I really enjoyed this segment on CNBC about capitalism and socialism. In this short clip Warren Buffett, Charlie Munger and Bill Gates discuss the nuance of their view and many of the confused narratives that are going around these days. Take a look for yourself, but here’s how I basically see this debate and the many problems around the use of these terms:
- Socialism means social ownership of the means of the production. Capitalism means private ownership of the means of production. No need to confuse it more than that.
- No country is purely capitalist or socialist. In fact, all countries are some blend of social and private ownership. The USA leans more heavily towards private ownership of the means of production, but there is still quite a bit of government intervention in redistributing the ownership of the means of production. Even Europe, which is often pegged as being “socialist” is predominantly capitalist though leaning more towards socialist economies than the USA does.
- Importantly, there are exactly ZERO predominantly socialist developed economy countries in existence. Every single developed economy in the world is a predominantly capitalist economy with varying degrees of socialist intervention in redistributing the means of production.
- People today seem to confuse inequality for a failure of capitalism. This is misleading. While capitalism has some level of inherent inequality the rise of mass inequality is a policy failure, not a failure of the system itself.
- By almost any long-term measure, the rise of capitalism has coincided with a significant increase in global living standards.
As I often say, capitalism is the worst system except for all the rest. In my view, these conversations need a lot more balance. Democrats need to stop making outlandish extremist claims about how billionaires and capitalists are evil and the Republicans need to stop looking at all forms of redistribution as evil. As Buffett says in the clip, the government needs to reallocate some resources. So, the question for our time is figuring out what the right amount of necessary reallocation is to keep our economy somewhat meritocratic so that we don’t veer so far into inequality that socialism inevitably rises due to populism and endangers our entire economy.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.