Chapter 11: Capitalism, Communism, & Bernie Sanders
Who deserves what?
The three major modern forms of economic production are (in a very real way) all systems by which societies decides “who deserves what.” When people claim that an employer has not paid them fairly, when people claim that the system is rigged against them, when people complain that the CEO of a major corporation was paid $10 million for a single year’s work, when people see prosperous international corporations paying no taxes, people are complaining about the economic system within which they work and live.
In the modern world there are only three major economic systems: Capitalism, Communism and Socialism. The origins of capitalism are most usually traced back to the 17th century Dutch state. Modern Communism usually traces its history back to Karl Marx in the mid 18th century and began as a rejection of Capitalism. Socialism has a double origin; many trace its modern beginnings to the French Revolution (1789) and then again as a hybrid between Capitalism and Communism in the later 19th century.
We can formulate a very basic statement about “who deserves what” for each of these economic systems:
- Capitalism—To each according to what s/he and the capital and land s/he owns produces.
- Communism—To each according to her/his need.
- Socialism—To each according to some mixed formula of production and need.
Milton Friedman (1912- 2006) is one of the staunchest supporters of Capitalism. Milton Friedman describes Capitalism as the principle “To each according to what he and the capital and land he owns produces.” Thus Capitalism is an economic system based in the private ownership of the “means of production” (i.e., capital) and use of capital for profit. Within Capitalism, each person is typically thought to own his/her own labor as well as whatever “capital” (money, land, shares of corporate stocks and bonds, and various other property rights) s/he may have accumulated. What we often call a “free market” economy is a form of Capitalism that is only very little regulated by the government and thus allows individuals and groups of individuals to decide on what to produce so as to maximize their own profits.
Karl Marx (1818-1883) is usually credited with the development of Communism. Communism teaches that under Capitalism a great social and political conflict arises between the class of owners and class of workers. The Capitalist class use their amassed capital (money, factories, land) to oppress the workers, who (lacking capital) must either labor or die. Because the working class is always larger than the capitalist class, the needs of the bulk of the population are sacrificed to further increase the wealth of the capitalists. According to Communism this conflict can only be ended with the elimination of that class distinction; people work but not within a system of social classes. This is to be accomplished by the elimination of individual ownership of capital; all means of production (capital) are to be owned collectively by the state or some more limited group of workers. Thus, in Communism, capital is collectively owned by the citizens of the state rather than the property of a relatively small group of wealthy persons.
Socialism is an economic system characterized by some mix of private and social ownership of the means of production and workers’ self-management. Socialism has many varieties, but most modern forms include some limited participation in capitalist markets. That is, Socialism is most usually a hybrid system that combines social and personal ownership of capital.
When people complain about the “evils” of Socialism they often overlook the fact all wealthy countries already have a hybrid system within which private capital and social ownership combine. All we have to do is to ask a few questions to see this mix. Who owns the local fire department? Who owns the roads? These are, of course, owned socially; most cities “own” their own fire department for the good of all its citizens. The roads are “owned” by the city, or the county, or the state, or (for interstate highways) the federal government. They are operated for the benefit of all citizens.
Even in Capitalism Some People Are Exempted from the Terms of Capitalism
Every society has groups of people who will be supported (to some extent) NOT by their own work or from the proceeds of their capital. Children in the advanced affluent societies are not expected to earn their own living. People with severe mental and/or physical disabilities, the elderly, severely wounded military veterans, these are all people who are either incapable of supporting themselves or are not expected to support themselves. This being the case, we should see that Capitalism does NOT work for such people, and this is true simply because these people cannot generate a salary sufficient to pay for their own needs—typically food, shelter, and basic medical care. Remember the staunchest defenders of Capitalism have defined Capitalism as an economic system in which each person is paid “according to what he and the capital and land he owns produces.” So, in instances where people cannot perform labor (because of severe mental or physical disability) AND these same people lack sufficient capital (investment income) to be able to support themselves, then the rest of the society does NOT simply let these people die. Rather, various “welfare” programs are instituted, and these programs are most frequently paid for through taxes. The point being made is, simply, that even in fully Capitalist systems it is NOT expected that all members of that society will function within the terms of Capitalism; rather some set of people are exempted from the terms of Capitalism because some people would simply perish within a purely Capitalist system.
Is Capitalism Required for Human Freedom?
Milton Friedman defends Capitalism on moral grounds as the ONLY economic system that can maximize human freedom, and the maximization of human freedom is (for Milton Friedman and most defenders of Capitalism) the highest and only argument necessary to defend Capitalism. Friedman is very concerned about concentrated power. He sees concentrated power as a threat to freedom. This is not an unusual argument. The Constitution of the United States of America itself is grounded upon exactly this threat of concentrated power. A system of “checks and balances” by which the Executive, Legislative, and Judicial branches of the American government maintain their independent powers is an essential aspect of the Constitution. Thomas Jefferson wrote about the need to divide these powers in his “Notes on the State of Virginia” (Query XIII) in 1794, “The concentrating these [powers] in the same hands is precisely the definition of despotic government.” In a similar fashion, Friedman is concerned about the combination of economic and political power; an essential role of Capitalism is, according to Friedman, to prevent such a combination of powers. Friedman says, “the kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.” Friedman worries that combining economic and political power in the same hands would become highly coercive and, thus, harmful to freedom. Friedman states that by separating economic and political power, Capitalism “enables economic strength to be a check to political power rather than a reinforcement.”  Does this actually happen?
