Compare and contrast. We were taught that when we were little kids. It’s important to compare things to one another, not necessarily to judge them, but to gain a better understanding of the ways the world works. It’s amazing how many people fail to use this basic test towards the biggest issues of today. Compare and contrast private schools with public schools, for instance. If we were honest with ourselves, we might be able to steal a few good ideas from private schools and use them to make public schools better. But no. Compare and contrast isn’t for real world issues, is it?
The big battle of the last century has been capitalism versus socialism. In the simplest terms – capitalism is businesses and trade being directed by private individuals, while socialism is businesses and trade directed by the state. The idea behind capitalism is that individuals know how to create wealth better than the government. Every person makes their own decisions which impact how much money they make. The “problem” with capitalism is that you end up with some people who have a LOT of money, and other people who have very little.
Socialism takes control of the market, and directs businesses to pay certain wages, provide certain benefits, and produce certain products. When the government takes control of all these things they are able to “spread the wealth” evenly. The chasm between rich and poor isn’t nearly as wide. The problem with socialism is that it completely does away with things like incentives, it limits political freedom, and it completely ignores the role of prices in the market.
And so the argument continues. It is, however, very easy to put an end to any argument that socialism is superior to capitalism. Compare and contrast. As Milton Friedman said, “The only relevant test of the validity of a hypothesis is comparison of prediction with experience.” So, with that in mind, let’s compare the prediction of socialism with our actual experience with socialism.
Greece. Like much of Europe, Greece is in an economic crisis. Much of this is due to it’s socialist policies. The young working class pay for and support the retirement of the seniors. Sounds fair right? People who make money give it to help those who aren’t working. The problem? Well, there are too many people collecting money and not enough people earning it. Greece’s unemployment rate is over 20%, and their retirement age is 50. Without incentives for people to earn more (and keep more), the working population continues to go in debt to support socialist retirement programs.
Cuba. Cuba actually has a number of things going for it. It has a very low unemployment rate, it has small debt (at least in comparison to Europe and the US), and only 1.5% of it’s population is “below the poverty line”. On the other hand, what exactly is the “poverty line” in a country where the average annual income is $9,900? And if the people of Cuba love it so much, why are basic freedoms (like expression, and the press) suppressed by the Cuban government? And why does Cuba have to keep it’s citizens captive? – That’s right. Emigration is pretty much outlawed in Cuba. No one gets to leave, because if they could – everyone would.
At night - one has lights, one doesn't.
But, never mind all of that. I hear the same story from people all the time. “Those countries aren’t true socialist countries.” “True communism has never been tried. We’ve only seen this barbaric form of totalitarianism.” Funny how often communism and totalitarianism go hand in hand. Perhaps that’s because to control a market requires controlling the people who make up that market. One thing people often overlook it that “markets” are PEOPLE. Free market = free people, which is why political freedom and economic freedom are inseparable.
But again – let’s not only compare the predictions with the results. Let’s compare the results with the results of alternatives. The evidence is jaw dropping, and the list goes on and on. I’ll let you do your own research, but here are a few examples -
- North Korea vs South Korea
- East Germany vs West Germany
- Soviet Union vs United States
- California vs Texas
- Illinois vs Wisconsin
Like Friedman said, the only relevant test to the validity of a hypothesis, (in this case, socialism) is comparing the predictions (everyone wins) with the actual experience (everyone loses). In the end, the actual evidence does not hold up. The only system to ever greatly increase the standard of living for a society has been the free market system. Unfortunately, the free market creates winners and losers. But even after all the wins and loses, the country as a whole continues to grow.
Adam Smith - Father of Capitalism
So why do people continue to flirt with the idea of socialism even if it’s failed miserably whenever it’s been tried, and even when there is a clear superior alternative? There are two things that make the modern day socialist tick. A misunderstanding of human nature, and a misunderstanding of economics. Things like money, prices, and incentives are very real and very important, and things like greed and envy are inseparable from humans.
There’s an idea out there that a utopia can be created. If only the economy were under the control of one centralized all-powerful government, everything would work out. Everyone would get what they need, and no one would want anything else. But that’s not the real world. People want more than they need, and they in fact have a right to go after it – the “pursuit of happiness”. The ideal socialist society is a fantasy. It’s been thought of for centuries, by Plato, by Thomas Hobbes, and by Karl Marx. It’s all the same, and it’s all unrealistic. Whenever it’s been tried it’s resulted in a controlled suppressed people, and a stagnant or dying economy.
Another big misconception is what Thomas Sowell calls the “Zero Sum Fallacy“. It’s the idea that wealth is not created, it’s distributed. The idea that there is a set amount of money in an economy, and one person can only get richer if someone else gets poorer. This is the backbone of why people are frustrated with capitalism. They simply don’t understand that even if one person earns millions, it doesn’t affect anyone else. His millions do not take away from what anyone else earns. Envy is understandable, it’s human nature, but envy in a free market is unfounded.
So, we have a group of people who believe that their fantasy can become reality. They disregard the laws of economics, and the laws of nature. Capitalism on the other hand doesn’t do away with human nature. It instead works with it. People are greedy – so why not let money be an incentive for them to invent, produce, think. Prices fluctuate for reasons, and disregarding those reasons in favor of price controls creates shortages and surplusses, neither of which serve anyone. The most people’s needs are met when a free market it truly free. Like I said earlier – free market = free people.