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by rdf
There is a trend for people in the west to use the terms capitalism and democracy interchangeably. Lately the confusion has been extended to phrases involving the word "market". The most common of these are "free market" and "market based".
Some clear definitions may help remove confusion and also redirect policy discussion to more useful ends. Like all such discussions those who favor one sort of political or economic system will try to bring their beliefs into the conversation through the door of semantics. This is a diversion. Diary rescue by Migeru
My definitions (with some help from the dictionary):
Political Organization Democracy - Government by the people Socialism - Any of various theories or systems of social organization in which the means of producing and distributing goods is owned collectively or by a centralized government that often plans and controls the economy. Communism - A system of government in which the state plans and controls the economy and a single, often authoritarian party holds power... Authoritarianism - a form of government in which the ruler is an absolute dictator... Economic Organization Capitalism - an economic system based on private ownership of capital Free Market - an economic system in which prices and wages are determined by unrestricted competition between businesses... Socialism - an economic system based on state ownership of capital Communism - a form of socialism that abolishes private ownership We see that several of the terms are used in both a social and economic sense. This leads to confusion. I prefer to sort things differently. There are two dimensions. Let's see how this works in the above cases. Democracy is a system of government where the people chose their leaders. There is no economic component. The opposite is authoritarianism where there are no such choices. This is also called dictatorship, totalitarianism or similar terms. When socialism and communism are used as types of government they are meant to imply that they are forms of authoritarianism. This usage arose when there were strong forces pushing for a reform of capitalism. The capitalists found it advantageous to conflate state ownership of the means of production with authoritarianism. The example of the USSR which called it self "socialist" gave weight to this association. Continued use of these terms in this way is meant to sow confusion. There are only two types of government, those where the people get to chose their leaders and those where they don't. We are speaking of the definitions here, not how well actual societies adhere to the principles. One can have an imperfect democracy. In terms of economics there are two aspects and the definitions above only cover one of them. The aspect covered is how money to finance the operation is obtained. In capitalism private individuals or other firms put up the money to run the enterprise. This is the capital. In exchange for contributing the money these people are given a share of the business. They become part owners. In return they expect to see their capital grow in value so that they make a profit on their investment. In socialism and communism the state owns the enterprise and provides the capital. The state may not expect to make a profit, or it may organize the enterprise as a pseudo-capitalist enterprise and expect it to return earnings to the state. This was the standard approach in the USSR and is the case currently in many of the oil states where the oil sector is owned by a state run enterprise. What these forms of economic organization have in common is the way they raise capital and how they deal with the money that they generate from their enterprise. This has to be contrasted with the issue of governance. Governance is how an enterprise is managed. In the west public firms are supposed to be run as representative democracies. That is the shareholders vote for the board of directors who then set policy and hire the top executive officers. The board is the representative of the stockholders. In the socialist or communist type of economic system the government picks those who will run the enterprises. Sometimes this is modified by having worker's councils who are allowed to participate in the governance of the firm, but they seldom have real authority. Could there be a system where the state owns the means of production, but the governance is handled democratically? There are such cases. A good example are the various quasi-independent, special purpose, entities such as the TVA or the various transportation agencies that run mass transit or roads. The directors of these enterprises are appointed by the government, and if the government is democratically elected, then, in principle, these boards are representatives of the people. Such quasi-independent entities are set up for a variety of reasons. One of the most popular is to ensure that those who manage them are removed from short-term political considerations. This is done by making their terms of office longer than those of those appointing them. Another reason is so that the public can see where specific funds are going and not have the comingled with other activities. It is also easier to raise money from the public (in the form of loans) when the loan repayment is going to depend upon a well-defined revenue stream, such as from a toll road. So the two dimensions are: how capital is raised and whether those providing it expect a profit on their investment, and how the enterprise in governed. We see that democratic societies have some socialist enterprises which are run by representatives of the people. China now is an example of an authoritarian, "communist", regime which permits private enterprises to sell shares to the public to raise capital. It is not clear how the governance of these enterprises works. It would appear that the central government still sets limits on what these firms can do, and that shareholders have no real say. To summarize: public governance vs authoritarian control