Capitalism, Socialism, and the Economics of Cohesion: A Thesis on Voluntary Exchange and the Dangers of Coercion
This is a draft form of my thesis.
Abstract
This document explores whether capitalism or socialism is more likely to produce a productive and peaceful society. It advances the argument that capitalism, in its pure form of voluntary exchange, inherently fosters both productivity and social cohesion, while socialism, by requiring central authority and coercion, undermines cohesion even when pursuing equality. Drawing upon the works of Adam Smith, Friedrich Hayek, Ludwig von Mises, and Milton Friedman, this study highlights how voluntary exchange strengthens interdependence, trust, and innovation, while coercion—whether through socialism or crony-capitalism—erodes those foundations. Historical case studies of the United States, the Soviet Union, and Scandinavian welfare states demonstrate the dangers of creeping coercion and the necessity of vigilance. The paper concludes that free societies must resist cronyism and socialism not by rejecting capitalism but by strengthening voluntary mechanisms of trust, such as insurance and reputation systems, which preserve liberty while mitigating risk.
I. Introduction
The question of whether capitalism or socialism offers the stronger foundation for a productive and peaceful society has animated political economy for over two centuries. Proponents of capitalism stress the system’s ability to generate wealth and innovation, while critics emphasize inequality. Advocates of socialism stress equality and fairness, while critics point to inefficiency and authoritarianism.
Yet these debates often focus on outcomes rather than underlying mechanisms. At the structural level, capitalism is based on voluntary exchange, while socialism is based on coercion. As Ludwig von Mises (1922) argued, socialism abolishes the market itself, replacing the dynamic coordination of dispersed knowledge with central authority. Hayek (1944) expanded this argument by showing that central planning necessarily produces coercion, since individuals cannot freely dissent from plans imposed upon them. By contrast, Adam Smith (1776) noted that voluntary exchange generates wealth precisely because individuals freely pursue their own interests while serving the interests of others.
This paper argues that capitalism, properly understood as voluntary and non-coercive exchange, not only maximizes productivity but also inherently requires and sustains social cohesion. Socialism, by substituting central authority for voluntary cooperation, undermines that cohesion. The greatest danger to free societies is not capitalism itself, but the erosion of voluntarism through crony capitalism and creeping socialism.
II. Defining Capitalism and Socialism
Capitalism in Pure Form
Capitalism is an order in which the means of production are privately owned and resources are allocated through voluntary exchange in competitive markets. In its purest form, it excludes government interference, leaving buyers and sellers free to contract. Milton Friedman (1962) described capitalism as “a system of voluntary cooperation” in which coordination is achieved without coercion.
Key features include private property rights, freedom of entry and exit, prices determined by supply and demand, and transactions that occur only when mutually beneficial.
Socialism in Pure Form
Socialism, by contrast, is an order in which the means of production are collectively owned, often by the state, and allocation is determined by central authority. Marx and Engels (1848) envisioned socialism as the abolition of private property and the subordination of production to social need.
Even in “democratic socialist” forms, socialism requires coercion through taxation, redistribution, or mandatory regulation. Dissenters cannot simply walk away; they must comply with decisions imposed by authority.
III. Capitalism as a Mechanism of Cohesion
Capitalism is not merely an engine of productivity; it is also a mechanism of cohesion. Each transaction is voluntary, occurring only when both parties believe they benefit. Farmers, millers, bakers, and customers form networks of interdependence, in which cooperation is essential.
Adam Smith’s “invisible hand” captured this logic: individuals pursuing their self-interest unintentionally promote collective welfare (Smith 1776). As Friedman (1962) observed, markets allow people to express preferences freely, rewarding good ideas while discarding bad ones. The correction mechanism is voluntary withdrawal, not coercive suppression.
Thus, social cohesion is self-reinforcing. Capitalism cannot function without trust and stability; markets thrive only when people honor agreements and respect voluntary exchange.
IV. Monopolies and the Role of Coercion
Monopolies are often cited as failures of capitalism. Yet true monopolies are rarely stable without state backing. Mises (1949) argued that monopoly power in free markets is temporary; competition undermines dominance unless external authority protects it.
Government interventions create monopolies by granting exclusive licenses, imposing regulatory barriers, subsidizing incumbents, or using tariffs to shield industries. These distortions transform capitalism into crony-capitalism—a hybrid system in which private actors collude with government to secure coercive advantage. At that point, capitalism is no longer voluntary; it has been compromised and shifted toward socialism in practice.
