A:

Their distinctions are many, but perhaps the fundamental difference between capitalism and socialism lies in the scope of government intervention in the economy. The capitalist economic model allows free market conditions to drive innovation and wealth creation; this liberalization of market forces allows for the freedom of choice, resulting in either success or failure. The socialist-based economy incorporates elements of centralized economic planning, utilized to ensure conformity and to encourage equality of opportunity and economic outcome.

Ownership

In a capitalist economy, property and businesses are owned and controlled by individuals. In a socialist economy, the state owns and controls the major means of production. In some socialist economic models, worker cooperatives have primacy over production. Other socialist economic models allow individual ownership of enterprise and property, albeit with high taxes and stringent government controls.

Equity

The capitalist economy is unconcerned about equity (in the sense of equality). The argument is that inequality is the driving force that encourages innovation, which then pushes economic development. The primary concern of the socialist model, in contrast, is an equitable redistribution of wealth and resources from the rich to the poor, out of fairness and to ensure "an even playing field" in opportunity and outcome.

Efficiency

The capitalist argument is that the profit incentive drives corporations to develop innovative new products that have demand in the marketplace. It is argued that the state ownership of the means of production leads to inefficiency because without the motivation to earn more money, management, workers and developers are less likely to put forth the extra effort to push new ideas or products.

Employment

In a capitalist economy, the state does not directly employ the workforce. This can lead to unemployment during times of economic recession. In a socialist economy, the state is the primary employer. During times of economic hardship, the socialist state can order hiring, so there is full employment even if workers are not performing tasks that are particularly useful.

Mixed Economy

Some countries incorporate both the private sector system of capitalism and the public sector enterprise of socialism to overcome the disadvantages of both systems. These countries are referred to as having mixed economies. 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 state and individuals.

 

RELATED FAQS
  1. What are the most important aspects of a capitalist system?

    Understand the main aspects of a capitalist system and how they contrast with the tenets of other types of economic systems, ... Read Answer >>
  2. How is the invisible hand affected in a communist or socialist economy?

    Discover why the invisible hand of the market is compromised by socialist and communist economies, where the government controls ... Read Answer >>
  3. What are some examples of free market economies?

    Hong Kong, Singapore and Australia are examples of free market economies. Read Answer >>
  4. What makes command economies fail?

    Read about three competing theories about the failure of socialism and command economies: human incentives, political corruption ... Read Answer >>
  5. What is the difference between Communism and Socialism?

    Communism and socialism are umbrella terms referring to left-wing schools of economic thought that oppose capitalism. Read Answer >>
  6. What role does the government play in capitalism?

    Take a deeper look at the role of government in a capitalist economic system and about competing ideas about the proper amount ... Read Answer >>
Related Articles
  1. Insights

    Socialist Economies: How China, Cuba And North Korea Work

    What is socialist economics in the context of Cuba, China and North Korea?
  2. Insights

    Pros and Cons of Capitalist vs Socialist Economies

    Capitalism relies on the markets. Socialism, on government planning. Each system has its pros and cons.
  3. Insights

    What Exactly is a Socialist Economy?

    Socialism's role in the world has changed dramatically in the last several decades.
  4. Insights

    Mixed Economic System

    Many of today's democracies operate under what is known as a mixed economic system, which combines aspects of capitalism and socialism.
  5. Personal Finance

    Understanding Capitalist Economy Traits

    Capitalist economies share several traits.
  6. Insights

    Main Characteristics of Capitalist Economies

    Commerce is based on the principles of capitalism, but there are few, if any, examples of pure capitalism except in theory.
  7. Small Business

    Who are Venture Capitalists?

    Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions.
  8. Investing

    What's a Centrally Planned Economy?

    A centrally planned economy is one where the government controls the country’s supply and demand of goods and services.
  9. Investing

    What's a Command Economy?

    A command economy is one where the government controls the economy, acting as the central planner, dictating production quotas and distribution levels, and setting prices. Such economies exist ...
RELATED TERMS
  1. Socialism

    An economic and political system based on public or collective ...
  2. Adventure Capitalist

    An adventure capitalist is an investor who backs higher risk ...
  3. Vulture Capitalist

    1. A slang word for a venture capitalist who deprives an inventor ...
  4. Marxism

    A social, political and economic philosophy that examines the ...
  5. Diluted Founders

    A slang term often used by venture capitalists to describe the ...
  6. Social Justice

    A political and philosophical concept which holds that all people ...
Hot Definitions
  1. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  2. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an insurance and an investment component. The insurance component ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Capital Asset Pricing Model - CAPM

    A model that describes the relationship between risk and expected return and that is used in the pricing of risky securities. ...
  5. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability of potential investments.
  6. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
Trading Center