How Large Scale Socialism Puts Capitalism at a Disadvantage

Thus far we have dealt primarily with private sector companies (those not owned by the government). However, it is becoming increasingly important to consider the impact of international competition amongst the private and public sectors.

Historically, we typically address this from the perspective of private companies forming to challenge public services to reduce costs. For example, the US Postal Service has seen competitors such as FedEx, UPS and DHL cut into its early dominant market share. I would contend that this is a natural and healthy interplay. As Milton Friedman discusses in Capitalism and Freedom, certain industries benefits from spreading costs publicly, others from private competition, and still others from some degree of hybrid. Roads and airports are a great example. It would make little sense for there to be two major highways running in parallel, each run by separate companies, and each charging competing fees.

As the world is growing and changing, it is important to consider this from the alternative perspective. Large socialist governments are forming companies to compete with international private companies. PetroChina and Sinopec, China's two largest listed oil firms, consistently receive subsidies from the mainland when oil prices become onerous, putting private sector firms such as ExxonMobil and Chevron at a relative disadvantage. When a country has a large trade surplus, it better equips them to spend money on such "cushions", creating larger and longer-lasting subsidies.

This leaves us with very large state-owned and subsidized companies in China and other command economies competing for resources with privately-owned companies elsewhere. If the privately-owned companies do not pursue mergers and acquisitions to continue their growth, the result is that their state-owned counterparts will become relatively larger, and have more pricing power and influence.

Although I am not advocating the supercorporation (as I hope is evident at this point), I am looking at their incentives. When viewed in light of globalization, large scale socialism incentivizes consolidation within capitalism, as corporates must grow in order to survive. As the number of players become fewer and fewer, the modes of production become more centrally controlled, leaving us with the aforementioned oligopolies.

The result is stunning. In theory, large-scale and widespread persistent socialism encourages more socialist-like behavior out of capitalism. In the extreme case, state-owned companies in countries with large trade surpluses can price away their competitors in the short run. This is a stark counterbalance to the argument that capitalist innovations challenge command economies over the long run. In order for long run arguments to hold, capitalist players must be able to survive the short run.