Friedman claims that the only economic system that can operate without coercion is Capitalism. His argument begins with an illustration of a rather strange society. In a simple market system each household controls a set of resources (money, food, tools, clothing & other items useful for human life). And each household chooses to engage in trade with neighboring households OR chooses not to. Each household is free to choose because it produces everything it needs. Friedman states that
. . . since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence no exchange will take place unless both parties do benefit from it. Co-operation is thereby achieved without coercion.
This is a very odd community; one in which each household produced sufficient food, housing, clothing, medicine, and computers such that they did not need to engage in trade with their neighbors. Nonetheless, Friedman proposes exactly this “household without need” as his basic economic unit. Unfortunately, his vision of a set of households each fully independent of all others cannot be found in any historical period anywhere in the world. Friedman’s vision seems to operate as did the “State of Nature” for both John Locke and Thomas Hobbes: a hypothetical original position (or reference point) during which all people were (theoretically) fully free and independent. Friedman then attempts develop an economic system (Capitalism) that retains that original state of near total freedom.
For Friedman people retain their freedom so long as they are not subject to coercion. If we live and work within an economic system that forces our actions, we are not free. Friedman admits that some limited coercion is necessary for any complex society. Should we decide that everyone must pay some limited taxes in order to fund the basic functions of the state (road construction, law enforcement, fire departments), then those who refuse to pay would have to be coerced. Friedman states on many occasions that Capitalism is NOT anarchism; any society will have, at least, some few essential rules and these rules will be enforced by even a very limited government.
Friedman’s claim that only Capitalism allows for economic exchange without coercion is grounded in the thought of John Locke (1632-1704). According to Locke the purpose of government is very limited. “The great and chief end therefore, of Men uniting into Commonwealths, and putting themselves under Government, is the Preservation of their Property. To which in the State of Nature there are many things wanting.” Locke presumes (as does Friedman) an original state of human beings living without law or government of any kind; Locke calls this a “state of nature;” Friedman postulates a “household without needs.” The problem of living in a “state of nature” is that although people are absolutely free to do as they please they are also living very insecure lives. They may be attacked at any moment; their property may be destroyed or stolen. This absence of security is what motivates people to freely join together into some sort of “government.” This union, or as Locke calls it “commonwealth,” has the great advantage of making our property more secure, but in order to gain that security, we must surrender some degree of our freedom. Locke claims, and it is easy to agree with him, that no person willingly surrenders all of their freedom and willingly becomes a slave. For Locke some of freedom in order to attain some increased security is an unavoidable choice; living in the “state of nature”—that is without government—is simply too dangerous. Locke thinks that to give more power to government is to diminish the freedom of the people who formed the government. Friedman agrees with Locke that the only government a person would willingly enter into is one with minimal powers. Friedman and Locke assume that by limiting the powers of government we maximize the natural freedoms and powers of individuals; every increase in government power must decrease the freedom of those people living within government.
We should remember that Locke, in 17th century England, was living through a major political/economic transition: new democratic/capitalist ideas were growing stronger as older medieval/feudal ideas were weakening. Locke’s political and economic thought are a direct assault on the absolutist powers held by medieval kings. From Locke’s place in history, he sees that government is both the single most pressing threat to human freedom and a necessary safeguard for our property. His solution is minimal government. Friedman’s arguments grow directly out of this Lockean conception of the dichotomy inherent in all government, and his solution to this problem is the same as Locke’s: minimal government. Since both socialism and communism seem to demand a powerful government, Friedman sees these two economic structures as incompatible with human freedom. This is not the place for a full discussion of the nature of government, but later thinker (including John Dewey and John Maynard Keynes) have put forward cogent arguments that this dichotomy between government power and individual freedom is false.
The Nature of Coercion
Moving beyond his initial model of the “household without need, Friedman goes on to develop an economic model suitable for a complex, modern society. He claims that within a complex modern world, economic exchanges are voluntary (lacking coercion) if two conditions hold:
(a) that the enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange, so that every transaction is strictly voluntary.
