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Capitalist Economic vs. Socialist Economics

Socialism and capitalism are different ideas in economics. The debate is always in the economic equality as well as the government’s role. The socialists argue that economic equality is not good for the society. They hold the fact that the government has the responsibility of reducing it through certain programs that would benefit the less fortunate or the poor. This may be done by offering public education free, have social security to the elderly, provide free healthcare or it be subsidized among others.

The capitalists on the other hand argue that the government does not make good use of the economic resources efficiently like the private enterprise. They argue that the society could be better if there was free market to determine the winners as well as losers in economy. Capitalist economy is made of free markets and the government does not intervene in any way in the economy. The private individuals together with the firms accumulate property and capital. The economies that are said to have the system of capitalist economy could have the government taking thirty five percent of GDP. The reason is that government caters for health, welfare, national defense and education. The economy is still said to be capitalist in that the firms and private enterprise have the freedom to produce whatever they want.


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One of the main arguments in economics especially in the debate of the socialism and capitalism is the government’s role. As we have mentioned, the capitalist system is a private ownership in the production and making of goods and services with the aim of getting profits. The socialism is a social ownership of production such as the common ownership, cooperative enterprises, autonomous enterprises and the direct public ownership. The proponents of capitalism look at the free markets and competition as ell as the voluntary exchange. The socialist advocate for the involvement of government but they differ in the social ownership in which they advocate, the level to which they rely on planning versus the market, the way to organize the management within the economic enterprises, as well as the role the state has in socialism construction.

This paper will look at the comparison between the Capitalist economic and the Socialist economics and advantages and disadvantages of the capitalist and socialist economies. I will also look at other economic systems such as the communist economist and the criticism of the two economics and try to analyze the economic system that is better.


This can be defined as the economic system in which the method of production (resources such as money and different types of capital) is owned by individuals. It is also called the free enterprise or the free market economy. The economy is run by individuals who are the owners of the private companies. They are the same people who make decisions of the companies. In the capitalist society, the businesses that incorporate are judged by the same laws like the individuals. This means that the corporations can sell or buy property, can be sued and can also sue others (Pearvler, 2013). The companies are liable to perform several actions just like the individuals.

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The companies live with the motive of gaining profits. They are there for the main purpose of making money. These companies are owned and they have managers. Usually the owners are also the managers of the companies for example in the case of small businesses. When the business enlarges, the owner could employ managers who may not necessarily be shareholders of the firm. In such a case, the managers are said to be owner’s agents. The work of management is a bit difficult as the aim of he business is to utilize maximize the wealth of the shareholders and stock prices so as to make the owners of the firm rich.

The work of the government in the capitalist economy is to ensure that there is a certain limit for the companies that are privately run. This is done by creating rules and regulations and enforcing them. The level of governing the rules and regulations in certain industries depend mainly on the way that industry abuses the said rules (Pearvler, 2013).

It is however important to note that competition and individualism are the main areas capitalist economy majors in. Individuals are always in the community and market place working towards protecting their interests. The success of these people is very much valued. People direct all their efforts and talents in benefiting themselves by having businesses or joining very profitable professions (Wise Geek, 2013).

The different ways of differentiating the various types of capitalism. These are;

  1. Free market- This type leaves all the aspects of the society in the hands of the market for governing. They have no intervention coming from the government.
  2. Corporate capitalism- Is a type of capitalism where large, economic, bureaucratic corporations tend to dominate in the economy. This paves way for the long term efficiency and planning. However there is little or no innovation. The large corporations can have more influence in the government. This makes the registration be designed in a way to protect the companies’ interests.
  3. Social market/ social democratic economy- Is a system that tries to balance advantages in system of free market which has a social support that is strong. Even if the industries are owned privately, the government is very much involved in ensuring that there is fair competition, low unemployment and that the social welfare is granted to the people who require it.
  4. State lead economy- the government owns the method of production. However, it is run in very capitalistic way. This means that they are able to obtain profits. This term is used to show that the government always gets involved in protecting the business interests.

Socialist economist

This is a type of economic system where ways of production such as the money and other different types of capital belong to the public or the state. In this case, all the people involved work hard to attain wealth which is later distributed among all the participants. This is the opposite of the capitalism where one will work for his or her own wealth. This system works on the theory that whatever is good for one individual can be good for everybody else. Therefore every person involved works for the good of themselves and also the good of the other people. In this type of economy, the government has the responsibility of deciding on the best criteria of distributing the wealth to the people (Pearvler, 2013).

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In the socialist economy the market is not there as such. It is the government which provides for the people. The tax in the socialist economy is higher as compared to the capitalist economy. The government may offer services such as the health care and education all being run by the government. The only idea in this case is that people pay for these services by paying higher taxes. The socialist economy is the one that emphasizes on the distribution of wealth and resources to people equally.

