Socialism vs. free market capitalism: the false dichotomy

The ideologies we embraced don't even begin to make sense in light of real-world evidence.

[Originally published in I-System TrendCompass] For generations now, western economic thought evolved around the ideas of free markets, private, profit-seeking enterprise as one of the key elements that leads to economic development, employment and prosperity. Of course, there’s truth in that, but over time, ideas tend to calcify and true understanding gives way to polarizing ideologies. Instead of examining real world evidence and refining their ideas, people align themselves with this or that school of thought and fall into tribal allegiances, defending their side as if it were their home football team. Few dichotomies are as polarizing as that between capitalism and socialism.

Nevermind the evidence, what’s your stripes?

One side sees free market capitalists (whatever that be) as greedy, cold-hearted scrooges; the other believes that socialists are lazy thinking freeloaders who barely deserve to exist. If you argue the actual issues, you must word your arguments very carefully to avoid triggering anyone’s tribal circuitry, get labelled as a commie and dismissed along with your arguments. In fact, when people tell me, “I’m a card-carrying free market capitalist,” I don’t even bother. This type can go into a fit of rage over “welfare queens,” but think it’s cool if a zombie private corporation gets a no-bid multi-billion contract from the government. Of course private contractors can do everything better and more cheaply than the government. If they make obscene profits at it, so much the better!

The Chairman of the Ludwig von Mises Institute of Germany wrote this in his book on economics:

“Losses are a sign that capital and resources have been wasted. And this not only makes the entrepreneur poorer, but also society, and we all suffer … From the consumer’s point of view… The higher the profit, the better. Higher profits means that scarce resources have been used to meet the needs of the people.”

That sounds good enough for most people in that tribe to nod approvingly: so true, so true… In fact, they’re inclined to believe that everything you love you owe to capitalism, as the great Lew Rockwell passionately argued in his 2009 article titled, “Everything You Love You Owe to Capitalism.” But what if Marquart, Rockwell and their patron saint Ludwig von Mises are wrong?

The mothership is sinking…

If we go by the appearance of things, we would agree that Great Britain is the mothership of free market capitalism and private property rights along with the United States. Particularly, the grand old Iron Lady, Margaret Thatcher and Ronald Reagan tend to be celebrated as the enemies of big state and champions of private enterprise which of course, generates jobs, creates wealth and gives us all the wonderful prosperity that we enjoy.

Mr. Thatcher famously said that the problem with socialism is that eventually you run out of other people’s money. LOL - so delightfully witty and clever, we should probably regurgitate that quip every time any darn socialist tries to peddle their freeloading lazy thinking on us. Our friends will reward us with a hearty laugh and we can mock and disqualify those socialists then and there - no need to exert oneself by listening to arguments or contemplating any tiresome nuance.

Card-carrying capitalists know for certain that private enterprise is ultra efficient, and that we all benefit because it produces products and services more cheaply and gives us greater consumer choice. The state stinks at everything. It therefore makes sense to turn substantially all of the state business to private enterprise which will automagically make everything super-awesome. With that certitude, the Iron Lady embarked on a large-scale privatization of public utilities in Britain, including transport, trash collection, water treatment, power generation, prisons and care for orphaned children.

If it weren’t for Vladimir Putin, the Jews, Muslims, the evil “CCP” and Climate Change, the privatizations would have been a smashing success, just as economic theory ideology predicted. As things stand however, it would appear that the free market mothership is sinking.

The actual evidence

As I wrote here on a number of occasions, Britain’s economy is in dire straits, the state’s share of the GDP is well over 50%, its fiscal position is catastrophic, public services are a hot mess and nearly everything that got privatized is shockingly dysfunctional. Former senior Whitehall insider Sam Freedman recently published a book titled, “Failed State: Why Britain Doesn’t Work and How We Fix it.” The book explores how, by managing the funneling public money to private contractors, the government became over-centralised with the Prime Minister and the Treasury dominating the domestic policy and the economy.

Local governance has been eviscerated, enabling collusion between government and big business. Before the clever and witty Iron Lady, local authorities carried out most of their functions in house, but that was socialism and therefore too costly and inefficient. Today much of it is privatised, but it is even more costly and less efficient. Freedman offered the example of “care” for orphaned children. Private equity firms saw this as an opportunity to make a killing and by today, three quarters of places for children are being provided by for-profit equity firms.

