Free-Markets vs. Regulated Markets (Capitalism vs. Socialism)
For a given market, the choice always boils down to state intervention vs. the free-market, there is no third option (unless you count mixed-markets).
In overly simple black and white terms, either government intervenes in the market or it doesn’t (here the term “market” is used broadly and refers to socioeconomics and not just economics; it refers to any exchange between humans).
We either move toward socialism and social markets or towards classic liberal free-market capitalism. We either favor collectives, or we favor the individuals who form the collectives. Each choice has consequences regarding collective and individual liberty.
Despite the binary choice for any given market, the choice is not binary broadly speaking. When considering all markets, if we regulate some key markets and not others, and if we are willing to regulate lightly, with a minimum mutilation of our individual and collective liberties and values, we create a “mixed market” (the third option of sorts).
So while the overarching idea of an either/or choice is true in one sense, it is a bit idealist, absolutist, and misleading in another.
A more centered argument says that the government and the market must balance each other to ensure a balance of liberty, authority, civil service, progress, social justice, production, employment, and competition in society.
Still, we can’t ignore the underlying facts that complicate government involvement, namely: “all action is human action” and “[at least some] men love dominion over others and will enter a state of war over it“.
So what theory do we turn to given the complex facts of human nature? Do we go left, right, or toward a third way? Good question! No one agrees how best hedge against the vice’s of man (be he King or Baron) while retaining the spirit of the principles of liberty, equality, and justice for all.
Perhaps, more-so than “the state” playing the role of regulator (and thus wielding a corrupting sort of potentially unchecked power), a collective representative body must balance a purely individualist driven free market, even if that body is a private entity formed within a private market, like a board or union.
Of course, no matter what logic we present, some will always reject the idea of creating “mixed” systems. Thus, we commonly find the absolutist ideas of pure socialism and state intervention (Marx), or pure free markets and no intervention (Mises).
We discuss these concepts below, but ultimately argue that “the third option” which is “both A and B” (and not either/or) is the ideal solution (*cue the ghosts of Mises and Marx storming out of the metaphorical room in a fit*).
Capitalism and Socialism: Crash Course World History #33.
TIP: On this page we are discussing two types of liberalism (social pro-state liberalism and classical radical anti-state liberalism), we not deciding between conservatism vs. liberalism. A few Baron and People led states aside (both of which we can find in ancient Athens; one pre-Solon, one after), traditionally kings and churches ruled nations (often in union, for example the “Holy Roman Empire”). After the late 1700’s, democracy began to rule in some parts of the west. The first version of democracy was a type of classic liberal democracy; it generally favored individual rights and a free-market (see Adam Smith) and came in two flavors, one more radical and anti-state, one more elitist and pro-tradition. Both can be seen as humanist depending on the issue. Over time, as this classical liberal ideology was used to support things like slavery and the alleged abuses of the robber barons, it began to lose its appeal to some, and socialism became popular (yet another type of liberalism which comes in many flavors). The story of the mid-1800’s to the mid-1900’s is largely explained by the different types of liberalism trying to strike balance between the need for social justice and collective liberty and the need for individual liberty. This results in everything from women getting the right to vote to WWII, and thus we get very different views on the reintroduction of state-power and social programs in politics. From this tense period, we get economists like Mises and Keynes, and we get thinkers Marx and Mill, each with very different viewpoints based on their experience. We also get the rise of a new type of despotism alongside others like the nativist right-wing one that has always existed, which harkens back to the authority of the old kings, the national socialist or authoritarian communist state (the far-left acting far-right). See the history of liberalism.
