A few months back, I had a lengthy argument with a close friend of mine. It was about communism and capitalism, and I was on the pro-capitalist side. I wanted to write this article since then, but I thought I better really understand both of them in the first place. Now I think I am in a better place to write this article than I was a few months back. I was quite surprised to find out that most, if not all, of the educated youths, are pro-Communists or Socialists or whatever -isms that give a false promise of equality. Even in the USA, that is why Bernie Sanders managed to get a lot of traction in the democratic primaries. But now I understand the allure behind them. If your knowledge about the workings of socialism or communism is fairly limited, I have attached an extremely rudimentary video which can expound quite clearly.
On a “perfect” world – where people are completely rational, have no self-interests and vices – socialism or communism might work. I mean, who does not want equality. But unfortunately, that just not how it works. The failure of any communist or socialist state is down to psychology. I will put it this way. Remember the time you were preparing a study plan to finish the entire syllabus within the semesters but probably fell short, that exactly what Lenin or Karl Marx or Mao or even Nehru was falling into. The psychological term is called the planning fallacy. To put this in a better way, we often exclude randomness and psychology when planning for anything, so most plans don’t work, even when they do, it is mostly out of luck. Shit happens, and for the most part, you can’t do anything about it. That is the beauty of chaotic systems and economies are certainly chaotic.
There is no better way to explain capitalism in a single sentence than what is said by the great Adam Smith himself.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
And there is nothing truer than this statement. In our core, we are all beings concerned with perpetuating our DNA and honestly, from a biological standpoint, that’s life. So there is no reason to believe that a system that heavily relies on “benevolence” of a lot of people will be sustainable and it has proven, repeatedly, the same.
On a deeper level, I found three reasons for this happening and all of them happen in tandem with each other.
- Absence of skin in the game
- Self-interest problem
- Competition problem
Skin in the game is a metaphor meaning what one has to lose in the event of a shit happening. In a capitalist society, entrepreneurs and businessmen have all to lose in case of any eventuality. A bad decision which hurts the company hurts the entrepreneur financially.
For our case, to talk about a socialist system (centralized control), let’s take the Indian railways; any centralized non-competitive system is not capitalist. A Railway manager has nothing to lose whether or not you had a pleasant trip or not. All he needs to make sure is that no shit goes crazy. He is not rewarded for performance or anything for that matter because there is no possible alternative to the Indian railways.
Self-interest problem arises when the self-interests of the parties involved are divergent. To illustrate this a little better, take a restaurateur, his self-interest is for you to become a regular customer – thereby him earning more money -, and your self-interest is to get a good healthy meal. In this case, the self-interests of both parties align and you both will reach a mutually agreeable result – here you being satisfied with your food and the restauranteur being hopeful of you becoming a regular customer.
The same cannot be said about the same railway manager. In a socialist system, his self-interest lies in pleasing his superiors – since power and influence are everything in a socialist system – whereas your self-interest lies in getting from point A to point B in a comfortable manner and I don’t need to mention that both of them are incompatible.
In a communist society, this alignment never happens. In a centrally planned and state-owned economy, you are expecting the benevolence of the people working for the state to satisfy your self-interests and it seriously contradicts Adam Smith. To put it in other words, it is not in the self-interest of a government employee for you to lead a happy life. Their self-interests probably include earning more money and power for themselves which leads to corruption and bureaucracy.
The competition problem is fairly straight forward. Absence of competition leads to complacency and corruption. It all has to do with the options one have and who has the leverage. In a true capitalist society, the customer is the KING and this is no cliché; it is true to the core. The customer has a lot of options in front of him, and that gives him leverage over the businesses. The exact opposite happens in any kind of socialist system; it empowers the institutions and bureaucrats over the people. There is no need to give an example for the capitalist system as anyone can imagine for themself. For the socialist system, think about the time when India used to be a loosely socialist system and it’s not that too long ago; it was only since 1991, India can be called as something of a capitalist state, still not true capitalist though. Let’s say you are a businessman in the ’70s who wants a loan to expand your business. The expansion of your business really has a lot of benefits for the society around you - more jobs -, but you getting a loan from that bank is not really in the self-interest of that banker; as there is just one centralized bank. There is no way one can get a loan from the central bank without bribing the manager because it is you who is desperate and you have nowhere else to go. The situation is the exact reverse today – at least ideally.
All these three things combined make a socialist society stagnant in all possible wellbeing indices; including scientific, quality of life, pollution, hunger, poverty and starvation. They no one can possibly deny that.
While I agree that capitalism is not perfect as it creates some sort of inequality, any centralized society is worse. If you want to be to bomb you with numbers, I can do it all day because it is just statistically undeniable. But I believe these three factors can explain the absence of success for any society which attempted to be just and socialist in a personal and psychological level. There are deep philosophical reasons for failure of these systems, but I don't think I am articulate enough to write them now...
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