The debate over capitalism vs socialism is a theoretical debate between ideologies. The basic question is what the role of government should be in our lives and who should control economic resources. The best economic and political system is where there is a good balance between capitalism vs socialism.
Capitalism allows the market to do its own thing, with as little interference as possible as a free market. In theory, every person has the opportunity to succeed, but not all do.
In a socialist economic system, a central government controls the economy and the distribution of goods and services. In theory, everyone is equally taken care of. But even there, some are richer than others.
Which is most popular, capitalism or socialism?
In reality, no country is purely one or the other. Countries do not have to claim to be either one, but you can see the differences in the levels of capitalism or socialism by how they operate. Both are economic systems that aim for economic growth through how they control economic resources.
Countries may lean to one side at many levels, but every country has a little of both. There are strengths and weaknesses to both approaches. Capitalism struggles with economic inequality, and a socialist economic system may struggle with economic development.
Western European countries try to find a balance between pragmatic socialism and responsible capitalism. Economic equality remains the core issue in the capitalist debate.
What is capitalism?
A capitalist economic system where the economy is left to run itself for the most part. Private businesses provide goods and services, while prices are set on the basis of supply and demand. It is a more free-market type of ideology. People own property and have the freedom to start any business they like. The basic motivation is to make a profit from capitalism, and the feeling is that it will ultimately benefit most people.
Adam Smith is regarded as the father of Capitalism. He is quoted as saying “It is not from the benevolence of the butcher, brewer, or the baker that we expect our dinner, but from their regard for their own interest.”
Capitalism is based on profit and the idea that ultimately everyone benefits. There is a voluntary exchange between the business and the consumer, as well as the business and the employee. Both have their own interests but cannot get them without giving the other what it wants. Self-interest in both parties is the key to prosperity.
See Related: Capitalism and Homelessness: Is There a Correlation?
What is Socialism?
While the basic motive of capitalism is profit, the basic motive of socialism is the common good or social good. Socialism is an economic theory that tries to close the gap between the rich and poor through the central government. The production and distribution of goods and services are publicly owned, so profits are to be shared by all.
Communism is similar, but it goes further, seeking to eliminate private ownership entirely. This would be a completely equal system. Communism is a more extreme version of socialism.
The government controls the economy, but in theory, eventually, there would be no need for the government once true equality was achieved. Eventually, the community itself would own the infrastructure, businesses, and means of production to support society. People would work as they are able, and people would get what they need.
What is socio-capitalism?
In the United States, about half the country blames capitalism for all the world’s evils and wants socialism. The other half blames socialism, or fears it at least, and loves capitalism.
In reality, the United States has always had a healthy balance of both. Supply and demand controlling prices without much, if any, government intervention is pure capitalism and allows for a lot of freedom. The Interstate Highway system, itself a marvel of engineering, is pure socialism in that everyone contributes to building it and everyone uses it as they need.
The United States is the poster child for capitalism perhaps, but the Heritage Index of Economic Freedom does not even list the United States in its top 10. The Fraser Institute, however, has the United States coming in at No. 6. Both rated Singapore as the most capitalistic nation in the world.
Surprisingly perhaps, several nations that people in the United States might consider socialist are listed as very capitalistic on these lists. New Zealand was near the top in both, as well as Switzerland, Holland, Denmark, and the United Kingdom.
See Related: Anti-Capitalist Investing: Meaning & Can It Work?
The Ultimate goal
While those in favor of socialism or capitalism point to the downside of each and demonize each other, both really have the same ultimate goal in mind. When you compare capitalism and socialism from an objective standpoint, it is clear that both want the best society possible, and both want the best for the people in their countries.
The real difference is one of philosophy. Capitalism gives more opportunity, but that means putting more pressure on the individual to succeed or fail. Socialism controls the economy and tries to make everyone equal, and the government is basically responsible for people instead of the individual. There is more emphasis on the individual in capitalism, and more emphasis on the group’s welfare in socialism.
The United States is considered a capitalist economy country because the economy is controlled by individuals. Countries like China or Russia favor a more socialistic type of government but have some private businesses. Most western European nations tend to take a middle ground between socialism and capitalism.
Pros and cons of socialism
There are several versions of socialism. Countries like North Korea are very socialistic, but they still have a lot of poverty, and equality is not achieved. European countries like Sweden or Denmark are very socialistic, but have some capitalism and are very successful.
Socialistic governments in Europe follow a more balanced approach and achieve the intent of socialism better than some other countries.
Positives of socialist economic systems
There is a progressive tax system that creates a welfare state and a redistribution of wealth. This lowers poverty significantly. The government owns things like railroads, utilities, and things considered essential to the quality of life.
There is still room for private ownership of businesses, which is the situation in most other industries. There is more equality among people. There is more regulation for private businesses which cuts some of the excesses of free markets.
