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This is an attempt to provide a rigorous explanation of socialism to kind people without specialized training. My belief is that we are all better off when we have clear conversations because we can shed the veils of ignorance and prejudice. Please feel free to chime in and let me know what you think and how I can improve my explanation.

Recent world history is a history of conflict between two theories of political economy, viz. communism and capitalism, put into practice. The extent to which the actual practice of political economy exhibits fealty to the political economic theory whose name may be borne by the system of practitioners is often questionable. But let us begin with theory and see how the theory might fail in practice, even when applied rigorously.

Communism is a system of political economy developed by Karl Marx. The formal definition of communism might be stated as follows,

Communism iff Yt = W(L)t.

Where iff stands for “if and only if” and means material equivalence or in this instance a definitional relation between the concepts, Yt is the production in an economy in time period t as measured by the final value of all goods and services, and W(L)t is the wages paid to the labor class in time period t. Y can be measured by, say, GDP. So when over a given year, if all of GDP is paid in the form of remuneration to labor as a class, then the society is a communist society.

Marx observed that there exists two important social classes, the capitalists and the proletariat. Capitalists supply capital, which we might represent with the letter K, and laborers supply labor, which we can represent with the letter L. According to Marx’s theory, actual value is created when laborers use their biological power with the implements of capital to fashion the materials of nature’s bounty into useable form to satisfy human wants. Thus value is created by supplying L to the economy.

However, in a capitalist society some of that value is returned to the suppliers of K, the capitalists, even though they did not create value by laboring. This Marx called class exploitation. A communist society is a society without class exploitation. Such a society, stated formally, exists when the value of productive output is returned to the class of laborers, the proletariat, in full. This does not presuppose that the returned value will be distributed amongst the proletariat equally. Only that it will be distributed to laborers as a class.

Communism may fail in practice because there is an insufficient supply of K to improve the condition of human beings because there are insufficient returns to the well-coordinated supply of K when only labor is rewarded with a flow of value going exclusively to the labor class.

On to capitalism, a system which emerged in practice after the legal structure of private property which developed in Tudor England and which was theoretically articulated by Adam Smith and David Ricardo. Capitalism is a system, whose formal definition could be stated as follows,

Capitalism iff Y = K + L + N.

Production is equivalent to the sum of capital, labor, and land or N (N is often supplied by the well-to-do middle class bourgeoisie, who are the privileged members of their own little communities as the primary owners of property in those communities). In well-functioning capitalism, all the value of final goods is returned in exchange. Returns to K are provided in the form of interest and profit, returns to L are provided in the form of wages, and returns to N are provided in the form of land rents.

Capitalism is a system of exchange value, where value of commodities is measured by prices in terms of the exchange value in private markets. Types of commodities which are unlike other types of commodities can be rendered equivalent in the medium of exchange value, which is an abstraction which underlies capitalist exchange, which typically occurs in the form of money. While households may supply commodified labor to acquire money to be surrendered for the purchase of other commodities, businesses supply financial capital in order to purchase commodities in order to operate and acquire more financial capital. Capitalism as a system produces the effect of an insatiable appetite for economic growth. If flows of financial capital are blocked by, say, a loss of investor confidence, then it produces an economic catastrophe. This is one of the reasons capitalism may fail in practice.

In capitalism, resources do not just flow between households and businesses. The medium of abstract exchange, money, must be supplied by banks. Banks have to do a good job of supplying the right amount of money in order to stabilize the economy. If banks do not do a good job of supplying the right amount of money, the economy can collapse. The more advanced capitalist societies become the more complex their economies become and as a result the more difficult it becomes for banks to supply the right amount of money.

In reality, when organized collections of states share a common form of money and a common bank, if there is a crisis of sovereign defaults (which is a fancy way of saying a state cannot pay its debts to the whole), then they placed in a sort of catch-22. When the European Union was faced with this situation, they had to face a choice between surrendering democracy and allowing unelected bureaucrats at the level of Europe to impose tough decisions on the people, or face the break-up of the monetary union by allowing the people to choose to exit the union to avoid accepting difficult economic conditions.

Capitalism struggles with the problem of needing more an more flows of financial capital, which is facilitated by banks and capital markets, which—as we have seen—have their own endemic weaknesses as components of capitalism which threaten system stability. This focus on capital tends to create greater and greater returns to K, which leads to a concentration of wealth in the hands of suppliers of K and takes wealth away from suppliers of L and N. Over time, this creates a great degree of social inequality, and overcoming this severe inequality is the fundamental problem of liberal capitalism. There is also a system between communism and capitalism. That system is socialism.

Unlike communism, socialism allows returns to capital. But under socialism, the government owns some of the means of production, and thus can rationally plan the allocation of returns to production to the various social classes. Socialism can look at lot like capitalism, but with an additional constraint enforced by a rational government which ensures fairness in the returns to value added and ensures social stability. It may look something like this,

Socialism iff Y = K + L + N s.t. K = L = N.

Where s.t. stands for “subject to” and can be read as “subject to the constraint of”. Socialism is about groups of people helping each other. K, L, and N need not be absolutely equivalent, but they can be driven close to a fair approximation by reasonable social planning. In this equation, we could replace K with a G, if government owns all the means of production, so that the equation would look something like,

Y = G + L + N.

In a mixed socialist economy—a mix of socialism and capitalism, we could use reuse G to differentiate what capital is contributed to production by the government and what capital is contributed by private suppliers capital, denoted with a K, so we get,

Y = G + K + L + N.

We could then describe the extent of socialism practice by comparing the amount of capital supplied by the government, and the amount of capital supplied by the government, which (from more socialism to less socialism) could be described by,

1.    G > K,

2.    G = K, &

3.    G < K.

Present day American may be described by condition 3, because the government does own some means of production, including high-technology production in the defense-industrial sector and for a time the government owned some shares of automotive producers and banks. However, the vast majority of capital is supplied by the private sector.

The goal of socialism is to supply sufficient amounts of the elements of production, and distribute the value of that production in a fair and sustainable way. It makes one wonder how anyone can argue against such a system. But socialism has a weakness, and that weakness is hatred. Hateful groups of people who hate one another struggle to get over their hatred for each other so that they can help each other instead. People whose vision is clouded by hatred fail to see how they are really interdependent. This hatred can come from both the oppressed and their oppressors, or from similarly-situated groups who feel they are in competition. It can even be manifested as hatred for a government which helps the other disadvantaged groups in a country. But it does cause people to fail to have a sense of their shared commitment to prosperity for all social classes.

Socialism works in theory and it has worked in practice. Socialism is a general system of political economy that can be applied regardless of context. If people get over their fear and hatred of others, and embrace their natural empathetic instincts, then socialism can work for anyone, anywhere in the world.

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