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The Characteristics of Capitalism and Socialism

How Capitlism and Socialism Differ as Economic Systems


Capitalism and socialism are different political, economic, and social systems in use by countries around the world. The United States is usually considered a capitalist country while Sweden is usually considered a socialist country. Sweden is not socialist, however, in the true sense of the word. A more extreme form of socialism is communism. An example of a communist country is Cuba. In truth, many countries have mixed economies. They have 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 capitalist society, usually companies that incorporate are treated by the same laws as individuals. Corporations can sue and be sued. They can buy and sell property. They can perform many of the same actions as individuals.

Under capitalism, companies live by the profit motive. They exist to make money. All companies have owners and managers. Sometimes, especially in small businesses, the owners and managers are the same people. 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 business firm is maximizing shareholder wealth or the price of the stock of the business firm in order to make each owner as wealthy as possible.

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

A capitalist system is also called a free market economy or free enterprise.

What is Socialism?

Socialism is an economic system where the means of production, such as money and other forms of capital, are owned by the state or public. Under a socialist system, everyone works for wealth that is, in turn, distributed to everyone. Under capitalism, you work for your own wealth. A socialist economic system operates on the premise that what is good for one is good for all. Everyone works for their own good and the good of everyone else. The government decides how wealth is distributed among the people.

In a socialist economy, there is no market as such. The government provides for the people. The taxes are usually higher than in a capitalist system. There may be government-run health care and a complete system of government-operated education. It is a misconception that people do not pay for these services. They do pay for them through higher taxes. Socialist systems emphasize equal distribution of wealth among the people.

The Pros of Capitalism and Socialism

The pros and cons of capitalism versus socialism have been debated for hundreds of years and there is a lot of misinformation out there. Capitalism increases the opportunities in the marketplace for personal economic growth. It increases opportunities for entrepreneurs to increase their personal wealth and for societies to grow as well. Hard work is rewarded under a capitalist economy.

In a capitalist economy, consumers can work toward riches and financial freedom. A competitive market results from capitalism and consumers are presented with a wide array of products and services to choose from. Consumers and companies regulate the free market. This is often seen as one of the strengths of a capitalist society.

Socialism seeks to promote equality among people by providing them with many of the same social benefits. Examples of benefits that individuals in a socialist society are provided are educational, health care, and care for the elderly and the vulnerable. Socialism means paying for things without necessarily expecting a financial return, just for the greater good. One of the pros of socialism is that it seems to be a way of achieving slow, but peaceful, progress. That is, at least, a goal of socialism.

The Cons of Capitalism and Socialism

Capitalist economies are money-driven without much regard for people unless they are owners or shareholders of business firms. In a capitalist economy, there is fierce competition and, perhaps, unfair competition. There is a tendency, in capitalist economies, for big companies to get bigger and for monopolistic behavior to occur. Unfair labor practices may occur since companies are driven by the profit motive. Since capitalism requires continual growth, environmental damage may occur as the resources of the earth are depleted. Some say capitalism makes the rich richer.

Socialism is economically inefficient as it does not reward entrepreneurs. Instead of rewarding entrepreneurs for creating wealth, it punishes them by making them pay higher taxes. Socialism can actually lower the living standards of all by not rewarding work and by making public assistance available to more than the neediest.

Many countries have mixed economic system with elements of both capitalism and socialism. In the U.S., predominantly a capitalist system, there are still social programs such as social security and Medicare. In many socialist countries, there are private business firms.

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