economy that America experienced after the slaves were set free. For example George Washington Carver developed hundreds of applications for farm products important to the economy of the south.

Typically, in a capitalist economy, hard work is rewarded. Entrepreneurs who pitch well are undoubtedly the winners. People work hardest when there is a financial reward. When there is a personal financial incentive; they take risks then in setting up businesses. This eventually leads to a more efficient economy as there will be many businesses providing competition for one another which then favors the consumers as they will get better quality goods and services.

According to Friedman, capitalism facilitates choice, which may determine success seeing as how in a capitalist economy one chooses what and where he would like to work or in what income generating activity he wishes to indulge in.

With less government, a capitalist country is not likely to have the vice of corruption.

In as much as capitalism promotes efficiency in the economy, little good can be said about it when it comes to equality. Capitalism tends to breed Inequality. There tends to be a difference in income in a capitalistic economic system. Wealth tends to redound among a few members of society who may have control over the means of production. However some debate may actually rise as to whether this is a disadvantage when we look at the bigger picture given that wealth is a major motivator to work or study for many people.

Capitalism might encourage monopoly power. The government may sometimes establish corporations in industries that tend to be monopolistic due to the high amount of capital needed to establish such companies. The government thus provides some level of competition. The government also sets up some form of standard setting body. In the absence of government interference firms may charge irrationally high prices in a bid to maximize their profits. The firms might also deal in low standard goods without any governmental standard setting body.

Wide income gaps between members of society. Some people in a capitalist economy get more revenue than others. This might lead to civil unrest in some countries as envy and greed are bound to occur.

Some economists, who have been labeled extremists by some for their somewhat ‘far-fetched’ ideas, believe that capitalism may eventually lead to the depletion of the earth’s resources as capitalism advocates for unrestrained economic growth, which leads to use of more and more resources.

According to Friedman, despite its obvious failure as an economic system in most countries, the fundamental ideas behind socialism if were successful would have some benefits.

Social equality. The public education system in socialist countries is an attempt to minimize the minimum education for all people. In the long run such a system would provide more educated citizens who would become innovators and prove useful to their country.

Medical equality. Socialized medical healthcare is a way to ensure everyone gets the same minimum healthcare benefits. This would increase the lifetime of more of the working force and hence the supply of labor would be enough to meet the needs of the employers.

People living in a socialist country are able to focus on issues that they consider not economically oriented such as pure science, math and the arts. This is due to the fact that the people do not have any financial incentive to focus on income generating activities. This is mainly because they do not have to worry about such issues as medical care as a minimum standard is guaranteed. This leads to a more fulfilling life.

According to Friedman, corruption is bound to exist. People living in socialist countries usually have to bribe officials or other people in strategic positions in order to get some kind of benefit that they were not supposed to receive. For example, a person may bribe the officials who hand out food stamp cards so that they get a card, which allows for more food. Friedman uses the example of a resident in Moscow who may have to wait for months to get his equipment fixed if he calls the state repair office. He may opt to call an acquaintance of his to do the job for him at an extra fee of course.

In a socialist country, people usually lack the incentive to work. A socialist country gives little chances, if at all, for financial freedom. People are not usually able to become entrepreneurs as most aspects of the economy such as the factors of production and/or capital are controlled commonly or by a government. Friedman uses the example of Russia where he states that most of the workers usually moonlight to make some extra cash.

Big government. The socialist government tends to get more money from taxes. More money makes the government more powerful. Big governments tend to be slow to change and this causes more bureaucracy. Big governments may also cause unnecessary wastage of taxes since they tend to have many departments that are bound to overlap one another in terms of functions. Hence two or more departments may be established to execute one action. Since the employees have to be paid, money is wasted.

Innovation is not particularly encouraged. Since the people are guaranteed a certain minimum standard of comfortable living why should they do that which gets them out of their comfort zones? This leads to a slump in economic development.

The possibility of turning into a communist country. Some believe that socialism is the first step to communism (basically no rich and no poor).

This shows that the role of capitalism in the United States is to provide a more efficient economic system. Socialism is depicted to be a hold on the efficiency of the economic system. However the authors are quick to recognize that some level of control is necessary.

All in all, the United States is a mixed economy. It is mainly a capitalist country but it contains some socialistic attributes such as strong government control in some areas. It is this balance that makes the United States such a strong force in the world economy.