Study Notes

Capitalism and Common Ownership (Socialism)

A Level
AQA, Edexcel

Capitalism is an economic and political system in which property and resources are owned privately, rather than through public ownership (i.e. by the state), with the intention of generating profit.

The distinction between private property and public ownership is relatively straight-forward. The former entails ownership of property by individuals and companies. This is the fundamental basis of capitalism; an economic system criticised by socialists. Public ownership however occurs when an organisation is run by the government for the benefit of all members of society. This is often referred to as nationalisation. According to socialists, common ownership ensures that the needs of the many override those of the few - the public sector can allocate scarce resources on a much more equitable manner than that of the marketplace.

The original Clause 4 of the Labour Party’s constitution made a firm commitment to common ownership of the means of production, distribution and exchange. This would ensure that the workers received the “full fruits of their labour” and “the most equitable distribution of resources.” Clause 4 was widely interpreted to mean that a Labour government should establish state control over the commanding heights of the economy. Whilst some degree of private sector activity would remain, an incoming Labour government would be committed to taking the key industries like coal and steel under state ownership.

In reality, successive Labour governments merely expanded the role of the public sector whilst leaving large sections of the economy subject to the unfettered market forces of supply and demand. When the party was in office, their Clause 4 commitment rarely played much of a role with the one notable exception of the Attlee government (1945-51). Unlike other Labour Prime Ministers, Clement Attlee inherited a political climate that was highly favourable towards state control and collectivism. Britain had just won a war against the forces of fascism and there was very little appetite amongst the public for a return to the high unemployment of the 1930s. Revealingly, the most left-wing government in British history was run by a figure that could only really be classed as a social democrat.

According to socialists, common ownership ensures that the needs of the many override those of the few. It is claimed that the public sector can allocate scarce resources on a much more equitable manner than that of the marketplace. Socialists also agree that the state can allocate resources more effectively than the private sector. Perhaps the clearest example of this argument is the National Health Service. This socialist-inspired scheme remains highly popular amongst the public, many of whom are instinctively opposed to any market-based reform of a service provided to all regardless of their ability to pay.

Not surprisingly, the socialist position on state ownership is subject to criticism from those on the right of the political spectrum. Profligate left-wing governments have at times sought to spend their way out of economic difficulties, with the inevitable consequence of higher taxes and/or an increase in the national debt. This places a particularly unequitable burden upon future generations. It has also been argued that the welfare state has expanded in scope and cost under Labour and Conservative governments, and yet its creators assumed that the amount of government spending would actually decline as the population become both healthier and more educated. As a result of this steady increase in the level of public spending, the millennials will have to pay off the massive accumulation of debt interest by governments who have raised the level of state involvement in the economy (such as the bail-out of those banks that were ‘too big to fail’).

Another powerful argument against extensive level of public ownership comes from free-market economists from the Austrian school of the mid-twentieth century. They claim that a planned economy will result in an inefficient allocation of scarce resources. Friedrich Hayek (1944) argued that “what cannot be known cannot be planned” and warned that “an expansion in the role of the state would lead to slavery for its people.” Ludwig von Mises (1956) added that an economy denied the signalling process of the price mechanism presents itself with the economic calculation problem. No bureaucracy has ever been created that can ever hope to predict the multitude of economic decisions taken every day by economic agents. He claimed that only the free-market has the capacity to address the basic economic problem of matching finite resources with infinite human wants. The notion that the government can run the economy on an efficient basis is therefore a major dividing line between left and right.

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