Socialism vs. Capitalism: What Is the Difference? (2023)

The United States is generally considered to be a capitalist country, while many Scandinavian and Western European countries are considered socialist democracies. In reality, however, most developed countries—including the U.S.—employ a mixture of socialist and capitalist programs.

Capitalism Definition

Capitalism is an economic system under which private individuals own and control businesses, property, and capital—the “means of production.” The volume of goods and services produced is based on a system of “supply and demand,” which encourages businesses to manufacture quality products as efficiently and inexpensively as possible.

In the purest form of capitalism—free market or laissez-faire capitalism—individuals are unrestrained in participating in the economy. They decide where to invest their money, as well as what to produce and sell at what prices. True laissez-faire capitalism operates without government controls. In reality, however, most capitalist countries employ some degree of government regulation of business and private investment.

Capitalist systems make little or no effort to prevent income inequality. Theoretically, financial inequality encourages competition and innovation, which drive economic growth. Under capitalism, the government does not employ the general workforce. As a result, unemployment can increase during economic downturns. Under capitalism, individuals contribute to the economy based on the needs of the market and are rewarded by the economy based on their personal wealth.

Socialism Definition

Socialism describes a variety of economic systems under which the means of production are owned equally by everyone in society. In some socialist economies, the democratically elected government owns and controls major businesses and industries. In other socialist economies, production is controlled by worker cooperatives. In a few others, individual ownership of enterprise and property is allowed, but with high taxes and government control.

The mantra of socialism is, “From each according to his ability, to each according to his contribution.” This means that each person in society gets a share of the economy’s collective production—goods and wealth—based on how much they have contributed to generating it. Workers are paid their share of production after a percentage has been deducted to help pay for social programs that serve “the common good.”

In contrast to capitalism, the main concern of socialism is the elimination of “rich” and “poor” socio-economic classes by ensuring an equal distribution of wealth among the people. To accomplish this, the socialist government controls the labor market, sometimes to the extent of being the primary employer. This allows the government to ensure full employment even during economic downturns.

The Socialism vs. Capitalism Debate

The key arguments in the socialism vs. capitalism debate focus on socio-economic equality and the extent to which the government controls wealth and production.

Ownership and Income Equality

Capitalists argue that private ownership of property (land, businesses, goods, and wealth) is essential to ensuring the natural right of people to control their own affairs. Capitalists believe that because private-sector enterprise uses resources more efficiently than government, society is better off when the free market decides who profits and who does not. In addition, private ownership of property makes it possible for people to borrow and invest money, thus growing the economy.

Socialists, on the other hand, believe that property should be owned by everyone. They argue that capitalism’s private ownership allows a relatively few wealthy people to acquire most of the property. The resulting income inequality leaves those less well off at the mercy of the rich. Socialists believe that since income inequality hurts the entire society, the government should reduce it through programs that benefit the poor such as free education and healthcare and higher taxes on the wealthy.

Consumer Prices

Under capitalism, consumer prices are determined by free market forces. Socialists argue that this can enable businesses that have become monopolies to exploit their power by charging excessively higher prices than warranted by their production costs.

In socialist economies, consumer prices are usually controlled by the government. Capitalists say this can lead to shortages and surpluses of essential products. Venezuela is often cited as an example. According to Human Rights Watch, “most Venezuelans go to bed hungry.” Hyperinflation and deteriorating health conditions under the socialist economic policies of President Nicolás Maduro have driven an estimated 3 million people to leave the country as food became a political weapon.

Efficiency and Innovation

The profit incentive of capitalism’s private ownership encourages businesses to be more efficient and innovative, enabling them to manufacture better products at lower costs. While businesses often fail under capitalism, these failures give rise to new, more efficient businesses through a process known as “creative destruction.”

Socialists say that state ownership prevents business failures, prevents monopolies, and allows the government to control production to best meet the needs of the people. However, say capitalists, state ownership breeds inefficiency and indifference as labor and management have no personal profit incentive.

Healthcare and Taxation

Socialists argue that governments have a moral responsibility to provide essential social services. They believe that universally needed services like healthcare, as a natural right, should be provided free to everyone by the government. To this end, hospitals and clinics in socialist countries are often owned and controlled by the government.