TIP: The “either/or” argument on this page comes from the Austrian “free-market classic liberal” school of economics, what we in America we might call “Pure Free Market Libertarianism.” This thinking rejects socialism of any kind and supports a fully free-market; it is an individualist philosophy (and right-wing in that sense), but it is a philosophy of pure liberty, and very left-wing in that sense). Socialism should be understood as any state intervention that favors the people in theory, which means that (as Mises suggests) any state intervention is a slippery slope. To Mises’ point, history shows that this can go from Lincoln to Hitler in less than a 100 years… but to counter his point, a lack of state intervention is arguably what created Lincoln in the first place. As western society began to favor collective authority and liberty over individual liberty, it ironically, became the conservative power which was revolted against in the first place, albeit authoritative largely on the grounds of ensuring collective rights. This is a complex truism that we have to deal with today, and figures like Mises help to give us a perspective. See individualism vs collectivism, the US parties switched platforms over time (as that story is a history of US politics), and our breakdown of the basic political parties (including an explanation of classical liberalism).
Collective Authority Vs. Individual Liberty
All of the above can be boiled down to saying, we must balance collective liberties with individual liberties, collective authority with individual authority, recognize the pitfalls of each, and respect the benefits of each, even when the outcome isn’t 100% “fair,” and even when this feat seems insurmountable.
From a non-absolutist frame, whether we err on the side of socialism or free markets is a nuanced and complex choice to be made in each market.
I don’t want the same blanket solution for my Xbox and my healthcare; I don’t need the same level of intervention in big banks, as in big peanut butter, or as in big oil.
Back in the 20’s and 40’s the fear of socialism was real (and it isn’t untrue today), and classic liberalism was losing ground (and this isn’t untrue today either), but fear and complexity don’t make extreme positions correct.
- The fear of socialism is based on the age-old fear of state intervention. Specifically, it is the classic liberal belief that individuals and capitalism drive liberalism via the free-market. It is consumerism driving demand, and individuals meeting that demand, that is the real democracy. The state breeds cronyism and “breaks that market” and thus inhibits liberalism.
- Meanwhile, the fear of classic liberalism is represented by the robber barons. When the common man has no representation in the government and the free market rules, the rich oppress the poor and keep their wages low by organizing with other business owners. When there is no oversight, the liberal barons start looking a lot like Kings.
History has more examples of states getting it wrong than individuals do of getting it right, but that is because governments have been historically authoritarian.
Despite the challenges of either, neither the free-market nor socialism works as a pure system without the other tempering it. Instead, a mixed social market system grounded in classic liberal principles and solid ethics contains the ideal solution but not always a practical one, especially in a democratic or republican nation of laws and elections.
At the end of the day, we are all individuals, and we are all collectives, the business owner, the businessman, the worker, and the union man all have rights. People work hard for political capital, for social capital, and for economic capital. When we let one have all the power, we start down a slippery slope.
Socialism vs Capitalism: Milton Friedman. “Do you think [X Communist society] doesn’t run on greed? What is greed?” – Milton Friedman.
TIP: The idea of fairness is dangerous in the wrong hands. Fairness is a fair shake, not an equal one. It’s not about “the same outcome,” it’s about striving toward “equivalent opportunity.” When we use the term “fair-trade” (as opposed to “free-trade”) it’s not about state intervention per-say; it is about morality, ethics, and justice as understood in the philosophical sense.
Ludwig von Mises and the Austrian School of Economics on Fair-Markets vs. Free-Markets
The idea noted above, that we have an either/or choice when it comes to governance and markets, is an almost correct assessment of socioeconomic politics by the famous Austrian school economist Ludwig von Mises, specifically Mises said in Planned Chaos (1947):
“The issue is always the same: the government or the market. There is no third solution”.
In his book, Mises is talking about how organizing labor in Unions, and other forms of socialism, only corrupt the free-market’s they seek to “make more fair.” Thus the Austrian school, and specifically Mises, implies that there is no such thing as a “fair market” created by state intervention, only free-markets are fair.
This idea can be boiled down to another Mises idea, that there are no groups, only individuals.
