Dissecting the Capitalism-vs-Socialism Dualism

Many apparent ideological disagreements ultimately boil down to semantics — to the definitions of words. One side assumes one definition of a word and the other side assumes a different definition, and because they never stop to explicitly examine those definitions, their positions seem irreconcilable.

Nowhere is this dynamic more pronounced than in the perpetual debate between capitalism and socialism. Do “capitalists” and “socialists” really have unresolvable, fundamental disagreements about principles and values, or are they just using different definitions of words?

Most people consider the two systems as opposites and incompatible with one another, but Silvio Gesell points the way forward to a possible resolution in which the ideals of both systems are seen to be complementary rather than incompatible.

If we define capitalism as private ownership of the means of production and socialism as public ownership of the means of production, then obviously the two systems can’t be reconciled. But these are narrow, superficial definitions that fail to get at the essences of both systems.

So how should we define “capitalism”? Most people (both those who support and those who oppose capitalism) would be hard-pressed to provide a concise, scientific definition of the word. Silvio Gesell’s definition is clear and precise: “An economic condition in which the demand for loan money and real capital exceeds the supply and therefore gives rise to interest.”

Within this seemingly simple sentence lies the key to revealing, and potentially resolving, the dualism between capitalism and socialism.

Before we get to a potential resolution, we must also define “socialism”. Many people equate socialism to Marxism and define it as a system in which private owners of the means of production are expropriated and control of the economy is handed over to the State. However Marxism is just one variety of socialism among many.

Silvio Gesell offers a broader, more inclusive definition of the word. The very first sentence of the introduction of The Natural Economic Order reads: “The abolition of unearned income, of so called surplus-value, also termed interest and rent, is the immediate economic aim of every socialistic movement.”

This definition includes, but is not limited to, Marxism. Marxists would agree that the elimination of “surplus-value” is their aim. Expropriation of private ownership of the means of production is the METHOD of Marxists, not the GOAL itself.

Marx asserts that eliminating private ownership of capital is the only way to solve the problem of surplus-value. But let’s repeat, expropriating the owners of capital is the method, not the goal. Gesell argues that Marx’s goal is correct, but his method is wrong.

Both Marx and Gesell agree that the goal is the elimination of surplus-value, but they have very different ideas about how to achieve that goal. And their different prescriptions stem from their different ways of analyzing the causes of surplus-value. Wheras Marx says that the cause of surplus-value is private ownership of the means of production, Gesell says that is has two causes — private ownership of land and a flawed form of money.

The main drivers of appreciation in land values are population growth and economic development. (It is important to distinguish between raw land values and the value of improvements made to land. In this case, we are only talking about raw land value.) So when someone gains wealth because the value of their real estate increases, this additional wealth is created by society as a whole, but the individual owner pockets the gain. From a Gesellian perspective, this is one form of surplus-value.

The other form of surplus-value, according to Gesell, is interest on money. Gesell argues that interest is not a naturally occurring phenomenon but is rather a consequence of a flawed form of money. And interest causes surplus-value in a variety of ways (the most significant of which are hidden).

Obviously interest causes wealth to flow from those who borrow money to those who lend money. This causes wealth to accumulate at the top of the socioeconomic pyramid. But interest on loans is not the most important way in which interest causes economic inequality. Interest impacts the wealth of every single member of society, even if they never borrow or lend money. It does this in multiple ways.

First, interest puts an artificial limit on the formation of productive capital. If holders of excess money have the option of lending money to the government and earning a risk-free return, they will obviously not choose to invest in risky productive enterprise unless the expected rate of return is significantly higher than the interest rate on government debt. This causes the hurdle rate of return which businesses must offer in order to attract investment to be higher than it would otherwise be, and any prospective business that cannot meet the hurdle rate will not be able to attract funding. This causes capital to always be scarce relative to the workforce. According to Gesell, this is the reason why owners of capital are able to extract surplus-value from labor, NOT simply because capital is privately owned.

And this scarcity of capital is not a natural or inevitable feature of the free-market system. It is due to the existence of interest. If interest did not exist, holders of excess money would be forced to fund more productive enterprises in order to preserve and grow their wealth. This would result in more businesses being formed, which in turn would result in more demand for labor. This would fundamentally shift the balance of power between business owners and labor.

If this analysis is correct, the appropriate solution is not to expropriate the owners of capital but rather to eliminate the artificial limit on the formation of capital so that market forces naturally shift power from capital to labor.

The second key way in which interest distorts the natural distribution of wealth throughout society is by making the goods & services we buy more expensive. This happens in two different ways. First, interest expense is a significant component of the prices of most goods & services. Therefore if interest didn’t exist, it would be cheaper to produce those goods & services. Second, by keeping capital artificially scarce, interest reduces competition between producers of goods & services. This distorts the natural interplay between supply and demand, resulting in artificially high prices.

So ordinary working people would see their wealth increase in a variety of ways if interest ceased to exist, even if they never borrow or lend money. They would earn more from selling their labor, and the goods & services they buy would cost less.

And this is the key to illuminating the false dualism between the private property/free enterprise system and the goals of socialism. If Gesell is correct in his analysis of the causes of surplus-value, the correct solution isn’t to eliminate private ownership of the means of production. It is to eliminate private ownership of land and to replace our flawed form of money with a more rational monetary system that doesn’t give rise to interest. If we do those two things, the free-market system will lose its capitalistic character and generate the results that Marxism aims at but has never yet been able to achieve in practice.