Socialism vs Capitalism

Socialism is based on the belief that one man knows better than one million. Capitalism rests on the principle that a million men know better than one.

In a pure socialist system the state makes decisions for everyone. For this reason it is slow to obtain adequate information on the best way to allocate resources. In a pure capitalist one the many make decisions for the many. It is much faster - and as history has shown, much more efficient - at allocating resources.

We don't, of course, live in a purely capitalist society. We have a 'mixed' economy. Ever developed nation, from China to Sweden, has a mixture of the free-market and state control. The recent credit crunch and banking crisis has swung the pendulum towards state control. The debate is now about what style of capitalism we want. The debate between socialism and capitalism ended with the fall of 'communism' (which really meant state control of economies).

State control failed. It was unable to recover. Capitalism, by contrast, has shown itself to be remarkably resilient; constantly reinventing itself, bouncing back and lifting people out of poverty through wealth creation. Its most severe crises - the Wall Street Crash, Stagflation in the 70s, the dotcom bubble, the credit crunch, the collapse of Lehmans - have not stopped its march. It was capitalism, in one form or another, that lifted millions in Asia out of poverty. It continues to do so in China and India. It is the best economic system for Man: now, and in the future.

I don't believe, however, in complete and total laissez-faire. In any competition, you need an umpire. You need rules. And you need punishment. Imagine a sport where there were no rules. It would still have a Darwinian element to it, but capitalism isn't just about survival of the fittest. It's about confidence. Capitalism needs a neutral umpire to enusre fair play. If all players see, and accept, that there is a level playing field, then they will join in the 'game'. If the system has no means of redress, no fair play, then they won't even participate. They will probably resort to bribery and corruption, as they do in so many parts of sub-saharan Africa. Or Afghanistan. The system is untrustworthy, so why bother participating in it?

I'm not sure Britain's version of capitalism is well run, with the result that the benefits aren't as great as they could be. Take supermarkets: the big players run a cartel, squeezing suppliers and shutting out competition. There's not as much competition as there should be, which is part of the reason we have higher prices than many countries.

In the banking sector, the big players were making so much money, and giving so much to the Exchequer, that the then Chancellor Gordon Brown got into bed with them and wouldn't get out. I remember watching him give speech after speech at the Guildhall, in his white bow tie, praising the City for it's invention and profit-making. He showed no regard whatever for their balance sheets, their liquidity, their debts. His 'tripartite' system of regulation was a sham. Because finance is now borderless, there was no overarching, respected authority to act as capitalism's neutral umpire and just lawgiver. There still isn't, although some world leaders are trying to more closely coordinate their regulation.

Capitalism survives by a process of 'creative destruction': the weak perish, the strong thrive. But we can only benefit from this if the strong are constantly exposed to stiff competition and kicked into line by the umpire, whose loyalties must always lie with the consumer. In the case of the banking crisis, the consumers were ordinary investors and their pensions. Gordon Brown and others forgot - no, disregarded - our interests, so seduced were they by the City's profits.

Capitalism's failures can't hide the fact that it is the only system that has the ability to react quickly enough to consumer needs, which is the foundation of a successful economic system. Socialism cannot, because it is centrally planned. The many make better overall decisions than the few.