Capitalism vs. Socialism: Here’s How They Differ

  • James Notaris

    CPA, ESQ, Legal Editor

  • Tyler Dikun

    Executive Editor

    In Brief:

  • There has been a call by some to adopt socialist policies.

  • Capitalism refers to an economic system in which the means of production and distribution are owned by private individuals and businesses.

  • Socialism refers to an economic system in which the means of production and distribution are owned by the government.

  • Socialism tends to disincentivize individuals and businesses which leads to far less innovation than in capitalist societies.

As the parable goes, “give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime. Ask yourself which person you would like to be in this situation – the one who must constantly depend on another for food, or the one who cultivates the necessary skills to fend for themself? Although over 2,000 years old, this biblical verse still rings true when discussing the differences between socialism and capitalism and demonstrates why the free market system will always be the most effective economic structure. 

Capitalism Explained:

Adam Smith, the father of capitalism, theorized that individuals are driven by a profit motive to improve their product or service in such a way that maximizes their revenue. In what he described as the “invisible hand”, Smith believed that individuals, operating by their own self-interests, inadvertently made society better.

In a free market economy, individuals as well as corporations constantly compete for market share in their given industries. Technological innovations such as the internet, smart-phone, and automobile were all invented and improved upon by profit-seeking individuals. Through their own selfish ambitions, these titans of industries have greatly improved the lives of billions around the world.

As such, a capitalist economic structure is one in which private businesses or individuals own the means of production rather than the government. In this system, one’s success is  entirely contingent on supply and demand. Businesses and individuals must constantly compete for revenue by improving their product or service. Check out this video here to learn more about the differences between the two.

Benefits of Capitalism:

Many scholars argue that there does not exist a better alternative than capitalism.

Limited government: a government that owns the means of production can begin to become an authoritative state. Indeed, socialist nations tend to control religion, freedom of speech, and even freedom of movement.

Innovation: in industries that are not controlled by a monopoly, businesses must continuously innovate in order to attract customers. This innovation has led capitalist societies to become the wealthiest on Earth.

Efficiency: capitalism leads businesses to propel towards peak efficiency in order to boost profit. By increasing efficiency in the form of automation, new technology, and cutting inefficient workers, businesses cut costs and limit waste.

Incentivization: capitalism incentivizes individuals to specialize in high demand/growth fields that pay a high wage. This incentivization leads to a more educated populace and a higher standard of living.

Socialism Explained

In a socialist society, all means of production and distribution is controlled by the government. Individuals are then dependent on the government for food, healthcare, living arrangements, employment, and much more.

As such, the government determines the amount of supply which directly impacts the price level. In this centralized planning approach, the government decides who, when, and how supply is distributed. Proponents of socialism argue that this equal distribution gives way to a more egalitarian society.

Arguments For Socialism State This:

Supporters of socialism argue that the focus should be employment level and equalization of compensation. Yet, every nation that has tested socialism has faced societal, economic, and financial ruin. (See Venezuela, Cuba, USSR, Zimbabwe etc.)

Cons of Socialism:

Lack of Incentives: socialism fosters a lack of incentives because the government eliminates free market qualities that spur on competition.

Movement of Wealth Out of The Nation: socialist countries often find that wealthy individuals and businesses flee in large numbers due to high taxes, massive government regulation, and a lack of incentivization to innovate.

Higher Taxes: socialist policies like free education, healthcare, and welfare require a large amount of tax revenue to fund their mammoth costs. Socialist governments like the ones found in Scandinavia typically require a tax rate of at least 30 percent.

Socialism vs. Capitalism: Outlook For The Future

Historically, the best economic systems have been those that favor the free-market. When the free-market is able to innovate, societies can rapidly advance and the overall standard of living increases.

When individuals and businesses are disincentivized, the entire populace suffers. Even once-ardent socialist/communist nations like Russia and China have opened their economies up to globalization and have leaned into the free-market. Just remember what a wise man once said…

“A government big enough to give you everything you want, is a government big enough to take away everything you have.”

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