Capitalism vs. Socialism: An Overview

Capitalism and socialism are the two primary economic systems used to understand the world and the way economies work. 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 relies on free market conditions to drive innovation and wealth creation and regulate corporate behavior; 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.

Key Takeaways

  • Capitalism is a market-driven economy. The state does not intervene in the economy, leaving it up to market forces to shape society and life.
  • Socialism is characterized by state ownership of businesses and services. Central planning is used to attempt to make society more equitable.
  • Most countries are mixed economies, falling in between the extremes of capitalism and 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 in demand they are and how difficult they are to produce. Theoretically, this dynamic drives companies to make the best products they can as cheaply as they can, meaning that consumers can choose the best and cheapest products,. Business owners should be driven to find more efficient ways of producing quality goods quickly and cheaply.

This emphasis on efficiency takes priority over equality, which is of little concern to the capitalist system. The argument is that inequality is the driving force that encourages innovation, which then pushes economic development. In a capitalist economy, the state does not directly employ the workforce. This can lead to unemployment during times of economic recession.

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What is Socialism?

Socialism

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.

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. To achieve this, the state intervenes in the labor market. In fact, 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 in demand from the market.

The other major school of left-wing economic thought is communism. Both communism and socialism oppose capitalism, but there are important distinctions between them.

Special Considerations

In reality, most countries and their economies fall in between capitalism and socialism/communism. 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.