How to Understand Capitalism and Socialism

A burning topic, figuratively and literally.

Those of us who experienced the Cold War can be excused for thinking that this argument was dead and buried, but that has proven not to be case. Nor could it be, if the analysis given here is correct. For socialism, unlike capitalism, is a matter of the heart.

For many moderns, socialism is indeed the ideal. As I wrote 20 years ago, 

Even at its triumph, capitalism remained deeply unpopular, even shameful. The people’s hearts were elsewhere. They longed for a return to lost community, a caring society, a giving society, for commitment, for compassion. Though the Marxist reality was rejected, its ideal remained living and vibrant. Something deep inside compelled people to seek a social order fundamentally different from the one in which they lived. The moral high ground was held by those proclaiming agendas fundamentally at odds with the liberal order.[1]

These moderns function within a capitalist system; what’s more, many professed socialists make quite a good living within it. On the face of it, this seems utter hypocrisy. But it isn’t if one understands one basic datum: capitalism and socialism are not two stand-alone systems. No indeed. Capitalism is a system that can be harnessed; and socialism is one method of harnessing it – or at least attempts to do so.

Capitalism is structure, socialism is direction

How is that, you may ask? To make this clear, we need to introduce the distinction between structure and direction. Structure has to do with the way things are, the way they are built. It also includes the way in which they develop. As with a tree: its structure is branches, roots, a trunk; and the seed will of itself develop into a such an object with these characteristics. Direction, on the other hand, is the way such structures are put to use. A tree can be used in various ways, to provide shade, to provide fruits in season, to provide beauty, shelter for wildlife, or even be cut down and used for saw-timber or firewood. The plan and purpose for a tree is imposed upon it, it is the direction to which the tree is subjected.

The distinction is straightforward enough, but it is neglected, when not completely ignored. Language can be equivocal and as such confusing, leading to false conclusions. This is the case for the subject at hand. For the first thesis to be proposed is perhaps the most controversial: capitalism is in fact structure, while socialism is direction.

This means that the usual method of dealing with these two “isms” is faulty. As if they were two competing entities, each complete in itself. Nothing could be further from the truth. Capitalism is indeed a stand-alone entity, but one which can take on many guises, depending on the various directions imposed upon it. Socialism is not a stand-alone entity; it is, in fact, one of these many directions.

Capitalism is the form in which an economy develops

Capitalism is not the structure of all economies, but it is the structure into which all economies develop if given the opportunity. That is because it is based on realities implicit in the human social order.

If we look at undeveloped versus developed economies, we see certain characteristics. The most obvious is undifferentiation versus differentiation. An undeveloped economy is an undifferentiated economy: it lacks complexity, it lacks a variegated division of labor, and it also lacks organizational complexity. It is based on a simple social structure, the family writ large, thus the clan or tribe. Society itself is an organization. All relations are internal, the law pertains only to these relations; outside relations are ex lex (outside the law = outlaw), hostis (enemy), presumptively hostile or at least suspect, lacking governance in terms of an overarching law.

In the process of the development of a social order, the monolithic social structure with its sharply defined internal (domestic) versus external (foreign) relations, begins to break up, re-forming into a multiplicity of lesser associations with shifting memberships and coordinated interaction.

This process is especially visible in the development of the legal system. On the one hand, there is the formation of one specialized institution, the state, an institution/organization among many, charged with the sovereign promulgation and execution of law. On the other is the development of private law.

Essentially, private law is external law. It is external to all the organizations and associations of which the society comes to be made up, including the state. Public law, by contrast, is the law internal to the state organization. But the state is only one association among many; and these other associations likewise have internal laws. What coordinates them all with each other? It is private law. As such, private law enables the generation of the pluralist associationalism of a differentiated social order.

Now then, this private law is characterized by certain specific institutions. These come up always and everywhere, and they did so paradigmatically in Roman law, which is why that law has served as the framework for all legal science. These are property, contract, and pledge; these revolve around the citizen; they are enforced by means of courts in terms of the due process of law.

This is why Roman law speaks of the law of persons, of things, and of actions; these three sets of law correspond to those three categories.

