Capitalism vs Socialism

What is the best economic system for the optimal functioning of society?

This is a question that many have debated and grappled with for centuries. In particular, there has been much contention about two systems, capitalism and socialism, and which is better for both the economy and members of society. In this explanation, we still examine capitalism vs. socialism, looking at:

• The definitions of capitalism vs socialism
• How capitalism and socialism work
• The capitalism vs socialism debate
• Similarities between capitalism vs socialism
• Differences between capitalism vs socialism
• The pros and cons of capitalism vs socialism

Let's start with some definitions.

Capitalism vs. Socialism: Definitions

It isn't easy to define concepts that have various economic, political, and sociological meanings. For our purposes, though, let's look at some simple definitions of capitalism and socialism.

The History of Capitalism and Socialism

The economic systems of capitalism and socialism both have centuries-long histories all over the globe. To simplify this, let's look at some major developments, focusing on the US and Western Europe.

The History of Capitalism

Previous feudal and mercantilist regimes in Europe gave way to the development of capitalism. Economist Adam Smith's (1776) ideas about the free market first pinpointed the problems with mercantilism (such as trade imbalances) and laid the groundwork for capitalism in the 18th century.

Historical events such as the rise of Protestantism in the 16th century also contributed to the spreading of capitalist ideology.

The development of the Industrial Revolution in the 18th-19th century and the ongoing project of colonialism both led to the rapid growth of industry and kickstarted capitalism. Industrial tycoons became very wealthy, and ordinary people finally felt they had a chance at success.

Then, major world events such as the World Wars and the Great Depression brought a turning point in capitalism in the 20th century, creating the "welfare capitalism" we know in the US today.

The History of Socialism

The 19th-century expansion of industrial capitalism created a sizable new class of industrial workers whose terrible living and working conditions served as the inspiration for Karl Marx's revolutionary theory of Marxism.

Marx theorized about the disenfranchisement of the working class and the greed of the capitalist ruling class in The Communist Manifesto (1848, with Friedrich Engels) and Capital (1867). He argued that socialism would be the first step toward communism for a capitalist society.

While there was no proletarian revolution, socialism did become popular in certain periods of the 20th century. Many, particularly in Western Europe, were drawn to socialism during the Great Depression of the 1930s.

However, the Red Scare in the US made it outright dangerous to be socialist during the mid-20th century. Socialism saw a renewed swell of public support during the 2007–09 financial crisis and recession.

How Does Capitalism Work?

The US is widely considered to be a capitalist economy. So, what does this mean? Let's examine the basic features of a capitalist system.

Production and the Economy in Capitalism

Under capitalism, people invest capital (money or property invested in a business endeavor) in a firm to create a good or service that can be offered to customers on the open market.

After deducting production and distribution expenses, the company's investors are often entitled to a portion of any sales profit. These investors frequently put their profits back into the company to grow it and add new customers.

Owners, Workers, and the Market in Capitalism

Owners of the means of production recruit employees who they pay wages to produce goods or services. The law of supply and demand and competition influence the price of raw materials, the retail price they charge consumers, and the amount they pay in salaries.

Prices typically increase when demand outpaces supply, and prices typically decrease when supply outweighs demand.

Competition is central to capitalism. It exists when numerous companies market comparable goods and services to the same customers, competing on factors like price and quality.

In capitalist theory, consumers can benefit from competition since it can result in reduced pricing and better quality when businesses compete to win over customers away from their rivals.

Competition is also faced by the employees of companies. They must compete for a limited number of jobs by learning as many skills and earning as many qualifications as possible to set themselves apart. This is meant to draw out the highest-quality workforce.

Fig. 1 - A fundamental aspect of capitalism is a competitive market.

How Does Socialism Work?

Now, let's study the foundational aspects of a socialist system below.

Production and the State in Socialism

Everything that people generate under socialism is viewed as a social product, including services. Everyone has a right to a portion of the rewards from the sale or usage of anything that they helped create, whether it be a good or service.

Governments must be able to manage property, production, and distribution in order to ensure that every member of society receives their fair share.

Equality and Society in Socialism

Socialism places more emphasis on advancing society, whereas capitalism prioritizes the interests of the individual. According to socialists, a capitalist system breeds inequality through unequal wealth distribution and the exploitation of society by powerful individuals.

In an ideal world, socialism would regulate the economy to prevent the issues that come with capitalism.

Different Approaches to Socialism

There are differing opinions within socialism over how tightly the economy should be regulated. One extreme thinks that everything, except the most private belongings, is public property.

Other socialists believe direct control is only necessary for basic services like healthcare, education, and utilities (electricity, telecommunications, sewage, etc.). Farms, little shops, and other companies may be privately owned under this kind of socialism, but they are still subject to government oversight.

Socialists also disagree about the extent to which the people should be in charge of a country, as opposed to the government. For example, a market economy, or one with a combination of worker-owned, nationalized, and privately owned businesses, is the basis of market socialism, which involves public, cooperative, or social ownership of the means of production.

Examples of Socialist Countries

Examples of self-identified socialist countries include the former Union of Soviet Socialist Republics (USSR), China, Cuba, and Vietnam (although self-identification is the only criterion, which may not reflect their actual economic systems).

The Capitalism vs. Socialism Debate in the US

You have probably heard of the capitalism vs. socialism debate in the US several times, but what does it refer to?

As mentioned, the US is seen as a largely capitalist nation. The laws and rules that the American government and its agencies enforce, however, have a significant impact on private companies. The government has some influence on how all businesses operate through taxes, labor laws, rules to safeguard worker safety and the environment, as well as financial regulations for banks and investment enterprises.

