How to define the concept of socialism? In the late 19th and early 20th centuries the most common definition was probably “social ownership of the means of production.” Since then, the terms applicability has grown substantially. European social democracies are popularly called socialist, or at least socialistic, and even Obama has been accused of following a socialist platform. Given how the word has been thrown around as a means of disparaging policies and ideologies that don’t represent the conservative agenda, most serious scholars have retreated into just accepting as socialist whoever wants to be called socialist. I’ve become increasingly convinced, though, that to think of socialism as an economic concept or system is untenable, and that instead socialism represents a — in my controversial opinion, dangerous — moral and political ideology.
Why has the definition of socialism shifted so much over the years? I have my theory. Even as far back as the late 19th century (particularly, in countries like Germany) there was a growing intellectual affinity with the socialist ideology. This is represented by the growing popularity of social democracy. Social democracy can be interpreted as a middle-of-the-road political program, but this is only useful if we assume the program to be static. Different political leaders have a wide variety of intentions, but it shouldn’t be controversial that the main motivation behind the early social democratic movement was the appeal of socialism — although, it’s important to consider the possibility that the precise shape that social democracy took is representative of both socialist inclinations and resistance to this ideology. Since immediate, dramatic social changes were unlikely, socialist sympathizers in western European countries instead adopted a piecemeal approach. But, given this connection between social democracy and socialism there was a flourishing in the political literature that warned of the dangers of socialism and the possibility that piecemeal social democracy can potentially (or, some argued, inevitably) lead to full socialism.
Some of the more well known examples of this literature include F.A. Hayek’s The Road to Serfdom, Karl Popper’s The Open Society and its Enemies, and Ludwig von Mises’ Omnipotent Government. While some of the authors were light social democrats (e.g. Hayek and Popper) and others were old liberals (e.g. Mises), these writings appealed to a renascent conservative movement. They were used by conservatives to oppose liberal legislation, and the term “socialist” soon began to be applied to whatever that person could build a connection with the communist socialism of the Soviet Union. In other words, the broader use of “socialism” was a natural outgrowth of the relationship between the socialism of intellectuals like Karl Marx, social democratic sympathizers, and the policies this second group began to pressure into existence.
Should we adopt the economic definition (social ownership of the means of production) or just accept that the word has lost much of its a priori meaning? The appeal of the economic definition is that there is a battery of well developed economic theory that convincingly argues for the deficiencies of socialism. The most well known critique is the incentives one, but the most damning is the calculation critique developed by Ludwig von Mises and Friedrich Hayek. When it comes to piecemeal interventionism, though, economists are much more divided as to what economic theory has to say. Most economists are probably in the middle and there is a well developed theoretical body that supports specific interventions: countercyclical stimulus, the provision of public goods, anti-monopoly legislation, the subsidization of specific information markets, et cetera. So, if socialism has already been refuted as a viable social organization, but interventionism hasn’t, there develops this dichotomy between the two that is at the root of the confusion as to where to draw the line.
I propose to drop the capitalism–socialism dichotomy, because it draws attention away from what all these issues really pertain to. Before making my point, allow me to provide some context by laying out my own way of seeing things. There is this entity we know as society, which is a collection of individuals which conjointly develop institutions and organizations, whether intentionally or unintentionally (“spontaneously”), that provide order. As society develops it becomes more complex, and this complexity, at least in part, represents the growing sophistication of order-establishing institutions and organizations.
Directly relevant to our discussion here is the development of money, and consequently prices. One issue that plagued early societies was that the allocation of resources was made difficult by the lack of access to these resources. Even if the required economic goods existed somewhere, there were high costs to transacting: you had to find a willing seller, and that seller had to be interested in what you could provide in return. The appearance of money helped assuage this issue by providing a medium of exchange that can be traded for just about anything, reducing the uncertainty attached to selling your produce in return for goods that don’t directly satisfy your wants. Money, in turn, made possible the formation of prices denominated in terms of the general medium of exchange, making simpler methods of profit and loss accounting possible. As Mises would say, money and money prices make economic calculation possible. And, for our purposes, money helped develop the institution we now know as “the market.”
Money and money prices are just part of one example, but the point I want to make is that when we talk about coordination we’re talking about coordination within a specific institutional framework. This framework has been developed over time, and continues developing. The more developed it is, the more complex it is. For instance, banks went from being simple money warehouses, to financial intermediaries, to forming clearinghouses, to broadening finance to other types of firms and financial assets, et cetera. The institutions around banking developed concurrently: the sophistication of the checks and balances increased. An even better example is the structure of production more generally. The great wealth that the modern structure of production bestows upon us is the product of centuries of economic development, capital accumulation, and institutional advancement. Other cases include the institutions of governance and justice (law), property rights, et cetera.
From this point of view it makes sense to drop the term “capitalism,” except as convenient shorthand. What we know as capitalism is really the prevailing web of coordination. The powerful critique of socialism developed by Mises can be rephrased to put it in the context of the last few paragraphs: socialism attempts to replace the means of coordination of the present system. But doing this without changing institutions in such a way to make alternative means of coordination possible means eliminating the processes of coordination altogether. Thus, socialism must lead to capital decumulation, intense discoordination, and, ultimately, social retrogression — it coercively nullifies the benefits of thousands of years of social progress.
Admittedly, Karl Marx’s formulation doesn’t suffer this pitfall. As I understand it, Marx believed that social development would one day lead to the establishment of the communist system. We could rephrase this as claiming that one day the right institutions will be in place to make coordination possible in a world where the means of production have no specific owner. The problem with Marx’s theory is that it’s essentially speculation. It is unscientific in that Marx doesn’t provide a good causal process by which such a system will arise. As such, as far as we know, it’s just as likely that social development will go in the opposite direction.
In any case, this is my case for dropping the terms “capitalism” and “socialism” altogether when talking about social organization. There is a complex web of processes of coordination which are developed over time, and continue to develop, and the problem with socialism is that it disrupts this coordination. The same would be true of capitalism, if some capitalist intellectual wanted to implement some kind of designed changes to the existing coordinating mechanisms of exchange. The same is true of interventionism, which actively changes these coordinating mechanisms: thus why fiduciary overexpansion leads to intertemporal discoordination (or the misallocation of the means of production and consumers’ goods), or why price controls also lead to the misallocation of resources.
When we talk about different proposed systems of organization we should recognize these as distinctly political, or ideological, concepts, and we must judge them based on how much they respect the prevailing institutional reality. This is a more sophisticated way of saying what Mises would have phrased as follows: we judge an idea by whether it can really achieve the ends it proposed. This is because the achievement of particular ends is largely decided by “forces” exogenous to the planner, that is by the institutional framework that defines the processes of social coordination. We can say that system a or b will come into existence in the future, but this is largely speculative and, in my opinion, is an activity without much value. The social scientist, instead, should stick to explaining how what we know works — more science and less engineering. There is a degree of undue nihilism here, because if institutions change what should stop us from helping to change them? I’m not suggesting that we humans are shackled to the inevitable forces of institutional change. But, there are reasons to prefer certain processes of change over others. This, however, is a topic for another day.