Capitalism,Socialism,Communism...Whatisthedifference?
Capitalismandsocialismaresomewhatopposingschoolsofthoughtineconomics.Thecentralargumentsinthe
socialism/capitalismdebateareabouteconomicequalityandtheroleofgovernment:socialistsbelieveeconomicinequalityis
badforsocietyandthegovernmentisresponsibleforreducingitviaprogramsthatbenefitthepoor.e.g.freepubliceducation,
freeorsubsidizedhealthcare,socialsecurityfortheelderly,highertaxesontherich.Ontheotherhand,capitalistsbelievethat
governmentdoesnotuseeconomicresourcesasefficientlyasprivateenterpriseandthereforesocietyisbetteroffwiththe
freemarketdeterminingeconomicwinnersandlosers.Thislackofgovernmentinvolvementintheeconomyiscalled“laissez
faire”(literally“letitbe”)
TheU.S.iswidelyconsideredthedefenderofcapitalismandlargepartsofScandinaviaandWesternEuropearesocialist
democracies.However,thetruthiseverydevelopedcountryhassomeprogramsthataresocialist.
Capitalism:
Atitsroot,capitalismisaneconomicsystembasedonthreethings:wagelabor(workingforawage),
privateownershipofthemeansofproduction(thingslikefactories,machinery,farms,andoffices),
andproductionforexchangeandprofit(youpayforwhatyouget).Whilesomepeopleownmeansof
production,orcapital,mostofusdon'tandsotosurviveweneedtosellourabilitytoworkinreturn
forawage.
Intermsofgovernmentinvolvementintheeconomy,capitalistsbelieveintheprincipleof“Laissez‐
faireeconomics,whichmeansto"letitbe".Therefore,capitalismisopposedtogovernment
interventionineconomicsbecausecapitalistsbelieveitisinefficient.Rather,afreemarketproducesthebesteconomic
outcomeforsociety.Govt.shouldnotpickwinnersandlosers.
InfluentialLeader:AdamSmithisoftenidentifiedasthefatherofmoderncapitalism.Inhisbook,
WealthofNations,hediscussestheimportanceofdivisionoflaborandfreetrade,thelimitson
governmentintervention,allsignifythemomentwheneconomicstransitionstothe“modern.”
Socialism
Socialismisaneconomicsystemwherethemeansofproduction,suchasmoneyandotherformsofcapital,areownedbythe
state(thegovernment)orpublic.Underasocialistsystem,everyoneworksforwealththatis,inturn,
distributedtoeveryone.Undercapitalism,youworkforyourownwealth.Asocialisteconomicsystem
operatesonthepremisethatwhatisgoodforoneisgoodforall.Everyoneworksfortheirowngood
andthegoodofeveryoneelse.Thegovernmentdecideshowwealthisdistributedamongthepeople.
Inasocialisteconomy,thegovernmentprovidesforthepeople.Thetaxesareusuallyhigherthanina
capitalistsystem.Theremaybegovernment‐runhealthcareandacompletesystemofgovernment‐
operatededucation.Itisamisconceptionthatpeopledonotpayfortheseservices.Theydopayfor
themthroughhighertaxes.Socialistsystemsemphasizeequaldistributionofwealthamongthepeople.
Communism
Inaway,communismisanextremeformofsocialism.Manycountrieshavedominantsocialistpoliticalpartiesbutveryfew
aretrulycommunist.Thekeydifferencesbetweensocialismandcommunismareduetothefact
thatsocialismissimplyaneconomicsystem,whilecommunismisbothapolitical/governmental
systemandaneconomicsystem.Thesecondmaindifferencebetweensocialismandcommunism
isthatwithincommunismthedistributionofgoodsandservicestakesplaceaccordingtothe
individualsneeds,whileinasocialistsystem,goodsandservicesaredistributedbasedon
individualefforts(e.g.payingtaxes).Finally,withinasocialistsystem,capitalismCANexist(e.g.
privatelyownedcompanies),whileinacommunistsystemcapitalismCANNOTexist.
InfluentialLeaderinthedevelopmentofSocialistandCommunisttheory:
Germaneconomist,philosopher,andrevolutionist,andoneofthemostoriginalandinfluential
thinkersofmoderntimes,KarlMarxproducedmuchofthetheoryofmodernsocialismand
communism.InhispublicationtheCommunistManifesto,Marxdeclaredthatallhistorywasthe
historyofclassstruggles.Undercapitalism,thestrugglebetweentheworkingclassandthebusiness
classwouldendinanewsociety,acommunistone.
Capitalism
Economicsystemwherethemeansofproductionare
ownedbyprivateindividuals
Governmentcontrolandinterferenceataminimum
NegativesofCapitalism
Privateownershipmeansproductionleadsinequality
ofwealth–richgetricher,poorgetpoorer
Competitionwastefulbecauseofhighcostof
advertising
Nogovernmentagencycontrollingproduction,creates
wastebyoverproductionandduplicationofeffort
Profitisthemotivationofproduction.Scarce
resourceswastedongoodsandservicesthatserveno
usefulpurpose
Dollarvote(onevotesforthemanufactureofgoodby
buyingthem),thepoorhavelittlesayindetermining
production
Planningindividualbasis,leadstooverproductionand
waste
Privateownershipofnaturalresourcespermitted
Allocationofnationalresourcesdeterminedbysupply
anddemand
Competitioneliminatesinefficientproducers,
improvesproducts,reducescosts
Privateownershipofpropertypermitted
Socialism
Socialismisaneconomicsysteminwhichmostmeans
ofproductionisownedandcontrolledbythe
government
Socialistsbelievemovingtowardtheirgoalsof
governmentownershipandcontrolofproductionby
gradualmeans
Propertynationalized,ownerscompensated
NegativesofCommunismandSocialism
Socialismlacksincentivesforincreasingeffort,no
motivatingforce
Determining“need”isaproblemwhichgovernmentis
unabletosolve
Becausegovernmentcontrolsproduction,italso
protectstheinefficientproducer
Becauseofimpropergovernmentplanning,both
overproductionandunderproductioncananddooccur
Freedomofchoiceissomewhatlimited
Governmentplansproductionbydetermining what
producedandwhatquantity
Socialism,productiondeterminedbyneednotprofit
Becausegovernmentownsproduction,productioncan
beplannedandwasteeliminated
Overproduction,duplicationofeffort,anddepressions
avoidedascompetitionreplacedbycooperationand
planning
Communism
Communismisaneconomicsystemwhere,intheory,
allgoodsownedcollectivelyandpaymentofincome
basedonneed
Individualsgivenlittlefreedomindeterminingwhatto
produce
Everythingownedcollectively,privateownershipof
productionprohibited
Individualsworktofullpotentialwithcompensation
determinedbygovernment.Inmostcontrolled
economies,incentivesusedtoencourageworkatfull
potential
DifferencesbetweenCommunismandSocialism
Communistsseektoendcapitalismbyrevolution
whereassocialistsdoitbyballotbox
Socialistsbelieveinorderlytransferforproduction
fromprivatetopublicownership
Undersocialism,fairpaymentismadefornationalized
property
Socialismhashighregardforanindividual’sfreedom