Capitalism vs Socialism

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Capitalism and socialism are somewhat opposing schools of thought in economics. The central arguments in the socialism vs. capitalism debate are about economic equality and the role of government. Socialists believe economic inequality is bad for society, and the government is responsible for reducing it via programs that benefit the poor (e.g., free public education, free or subsidized healthcare, social security for the elderly, higher taxes on the rich). On the other hand, capitalists believe that the government does not use economic resources as efficiently as private enterprises do, and therefore society is better off with the free market determining economic winners and losers.

The U.S. is widely considered the bastion of capitalism, and large parts of Scandinavia and Western Europe are considered socialist democracies. However, the truth is every developed country has some programs that are socialist.

An extreme form of socialism is communism.

See also Communism vs. Socialism.

Comparison chart

Capitalism versus Socialism comparison chart
	Capitalism	Socialism
Key Elements	Competition for ownership of capital drives economic activity & creates a price system that determines resource allocation; profits are reinvested in the economy. "Production for profit": useful goods and services are a byproduct of pursuing profit.	Calculation in kind, Collective ownership, Cooperative common ownership, Economic democracy Economic planning, Equal opportunity, Free association, Industrial democracy, Input–output model, Internationalism, Labour voucher, Material balancing.
Ideas	Laissez-faire means to "let it be"; opposed to government intervention in economics because capitalists believe it introduces inefficiencies. A free market produces the best economic outcome for society. Government should not pick winners and losers.	All individuals should have access to basic articles of consumption and public goods to allow for self-actualization. Large-scale industries are collective efforts and thus the returns from these industries must benefit society as a whole.
Political System	Can coexist with a variety of political systems, including dictatorship, democratic republic, anarchism, and direct democracy. Most capitalists advocate a democratic republic.	Can coexist with different political systems. Most socialists advocate participatory democracy, some (Social Democrats) advocate parliamentary democracy, and Marxist-Leninists advocate "Democratic centralism."
Key Proponents	Richard Cantillon, Adam Smith, David Ricardo, Frédéric Bastiat, Ludwig von Mises, Fredrich A. Hayek, Murray N. Rothbard, Ayn Rand, Milton Friedman.	Charles Hall, François-Noël Babeuf, Henri de Saint-Simon, Robert Owen, Charles Fourier, Louis Auguste Blanqui, William Thompson, Thomas Hodgskin, Pierre-Joseph Proudhon, Louis Blanc, Moses Hess, Karl Marx, Friedrich Engels, Mikhail Bukinin.
Social Structure	Classes exist based on their relationship to capital: the capitalists own shares of the means of production and derive their income in that way while the working class is dependent on wages or salaries. Large degree of mobility between the classes.	Class distinctions are diminished. Status derived more from political distinctions than class distinctions. Some mobility.
Religion	Freedom of religion.	Freedom of religion, but usually promotes secularism.
Philosophy	Capital (or the "means of production") is owned, operated, and traded in order to generate profits for private owners or shareholders. Emphasis on individual profit rather than on workers or society as a whole. No restriction on who may own capital.	From each according to his ability, to each according to his contribution. Emphasis on profit being distributed among the society or workforce to complement individual wages/salaries.
Economic System	Market-based economy combined with private or corporate ownership of the means of production. Goods and services are produced to make a profit, and this profit is reinvested into the economy to fuel economic growth.	The means of production are owned by public enterprises or cooperatives, and individuals are compensated based on the principle of individual contribution. Production may variously be coordinated through either economic planning or markets.
Definition	A theory or system of social organization based around a free market and privatization in which ownership is ascribed to the individual persons. Voluntary co-ownership is also permitted.	A theory or system of social organization based on the holding of most property in common, with actual ownership ascribed to the workers.
Discrimination	Government does not discriminate based on race, color, or other arbitrary classification. Under state capitalism (unlike free-market capitalism), government may have policies that, intentionally or not, favor the capitalist class over workers.	The people are considered equal; laws are made when necessary to protect people from discrimination. Immigration is often tightly controlled.
