Differences Between Capitalism and Socialism

Differences Between Capitalism and Socialism

Image by © The Balance 2018

Capitalism and socialism are two different political, economic, and social systems blended together by countries around the world. Sweden is often considered a strong example of a socialist society, while the United States is usually considered a prime example of a capitalist country.

In practice, however, Sweden is not strictly socialist, and the United States is not strictly capitalist. Most countries have mixed economies with economic elements of both capitalism and socialism.

What Is Capitalism?

Capitalism is an economic system where the means of production are owned by private individuals. "Means of production" refers to resources including money and other forms of capital. Under a capitalist economy, the economy is substantially run by individuals who own and operate private companies. Decisions over the use of resources are made by the individual or individuals who own the companies.

In a theoretical capitalist society, companies that incorporate are treated by the same laws as individuals. Corporations can sue and be sued; they can buy and sell property, and they can perform many of the same actions as individuals.

Under capitalism, companies live by the motivation for profit. They exist to make money. All companies have owners and managers. In small businesses, the owners and managers are generally the same people, but as businesses grow, the owners may hire managers, who may or may not have any ownership stake in the firm. In those cases, the managers are called the owners' "agents."

The job of the management is more complex than just making a profit. In a capitalist society, the goal of the corporation is maximizing shareholder wealth.

Under capitalism, it's the government's job to enforce laws and regulations to make sure there is a level playing field for privately run companies. The amount of governing laws and regulations in a particular industry generally depends on the potential for abuse in that industry.

Pros and Cons of Capitalism

Pros
  • Encourages competition

  • Provides consumers with choices

  • Potential for economic growth

Cons
  • More inequality

  • Lack of social safety net

  • Opportunities for corruption

Pros Explained

Encourages competition: In capitalist societies, it's survival of the fittest when it comes to businesses. New businesses are frequently created and compete with others in the same industry. A competitive market means that higher-quality goods and services are being produced and provided.

Provides consumers with choices: One byproduct of the competitive market is that consumers have more options to choose the products and services they prefer.

Potential for economic growth: With more businesses and more choices, there's more spending by consumers, which means that companies can hire more. All of these factors can lead to economic expansion.

Cons Explained

More inequality: Again, the basic premise of capitalism is survival of the fittest. People who don't have in-demand skills may have a hard time catching up once they fall behind. The gap between the rich and the poor widens; the rich get richer, and the poor get poorer.

Lack of social safety net: There might not be as many provisions for social benefits programs such as universal health care in capitalist societies.

Opportunities for corruption: In capitalism, there isn't always a separation of government and private business. That means wealthy business owners may lobby for favor among politicians, further increasing the gap between those with power and those without.

What Is Socialism?

Socialism is an economic system where the means of production, such as money and other forms of capital, are owned to some degree by the public (via the state). Under a socialist system, everyone works for wealth that is in turn distributed to everyone.

A socialist economic system operates on the premise that what is good for one is good for all and vice versa. Everyone works for their own good and for the good of everyone else. The government decides how wealth is distributed among public institutions.

In a theoretical socialist economy, there is a more limited free market than in an archetypal capitalist economy, and thus the taxes are usually higher than in a capitalist system. There are government-run healthcare and educational systems for taxpayers. Socialist systems emphasize more equal distribution of wealth among the people.

Pros and Cons of Socialism

Pros
  • Reduces income inequality

  • Social stability and infrastructure

  • Greater rights for workers and individuals

Cons
  • Depends on cooperation

  • Government may abuse power

  • Fewer rewards for innovation

Pros Explained

Reduces income inequality: In socialism, wealth is distributed among the population, and relative poverty is reduced.

Social stability and infrastructure: With programs such as universal basic income, universal health care, and tax-funded education, individuals may be less likely to fall upon hard times.

Greater rights for workers and individuals: Socialism protects workers from exploitation, because they own the means of production. There are often strict labor laws in place as well.

Cons Explained

Depends on cooperation: In socialism, the idea is that everyone is working together toward the same goals. However, there is no guarantee that individuals will always want to cooperate with each other.

Government may abuse power: The government decides how wealth should be distributed, but a corrupt government could mean that resources and wealth are not distributed fairly.

Fewer rewards for innovation: Socialism doesn't depend on competition, which means that workers and businesses might not be interested in continually improving their products and services.

Mixed Economies

Most counties have a blended economic system that includes elements of both capitalism and socialism. In many socialist countries—like Sweden, for example—there are still private businesses as well. 

In the U.S., there are many government-run programs that are funded through taxes, including Social Security, Medicaid, banking bailouts, and public schools.

Frequently Asked Questions

Who invented capitalism, and when was it invented?

The Scottish political analyst and philosopher Adam Smith is often credited with having invented modern capitalist theory in the 18th century. One of his most famous works, "An Inquiry into the Nature and Causes of the Wealth of Nations," was published in 1776.

What is crony capitalism?

Crony capitalism is a form of corruption that may be prevalent in some capitalist societies. In crony capitalism, the government or government agencies show favoritism to certain businesses, which helps them get ahead of their competitors.

What is late-stage capitalism?

The concept of late-stage capitalism focuses on the inequalities that are present in modern capitalistic societies. The term is used to criticize capitalism as it has evolved from its original free-market-based economic system to the widening gap between social classes it has caused.

What is democratic socialism?

Democratic socialism is a modern form of socialism that is used in several countries around the world, including Sweden, France, and Germany. It places a larger focus on social programs, such as free university education and state-provided health care.

What is the difference between socialism and fascism?

The ideologies of socialism and fascism both were created in response to the downfall of capitalism. Socialism aims to eliminate economic inequality through shared resources and the shared goal of working toward the "greater good." Fascism, on the other hand, works toward its idea of the "greater good" using forcible suppression, often leading to nationalism, xenophobia, and social Darwinism.