Furthermore, private law has an economic dimension; in fact, this is perhaps its most significant dimension. For property, contract, and pledge, all determine economic relations. Together, they provide for the generation of credit and debt, and thus money. They are thus the basis for capitalism, which is an economy in which these institutions take their place. As such, every economy which develops, does so along these lines, and capitalism becomes more or less a part of everyday life, depending on the degree to which one becomes a participant in the process. The alternative is to remain a subordinate member of a group, enjoying only group-internal rights and privileges, eschewing exposure to the outside world. This is manorialism, which may coexist within capitalism as an outpost of the previous undifferentiated economy.

Upshot: The institutions of private law are the institutions of capitalism.

Socialism tells us how an economy ought to be arranged

Therefore, capitalism is a set of institutions that arises through the differentiation of society from monolithic to pluralistic conditions. It is a structure; it is the structure of a developed economy. Socialism, on the other hand, is a set of ideas about how such an economy ought to be arranged. It thus arrives on the scene once capitalism has been established.

In fact, it arrives on the scene only when a specific form of capitalism is established. This would be the form of capitalism which generated the Industrial Revolution – essentially, a combination of financial innovation and technological application, leading to the explosion of productivity characteristic of capitalism since the 19th century. This superabundant productivity, in turn, led to the divorce of production and consumption which has had momentous effects on all aspects of life.

One of these effects has been precisely socialism. For what is it that inspires socialism, this vision of how things ought to be? The spectacle of maldistribution of the exorbitant wealth suddenly made available to mankind. Not only do the “capitalists” benefit from this new process of production by amassing enormous fortunes, money which, in this view, has been misappropriated, as it rightly belongs to the workers. But production itself is disproportionately distributed. Seemingly it goes to those who already have, leaving those lacking the means to participate in the capitalist system to “go without.”

We could argue that this is not the proper way to look at this phenomenon. After all, the actual conditions of the working class have improved on a consistent basis, albeit through periods of depression which likewise can be explained quite adequately without issuing a blanket condemnation of the capitalist system. The standard of living for all people in post-Industrial Revolution (“industrialized”) societies has improved dramatically over the years. Citizens of countries which have not been industrialized attempt, on a monumental scale, to migrate to nations which have been, which does not argue for a deterioration in conditions.

In this sense, post-Industrial Revolution capitalism has been its own worst enemy. It has created the means to generate enormous productivity. But this has only awakened a spirit of resentment regarding the ends to which that productivity is directed.

Because it creates conditions of inequality, or better, does not alleviate inequality, it also creates resentment, even though the baseline condition of everyone is improved. Spurred on by the concurrent development of rights-oriented ideologies, it has engendered a spirit of entitlement to the fruits of the production of the capitalist engine.

This fundamental change in mentality is something which has not received sufficient comment. Prior to the Industrial Revolution, this entitlement mentality did not exist. No one dreamed of claiming a right to food, housing, work, health care, education, etc., the way citizens of industrialized nations do. This is because there was not yet any divorce of production from consumption. For the most part, the production/consumption loop was closed in local or regional contexts. But since the advent of the Industrial Revolution, production has become a problem.[2] The connection between production and the consumption of that production has been lost. The division of labor has lost its self-evidence. The “cog in the machine” experience, itself the product of a complex division of labor, supply chain logistics, and the like, has created conditions of uncertainty with regard to one’s position and purpose in society.

One of the first harbingers of the new state of affairs was the controversy over the possibility of gluts, waged in the early 19th century between Thomas Malthus and Thomas Chalmers on the one hand, and Jean-Baptiste Say on the other. It was this controversy which inspired Say to develop what has since become known as Say’s Law: supply creates its own demand. In other words, production and consumption are bound together in an iron loop. As such, Say argued, there can be no possibility of gluts.

But reality proved otherwise. Say’s Law could be better formulated as supply ought to create its own demand. When it doesn’t, something is wrong. This is what fired the socialist mentality. The production/consumption mismatch led to gluts on the one hand and shortfalls on the other. The mismatch might have been repaired by reforming the system. One of the major elements of that system was an unfair financial and monetary system – commodity-based reserve banking – that generated boom-bust business cycles with an intrinsic deflationary bias, and so consistently benefited the creditor over against the debtor.[3]

Instead, visions were spun of order and justice establishing real, absolute equality in the here and now – visions, be it said, totally dependent on and reliant upon the underlying economic reality.

