In a recent article for Arc Digital, philosophy professor Ben Burgis confronts the idea that socialism is inconsistent with human nature. In the course of his discussion, he invokes a Letter exchange between fellow Arc contributor Matthew McManus and me, and claims that I attribute a “human nature is actually good” view to the left.

Here’s a bit of context. In that exchange, McManus and I took a great deal of time and effort exploring the meaning of individualism in an age of social justice activism. Our overarching concern was human potential — and how various social and political institutions may or may not impede its realization. We particularly focused on such ideas as freedom, autonomy, and alienation, as well as Hegel, Marx, and the economic approach to studying human behavior.

Within this discussion, Burgis saw something that convinced him I was suggesting we should design society to enable human flourishing only if we believe humans are innately good. Specifically, he took me to be saying “we should only aim at a society that allows humans to flourish if we assume that human nature is noble.”

But Burgis has me wrong: I wasn’t assuming anything about human nature. In fact, in considering such a nebulous notion as “human nature,” I feel a little like Soren Kierkegaard at the beginning of Fear and Trembling: “the present author is no philosopher, he has not understood the System, nor does he know if there really is one, or if it has been completed.” On human nature, I defer to Shakespeare, Machiavelli, and Hume, the last of whom, Burgis reminds us, “says that most of us ‘float between virtue and vice’ — not good enough for heaven or bad enough for hell.”

I don’t presume to know whether socialism or capitalism is better aligned with the impulses of human nature, which is endlessly unfolding and surprising. While I share a progressive interest in the pursuit of a more humane society, I believe the economic approach to studying human behavior should convince us that the words “socialism” and “capitalism” are unhelpful and should be abandoned in the dustbin of history.

Burgis agrees with Emma Goldman that a “post-capitalist” arrangement wouldn’t merely be fairer than our current setup but would also be freer. In a prior essay co-authored with McManus, Burgis writes:

Major figures in progressive thought, from Rousseau down to Žižek today, have emphasized that the primary reason to reform society and engage in more egalitarian distributions of social goods is that it will enhance the freedom of all. So the difference between Left and Right is in some respects more about the kind of freedom we should seek to secure.

The left-wing conception of freedom, they argue, is “not exclusively about non-coercion by government or other individuals,” but “also about how capable one is of making choices to pursue various life goals.” While only roughly analogous, this sounds a bit like Isaiah Berlin’s two concepts of liberty, where “negative liberty” is a kind of “freedom from,” which Burgis and McManus associate with the right, and “positive liberty” is a kind of “freedom to,” which they associate with the left.

Although I recognize the importance of both, I am not sure we achieve the realization of “human potential” by expanding positive liberty. I am sympathetic to Dostoyevsky’s message in the Grand Inquisitor parable that freedom may be too heavy a burden for most people to endure.

Does this mean we abandon the project of trying to structure society so that both forms of freedom are available to each person? Of course not—while neither are a guarantee of happiness, both negative and positive freedom are intrinsically worthwhile.

But rather than improve our situation by trying to ascertain which system, capitalism or socialism, better accords with human nature, my suggestion is that we use the economic approach to human behavior to explore how human potential might thrive in a society with a more expansive implementation of “freedom.” After all, the economic approach to human behavior does not definitively assume anything about human nature’s compatibility with capitalism or socialism; it has little interest in ideological dogmas.

Burgis begins his article by claiming that “anyone who sets out to defend socialism in the early decades of the 21st century needs to confront the wide variety of anti-socialist arguments developed during the 20th.” The same should be said for those defending capitalism. Given this, it’s unclear how focusing on these systems helps us analytically.

For example, in a debate with Burgis at Common Lodge, I pointed out:

Burgis reasonably noted:

It’s also worth noting that Sweden successfully resolved the former crisis by extracting equity from the banks in exchange for bailout funds, a far more socialist way than the United States resolved its crisis. Whether the Swedes would have been better off without the accompanying more capitalist moves Church praises is, at the very least, an interesting question. Meanwhile, we can be sure of this much: The Nordic economies today continue to have both far larger public sectors and far better outcomes for people at the bottom of society than countries like the United States.

The takeaway is that Nordic economic policy in the past few decades has hinged more on the degree of public sector intervention in private sector market activity. This may seem like hair-splitting semantics, but it’s not. The debate about whether society is better served by capitalism or socialism has become so loaded with ideological baggage stemming from these terms’ disparate historical usage that the debate has become uninformative.

