Overview of Capitalism and Socialism for Effective Altruism

bykbog5d16th May 20199 comments

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This is an edited excerpt from the work in progress Candidate Scoring System 5. I figured it would be useful for people who are interested in capitalism and socialism. It's far from perfect, but I have not found any remotely satisfactory overview anywhere else. This can be a starting point for people who want to debate whether economic systems should be treated as a priority in EA.

Capitalism is an economic system where the means of production - land, machinery, investment capital - are mostly held by private owners. Socialism is an economic system where they are owned by the public in a collective or governmental organization. For a variety of reasons, it could be important to take a stance on the question of which is preferable. However, this question is simply too vague to be a valid basis for direct research, because there are many very different ways that these systems can be realized. Modern economic and political science scholarship focuses on narrower and better-defined issues. Acemoglu and Robinson (2015) note, “we do not believe the term capitalism to be a useful one for the purposes of comparative economic or political analysis… both Uzbekistan and modern Switzerland have private ownership of capital, but these societies have little in common in terms of prosperity and inequality because the nature of their economic and political institutions differs so sharply.” Socialism is also very broad. Deep ideological disputes exist among leftists in America, concrete policy proposals are rare and controversial, and there is no clear conception of what future socialism would look like. If we want to evaluate the desirability of generic increases or decreases in the probability of socialist change, we cannot select a specific policy proposal that we would prefer. Instead we must survey the various possible forms and components of socialism and produce a vague expectation over the lottery of possibilities.

When it comes to the centrally planned economic models of existing and historical socialist states, economists overwhelmingly regard them as inferior to capitalist economies. There is disagreement on whether early Soviet industrialization was expedited much by central planning (Krugman 1994, Allen 2005), but the human costs are unequivocal. The entire suite of socialist policies reduced Soviet agricultural productivity by about 50% (Johnson and Brooks 1983). Central planning went awry in the USSR when poor leadership appeared later on (Allen 2001, Allen 2005). Fidel Castro’s revolution was an economic disaster for Cuba (Salazar-Carrillo and Nodarse-León 2015).

However, most socialists nowadays espouse alternative models. Perhaps the most notable example is Schweickart (2011). We have not seen any rigorous, holistic, comparative evaluation of such schemes. Therefore, we will look more specifically at major components of socialist plans.

One aspect of many socialist plans is greater government control of the economy. Hall and Lawson (2014) looked at 198 empirical studies and found that economic freedom corresponds with good outcomes in 2/3 of studies and bad outcomes in less than 4% of studies. It’s worth noting, however, that other aspects of socialism might temper some of the downsides of free markets and thereby reduce the necessary level of economic regulations.

Another aspect of many socialist programs is the replacement of privately owned enterprises (POEs) with state-owned enterprises (SOEs). Two comprehensive literature reviews have shown that SOEs are inferior to POEs (Megginson and Netter 2001, Shirley and Walsh 2001). Also, two recent studies have found that Chinese SOEs are inferior to POEs (Boeing et al 2015, Fang et al 2015). Goldeng et al (2008) found that POEs outperformed SOEs in Norway in the 1990s. However, some of the recent work questions this point of view. Jakob (2017) looks at an international dataset and finds that there is no difference in performance between POEs and SOEs. A metanalysis by Bel et al (2010) found that privatization of local waste and water services has no effect. Omran (2004) suggested that privatization of Egyptian firms in 1994-1998 did not create significant improvements. Demsetz and Villalonga (2001) found that there is no systematic relationship between ownership and performance in US enterprises. But even if SOEs are just as good as POEs on the margin, it seems unnecessarily risky to push radical changes to implement many more of them.

State-owned enterprises are not universally desired by leftists, depending on the industry. A relatively popular SOE program would be nationalization of the finance industry, outlined by Schweickart (2011) under the label “social control of investment”. Public banks are still less efficient than private banks, but the difference is much smaller than it is in other industries (Megginson 2003). It seems plausible that public investment would promote better domestic social outcomes despite the inefficiency, if the banks are properly designed and implemented. However, public banks in the West would cut investment in foreign economies, as public banks would be politically mandated to support projects which maximize employment for the domestic population. This would allow more severe poverty in the developing world.

Another major plan of many contemporary socialists is the use of worker cooperatives, firms which are owned and managed by the workers. Pérotin (2012, 2015) summarizes research to show that worker cooperatives have broadly positive impacts. As for firms which are merely owned by workers, Kruse (2016) summarized existing research to show that worker ownership is modestly positive for both firm performance and employee welfare, though a study by Monteiro and Straume (2018) found inconclusive and potentially negative impacts on firm efficiency in Portugal. But a significant downside of worker-owned and especially worker-managed firms in the US is that they discourage outsourcing to needier workers in poorer countries. And mandatory collectivization could have very bad effects, as shown by the 20th century’s socialist programs.

