Capitalism is an economic and political system in which individuals own economic resources and industry, whereas under socialism, the state plans and produces goods, and either owns or redistributes resources among its citizens. In a capitalist economy, the political system emphasizes competition for resources as a means of increasing capital (or wealth) and developing personal success. In a socialist economy, the emphasis is on distributing wealth so that individual needs are met with collective capital. There are many different versions of both capitalism and socialism, and most modern societies are a blend of the two.
Capitalism
Individualism and competition are fundamental to capitalism. In a purely capitalist society, individuals are responsible for protecting their own interests in the marketplace and within their communities. The potential success of each individual is also valued. People are encouraged to direct their talents in a way that benefits themselves, such as by starting a business or entering a highly profitable profession.
Capitalism relies on a system of checks and balances brought about through competition. Individuals who own capital can compete with others to provide goods and services to the marketplace; those who produce and effectively market goods that are in demand and at a price that people want to pay are likely to succeed. Similarly, businesses that treat their workers well and pay good wages are most likely to attract good employees, which is more likely to mean success for the business. Those who offer inferior service or fail to attract good workers will eventually fail and leave the marketplace.
Low taxes are generally a goal of capitalistic governments. In addition, government funding for public services, like social service benefits, is generally kept to a minimum. Health care systems may also be primarily funded by the private sector, requiring citizens to purchase their own health insurance or rely on an employer to provide insurance.
Types of Capitalism
When discussed theoretically, capitalism has several unique defining characteristics. In practice, however, nuance has developed and as a result, it can be separated into a variety of types:
Free-market capitalism: This type of capitalism leaves all aspects of a society to be governed by the market, with little or no intervention from the government. Here, the role of the government is limited to protect the lives and property of the citizens.
Corporate capitalism: In this type of economy, large, bureaucratic corporations dominate the economy. This allows for long-term planning and efficiency, but less innovation. Large corporations may also have an equally large influence over the government, leading to legislation designed to protect the interests of those companies.
Social-democratic or social market economy: This economic system is an attempt to balance the benefits of a free-market system with a strong social support structure. While most industries are privately owned, the government is more heavily involved in making sure that competition is fair, unemployment is low, and social welfare is provided for those who need it.
State-lead capitalism: In this economy, the means of production are owned by the government, but run in a “capitalistic” way — meaning for profit. The term is also sometimes used to describe an economy in which the government steps in to protect the interests of businesses.
Socialism
Socialism relies on governmental planning, rather than the marketplace, to distribute resources. While it is usually possible for individuals living in a socialist country to own businesses or offer professional services directly to consumers, they are usually taxed heavily on their profits. Public services are typically numerous and funded by taxpayer money. Citizens are expected to work, but the government provides services such as education, healthcare, and public transportation for free or at very low cost. Socialist countries also often have extensive social welfare systems to aid the unemployed, disabled, and elderly.
In addition to paying higher taxes, business owners in socialist countries are often expected to comply with very strict labor laws designed to protect workers against exploitation. These laws include restrictions on work hours and mandate regular vacations, sick time, and leave for numerous reasons, such as the birth or adoption of a baby. Employers are typically not expected to provide health insurance coverage, however, as medical care is usually provided through national health care systems.
Types of Socialism
There are a wide range of socialist political philosophies, including Marxism and reformism. Marxism, originating from the works of Karl Marx and Friedrich Engels, argues that socialism is the mid-point between capitalism and communism, with the means of production controlled by the working class but with the state guiding the economy on the workers’ behalf. Reformism, sometimes called social democracy, is focused on changing capitalist societies from within, through the political process and government reform.
In addition, there are a number of different economic theories of socialism:
Market socialism involves running public or cooperative companies within the free market. Rather than depending on taxes, the government takes all profits and redistributes them by paying employees, funding public institutions, and offering social services.
In a planned economy, the government owns the means of production, and plans out what will be produced, how much will be made, and the price it will sell for.
Self-managed economies depend on the collective actions of specific groups to make decisions. For example, a self-managed company may be owned by its workers, who collectively decide the direction of the business.
State socialism or state-directed economies have industries that are owned cooperatively, but which operate with some planning or direction from the government.
Communism
While it is a different economic system, many people confuse socialism with communism. Under communism, everything is owned communally, or by everyone. Ideally, there is no government or class division, and no money; each person contributes to society as best as he or she is able, and takes from that society only what he or she needs. The decisions made by that society are supposed to benefit the people as a whole, not any individual.
Historically, countries that have been called “communist” actually practiced some form of socialism, usually run by one political party. The state typically owned all forms of production and practiced very strict central planning — meaning that the government decided how all resources were to be used. Many critics argue that most governments that are called “communist” are really very different from the word’s true meaning.
Mixed Economies
Very few societies are purely capitalist or purely socialist, although most are more strongly one than the other. The United States, for example, is considered to be a capitalist society, but the Social Security system, which provides support for people who are unable to work, is socialistic. Sweden is considered by some people to be a socialist country because of its high tax rate and large welfare system, but the majority of industry in the nation is in private hands, which is capitalistic.
Critiques
The criticisms of both capitalism and socialism largely stem from different opinions about how economic forces should shape governments and societies. Some critics believe that the human spirit needs competition to fully develop, while others emphasize the need for people to cooperate with each other, ensuring that the needs of all citizens are met. Within each philosophy, there are additional critics who disagree about how each economic or political system would work best.
Critics of capitalism note that the marketplace can be unstable, presenting real dangers to the well-being of those who are not wealthy or who are otherwise vulnerable. Giving business owners free rein to set the terms of employment and to keep most of the profits from their enterprises to themselves, can establish a wealthy class which, in turn, can suppress the freedom of others. These critics also note that a purely capitalist society does not address the needs of those who are truly unable to compete either as business owners or as laborers. Without some social support systems, such as Social Security or welfare, those who cannot work or earn enough money to survive must lead a precarious existence, and may be forced to rely on family or private charity for support.
Those who criticize socialism observe that heavy taxation to provide equal social services for all citizens can discourage business owners from innovation and excellence, given that the owner won’t personally profit from his or her efforts. In addition, when the government plans the economy, some critics question whether officials and their policy advisors really understand what is best for a country’s citizens; such socialist governments may give their citizen’s no choice in deciding what kinds of services they really want or need. In addition, capitalist critiques of generous socialist social welfare programs note that these programs may discourage people from working, as people may be able to live reasonably well on government benefits rather than having to hold a job. As a result, families may slip into generational poverty, as the children may grow up feeling entitled to government support.