Economic Systems Work At Different Scales (as do Relationships)

Capitalism works at large scales, Socialism at small, and neither works at the other's scale

When I was a child, I kept a ledger in my head. Whenever someone asked me for a favor, I added that to their tab, keeping track of my assets and liabilities as to who owed who what.

I was informed, when I told someone about this, that that was not how humans were supposed to work, and it was Very Bad Thing, and no one else kept track.

Part of me was mortified.

But the logical part of me, the part that likes counting things and keeping track of them, was confused. What was the meaning of a favor, if not a debt to be repaid later? And if no one was keeping track of how many favors they owed and were owed, then how did things stay balanced?

If you do me a favor 500 times and I do you a favor twice, how is that fair? And isn’t that inevitable, if no one is counting?

I stopped keeping track of these things in my head, not because I understood what was going on or what I should be doing instead, but out of simple deference to a social convention I neither understood nor agreed with. This happened a lot to me, growing up.

Now that I’m an adult, I have a much better understanding of how it’s all supposed to work, and…well, it’s this:

When it comes to friends and family, be a socialist. When it comes to strangers, be a capitalist.

Allow me to explain.

A brief aside on definitions:

The actual definition of socialism is: an economic system where property is collectively owned, which usually means it’s owned by the government.

The actual definition of capitalism is: an economic system where property is privately owned by individuals.

People tend to use those words to mean a whole lot of things they don’t actually mean, me included. Today we’re using the words to refer to the forms of social interaction they’re meant to incentivize. Socialism incentivizes collectivist engagement, while capitalism incentivizes market transactions.

The Necessity of Accountability

Why do people work?

Some people love what they do, sure, but there are plenty of jobs that are unpleasant, dirty, dangerous, or otherwise not fun. So why do people do them?

“To get money” is a simple answer and generally correct, but it doesn’t quite tell the whole story. After all, why can’t someone say they did the work, collect their paycheck, and go about their merry way without having to actually do anything?

In the modern world, this is partly the function of bosses or managers: to check that work has actually been accomplished. But there’s another problem.

Plenty of tasks in life are done by multiple people: plowing a field, building a skyscraper, creating a social media website. If 1,000 people are involved and one of them hasn’t done their work, but the end product is still completed (the field is still plowed, the skyscraper completed, the website built), how do you tell which person slacked off and doesn’t deserve to be paid?

Every person who’s gone through K-12 schooling understands this implicitly the moment they’re assigned a group project. Some kids do most of the work, some kids slack off, but everyone shares the grade. This creates a system where most of the work is done by the people who care the most about their grade, while other students get to free-ride on those students’ work.

In school, the slackers often get away with it; in business, they often get reported and fired (not always, in either case, but generally). But the point stands: when teamwork is required, there must be a method of accountability such that people are rewarded to the extent that they contributed and punished to the extent that they slack. These incentives don’t have to be monetary; they can be in respect or reputation or future opportunities or anything else. But they have to exist, because if they don’t people will take advantage of the fact they don’t exist.

I can hear a friend of mine now saying that that assertion - people will take advantage of the fact that there is no method of accountability to slack off in settings where work is done by many - isn’t some kind of immutable law of human nature, but something socialized into us. There are no immutable truths of human nature, my friend would argue, and so we could imagine a different world where people are always socialized to do their fair share.

My response: there is an immutable truth to human nature, and it is: on average, in the aggregate, people respond to incentives. So long as the situation creates an incentive to slack off, there will be people - not everyone, not all the time, but some - who will slack off. Creating a culture and socializing a populace to not do so is simply another way of creating an incentive to not slack off, creating accountability through shame and judgement rather than monetary reward. But in the absence of such a culture, in the absence of any monetary consequences, people are going to do less work instead of more, especially if the work is unpleasant or boring or there are other things they’d rather be doing.

So how are people held accountable for their work (or lack thereof)?

There are two categories of ways to hold someone accountable for their work, and we’ve already been gesturing at them: monetary ways and non-monetary ways. The key difference between them (aside from the obvious) is the scale at which they work, and that is the key to the entire debate between socialism and capitalism.

Every economic system requires a way to hold the people in it accountable for the work they do. Socialism uses non-monetary methods, which work at small scales but not large ones, and capitalism uses monetary methods, which work at large scales but not small ones.