This viewpoint can be understood by the fact that Mises had to leave Germany during Hitler’s rise to power due to being Jewish, so he saw the fall of classic liberalism and rise of socialism first hand (although his viewpoints go back much further to his previous work as an economist). The video below explains Mises the man, here our focus is on his fundamental ideology (his aversion to collectives and the state).
(Ron Paul Inspiration) The Ludwig von Mises Story. Free-markets breed liberty, i.e. choice, democracy, and individual liberty come at a cost worth paying. This would be the stance of Libertarians and Libertarian minded Republicans, although they often use the ideology to push conservative ideas. (See exploiting loopholes through deregulation.)
“There is no third social system feasible which would be neither market economy nor socialism. Government control of only a part of prices must result in a state of affairs which — without any exception — everybody considers as absurd and contrary to purpose. Its inevitable result is chaos and social unrest.” -Mises
There are No Groups Only Individuals
Mises asserts, in his socioeconomic masterwork Human Action (1949),
“First we must realize that all actions are performed by individuals.… If we scrutinize the meaning of the various actions performed by individuals we must necessarily learn everything about the actions of the collective whole. For a social collective has no existence and reality outside of the individual members’ actions.”
A free market is an individualist ideology. A fair market is a collectivist ideology, where behavior is enforced by the state and groups. All collectives are comprised of individuals. If these factors are taken together, they mean that the state, fair market, government, etc. may be thought of as vehicles for individuals to oppress other individuals.
At least in a free-market every individual gets to make their deal without a nanny state dictating their life. Deals end up being fair over time, as the free-market tends to balance itself out through individual actions. Groups, especially large, powerful, single entity state groups, have so much power that they override individuals and create unbalance in markets.
What seems like “fair” policies enacted by groups, boils down to coercion by individuals using the group as a sort of battering ram.
Once the individuals in the groups get power, they will inevitably use that power to help themselves (with the group becoming an afterthought at best), and this is less fair and productive than the divvying that happens in the free-market.
Worse, once there is a central fund or a centralized power, that power becomes too big to fail and will naturally, due to self-interest, squash its enemies, which will be other powers, including the free market.
When we consider these Austrian arguments and remind ourselves of Stalin and Hitler, we get a clear warning of the dangers of socialism, but we can’t get too caught up in this. After-all, we have nearly forgotten the dangers and short-fallings of the free market (and hint, they aren’t in some fable of the Robber Barons as robbers, they are in the dangers of treating every market like it is the same and taking an absolutist stance).
Economic Schools of Thought: Crash Course Economics #14.
TIP: The Austrian school of thought is empowering and often true. Their ideas are the fundamental principles of classical liberalism, the philosophy that created western democracy. Unless you are a fan of authoritative Kings, an order-loving Tory, or a die-hard Marxist, who wants to turn all markets into central funds, these ideas should resonate. Despite their truth, though, I think history shows they aren’t perfect.
The Problem With Individuals and Free Markets
Individual liberty is often the answer to our questions, especially in the West. After our hard-won revolutions, the idea of collective authority is repellent. Idealism doesn’t magically create a perfect system.
In real life, individuals create the very groups and central funds that pose a danger to us. An individually created monopoly is often more productive than a state-run monopoly, but this is only true when there is competition. Capitalism can support monopolies in many markets with minimum competition. However, at a point, there becomes little to no difference between a state-run monopoly and a privately-run one.
- Private companies create structure and order within the company. This is a form of government. Self-government is still government.
- Private companies gain power and use it. This is a form of authoritarianism, which is governance. Still government.
- A code of ethics can govern a body without having any authority. Another form of government.
Thus, the dangers of the free-market are the dangers of the social-market. We hardly need to list the dangers Mises notes again through a slightly different lens. Instead, I’ll lead you to the ah-ha moment we can distil from this.
Monopolies and Anti-Competitive Markets: Crash Course Economics #25.
