SOCIALISM. It’s a word that can make people on the far left swoon, as they imagine an egalitarian utopia, even while inciting those on the far right to mumble protective oaths like a medieval citizen seeing a sign of the devil. It’s also a word that Google Trends reports has had a surge in search-related interest since last December.
As competing visions of how to protect and enhance the American economic system vie for political popularity, the word is used to both support and condemn proposals. Problem is, it’s been stretched, pulled, interpreted and manhandled so much that two people debating the merits of socialism may not even be discussing the same thing. That’s not good if our goal is calm, cool deliberation, rather than emotional, knee-jerk confrontation.
Let’s take a step back and revisit some basic economic concepts. Economics is the study of how we make choices. Economic systems are defined by who gets to make those choices. In their purest form, there are three such systems:
Free market economy. Individuals, most notably buyers and sellers, make the decisions. They negotiate price and quality. Life is improved, famously, by the “invisible hand” of the competitive market. Its advantage is that it allows maximum freedom, sets an immediate, rational value to things, and inspires capital investment and innovation.
The downside is that it’s predicated on a delicate balance of power between buyers and sellers, which—if thrown off—can subvert the system, as happens when someone has a monopoly. In addition, the system is prone to making more short-term, individual-benefitting decisions, rather than long-term choices that might help us collectively, such as reducing pollution or improving mass transportation.
Command economy. In this model, decisions are made by those with political power. This is the category into which socialism falls. But the category also includes regulation by republican forms of government, monarchies and dictatorships. Big picture decisions can be made that have long-term advantages, such as constructing public schools to educate future citizens. If done well, it’s also possible to achieve economies of scale—as happens with public utilities. The downside: Governments are notorious for not doing things well, quickly or without waste.
Traditional economy. This is the sleeper one—but, ironically, it has the most decision-makers, because the group consists of all our ancestors and their continuing influence. Why is beef off the menu for one religion and pork off the menu for others? Why are many stores closed on Sunday, or clam chowder red in some parts of the country and white in others, or some clothes just for one gender?
These are the cumulative effects of cultural decision-making over time, and we often roll with them. The advantage of this system is that it gives people a framework to work within. It offers the comfort and identity that comes with being part of a group. The downside: Traditional decisions can be the hardest to change, even when they have become antiquated and counterproductive.
Which system do we have? What’s the best system? The first question is simple to answer, because it is true for every system ever used: We are a mixed system, predominantly free market, but with elements of the others.
Go to a grocery store. The owner decides what to sell and what price he wants to charge, though—aware of the importance of culture—he’ll take into account local area favorites. As customers, our choice is limited by the grocery store’s selection—but we always have the choice to go to another grocery store. We can be fairly confident the food sold is of a minimum health standard set by the government, and we may pay for our purchase with government assistance, because we are elderly, a veteran or poor.
In other words, it’s mostly free market, but with aspects of both a command and traditional economy.
We can debate what the best balance is between the three. But it’s counterproductive to engage in demonizing and name-calling, and we shouldn’t irrationally condemn any of the historic and vital aspects of what’s become the world’s greatest economy. People on the left have no doubt benefited from wealth earned by entrepreneurs. People on the right have had their lives enhanced, and possibly saved, by government safety standards. And we all love national holidays.
Jim Wasserman is a former business litigation attorney who taught economics and humanities for 20 years. His previous articles for HumbleDollar were Applying Pressure, Five Mistakes, Spoonful of Advice and Under the Influence. Jim’s three-book series on teaching behavioral economics and media literacy, Media, Marketing, and Me, is being published in 2019. Jim lives in Granada, Spain, with his wife and fellow HumbleDollar contributor, Jiab. Together, they write a blog on retirement, finance and living abroad at YourThirdLife.com.
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