Economic Coordination	Relies principally on markets to determine investment, production, and distribution decisions. Markets may be free-markets, regulated-markets, or may be combined with a degree of state-directed economic planning or planning within private companies.	Planned-socialism relies principally on planning to determine investment and production decisions. Planning may be centralized or decentralized. Market-socialism relies on markets for allocating capital to different socially-owned enterprises.
Free Choice	All individuals make decisions for themselves. People will make the best decisions because they must live with the consequences of their actions. Freedom of choice allows consumers to drive the economy.	Religion, jobs, & marriage are up to the individual. Compulsory education. Free, equal access to healthcare & education provided through a socialized system funded by taxation. Production decisions driven more by State decision than consumer demand.
Political Movements	Classical liberalism, social liberalism, libertarianism, neo-liberalism, modern social-democracy, and anarcho-capitalism.	Democratic socialism, communism, libertarian socialism, social anarchism, and syndicalism.
Ownership Structure	The means of production are privately-owned and operated for a private profit. This drives incentives for producers to engage in economic activity. Firms can be owned by individuals, worker co-ops, or shareholders.	The means of production are socially-owned with the surplus value produced accruing to either all of society (in Public-ownership models) or to all the employee-members of the enterprise (in Cooperative-ownership models).
Private Property	Private property in capital and other goods is the dominant form of property. Public property and state property play a secondary role, and there might also be some collective property in the economy.	Two kinds of property: Personal property, such as houses, clothing, etc. owned by the individual. Public property includes factories, and means of production owned by the State but with worker control.
Examples	The modern world economy operates largely according to the principles of capitalism. The UK, US, and Hong Kong are mostly capitalist. Singapore is an example of state capitalism.	Union of Soviet Socialist Republics (USSR): although the actual categorization of the USSR's economic system is in dispute, it is often considered to be a form of centrally-planned socialism.
View of war	War, although good for select industries, is bad for the economy as a whole. It wastefully diverts resources away from producing that which would raise consumers' standard of living (i.e., that which is demanded by consumers), toward destruction.	Opinions range from prowar (Charles Edward Russell, Allan L. Benson) to antiwar (Eugene V. Debs, Norman Thomas). Socialists tend to agree with Keynesians that war is good for the economy by spurring production.
Variations	Free-market capitalism (also known as laissez-faire capitalism), state capitalism (also known as neo-mercantilism).	Market socialism, communism, state socialism, social anarchism.
Way of Change	Fast change within the system. In theory, consumer demand is what drives production choices. Government can change the rules of conduct and/or business practices through regulation or ease of regulations.	Workers in a socialist state are the nominal agent of change rather than any market or desire on the part of consumers. Change by the State on behalf of workers can be swift or slow, depending on change in ideology or even whim.
Means of control	Capitalism promotes a "society of contract" as opposed to a "society of status." Production decisions are driven by consumer demand and resource allocation is driven by a price system arising from competition for profit.	Usage of a government.
Earliest Remnants	The ideas of trade, buying, selling, and such have been around since civilization. Free-market, or lasseiz-faire capitalism was brought to the world during the 18th century by John Locke and Adam Smith, aiming for an alternative to feudalism.	In 1516, Thomas More write in "Utopia" about a society based around common ownership of property. In 1776, Adam Smith advocated the labor theory of value, ignoring the previous Cantillonian view that prices are derived from supply and demand.
View of the world	Capitalists see capitalistic and market-based societies as beacons of freedom, priding themselves on permitting social and economic freedoms not experienced under Communism and Fascism. The focus is on individualism as opposed to nationalism.	Socialism is a movement of both the worker and middle-class, all for a common democratic goal.

Tenets

One of the central arguments in economics, especially in the socialism vs. capitalism debate, is the role of the government. A capitalist system is based on private ownership of the means of production and the creation of goods or services for profit. A socialist system is characterized by social ownership of the means of production, e.g., cooperative enterprises, common ownership, direct public ownership, or autonomous state enterprises.