Why Socialism Works at Small Scales

If you live with someone and have agreed to share the chores, but the other person - let’s call them Larry - isn’t doing their share, what can you do about it?

There are a number of ways you can punish Larry for not doing the dishes he said he’d do.

You can nag him about the dishes, trying to invoke his own sense of responsibility and/or fairness. You can tell other people about his malfeasance, making sure that, within your overlapping social group, people will know that he can’t be trusted to keep his word if he can’t even do the dishes he said he’d do. And you can stop holding up your end, ceasing to vacuum the apartment until the dishes are done, and so on.

These are all non-monetary ways of holding Larry accountable for his contribution, and they all share a crucial feature: they work because you and Larry have a personal relationship. You know each other, you share space, and to a greater or lesser extent you share a community. If Larry cares about his personal sense of fair play and keeping his word, nagging him should work. If instead he cares about his reputation, then telling (or threatening to tell) his community about his slacking should work. And if he only cares about his own comfort, then not doing your part until the dishes are done should incentivize Larry to do his (lest he live in a dirty apartment, which we presume infringes on his own comfort).

The socialist ideal - from each according to their ability, to each according to their needs - only works so long as each contributes according to their ability, and without ownership or money it relies on integrity, reputation, and reciprocity to make sure that everyone does their part.

Unless Larry is a legitimately terrible person or an actual psychopath (in either case you probably shouldn’t be rooming with him), these sorts of incentives are usually enough to get people to do their part. And it works at a scale beyond 1-to-1: so long as people are known to one another, so long as reputation matters within the community and people can keep track of who’s slacking and who’s working, these non-monetary incentives supply sufficient accountability to keep an economy running.

This has been shown time and again; there have been many successful communes throughout history that functioned more or less on this basis; the ones I’m aware of are the Israeli kibbutzim.

The problem comes when you hit Dunbar’s Number. While the actual number may be anywhere from 50 to 500, the fact is that a single human can’t maintain relationships with an infinite number of other humans. Our brains are amazing at tracking our relationships to other people, but once you get past a hundred it starts to get really hard to keep going. Think about it: do you even have 100 distinct relationships?

Methods of accountability that rely on personal and communal relationships don’t work if you can’t keep track of said relationships. As an example, imagine that instead of rooming with Larry, he’s a member of the commune you’re in, which has 50,000 people total. If Larry slacks off, maybe you can damage his reputation a little, but that’s about it - appealing to his personal integrity isn’t likely to work if he’s already slacking off, and not doing your own work means nothing, since there’s 49,998 people to pick up the slack. And if Larry works in a different area than you, well, you may not know any of the people he works with, and they may not trust your opinions about someone they do know.

Non-monetary methods of accountability only work when people know and trust one another, and there are real and finite limits to how many people a single person can know and trust (about 100). Thus, non-monetary methods of accountability stop working once you get above that scale.

Why Capitalism Works at Large Scales

They key problem anyone who’s worked in a large organization understands is communication. When you have to coordinate hundreds to thousands of people, none of whom know each other well, live together, or work directly with one another, how do you do it?

One answer to the problem of communication is bureaucracy: organize everyone into teams with managers, and then those managers have managers, and those managers have managers, and so on, up until you get to vice-directors and directors and Chief Officers and Vice-Presidents and Presidents.

To put it bluntly, while bureaucracy technically gets the job done, it sucks. It’s slow, inefficient, subject to corruption, decays into a moral maze, and manages to be pretty terrible at most of the things it does.

Running an economy via bureaucracy doesn’t work. We know it doesn’t work because it’s been tried: it’s called a command economy, and it’s what the Soviets tried and failed to do. It’s what North Korea does, and their economy is garbage. Even China, for all that it claims to be communist, has seen economic growth in recent decades not through its command economy but rather through free-market reform.

(It’s possible that an ASI -Artificial Super Intelligence - could successfully run a command economy; there’s no law of physics that says a command economy can’t work. But it seems beyond human capability.)

The key issue is that there’s so much information that has to be transmitted between everyone that no command economy - no bureaucracy - can handle it. Local fluctuations in the supply of labor, weather conditions affecting transportation networks, which products are complements and which are substitutes: no command economy can successfully synthesize this hyper-local and hyper-detailed information properly.