How to Temper Markets
Mises’ broad conclusion is right; there is only government or free markets, but the implication is wrong. There is a third option, and that option is a system of oscillation, minimum mutilation, and discretion. Perhaps the ideal solution would be a system that purposefully regulates lightly and respects the private market and a system that embraces the private market instead of demonizing it.
Since all individuals are collectives, and all collectives are individuals, we must always err on the side of the individual, but must never dismiss the sentiment of the collective.
We must fall back on ethics, but also fall back on facts such as economic facts, facts about budgets, facts about labor, facts about employers. We do not need rhetoric and sentiment, but facts.
Some markets work better with government intervention than others, and government intervention comes in more forms than a free-marketeer or Marxist may suggest.
People’s inability to govern themselves ideally or uphold free markets isn’t necessarily a failing of governments or free-markets, it may be our weakness as people. The system may not be broken; it may just be complex. So far there is no evidence that we ever tried a system that would work fully.
Mises was close to right, but that hardline stance of the Austrian school will never be fully right, they correctly address some problems of government, but they are far too eager to dismiss the drawbacks of the free market. Both are dangerous tools of authoritarians.
Liberty tempers authority; Authority tempers liberty.
We must represent collectives and individuals; this is true despite the fact that collectives are individuals and individuals form collectives.
Government and free-markets are either/or on one level, but not on another. They are separate ideologies that can both have strikingly similar consequences (i.e. tyrants and the reduction of liberty).
Government and free markets are, in fact, two sides of the same coin. They must be balanced despite their seeming incompatibility. This is particularly true when we factor in man’s tendency toward oppressing and exploiting others, especially when he has political, social, or economic capital behind him.
A healthy fear of cronyism, a love of liberty, a fear of individual power, a love of order, and an appreciation for all schools of thought will help lead us toward striking a balance. Someday we may find a perfectly balanced mixed market approach that respects the individual and the collective and wards off tyrants. In the meantime, we all need to be willing to discuss ideas.
Markets, Efficiency, and Price Signals: Crash Course Economics #19.
Price Controls, Subsidies, and the Risks of Good Intentions: Crash Course Economics #20.
The article would be better if it didn’t conflate capitalism and markets. The two terms can be used in diverse ways, but I think there is a good argument for making a distinction between the two for the sake of precision. Markets can be broadly defined as the dynamic system of exchange that happens between those who demand goods and those who supply goods. Capitalism can be thought of as the way in which ownership of capital is distributed throughout society.
I think this distinction is important for a couple of reasons.
1) using the above definition allows you to speak about markets as they pre-existed modern capitalism. The private buying and sharing of goods between peasants under feudalism is not usually referred to as capitalism. Capitalism is generally understood to have evolved out of the private ownership of land and the opening of merchant trade (though this could maybe be called mercantilism rather than capitalism strictly).
2) It allows you to discuss markets which exist contextually or in small enough capacities that it would be strange to think of them as examples of “capitalism”. Get 30 kids together after Halloween and see them go around trading and bartering their candy, and they are engaging in market behavior. There is supply and demand. Some kinds want sour things. Some kids want chocolate. Some kids have big full sized snickerbars but they hate peanuts so they are much more willing to trade it for a bag of gummy worms. This ain’t capitalism. But it is a market.
3) There are lots of things that we can discuss markets in which don’t include money or even bartering easily converted things like commodity goods. Social capital is a very real thing. Education is a form of non-physical capital. There is a vast wealth of capital that people exchange through market mechanisms (just look at the way dating apps evolve to respond to this). But while each of these things have “capital”, a factor of production, no one would generally call these instances of exchange “Capitalism”.
Thanks for the feedback. You make some really solid points. I’ll think on this and respond / edit as needed.
All real-world markets are imperfect. Thus, the study of real markets is always influenced by competition for market share, high barriers to entry and exit, different products and services, prices set by price makers rather than by supply and demand, imperfect or incomplete information about products and prices, and a small number of buyers and sellers.
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