A more neutral and productive formulation of the debate asks what degree of public sector intervention in markets is necessary to make them work better — to be more efficient, more fair, more “just.” What’s important is that this formulation takes markets for granted.

One of the most puzzling, even irksome, aspects of contemporary debates about capitalism and socialism is the idea that markets are a social construct contingent on historical developments—as if markets are a choice that reflect ideological commitments to intellectual and material conditions known “capitalism.” But as I argued in my debate with Burgis, markets are unavoidable. The choice is not whether we have markets, but whether and how we defy or accommodate market realities. Where there is supply and demand, there is a market. What matters is whether markets are working well, which means the real concern is market design.

In other words, the “market” is not a Panglossian neoliberal fantasyland. Laissez-faire “free market” fundamentalism is a red herring. “Markets” simply refer to the activity of people seeking gains from trade. Put simply, whenever a resource is in demand, and someone is able and willing to supply it while earning a reasonable return, there is a market. If there is an assumption I’m willing to make about human nature, it is that human beings are innately attracted to the prospect of gains from trade. This impetus to partake in gains from trade is what gives rise to markets. The question is whether markets are working well in some particular context, which means examining whether market design provides conditions for trade to take place in a way that maximizes gains.

As the late economist John McMillan explains in Reinventing the Bazaar: A Natural History of Markets, a great deal of economic progress is the result of people figuring out how to make markets work better. For example, McMillan writes:

In 18th-century New York, stocks and bonds were traded haphazardly. Anyone wanting to buy or sell securities had to search for someone to trade with: by word of mouth, by advertising in a newspaper, or by just dallying in a coffeehouse until the right person appeared.

In 1792, John Sutton “organized a securities exchange at 22 Wall Street,” where buyers and sellers of stocks could meet to partake in auctions that made the market for stocks and bonds work more efficiently. Even then,

Sutton’s auctions lost their effectiveness because other traders began to free-ride on them. The interlopers would attend the auctions merely to observe the going prices, then they would hold their own sales, offering the securities at lower commission rates and taking business away from Sutton.

But then “this practice soon became self-defeating, as it meant too few securities were passing through Sutton’s auctions for the bids to be meaningful guides to the securities’ true value.” As a result, “24 of Wall Street’s most prominent brokers agreed to form a new auction” and “formulated from scratch the rules governing how securities were bought and sold, and set up methods of contract enforcement and dispute settlement.”

In his book, McMillan explores a variety of examples, from eBay to rice merchants who set up the “world’s first futures markets” in 18th-century Japan, of how rudimentary markets spontaneously arose as a result of the human tendency to seek gains from trade, and how these markets evolved in response to initial shortcomings in market design.

The attempt to make markets work better means addressing market frictions like high transaction costs, impediments to the free flow of information, lack of price transparency, weak contract enforcement, anti-competitive behavior, and other impairments that lessen incentives for human trade to flourish.

Thus, it’s not markets, but the design of markets, that should concern us.

The fuel powering the engine of markets is self-interest, not selfishness, a distinction which can be illustrated by the basic economic framework of constrained optimization. As any economics student learns, the conceptual heart of consumer theory is “utility” maximization. The idea is to identify an objective function — e.g., a Walrasian demand function — that explains how “utility” is derived from consumption of a bundle of goods and services, subject to an income or wealth constraint. But what is “utility”? The answer depends on individual preferences. It is perfectly consistent for a pure altruist to maximize utility, where “utility” is a function of how much the person is able to help other people. For example, utility can depend not on one’s own consumption of goods and services, but on other people’s consumption of goods and services, such that one’s utility increases or decreases in inverse proportion to someone else’s consumption.

Whether utility depends on one’s own consumption, or another person’s consumption, there is still a budget constraint. One only has so much income or wealth to allocate toward the purchase of items that contribute to one’s satisfaction. Moreover, the particular bundle of goods and services purchased depends on relative prices, which depend on the relative value of goods and services as determined by the give and take between consumer preferences and productive technology, which, incidentally, gets at why Marx’s labor theory of value does not help us very much. No matter how many average hours of labor factor into the production of goods and services, it is up to consumers to choose the goods and services they prefer.

Reductive formulations claim that capitalism depends on profit accumulation stemming from a right to private property, while socialism depends on an interest in more egalitarian outcomes as a result of public, or worker, ownership of a substantial share of social resources. Many also point out that socialism typically requires a significant degree of central planning. But as Burgis writes: “What these visions [of socialism] have in common is a broad-strokes aspiration to transfer economic enterprises from the ownership of private business-owners to workers and communities in order to bring about a more just and egalitarian social order.”

