Capitalism vs. Socialism: An Overview

The terms capitalism and socialism are both used to describe economic and political systems. On a theoretical level, both of these terms also describe specific schools of economic thought. One of the most fundamental differences between the systems of capitalism and socialism lies in the scope of government intervention within an economy.

The capitalist economic model relies on free market conditions for the creation of wealth. The production of goods and services is based on supply and demand in the general market. This economic structure is referred to as a market economy.

In a socialist economic model, the production of goods and services is either partially or fully regulated by the government. This is referred to as central planning, and the economic structure that is created is known as a planned economy or聽a command economy.

Key Takeaways

  • The capitalist economic model relies on free market conditions for the creation of wealth; the production of goods and services is based on supply and demand in the general market.
  • In a socialist economic model, the production of goods and services is either partially or fully regulated by the government; this is referred to as central planning, and the economic structure that is created is known as a planned economy or聽a command economy.
  • Most countries are mixed economies, falling somewhere on the spectrum between pure capitalism and pure socialism.

Capitalism

In a capitalist economy, property and businesses are owned and controlled by individuals. The production and prices of goods and services are determined by how much demand they generate and how difficult they are to produce.

Theoretically, this dynamic drives companies to make the best products they can for as cheaply as they can; capitalism is intended to drive business owners to find more efficient ways of producing quality goods. For consumers, this dynamic is intended to create a system wherein they have the freedom to choose the best and cheapest products.

This emphasis on efficiency takes priority over equality. An equal distribution of goods and services among all members of a society is of little concern within a capitalist system. According to the economic theories that underpin capitalism, inequality is the driving force that encourages innovation, which results in economic development.

In a capitalist economy, the state does not directly employ the workforce. This leads to high levels of unemployment during times of economic recession.

1:43

What is Socialism?

Socialism

In a socialist economy, the state owns and controls the major means of production. In some socialist economic models, worker cooperatives own and operate the primary means of production. A worker cooperative is a firm that is owned and self-managed by its workers. Other socialist economic models allow individual ownership of enterprise and property, albeit with higher taxes and a higher degree of government controls.

The primary concern of the socialist model of economics is an equitable distribution of wealth An equitable distribution of wealth is meant to ensure that all members of a society have an equal opportunity to attain certain economic outcomes. To achieve this, the state intervenes in the labor market.

In a socialist economy, the state is one of the primary employers. During times of economic hardship, the socialist state can order hiring, so there is close to full employment even if workers are not performing tasks that are particularly in demand from the market.

In addition to capitalism and socialism, the other major school of economic thought is communism. Many tenets of communism and socialism stand in opposition to capitalism, but there are important distinctions between socialism and communism.

Special Considerations

Most modern economies are mixed economies. This means they exist somewhere on a continuum between pure capitalism and pure socialism, with the majority of countries practicing a mixed system of capitalism wherein the government regulates and owns some businesses and industries.

In the purest form of a capitalistic system (sometimes referred to as laissez-faire capitalism), private individuals are unrestrained, and the economy operates without any government checks or controls. Private individuals and businesses may determine where to invest, what to manufacture and sell, and the prices of goods and services.

In a purely socialist system, all means of production are collective or state-owned.

Some countries incorporate both the private sector system of capitalism and the public sector enterprise of socialism to overcome the disadvantages of both systems. In these economies, the government intervenes to prevent any individual or company from having a monopolistic stance and undue concentration of economic power. Resources in these systems may be owned by both the state and by individuals.