Capitalism vs. Socialism: An Overview
The terms capitalism and socialism are both used to describe economic and political systems. On a theoretical level, both of these terms also describe specific schools of economic thought. One of the most fundamental differences between the systems of capitalism and socialism lies in the scope of government intervention within an economy.
The capitalist economic model relies on free market conditions for the creation of wealth. The production of goods and services is based on supply and demand in the general market. This economic structure is referred to as a market economy.
In a socialist economic model, the production of goods and services is either partially or fully regulated by the government. This is referred to as central planning, and the economic structure that is created is known as a planned economy ora command economy.
Key Takeaways
- The capitalist economic model relies on free market conditions for the creation of wealth; the production of goods and services is based on supply and demand in the general market.
- In a socialist economic model, the production of goods and services is either partially or fully regulated by the government; this is referred to as central planning, and the economic structure that is created is known as a planned economy ora command economy.
- Most countries are mixed economies, falling somewhere on the spectrum between pure capitalism and pure socialism.
Capitalism
In a capitalist economy, property and businesses are owned and controlled by individuals. The production and prices of goods and services are determined by how much demand they generate and how difficult they are to produce.
Theoretically, this dynamic drives companies to make the best products they can for as cheaply as they can; capitalism is intended to drive business owners to find more efficient ways of producing quality goods. For consumers, this dynamic is intended to create a system wherein they have the freedom to choose the best and cheapest products.
This emphasis on efficiency takes priority over equality. An equal distribution of goods and services among all members of a society is of little concern within a capitalist system. According to the economic theories that underpin capitalism, inequality is the driving force that encourages innovation, which results in economic development.
In a capitalist economy, the state does not directly employ the workforce. This leads to high levels of unemployment during times of economic recession.
Socialism
In a socialist economy, the state owns and controls the major means of production. In some socialist economic models, worker cooperatives own and operate the primary means of production. A worker cooperative is a firm that is owned and self-managed by its workers. Other socialist economic models allow individual ownership of enterprise and property, albeit with higher taxes and a higher degree of government controls.
The primary concern of the socialist model of economics is an equitable distribution of wealth An equitable distribution of wealth is meant to ensure that all members of a society have an equal opportunity to attain certain economic outcomes. To achieve this, the state intervenes in the labor market.
In a socialist economy, the state is one of the primary employers. During times of economic hardship, the socialist state can order hiring, so there is close to full employment even if workers are not performing tasks that are particularly in demand from the market.
In addition to capitalism and socialism, the other major school of economic thought is communism. Many tenets of communism and socialism stand in opposition to capitalism, but there are important distinctions between socialism and communism.
Special Considerations
Most modern economies are mixed economies. This means they exist somewhere on a continuum between pure capitalism and pure socialism, with the majority of countries practicing a mixed system of capitalism wherein the government regulates and owns some businesses and industries.
In the purest form of a capitalistic system (sometimes referred to as laissez-faire capitalism), private individuals are unrestrained, and the economy operates without any government checks or controls. Private individuals and businesses may determine where to invest, what to manufacture and sell, and the prices of goods and services.
In a purely socialist system, all means of production are collective or state-owned.
Some countries incorporate both the private sector system of capitalism and the public sector enterprise of socialism to overcome the disadvantages of both systems. In these economies, the government intervenes to prevent any individual or company from having a monopolistic stance and undue concentration of economic power. Resources in these systems may be owned by both the state and by individuals.
FAQs
Capitalism is based on individual initiative and favors market mechanisms over government intervention, while socialism is based on government planning and limitations on private control of resources. Left to themselves, economies tend to combine elements of both systems.
What are 5 major differences between capitalism and socialism? ›
Main Differences Between Capitalism and Socialism
| Differences Between Capitalism and Socialism |
|---|
| Capitalism | Socialism |
|---|
| Allocation system | Market-based | Central planning |
| Income distribution | Based on private contracts | Redistributed equally |
| Government role | Minimal intervention | Extensive control |
4 more rowsCompetition between multiple businesses is an integral part of a Capitalist Economy. In a Socialist Economy, there is no competitor to the government. The distribution of income is unequal in a Capitalist Economy. The distribution of income is more or less equal in a Socialist Economy.