Proponents of capitalism espouse competitive and free markets and voluntary exchanges (instead of the forced exchange of labor or goods). Socialists advocate greater government involvement, but the opinions of supporters differ in terms of types of social ownership they advocate, the degree to which they rely on markets versus planning, how management is to be organized within economic enterprises, and the role of the state in regulating businesses to ensure fairness.

Criticisms of Socialism and Capitalism

Criticisms of Capitalism

"When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first, capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based." —French economist Thomas Piketty in Capital in the Twenty-First Century

Capitalism is criticized for encouraging exploitative practices and inequality between social classes. In particular, critics argue that capitalism inevitably leads to monopolies and oligarchies, and that the system's use of resources is unsustainable.

In Das Kapital, one of the most famous critiques of capitalism, Karl Marx and Friedrich Engels claim that capitalism centers profits and wealth in the hands of the few who use the labor of others to gain wealth.

The concentration of money (capital and profits) in capitalism can lead to the creation of monopolies or oligopolies. As postulated by British economist John Maynard Keynes, oligopolies and monopolies can then lead to oligarchies (government by a few) or fascism (the merging of government and corporations with monopolistic power). Laissez faire capitalism, as espoused in 19th century U.S. business growth, did reach the point where monopolies and oligopolies were formed (e.g., Standard Oil), which gave rise to antitrust laws, trade union movements, and legislation to protect workers.

Critics such as Richard D. Wolff and environmental groups also state that capitalism is destructive of resources both natural and human, as well as disruptive to economic stability, though this is actually considered a plus in the "creative destruction" facet of Joseph Schumpeter's economic theories. The unplanned, almost chaotic, factors of a capitalist economy, with its recessions, unemployment, and competition, are often seen as negative forces. As defined by historian Greg Grandin and economist Immanuel Wallerstein, the destructive nature of capitalism moves beyond workers and communities to natural resources, where the pursuit of growth and profits tends to ignore or overwhelm environmental concerns. When linked to imperialism, as in the works of Vladimir Lenin, capitalism is also seen as a destroyer of cultural differences, spreading a message of "sameness" across the globe that undermines or drowns out local traditions and mores.

Criticisms of Socialism

"Socialist policy is abhorrent to the British ideas of freedom. Socialism is inseparably interwoven with totalitarianism and the object worship of the state. It will prescribe for every one where they are to work, what they are to work at, where they may go and what they may say. Socialism is an attack on the right to breathe freely. No socialist system can be established without a political police. They would have to fall back on some form of Gestapo, no doubt very humanely directed in the first instance." —British Prime Minister Winston Churchill in 1945

Critics of socialism tend to focus on three factors: the loss of individual freedom and rights, the inefficiency of planned or controlled economies, and the inability to establish the constructs socialism theorizes are ideal.

Based on long-term growth and prosperity, planned or controlled economies typical of socialist states have fared poorly. Austrian economist Friedrich Hayek noted that prices and production quotas would never be adequately supported by market information, since the market in the socialist system is basically non-reactive to prices or surpluses, only to shortages. This would lead to irrational and ultimately destructive economic decisions and policies. Ludwig von Mises, another Austrian economist, argued that rational pricing is not possible when an economy has only one owner of goods (the state), as this leads to imbalances in production and distribution.

Because socialism favors the community over the individual, the loss of freedoms and rights is deemed undemocratic at best and totalitarian at worst. Objectivist philosopher Ayn Rand stated that the right to private property is the fundamental right, for if one cannot own the fruits of one's labors, then the person is always subject to the state. A similar argument raised by supporters of capitalism, and therefore often by critics of socialism, is that competition (considered a basic human trait) cannot be legislated away without undermining the will to achieve more, and that without proper compensation for one's efforts, the incentive to do well and be productive (or more productive) is taken away.

Socialism is often criticized for tenets that are not socialist, but rather communist or a hybrid of the two economic systems. Critics point out that the "most socialist" regimes have failed to deliver adequate results in terms of economic prosperity and growth. Examples cited range from the former U.S.S.R. to current regimes in China, North Korea, and Cuba, most of which were or are more on the communist end of the spectrum.

