Capitalism and socialism — PM is right, but why it isn’t true at the same time

Prime Minister Tun Dr Mahathir came up with a favourable statement about the acceptable face of capitalism when addressing a retreat of the Johor government with federal government leaders a few months ago.

His main point was that a number of his ministers are socialist in their outlook and they regard businessmen as capitalists who should be opposed because they are a menace who oppress workers and the people.

To minds everywhere, I agree that capitalism does sound like a system of rule by capitalists for capitalists and socialism sounds like a system of rule by society for society.

But in saying and believing so, Mahathir makes plain that he doesn’t actually know what socialism is. He conflates capitalism with free markets and socialism as being against both, and that’s simply not what the word means at all.


Effectively, he is making the same mistake as US Senator Bernie Sanders — confusing socialism with social democracy.

Health care for all, unemployment insurance (not unemployment itself which is something socialism is rather good at producing) and agricultural subsidies — none are socialism in any form or manner. Socialism is about who owns the productive assets in a society.

There are various flavours of socialism. The Soviets thought it should be government that should own everything and run it badly. Other flavours emphasise more communal versions. It might be the workers who own an enterprise, could be the customers. The distinguishing feature is that it’s not the capitalists who own it.

And that’s the difference between socialism and capitalism — who owns the productive assets of the society. I’ve got to say I don’t particularly worry one way or the other about those two systems because as long as the choice is free, I don’t think it matters.

Therefore, none of the things that Mahathir is talking about have anything at all to do with socialism. It is social democracy. Taxing the rich a bit more to give a bit more to the poor? That’s social democracy.

Running a programme so that the disabled by chance or ill fortune still get to live? That’s social democracy, not socialism.

Further, this has nothing to do with the market. We can have socialism and/or capitalism both with and without market. Capitalism without market is something closer to fascism than anything else; socialism without market is the mistake almost all real existing socialists have generally made.

The Soviets, Venezuela, etc, they’ve all assumed that we should not be using the market and the price system in its dual role as an information system and an allocation system. That’s why they ended up as fragments of economic rubble.

The places that do understand the role of markets are pretty nice. You can have the tax-heavy social democracy of the Nordics, or the rather lighter welfare systems of the US or UK. All have large swathes of both socialism and capitalism within them and they work largely because they use the free market to do what markets do. In fact, the Nordics are notably more free market than the US is.

The one that makes the most sense to me in the market is commerce. The basic idea is that for almost all of us, almost all of the time, we’re simply worth more to someone else alive than dead. Here’s why.

First: some history. For millennia we have seen wars, the sole purpose of which was to gain control over land and the people who worked that land. It was by scooping the agricultural surplus that a leader or a warrior clan, if you prefer, became rich. Control of the land and the workforce was thus the aim.

This was as true of the Roman Empire as the Chinese, the Mughal states, the Incas, and Aztecs. Kings became very rich as they made all the land their personal properties.

Then Hitler’s aim, stripped of the racist idiocy, was for Germany to control the agricultural lands of Eastern Europe and thereby grow rich.

And then something changed — the mechanisation of agriculture and the move into industrialised societies. Yes, most certainly, there was industry before that but the mass movement away from the land really only happened in the 20th century.

And suddenly owning land and its workforce wasn’t the way to national wealth at all. In fact, as Russia found out, owning the physical factories wasn’t the way either, for they did disassemble much of Central Europe’s industries and carted them back to the Soviet Union. And they had by far the vast majority of those steppes lands, possibly the most fertile agricultural land on the planet. And yet they didn’t grow rich, as we know very well.

The richest places in the world today are the little city states — Hong Kong, Singapore, Luxembourg, none of which have even the vaguest possibilities of feeding themselves, and we can argue for the benefits of social democracy against markets all we want. But the basic underlying point is, true it is places which are somewhere in the spectrum reliant upon markets only have ever become rich or stayed so once there. That is, markets matter!

But here’s the problem. Imagine that you are a corporate CEO, and you want to do some hiring. You could hire engineers, the kind of people who make new products or make existing products more cheaply. Or, you could hire lawyers and lobbyists, people who work with government officials to pass new laws that keep out competition or pay you subsidies.

If you want to earn honest profits, you have to sell to consumers, who want quality and low prices. That’s hard, especially for mature products in industries that have been around a while.

At some level, even the most independent-minded entrepreneurs realise that it’s easier to sell a sad story to the government than it is to sell real products to consumers. In fact, you can’t blame the corporate leaders who succumb to this temptation: there’s nothing illegal about making government your source of revenue.

But this is not how the market actually works. So, is the market rigged? Yes, the market is rigged. Of course, we could just move one step up the chain, and hope for “good” political leaders.

After all, politicians get to design the system of incentives, and in principle that system could deny opportunities for rent-seeking. But why would a politician want to do that? Forcing businesses to line up to beg for favours is a big help at election time. Businesses that don’t play along will be singled out for “special” attention, either extra taxes or unwelcome regulation.

Once we start thinking, “Huh. Everybody else is taking — why shouldn’t I?” And in fact, If I don’t, my firm is not going to survive and I have to fire my workers, so it doesn’t matter. It’s the right thing to do. But I do think that I should get a special deal for my company, my industry, my situation because everybody else is at the trough.

Even in our education system, it appears that a significant part of the values taught actively encourage and even glorify privilege seeking. Approved history texts normally treat the adoption of new redistributive policy as a social gain. Probably the most controversial topic in schools and universities is environmentalism, the main thrust of which is to make students enthusiastic supporters of strict environmental regulations regardless of their efficiency.

See what happens, whether it is capitalism or socialism, this is still happening because people do respond to incentives.

I don’t mind if people discussing these issues don’t agree with me. But I really would prefer it if they actually understood the issues and concepts here. The markets are what matter, not the system of government. And social democracy might be a good or a bad thing, but it’s absolutely nothing to do with socialism.


The views expressed are those of the author and do not necessarily reflect the official policy or position of the New Sarawak Tribune.