Defining the Terms

Over the past 150 years, one of the most contentious intellectual and prac­tical disputes has been between those who favor capitalism and those who favor socialism. An accurate historical chronicle of this dispute, either in the practical realm or in the realm of ideas, would be a monumental undertak­ing.

The purpose of this first chapter is to provide just such an account. This first section seeks an adequate definition of the key terms. The second sec­tion identifies the main points in contention. The main conclusions of these first two sections are that the objects of discussion are abstract types of eco­nomic systems and that the dispute is a twofold dispute about different and conflicting conceptions of the good society and conflicting empirical beliefs about the social consequences of the two types of economic systems.

On the face of it, the dispute seems to be about economic systems. How­ever, some writers have used the terms ‘capitalism’ more broadly to refer to a society in its entirety or even to a culture. ‘Socialism’ has sometimes been used in a similar way, and it has also been used to refer to a social movement. Using these terms in such broad ways serves to emphasize the interdepen­dence of social institutions and the interconnectedness of social phenomena generally. Though these interrelations and interconnections can hardly be denied, one problem with understanding these terms so broadly is that the dispute becomes very difficult to evaluate, since the objects of discussion are entire societies, cultures, or social movements and not just economic systems.

The most natural alternative—and the one that will be adopted in this book—is to think of capitalism and socialism as economic systems. This way of understanding the subject matter of this dispute has a long and impressive historical pedigree and a high degree of contemporary relevance. On this understanding, the dispute between those who favor capitalism and those who favor socialism is a dispute about economic systems. Partisans of these alternative economic systems may or may not have significant disagreements about other matters; indeed, one of the questions to be investigated in an ana­lytical account of this dispute is just how far these disagreements must extend, given a fundamental difference of opinion about economic systems.

However, it might be objected that to characterize this as a debate about economic systems is incomplete or misleading because economic systems are inextricably intertwined with other social systems and institutions, in partic­ular, political systems. More precisely, even to describe an economic system, it is necessary to make some tacit or explicit suppositions about the accom­panying political system. For example, in describing a capitalist economic sys­tem, one must presuppose the political recognition and enforcement of pri­vate property rights. On the other side, socialists typically envision a commanding presence in the economy for the state. Certainly, one cannot specify a socialist economic system without describing some elements of the state apparatus, at least at some level of abstraction.

Although political and economic systems cannot be completely separated, it is not necessary to specify the political system fully in order to discuss cap­italist or socialist economic systems. After all, some aspects of the political sys­tem are not directly relevant to a given economic system and how it func­tions. In light of this, in what follows, capitalist and socialist economic systems will be conceived of as including whatever parts of the political system are presupposed in their respective descriptions.

To understand what capitalist and socialist economic systems are, let us begin with the general concept of an economic system. Economic systems are social institutions, and social institutions are rule-governed domains of human behavior that answer to some identifiable range of human needs. The economic system of a society is that social institution which regulates the pro­duction and exchange of exchangeable goods and services. (Not all goods are exchangeable—love and divine grace come to mind as examples.) Its func­tion is to meet those human needs that can be met by exchangeable goods and services.

The specification of a social institution, for example, a society’s economic system, requires a statement of the rules that govern behavior in the relevant domain.

What, then, is meant by the terms ‘capitalist economic system’ and ‘social­ist economic system’? Let us begin by replacing the former term with the term ‘free enterprise system.’ There are a number of reasons to recommend this. First, it is arguable that someone or some group is going to have to play the role of capitalist in any economic system, in which case it is misleading to describe one economic system as “capitalist.” Second, the term ‘capitalist eco­nomic system’ carries nineteenth-century Marxist connotations; in particu­lar, it suggests that most firms are owned by one or a few individuals—cap­italists—who do not labor. This is not, in general, the case today in so-called capitalist economies. More generally, it suggests that one who describes an economic system as capitalist subscribes to important elements of Marx’s analysis of capitalist society, elements that are contentious and controversial.

On the other hand, though the term ‘free enterprise system’ is not with­out unwanted connotations, it is more descriptively accurate. To designate an economic system in this way is to suggest that firms are free to carry on production in whatever manner they see fit, subject only to specifically enu­merated side constraints imposed by the state. It also puts the focus on the enterprises or organizations, which is especially appropriate for the purposes of this study; for as we shall see in later chapters, a crucial difference between the most defensible form of market socialism and a free enterprise system is that the former, but not the latter, mandates by law a certain type of economic organization, the self-managed cooperative. By contrast, in a free enterprise system, production can be and is in fact organized through a variety of dif­ferent organizational forms.

