Capitalism vs. Socialism

February 5, 2010 in Economics - General | 2 comments

John Kay offers a European perspective on the debate of between the superiority of a market economy against a centrally planned economy.  Is there empirical evidence that a market economy is superior?  John Kay says yes:

“The fall of the Berlin Wall in November 1989 …marked the end of the most extensive controlled experiment in the history of social sciences – the division of Germany into two economic zones, one centralised and planned, the other a market economy. After forty years, the gap in living standards between the two was so extreme that the experiment was terminated.”

Why is capitalism so successful over the long run?  Kay gives 3 reasons:

  • Prices act as signals; the operation of the price mechanism is a better guide to resource allocation than central planning
  • Markets function as a process of discovery, the chaotic process of experimentation through which a market economy adapts to change…Centralised systems experiment too little. They find reasons why new proposals will fail – and mostly they are right in their suspicions, because most experiments do fail. But market economies thrive on a continued supply of unreasonable optimism.
  • Markets yield benefits from the diffusion of political and economic power… A one sentence description of why some countries are poor and others rich is that the politics and economics of poor countries are dominated by rent-seeking and the politics and economics of rich countries are not.

But isn’t a market economy one motivated solely by greed?  Can a country motivated solely by greed be successful?  According to Kay, “This is the economic environment of Nigeria and Haiti, and it does not work.”  Instead, the greed must be tempered through the mechanisms of trust relationships and reputation.  To get a broader perspective, Kay concludes with the following:

“Markets are not a well-oiled machine: they more closely resemble a constantly changing, adaptive biological system. Pluralism is their motive force, their essence is chaotic, their development inherently uncertain. If we could predict the evolution of markets, we would not need markets in the first place.”

Source: Kay, John (2009) “The Rationale of the Market Economy: A European Perspective,” Capitalism and Society: Vol. 4: Iss. 3, Article 1.

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  1. Jason Shafrin’s avatar

    Jason Shafrin on February 6, 2010 at 11:35 am

    I want to repost a comment that Demetrios Perdikis MD, FAAFP made on the Medpedia syndication of this blog. He said:

    “This is an excellent, timely topic and I commend Jason for posting it as well as his excellent work in health care economics. Dr. Shafrin rhetorically asks, “Is there empirical evidence that a market economy is superior?” He does a fine job presenting the topical perspectives. Thought I’d comment with a few concordant thoughts. There is a rich history of empirical evidence of the failure of centrally planned societies. The inefficiencies of any centrally planned system, whether collectivist or monarchical, emerge from the natural constraint that the human capacity for consequential knowledge is extremely small within individuals. Applied to ‘managing’ an entire society, a recent example of the failure of central planners to keep track of the hundreds of millions of interactions occurring at any time in a society of any reasonable modern proportion is the USSR debacle. That failed system asserted that it’s possible for a few hundred, or even a few thousand, central planners to keep track of the country’s 24 million prices (Sowell). Anyone who has tried to follow even a thousand prices is very quickly overwhelmed, as stock traders, portfolio managers and other financial workers know too well to even consider falling into that trap. But you don’t have to be a financial wizard to intuitively conclude that while one is perfectly comfortable deciding how much he is willing to pay for shoes, he would never consider deciding how much his neighbor should pay for shoes, never mind trying to decide the price of shoes for every person in one’s town. The collective work of the venerable Say, Hayek, Williams, Sowell and Friedman (and, of course others) points to the empirical exemplification of the role of individual decision-making at the point-of-exchange in a market/consumer economy. Yet, many seem to want to continue the non-debate between capitalism and collectivism. Suggesting that a system in which the means of production is centrally controlled benefits society more than a consumer-emergent system mechanized by locally chosen prices in a free society is as antithetical to logic as the notion of treating hypertension in 2010 with mercurials (Circulation. 1950;1:508-515). The reason being that both have been factually proved to be false and detrimental. New hypotheses, even if well constructed will not alter the course of historical facts in either case. I doubt that physicians prescribing Thiomerin for hypertension would have their justification for its use dignified in any serious current discussion on the matter. When a line of argumentation ceases to have extrinsic value ought it not exempt itself from serious thinking?”

  2. mike harrison’s avatar

    mike harrison on March 22, 2010 at 2:49 pm

    I think our founding fathers are turning over in their graves over the turn toward socialism that this health care reform bill does to this economy. I think that we should return to capitalism before its too late.