Socialism and capitalism refer to two forms of economic systems out of the many that exist. An economic system refers to allocation, production and distribution of resources by the government of a country. The difference between these two economic systems is that of the level of government intervention with socialism being placed at maximum and capitalism at a minimum.
Through this article, the author has made an attempt to examine both of these economic systems and analyses the difference between the two.
When it comes to socialism, there can be variations in the way it is followed, but the means of production are always equally owned. In some countries, the elected government owns and regulates the industries and businesses while in some countries, worker cooperatives exist that own production. Further, in some socialist economies, private ownership of property and enterprises is allowed but it is subject to government regulations and high taxes. In all of these models, the focus is on equal distribution of resources and wealth so as to provide an “even playing field”. The reasoning behind this is that everyone should be given an equal benefit for the hard work that has been put in.
The prices are controlled and regulated by the government and cooperative bodies. The government usually decides prices on the basis of need; resources that fall under basic needs are provided at low prices so that everyone can afford those. Socialism works on a mantra that states, “From each according to his ability, to each according to his contribution.” This means that every person in the country is entitled to a share in the collective production of the economy which includes the wealth and goods and this share is distributed on the basis of one’s contribution to production.
The proponents of socialism believe that the socio-economic classes of “rich” and “poor” should be eliminated and for that to be possible, the government has to be the primary employer. When the government employs the general workforce, unemployment tends to eliminate even during the times of economic downturns.
It is believed that social welfare is more important than profit maximisation and hence, such goods are produced which complete the basic needs of the society. The three questions of economics – what to produce, how to produce and for whom to produce are all determined by the government which is often termed as centralized planning. The end product is that goods are fairly distributed and social inequality is diminished, slowly paving way for elimination of socio-economic classes.
One of the major features of socialism is that healthcare and education facilities are provided by the government at minimum costs, sometimes even for free. The State assumes the responsibility of providing its citizens with essential services so that no citizen is deprived of basic needs due to inequality.
Therefore, socialism is that economic system in which the State owns the property, business, enterprises and capital and distributes the wealth and resources so as to maintain social equality in the society with a view to providing equal opportunity and outcome.
Capitalism, on the other hand, is an economic system where private ownership is given primary importance with the State only assuming the role of regulation. The means of production are owned by the private individuals and the market forces of supply and demand determine the kind and the number of goods to be produced and services to be provided. The focus is on a competitive economy; the people who can afford the resources, get the resources. Business owners do not concern themselves with social welfare and their only aim is profit maximisation. Therefore, quality is given importance so that people continue to buy their products and attempts are made to keep the manufacturing costs minimum so that profits are maximized.
The government does not play any role in determining the prices of goods and services and firms have free play in terms of setting the market prices. It is the forces of supply and demand that eventually determine the prices. If the demand for a particular good is high, its price will also remain high and vice versa.
The purest form of capitalism is termed as a laissez-faire economy and it refers to a system where no restraints are placed on individuals if they wish to participate in the economy; they are free to invest their money and produce what they wish at whatever prices they wish. However, a pure laissez-faire economy is not reasonable and most capitalist economies employ some amount of regulations on business investments and enterprises.
As capitalist economies are based on the forces of supply and demand, there exists an everlasting competition between the firms thereby promoting efficiency and innovation. Every firm wishes to increase the demand for its products and hence importance is placed upon producing quality goods and introducing innovative goods.
The general workforce is not employed by the State and due to this, in times of economic downturns, unemployment keeps on increasing. Employment opportunities in capitalist economies are provided when there is a need in the market which is determined by demand; if the demand decreases, the producers fire the workers and unemployment prevails.
Everyone in the economy is rewarded on the basis of their personal wealth. The capitalists are only concerned with selling their products and no efforts are ever made to bridge the gap between the rich and the poor.
Healthcare and education facilities are also provided by the private sector which charge high prices and only the rich are able to afford the luxuries. Therefore, the major problem of capitalism is income inequality as everything is determined by cut-throat competition and the focus is only on profit maximization.
Analyzing the difference
While a myriad of differences exists between the two economic systems, it is to be noted that in the real world there are a very few countries that are purely socialistic or capitalistic; since most countries are mixed economies, they fall in-between capitalism and socialism.
The crux of the difference between the two systems is the extent of government intervention in the economy. In a socialistic economy, the government owns the assets and manages the co-operatives; it functions in an egalitarian manner to facilitate equality, by redistributing resources from the rich to the poor. The state controls the means of production and distribution, which ensures that there is equality of opportunity in the society and the resources aren’t hoarded by any one individual by way of monopolizing the market.
In a capitalistic market, however, most assets are owned by private firms and the State only regulates their operation to an extent. Goods and services are produced (by private or corporate-owned companies) with the main objective of profit maximization. The market comprises of buyers and sellers, and it functions on a demand-supply basis. Needless to say, a capitalistic market does not have its pillars on the foundations of equality. Since the goal of the private firms is to earn profit and reinvest this profit back into the market, equal distribution of resources is not paid heed to.
Proponents of capitalism often argue that the manifestation of inequality is necessary in order to prevent economic development from stagnating and facilitating innovation. This argument, in turn, finds its basis on the belief that socialistic markets are less efficient than capitalistic markets. State ownership of assets and its control of the means of production provide the workers with a sense of security which breeds complacency. In other words, the basic needs of the workers are met and people living in it are given a social safety net. This leaves little room for re-evaluation and innovation since people have less to strive for. But the competition in a capitalistic economy compels the firms to stay on their feet in order to survive. Profit maximization serves as a motivation to nurture innovation and increase efficiency, by encouraging the production of desirable goods.
Having said this, the aforementioned social safety net provided to the people in a socialistic economy ensures that the basic necessities of the employees are met with by the government. In a fluctuating market scenario, which consistently undergoes uncertain periods of boom and shortfalls, it ensures employment and security to the people. On the other hand, workers and private owners in a capitalistic economy are faced with unemployment and heavy losses in times of recession. A classic example of this would be the Great Depression during the 1930s when the level of unemployment was as high as 25%.
Moreover, consumer consent in a capitalistic economy is of primary importance, considering the fact that the market is largely governed by the law of demand. As the demand for a particular product increases, its supply increases; this enables the producers to exploit their position by charging much higher prices. In a state-controlled market, the government fixes the prices for products, which ensures fair play in the market.
However, in the same breath it can be argued that while the government imposes very high progressive taxes for public services, taxes in a capitalistic economy are based on individual income and hence limited.
Therefore, it is not feasible for any country to be completely socialistic or capitalistic. The most basic needs should be provided by the State to people who cannot afford them and a free play of the market is equally important to ensure efficiency and innovation. The State should not be expected to provide all the resources to its citizens consequently making them inefficient, but at the same time, the basic resources should not be left in the hands of the capitalists to be governed. Hence, most economies opt to be mixed economies so that nowhere a pure equality or inequality exists.