What is the Difference Between Capitalism and Socialism

The main difference between capitalism and socialism is that in capitalism, means of production are owned by private entities whereas, in socialism, means of production are owned by the government or public.

Capitalism and socialism are basically two opposing economic systems. The characteristic feature of capitalism is the private ownership of the means of production while that of socialism is the public ownership of the means of production. Moreover, in capitalism, the supply and demand help to set the consumer prices whereas, in socialism, the government helps to set the consumer prices.

Key Areas Covered

1. What is Capitalism
    – Definition, Characteristics
2. What is Socialism
     – Definition, Characteristics
3. What is the Difference Between Capitalism and Socialism
    – Comparison of Key Differences

Key Terms

Capitalism, Economy, Socialism

What is Capitalism?

Capitalism is an economic system where private actors (individuals and businesses) own the factors of production, i.e, entrepreneurship, natural resources, capital goods and labour. In a capitalist society, the production of goods and services depends on supply and demand in the general market. Furthermore, private property, competitive markets, capital accumulation, wage labour, a price system, and voluntary exchange, are some main characteristics of capitalism.

Economists have analyzed capitalism and identified several forms of capitalism in practice. Some of these include free-market capitalism, state capitalism and welfare capitalism. Moreover, free-market capitalism is considered as the purest form of capitalism. In such an economy, there are unrestrained private individuals; they have the power to decide what to produce and sell, where to invest and prices for goods and services. However, most countries in the modern world have a mixed form of capitalism, with some degree of government regulation.

The main advantage of capitalism is that it gives the best products for the best prices. Moreover, there is an intrinsic reward for innovation in capitalism. However, this system also has disadvantages. The private ownerships in capitalistic systems allow businesses to gain monopoly power in terms of product and labour markets. This can create a great injustice in society.

What is Socialism?

Socialism is an economic system where everyone in society equally owns the factors of production. Also, this public or state ownership takes place through a democratically elected government. In a pure socialist economic system, everyone works for wealth, and there is an equal distribution of wealth among everyone. Moreover, the underlying premise of a socialist economic system is that “what is good for one is good for all”. In other words, it highlights the fact that everyone in society should have a right to decide on how resources should be used and consumed.

Moreover, in a strictly socialist economy, the government makes all production and distribution decisions (in terms of legality), and people depend on the state for everything from food to healthcare. The government also decides the goods and services and their pricing levels.

Difference Between Between Capitalism and Socialism

Definition

Capitalism is an economic system where means of production are owned by private individuals or entities, whereas socialism is an economic system based on public ownership of the means of production.

Means of Production

Means of production are owned by private individuals and entities in capitalism, whereas means of production in socialism are owned by the government or public.

Prices

In capitalism, the supply and demand help to set the prices whereas, in socialism, the government helps to set the prices.

Equality of Income

While income in a capitalist economy is set by free-market forces, income in a socialist economy is equally distributed among everyone.

Innovation and Efficiency

High competition in capitalism encourages innovation and efficiency while there is less incentive for innovation and efficiency in socialism, especially in state-owned businesses.

Countries

The United States, Japan, Germany and Hong Kong are countries that have some form of capitalism whereas North Korea, Mexico, Sudan and Venezuela are countries that have some form of socialism. 

Conclusion

Basically, capitalism and socialism are two vastly opposing economic systems. The main difference between capitalism and socialism is that in capitalism, private entities own the means of production whereas, in socialism, the government or public owns the means of production. 

Reference:

1. Amadeo, Kimberly. “Socialism’s Pros and Cons.” The Balance, 30 Oct. 2019, Available here.
2. Amadeo, Kimberly. “How Capitalism Works Compared to Socialism and Communism.” The Balance, 9 Nov. 2019, Available here.
3. Chappelow, Jim. “Capitalism Definition.” Investopedia,  4 Nov. 2019, Available here.
4. Kenton, Will. “What Is Socialism?” Investopedia, Investopedia, 7 Oct. 2019, Available here.

Image Courtesy:

1. “Graphic depiction of capitalism” By Rcragun – Own work (CC BY 3.0) via Commons Wikimedia