Large portions of other industries, including the post office, schools, hospitals, roadways, railroads, and many utilities e.g., water, sewage, and power systems, are also owned, operated, or under the authority of state and federal governments. This means that both capitalist and socialist mechanisms are in play in America.

The question of how much the government should influence the economy is at the heart of the debate and is still regularly disputed by academics, politicians, and people of all backgrounds. While some view such measures as infringing on the rights of corporations and their profits, others claim that intervention is required to safeguard workers' rights and the welfare of the general population.

Capitalism vs. Socialism: Similarities

Socialism and capitalism are both economic systems and have some similarities.

The most significant parallel between capitalism and socialism is their emphasis on labor. They both acknowledge that the world's natural sources are value-neutral until utilized by human labor. Both systems are labor-centric in this way. Socialists contend that the government ought to control how labor is distributed, whereas capitalists state that market competition should do this.

The two systems are also comparable in that they are both based on ownership and management of the means of production. They both believe that increasing production is a good way to raise an economy's standard of life.

Furthermore, both capitalism and socialism acknowledge that the standard by which the economy should be judged is capital (or wealth). They disagree on how this capital should be utilized - socialism holds that government should oversee the distribution of capital to advance the interests of the entire economy, not just the wealthy. Capitalism holds that private ownership of capital creates the most economic progress.

Capitalism vs. Socialism: Differences

The ownership and management of the means of production are the fundamental differences between capitalism and socialism. In contrast to capitalism, where private individuals own and control all means of production, socialism places this power with the state or government. Businesses and real estate are among these means of production.

Socialism and capitalism not only employ different methods for creating and distributing products, but they also stand for diametrically opposed worldviews.

Capitalists maintain that which goods are produced and how they are priced should be determined by the market, not by people's needs. They also believe that the accumulation of profit is desirable, allowing for reinvestment into the business and, ultimately, the economy. Supporters of capitalism argue that individuals should, by and large, fend for themselves; and that it is not the responsibility of the state to look after its citizens.

Socialists have a different perspective. Karl Marx once observed that the amount of labor that goes into something determines its value. He emphasized that there can only be profit if workers are paid less than what their labor is worth. Therefore, profit is an excess value that has been taken from workers. The government should shield workers from this exploitation by controlling the means of production, using them to produce goods that meet people's needs rather than pursuing a profit.

Fig. 2 - Who owns the means of production, including factories, is what differentiates capitalism and socialism.

Capitalism vs. Socialism: Pros and Cons

We have become familiar with the workings of capitalism and socialism, as well as their differences and similarities. Below, let's look at their respective pros and cons.

The Pros of Capitalism

• Supporters of capitalism argue that one of its primary advantages is individualism. Due to minimal governmental control, individuals and businesses can pursue their own self-interest and engage in their desired endeavors without external influence. This also extends to consumers, who have a wide variety of choices and the freedom to control the market through demand.

• Competition can lead to the efficient allocation of resources, as companies must ensure they are utilizing the factors of production to the greatest extent to keep their costs low and revenue high. It also means that existing resources are used efficiently and productively.

• Additionally, capitalists argue that profits accumulated through capitalism benefit the wider society. People are motivated to produce and sell items as well as invent new products by the possibility of financial gain. As a result, there is a greater supply of commodities at lower prices.

The Cons of Capitalism

• Capitalism is most strongly criticized for causing socioeconomic inequality in society. The most influential analyses of capitalism have come from Karl Marx, who established the theory of Marxism.

  • According to Marxists (and other critics), capitalism creates a tiny upper class of wealthy individuals who exploit a huge lower class of exploited, underpaid workers. The wealthy capitalist class owns the means of production - factories, land, etc. - and the workers must sell their labor to make a living.

• This means that in a capitalist society, the upper class wields a great deal of power. The few who control the means of production make enormous profits; amass social, political, and cultural power; and establish laws that are detrimental to the rights and welfare of the working class. Workers often live in poverty while owners of capital grow increasingly rich, causing class struggle.

• Capitalist economies can also be very unstable. There will be a greater likelihood of a recession developing when the economy starts to contract, which will raise the unemployment rate. Those with greater wealth can endure this time, but those with lower incomes will be hit much harder, and poverty and inequality will increase.

• In addition, the desire to be the most profitable can lead to the formation of monopolies, which is when a single company dominates a market. This can give one business too much power, drive out competition, and lead to the exploitation of consumers.

The Pros of Socialism

• Under socialism, everyone is protected against exploitation by state rules and regulations. Since the economy functions for the benefit of wider society and not wealthy owners and businesses, workers' rights are strongly upheld, and they are paid fair wages with good working conditions.

• According to their own capacities, each person receives and provides. Every person is given access to necessities. The disabled, in particular, benefit from this access along with those who are unable to contribute. Healthcare and various forms of social welfare are rights that belong to everyone. In turn, this aids in lowering the poverty rate and general socioeconomic inequality in society.

• Due to the central planning of this economic system, the state makes quick decisions and plans the utilization of resources. By encouraging effective resource use and utilization, the system reduces wastage. This typically results in the economy growing quickly. A significant advancement made by the USSR in those early years serves as an example.

The Cons of Socialism

• Inefficiency can result from relying too heavily on the government to manage the economy. Due to a lack of competition, government intervention is susceptible to failure and inefficient resource allocation.

• Strong government regulation of businesses also deters investment and lowers economic growth and development. A high rate of progressive taxes can make it harder to find employment and launch a business. Some business owners may believe that the government is taking a big chunk of their profits. Most people avoid risk because of this and opt to work abroad.

• In contrast to capitalism, socialism does not offer consumers a variety of brands and items to choose from. This system's monopolistic character forces customers to purchase a specific good at a specific cost. Additionally, the system restricts people's ability to choose their own businesses and occupations.