Capitalism and Socialism: Toward a Common Understanding

Our nation’s prosperity, economic dynamism, and reputation as a hub of innovation and opportunity owe much to entrepreneurship.  By recognizing opportunities for deploying resources in more productive ventures (Kirzner, 1973) and identifying entirely new products and services or ways to produce and deliver them (Schumpeter, 1942), entrepreneurs have helped fuel economic growth and opportunity and made the U.S. a leader in innovation.

Unfortunately, there has been a decline in entrepreneurship in the U.S., with new firms accounting for significantly smaller shares of all businesses and employment than in the early 1980s.  While there are many potential remedies to this problem, it has been suggested by some that universities can play an important role in providing the inspiration and skills that will yield successful entrepreneurs, possibly spurring entrepreneurship in general.

Recently, the Challey Institute for Global Innovation and Growth conducted a survey of 2,000 students at 130 four-year universities/colleges across the U.S. to gain insights into student views toward entrepreneurship and the systems that support entrepreneurship.  When students were asked about whether they have plans to start their own business, only 22% said yes.  Moreover, only 30% of the students surveyed said that their classes and other activities in college have inspired them to consider starting their own business, and only 47% said their classes and other activities in college have helped them develop the skills they would need to successfully start their own business.

While these results are certainly suggestive of the role that universities can play in enhancing U.S. entrepreneurship by equipping students with the mindset and skills they need to be entrepreneurs, other results in our survey suggest an even more important role for universities in enhancing entrepreneurship.  The future of entrepreneurship in the U.S. may depend heavily on a common understanding of capitalism and socialism.

An important insight into understanding a nation’s entrepreneurial activity was provided in an academic article by William Baumol in 1990.  While acknowledging that the number of entrepreneurs may vary among societies, he suggested that a more important factor in determining the contributions of entrepreneurs to society is their allocation of effort to productive or unproductive activities.  That is, entrepreneurs can engage in productive entrepreneurship by doing things like developing new products or production methods, or they can engage in unproductive entrepreneurship by doing things like suing other companies or lobbying politicians to develop rules that limit competition.

According to this theory, whether entrepreneurs engage in productive or unproductive activities, and whether they are considered to be an entrepreneur by the way it is defined by most people, depends on the rules of the game.  Rules that make productive entrepreneurship more profitable than unproductive entrepreneurship will produce more of what we call entrepreneurs, while rules that make unproductive entrepreneurship more profitable will generate more attempts to seek wealth transfers from others without creating value for society.

As a result, Baumol suggests the most important way to enhance productive entrepreneurship may be through the rules of the game.  He gives examples of policies that could be beneficial to productive entrepreneurship, such as reforming rules regarding private antitrust legislation to prevent firms from suing others just to reduce competition and reforming capital gains taxes to prevent firms from threatening takeover just to earn a short-term profit.

Perhaps the most important rule that influences entrepreneurship, however, is the economic system in which firms operate.  A number of studies have shown an important link between economic freedom and entrepreneurship.  As pointed out by Sobel (2008), less government spending, lower taxation, fewer subsidies, less regulation, more secure property rights and contract enforcement, and a more fair judicial system increase the payoff of productive relative to unproductive entrepreneurship.  These are the characteristics that encompass free market capitalism.

This suggests that productive entrepreneurship should thrive under the characteristics of free market capitalism (e.g. protection of private property, reliance on private sector activity over the public sector), while unproductive entrepreneurship becomes more profitable under the characteristics of socialism (e.g. reliance on the public sector over the private sector, heavy redistribution of wealth).  As a result, maintaining a capitalist system and enhancing economic freedom are critical to the future of productive entrepreneurship.

Because maintaining a capitalist system in the U.S. depends on society embracing it, we also asked students about their views on capitalism and socialism.  When asking the 2,000 students about their views on capitalism, 23% reported having positive views, 38% reported having negative views, and 39% reported having neutral views.  Moreover, 23% agreed that capitalism can help solve major challenges, while 47% disagreed and 30% had no opinion.  When asked about socialism, 27% had positive views and 36% felt it could help solve major challenges, compared to 28% with negative views and 26% who felt it could not solve major challenges, with the remaining students neutral.

