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. Unfortunately, the naive belief that capitalistic efficiency is due to the top-down structure within businesses is simply grist for the mills of social reformers.

Before going any further it's a good idea to clarify the terms socialism and capitalism. They have such a wide variety of meanings to different people that clarification is necessary. Afterward, it will be much easier to understand how businesses, in a capitalistic society, with capitalists in charge, can indeed contain a socialistic structure.

The Capitalist

Socialism and Capitalism

Earlier we described the origins of socialism and showed how its founders intended it to be a social order patterned after businesses; only without capitalists. They wanted to retain the productivity and efficiency, but eliminate the exploitation they saw within the system.

As these reformers envisioned a social structure to be like a "national workshop" they adopted one critical feature from business—the centralized control of production. Gradually, this became the most defining characteristic of socialism. Indeed, in his 1922 book entitled Socialism, Ludwig von Mises stated:

Other definitions, however, often confirmed Mises' own. The dictionary definition of socialism is essentially the same—

This definition of socialism has an ironic twist when metaphorically applied to businesses. Most of our large businesses today, in capitalistic countries, have internally socialistic structures—production within them is centrally controlled instead of market-controlled.

The significance of centralized control is easily overlooked. After generations of such control, both in governments and in businesses, it is difficult for many people to envision any workable alternative. They fail to see the order in de-centralized control systems, such as markets, even though the model for them is readily available—capitalism.

To many people capitalism simply means a system designed by, and for, the capitalists—a total system for exploitation of workers, and of society, by the wealthy. However, this view is primarily influenced by the concept of the capitalist we described above. The dictionary definition of capitalism reads:

As far as it goes, this definition is accurate. But it is even more revealing to compare how production is controlled in capitalism with how it is controlled in socialism . In his book Bureaucracy, Mises stated:

Thus, the salient feature of capitalism is not that wealthy people are in positions of authority within businesses, but that consumer choices dictate production. A consumer or market-based control of production identifies a system as capitalistic. A centralized control of production identifies a system as socialistic—capitalism is customer-driven, socialism is command-driven.

According to these meanings of socialism and capitalism if production in a business is governed by plans, rules, budgets, and quotas, it is socialistic. If it is governed by customer demand in an internal market system, it is capitalistic.

Just because a society is predominantly based on one model, doesn't mean its businesses can't be based on a different one. Most large businesses in capitalistic society are structured internally on a socialistic model, but externally they still need to compete for customers. The external system is capitalistic; the internal one, socialistic.

Are Businesses Socialistic? Does It Matter?

Are large businesses structured like a socialistic system? Two important reasons exist for understanding if this is true. First, if they are indeed socialistic, then based on our knowledge of history, if we can change the model of our businesses to more closely reflect a Western economic model there is a great potential to revolutionize productivity and increase the standard of living for everyone. Ask yourself, how efficient is socialism? Do we really want our businesses patterned after that same model? Secondly, people often learn their organizational skills through their employment. Then when they look for solutions to non-business problems it's only natural that they would use the methods they already know. No wonder our government is constantly challenged by creeping socialism!

Many people would be shocked to hear that large businesses are structured internally like a socialistic government. Here in the United States—the bastion of capitalism—large businesses seem to be the very essence of capitalism. At first blush it seems absurd to think they could be organized in any way similar to socialism. However, once a little history is disclosed about the origin of Socialism this truth soon becomes obvious. The first step is to understand that the socialist concept of the ideal society was from its very beginnings modeled after business. Hence, it is more accurate to say that socialism is based on a business model, than it is to say that business is based on a socialistic model, but either way, they are both based on a model of centralized control.

The Employment Relationship

One more clarification is necessary before moving on: The exploitation theory put forward by the social reformers is misleading. The employment relationship is simply a contract. The employer agrees to pay the employee a given wage provided he or she performs specific tasks as directed by the employer. As long as the employer does not ask the employee to do anything illegal or unethical, then he or she is bound to do as instructed, even if it is inefficient, unproductive, and personally unfulfilling. If the employee is not satisfied with the compensation, work environment, tasks assigned, use of resources, or anything else, the employee is free to re-negotiate the contract or leave the relationship and seek employment elsewhere.

There is really no more exploitation in the employment relationship than in any other market exchange. When people buy and sell they voluntarily give up something they value less for something they value more. They are literally exploiting the differences in perceived value. If there isn't surplus value in every market transaction then buying and selling won't occur. Surplus value is essential to any exchange, including employment. If an employee feels he or she is not receiving adequate compensation for a given level of effort then two choices exist: Either petition for a higher salary or exchange labor with a different party. Perhaps another employer will value that person's labor more highly.

The concept of the capitalist uses terms implying wickedness on the part of the owners—exploitation, greed, expropriation, etc. However, there is nothing inherently unethical about controlling production within a business centrally, or, using my terms, structuring it on a socialistic model. In fact, for very small businesses there is evidence to suggest that it is an efficient method. It is in large businesses that the inefficiency, stagnation, labor unrest, and a lack of motivation become evident. As long as the owners are willing to accept the consequences of using a centralized model, there is nothing wicked in doing so.

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.

The Soviets desired to totally eliminate capitalism by creating state-controlled 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 many 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 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. As large businesses struggle under the weight of bureaucratic measures some common solutions have been to merge them with other companies or break them up into smaller and smaller units. While destructive in many ways, such changes often help to reintroduce 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 businesses within a capitalistic 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 constitutional and free-market principles. This is Constitutional Enterprise.