First of all, why need the enterprises be private? If I wish to enter one of Michigan’s beautiful state parks, I’m required to pay a fee. If I wished to go to a private park (like Disneyland), I would also pay an entry fee. Why is my entry into Disneyland not coercive while my entry into a Michigan state park coercive? Friedman is concerned that there be numerous market choices; if some super powerful government owned all the parks I would have no choice but to contract with the government if I wished to visit a park. In the realm of parks, I can choose one of the numerous county parks rather than a state park, or I may choose a city park, or even a national park. No single government owns them all. But still we should say that none of those parks meet Friedman’s requirement for ownership by “individuals,” since they are owned by various levels of government. But it is unclear how the fact of community (or government) ownership of the parks makes me less free. However, if all the parks were owned by some monolithic, evil, government, that government could (in theory) ban me from all its parks. Friedman seems to assume that under Communism or Socialism some monolithic government would own everything. This might have been true under the most autocratic period of Soviet Stalinism, or Mao Zedong’s China, but it simply isn’t true of any modern, democratic, nation, even the ones some people call “socialist,” like Sweden and Denmark.
Friedman’s second requirement is that for any person to be free they must be able to choose NOT to enter into any “particular exchange.” One of the key properties of any Capitalist society is the existence of a group of laborers who lack sufficient capital to support themselves and thus have no choice but to enter into the market to sell their labor. These workers may either work or starve; such is the coercive element of Capitalism. Notice that Friedman tries to avoid this conclusion by limiting coercion to situations in which a person is “free” to NOT engage in some particular exchange.
Since the worker may have a choice of who to work for, Friedman sees the worker as “free” because the worker seeking employment may choose NOT to work for one particular employer because there is always another employer hiring employees. From Friedman’s perspective, a particular worker is NOT coerced into selling his/her labor as long as that worker may choose to sell his/her labor to either Wal-Mart or MacDonald’s. What Friedman fails to consider is not only that under circumstances of high unemployment there may only be a single employer (or no employer at all), but (more importantly) the worker MUST work or starve. Friedman’s central claim is that the market economy we call Capitalism is NOT coercive. His claim works to the extent that we agree with his rather limited definition of coercion: no coercion exists so long as persons may choose to refuse to engage in any “particular” exchange.
The Collusion of Political and Economic Power
Friedman is justified in his concern that political power could become highly concentrated and thus interfere with human freedom. But his claim that economic power limits political power is suspect. Although one might imagine that economic and political power could be separate and thus each could limit the other’s power, in reality economic power easily manifests itself as political power and vice-versa. The Fox News Channel was founded by Rupert Murdoch in 1996. His conservative political stance is well-known. In 1993 Murdoch had purchased Star TV, a Hong Kong company for $1 billion. He has clearly used his economic power to promote his political influence.
Regardless of whether one agrees with Murdoch’s politics, it should be abundantly clear that political and economic powers are not distinct and that often each is been used to gain further power in the other. Jeff Bezos (and his immediate family) is worth more than $130 billion; Bill Gates is worth about $100 billion. Who do you think has more political power, YOU or Bill Gates? Having very wealthy people does not limit the powers of political leaders; rather the wealthy trade on their economic power to buy political power. Wealthy conservatives often use their power to limit minimum wage laws, to limit worker’s rights, to undercut social safety nets. This is not to say that wealthy liberals do not also use their economic power to push for their own political agendas. But the key point here is that political and economic powers are largely interchangeable and thus often reinforce rather than limit each other.
The Nature of Communism
When Karl Marx studied European Capitalism in the mid- 19th century, he observed many problems. He found so many problems that he thought Capitalism was ultimately doomed to failure. Capitalism would, at some point in history, be replaced with Communism. In a very real way, Communism is a criticism of the failings of Capitalism, but for our purposes we need to look at Communism itself and how it is supposed to be a fairer system. Remember that we’ve defined Communism as an economic system within which people get what they need. Thus, Communism is a system not based in rewarding people for what they do, but is, rather, a system of ensuring that as many human needs as possible are met.
The single most essential feature within Communism is the absence of private ownership of the means of production. People are not allowed to accumulate vast fortunes. In fact, even modest fortunes of a few million dollars would not be allowed. This limit is to be accomplished by prohibiting the ownership of what Marx calls “private property.” Under Communism all factories, farms, mines, forests, major tools, and intellectual properties are owned collectively rather than privately. The abolition of “private property” under Communism often sounds frightening to people who “own” things.
Private Property is NOT Personal Property
When Marx condemns the ownership of “private” property, we need to pay close attention to how he defines that term. Regardless of how you or I might use the term in ordinary conversation, for Marx the term “private” property has a very precise definition. Private property includes all things that can be used to produce “profits.” Wages are NOT profits. A carpenter needs tools to perform her/his job and to gain wages used to support a family. The hammers, saws, levels, drills, etc. used by a carpenter are not private property, but personal property. They are not private property because these tools cannot be used to produce profits; however, they can be used to help produce wages. This distinction is important. If someone were to own a factory that produces thousands of carpentry tools every year, which are to be sold for profit, then that factory is “private property” under Capitalism and would have to be collectively owned under Communism. The key distinguisher here is one of “profit” versus “wages.” And, although sometimes the distinction can be hard to see, usually the difference is obvious. My 300 square foot garden is “personal” property; the 10,000 acre farm is “private” property. My shoes are “personal” property; the factory that makes shoes is “private” property. My car is “personal” property; the factory that makes cars is “private” property. A small pile of oak boards that I may use to make a table is “personal” property; the 1,000 acre forest from which those boards come is “private” property. Under Communism, individual people and families are the true owners of their “personal” property, while “private” property would cease to exist and be owned collectively. Thus, all banks, forests, factories, farms, patents, and other items from which “profits” can be made would be owned collectively.