V. Socialism and the Inevitability of Coercion
Unlike capitalism, socialism cannot function without coercion. Hayek (1944) noted that central planning requires enforcing compliance, since individuals cannot opt out. This structural reliance on coercion explains why socialist systems often suppress dissent.
Historical experience confirms this:
The Soviet Union equalized outcomes but at the cost of productivity and liberty, producing shortages, inefficiency, and repression until its collapse (Nove 1991).
Maoist China experienced stagnation until Deng Xiaoping’s reforms reintroduced markets, leading to rapid growth (Naughton 2007).
Scandinavian welfare states are often mischaracterized as socialist. In reality, they are market-based capitalist economies that overlay redistribution onto free markets (Bergh 2014). Their productivity arises not from socialism, but from capitalism preserved at the core.
Thus, socialism, by design, undermines cohesion by binding individuals to authority rather than voluntary cooperation.
VI. Signs of Creeping Socialism and Cronyism
Free markets rarely collapse outright; they erode gradually through creeping coercion. Warning signs include:
Government-Granted Privileges: subsidies, bailouts, and tariffs.
Regulatory Capture: agencies controlled by the industries they regulate (Stigler 1971).
Barriers to Entry: licensing or compliance regimes that exclude small competitors.
Compulsory Partnerships: mandates forcing buyers or sellers into specific arrangements. This includes forcing the business to accept the state as a partner.
Targeted Tax Codes: rules favoring politically connected groups.
Each of these reduces voluntarism and introduces coercion, shifting systems toward socialism in practice, even when labeled capitalist.
VII. Voluntary Mechanisms of Trust
Capitalism contains within itself the means to manage risk without coercion. Insurance, contracts, and reputation systems provide safeguards that reinforce trust.
Buyers can protect themselves with escrow, warranties, and review platforms.
Sellers can insure against default and maintain reputational capital.
Both parties benefit from decentralized reputation systems, particularly in digital economies.
These mechanisms demonstrate that cohesion and trust do not require state coercion; they emerge naturally from voluntary cooperation.
VIII. Conclusion
The distinction between capitalism and socialism is not simply about productivity versus equality; it is about voluntarism versus coercion.
Capitalism, preserved in its pure form, fosters productivity, innovation, and cohesion by requiring voluntary cooperation.
Socialism, even with benevolent goals, relies on coercion that undermines trust and stifles innovation.
The greatest threat to free societies is the erosion of voluntarism through crony-capitalism and creeping socialism.
History shows that free societies flourish when they resist monopolistic privilege, guard against government favoritism, and reinforce voluntary mechanisms of trust. As Hayek warned, “The more the state ‘plans,’ the more difficult planning becomes for the individual” (1944, 94).
The path forward is not to reject capitalism but to protect it from coercion, ensuring that productivity and peace remain rooted in voluntary exchange—the proper foundation of social cohesion.
References
Bergh, Andreas. 2014. Sweden and the Revival of the Capitalist Welfare State. Cheltenham: Edward Elgar.
Engels, Friedrich, and Karl Marx. 1848. The Communist Manifesto. London: Workers’ Educational Association.
Friedman, Milton. 1962. Capitalism and Freedom. Chicago: University of Chicago Press.
Hayek, Friedrich A. 1944. The Road to Serfdom. London: Routledge.
Mises, Ludwig von. 1922. Socialism: An Economic and Sociological Analysis. Indianapolis: Liberty Fund.
Mises, Ludwig von. 1949. Human Action: A Treatise on Economics. New Haven: Yale University Press.
Naughton, Barry. 2007. The Chinese Economy: Transitions and Growth. Cambridge, MA: MIT Press.
Nove, Alec. 1991. The Economics of Feasible Socialism Revisited. London: Routledge.
Smith, Adam. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. London: Strahan and Cadell.
Stigler, George J. 1971. “The Theory of Economic Regulation.” The Bell Journal of Economics and Management Science 2 (1): 3–21.
Special thanks to, Robert Murphy, Walter Williams, Charlie Kirk, and Thomas Sowell for inspiring me with a love of economics.
Dang, I somehow forgot to add Prof St. Onge to my thx list.