When the communist system in the Eastern bloc fell apart at the end of the eighties the free marketeers all over the world cried "Victory," exclaiming that capitalism had won over communism. They claimed that Adam Smith had been proven right and Karl Marx was wrong after all.
Some think the celebration was a little premature. As Masha testified at the start of this chapter, the transition from a communist society to a capitalist society has been painful, especially in the 1990s. Many Russians even now want a return to strong government involvement.
Here are the definitions in play:
Capitalism is an economic system based on private property and voluntary exchange in markets.
Communism is an economic system based on workers' ownership of the means of production and, in many cases, the centrally planned allocation of work and commodities.
In Hirschman's terms you could say that capitalism is based on the exit option whereas communism is based on voice if it is democratic and on loyalty if it is authoritarian. Some communists will deny that central planning is necessary in their ideal world, where the state would "wither away." True, it didn't when it was tried. And many Marxists define capitalism as a system based on "wage labor," that is, working for a boss rather than for oneself or one's community. True, if we exchange at all we work "for" others.
No pure capitalistic system exists; neither does pure communism. The former Soviet Union was not purely communistic because a massive state, not the workers, owned everything; the workers were employees of the state. Very reluctant employees, usually. The joke among ordinary Poles or Russians was, "We pretend to work. And the state pretends to pay us." That is why some on the left in the West called the system "state capitalism," the state merely taking over where the capitalist bosses left off. Western economists pointed out that even in the centrally planned economy of the Soviet Union an extensive market economy was operating on the sly. So in parts of a supposedly communist system there was an exit option.
The U.S. is not purely capitalistic either. It is not all exit. There is plenty of opportunity for voice. And a big chunk of life in the U.S. is ruled by loyalty, in the family most prominently, but also in armies and clubs. There is also a good deal of central planning in the U.S. - though located in the big corporations and not so much in Washington. As in the former Soviet Union, corporations do not rely much on markets in the arrangement of their internal affairs. If a middle manager at Kraft Foods is told to hire more chemists, she does so. She's not presented with a price and asked to choose. The big---and small---companies rely on management methods to determine who does what and how much.
Economically the two kinds of planning, Soviet central and General Motors central, do look quite similar. Politically they are very, very different. Someone trying to exercise the "exit" option in General Motors might possibly be wished well as he leaves, and if while employed he tries to exercise the "voice" option he is sometimes listened to. But anyone trying to exercise either option in the old Soviet bloc of countries, or today in places like (still) Communist (though very market-oriented) China, or in North Korea or Cuba, is jailed or shot. In the times of Stalin in Russia (1779-1953, ruled 1922-1953) or Mao in China (1893-1976, ruled 1949-1976) his friends and relatives would be shot along with him.
The resulting difference in economic behavior is great. A worker on the line in General Motors may feel put upon by the bosses, and call himself a "slave" and call the bosses "tyrants." But he's not going to shot if he tries to leave. He's not a real slave and the company is not a real tyranny. And in its markets for sales General Motors, unlike an all-encompassing socialist state, faces other car makers, who can hire the engineer fired for exercising voice, or supply the customer who exercises exit.
There have been sizable communist experiments in capitalistic U.S., dozens of them in the last century, as for example the Amana colonies:
Amana refrigerators, air-conditioners, and other kitchen appliances are made by the Amana Company in Eastern Iowa---it's now owned by another Iowa firm, Maytag, which in turn is now owned by Whirlpool. Strangely, this highly successful capitalist enterprise originated in the largest communist experiment in America. Like dozens of other communities in America from the Plymouth Puritans onwards, the Amana Colonies were settled in 1855 as a religious community, by the pietistic Community of True Inspiration, dating from 1714 in southwestern Germany. The colonists in Iowa owned their clothes and other personal odds and ends. But all other possessions were common property, including the factories, the schools, the houses, and even the kitchens. In imitation of what they imagined very early Christian communities to have been like, they shared tasks, each according to his or her ability, and ate together in communal dining halls. Internally the community relied on voice---a German voice, since until recently the religious service and schools were conducted only in the old language. Externally, the Colony dealt in a market, with exit. But internally the community was held together with loyalty. The colonists had, and retain, a reputation for hard work and craftsmanship---and yet also a reputation for a certain lack of initative.