What, then, does the term ‘free enterprise system’ mean exactly? The fol­lowing seems to accord reasonably well with customary usage: a free enter­prise economic system is any economic system in which (1) most of the means of production (raw materials, capital goods, etc.) are privately owned and (2) people are free to sell their labor on the market. As suggested, the first con­dition is to be understood as laissez-faire: subject to the constraints imposed by the rights of others and subject to other specifically enumerated restric­tions imposed by the state, individuals and groups are formally free to acquire and dispose of means of production in whatever manner they see fit. Note that the definition says “most” of the means of production, since the state can and does own some means of production in existing free enterprise systems. Sometimes state involvement in the economy is so extensive and pervasive that it is not clear that private individuals and groups can be said to truly own the means of production.

The second condition about labor markets helps to distinguish a free enterprise system from systems of slavery and serfdom, as well as other prim­itive economic systems. Other systems have recognized private ownership of the means of production, at least for some individuals, but they have not countenanced the universal freedom to sell one’s labor. Note that in existing free enterprise systems, the state does impose specifically enumerated restric­tions on the sale of one’s labor. For example, a wide range of occupations and professions require that individuals have state licenses to sell their labor. This includes not only doctors and airline pilots but also primary school teachers and plumbers. Curiously enough, although cosmetologists need a license, cosmologists do not. Nor do journalists, politicians, or clergy. In a highly reg­ulated society, it is ironic that many of those who can most deeply affect a society and its citizens do not need a license to ply their trades.

Based on this definition of a free enterprise system, it is obvious that there can be significant variations within this general type. One dimension along which particular free enterprise systems can vary, at least up to a point, is the extent to which the production and exchange of goods and services is car­ried out through private enterprise as opposed to the state. States have removed the production and exchange of various goods and services from the domain of private enterprise in a variety of ways. Perhaps the most com­mon is by awarding a legal monopoly on the production and distribution of some good or service to a nationalized or municipalized firm. States also exclude private enterprise through an outright ban on the production and/or distribution of some goods or services (e.g., recreational drugs, human organs).

Free enterprise systems can also vary in the nature and extent of side con­straints imposed on the exercise of private property rights. Side constraints require or prohibit certain courses of action that an owner of private prop­erty must do or refrain from doing; the owner retains what might be called residual rights of control in the sense that he can do whatever is not expressly forbidden and can refrain from doing whatever is not expressly required. These side constraints go beyond the traditional prohibition on harmful use to include such restrictions as zoning laws, occupational licensing, and the imposition of various terms and conditions on the employer-employee con­tract. Over the past few decades, these constraints have grown more numer­ous and detailed in existing free enterprise systems. At some point, their pro­liferation so diminishes residual rights of control, and thus effective ownership, that such systems can no longer be accurately described as free enterprise. This is one reason why a state that is ever more intrusive in the economy is favored by opponents (and opposed by proponents) of a free enterprise system.

Finally, free enterprise systems also vary according to the extent to which the state tries to manage the economy. All modern states use tax and fiscal policy to affect the economy at both macro and micro levels, and some par­ticipate more actively through a variety of other instrumentalities, such as subsidies, public-private partnerships, and purely public investment in infra­structure. On the other hand, large-scale investment planning is not a func­tion the state takes on in a free enterprise system. The definition of a free enterprise system employed here implies that it relies on private initiative for most new investment. All these variations are variations within a type. To reit­erate, what makes an economic system a free enterprise system is that (1) most of the means of production are privately owned and (2) people are free to sell their labor on the market.

Let us consider now the term ‘socialist economic system.’ This term is harder to define, since socialists disagree among themselves about what socialism “really is.” It would seem that everyone (socialists and nonsocialists alike) could at least agree that it is not a system in which there is widespread pri­vate ownership of the means of production. Thus, the terms ‘socialist eco­nomic system’ and ‘free enterprise system’ are logical contraries in that no system can be both, though a system may be neither. But what about West­ern European social democracies? Aren’t they counterexamples?

It might be argued that the socialist character of these systems is to be found in the extensive social welfare programs provided by the state and per­haps in their relatively progressive tax systems. To some extent, the dispute here is merely terminological, to be settled by stipulation. On the other hand, it is, I think, more accurate and illuminating to say that these societies have free enterprise (or capitalist) economic systems and that their political sys­tems contain structures that are intended to realize various goals or values that are commonly associated with socialism.¹ Furthermore, these political structures are from time to time run by people who call themselves “social­ists.” This way of thinking about what socialism involves forces one to distin­guish institutional means from the ends one believes the institutions can or should achieve. To be a socialist is not just to believe in certain ends, goals, values, or ideals. It also requires a belief in certain institutional means to achieve those ends; whatever that may amount to in positive terms, it cer­tainly presupposes, at a minimum, the belief that these ends and values can­not be achieved in an economic system in which there is widespread private ownership of the means of production.

