Thus, the most identifiable characteristic of a socialistic structure is the centralized, or top-down, system of control within it. This includes any centrally controlled institution, whether it is a government or a business.

Because democratic elections are held in many socialistic countries socialism is often thought to be based upon "government by the people." This would imply a bottom-up system of control. But whether or not a socialistic government is democratically elected, the consumers, and therefore the citizens, are truly sovereign only within a market society—capitalism. In the economic democracy of capitalism, every dollar of every consumer represents a vote. Not so in socialism, where a central authority oversees production—top-down. It is the presence or absence of a market system, not just the form of government, which defines a system as capitalistic or socialistic.

But a market for consumer goods is not enough. A market must exist for investment capital as well. A high standard of living can be achieved for the mass of the people only in a system where capital naturally seeks its most productive use. In a capitalistic system investors wisely restrict their investments to only those firms which can produce as high a return as possible. To achieve this profit the firms must produce a product the customers are willing to buy. Leaders in a socialistic system of communal or state ownership seek other goals, such as social equality, or steady employment, largely irrespective of any profit produced. Investment capital, therefore, is not competed for and thus does not flow to its most productive use. The standard of living for the masses remains low in a socialistic system while in capitalism it is notably higher.

The motivating well-spring of all socialistic quests has been a revulsion for top-down control of businesses by the wealthy—ironically, a socialistic structure itself. Marx referred to the "exploitation" of workers by the business owners as wage slavery. Neither he nor other socialists could see the bottom-up control by the consumers acting as a check on the power of the wealthy. Attempting to end top-down control of the masses by the wealthy, socialist visionaries achieved top-down control by their own governments. In other words, they ended wage slavery by installing literal slavery. Small comfort to the masses!

The socialists did not want to disrupt this technological miracle, but merely to distribute the profits of it more fairly. They observed the workers earning profits for the wealthy business owners and maintained they were being unfairly exploited. Believing the strength of the system was in its structure, they didn't want to eliminate businesses, but merely to replace the wealthy business owners with the state.

In his work The State and Revolution, Lenin states:

And The Communist Manifesto proclaims:

The passage of time has revealed a conclusion quite different from that of Schumpeter's. The naive belief that capitalistic efficiency is due to the top-down structure within businesses is simply grist for the mills of social reformers.

Profit is not the motive for engaging in the myriad voluntary organizations which give charm to our lives. Charitable organizations, community athletic teams, clubs or associations of common interest, and especially our families; these are the reasons we engage in capitalistic pursuits. The workings of our most cherished institutions are bastions of centralized control and communal ownership. They are not capitalistic in nature, but must be supported and funded by capitalistic methods. Workers are not just one-dimensional machines of production, but interested members of families and communities. Such associations have rewards outside of wages and profits. To use Hayek's words, "we must learn to live in two sorts of worlds"—social and economic—and learn to protect the unique features of each.

An economic system cannot function efficiently on a social model. When we extend the workings of the small-group to large-scale enterprise, socialism emerges.

Socialistic structures of control can be successful only in very small businesses, where inefficiencies are obvious and the natural affections between individuals tend to compensate for the disagreements and injustices which are bound to occur. Indeed, some of our most successful business experiences come about from the esprit de corps present in a small team of individuals with common goals.

Large organizations are not efficient under socialism because, in a system without consumer-driven prices, no measures exist to guide production. Without such measures the well-meaning participants work at cross-purposes with each other and lost opportunities become increasingly difficult to identify. While people in such a system may fervently desire greater prosperity, the injustice of the system itself becomes a demotivator. Frustration turns to resentment and suspicion. Someone, they feel, must be incompetent or selfish. Unable to see flaws in the overall system they search for villains and saviors.

Here it is necessary to distinguish between the organizational structure inside of businesses and the organizational structure of the environment outside—the state. The Soviets desired to achieve socialistic socialism— socialistically structured businesses within a socialistic state. They soon found the laws of human nature and economics prevented a successful implementation of such a scheme. The inevitable episodes of under-producing what was desired and over-producing what was not forced underground economies to emerge. Black markets supplied what was necessary to keep the people from starving. Repeatedly they had to retreat from socialist ideals and allow some private production to take place. The result was capitalistic socialism—small capitalistic enterprises within a socialistic environment.

In the so-called capitalistic countries a different irony emerged. The free market reflected consumer preferences extremely well. Shortages and overages were rare and the standard of living blossomed. But the success convinced the leaders of industry that their business structures were efficient as they were. They could not see the inefficiencies of socialistic systems working right within their own firms. They had achieved socialistic capitalism—socialistically structured businesses within a capitalistic environment. But to add irony upon irony, many of these successful business leaders, believing their own systems to be efficient, tried to infuse the same socialistic practices into the external society. And they were not alone in their attempts. Socialist and communist organizations of all sorts, subversive and blatantly open, tried to accelerate the slide toward a totally socialistic system. Universities, labor unions, the news media, the entertainment industry, and even well-intentioned religious leaders all lent a hand at smiting the capitalist monstrosity. Had it not been for the impossibility of achieving total socialism, as the Soviet Union has so vividly demonstrated, we would have arrived there long ago. In his book Socialism, Ludwig von Mises observed:

Socialism can exist only in the presence of capitalism, either internal to businesses or external. Someone has to pay for every socialistic measure. In the past, while the society outside of our large businesses was largely capitalistic, the inefficiencies of socialistic structures inside could be coped with. But today our large businesses are being forced to break up into smaller and smaller units because the external society has long been in the process of becoming more and more socialistic. The internal and external overhead of socialistic measures will no longer support large bureaucratic enterprises. Breaking them up reintroduces capitalistic measures—infusing the economic calculation of market exchange. Professor Mises put it this way:

So here is the all important point at which we have finally arrived: Though socialism can survive only in the presence of capitalism, capitalism, at least in governmental and business realms, does not need socialism! What we need is capitalistic capitalism—capitalistic businesses within a capitalistic social environment. Not only will our businesses prosper within, but we will stop seeding socialistic practices into the external society and poisoning the well of our own prosperity.

In the long run the top-down, centrally planned, hierarchy of large businesses is just as certain to "wither away" as is the socialist state. Our task is to design and implement a new business structure based upon bottom-up control. This is Constitutional Enterprise.