Luckily for humanity, however, prices can synthesize this information. It’s what they’re for. Prices in the market contain all generally known information from every possible source. If the supply of copper is affected by weather or labor or earthquakes or whatever, that information is reflected in the price of copper. If the demand for bread changes because there’s a new fad diet or everyone forgot how to make bagels or avocado toast becomes popular, that change gets reflected in the price of bread. This all happens in real-time, a decentralized pooling of information that allows quadrillions of tiny details to be synthesized into a single number, which is communicated efficiently across the economy.

Millions of workers don’t have to be organized top-down when they can coordinate based on information that comes bottom-up. The price system, one of capitalism’s greatest accomplishments, serves to communicate all relevant information in a way that makes the economy possible. But this system only works when local experts, including buyers and sellers, can contribute to it, which only works when property is private, i.e. bought and sold for a price.

Because prices are the correct way to aggregate and disseminate information across vast numbers of people, we use them to determine the value of someone’s labor as well as the value of any given good. Wages are set by the price system like everything else, which allows them to partake in and benefit from the communication effects of the system. People who don’t know or trust one another can still understand the relative value of their labor, because all of that information is contained in the market price of said labor.

This monetary method of accountability - paying people for their work - is thus a piece of the large-scale price system. To be sure, it depends upon small-scale interactions: if you buy some bread from a bakery, you’re trusting that the bread is edible and what you paid for, and sometimes that trust is broken (in which case, you stop buying bread from that bakery, eventually the bakery goes out of business, and the problem corrects itself). Similarly, if a company pays you to do work and you don’t do that work, eventually you get fired.

While there are plenty of inefficiencies in monetary methods of accountability, the price system (which sets a price to labor) eventually sorts things out, aggregating, synthesizing, and disseminating a near-infinite amount of information across the economy.

Monetary methods of accountability work at large scales because prices are an efficient way to aggregate vast amounts of information, including wages. Furthermore, prices and wages are impersonal, making them useful for interactions between strangers but awkward and uncomfortable for interactions among those closest to you.

Why Neither Works at the Other’s Scale

In a sentence: non-monetary forms of accountability don’t work at large scale and monetary forms of accountability don’t work at small scale because, in either case, they mix the sacred and the mundane.

The Sacred and the Mundane

While worthy of its own post, the idea is that we humans treat some things very differently than others, and get mad when those two categories get mixed up.

Things like love, art, beauty, family, and life are ‘sacred’; you don’t have to justify their value to anyone. Humans value these intrinsically across cultures, and consider them to be the things that make life worth living.

Things like money, time, and entertainment are ‘mundane’; things we trade or consume without much thought. We can be compelled to give them up or take them.

The difference between the sacred and the mundane become stark when you try to mix them up: putting a monetary value on a human life, or telling someone that they could find love if they were willing to work at it for an hour a day. This offends people deeply; Robin Hanson has done a lot of writing on the topic.

It feels…sordid to mix the two together, disgusting in a way that words can gesture at but generally fail to convey. For instance: how much money would you have to be paid to have another child? Or to never have a child? Just thinking about the question gives me the ick.

Trust Can’t Replace Prices

Socialism uses things like reputation, integrity, and trust to keep its members accountable, but these aren’t numbers. While you might trust some people more than others, trust is a sacred value, not to be quantified - doing so, putting a number on how much faith you have in someone to have integrity - mixes the sacred and the mundane. It’s taking something beautiful and personal and dragging it down to the level of a spreadsheet.

But without a number, how can you communicate how much you trust someone? Remember, a large economy relies on absurdly large amounts of communication, and in capitalism this is facilitated by the price system - a number. How are you supposed to tell thousands, millions, billions of other people how much you do or don’t trust someone to do their job, when doing so would require a one-on-one conversation with each of them? It’s impossible.

Socialism fails to scale because all the information it relies upon to function is sacred, and there’s no way to communicate that information beyond a given scale.

Prices Can’t Replace Trust

Capitalism uses a price system to communicate how valuable goods and services are, but prices are a feature of the mundane. They have no place in an intimate relationship. This is the mistake I made as a child - I thought I could keep a ledger of favors asked and owed, as if I was a business keeping track of my assets and liabilities instead of a human being with a sister.