In light of these considerations, it is fair to say that in a socialist economic system, private ownership of the means of production is, in general, prohib­ited. The “in general” qualifier is inserted to make room for some private ownership in a socialist economy, just as there is some public ownership in free enterprise systems. There is no need to be completely rigid in one’s enthusiasm for any form of ownership. The only requirement is that private enterprise is the exception, not the rule, in a socialist system.

What else does a socialist economic system involve? Those who favor social­ism generally speak of social ownership, social control, or socialization of the means of production as the distinctive positive feature of a socialist economic system. But what does this amount to? The main idea seems to be that an eco­nomic system is socialist only if control of the means of production is exercised in the interests of society at large or at least in the interests of the working class. The way this is usually explained is that just as private property serves private interests under capitalism, socialized property serves the public interest under socialism. On the Marxist variation, socialized property serves the interests of the working class, at least until all classes wither away, after which socialized property serves the public interest. To say that an economic system is socialist, then, is to say that in general, the means of production are not privately owned and that the ownership or control of same is social. As a definition, this is accu­rate as far as it goes, but it leaves quite a bit undetermined.

What is most sorely missing is a description of how this social control is to be institutionally realized. How are the means of production to be controlled “in the public interest”? The definition supplies no answer. This lacuna is not really a deficiency in the definition of a socialist economic system, however, because there are considerable differences of opinion among socialists about the institutional form that social control should take. In trying to formulate a general definition of a socialist economic system, it is important not to pre­judge these internal disputes and rule out or anathematize (as grim socialists of earlier generations put it) any historically or philosophically significant strand of socialist thought. Nevertheless, it would be useful for illustrative purposes (and absolutely required for some important purposes later on) to describe some ways in which social control of the means of production could be institutionally realized.

One way is through complete state ownership. The state wholly owns most of the means of production within its borders. Historically, this is the form that the overwhelming majority of actually existing socialist systems have taken. Why might this be thought to be a form of social ownership or control? Many non-Marxists believe that the state (at least, if it is democratic) represents, albeit imperfecdy, the public interest, that is, the interests of soci­ety at large. If the state owns the means of production, then it manages them in the public interest. That is why it is called social ownership. (The phrase “in the public interest” perhaps must be understood in terms of the stated intentions of those who are in control.)

On the other hand, a common Marxist view holds that whenever and wherever states exist, there is a ruling class whose interest states always rep­resent. Thus, when the economic system is a free enterprise system, the (bourgeois) state represents the interests of the bourgeoisie. When the work­ing class seizes state power, the proletarian state will manage the means of production in the interests of the working class. On the Leninist version of this story, at a crucial point in the class struggle, the Communist party comes in off the bench to substitute for the working class (and thereafter forgets to takes itself out of the game). After the revolution, it ultimately controls the means of production—still, however, in the interests of the working class. As noted, with the advent of a classless society, the means of production are to be managed in the interests of society as a whole. For these admittedly diverse reasons, many Marxist and non-Marxist socialists equate socializing the means of production with state ownership.

Notice that on either view, there is a contingent connection between state ownership and socialization of the means of production. It is logically possi­ble for the state not to represent the public interest or the interests of the rul­ing class. Indeed, it is widely believed, even among socialists, that this some­times happens. Thus, the debates within the socialist camp about whether certain economic systems are really socialist are, at one level, quite legitimate. However, these debates might be more usefully described as disputes about whether or not a nominally socialist economic system can or does realize var­ious socialist goals or ideals.

State ownership is not the only way of understanding social ownership or control. Another way of conceiving of it is in terms of cooperatives, such as exist in what used to be Yugoslavia or, on a smaller scale, in the Mondragon experiment in Spain and the kibbutzim in Israel.² In systems like these, the workers themselves control the means of production with which they work; that is, most enterprises are self-managed. If an economic system consists pri­marily of self-managed firms, what makes that system socialist is that control of most of society’s means of production is by—and thus presumably in the interests of—the workers. And, of course, in such a society most adults are workers. According to proponents of this form of socialism, social control of the means of production may be further augmented by democratic control of the state, which is to have a significant role in directing the economy.