A deeper dive into our survey shows that not only do students feel more negatively about capitalism than socialism, but they also have a misunderstanding of capitalism and socialism.  When students were given three choices for defining capitalism: (1) a free market definition (an economic system in which property is privately owned, exchange is voluntary, and production and pricing of goods/services are determined by market forces), (2) a cronyism definition (an economic system in which corporations utilize grants, special tax breaks, political connections, and special rules that favor them over competitors to earn profits), and (3) not sure, 49% chose the free market definition, 36% chose the cronyism definition, and 15% chose not sure.

Not surprisingly, these conflicting definitions of capitalism yielded different attitudes about capitalism. For students choosing a free market definition of capitalism, 40% have a positive view, 19% a negative view, and 41% neutral.  By comparison, for students choosing a cronyism definition, 6% have a positive view, 70% have a negative view, and 25% a neutral view.  Similarly, the definitions generate differences in beliefs about whether capitalism can help solve important problems, with 35% of those defining capitalism with free markets agreeing, compared to 11% defining it with cronyism agreeing that capitalism can help solve major challenges.

In choosing among different definitions of socialism, 37% used the central planning definition traditionally associated with socialism (an economic system in which the types, quantities produced, and prices of goods and services are planned by the government and property is owned by society), 44% used a redistribution definition (an economic system in which individuals/companies make decisions on the types, quantities produced, and prices charged for most goods and services, but government plays a very active role in assuring prices are fair and in ensuring an equitable distribution of resources between rich and poor), and 19% said unsure.  As with capitalism, this also affected their views of socialism, with 20% having positive views and 30% believing it can help solve major challenges for those that defined it as central planning, compared to 41% with positive views and 50% believing it can help solve major challenges for those that defined it as redistribution.

This is concerning for a number of reasons.  Most obvious is that it suggests the potential abandonment of the system that has generated the prosperity and progress we have realized as a society.  In addition, to the extent that the lack of common definitions of capitalism and socialism among students reflects similar disagreement in society, it will be difficult to have meaningful conversations on the future of economic systems.  Finally, and perhaps not as obvious, is that the misunderstandings that exist may perpetuate the types of policies that lead to further mistrust in capitalism and a movement away from the type of free market capitalism that has led to our prosperity.

A recent academic article by Klein, et. al (2022) highlights the problems that may result from a confusion of capitalism with cronyism.  They note a damaging spiral that occurs when people attribute societal problems that have roots in cronyism to capitalism.  People blame a variety of ills on capitalism, and seek government intervention as a remedy.  As the authors point out, the increased government involvement in the economy increases the payoffs to engaging in cronyism and incentivizes cronyism.  Therefore, the remedy to problems with “capitalism” amounts to more government intervention, the inevitable cronyism that results, further distrust in capitalism, and additional calls for government intervention.

As a contemporary example, consider the recent supply chain problems experienced in the U.S. that have been attributed to capitalism.  While the causes are many, no good argument has been made as to why this is a “capitalism” problem.  On the other hand, the supply chain problems are at least partially rooted in cronyism, with dockworkers unions fighting port automation for decades and lobbying various governments to prevent it, and with the Jones Act preventing non-U.S. owned, built, and crewed ships from transporting goods between U.S. waterway ports.

As a result of the supply chain problems, there have been calls for reshoring, with a variety of potential policies to bring supply chains back to the U.S., such as trade tariffs and/or subsidies.  The obvious problem with these types of policies is that they harm consumers with higher prices and taxpayers with more taxes.  Another consequence, however, is that they incentivize firms to engage in cronyism, lobbying to make sure that their product is protected by tariffs or subsidies, and lobbying for exemptions to tariffs for the inputs the firm needs.  It is likely that this would further erode trust in capitalism, leading to more government intervention and more cronyism – exactly the type of harmful spiral highlighted by Klein, et al.