People are not corporations. The ways we relate to each other, the ways we’re intimate, the trust we build and bonds we forge - these are not for sale. To do so would be to drag human relationships, something sacred, into the dirt of the mundane. To make this clear, imagine a nuclear family (father, mother, two kids) trying to be capitalist within their own home. They’d have a currency, and…. what? Would the father pay the mother for sex? Would the children rack up debt for their food and board? If the mother wanted emotional intimacy, would she have to cough up dough for it? If someone gets sick, do they have to pay the others to take care of them?

The very idea is nonsense. People don’t relate to one another through prices; intimate relationships aren’t formed via haggling.

Capitalism doesn’t work at small scales for the very reason it does work at large ones: it reduces everything to simple numbers. Those numbers aggregate information and are easy to communicate, but they can’t come close to capturing actual human intimacy.

Applying Socialism to Close Relationships

From each according to their ability, to each according to their need.

I think the reason that sounds so seductive economically is because it’s how human relationships work. In a close relationship between two people, there is no account or ledger or tally of debts incurred and owed. There’s just two people who help each other when they need help, giving of themselves freely and taking joy in the giving.

To be precise, imbalanced relationships can and do happen, and some (not all) of them can be quite unhealthy. If one person has health problems or a disability, they may not be able to give in the same way as the other. Furthermore, life circumstances may impact one person’s ability to reciprocate for a time (I’ve had friends who had children, and thus were understandably occupied, for instance). These are all fine.

But if it becomes normal in a relationship for one person to do all the work - physical or emotional - over the long term, that’s a free-rider problem, similar to a commune where someone is slacking off. It’s an unhealthy relationship where accountability and reciprocity have failed.

In general, however, the best way to treat friends and family is to be generous in giving of yourself and rely on them to be generous in giving back. And if you happen to need less help or emotional support and get less, that’s okay, so long as you’re getting what you need.

Applying Capitalism to Strangers

Think about how you relate to people you need things from but aren’t close to: you pay them for their services. You pay a plumber to fix your pipes, an electrician to fix your wiring, a business for its products, and so on. The interaction doesn’t depend upon trust or emotional intimacy; it’s a simple exchange of goods or services for currency, and it works.

It also scales - you can pay a lot more people than you can have a close relationship with. Imagine if you had to emotionally bond with every person you bought something from; you’d have no time to do anything else! Not to mention, whether or not a leaky faucet gets fixed would depend upon whether or not you remembered your plumber’s birthday.

Furthermore, the impersonal nature of prices creates an environment where people can separate business from the rest of their lives. It lets people haggle over prices without insulting each other or ask for a raise without it feeling like a betrayal.

Objections

But, one might argue, aren’t the social democracies of Northern Europe important success stories for Socialism at a large scale?

A full rebuttal of that point is beyond the scope of this post, but I’ll note a few things:

1. Those social democracies are historically very ethnically homogeneous, which allows them to maintain a much higher level of social trust at a larger scale than if they were more diverse.

2. Part of the “success” of those nations depends on Georgist principles, which argue that land and natural resources should be collective property, while labor and capital remain private.

3. These nations are small, as nations go, and don’t face the same challenges of scale that e.g. America does.

4. Having high taxes and a generous welfare state is socialist, yes, but not nearly as socialist as it could be. And Americans routinely overestimate just how socialist the successful countries in Europe are.

5. The economies of these nations aren’t amazing, only okay. The US outperforms them on most objective metrics.

What about China?

1. The free-market reforms of Deng Xiaoping were crucial to the rise of China as an economic superpower.

2. China is a very ethnically homogeneous state with a massive cultural history of collectivism and empire, something the US doesn’t have.

3. China’s economy isn’t doing as well as China likes to say; their reported numbers are not always true, and they’ve got big economic problems of their own.

4. There’s a reason wealthy Chinese people like to park their wealth in the US. It’s a lot safer than parking it in China, where the government can confiscate whatever it wants.

5. Technically, one could replace trust and social cohesion as measures of accountability with a totalitarian surveillance state, as China seems to be in the process of doing, and that might make Socialism work at scale. It is not, I think, something that any of us actually want.

Conclusion

Trust allows small-scale coordination through sacred relationships.

Prices allow large-scale coordination through mundane numbers.

These are the two bedrocks on which we build our relationships and our economic systems, and why the two need to be built on different foundations. It’s why trying to swap the two has always - and, according to this model, will always - fail.