Theory Of Capitalism and Socialism

Austrian Critiques of Neoclassical Economics and the Debate About Socialism and Capitalism

Contributors to both orthodox and heterodox economic ideas have at times tried to determine the most appropriate set of economic institutions for achieving economic efficiency, equity, and growth. Sometimes these writings have been highly technical, addressing the theoretical requirements for optimum resource allocation under any economic system; sometimes they have been broad-brushed, speculating about the long-run possibilities of socialism or capitalism.

Orthodox mainstream economists often do not engage in these broader questions of which economic system is preferable: socialism or capitalism. Instead, they focus on the economics of markets. Their response to Marx was mostly silence, as if the topic were beneath them. Edgeworth, for example, wrote, "We have much sympathy with those who hold that the theories of Marx are beneath the notice of a scientific writer."1 When some mainstream neoclassical economists did enter the debate, because it touched upon a technical point— whether markets and socialism were compatible—they argued that free markets and socialism were compatible, a response that the Austrian economists disputed. This question concerning the most appropriate set of institutions is one of the most important questions facing societies in the world today. Modern means of communication and travel allow people in poorer societies to be cognizant of the disparities between their level of well-being and those of wealthier societies. Those countries that were formerly members of the USSR and those that were dominated by the USSR are presently in the process of trying to fashion new institutional structures to replace those that failed to give them adequate levels of wealth and freedom. It seems particularly appropriate, therefore, to survey economic literature on the merits of these two often juxtaposed systems, capitalism and socialism. Let us begin by considering the definition and history of the terms capitalism and socialism.