and public ownership of enterprises vs state ownership. These are the divisions that should be used if confusion is to be kept to a minimum. Part of the problem with these idealized definitions is that they don't correspond to modern conditions in many cases. I've already mentioned China as a case where there are private firms in an authoritarian regime. In the west we have been seeing a break down in governance. Most public firms raise capital by selling shares to the public, but because of the rules on how governance works in practice the shareholders have no control over their own companies. The chances of a group of shareholders replacing the board of directors is so slim that when such a challenge is made it is a major news item. Effectively we have public ownership, but authoritarian governance in a capitalist system. Some claim that many democracies are also highly imperfect. They hold elections, but the choice of candidates is restricted by various institutional forces so that only a narrow range of interests are represented. In the US, for example, the wealthy and professional classes make up the vast majority of those holding higher office. Those representing the vast majority of the people have little chance of getting elected - the cost of running for office makes this almost impossible. Finally we need to address the concept of the "free market". This is neither a form of governance nor a way to raise capital. It is a process. There is a theory that competition leads to optimum results and that such competition takes place in a market. There are many examples where this has proven to be the case. Competition frequently leads to improved products as one firm tries to get a jump on the competition. It says nothing about how these firms raise their capital nor how they are individually managed. The government, for example, puts out requests for proposals for research projects. Those who "compete" for the funding are universities or other non-profit research facilities. These are privately funded, or quasi-state entities and are managed by non-democratic boards or representatives in the case of state owned universities. The competition takes place in the market, the enterprises are not part of the capitalist system. There have even been cases where rival non-profit organizations compete with each other or with for profit entities. Sometimes it is felt that having several enterprises working on the same task will lead to better results more quickly. Once again this a process not a type of organization. I cheated before in the definition of free market here's the complete entry: Free Market - an economic system in which prices and wages are determined by unrestricted competition between businesses, without government regulation or fear of monopolies. Notice that this definition includes some political ideology along with the process (the part in italics). There can be no such thing as a totally free market without some rules. At a minimum there need to be rules against doing violence against the other party and just taking what you wish. There also need to be rules which govern contracts. These rules must be enforce by the "government". This doesn't have to be a centralized government, in a tribe it could be the elders or some other local system. This is still the "government". As I said at the beginning one must be wary of ideology masquerading as semantics. The alternative to "free market" is central planning. Who owns the means of production is irrelevant as I've illustrated. Central planning has a bad reputation in the capitalist countries because of the failures in the USSR. But the USSR was able to put a satellite into orbit before the US and was able to develop the atomic and hydrogen bombs just as did the US. Notice that in both these cases the US, itself, resorted to central planning and quasi-governmental organizations to get the task done. Apparently free enterprise has its limits. The problem with central planning is not that it is centralized, but that the institutional forces limit innovation. This is because it is undemocratic, not because it is centralized. Monopolies are a form of central planning and they limit innovation just as much as do any other institutions which don't have to worry about others eating their lunch. The "free market" can also suffer from waste. While we wait for the market to decide whether to adopt one format of video media or another vast sums of money are being spent on what will become the loser. Those who pick the wrong choice will see their investment become worthless, as will the firms who ramped up to produce the product. Was the market truly optimal when all these costs (including the impact on the environment) are taken into account? Would having centralized planning (this does not have to be governmental, it could be a private standards group) eliminate the competition actually be better? It worked for the width of railroad tracks and the basic internet protocols. If democracy is the best form of governance for societies why isn't it also appropriate for the management of non-governmental organizations? We ended up with three, not two, dimensions: ownership, governance and process. In the real world we find examples of all combinations. We also find successful examples and failures. This implies that the failures are not due to the way things are organized, but to what end they are being run. A system run for the benefit of the few will seldom be as beneficial for the many. A system run using authoritarian governance is likely to be resistant to innovation or change. A system with limited constraints on trading behavior is likely to lead to market distortions. All these failures can be minimized if the general public can see that its interests are being represented. |
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Capitalism and Democracy | 36 comments (36 topical, 0 editorial, 0 hidden)
Capitalism and Democracy | 36 comments (36 topical, 0 editorial, 0 hidden)
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