In this sense, socialism is a production of the “revolt of the masses,” Ortega y Gasset’s summation of the change in mentality brought on by the Industrial Revolution. Ortega pointed out that modern man has a new attitude, one of expectancy combined with ignorance. All the fruits of progress are taken for granted, while the process by which they all are generated is not only not understood, but dismissed as irrelevant. Dangerous, this kind of enlightened unenlightenment. And that is what socialism does: it takes for granted the ongoing existence of productivity, and expects to direct the flow in new directions.

So socialism views the “means of production” and the concurrent systems of logistics, transportation, legal order, etc., as pre-existing realities that are just there.[4] All it takes is to remove the group that is atop the system and replace that group with an enlightened one, one with the right set of values, who will take that massive superabundant productivity and put it to good use, and so provide for everyone’s needs and wants while also saving the planet from greed, corruption, pollution, and other ills.

But socialism undermines the structure it is attempting to harness

But this is to beg the question. Certainly, capitalism is structure, but it cannot be harnessed to socialist goals, because to do so would require that we dial back the institutions characteristic of a developed economy, all of which revolve around private law with its institutions of property, contract, and pledge. As such, it would cast society back into the condition of an undifferentiated monolith. For one thing, this would reduce carrying capacity logarithmically (i.e., reverse exponentially). The result would be mass starvation.

Capitalism is structure, but it requires a certain spiritual infrastructure to operate. It developed in the West, because of the peculiar confluence of factors in the West, particularly Roman law and Christianity. One of the fruits was the abolition of slavery, something which hitherto had only been contemplated as a far-fetched possibility, which only obtained in a bygone Golden Age. As with everything else, our age views this, not as an achievement, but as something to be expected as a matter of course, requiring no thought as to how it came about, but only vilification for the fact that it took so long.

Ortega’s motif of a revolt of the masses explains this perplexing bias against the hand that feeds. The capitalist order, the order of private law, is not only institutions but customs, mores, habits. The three loci of private law as listed above are persons, things, and actions. Actions can be summed up as due process of law: no one can be deprived of life, liberty, or property without a fair trial, without being able to defend oneself before a neutral arbitrator. Things can be summed up as the laws, including property, contract, pledge, credit and debt. These are the rules enabling free and equal individuals to pursue their own ends in freedom and for mutual benefit.

Thirdly, persons are citizens. This is the subjective side, over against law, the objective side. Laws do not exist in a vacuum; constitutions do not enforce themselves. Persons, citizens, give direction to the structure that these provide. They either use these tools advantageously, or misuse them to their own great disadvantage. The goal, as Aristotle said, is reciprocity.

There are two different orientations citizens can adopt when faced with this framework. One is that of a virtue orientation. The virtuous citizen pursues self-reliance through an ethic of work and saving. He follows the Apostle Paul’s injunction: “He who steals must steal no longer; but rather he must labor, performing with his own hands what is good, so that he will have something to share with one who has need” (Ephesians 4:28).

The other is an entitlement orientation. The entitled citizen goes through life being owed things, demanding rights which, when analyzed, begin to look a lot more like privileges. Politicians pander precisely to the citizen harboring this mentality. Such citizens are who Ortega had in mind with his mass-man, his “Señorito Satisfecho.” Production is just there; or even worse, mass-man’s wealth has been confiscated, somehow, although how precisely he finds it difficult to pin down. We resort to generalities, demonizing capitalists, or “kulaks,” or various ethnic groups. There have been many such groups demonized throughout history. The Jews are just one. Who are today’s Jews?

A structure exists to be harnessed to one direction or another. Here as well, nature abhors a vacuum. Contemporary capitalism is certainly being subjected to a certain “vision of the good.” Perhaps it would be better to say that it is being subjected to two competing such visions. The question is, which one will win out.

Further reading:

[1] A Common Law, p. 6 (2nd ed.: p. 8).

[2] See “Consumers of the World, Unite!

[3] This is the true basis for Marx’s critique of the “capitalist” – see “The Social Question Unravelled.”

[4] “Civilisation is not ‘just there,’ it is not self-supporting. It is artificial and requires the artist or the artisan. If you want to make use of the advantages of civilisation, but are not prepared to concern yourself with the upholding of civilization – you are done. In a trice you find yourself left without civilisation. Just a slip, and when you look around everything has vanished into air.” Revolt of the Masses, p. 88.

Author: Ruben Alvarado