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 runs through individuals who own and operate private companies. Decisions over the use of resources are made by the individual or individuals who own the company.

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 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 the business gets larger, the owners may hire managers who may or may not have any ownership stake in the firm. In this case, the managers are called the owner's 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.

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 vise 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 health care and educational systems for tax payers. Socialist systems emphasize more equal distribution of wealth among the people.

Mixed Economies

Most countries have a blended economic system including elements of both capitalism and socialism. In many socialist countries, as in Sweden, there are also still private businesses. In the U.S., there are many government-run programs that are funded through taxes, including Social Security, Medicaid, banking bailouts, and public schools.