Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Economics
Related Main Page | Political Issues Main Page
Theoretically, there is a clear distinction between capitalism, socialism and communism. The key is the profit motive as indicated in the graphic below. 1 The models at the top of the illustration represent maximum government ownership of capital and land, while the models at the bottom of the illustration represent the absence of government. The models on the left-hand side exclude the profit motive, while the models on the right-hand side include the profit motive. On the lower right-hand side, free enterprise capitalism represents the maximum individual freedom within a capitalist system, while state capitalism represents the minimum individual freedom. On the left-hand side, communism represents the maximum individual freedom for a socialist system, while state socialism represents the least individual freedom. 2
Why does the Profit Motive Separate Capitalism from Noncapitalist Economies?
The main institutions of capitalism include:
1. The idea that individuals act as "economic men", i.e., attempt to balance cost (human energy) with satisfaction.
2. Private property, i.e., the right to acquire, keep, use exclusively, and dispose of valuable things.
3. Inheritance, i.e., the owner's right to designate the recipient of title to property (the right of bequest), and the right of an individual to claim title (the right of inheritance).
4. Freedom of individual initiative, i.e., the freedom of individuals to exercise their own initiative in economic matters.
5. Competition, i.e., economic rivalry.
6. The profit motive, i.e., when the monetary difference between receipts and expenditures is an incentive to action.
Although all of the other institutions of capitalism (1-5) can exist at some level in noncapitalist economies, the profit motive is incompatible with socialism or communism. On the other hand, capitalism cannot exist without the profit motive. It is the controlling mechanism and coordinating force that represents the key institution of capitalism.3
Capitalism has many strengths (e.g., flexibility, a rising standard of living, entrepreneurial energy, technological progress, and individualism), and many weaknesses (e.g., emphasis on pecuniary values rather than human welfare, economic inequality, unearned incomes, incentives to create scarcity, waste, lack of balance, economic insecurity, and individualism).4 Note that individualism is both a strength and a weakness of capitalism.
Where Our Capitalist System Should be Headed
According to critics, capitalism can only provide the appearance of democracy. Social and economic democracy cannot be achieved solely by voting, but instead by removing the excessive social and economic inequalities, and class differences.5 Some argue that democratic socialism is the answer. Perhaps a more collectivist or communitarian capitalist system is the answer? Notice that both individualistic capitalism and communitarian capitalism fall into the same category.6 Both systems include a mixture of state (i.e., government) regulation and private enterprise. In terms of the whole scheme of possible economic systems, the two models are very close together. These two models mainly differ in terms of the amount of emphasis placed on individual freedom. It is important to understand that while individual freedom represents the greatest strength of capitalism, it also represents the greatest potential weakness. Finding the optimum mix of individual freedom and cooperation within a larger community is the goal of both systems.
An important question is whether individualistic capitalism is flexible enough to survive in its present form? Although there has been more emphasis on corporate social responsibility in recent years, Porter and Kramer argue that capitalism should evolve into a higher form based on shared value. See MAAW's Social Accounting topic for more on social accounting, and the Porter and Kramer summaries below for an explanation of the shared value concept.
Some Other Proposals to Fix Capitalism
Elizabeth Warren's economic model has been referred to as accountable capitalism. 7 The Accountable Capitalism Act would require workers to choose 40 percent of the corporate board seats as an antidote to short-term thinking. Another piece of legislation is referred to as the Anti-Corrupt and Public Integrity Act. This act is essentially an assault on lobbying. Another idea is to develop a Global Financial Register that records the ownership of financial assets. According to the proposal's advocates, this would deal a severe blow to money laundering and rising inequality.
What is Really Needed?
There are many other proposals mentioned on the internet. However, political talking points and one-liners are not helpful, and only confuse the issues discussed above. People need to know what socialism is, and what it is not. Our current social programs do not represent socialism, but instead attempts to mitigate some of the problems associated with capitalism. A more comprehensive discussion of how the weaknesses of capitalism can be overcome is needed from both political parties, and more importantly from unbiased independent thinkers. The future of our democratic capitalism depends on an underlying social structure based on education, truth-telling, and moral character.
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Another view of the econmic system models including an explaination below the grahic.
1 The graphic illustration and part of this discussion are from Chapter 1 of Martin, J. R. Not dated. Management Accounting: Concepts, Techniques & Controversial Issues.
2 For more on how capitalism differs from noncapitalist economies, see Oser, J. 1963, The Evolution of Economic Thought. Harcourt, Brace & World, Inc. (Summary), and Loucks, W. N. 1965. Comparative Economic Systems, 7th edition. Harper & Row.
3 Loucks. Comparative Economic Systems, p. 38.
4 Loucks. Comparative economic Systems, Chapter 3.
5 Loucks. Comparative economic Systems, p. 200.
6 See my discussion of individualistic versus communitarian capitalism in Chapter 1.
7 See Elizabeth Warren's Theory of Capitalism.
Related Summaries:
Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press. (Summary).
Oser, J. 1963. The Evolution of Economic Thought. Harcourt, Brace & World, Inc. (Summary).
Porter, M. E. and M. R. Kramer. 2006. Strategy and society: The link between competitive advantage and corporate social responsibility. Harvard Business Review (December): 78-92. (Summary).
Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary). The evolution to a higher form of capitalism.
Thurow, L. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. William Morrow and Company. (Summary).
