Karmic Capital

A spectre is haunting Europe and America—the spectre of socialism. It’s threatening to extend its shadow over young people everywhere. The periodic rediscovery of socialism by successive generations might tempt us into seeing it as evidence of history repeating itself; often as tragedy, always as farce. The youth are once again embracing an ideology whose economic record ought to give them pause. Socialism may promise equality, fairness and a more equitable distribution of wealth. What it has consistently struggled to demonstrate, however, is an ability to create wealth in the first place.

That is the principal distinction that tends to disappear in the ideological debate: wealth must first be created before it can be distributed. Redistribution is a political decision; wealth creation is an economic process. The former can be decreed by government. The latter requires enterprise, capital, investment, innovation, competition and, above all, incentive.

Capitalism works, or tends to work better, because it recognises something fundamental about human economic behaviour: individuals are more likely to accumulate, invest and create wealth when they have ownership of it and a stake in its growth. Personal wealth is not merely an accumulation of private consumption. It becomes capital. Savings flow through banks, pension funds and financial markets into businesses, factories, infrastructure, research and new technologies. Entrepreneurs risk their own money, investors finance their ideas, and successful enterprises reinvest their profits. The chain of logic is simple and stark: wealth generates investment; investment improves productivity; productivity creates further wealth.

To see the point we can look at South Korea, Taiwan, and also China after its abandonment of Maoist economic orthodoxy. Their rapid expansion was driven by private enterprise, investment, manufacturing, exports and integration into global markets. China is particularly instructive since its growth accelerated dramatically after Deng Xiaoping introduced market reforms from 1978, dismantling the collective agricultural system and permitting private initiative and capital accumulation. China did not become prosperous by becoming more socialist but by becoming considerably less so economically.

Dogmatic socialism attempts to replace private ownership and market allocation with state ownership and central planning. The problem is not simply that bureaucracies make mistakes or engender corruption; private businesses make mistakes too. The problem is that the system removes the mechanisms through which mistakes are identified, punished and/or rectified. Without meaningful competition, the incentive to innovate weakens. Without independent capital allocation, investment becomes vulnerable to political priorities. Without prices reflecting genuine demand and scarcity, resources are systematically misallocated. The state can command production but not productivity.

The Soviet Union demonstrated this on a monumental scale. It industrialised rapidly, developed formidable military and scientific capabilities and made genuine advances in education and infrastructure. But its planned economy increasingly struggled with technological innovation, consumer production, efficiency and, of course, productivity. Soviet factories fulfilled production quotas rather than consumer needs; shortages coexisted with surplus inventories of unwanted goods. By the 1980s, the system had stagnated. Its eventual collapse was not simply an unfortunate accident of leadership but the culmination of structural economic weaknesses. When that inevitable (with hindsight) collapse came, it was the last but one nail in the coffin of socialism. Or so it should have been. (But history didn’t end, and so here we are again.)

Perhaps the most compelling illustration is the comparison between the two Germanys. The German Democratic Republic (GDR) was, by East European standards, one of the more industrially developed and prosperous members of the socialist Warsaw Pact. It possessed a substantial manufacturing base, skilled workers and a lot of technical capability. Yet its achievements look insignificant measured against the Federal Republic of Germany (FRG), operating under a market economy from the start.

By 1989—when the socialist Soviet Bloc in Europe fell along with the Berlin Wall—estimates put West German GDP per head at roughly twice the East German level (although comparisons are complicated by different accounting systems and exchange-rate assumptions). The GDR’s industrial productivity was substantially lower. Its industrial infrastructure was ageing, energy production depended heavily on highly polluting lignite coal, and investment had been concentrated in selected industries at the expense of consumer durables and public infrastructure.

This contrast was visible in everyday life. In 1988, approximately 97 per cent of West German households owned a car, against 52 per cent in East Germany. Telephone ownership was approximately 98 per cent in the West and just 9 per cent in the East. Queues, restricted choice and long waiting periods for consumer goods were familiar features of East German life—as they were in more acute form in the rest of the East Bloc, with the exception of Hungary which, significantly, practised a limited market economy and enjoyed a better standard of living as well as better access to Western consumer goods. For East Germans, the Trabant (‘Trabi’) became an unlikely symbol of an economy capable of maintaining heavy industry but struggling to deliver the ordinary material comforts available across the inner-German border.