Who might actually be responsible for the daily management of these private properties is a question Communists find it difficult to answer. In Capitalism the owners hire the managers; in some cases, the owners assert their authority and choose to manage their properties directly. However, in Communism (where ownership is collective) a mechanism must be developed to decide on how large, productive organizations (like banks, factories, farms) are to be managed and by whom. With the idea that the people who work in factories, farms, and banks actually know a lot about them and how to maximize production, we might find a workers’ council holding managerial responsibilities. However, that need not be the case. It is possible that an individual city might take managerial responsibility for factories and banks within its borders, as happens today with local fire departments. The key issue here is that any revenue generated by these local organizations would be the property of the local community, with the possibility of a wider sharing of revenue with larger political units like counties, states, and nations. What cannot happen under Communism is actually common under Capitalism: persons living hundreds or thousands of miles away owning the productive resources of an organization. Under Communism, in effect, the “stock holders” are the local community, or the workers in the organization, or the people of the nation.
Can Communism Allow for Some People to Make More Money Than Others?
Yes. Marx never says that some workers (especially more talented or harder working ones) cannot be paid more for their work. However, remember that the first order of who gets what in Communism is need, not production. So, the human needs of a community would have to be meet first, before any particularly gifted worker might be paid extra. How those “needs” might be determined is a particularly challenging problem for Communism. Under Capitalism, people are allowed to buy whatever they want with the money/resources they have. The poorest people (those lacking the sufficient resources to purchase what they need) are usually allowed to claim some additional resources (like food and shelter) beyond the limits of what they can afford. Thus, in Capitalism a “market” for “needs” exists, and who gets what is simply a matter of what any person can afford; each person (or household) makes their own decisions about what to buy. In Communism such a “market of needs” does not exist and a different mechanism for the distribution of resources has to be instituted and managed. This can be a particularly difficult task. How does any community know who needs what? Can we trust people to simply go into a large communal warehouse and take what they need?
Beyond the basics of food, shelter, and clothing, what is a “need”? Who would decide on such things? Once the true needs of a community have been met, how might other goods be fairly distributed? Who should have access to a piano? To a super-computer? To the complete works of Plato? Communist societies tend to work best on a small scale where people know and are known by each other. In a prosperous Communist society, I certainly would not have a piano in my house (because I am totally lacking in musical talent), but I might have many books of philosophy. Would people have “spare” time in a prosperous Communist society? Would people take vacations? Not only is the distribution of resources to meet needs a challenge in Communism, but the distribution of non-need items is a challenge as well. The entire market system that plays the key role in distribution under Capitalism is absent in Communism. How this market might be replaced is, perhaps, the most difficult challenge to Communism.
The Nature of Work
In contemporary America and Europe, it is common for people to complain about their work. People often fantasize about living without having to work. Marx has an explanation for this, and surprisingly he claims that work is one of the most important and individually rewarding parts of a fully human life. However, under Capitalism work is most often alienating: the worker cannot identify her/himself with the work s/he performs. “Its alien character emerges clearly in the fact that as soon as no physical or other compulsion exists, labor his shunned like the plague.” Must all labor be alienating? According to Marx, it is an essential aspect of Capitalism that labor becomes unnatural, but work itself need not be alienating. Rather, human labor is, in its original form, the direct satisfaction of human needs. People need to eat, thus ancient humans foraged for food; people need shelter from harsh weather, thus people build houses. There is nothing un-natural about human labor. For Marx, “the productive life is the life of the species. It is life-engendering.” People work in order to satisfy their needs; after those needs are satisfied people will continue to labor in order to satisfy their desires—perhaps a comfortable chair, a more efficient tool, a soft bed, or some other nicety. So, for Marx, labor is not naturally oppressive; rather, labor allows humans to satisfy both their needs and (to some extent) their desires. As long as we are working to satisfy needs or to satisfy self-chosen ends, work need not oppress us. In fact, it is through work that humans discover their manifold abilities: music, science, craft, and art. In a Communist society, the population works to ensure that everyone has their needs met, and, then later, perhaps, some of their desires met as well, and it is through this process of work that human beings discover their talents, refine their skills, and take pleasure in their abilities to create.