Universal health care and education are provided without cost. The government promotes the common good and social welfare. Free health care and education improve the health of everyone and that ultimately makes the entire society more productive.
From a financial standpoint, a very wealthy person can pay a lot of money in taxes and still have enough left to enjoy a nice lifestyle. The very poor person receives the benefit and is able to get their basic needs met without worry. This should lead to a more cohesive society where even those that are not fortunate can still feel like they have a fair shake in life.
There is also a benefit in public ownership, which allows utilities or health care to not have to be ruled by the profit margin. When profit is the primary motive, some services could be cut if they do not help the profit margin. In countries where that is not the primary concern, you can offer services to more people, and help people that may not be reached otherwise.
See Related: Why Is Socially Responsible Investing Important?
Negatives
In a perfect world, a socialist economy would be ideal, but unfortunately, people are not perfect and that is where problems arise.
The lack of profit motive and high taxes can discourage businesses from starting up or expanding. If the government is going to take most of your profits, you may not feel the need to try to make more profits or to take risks. The very rich can find tax havens in other countries, so there ends up being less investment in the country. The same is true for workers. When the government is meeting your needs, you may not feel the need to work or be productive.
While healthcare may be free, there will also be limits on resources available to doctors in a socialist society. This can lead to the rationing of healthcare. There are even longer waiting lists for procedures in socialized medicine than there are in private medicine.
Government failures in running and regulating businesses and welfare programs can cause great harm. Considerable government intervention is excessive regulation of business that leads to less employment and poverty.
Pros and cons of capitalism vs socialism
Many economic experts say capitalist economic systems offer the most opportunity for most people. Capitalism offers freedom to try to become wealthy, but that necessarily means there is the possibility of failure. You have the freedom to do what you want, but you are on your own if things go badly. While socialism seeks to have social equality, capitalism by its nature creates different social classes.
In capitalism, taxes are much lower, especially on businesses. The theory that businesses will invest more in the economy if they don’t have to pay as much in taxes is called the trickle-down theory. Rich people create jobs so poor people can earn money and slowly build wealth. This is the theory behind capitalism.
Pros of a capitalist economy
Freedom is the biggest positive about capitalism, but as mentioned, that has a deep downside as well. When the government controls everything, people have less power, so capitalism should also lead to more political freedom as well. The profit incentive encourages firms to seek more profit. Government interference can hinder this growth.
With a lot of freedom and profit as an incentive, businesses are willing to expand. Businesses can respond to demands and opportunities to provide things people want and need. Finding ways to be more efficient increases profit, and, as a result, businesses are more efficient and successful. Capitalism leads to innovation.
Individuals can start businesses more freely and take more chances. Employees have the incentive of income and potential rises in pay, for doing a good job.
Free markets consist of private individuals responding to what people want and need. Consumers have more choices and are free to make those choices in a capitalistic economy.
Employers want to keep profits by paying as little as possible. Employees want to make more money and do not have to accept a job that does not pay enough. That constant struggle should keep some of the excesses in check.
See Related: What Are Conscious Capitalists? Definition & Key Principles
Negatives.
The biggest negative of a capitalist economy is the inequality that naturally results. Private or corporate ownership can lead to monopoly power in a capitalist system. In capitalism there is little concern about social welfare, so people are on their own as far as food, shelter, and healthcare. Laissez faire capitalism leads to abuse, while socialist economies try to lessen that abuse.
Without regulations, businesses could become monopolies that give them the power to manipulate consumers and employees. When businesses have monopolies or too much power, they can pay lower wages while charging even higher prices. This can increase the gap between the rich and poor even more. This inequality leads to further social division and resentment of power structures.
Wealth inequities and inheritance increase the gap as well. Capitalism proponents say you get the rewards of your hard work. This may be true, but if you are born rich you naturally have more opportunities. If you are born poor, it is harder to get the same opportunities that rich people have. In those cases, there ends up being a lack of equal opportunity which capitalism was supposed to provide.
Which is the better economic system?
When looking at the differences between socialism and capitalism, we can see a lot of potential for both good and bad with both. Someone may ask “is socialism better than capitalism?” The better question would be how can you combine the two and get the best outcome.
Even capitalists admit some things should be run by the government. Even socialists admit there should be some room for private enterprise. There are no countries that have an absolute socialist or capitalist society.
A list of socialism vs capitalism pros and cons shows the strengths and weaknesses of both ideologies. Capitalism focuses on individual freedom while socialism focuses on the good of society. The question of capitalism vs socialism should not be which is better, but how can the two work together to achieve the best result? Democratic socialism combines market forces with the idea of equal distribution.
Conclusion: capitalism vs socialism for economic growth
People should have the freedom and incentive to be innovative, to create things, and to profit from their labor which a capitalist economic systems promise. Democratic socialist parties in Europe have perhaps done the best in achieving a balance between profit incentive and an effort to eliminate economic inequality. The best bet is to combine the two economic systems.
Related Resources
