Capitalism vs. socialism overview

The economic system of capitalism, under which goods and services are privately owned and distributed, competition is actively promoted, and resources must be earned by citizens, stands in contrast to the economic system of socialism, under which emphasis is placed on governmental ownership of the means of production, and resources are distributed to citizens. While the United States is, and always has been, a capitalist society, several countries operate under some form of a socialist regime. Consequently, the distinction between capitalist and socialist economic systems is not merely one of semantics; in the global economy of the twenty-first century, political and social tensions arise between countries that have such drastically different economic philosophies, as they struggle to find common ground and trade with one another or, at the very least, to peacefully coexist. Furthermore, political debates within countries, not least the United States, rage between advocates of capitalism and some form of socialism. Despite the way the two sides paint each other, positions in this debate generally fall along a spectrum, as opposed to two polar opposites, since few people actually advocate for either pure capitalism or pure socialism.

Understanding the Discussion

Capitalism: An economic system under which goods and services are privately owned, and decisions concerning pricing, investments, and distribution are determined in a free-market system (a system that operates independently of the government), primarily on the basis of competition between businesses.

Communism: An economic system under which a single authoritarian party controls the means of production. Under a communist regime, there is no private property, and goods are available to all and, in theory, distributed evenly by the government.

Laissez-faire: French for "let do," this phrase describes the capitalist economic system wherein business success and failure is determined from the course of events as they naturally occur, without government intervention. Laissez-faire policies could include low taxes, little government regulation, free markets, and private ownership of the means of production.

Means of production: The items—such as land, machinery, natural resources, and factories—used in the production of goods.

Oligopoly: A market or industry that is dominated by only a few producers.

Monopoly: A market or industry that is dominated by only one producer. In many free market economies, the existence of a monopoly is not illegal, but when monopolistic business practices are determined to be abusive or predatory, sanctions could be imposed on the offending producer.

Socialism: An economic system under which the government owns and administers the means of production and distribution of goods. Goods and wages are distributed on the basis of the work performed. Socialism is viewed as being in between capitalism and communism.

Understanding Capitalism

Adam Smith, the eighteenth-century Scottish philosopher who is widely viewed as the father of economics, famously wrote, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." This statement encapsulates many of the tenets of capitalism: profit, private ownership, a market economy, and competition.

In a capitalist economy, the means of production are owned privately, and are free from government control. Capitalists believe private ownership is preferable because power is diffused among many businesses, rather than concentrated in the hands of a central government, and because capitalists believe that businesses thrive when people have a personal interest in their work. Another tenet of capitalism is the "free market" economy, in which supply and demand are unregulated and corporations—and consumers—make economic decisions on the basis of self-interest, personal experiences, and financial wherewithal. Competition correlates with the free market economy. Businesses succeed and fail based on how well, compared to other businesses, they produce their goods, price their merchandise, invent profitable modifications to production, and market their products. Capitalist countries also operate under a profit and loss system, wherein businesses that fail to make ends meet must simply shut their doors.

Those in favor of a capitalist economic system cite several benefits of such a system. Primarily, they argue that individuals and businesses should be able to determine their own destiny, and should succeed—or fail—based on their own achievements. Those with the best ideas and most creative strategies will be rewarded with profits, and those that lack the motivation or resources to compete for their share of the market will be unable to stay afloat. Capitalists also argue that their model is the best for consumers, because capitalism thrives on competition between businesses, so consumers almost always have a choice of which goods to purchase. Through their choice of products, they help determine which businesses will thrive and which need to make changes.

Critics of capitalism argue that it is a system based on inequality, claiming that big businesses and wealthy individuals thrive, while laborers are oppressed and often unable to get ahead no matter how hard they work. They also argue that capitalism sometimes leads to oligopolies or monopolies—economic situations in which there are only one or a few producers of goods. In an oligopoly or monopoly, consumers have little choice but to purchase a specific product at a price determined not by competition but by the producer’s ability to charge an unfairly high price because no other business is producing that same good. Finally, those opposed to capitalism argue that by its nature, capitalism will eventually lead to the depletion of natural resources, as corporations have insufficient incentive to conserve resources, and are, instead, primarily concerned with economic growth as it is related to their profit margin.

Understanding Socialism

Different forms and varying degrees of socialism exist. Consequently, it is almost impossible to generalize about the ideals of socialism. Nonetheless, certain tenets of socialism are widely accepted. In a socialist structure, individuals and private businesses have less economic decision-making power, and the government has more. The government controls more of the means of production and has more ability to set prices and levels of production and to make business decisions. Businesses are subject to much higher degrees of government regulation, and there is less competition. Importantly, there is also less danger that a business owner will go out of business and have to lay of his or her employees, because of government protections that are in place.

