Capitalism and Socialism as Forms of Economy

Its social consequences, as observed

Reduction of inequality of income, and wide provision of education, health care and employment security, which the historical record supports.

Bureaucracy. Planning requires an administrative apparatus of great size and power, and this is the standing sociological criticism: the concentration of economic and political power in the same hands. Weber anticipated it, arguing that socialism would increase rather than reduce bureaucratic domination.

Loss of the information the market provides. Prices carry information about scarcity and preference, and planners without them face a problem of calculation that proved severe in practice.

Weak incentives, where reward is detached from effort.

Restriction of choice, both of goods and of occupation.

Alienation not abolished. As [Work and Alienation] notes, workers in state-owned industry reported the same estrangement, which is evidence that the detailed division of labour and hierarchy contribute independently of ownership.

Kinds of socialism

Marxian or revolutionary socialism, holding that the transformation requires the overthrow of the existing order. Democratic socialism, seeking the same ends by constitutional means. Fabian or evolutionary socialism, seeking gradual change through legislation. Utopian socialism, the earlier tradition of Owen, Saint-Simon and Fourier, which Marx and Engels criticised for proposing ideal communities without an analysis of how the change would come about.

The comparison

The mixed economy, and India

No large economy is purely either. Every capitalist economy has extensive public provision, regulation and redistribution; every socialist economy has had markets, legal or otherwise. The realistic categories are degrees of a mixture.

India's own position should be described in three phases and stated neutrally.

The Constitution does not prescribe an economic system, and the Directive Principles in Part IV direct the state to secure that the ownership and control of material resources are so distributed as best to subserve the common good and that the operation of the economic system does not result in the concentration of wealth to the common detriment. The word socialist was inserted into the Preamble by the Constitution (Forty-second Amendment) Act 1976.

The planned phase. From 1950 India followed a mixed economy with a large public sector, five-year plans, industrial licensing, restrictions on foreign investment and extensive regulation of private enterprise.

The 1991 turn. Facing a balance of payments crisis, India substantially liberalised: industrial licensing was largely dismantled, foreign investment was opened, tariffs were reduced and the public sector's reserved role was narrowed. The social consequences, growth, the expansion of an urban middle class, new occupations, widened inequality and continued rural distress, are the subject of [Liberalization and Globalization].

How to write this in an exam: describe the arrangements and their observed consequences, attribute evaluative claims to those who make them, and avoid asserting that either system is superior. That is both accurate and safe.

A worked example

Under capitalism, a company decides. It will produce a medicine if it expects the revenue to exceed the cost, which means a disease affecting people who can pay attracts research and one affecting people who cannot may not, however severe. The market's strength, responsiveness to demand, and its weakness, indifference to need without purchasing power, are the same mechanism.

Under socialism, a planning authority decides, in principle by need. Its strength is that a disease of the poor can be prioritised; its weakness is that the authority must know what is needed and in what quantity without the information prices carry, and its decisions are subject to political rather than commercial distortion.

In India both mechanisms operate, and the law is the instrument that mixes them: patent provisions defining what is patentable, compulsory licensing powers, price control of essential medicines, and public procurement for government programmes. A law student should notice that each of these is a device for correcting one system's characteristic failure with the other's logic, which is what a mixed economy consists of in practice.

Quick revision

1. Capitalism: private ownership, profit, wage labour, market allocation, competition, accumulation.
2. Socialism: social ownership of productive property, production for use, central planning, distribution by work or need, declared abolition of classes.
3. Capitalism's consequences: growth, class formation, urbanisation, inequality, insecurity, alienation, and the corrosion of ascriptive status.
4. Weber: modern capitalism required a disciplined acquisitive ethic and, institutionally, free labour, rational accounting, a calculable legal system and rational administration.
5. Socialism's consequences: reduced inequality and wide services, against bureaucracy, the calculation problem, weak incentives and restricted choice. Weber predicted greater bureaucratic domination.
6. Kinds: Marxian, democratic, Fabian, utopian.
7. No economy is purely either. India: a mixed economy from 1950 with planning and licensing; "socialist" inserted in the Preamble by the Forty-second Amendment 1976; substantial liberalisation from 1991.

Test yourself

1. Compare capitalism and socialism on five points. Ownership of the means of production, private against social or state; the object of production, profit against use and need; the mechanism of allocation, market and price against central planning; distribution, by ownership and market wages against by work done or need; and the role of the state, limited in the classical model of capitalism against central and extensive under socialism.

2. What did Weber say modern capitalism required? A distinctive attitude, the systematic, disciplined and calculating pursuit of gain as a duty rather than for enjoyment, which he traced to ascetic Protestantism; and a set of institutional conditions, namely formally free labour, rational accounting, a calculable and predictable legal system, and a rational administration. The inclusion of a calculable legal order is the point of most direct interest to a law student.

3. State three criticisms of socialism as observed in practice. That planning requires an administrative apparatus of great size, concentrating economic and political power in the same hands, which Weber predicted would increase bureaucratic domination rather than reduce it; that abolishing markets removes the information prices carry about scarcity and preference, leaving planners with a severe problem of calculation; and that detaching reward from effort weakens incentives, while choice of goods and of occupation is restricted.

4. Is India a capitalist or a socialist economy? Neither in a pure form. The Constitution does not prescribe an economic system, though the Directive Principles direct that ownership of material resources be distributed to subserve the common good and that wealth not be concentrated to the common detriment, and the word socialist was inserted into the Preamble in 1976. India followed a mixed economy with extensive planning and licensing from 1950, and liberalised substantially from 1991. It is a mixed economy whose mixture has changed.

5. Why does the assembly-line worker's alienation matter to the comparison? Because alienation was reported in state-owned industry in socialist economies as well as in private industry under capitalism, which indicates that it is produced substantially by the detailed division of labour, by scale and by hierarchy rather than by private ownership alone. It follows that changing who owns an enterprise does not by itself restore the worker's relation to the work, and that the comparison between the two systems cannot be settled on this ground.