In Capitalism, labor is necessarily “alienated,” and thereby oppressive. Much of the production within Capitalism is needless luxuries for the wealthy, the kinds of things that workers will never be able to enjoy: private yachts, mansions, race cars. In Communism labor provides for human needs and defines our human nature as makers. Labor may not be “fun” in a Communist society but it is supposed to be fulfilling. Under Capitalism the owners cannot pay their workers the full worth of the workers’ labor; if they did there would be no profit generated for the owners, and thus no incentive to hire workers. In a Capitalist society, most workers have little or no control over what is produced or how. If you ever worked “fast food” you should know that your efforts at creativity in food production were not appreciated. In Capitalism, workers are alienated in numerous ways that tend to make work uninspiring and unpleasant. But we should remember also that Marx claims that the owners are also alienated. When large corporations fire hundreds of workers, many of the managers feel badly. They have to fire hundreds of workers who may then never find another job. Few managers actually enjoy firing workers, but they have no choice; it is merely a “business” decision. So, Marx insists that Capitalism “alienates” all members of the society, not just the workers.
The success of markets
Capitalism has the advantage of using a “market system” in order to determine prices and the distribution of goods, but it has the disadvantage of alienating all members of the society and of creating and maintaining a dis-advantaged class of working poor. Communism has the advantage of having no alienated class of working poor, but (lacking a market system) it has the problem of finding some process to determine prices and the distribution of resources. It should be obvious that both systems have strengths and weaknesses. The market system allows each seller to determine prices without the need for any government bureaucracy. There is a great efficiency in using a market system. If I want to buy a loaf of bread, I may choose where to buy it; if I like the taste of one brand over the other, I’m free to exercise my preference. If some seller of bread or some brand of bread does not please me, I’m free to do business elsewhere. No government bureaucracy is needed to determine prices and availability. The market efficiently decides what bread to bake, the price, the quality, and the quantity. Without a market some sort of government bureaucracy needs to be maintained in order to make these decisions, but the sheer number of production decisions that have to be made is staggering. Think of each product you can currently find at any Meijer’s store. Think of all the sizes and colors available! How could any government decide in advance how to best meet the needs and wants of all consumers? It has been argued that I don’t need to have 14 different sock colors to choose from. But the makers of socks have made that decision AND if they choose badly the makers of socks bear the burden of their poor choices. How could we know that fuchsia-colored socks would be wildly popular this summer?!
The problems of markets
One can easily find data on the distribution of wealth and income in America. Although the various studies may produce slightly differing numbers, a single overwhelming fact comes through: our country distributes wealth and income in a very uneven manner. In studies of wealth (as distinct from income) we find that the least prosperous 40% of American households have no wealth. The French economist Thomas Piketty sees the essential paradox of American capitalism is that fully half of the adult citizens residing in America own no capital at all.
As for income, there is a widespread agreement on the basic numbers. The median household income in the United States (in 2018) was about $60,000. Half of American households had incomes of more than $60,000 and half had less. What is more troubling is that the poorest 25% of American households had incomes of $30,000 or less! Since there are about 128 million households, that means that nearly 30 million American households are surviving on very meager incomes. The top 1% of American households bring in $435,000 per year or more. When it comes to wealth the results are even more lop-sided. The wealthiest 0.1% of American households have the same about of wealth as the “poorest” 90%. Even mainstream business magazines admit to the problem. Here is a statement published in Business Insider, Oct. 23, 2017, “It’s no secret that the US has an inequality problem.” Here is a similar statement from Fortune Magazine, “There is no dispute that income inequality has been on the rise in the United States for the past four decades. The share of total income earned by the top 1 percent of families was less than 10 percent in the late 1970s but now exceeds 20 percent as of the end of 2012.”
Why Markets Sometimes fail
For all the advantages of markets, we need to remember that markets do not solve all economic problems and that for some social resources, markets fail to ensure anything like an adequate distribution. Housing is a notorious problem in many American cities. The average rent on the average apartment (766’ sq.) in Chicago is $1,900/month. In Los Angeles the average rent is $2,380/month. The average cost of stay in the hospital is nearly $16,000–that does not include the costs of doctors services. Americans pay more for prescription drugs than any other country in the world (about half a trillion dollars—$500,000,000 this year), while drug companies are some of the most profitable companies on the planet.
Various events can undermine markets. The state of Florida (dominated by the Republican Party for the past 25 years) recognizes that sometimes markets fail. Numerous hurricanes have devastated parts of Florida again and again. People fleeing these dangerous storms often have to buy gasoline for their cars and rent hotel rooms in areas away from the storms. The storms provide opportunities for dishonest business people to raise their prices. If people need gasoline to flee from a hurricane, why not charge them $12 per gallon? If a family flees a storm and needs a hotel room for a few nights, why not charge them $500 per night (instead of the normal price of $100 per night)? With every hurricane the office of the state’s Attorney General receives complaints about price gouging. Florida statute 501.160 makes it illegal, once a state of emergency has been declared by the governor, for businesses to raise their prices for essential items (like food, gasoline, shelter) above the average price for the previous 30 days. Why would the government of the state of Florida do such a thing? Even Milton Friedman should be able to understand that when people are fleeing from a hurricane, they are no longer “effectively free to enter or not to enter into any particular exchange.” The people fleeing a hurricane MUST buy gasoline; they must buy water; they must rent a hotel room. The fundamental properties of a free exchange cease to exist when people are no longer “free” to make a particular purchase.