Because socialists believe that capitalism places great power and wealth in the hands of only a few, another tenet of socialism is a more equal method of distributing wealth and power. This system is often based on the amount of labor that each person expends. This concept has, over time and by many economists, been called "to each according to his or her contribution." Accordingly, a socialist economy does not distribute wealth equally (like the goal of a communist regime); but it does strive to distribute wealth more equally, with an emphasis on the worker’s contribution. Countries that subscribe to some form of socialism include, among others, India, Bangladesh, and North Korea.

Those in favor of socialism argue that its main benefit is that it distributes wealth among the people rather than concentrating great wealth in the hands of only a few. To underscore this point, it was estimated in the United States that the richest 1 percent controlled about 40 percent of the wealth in the country as of 2016; the bottom 90 percent controlled less than 25 percent. With such enormous sums of money concentrated in a fraction of the population comes tremendous economic, social, and political power for that small segment of society. In a socialist state, the government regulates the market and the means of production, so that wealth is distributed on a more equal basis, rather than being concentrated in the hands of only a small percentage of society. Under a socialist regime, emphasis is placed on taking care of individuals through social programs.

Another common tenet of socialism is environmentalism, as socialists believe that capitalist societies, by nature, exhaust the world’s natural resources in an effort to maximize their production and profit. Socialists believe that production should be driven by use, not profit. They believe that depressions and recessions in capitalist systems are caused by overproduction of goods. Socialists note that under capitalism, when too much of a certain product is produced, if the item fails to sell, the workers that produced the item are laid off because the owner of the company has failed to make a profit. Socialists believe, instead, that the focus should be on satisfying the needs of people, rather than achieving a profit. Finally, socialists believe that their economic structure will result in reduced poverty, when compared to a capitalist model. In recent decades, capitalists have used advances in technology to replace workers, thus creating profit, as well as poverty for displaced workers. However, socialists believe that the benefits of new technology and inventions should be shared by all, thus reducing poverty.

Those opposed to socialism argue that it limits the power of the individual to succeed or fail on their own merits, to be rewarded for their ingenuity, and to have the opportunity to prosper without the aid of the government. There is little incentive for workers to be productive, and to be creative in inventing new technologies, as they reap less personal benefit from their own labor. They also argue it is impossible for the government to "plan" the economy, as one entity cannot possibly foresee all circumstances and contingencies. Capitalists further contend that, under a socialist regime, there will be fewer technological advances, thus producing a static economy. Economist Milton Friedman has argued that when the government owns the means of production, there is no competition and, accordingly, no incentive to produce goods in new or more efficient manners. As an example to underscore his point, he noted that, in the United States, the areas of the economy that are the least efficient are the areas in which the government owns the means of production.

Overlap

Capitalist and socialist economic plans are fundamentally different. While capitalism places emphasis on the individual and self-determination, socialism places the importance on the society as a whole, assisted by the government. Though the United States operates under a capitalist system, some argue that the progressive tax code in the US, which taxes the wealthy at higher rates, and the levels of government regulation of business lean toward socialism and against the principles of capitalism, to the country's detriment.

Furthermore, some argued that the federal stimulus plan of 2009, which aimed to respond to the Great Recession by creating jobs for many Americans, was a glorified form of socialism, as it simply provided government-funded work for individuals where there was not necessarily a market demand for such work. Similar arguments were made following the passage of health care reform, known as the Patient Protection and Affordable Care Act, in 2010. Opponents of the law have argued that it represents a government takeover of the American health-care system and have been particularly critical of the fact that it included an individual mandate, requiring all Americans to have health insurance. Proponents of the legislation argue that it has provided health benefits to millions of people who could not otherwise afford it on the free market, and that in fact the law needs to be expanded.

In US politics, definitions of socialism have been clouded by the tendency of Republicans to brand any Democratic attempt to raise taxes or expand government programs as socialism, whereas very few Democrats would identify themselves or their policies as socialist. However, Vermont senator Bernie Sanders made headlines in his 2016 presidential bid by self-identifying as a democratic socialist (meaning someone who uses democracy to achieve socialism). He gained attention by advocating "Medicare for all," a plan to implement a European-style single-payer, tax-funded health care system that would replace the system of competing private health insurance companies in the United States. He also advocated free tuition at public universities. While Sanders did not win the 2016 Democratic presidential nomination, his ideas gained traction in the liberal wing of the Democratic Party, and came to be espoused by many of those seeking the party nomination in 2020. This gave ample fuel to Republican warnings that the United States was threatened by a slide toward socialism.

The debate can be expected to continue, as countries and world leaders disagree as to whether a capitalist system or a socialist system better cares for its citizens and advances the interests of humanity as a whole.

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