With respect to planning, what seems to escape the attention of Burgis and socialists in general is that capitalism is compatible with planning activities “outside” markets. As McMillan observes, a great deal of economic activity, even in “market economies,” already takes place outside the market: in households, the government, and even firms.

Focus on that last one for a moment. As the economist Ronald Coase explained, a “firm” is a kind of planning enterprise in that many allocative decisions take place within the firm rather than within markets (because intra-firm allocation can be conducted at lower transaction costs than by resorting to market price mechanisms). However, intra-firm decision-making still depends on market-like incentives in its reliance on “two of the most powerful instruments of economic analysis developed by Marshall, the idea of the margin and that of substitution.” If you put those together, you get the notion of “substitution at the margin.”

Similarly, “socialist” policies like progressive taxation, which seek a significant redistribution of social resources in the quest for more democratization and freedom, are not incompatible with “capitalist” incentives associated with the idea of substitution at the margin.

Use the infamous “Laffer Curve” as an example. The Laffer Curve does not claim that reducing taxes per se will increase government revenue; rather, it claims that, at some point, further increases in tax rates sufficiently affect economic incentives to reduce the amount of tax revenue the government will take in. Conversely, beyond a certain point, reducing marginal rates can sufficiently affect economic incentives to increase the amount of tax revenue the government will take in. This is the idea of substitution at the margin, in this case dealing with work-leisure tradeoffs and fiscal multipliers that account for the marginal propensity to consume in response to a specific change in tax rates.

The point is not to defend the Laffer Curve or to say that “socialism” is the same thing as “supply-side economics” (a term often misunderstood by non-economists). It is rather to say that the question should not be whether socialism or capitalism better serves society because one is more realistically aligned with the dictates of human nature, but what the economic approach to studying human behavior can tell us about the potential consequences of social and economic policy.

I doubt whether many “capitalist” (i.e., mainstream) economists would object to any aspiration “to bring about a more just and egalitarian social order.” One would encounter much disagreement about how to do so, and much of this disagreement would ultimately stem not from a disagreement about first principles — namely, the importance of market-based incentives at the margin — but about how to design policy in a way that aligns incentives with behavior in a way that promotes “a more just and egalitarian social order.”

A few years ago, the economist Thomas Piketty wrote a giant book about capitalism and inequality, but as Wharton finance professor Jeremy Siegel points out: “Piketty’s equations apply whether the economy is capitalist, socialist, communist, or fascist. His equations are based on definitions of capital, output, and growth that are true in all economies and have nothing at all to do with capitalism.”

In other words, whether we have “capitalism” or “socialism” doesn’t matter. What matters is whether markets are working the way we want them to, whether market design is optimized.

Now to Marx, whose superficial distinction between capitalism and socialism is at least partially responsible for this mess.

Here is Burgis attempting to clarify how Marx envisaged the evolution of socialism in its next phase:

Under capitalism automation puts people out of a job. Under socialism, Marx predicted, it would just mean that workers could vote themselves fewer hours of work for the same compensation. Eventually, he thought there would be so much abundance that everyone could simply take what they needed, and what little work still needed to be done by humans could be accomplished by everyone just pursuing whatever projects happened to interest them. That’s when we get, “From each according to their abilities, to each according to their needs.” This might strike some readers as wildly unrealistic science fiction.

It’s not just wildly unrealistic. It’s bad economics.

According to proponents of fully-automated luxury communism (see here for a review of Aaron Bastani’s book in Arc Digital):

Automation, robotics, and machine learning will, as many august bodies, from the Bank of England to the White House, have predicted, substantially shrink the work force, creating widespread technological unemployment. But that’s only a problem if you think work — as a cashier, driver or construction worker — is something to be cherished. For many, work is drudgery. And automation could set us free from it.

There are two problems with this picture.

First, technology-related displacement of workers is nothing new. Economic dislocation as a result of changes in inherently dynamic economies have been occurring for as long as history has run its course, and it’s not necessarily a bad thing. Job displacement frees up labor to do other things, especially as new markets, and thus new jobs, emerge. In practice, this is much easier said than done, and I would join Burgis and many others in encouraging the development of policy that provides adequate assistance to people whose livelihoods are disrupted by natural economic developments, and who incur substantial costs in making the transition to new circumstances.