But the GDR was hardly the poorest socialist economy. And that is precisely what makes the comparison so revealing. Even its relatively successful industrial model couldn’t generate anything approaching the wealth, consumer choice and productive dynamism of its capitalist neighbour. The lesson was not that East Germany produced nothing, but that it produced wealth inefficiently and failed to convert its considerable industrial resources into comparable prosperity.

And here another important distinction should be made for the benefit of those conflating socialism and social democracy. The latter is not socialism. It offers a different proposition altogether. The Scandinavian countries, Germany and other West European economies have demonstrated that capitalism can coexist with extensive welfare provision, public services, progressive taxation and social security. While it is in part the fraying of this social contract that is contributing to protests (and riots) across Western Europe today, it must be remembered that these countries are market economies. Their welfare systems depend on the wealth generated by private businesses, competitive industries, investment and productive employment. Social democracy is a compromise within capitalism—and not an economic vindication of socialism.

Nor does every leftwing government necessarily mismanage an economy. But the historical temptation towards fiscal excess, protectionism, nationalisation, politically determined subsidies and state interference has repeatedly produced economic distortions. Argentina illustrates the dangers of populist economic management, chronic fiscal indiscipline and monetary instability, although it hasn’t been a straightforward example of Soviet-style socialism. Cuba’s slow decay and ultimate collapse, on the other hand, demonstrate the limitations of prolonged state domination of productive activity. Neither inequality nor economic hardship is exclusive to capitalism, and neither can be remedied by simply expanding the state.

What, then, explains socialism’s renewed appeal? In America, Bernie Sanders and Alexandria Ocasio-Cortez have helped bring democratic socialism into mainstream political conversation. Zohran Mamdani’s 2025 mayoral victory in New York gave the movement another prominent platform. Gallup’s September 2026 polling found that 43 per cent of Americans viewed socialism positively, a record for the poll, although capitalism remained ahead at 55 per cent. A separate Cato Institute survey found that 53 per cent of Gen Z respondents viewed socialism favourably, compared with 45 per cent for capitalism.

In Britain, Jeremy Corbyn’s political movement, the growing appeal of nationalisation and the popularity of anti-capitalist arguments among younger voters have reflected a similar mood. Across continental Europe, housing affordability, insecure employment, inequality and dissatisfaction with established political parties have provided fertile ground for renewed leftwing activism—and extremism. And the germ of anarchy present in this ignorance or misreading of history is all too evident in India too as the ghost of socialism resurrects itself among Gen Z, with mainstream political parties not thinking twice about sharing platforms with representatives of the radical left.

However, such grievances are rarely wholly imaginary; nor should they be dismissed as youthful ignorance alone. But there is a difference between recognising capitalism’s failures and assuming socialism has the answers.

Indeed, some of the attraction of socialism rests on a confusion of terminology. Many young people who describe themselves as socialist are advocating better public services, stronger welfare provision and greater economic equality, not the abolition of private property or introduction of central planning. These are legitimate subjects for democratic debate. But they are not necessarily arguments for socialism as an economic system.

Capitalism is imperfect. It produces inequality, periodic crises and concentrations of economic power that require regulation and accountability. Its achievements should not exempt it from criticism. But its fundamental advantage remains: it creates mechanisms through which individuals can accumulate wealth, invest it, take risks, innovate and generate more wealth. It is, essentially, a virtuous cycle and humanity has known no better to date.

The fundamental lesson of economic history is that wealth must first be created before it can be distributed. Socialism has repeatedly demonstrated its ambitions for the latter. Its record on the former is unconvincing. A society can debate how its wealth should be shared. It cannot indefinitely evade the question of how that wealth is to be created.

On Deepavali, Indians can be thankful that the country has largely shed its prejudices against wealth and wealth creators. It should impart the lessons of the journey since economic liberalisation in 1991 to its youth—how moving away from a planned and mixed economy made India more prosperous, multiplied individual choice and lifted living standards. The young will make their own decisions but there is no harm in sounding the warning from history.