1. Opinion

The modern mix of capitalism and socialism Column: The modern mix of capitalism and socialism

The choice in advanced economies is never either socialism or capitalism but how best to mix them.
The U.S. military is a socialist enterprise while televisions are produced and sold in capitalist enterprises. (Mauricio Lima/The New York Times) XNYT5
Published Jan. 4

A common gambit in politics is to apply labels to one's opponent that incite voters to react negatively. Prompted by the debates over health insurance and the rise of self-described "democratic socialists" vying for high office, a current favorite label is "socialist." For example, to counter the increasing voter acceptance of the Affordable Care Act, the Trump Council of Economic Advisors warns the public of the evils of "socialized medicine."

We expect the "socialism" label will be tossed around a lot in the coming election cycle, so it behooves us to figure out what it means. When a good or service is socialized, some level of state, local or federal government owns the means of its production. When a good or service is produced by capitalists in a "market," the means of its production are owned and operated by private individuals or business entities.

In modern societies, virtually all goods or services combine some socialism and some capitalism. The military is a socialist enterprise while televisions are produced and sold in capitalist enterprises; medical care is a capitalist enterprise while health insurance is increasingly a socialist enterprise; car travel is a mix: cars produced in capitalist markets are driven on socialist roads. The key problem for society is to allocate tasks to the proper system for their production and operation.

Opportunistic politicians often find that the socialist label helps them win votes, regardless of how misleading their use of this word may be. The reason is rooted in history, not economic logic: in post-war Europe, many countries relied too heavily on socialism, allocating to socialism tasks better left to the market such as food, oil, coal, steel, housing and home appliances. The result was great inefficiency, even hunger and deprivation.

For many citizens who migrated from these heavily socialized countries, the socialist label carries negative memories of constraints on personal and business freedoms. Cold-War era newsreels depicted a dreary and oppressive existence for those behind the Iron Curtain, which served to instill a reflexive preference for capitalism over socialism in the average American.

The choice in advanced economies is never either socialism or capitalism but how best to mix them. Private individuals and firms rely on a variety of public goods and services, or those goods and services which by their very nature must be shared, provided by some level of government and paid for with taxes. The challenge for modern society is not to choose systemwide capitalism over systemwide socialism; it is to determine task by task whether private enterprise markets or a well-chosen level of government would be a better allocator of resources. Usually government is in charge of public goods, while profit-driven private firms compete to provide those goods and services that can be owned by individuals and bought and sold on markets.

Investors and entrepreneurs can be more successful and add more jobs to the economy when their investment is complemented by a well-maintained and managed public sector. The decision-makers in the private sector routinely demonstrate how much they need an efficient public sector when they choose their location to have access to publicly provided goods and services. If they need freeway access, they locate near one. If they need internet access, they make sure that the broadband is fast and reliable where they locate. If they need a highly educated workforce, they find a city that will provide it. If such talent is absent, they will lobby the government to create such complements to their enterprise. For example, the business community strongly supports educational programs emphasizing STEM subjects (Science, Technology, Engineering, and Mathematics). They intend to pay but a small part of the shared tax obligation that finances them, and will expect the public to provide them, or else they will relocate.

For the private sector to grow to its potential, a modern nation must invest in its physical infrastructure and in the human capital of its citizens. The deterioration of our country's roads and bridges, and the general poor national test results from our public schools, demonstrate our neglect of the public sector. Now is a good time to remedy this neglect; interest rates remain quite low by historical standards. Rebuilding our streets, roads, sewer and water systems, broadband, and investing in all forms of education and training would create assets the market system can use to boost productivity and enhance personal incomes. It's a "win-win" opportunity that will require a large public investment. We must recognize that dismissing such investments as "socialistic" misses the essential economic logic: socialism and capitalism can be complements, not enemies.

William L. Holahan is emeritus professor of economics at the University of Wisconsin-Milwaukee. Charles O. Kroncke, retired dean of the College of Business at UW-M, is also retired from the University of South Florida. They are co-authors of "Economics for Voters.''


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