After fifty years of strict socialism the pressures to enter the market more thoroughly became too strong to resist. The young, especially, were attracted to the moneyed glitter of the market. The official web site tells a story that has been played out in many centralized societies, from your own home to Soviet Russia: "By the 1930s, the communal system in Amana had generated stresses which it could not resolve. Many community members found the rules associated with communal living to be petty and overly restrictive. Regulations governed most aspects of daily life including dining, dress and leisure activities. Many young people wanted to be free to play baseball, to own musical instruments or to bob their hair in the new style. Families wanted to eat together at home rather than in the communal kitchen dining rooms."
In 1932 the community, in "the Great Change," adopted a capitalistic, corporate form. The Amanians became stockholders. Workers got paid an ordinary wage and households began to cook their own meals. Many bought or built houses in private. The Amana Refrigeration Plant was owned by the stockholders until sold to Raytheon in 1965. The economic and social change was not so simple as the legal change. Amana, through which Interstate 80 now cuts, with gift shops galore at the exits, continues to be a community with a special character, where loyalty and voice often can alter the market outcome.
There is no market economy without significant involvement of the government. After all, rights to private property need to be enforced somehow---which brings in governmental courts. The government at a minimum must see to it that force and fraud is punished, or else the market will break down in violence.
Once upon a time the government was small, so small that it is difficult for modern people to believe. U.S. governmental expenditures as a share of all economic activity are nowadays around 35 percent. In 1900 they were a mere 7 percent. An the power of government extends far beyond its direct expenditures, by way of regulations from local building codes, which barely existed in 1900, to national immigration laws, also barely existing in 1900. The government now spends or heavily regulates about half of national income, even in a market-oriented country like the United States. The share is higher in places like The Netherlands or Sweden.
The British colony of Hong Kong - handed back to Communist China in 1997 by the terms of a 99-year lease- is perhaps the closest modern approximation to pure market capitalism. Little Hong Kong and gigantic Communist China now make a very odd couple. Hong Kong has Western standards of living, for example, and wants at least its local government to be elected. Big China has been adopting capitalism with enthusiasm, unlike the reluctant, uneven move to capitalism in Russia. But the Communist Party still makes the rules, without free speech or opposition parties, and with still a system of imprisonment for political "crimes."
The United States is plainly the leader of capitalism, however much mixed with socialism in the form of governmental regulation and subsidies. It does for example have the lowest share of government expenditure of any large poor country.
A mixed economy is ruled by markets as well as a government.
With such a definition, of course, any economy short of extreme anarchy is "mixed." Some economies, as the map suggests, lean towards the socialist side of the mix, some towards the capitalistic.
Some Western and especially English-speaking economists believe that a world with a radically smaller government would be better.
By historical accident the early Americans were lightly governed. English people at home in England were taxed heavily, and vigorously governed. But their theory of their governing was "libertarian," whatever the realities. The least of them felt himself to be a "free-born Englishman." Englishwomen, too, though in fact having less economic power than women in, say, the Netherlands, felt free. The governments of Continental Europe by contrasts had populations unaccustomed to asserting their "freedom," and the rulers believed themselves, often on not very good grounds, to be competent to intervene in the economy. An English-speaking criticism of economic policy was therefore likely to be a criticism of interventionist government, and so it was.
Northern European countries have more intrusive governments than the U.S. and even the U.K. Their welfare states take the form of comprehensive, and often astonishingly generous, programs for the least advantaged, such as the unemployed, disabled, and poor. The citizens of welfare states are guaranteed a minimum level of existence. Of course, they pay for this security in the form of high taxes. And they pay in high levels of idleness. Many Swedes nowadays find their country's programs to pay for disabled people too lax--- healthy people in large numbers claim to be disabled, and get nearly full salaries for life. In German companies workers have a real voice on the governing boards of corporations. In Holland until recently most wages were negotiated among unions, employers, and the government in a cozy meeting. Market forces were thus circumvented, at least in part.
It is usually and correctly presumed that the invisible hand can take care of most matters of efficiency - that is, what things are produced and how. That's a tall order. It's why even a socialistic mixed economy like Sweden can be called "capitalistic." Sweden lets the market decide what color the raincoats will be, who will make them, how many will be produced, who will sell them, what they will be made of, and so forth. By contrast, in fully socialist economies such as the Amana Colonies or the old Soviet Union the government attempted to decide everything---and most of the raincoats were decreed to be green.