The business owners are also expected to abide with strict laws of labor. These are made to protect the workers from being exploited. The laws include regular vacations, restricted working hours, various leaves like baby adoption leaves and birth leaves, sick time, among others. The employers are not asked for health insurance because the medical care is provided by the systems of health care nationally (Wise Geek, 2013). 

There are different types of socialist economy theories. These are;

  1. Market socialism- This deals with running the cooperative and public companies in the market which is free. The government obtains all the profits and later distributes the same by funding the public institutions, providing social services and paying the employees.
  2. Planned economy- In this type of the economy, the production means is owned by the government. The government is responsible of planning what is to be produced, the quantity and the price it will be sold.
  3. Self managed- These rely on specific groups to make their decision. A company could be owned by the people who work there. They will therefore collectively decide on the way forward for the business.
  4. State directed- These include the industries which are cooperatively owned. They however operate with a lot of planning and are given direction by the government.    

Comparison between the Capitalist and socialism economists

In capitalist economy, the method of production or capital is operated, traded and owned with the aim of gaining profit by the shareholders or the private owners. They lay emphasis on profits to individuals other than on the society or the workers. Socialism, have the philosophy that every individual depending with the ability to do his or her part and the contribution the workers make, they emphasize on distributing profits to the society as well as the workers on top of the wages they receive.

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In capitalist economy, the idea of “let it be” is very much opposed to the intervention of the government as the capitalists believe that it introduces a lot of inefficiencies. They argue that the government should not be the one to pick the losers and winners because the free market eventually produces the best outcome of the society. Socialism holds the idea that people should have equal opportunities when it comes to success. The workers for example, should have a say in the management of their factory or working station. They argue that the government should control the winners and losers because free market will have problems such as tragedy of commons.

In capitalist economy, accumulation of the production and capital moves the economic activity forward. The key element in this case is that it is necessary to always produce the profits and continue re investing these profits in the economy. They argue that the better goods and also services that are in the market are byproducts of the profits which are pursued (Diffen, 2012).According to socialist economists, the production and the economic activity are modified in a way so as to meet the economic demands and human needs. Their key element is the aspect of “production to use”. They believe that the goods and services that are useful are specifically produced because of their usefulness.

The capitalist economy will very much rely on the market in the economic coordination of production, distribution and investment decisions. These markets could be free, regulated or combined consisting of a degree of government directed planning or private companies planning. In the socialist economist, the economic coordination mainly relies on planning so as to determine the production and investment decisions. The planning could be centralized or even decentralized (Diffen, 2012). The market on socialism relies widely on the market in capital allocation to various owned enterprises.

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In capitalism, the ways of production are owned by the private investors and are mainly involved in profit making. This makes the producers be very much involved in the economic activities so as to have more profits. In the socialist economist, the ways of production are very much socially owned. The surplus profits are given either to the society in the public ownership model, or the enterprise employees i.e. in the model of co-operative ownership.

In capitalism economist the political movements include, classical liberalism, libertarianism, social liberalism, neoliberalism and the modern democracy. The key proponents are David Ricardo, Adam Smith, Milton Friedman, Ayn Rand and Friedrich Hayeck. In the socialism economist, the political movements include the democratic socialism, libertarian socialism, communism, syndicalism and anarchism. The key proponents are Robert Owen, Karl Marx, Pierre Leroux, Fredrich Engels, Albert Einstein, John Stuart, Leo Tolstoy, George Bernard and Emma Goldman.

There is a very fast change in the capitalist economist. The relationship between the seller and the buyer or the market is the main fuel of the production. The government has the power to change the rules of business practices or the conduct through regulations. This could be done through ease of the regulations. In the socialism, the workers are the agents who bring change unlike in the other case of market or the customer’s desire. This change that is affected by the customers could be swift or even slow. This is dependent on the change in the ideology of the employers (Diffen, 2012).

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Criticism of Capitalism and socialism


The critics hold the argument that capitalism is inefficient and unfair in the distribution of power and wealth, tends to be in the monopoly and oligopoly market, imperialism, the wars of counter revolutionary and other forms of cultural and economic exploitation, the repressions of trade unionist and workers; the phenomena of inequality and social alienation, unemployment as well as the economic instability. The critics argue that an inherent tendency in oligopolistic structures when the “Let it be” idea is put together with the private property of capitalist. Most of the socialists regard capitalist as irrational. This is because they argue the direction of economy is unplanned, leading to international contradictions and inconsistencies.