Leftists often allege that institutional bias from the capitalist system distorts the views and research of economists and historians, so that socialist programs are better than they seem. But we have seen little evidence of this going on, and it is inconsistent with two major academic trends: the academic popularity of Marxist doctrine in economics in the late 19th and early 20th century, and the widespread, almost unquestioning academic acceptance of anti-capitalist views in certain subfields of the humanities today. Empirical analysis of socialist regimes is actually likely to be over-optimistic because they have typically been autocracies, which deceive their audiences (Gregory 1990, Kornai 1992, Martinez 2019). American economics textbooks systematically overestimated Soviet growth during the Cold War (Levy and Peart 2011).

In sum, government control of the economy would be bad, state-owned enterprise would mostly be bad, and worker cooperatives could be good or bad depending on the context of their implementation. However, these programs may have interactions with each other so that a multifaceted socialist program could not be reliably judged merely by taking the sum of its parts. Socialists usually believe that interactions will be positive – in other words, socialist projects will perform much better if their environment has more socialist aspects in other ways. However, we have seen no good arguments for this view. Negative interactions seem equally possible. The benefits of socialist programs might have diminishing returns as they stack. An excess of socialist programs could concentrate too much power in the government, creating incentives and opportunities for totalitarianism and abuse as we saw in the 20th century. So the question of interactions doesn't give us much reason to take a side, though it yields another layer of uncertainty.

Political philosophy does not change the picture. Cohen (2009) argues that socialism would theoretically be more compatible with ideal principles like equality and fairness, but Brennan (2014) demonstrates that Cohen’s argument does not work. Brennan further argues that capitalism is superior in terms of theoretical alignment with ideal principles, but Hall (2014) finds that this part of his argument fails. In any case, such appeals to ideal principles have little relevance for real economic and social outcomes. Similarly, Marx argued that exploitation and alienation are inherent to capitalism (Wolff 2003), but there is no good evidence showing that this hurts aggregate well-being relative to alternatives. In fact, the capitalist organization of alienating and exploitative labor has led to substantial improvements in population size and quality of life over the history of industrial society. Fuerstein (2015) meanwhile argues that capitalism weakens democracy and further shows that this weakening of democracy has real social costs. However, he does not compare this to the effects of socialist systems on democracy, and he outlines solutions that are compatible with capitalism.

It does seem possible to sketch out a socialist proposal that would probably be superior in practice to the current trend of capitalist policies. However, there are still reasons to be pessimistic about generic movements to implement socialism. Many leaders of failed historical socialist movements and nations were avid scholars of Marxist theory, not ignorant and mistaken on its content. Socialist regimes also varied significantly in their ideologies, such as the various stages of Soviet doctrine, Maoism, Juche, and other systems. Therefore, historical failures cannot be attributed to simple and avoidable ideological errors on the part of socialist leaders. And some trends among some current Western leftists – disinterest in policy planning, disinterest in economic research, economic denialism, historical revisionism and apologia, dehumanization and violence towards political opponents, censorship and censure of internal dissent, internal sectarianism, explicit opposition to objectivity and truth-seeking, and vindictive attitudes on social justice politics – increase the chances of repeating the failure modes of 20th century socialist programs. Even if we identify as socialist and create a desirable socialist plan, it is incorrect to assume that leftists will implement it instead of worse ideas, which means we should not endorse generic socialist efforts.

Additionally, socialist change might come in the form of violent revolution, which would have a number of additional domestic and international costs. This possibility gives an extra reason to prefer maintenance of the existing economic system.

Despite these issues, there is still substantial value of information in testing a better model of socialism, if a good pathway to running a good test can be identified.

Overall, there is decent but not decisive evidence against socialism. It’s plausible that some forms of socialism, particularly those which leverage worker cooperatives while maintaining competitive markets, could be better than capitalism; this has not been substantiated well enough to provide a foundation for general activism and policy planning but may be worth testing in the right circumstances. However, there is no guarantee that generic socialist forces in America would lead to a good socialist system rather than a bad socialist system. Nor is there a guarantee that socialist change would be a peaceful process. Therefore, generically increasing the strength and stability of the capitalist system seems like a good thing, though it also seems too uncertain and intractable to merit attention as a cause area in its own right.

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