Although there are many other examples, this highlights the importance of having a common understanding of different types of economic systems.  In order for future leaders to engage in meaningful conversations on policy that will affect our nation’s future, it is essential that they have an accurate and common understanding of capitalism and socialism.  It is the responsibility of university/college educators to provide this understanding, especially those that provide business and economic training.  Thus, it is particularly important to examine the state of understanding about capitalism and socialism among students majoring in business and related majors.

We find, indeed, that business students have less confusion over capitalism in comparison to other majors.  63% of business majors define capitalism as free market capitalism compared to 46% of non-business students, while 26% of business students and 38% of non-business students define it as cronyism, and 11% of business students and 16% of non-business students are unsure what is meant by capitalism. This also leads to more positive views of capitalism; we find that business students are more likely to have a positive view of capitalism, even after controlling for political ideology, socioeconomic status, and sex.  37% of business students view capitalism positively and 24% negatively, compared to 20% positively and 41% negatively for non-business students.  The influence of business professors is also apparent, with business students reporting that among professors who express opinions on capitalism, 59% are positive and non-business students reporting that among professors expressing opinions on capitalism, 32% express positive views.

Similarly, business students have less confusion about socialism than other majors.  46% of business students define socialism as central planning compared to 35% of non-business students, while 37% of business majors and 45% of non-business majors define it as redistribution, with the remaining 17% of business students and 20% of non-business students unsure of what is meant by socialism.  We find that the improved understanding of socialism by business students leads to more negative attitudes toward socialism even after controlling for political ideology, socioeconomic status, and sex.  Although the influence of professors is not as apparent with socialism, we find that business students report smaller percentages of professors who express opinions on socialism being positive in comparison to non-business students – 55% vs. 59%.

Although there is an improvement when comparing an understanding of capitalism and socialism among business students to other majors, the lack of a common understanding among this group of students is particularly concerning. If students who are trained in the fields that specialize in an understanding of markets and the ways that firms interact with each other and the rest of society don’t have a common understanding of capitalism and socialism, how can we expect the rest of society to have the common understanding of capitalism and socialism that will allow us to have an informed debate about the future of economic policy?

Clearly universities, and business schools in particular, need to take a bigger role in teaching students about economic systems and their implications.  While business students receive training in economics and the role of markets and incentives early in their degree programs, this training needs to be reinforced throughout the business curriculum.  It’s important that students not lose sight of the importance of the broader economic environment when learning about functional areas of business.

Moreover, deeper training in economic systems (capitalism and socialism), their implications, the positive role of entrepreneurs in society, and the advancements in human progress and the role of economic freedom in creating this human progress would be beneficial for all students.  At the Sheila and Robert Challey Institute for Global Innovation and Growth at North Dakota State University, we’re working to provide this training.  We offer a class called “Market Values” that allows students to explore the economic implications of capitalism and socialism.  In addition, the Institute has a speaker series that offers students opportunities to engage with leading academics on issues related to human progress, flourishing, and opportunity, with many of these speakers focusing on the role played by economic freedom and markets.

Other centers and institutes are doing similar things across the country.  However, these efforts need to be extended more broadly across universities and to more students within universities.  In addition, universities should consider requiring training in the role that economic systems play in progress and human flourishing for all students.

Universities have an important role to play in our nation’s future, its prosperity, capacity for innovation, and environment for entrepreneurship.  Ensuring future economic growth and opportunity requires maintaining and enhancing the types of policies that enable the private sector to be successful and increases the payoffs to productive entrepreneurship relative to unproductive entrepreneurship.  This requires a clear and common understanding of what is meant by capitalism and socialism, along with their implications.  Universities, and especially the business disciplines, need to take the lead in providing this understanding.

John Bitzan
John Bitzan
John Bitzan is the Director of the Sheila and Robert Challey Institute for Global Innovation and Growth and a Professor of Management at North Dakota State University. John has co-edited three books in transportation economics and his research has been published in a wide variety of academic journals; his work has also been cited in regulatory proceedings before the Surface Transportation Board by various entities, such as the Norfolk Southern Railroad and the U.S. Department of Agriculture.
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