What is the difference between capitalism and socialism in simple terms? ›
A capitalist economy relies on free-markets to determine, price, incomes, wealth and distribution of goods. A socialist economic system is characterised by greater government intervention to re-allocate resources in a more egalitarian way. There are also different aims of the economic systems.
What is the main problem with socialism? ›
One criticism of socialism is that, in any society where everyone holds equal wealth, there can be no material incentive to work because one does not receive rewards for a work well done. They further argue that incentives increase productivity for all people and that the loss of those effects would lead to stagnation.
What country is socialist? ›
Marxist–Leninist states
| Country | Since | Form of government |
|---|
| Republic of Cuba | 24 February 1976 | Unitary one-party socialist republic |
| Lao People's Democratic Republic | 2 December 1975 | Unitary one-party socialist republic |
| Socialist Republic of Vietnam | 2 September 1945 | Unitary one-party socialist republic |
1 more rowCanada is more capitalist than socialist. The nation's economy is classified as a mixed market economy with a robust social safety net. This means that Canada has influences from both socialism nor capitalism. It is a mix of the two.
What are the disadvantages of socialism? ›
KEY Points. Disadvantages of socialism include slow economic growth, less entrepreneurial opportunity and competition, and a potential lack of motivation by individuals due to lesser rewards.
Which country uses capitalism? ›
Top 10 Countries with the Most Capitalist Economies - 2021 Heritage Index of Economic Freedom:
- Singapore (Freedom score: 89.7)
- New Zealand (83.9)
- Australia (82.4)
- Switzerland (81.9)
- Ireland (81.4)
- Taiwan (78.6)
- United Kingdom (78.4)
- Estonia (78.2)
The difference in this is that capitalism rewards individuals for success and progress by allowing them to grow that wealth through investment and other actions within the market. On the other hand, socialism allows the opposite by stripping away that wealth to be redistributed throughout the economy.
The CCP maintains that despite the co-existence of private capitalists and entrepreneurs with public and collective enterprise, China is not a capitalist country because the party retains control over the direction of the country, maintaining its course of socialist development.
What is socialism in simple terms? ›
Socialism is a political ideology that aims to make people equal. It generally focuses on equality of wealth (eg. similar wages, housing, education, healthcare), although since the 1960s, it has often focused on equality of power.
What is an example of capitalism? ›
In a capitalist economy, capital assets—such as factories, mines, and railroads—can be privately owned and controlled, labor is purchased for money wages, capital gains accrue to private owners, and prices allocate capital and labor between competing uses (see “Supply and Demand”).
Who benefits from socialism? ›
Pros of socialism
A welfare state which provides a minimum basic income for those who are unemployed, sick or unable to work maintains a basic living standard for the poorest in society and helps to reduce relative poverty.
What is the example of socialism? ›
Common ownership under socialism may take shape through technocratic, oligarchic, totalitarian, democratic, or even voluntary rule. A prominent historical example of a socialist country, albeit one run by communists, is the former Union of Soviet Socialist Republics (U.S.S.R.), also known as the Soviet Union.
Is North Korea a socialist? ›
According to Article 1 of the state constitution, North Korea is an "independent socialist state". It holds elections, though they have been described by independent observers as sham elections, as North Korea is a totalitarian dictatorship with a comprehensive cult of personality around the Kim family.
What are 5 differences between capitalism and communism? ›
Capitalism exhibits private ownership, profit motive, minimal government intervention, competitive market, capital accumulation, class system, etc. Communism exhibits common ownership, central planning, no competition, classless society, etc.
What are the major differences between capitalism socialism & Communism? ›
In brief, Communism backs full control of the Government across all standards of production and other resources. Socialism exercises adaptable forms of controlling the State. Capitalism supports a free market and overall economy without the involvement of the State.