When Milton Friedman writes about the “market” system of capitalism, he defines the foundation of that system as a set of willing participants, one freely willing to sell and another freely deciding to buy. Numerous problems can arise in this interaction of willing buyers and willing sellers. The American Health Care system is a powerful example of a failed market. There are numerous standard textbooks that list various reasons for market failure, one form of market failure is called “concentrated power.” Markets for specific goods or service fail when one company gains so much power within a market that it effectively shuts out competition. Remember that for Friedman a buyer is free so long as they have the choice of selecting between various sellers. For most Americans using our health care system, there is no choice. How does victim of a terrible car crash negotiate prices with doctors on the way to the hospital? How does a person negotiate the price of a prescription drug when there is only one such drug available and no one will tell you the price? How does one even think about negotiating the price of cancer surgery? Clearly there is little or no competition in healthcare, so, according to Friedman, we are not “free” to make choices in this part of our lives; we are “coerced” in Friedman’s term.
The evidence of the failure of the American healthcare system is abundant. Most studies show that Americans as a nation pay about 17% of the entire GDP (gross domestic product) for health care. That is, 17 cents of every dollar spent for everything Americans buy every year is spent on healthcare. When we compare that 17% figure with what people in other advanced nations pay for their healthcare we see a huge discrepancy. The advanced nations of the world pay in the range of 8–12% of their GDP. But our health system is no better. In fact, the average European lives 2 or 3 years longer than does the average American, and they pay 30-40% less for health care.
The average American lives to the age of 79.3 years. That ranks us number 31 in the world, barely ahead of Cuba and just behind Costa Rica, Chile and Slovenia. The citizens of Japan and Switzerland live the longest—more than 83 years. The cost of health care in these countries is much less than in America. The additional billions of dollars Americans spend every year doesn’t seem to help.
David Brodwin’s article written for U.S. News and published in June of 2017 says,
Health care is what economists call a “market failure.” In other words, the normal logic of competition is not working. Part of the failure involves what is called “price discovery.” Simply put, markets don’t work well unless the buyer can discover the price of something before signing the order. How can you choose between a Tesla and a Corolla without knowing the price? Yet, it is all but impossible to find the real price for your medical services until after the service is performed, and after the insurance company (if you have coverage) has pored over the bills from the doctors, labs, hospitals and other providers.
Another part of market failure involves a tremendous lack of real competition. In many parts of the country, all the hospitals are owned by one or two major chains. They charge what they want. Likewise, in many places only one or two insurance companies offer coverage for individuals and small businesses. And on top of that, drug companies have wrangled language through a prior Congress that actually prohibits Medicare and Medicaid from negotiating prices.
Using Milton Friedman’s definition of a free market, it should be obvious that there is no “market” for health care in the United States. Since markets can and do fail, it should be obvious that markets do not solve all our economic problems. On the other hand, markets do (in many instances) allow individual business owners and consumers to decide for themselves what prices to pay, which goods to buy, and when to walk away from bad deals.
There are various reasons that the American health care system has failed, and all of those reasons grow from the concentration of power. Medicare is forbidden by federal law from negotiating drug prices. It is forbidden by federal law to import pharmaceuticals into the US. By reducing competition, prices and profits rise. In 2016 four of the top five most profitable corporations in American were drug companies. The average large American company produced a profit of just over 10% that year; AMGEN’s profits were more than 40%.
Socialism as most often found today in Europe is form of “mixed” economy using both a market (as found in Capitalism) and (to some extent) government ownership to ensure both fair competition and that essential services be provided to all people. We need to understand that in the United States in the early 21st century we already have something like a mixed economy. Public schools, public health clinics and local fire departments all exist to ensure that all citizens are educated and healthy, and safe.
Most towns and cities have a fire department so that ALL residents (rich and poor) have protection from fires. In the early 19th century many American cities had a market of several independent fire departments. If a home owner (or business owner) wanted protection, he paid a price and placed a plaque on the exterior walls of his building naming the fire company to which he had paid a fee. If a building caught fire, all the local fire departments rushed to the fire. If there was no insurance plaque on the outside of the building, it was left to burn. That is, until, an insured building actually caught fire. However, those fire departments who had not been paid a fee, simply returned to their fire stations and let the city burn. Clearly, this is another example of the failure of a market system. And this explains why American cities no longer leave fire protection to a market. Most American cities have a community-owned fire department that protects the entire community. And most fire departments have reciprocal agreements with nearby cities to help each other in the event of major fires. We are all better off because we no longer have a market in fire protection. Socialism (the collective ownership of some capital) can be a solution to failed markets.