Capitalists contend that state, rather than private control, leads to inefficiency and lengthy delays in providing healthcare services. In addition, the costs of providing healthcare and other social services force socialist governments to impose high progressive taxes while increasing government spending, both of which have a chilling effect on the economy.

Capitalist and Socialist Countries Today

Today, there are few if any developed countries that are 100% capitalist or socialist. Indeed, the economies of most countries combine elements of socialism and capitalism.

In Norway, Sweden, and Denmark—generally considered socialist—the government provides healthcare, education, and pensions. However, private ownership of property creates a degree of income inequality. An average of 65% of each nation’s wealth is held by only 10% of the people—a characteristic of capitalism.

The economies of Cuba, China, Vietnam, Russia, and North Korea incorporate characteristics of both socialism and communism.

While countries such as Great Britain, France, and Ireland have strong socialist parties, and their governments provide many social support programs, most businesses are privately owned, making them essentially capitalist.

The United States, long considered the prototype of capitalism, isn’t even ranked in the top 10 most capitalist countries, according to the conservative think tank Heritage Foundation. The U.S. drops in the Foundation’s Index of Economic Freedom due to its level of government regulation of business and private investment.

Indeed, the Preamble of the U.S. Constitution sets one the nation’s goals to be “promote the general welfare.” In order to accomplish this, the United States employs certain socialist-like social safety net programs, such as Social Security, Medicare, food stamps, and housing assistance.

Socialism

Contrary to popular belief, socialism did not evolve from Marxism. Societies that were to varying degrees “socialist” have existed or have been imagined since ancient times. Examples of actual socialist societies that predated or were uninfluenced by German philosopher and economic critic Karl Marx were Christian monastic enclaves during and after the Roman Empire and the 19th-century utopian social experiments proposed by Welsh philanthropist Robert Owen. Premodern or non-Marxist literature that envisioned ideal socialist societies include The Republic by Plato, Utopia by Sir Thomas More, and Social Destiny of Man by Charles Fourier.

Socialism vs. Communism

Unlike socialism, communism is both an ideology and a form of government. As an ideology, it predicts the establishment of a dictatorship controlled by the working-class proletariat established through violent revolution and the eventual disappearance of social and economic class and state. As a form of government, communism is equivalent in principle to the dictatorship of the proletariat and in practice to a dictatorship of communists. In contrast, socialism is not tied to any specific ideology. It presupposes the existence of the state and is compatible with democracy and allows for peaceful political change.

Capitalism

While no single person can be said to have invented capitalism, capitalist-like systems existed as far back as ancient times. The ideology of modern capitalism is usually attributed to Scottish political economist Adam Smith in his classic 1776 economic treatise The Wealth of Nations. The origins of capitalism as a functional economic system can be traced to 16th to 18th century England, where the early Industrial Revolution gave rise to mass enterprises, such as the textile industry, iron, and steam power. These industrial advancements led to a system in which accumulated profit was invested to increase productivity—the essence of capitalism.

Despite its modern status as the world’s predominant economic system, capitalism has been criticized for several reasons throughout history. These include the unpredictable and unstable nature of capitalist growth, social harms, such as pollution and abusive treatment of workers, and forms of economic disparity, such as income inequality. Some historians connect profit-driven economic models such as capitalism to the rise of oppressive institutions such as human enslavement, colonialism, and imperialism.

Sources and Further Reference

• “Back to Basics: What is Capitalism?” International Monetary Fund, June 2015, https://www.imf.org/external/pubs/ft/fandd/2015/06/basics.htm.
• Fulcher, James. “Capitalism A Very Short Introduction.” Oxford, 2004, ISBN 978-0-19-280218-7.
• de Soto, Hernando. The Mystery of Capital.” International Monetary Fund, March, 2001, https://www.imf.org/external/pubs/ft/fandd/2001/03/desoto.htm.
• Busky, Donald F. “Democratic Socialism: A Global Survey.” Praeger, 2000, ISBN 978-0-275-96886-1.
• Nove, Alec. “The Economics of Feasible Socialism Revisited.” Routledge, 1992, ISBN-10: 0044460155.
• Newport, Frank. “The Meaning of ‘Socialism’ to Americans Today.” Gallup, October 2018), https://news.gallup.com/opinion/polling-matters/243362/meaning-socialism-americans-today.aspx.