Second, despite the utopian vision, there’s a well-known shortage in labor markets for data scientists and software developers/engineers, a main reason they command such high salaries. In other words, human capital underlies this infrastructure. Labor markets do not cease to exist. Where there is demand for all that encompasses “fully automated luxury communism,” there must be a supply of human capital, not to mention risk capital, entrepreneurial skill, and all else entailed in the supply of what we might call the “AI” economy. Economies are dynamic. They evolve. As they do, resources never stop needing to be allocated and reallocated, which brings us back to supply and demand.

Finally, even an “AI” economy would not obviate the problem of scarcity and allocative efficiency. The Knowledge (or Calculation) Problem, i.e., the difficulty of parsing through the immense complexity of modern economies to determine the optimal allocation of resources, is not simply a bookkeeping problem. Let’s grant, for example, a long run utopian vision in which technology automates communism and we all do what we love. As Burgis writes: “Eventually, [Marx] thought there would be so much abundance that everyone could simply take what they needed, and what little work still needed to be done by humans could be accomplished by everyone just pursuing whatever projects happened to interest them.” As mentioned above, there are still only so many hours available in a day, which means I have to make choices about how I spend my time. It’s not only that time remains a scarce resource, but my preferences may change as human creativity flourishes and new goods and services are created. Economies in abundance would still be dynamic, and human nature would still be endlessly unfolding and surprising. Perhaps I would eventually become bored with playing chess and reading Shakespeare, and suddenly become interested in mastering the works of Marx.

The point of this catechism is to emphasize that economics is concerned with value creation. But this is not, and probably never will be, an easy and straightforward endeavor simply involving instrumental calculation or measures of aggregate welfare. Introspection — i.e., the formation of preferences — is hard. The formation of a value-creating enterprise — i.e., a business — is hard. The pursuit of value, whether in terms of utility or profit, may be facilitated by material abundance, or the assurance of a threshold level of freedom, but it is certainly not guaranteed. This is why a central tenet of modern economics is that the protection of private property is crucial to the proper functioning of markets.

The right to property is important not necessarily because it is constitutive of some version of natural rights, but because it provides an incentive for those who value a resource the most to figure out how to make the most efficient use of the resource. For example, the tragedy of the commons illustrates how common access to public resources can lead to overuse, at least in part because, without property rights, users have no incentive to internalize the cost of overuse. That said, economist Elinor Ostrom won the Nobel Prize for economics in 2009 for work on how institutional arrangements, such as mechanisms for conflict resolution, can solve such collective action problems.

Similarly, consider the case of worker co-operatives, which are often cited as an alternative mode of firm organization that can augment “worker” control of firms. Mondragon provides evidence that a co-op can be a viable mode of firm organization. But co-ops do not negate the necessity of value creation, i.e., earning a profit, since in the long run, a firm needs to cover its costs or else it’s not a viable enterprise. Worker co-ops, which “democratize” decision-making, may arrive at different decisions about how profit gets used, allocated, and distributed, but this does not mean co-ops do not depend on incentives associated with profit and private property. One does not start a business to ensure “worker democracy,” but to create something of value. Organizing as a co-op may be a goal, but it is secondary.

Burgis has suggested nationalization of banks as a potential means of increasing the “birth rate” of co-ops, which, he claimed, is “abysmal without state intervention,” even though “the death rate of co-ops is no higher than for traditional firms.” But as I pointed out:

One estimate [for Canada; another for the U.S. can be found here and here] is “that about 96 percent of small businesses (1–99 employees) that enter the marketplace survive for one full year, 85 percent survive for three years and 70 percent survive for five years.” Thus, when you say the death rate for co-ops is no higher than for traditional firms, are you saying that most co-ops are destined to fail?

In other words, the formation of a value-creating enterprise — i.e., a business — is hard. The formation of a worker co-op is no guarantee of success.

In his article, Burgis writes: “in G. A. Cohen’s Why Not Socialism? we’re asked to wonder why society shouldn’t be able to function like a camping trip, where families share equipment and resources and whatever else they individually brought, rather than assert their exclusive use over those goods.” I would venture to say that Cohen is underestimating the possibility that kids may fight over the last marshmallow, and gives short shrift to potential disputes that arise as a result of sibling rivalries, exhausted parents, or the difficulties of arriving at solutions to collective decision-making about what to do with the limited amount of vacation time available. When it comes to disputes across families and not just within families, the opportunities for complications multiply.

But rather than debate with Burgis whether “humans are bad” or “humans are good,” I am more concerned about what works in terms of creating value given the constraints at hand. The economic approach to human behavior is a far more useful way to address this problem than worrying about whether capitalism or socialism is compatible with human nature.