That didn’t quite lower the cost, however: in the past five years, the cost of this function has risen by 72%, and the average weekly bill per child now stands at just under £6,000. That’s more than £850 ($1,160) per day - more than renting a room at The Ritz, as Freedman points out! But private enterprise doesn’t only seek to maximize profits; they also endeavor to minimize costs. To do that, private child carers sought out properties in the cheapest parts of England, removing the children from their local areas where they may have some family and social support. That made it much easier for them to be targeted by grooming gangs, among other things. But hey, that too can be a source of profits for the valiant private equity interests.

Privatizing trash in Croatia

In an October 2023 TrendCompass report I wrote about our experience with privatized trash collection in Croatia which worked out equally splendidly. Trash collection is a simple thing: people deposit their trash at designated collection points and someone picks it up to take it elsewhere for disposal or treatment. If the process functions correctly, that's about as much as anyone needs to know about it.

The process functioned perfectly well in former Yugoslavia, a socialist country with a one-party Communist regime even though another titan of free market capitalistic thought argued that this could not possibly have been so. Here’s what Murray Rothbard wrote:

"If... everyone under socialism were to ... produce 'according to his needs,' then, to sum it up in the famous question: Who, under socialism, will take out the garbage? That is, what will be the incentive to do the grubby jobs, and, furthermore, do them well?"

Of course, who would be so obtuse to contradict Murray Rothbard and insist on the evidence of their lying eyes? In Croatia we didn’t and we turned trash collection over to the private sector which quickly reformed the process and made it a profitable business. We felt the changes immediately: first, they reduced the number of collection points and now many people had to carry their trash quite a distance from their homes. In effect, we all started working part time for the private trash collectors.

They also introduced billing by the size of the container which we were now obliged to purchase from the company: so much consumer choice! Now the people who generated more trash paid more, and those who could fit theirs into small trash cans paid less: so, so fair and equitable! Furthermore, instead of collecting the trash every day they started doing it only once a week, so today the pensioners even have the freedom to pick at their leisure over their neighbors’ leftovers for supplemental nutrition. Here’s what my native city of Rijeka now looks like:

Awesome. Yay, capitalism!

But a profitable enterprise can never be profitable enough. The owners proceeded also to reduce their workforce, slashed the salaries of the remaining ones and cut back on expenses like maintenance and the street furniture that concealed the trash dumpsters from view. The touted fairness in billing gave people the incentive to save money by buying smaller containers and dumping excess trash in their neighbors' bins. The next improvement was introducing trash bins with a lock and key so you could lock your own trash (fabulous innovation!). The people adjusted by leaving their trash next to the bins or in small public trash cans where it piles up and makes an ugly, stinking mess.

Under Socialism, trash was something that we disposed of near our homes from where it disappeared and we gave it no further thought. Our cities were clean and I don’t recall even once anyone talking about trash disposal. With privatization, trash collection became much more expensive, the system got complicated and the trash collection companies turned unreliable and bossy at the same time. The workers became deeply unsatisfied and significantly poorer.

Our cities turned into a mess. True, the owners of the trash collection companies became fabulously rich. We call them the “trash mafia” now, and the man who managed their privatization became one of Croatia’s oligarchs with considerable political influence. In all, privatizations have created many private fortunes and transformed Croatia from a well ordered society to a third world nation. They seem to be doing the same at the British mothership.

So what’s with the ideology?

If economic theory contradicts real-world evidence, why is it still as contentious? Why is it that we can’t get past labels and tribal allegiances so that we could focus on the ways and means of improving our societies? I think it’s a bit like with the “vaccines are safe and effective” slogan: the beliefs must be maintained because they facilitate someone’s profitable enterprise. The cost to the rest of society isn’t even secondary - it’s utterly irrelevant. Empirical evidence corroborates this:

It’s not that free market capitalism is bad: it’s that we don’t live in free market capitalism and much of what we think we understand about “socialism” is patently wrong. The dismal science of economics has hardly evolved at all over the last century and most learned economists continue to cling to beliefs articulated in 100+ year old textbooks. We would do much better to simply articulate what we, as a community of humans actually want in life and then study systems that are most conducive to those ends. With all the information and knowledge at our disposal today, this should be doable and intellectually much more productive than conjuring insults for the members of the other tribe.

Alex Krainer – @NakedHedgie is the creator of I-System Trend Following and publisher of daily TrendCompass reports which cover over 200 financial and commodities markets. One-month test drive is always free of charge. To learn more about TrendCompass reports please check our main TrendCompass web page. To start your trial subscription, drop us an email at TrendCompass@ISystem-TF.com, or:

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