Equality and Capitalism

“Equality” does not have to mean “anti-capitalism”. Poverty and inequality can be fought either through planned economies or through a managed form of capitalism. In planned economies, ownership of goods and assets generally rests with the state, and government planners decide what is best for the economy. In a capitalist system, there is private and not government ownership of wealth, and wealth-creation is left to individuals and the "market".

Problems of planned economies

Some of the problems of planned economies are apparent from looking at the example of the Eastern European economies in the era of communism. During this time, prices of goods were fixed by government planners. These planners had to guess which goods and how many of those goods consumers wanted. However, their forecasts would often be wrong, leading to shortages or surpluses of goods, which resulted in inefficiency and waste in the system. This demonstrated that even with the best will in the world, good and accurate economic planning remains a very difficult and expensive task. It involves the state performing a role that is much more cheaply and efficiently performed by the market.

A further problem with the planned Eastern European economies was that state-owned banks were reluctant to enforce bankruptcy against poorly performing state-owned enterprises. The state banks began by lending money to state enterprises in order for those enterprises to meet the targets set by planners. However, even if the state businesses were inefficient, the state banks would continue lending them money, as often the state banks’ own assets would consist of old loans to state businesses. Therefore, if the state enterprise went bankrupt, so did the state bank.

This continual lending of money by the state banks represented a huge waste of resources that would have been more efficiently allocated under the market system. The market would have enforced bankruptcy against the inefficient enterprise, and only enterprises that created wealth would have survived.

The Eastern European experience highlights some of the problems of planned economies- the inefficient allocation of resources and the continued survival of inefficient businesses. These problems are compounded by the fact that in non-market economies, there are often few or no incentives for citizens to produce goods more efficiently, whereas the market provides direct financial incentives for efficient performance. Wealth production is therefore at its greatest in market economies, although any market economy needs to be carefully managed, so as to achieve the maximum benefit for society as a whole rather than only for a select few.