Who Controls the Economy? The Lessons of Capitalism and Socialism

I remember coming across David Harvey’s critique of capitalism early on in my college years. After seeing this video, I was ready to join a Marxist organization.

Anyway, he makes a compelling argument, but many years later, after a lot of research, I’ve come to see things differently thanks to my interest in Austrian economics. Please watch the video, because it’s very interesting and the only way to understand what I’m saying:

In his RSA Animate presentation, The Crisis of Capitalism, David Harvey makes several compelling observations about the weaknesses of modern capitalism. He points to financial speculation, economic inequality, stagnant wages, political influence, and wealth concentration. These are legitimate concerns. Where I disagree is with the implication that these problems are inherent to capitalism and that socialism offers a viable alternative.

My central question is this: How does an economic system coordinate production, allocate resources, encourage innovation, and respond to the changing needs of millions of people?

This is where the Austrian economists Ludwig von Mises and Friedrich Hayek offer an important counterargument to Marxist theory.

The problem with central planning

In 1920, Mises published Economic Calculation in the Socialist Commonwealth. His argument was straightforward: without private ownership and market exchange in the means of production, a socialist economy loses the price signals necessary to determine whether resources are being used efficiently. A government can establish production targets, but how does it know whether steel, labor, machinery, or capital would be better used elsewhere?

Hayek expanded this argument in his 1945 essay, The Use of Knowledge in Society. Knowledge is dispersed throughout society. Farmers, business owners, workers, consumers, and entrepreneurs possess information that no central planning authority can fully collect or process. Market prices communicate much of that information, allowing millions of independent decisions to coordinate economic activity.

This was not merely a theoretical concern. The Soviet Union provided a historical demonstration of the difficulties.

Why did the Soviet economy fail?

Under Stalin, the Soviet Union achieved enormous industrial expansion through its Five-Year Plans. It also paid a devastating human price. Forced collectivization, confiscation of agricultural production, deportations, coercion, and the famine of 1932–33 exposed the brutality of an economic system in which political authorities controlled production and distribution.

The problem extended beyond Stalin. Soviet planners relied on production quotas that frequently rewarded the wrong things. Factories met numerical targets while sacrificing quality. Managers exaggerated their needs to secure resources. Inefficient enterprises remained in operation because the state protected them. Consumers faced shortages, limited choices, and long waits.

The Soviet Union achieved significant military, scientific, and industrial accomplishments. But by the Brezhnev era, economic stagnation had become increasingly apparent. Extensive growth through additional labor and machinery was reaching its limits, while productivity and consumer innovation lagged. Gorbachev’s reforms attempted to address these problems, but weakening the old planning system without successfully establishing a functioning market economy contributed to an increasingly unstable situation. The Soviet Union dissolved in 1991.

This history does not prove that every conceivable form of socialism must fail. It does, however, demonstrate the enormous problems associated with concentrating economic decision-making in a central authority.

Where I disagree with Harvey—and where capitalism deserves criticism

Harvey is right to criticize the excesses of modern capitalism, but several distinctions are necessary.

First, capital accumulation is not automatically exploitation. Investment can expand production, create employment, improve technology, and raise living standards. But economic growth alone is not proof that an economy is working fairly. A society can become wealthier while large segments of its population experience stagnant wages, insecure employment, rising living costs, and diminishing opportunities.

Second, financial speculation is not synonymous with productive investment. Financial markets can allocate capital efficiently, but they can also become distorted by government guarantees, monetary intervention, excessive leverage, and institutions that privatize profits while socializing losses. The financial crisis of 2008 demonstrated that market participants do not always bear the full consequences of their decisions.

Third, economic inequality deserves serious examination. Inequality is not automatically evidence that wealth was created at someone else’s expense, but neither is every unequal outcome justified simply because it emerged through a market transaction. Inherited advantages, unequal access to education and capital, monopoly power, and unequal bargaining positions can limit genuine economic opportunity. A worker who has few employment alternatives does not necessarily have the same practical freedom as an employer with considerable economic power.

Fourth, markets do not automatically account for every social cost. Pollution, environmental degradation, public health risks, and other externalities can impose costs on people who never agreed to the underlying transactions. Markets also do not reliably provide every public good. These are legitimate reasons for carefully designed public policy.

The answer, however, need not be centralized economic control. It can include effective antitrust enforcement, fraud protection, environmental standards, a reasonable social safety net, access to education, and institutions that preserve competition and economic mobility.

Finally, Harvey’s criticism of corporate power should not be confused with a criticism of competitive markets. There is a profound difference between a business succeeding by serving customers and a corporation succeeding because it has cultivated political relationships, secured subsidies, influenced regulations, or eliminated competitors through government protection.

This brings me to what I consider one of the greatest contradictions in contemporary American economic life: crony capitalism.

Corporations lobby government for favorable treatment. Politicians rely on powerful financial interests. Regulatory systems can become barriers to entry that protect established businesses rather than consumers. The relationship between concentrated wealth and political authority becomes mutually reinforcing.

This is not the competitive capitalism that Austrian economists defend. Nor does criticizing it require defending every action taken by private enterprise.

But there is an important distinction between the failures of a market economy and the failures of an economy in which political authorities control resource allocation. In the Soviet system, the state was simultaneously the employer, owner, investor, regulator, and political authority. Few independent institutions could correct its mistakes.

The danger in both systems is concentrated power. The difference is how that power is acquired and exercised.

I am not interested in defending corporations simply because they are privately owned, any more than I am interested in defending government simply because it claims to represent the public. Neither ownership nor ideology guarantees fairness, efficiency, or accountability.

The goal should be a more competitive and humane form of capitalism: one that rewards productive enterprise without letting wealth buy political privilege; protects individual freedom while recognizing that opportunity is not equally distributed; and provides a meaningful safety net without suppressing initiative or innovation.

Markets are powerful mechanisms for coordinating economic activity, but they are not moral systems. They need rules, institutions, and accountability. The challenge is to design those institutions without giving government so much power that it becomes the very source of privilege and economic distortion it was supposed to prevent.

Changing who owns the means of production does not eliminate the human desire for power, privilege, influence, and economic advantage. It can simply change who gets to exercise those privileges.

No economic ideology should be exempt from scrutiny. Not capitalism. Not socialism. And certainly not the political and corporate institutions that increasingly blur the distinction between the two.