There may be other ways in which the means of production can be social­ized. In particular, the two modes of Socializationjust outlined need not be mutually exclusive. As we shall see in chapter 2, the concept of ownership is quite complex. It consists of a package of rights, terms, and conditions that may be distributed across worker cooperatives and the state in such a way that neither may be said to be “the owner.” But even this may not exhaust all of the alternative ways of understanding social control of the means of produc­tion. Syndicalism, the view that entire industries should be owned or con­trolled by those who work in them, is one possibility, though no one has ever been able to explain how an entire system with only one firm per industry is supposed to function. There may be others. However, state ownership and worker cooperatives—or some combination of the two—have predominated in both the theory and practice of socialism. If a socialist economic system is defined as any system that prohibits most private ownership of the means of production and which mandates social control of same, then we have a defi­nition of a socialist economic system that is indeterminate but determinable. That may be the best we can do, given the heterogeneity of socialist thought and the socialist movement.

There are two things absent from this definition that are worth pointing out. First, there is no mention of the ownership of labor. This is an issue that has not been clearly articulated in socialist thought and practice. Marxian socialists do not believe that workers in postcapitalist society would own their labor (labor power, in Marx’s terminology), at least in the sense that implies the right to sell it or alienate it (Marx [1875] 1971, 16). On the other hand, they do envision worker control of the means of production and thus worker control of the conditions of labor. Additionally, in the centrally planned Marx­ist economies of the twentieth century (assuming they are socialist), the work­ers have had, at best, highly truncated ownership rights in their labor. Early Soviet thought and practice conceived of workers as soldiers in the struggle for socialism. Like soldiers everywhere, they were subordinated to the will of their commanders—in this case, the leadership of the Communist party. By contrast, as the next chapter shows, market socialists favor something like worker (self-) ownership of labor, subject to some restrictions. There are, of course, profound differences between workers’ relationship to their firms in market socialist systems as compared to free enterprise systems. In particu­lar, the workers have certain management and income rights in the market socialist firm that they lack in capitalist organizations. But in terms of control over their labor power, no proponent of market socialism believes that work­ers would or should have fewer rights than workers in a free enterprise sys­tem have.

A second thing to note about this definition of a socialist economic system is that it neither states nor implies that such a system is a market economy or a centrally planned economy or something in between. This is as it should be, since socialists, especially in recent years, have become more critical of central planning and more favorably disposed toward the market. Strictly speaking, either mode of socialization (state ownership or worker coopera­tives) is consistent with reliance on central planning or the market, though those who favor state ownership have also generally favored central plan­ning, and those who favor worker cooperatives have generally championed the market. Though there may be no logical connection between these modes of socialization and the respective ways of organizing production across enter­prises, there may be empirical connections between a given mode of social­ization and markets or central planning.

Before closing this section, one general objection to defining a socialist economic system in terms of property rights or ownership rights warrants brief notice. One of the most prominent figures associated with socialism, Marx, maintained that rights are not universal categories of social existence but are instead products of a particular historical epoch, namely, the capital­ist era.³ They are boundary markers between competing egoists that facili­tate the pursuit of private interests. Any society that has a need for them and recognizes them is inherently defective. Postcapitalist society, at least in its higher phase, is not inherently defective and thus is a society that has gone “beyond rights.” So, to define a socialist economic system in terms of owner­ship rights is incompatible with a leading socialist theoretician’s conception of the ultimate alternative to the existing capitalist order.

The problem with this dismissive view of property rights is that it over­looks that fact that any society will have to have rules governing the disposi­tion of means of production (and, indeed, labor)—rules with prescriptive content and backed by some important, though not necessarily coercive, sanctions. The reason for this is twofold: not all valuable productive ends can be achieved (i.e., there will always be scarcity in some form), and it is highly unlikely that there will ever be unanimous agreement about how to deal with that scarcity. Property rights in the means of production specify how these inevitable disagreements about the deployment of the elements of society’s productive apparatus are to be resolved. In consequence, such rights—or some close functional analogue—will be part of any society’s institutional structure for as far into the future as it makes sense to look.

If Marx did not think of a socialist economic system in terms of property rights or something like it, then so much the worse for Marx. Recall that an analytical account of the capitalism/socialism dispute does have a prescrip­tive component, so absolute fidelity to the historical record is neither neces­sary nor desirable. Indeed, a recurring weakness in socialist thought is that property rights in the means of production in a socialist economy have been incompletely specified beyond the rejection of private ownership. The dili­gent investigator must search carefully and rely on indirect evidence to fer­ret out socialist conceptions of property rights.