SUCH is the pervasiveness of bourgeois ideology these days that even many who are wholly committed to the vision of socialism entertain ideas about it that are utterly erroneous. It would not be out of place therefore to go back to this basic question once again. The common perception of socialism is that it is a society characterized by the social ownership of the means of production, for which state ownership is taken as a proxy. But this, while a necessary condition, is not a sufficient condition. The former Yugoslavia for instance, while being characterized predominantly by state ownership of the means of production, had many of the features that are associated with capitalism, such as unemployment, inflation, and inequality both personal and regional (though nowhere as extreme as what neo-liberal capitalism has “achieved” today); likewise there are many capitalist countries like France where there is a significant nationalized sector but this fact does not make France a socialist country. Socialism therefore clearly means something more than just social or state ownership.

What capitalism fundamentally promotes among economic agents is competition: competition among capitalists which forces them to accumulate, so that they can introduce the latest process and product innovations, for otherwise they would go under; and competition among workers (which of course the workers overcome by forming what Marx had called “combinations” or trade unions that the capitalists are forever trying to break or enfeeble). Socialism by contrast is based on cooperation among economic agents; since such cooperation is impossible in the absence of the means of production being owned in common, and hence in the absence of the disappearance of the class of capitalists, socialism entails cooperation among workers, that is, an eschewing of competition. Yugoslavia, the case mentioned earlier, pursued “market socialism” which basically meant state-owned firms competing against one another on the market rather like privately-owned firms do under capitalism; and this was the reason why it displayed certain features of capitalism.

Competition being the basic mode of operation of the capitalist system entails in turn that those who lose out in the competitive race must face some penalty. This penalty must be in the form of being “cast out” of the system, which suggests that there must be an “outside” of the system to which such “failures” can be consigned. This “outside”, which Marx and Engels called the “reserve army of labour” plays an even more important role under capitalism which is as follows.

Every system of production requires some mechanism for enforcing work-motivation and work-discipline on the workers. Under slavery, the slave himself was owned by the “master” who could use physical coercion to enforce work-motivation and work-discipline. Under feudalism, likewise, physical coercion, the whip of the feudal lord, was the means used for enforcing work-motivation and work-discipline. But under capitalism, ideally at least, there is no scope for using physical coercion on the workers; why then do they get motivated to work in a disciplined manner? The answer is that they would get the “sack” if they did not, that is, they would get thrown out of the system; and for this to be possible there must be an “outside” of the system.

This “outside” is also important for two other crucial purposes: one, for ensuring that real wages are kept in check compared to labour productivity, which makes possible a continuous appropriation of surplus value by the capitalist; and two, for ensuring that money wage claims are kept in check which is what underlies the stability in the value of money. The capitalist mode of production therefore must be defined as a totality consisting of both an “inside” and an “outside”. This “outside” is a logical constituent of the system; it is as essential as the “inside” in defining the system as a whole.

Marxism alone cognizes this fact, which no strand of economics other than Marxism does. The most common strand of economics, the Walrasian one, for instance, sees an equilibrium being arrived at in the market where demand and supply are equal in all markets, which means also in the labour market. The system in other words is characterized by full employment in every period; there is no reserve army, no involuntary unemployment, and hence no “outside”, only the “inside”. What ensures work-motivation and work-discipline in such a system is left unexplained, which means in effect that there is no production at all. Even Classical Political Economy cannot explain production since it cannot explain work-motivation and work-discipline, notwithstanding the fact that Marx had, with extravagant generosity, once described David Ricardo, a central figure among classical economists, as a “theorist of production par excellence”.

This in fact brings us to the core of the difference between capitalism and socialism: while capitalism, though it does not rely on physical coercion in making people work, relies on the coercion of the “sack”, of chucking people into unemployment, or throwing them from the “inside” to the “outside”, socialism has no “outside”. People work under socialism not out of any coercion but for the benefit of the community to which they belong, the community that also owns the means of production. Social ownership of the means of production is essential for the formation of such a community; it does not per se define socialism, but it constitutes a necessary condition for the existence of socialism.  

From this basic difference between capitalism and socialism, another important difference follows. Capitalism is, and must be, a punitive system, a system based on punishing laggards, while socialism, whose essence is cooperation, cannot be a punitive system. This punitiveness is ingrained in the functioning of the capitalist system, it is not necessarily the result of anyone’s nastiness. Capitalists who do not accumulate and hence lack the wherewithal to introduce new processes and products, are punished through losing their place in the system; and their place is taken by more accumulating, and more technology-introducing capitalists, who generally happen to be larger, a phenomenon that Marx had covered under the term “centralization” of capital. And workers who do not perform to the satisfaction of the capitalists are punished by the latter through losing their place within the system and being thrown into the ranks of the unemployed. The “outside”, or the reserve army of labour, is thus both a receptacle for those who are punished, and also simultaneously a mechanism for asserting the power of capital over labour.

Two conclusions immediately follow. One, any move towards “welfare capitalism”, towards improving the general conditions of the population, is simultaneously a reduction in the punitive power of the system, and hence also in the power of capital over labour. This is a point that Keynes had missed, for, even while seeing the flaws of the capitalist system as conceptualized by the Walrasians, he still saw the system in broadly Walrasian terms, in the sense of seeing it as consisting not of an “inside” and an “outside”, but only of an “inside”. Capital’s objection to Keynesian measures, which Keynes saw as arising only from a lack of understanding of the working of the system and as disappearing over time as better understanding seeped in, was in fact more firmly grounded; not only was full employment an impossibility under capitalism, but any move towards it tended to undermine the power of capital over labour (which is not to say that in certain situations capital would not accept such a move). The fact that the Keynesian measures towards stabilizing capitalism have fallen out of fashion nowadays should not come as a surprise. A “reformed capitalism” or a “welfare capitalism” is a chimera, since it ignores the fact that the system is a punitive one.

Two, since socialism by its very nature is not a punitive system, it must be characterized by full employment. Its being punitive, whether in the sense of falling short of full employment or in the sense of using more directly coercive methods to enforce work-motivation and work-discipline, can at best be a transitional phenomenon that characterizes the period when it is getting established, but it is not a characteristic of socialism; indeed it is antithetical to socialism.

It is not surprising that the only economies in modern times that have been characterized by full employment have been the Soviet Union and the socialist economies of eastern Europe. With the collapse of socialism there, we are back to the pervasive presence of unemployment in those societies. But no matter what deviations and distortions are introduced during the coming into being of socialism, apotheosizing them as permanent characteristics of the system is a grievous error.