If One Wishes to Discredit Capitalism, One Should at Least Understand How It Works

Socialism: A Logical Introduction
Scott R. Sehon
Oxford University Press, 2024; 268 pp.

This is a better book than I expected it to be, but it is not without its problems. Scott Sehon, a philosophy professor at Bowdoin College, is strongly inclined to believe that socialism is better than capitalism, but in the book, his main aim is to set forward some of the main arguments in favor of each system, indicating their strengths and weaknesses. He has an additional aim. He wants to teach people how to reason logically and believes that one way to do this is to state an argument in numbered premises and then discuss each premise. “My next philosophy teacher (at Harvard) Paul Hoffman, first showed me the amazing utility of breaking a philosopher’s argument down into numbered steps.” Sehon succeeds in showing that formulating a sound argument—one with only true premises and no mistakes in inference—is often a difficult task, and he poses some good challenges to those of us who support capitalism. However, I think there are difficulties with some of his arguments, and these are what I’m going to discuss in this week’s column.

By “socialism,” Sehon means a system with “(i) Collective ownership and control of the means of production and (ii) Equality of distribution or redistribution of wealth”; this contrasts with capitalism, a system with private ownership of the means of production. Both of these systems come in degrees, and no system has ever been purely socialist or purely capitalist. Sehon thinks that, other things beings equal, movement in the socialist direction is desirable. Why is this so? Socialism, he contends, better promotes human welfare than capitalism, and so long as socialism doesn’t violate people’s rights, we ought to adopt it. Defenders of the market can offer a parallel argument; capitalism better promotes human welfare than socialism, and so long as capitalism doesn’t violate people’s rights, we ought to adopt it. He calls these two arguments “the master arguments,” and most of the book consists of his analysis of them.

With exemplary fairness, Sehon acknowledges that he cannot demonstrate that capitalist employers exploit workers, but he gives far more credence than he should to the argument that they do this. In essence, he says that the employers extract surplus value from workers, and we are free to call this “exploitation,” but doing so does not suffice to show that workers are being treated unjustly. There might be circumstances in which such a wage bargain is ethically allowable. If, for example, you are a utilitarian and think that capitalism is much more productive than socialism, then you might think that it is all right to have a system in which workers are pressured to accept less than the full value of their labor. You might, though, think that pressuring workers to do this “involves a certain violation of a person’s dignity” [emphasis in original], and in that case, you will view the wage bargain as unjust. “In my self-appointed role of analyzer of arguments, it seems I should take a position on this question. However, I am honestly not sure what to say, and I think this is a question on which honest and well-informed people could rationally disagree.”

The way in which Sehon gives the exploitation argument undue credence emerges from his offering an example of this sort: a worker works an eight-hour day. Part of the day will be spent in earning what is needed to pay his salary, but the value of what he produces for the rest of the day goes to his employer. If the employer didn’t earn a profit, it would not pay him to hire the worker.

The flaw in this is the unsupported step that the worker earns less than the value of what he produces. This step makes sense in Karl Marx’s labor theory of value, but it doesn’t in the subjective theory of value that most economists have accepted since the 1870s. In this account, labor is just one of the three factors of production. Land and capital are the others, and in equilibrium, each factor earns its marginal product. Unless you accept Marx’s theory (or some other theory that has the same consequence), you have no basis for saying that labor is the sole source of value.

To avoid misunderstanding, I’m not saying that the subjective theory is correct (though I think it is), nor am I saying that the capitalist owners of the other factors of production ought to earn the returns from the contribution of these factors to the product. The point, rather, is that you can’t properly assume that profit comes from “surplus value” without argument. We can see the problem more clearly if we look at a worker’s cooperative that competes in the market. (Sehon accepts market socialism as a legitimate type of socialism.) The cooperative will also have to assign income shares to land and capital in order to assess how well it is doing. How the cooperative chooses to distribute the gains from these factors, once it has made this assessment, is another matter.

Sehon is guilty of an even more serious mistake, and this affects his presentation of an important argument for capitalism, which he takes from Friedrich Hayek. He takes Hayek to be arguing in this way: the free market can use more information in making economic decisions than a “democratically controlled” economy is able to use and, because of this, can make better decisions, other things being equal. However, other things are not equal, Sehon avers. Hayek’s argument depends on the crucial premises that “to the extent that more information is available and used in making decisions, the better the decisions will be for the person making the decision” and that “to the extent that each person makes economic decisions that are better for them, the decisions will be cumulatively better for all” [emphasis in original], but the second of these premises, Sehon notes, does not follow from the first. In fact, there are many cases in which someone who is making a better decision in his own interest will make a worse decision for others.

That is indeed so, but Sehon has not grasped the core of Hayek’s argument, which is that economic resources cannot be allocated rationally without market prices. It isn’t merely that the central planners would have to be content with using less information than is available to actors in the free market but rather that the amount of information required to coordinate a complex economy is so vast that the planners couldn’t accomplish the task at all. Divergences between what is better for an individual decider and what is better for all are then of comparatively minor significance. Hayek’s argument, it should be emphasized, is directed against central planning. As Sehon notes, market socialism uses prices, albeit to a limited extent, but Hayek’s criticism of market socialism (e.g., in his article “The Present State of the Debate” in Collectivist Economic Planning) would then have to be addressed, and Sehon does not discuss this topic.

However, there is an even more glaring omission in Sehon’s comparison of socialism and capitalism. Ludwig von Mises argued that a socialist economy—by which he meant an economy run by central planners—would collapse into chaos. In the absence of numerical market prices, resources cannot be allocated rationally. The argument differs from Hayek’s, to reiterate, in its stress on prices as ways to calculate. Mises’s first formulation of the calculation argument in 1920 led to an enormous literature, but Sehon seems blissfully ignorant of all this. He lists Mises’s Socialism, which includes the 1920 article as well as further discussion of the calculation argument, in his bibliography, but his only comment on Mises is this: “Mises has become something of a hero to libertarians.”

Sehon comes to us as a professor who would teach us to think logically about socialism and capitalism, but our teacher needs more instruction himself.