Based on historical evidence from communist governments, to date, extensive famine, severe poverty, and collapse are the end results of trying to control an economy based on "5-year plans" and assigning people to jobs and tasks as if the country were a machine rather than a society. A common observation about particularly restrictive socialist or communist economies is that they eventually develop "classes" with government officials as "the rich," a fringe-like "middle class," and a large "lower class" composed of workers, which supporters of capitalism are often quick to point out are the same structures socialism eschews as "exploitative."

Capitalism vs. Socialism Timeline

1776 - Adam Smith publishes The Wealth of Nations, establishing an economic point of view on history, sustainability, and progress.

1789 - The French Revolution espouses a philosophy of equality for all, building upon the tenets also included in the U.S. Declaration of Independence and the Constitution.

1848 - Karl Marx and Frederich Engels publish The Communist Manifesto, defining the social struggle between the moneyed classes and workers, the former exploiting the latter.

1864 - International Workingman's Association (IWA) is founded in London.

1866 - The U.S. National Labor Union is founded.

1869 - The Social Democratic Worker's Party forms in Germany. Socialism becomes increasingly linked to trade unions in the 1870s, particularly in France, Austria, and other countries in Europe.

1886 - The American Federation of Labor (AFL) is created. (It will later merge with the Congress of Industrial Organizations (CIO) in 1955.)

1890 - The Sherman Antitrust Act passes, with the aim of encouraging competition against large and powerful corporations.

1899 - The Australian Labor Party becomes the first elected socialist party.

1902 - The British Labour Party wins its first seats in the House of Commons.

1911 - John D. Rockefeller's Standard Oil is broken up under antitrust laws. After the breakup of Standard Oil, Rockefeller's wealth rises until he becomes the world's first billionaire.

1917 - The Russian Revolution overthrows the Tsarist regime and imposes a Communist government, led by Vladimir Lenin. Europe and the U.S. react to the takeover with concerns that Communism will sweep away democracy.

1918 - The German Revolution establishes the Weimar Republic with the Social Democratic Party nominally in charge, facing challenges by communist supporters and National Socialists.

1922 - Benito Mussolini assumes control of Italy, calling his blend of corporations and government power "fascism."

1924 - The British Labour Party forms its first government under Prime Minister Ramsay MacDonald.

1926-1928 - Joseph Stalin consolidates power in Russia, emerging as the leading force for communism around the world.

1929 - The Great Depression begins, plunging the world into an unprecedented economic slowdown. Capitalism is blamed for its excesses, and socialist parties of varying ideological stances emerge, primarily in Europe.

1944 - The Canadian province of Saskatchewan forms the first socialist government in North America.

1945 - The British Labour Party returns to power, ousting Prime Minister Winston Churchill.

1947 - China is taken over by a communist regime led by Mao Zedong.

1959 - Fidel Castro overthrows the Fulgencio Batista regime in Cuba, then surprisingly announces an alliance with the Communist Party of the U.S.S.R.

1960s - 1970s - Nordic countries, such as Norway, Denmark, Sweden, and Finland, increasingly blend socialism and capitalism to develop higher standards of living, with particular progress in education, health care, and employment.

1991 - The Soviet Union (U.S.S.R.,) collapses, and former Soviet republics attempt to throw off their communist past to explore democratic and capitalist systems, with limited success.

1995 - China begins capitalist practices under the Communist Party's auspices, launching the fastest-growing economy in history.

1998 - Hugo Chávez is elected President of Venezuela and embarks on a nationalization program, leading a social democratic movement in Latin America led by Bolivia, Brazil, Argentina, and others.

2000s - Corporate profits set record highs nearly every year, while real wages stagnate or decline from 1980 levels (in real dollars). French economist Thomas Piketty's Capital in the Twenty-First Century, which analyzes economic inequality under capitalism, becomes an international bestseller.