Bernie Sanders and “democratic socialism”
Looking closely at the economic reforms suggested by Bernie Sanders, one should be struck by the fact that it really does NOT look much like socialism. It looks like there is still a market system for determining prices; the federal government is NOT going to plan the economy—even partially.
On some issues, Bernie actually agrees with Milton Friedman. Both argue that combined economic and political power is dangerous. Both believe that markets are an essential part of any well-run economy. But Bernie sees an important aspect of the modern world that Milton misses: people with great economic power also possess great political power. Bernie recognizes that economic power skews the political system and allows a relatively small group of wealthy people to wield more political power than do the less wealthy.
If we believe that each citizen of this country is to have an equal right before the law and in the market, then allowing for great wealth is, itself, an assault on that belief. Much of Bernie’s agenda is focused on ensuring greater political equality by ensuring greater economic equality. Bernie’s agenda is to limit the wealth of the very wealthiest (and therefore most politically powerful) people in this country while at the same time improving (if only modestly) the economic well-being of least well-off and thereby increasing their political power. Summing up Bernie’s plan for America is difficult because there is much to it, however I will try to sum it up in six major statements.
- Federal Income Tax rates are too low for wealthy individuals and wealthy corporations. The highest current individual federal income tax rate in America is 37%. The maximum rate for corporate federal taxes was, until 2018, 35%; it was cut that year to 21%. However, because of various loopholes in the federal tax code, many very profitable actually have paid NO federal income tax. In the most recent year that figures are available (2018) Amazon reported profits of over $11 Billion and paid zero dollars in federal income tax. Netflix reported profits of $845 million and paid no federal income tax. There are, at least, 60 large and profitable corporations that paid no federal income tax in 2018. These include GM, Halliburton, IBM, and Eli Lilly. “Jeff Bezos, who, at this writing, is worth over $150 billion, the wealthiest person on earth. You tell me: Why should the taxpayers of this country spend billions a year subsidizing Mr. Bezos when many of his employees receive wages so low they they are forced to go on food stamps, Medicaid, or other federal programs” (Sanders, 2018, p. 246).
- Require Medicare to negotiate drug prices and allow the importation of drugs from other countries. Currently, federal law prohibits Medicare from negotiating the prices they pay for pharmaceuticals. The reason for this law is that in theory Medicare is so large that it could drive prices down so low as to harm the pharmaceutical industry. But the other side of the argument holds just as well. By outlawing any negotiation of prices, the industry drives prices so high it harms Medicare’s ability to pay. Federal law also prohibits Americans from importing drugs into the United States unless you are the manufacturer of those drugs. Most other countries negotiate drug prices with the manufacturers and thereby pay substantially less for prescription drugs. Bernie wants to allow Americans the same benefits enjoyed by Europeans and Canadians.
- Social Security has to be strengthened. According to the Social Security Administration the poorest 33% of households run by retired Americans rely on their Social Security checks for 90% or more of their income. This number has been debated and some studies seem to show that actually only the poorest 15% of retired Americans rely on Social Security for 90% or more of their total income. Teasing out the difference between individual and household data makes things complicated. But everyone agrees that too many Americans rely too much on Social Security. Currently, Americans pay about 6.2% tax on annual salaries up to $133,000. So, for those fortunate enough to make $266,000 this year, they will only pay Social Security tax on half of their salary; this reduces such a person’s effective Social Security tax rate to 3.1%. The higher your salary, the lower your effective tax rate. Bernie has proposed that we leave this salary cap in place but add a Social Security surcharge on annual salaries over $250,000.
- Break up the largest corporations to reinvigorate competition. One of the most fundamental advantages of Capitalism, is that markets can force sellers to compete with one another. Competition tends to drive prices down. As we have seen, one of the most common risks to markets is the dominance of one or two powerful corporations. When competition dies, markets are skewed in favor of a small number of corporations powerful enough to set prices as they please.
- Increase the national minimum wage to $15/hour. This plan would increase the economic power of the poorest working Americans. With more economic power, these Americans would have a little more political power. Also, this would increase the consumption side of the “production/consumption” equation. No company willingly produces goods that can’t be sold. So a profitable business needs customers who themselves have money to spend. While wealthy people tend to save and invest much of their income, the poor always have needs. Putting more money in to the hands of the poorest 30% of American families, would tend to push more money into consumption, which would spur business. About 42% of all American workers are currently making less than $15 per hour (which if applied to a full-time job works out to about $30,000 per year). The jobs that pay less than $15 per hour include retail sales, cashiers, food prep, office clerks, laborers, janitors and cleaners. “When you earn $9, $10, or $11 an hour, you just can’t afford housing, health care, child care, transportation, decent food, other other basic necessitates of life” (Sanders, p. 246).
- Cap credit card interest rates at 15%. This may seem a small thing, but many American families have credit card debt that is crushing the life out of them and reducing their ability to pay of education, health care, and save for retirement. The average credit card rate in America today is about 18%, however interest rates in general are currently (2019) at near record lows. Big banks can borrow money from the federal reserve for about 2.5%. Clearly big banks would still be able to make major profits borrowing money at 2.5% and loaning it back out at 15%.
Bernie doesn’t look like a Socialist
Looking at Bernie’s plan for America, it hardly even seems like real Socialism. He’s not talking about workers taking over the businesses they work in. He’s not talking about any sort of centralized government planning of the economy. He does talk about taking care of people’s needs. Remember that even Milton Friedman says that some level of government intervention in our lives is necessary for any civilized people.
Bernie’s idea of “socialism” looks more like a re-direction of lives toward our social obligations and away from our selfish wants. Too many Americans have lost both their economic and political powers. He wants to change some of the rules that perpetuate that inequality. His essential insight is that when people lack economic power they also lack political power.
Countries like Sweden, Norway, and Denmark are often called “socialist,” but in reality they are not. These countries retain a set of capitalist markets, however they also provide a substantial social safety net and universal health care. These nations promote public welfare through relatively high taxes and government spending. The Prime Minister of Denmark explained that in his country,
We have universal health coverage – you don’t pay to see your doctor or go to the hospital. We have a high degree of social security. You are entitled to benefits if you lose your job, if you get sick, if you are disabled. We have one year of maternity leave, we have subsidized early childhood education and care and we ensure care for our elderly if they cannot manage on their own. We also have a strong and free educational system. Students in institutions for higher education and university do not pay for their education, on the contrary they receive educational grants for studying.
While it is true that the Scandinavian countries provide things like a generous social safety net and universal health care, an extensive welfare state is not the same thing as socialism. What Sanders and his supporters often call “democratic socialism” is what Europeans usually call “social democracy,” a system in which the government aims to promote the public welfare through heavy taxation and spending, within the framework of a capitalist economy.
Warren Buffet is one of the wealthiest and most famous American investors. Recent estimates of his wealth range from $70 billion to $80 billion. In 2013 he illustrated the fundamental inequality of the American tax system. He said quite simply that the federal income tax system was unfair because his secretary paid a higher federal income tax rate than he did. For many years the income tax rate on investment income has been lower than the tax rate on salaries. Currently, a single wage earner making anywhere between $38,701 and $82,500 pays a marginal tax rate of 22%. Mr. Buffet makes his money with investments (mostly long-term capital gains) which are never taxed higher than 20%. The middle income wage earner pays a higher percentage of their income in federal income tax than does the multi-millionaire investor. Somehow the American federal income tax system taxes salaries more heavily than investment income. Middle class Americans make most of their annual income as salary. The very wealthy make most of their annual income as investment. This is simply one of a large number of tax laws put into effect to benefit the already wealthy. In a true democracy we would not enact laws that privilege the wealthy. And that seems to be what Bernie means by “socialism.” He sees that gross economic inequality cannot exist without political inequality. Power manifests itself in many ways, and the essence of democracy is the dispersal of power—be that power political or economic. Concentrated wealth is a form of concentrated power and, as such, is the negation of democracy.
Thomas Jefferson wrote to a friend in 1816, “Those seeking profits, were they given total freedom, would not be the ones to trust to keep government pure and our rights secure. Indeed, it has always been those seeking wealth who were the source of corruption in government.”
For deeper thought
- How have we defined Capitalism, Communism and Socialism in this article.
- Explain the connection between Locke’s “state of nature” and Friedman’s “household without need.”
- How is it that “political” and “economic” powers can provide a check on each other, according to Milton Friedman?
- Why does work suck? Can work be rewarding? How so?
- What is the difference between European style “social democracy” and socialism?
- In what ways are markets useful? Can markets fail? Why or why not?
- Do economically disadvantaged people actually have less political power than do the wealthy?
- How does Karl Marx distinguish “personal” property from “private” property? Is this a useful distinction?
- Capitalism and Freedom (Chicago, 1962), pp. 161-2. ↵
- Ibid., p. 9 ↵
- Ibid., p. 15 ↵
- Ibid., p. 13. ↵
- Locke, Second Treatise, Chap. IX, § 24. ↵
- Capitalism and Freedom (Chicago, 1962), p. 14. ↵
- Marx, Karl & Friedrich Engels. The Marx-Engels Reader. W.W. Norton & Co., 2nd ed., 1978, p. 74. ↵
- Ibid., p. 76. ↵
- Piketty, Thomas. Capital In The 21st Century. Harvard University Press, 2014. ↵
- Chris Matthews, Fortune Magazine, 2014. ↵
- “Health Care Is a Market Failure” USNews.com, June 23, 2017. Available at: https://www.usnews.com/opinion/economic-intelligence/articles/2017-06-23/senate-obamacare-repeal- plan-ignores-market-failure-of-us-health-care ↵
- See AARP Bulletin, May, 2017. ↵
- “Nordic Solutions and Challenges: A Danish Perspective,” Kennedy School of Politics. Speech given by Lars Løkke Rasmussen, Oct. 29, 2015. ↵