During the 20th century, a person by the name Vladimir Lenin stated that the use of military power was inevitable on monopoly capitalist in defending the interests of capitalists abroad. An economist by the name Branko Horvat mentioned that it is not known that the development of capitalist leads to total destruction of the economic freedom (Diffen, 2012).  Ravi Batra a professor of economics in University of Southern Methodist commented that the excess wealth and income inequalities are important factors in causing the economic depression and financial crisis that lead to collapse of capitalism as well as the coming up of the new social order  

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Environmentalists also argue that the capitalism needs economic growth which is continued, one that will deplete the earth’s natural resources and other resources. They argue that the production of capitalists majors on the environmental costs of the society. It is not able mitigate the impact on the ecosystem as well as the biosphere. Scholars and labor historians like Immanuel Wallerstein, Latterly Marcel, Tom Brass and Vander Linden argue that the un free labor such as that by the slaves, indentured servants, the coerced persons and prisoners is very compatible with the relations of capitalists.

Religions have also opposed certain capitalist elements. The traditional Judaism, Islam and Christianity always have forbidden the act of money lending to be returned with interest. The Christianity has always criticized and praised the capitalism especially on the materialist aspects (Diffen, 2012).


The socialism criticism has the claims that the political models and socialist economic are incompatible or inefficient with the civil liberties to the condemnation of certain socialist states. There is a lot of focus on records of human rights and economic performance of the communist states.

Friedrich Hayek, a key proponent of capitalist stated that the command economy of socialism could not be able to deliver information on productive quotas and prices because they lacked price mechanisms and therefore could not make economic decisions rationally. He continued with the argument that the social control on the distribution of private property and wealth which the socialist advocate for, cannot be achievable not unless there is reduced prosperity of general population as well as reduced economic and political fields. Others argued that the socialist economy could not work as it was not possible to have a rational pricing on the capital goods since the sole owner of the capital goods is the state.

The Advantages and disadvantages of socialism and capitalism


These have always been discussed over the years and many people always hold different views about the socialism and capitalism

Capitalism has been known to increase chances for the individual’s economic growth in the market. The entrepreneurs have better chances of increasing their individual wealth and the growth of the societies. Those companies that work extra hard are better rewarded in capitalist economy.

Consumers in the capitalist economy can be able to work with the aim of attaining financial freedom as well as becoming rich. A market with competition comes from capitalism. The consumers are provided with a big range of products and services to be able to choose the ones they like. It is the work of the companies and the consumers to control the free market. This is one of the major strengths of the capitalist economy (Peavler, 2013).

Socialist economy on the other hand aims at promoting equality to people. This is done by offering several of the social benefits. Some of these benefits the people in the social society are offered include health care, taking care of the vulnerable and the elderly and education. The actual meaning of socialism is paying for something and not necessarily expecting any financial return. The main pro for socialism is that it looks like a way to achieve slow, though peaceful progress.

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The capitalist economy is very much involved in making money and does not have regards to people unless these people are shareholders or the real owners of the companies. There is also a stiff competition in the capitalist economy and this could perhaps be unfair competition. There is a certain behavior especially with the big companies to become bigger so that the tendency of being monopolistic can occur (Pearvler, 2013). There could also be unfair practices of labor because the companies have the drive or the aim of getting profits. Now that capitalist requires continued growth, there may be environmental damage because of the resources on the earth being depleted. People have the view that the capitalists only make those who are rich to become richer. 

Socialist economy is inefficient in that it does not give reward to the entrepreneurs. Other than rewarding the entrepreneurs because of creating wealth, they actually punish them by asking them to pay taxes which are very high. The socialist economy lowers the standards of living of people because it does not reward those who work. Instead, it provides assistance to the public and includes even those who do not need the assistance (Pearvler, 2013).

Communist Economy

To some extent, communism is a form of socialism. Most of the countries have political parties that are dominant in socialism and very few are communist. It is also called planned economy. It is operated fully by the government. Only controlled and state owned businesses exist.

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The communist economy is based on Karl Marx beliefs and thoughts. It is an economy that is characterized by controlled ownership of the methods of production (Naik, 2010).In the communist economy, the people’s social welfare is a priority as compared to the capitalist economy where profit is the priority.

The notion that the society is of more importance than the individual, suggests that every individual should work to the capacity. The individuals get paid according to their needs. In communist economy, only the services and goods that are needed by the people are provided. The resources in this economy are all owned by the public. This is because of the belief that public ownership of the resources will reduce the inequalities in the distribution of wealth. It also assists in the realization of the desired objectives in the society.

One of the biggest advantages of this type of economy is that every person is able to get their needs. Each and every member of the society has a role to play in the contribution of the process of development according to his or her capacity. The communism is also able to abolish the economic disparities. It instead achieves the economic stability. However, the communist economy has got loop holes. It does not consider that people are not equal and are not the same. This is because when there is no competition, the initiative and desire to improve is also absent. The implementation process is delayed because the whole process of planning is taken by the central planners (Naick, 2010).

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The system of communist economy started at the Soviet Union. Some of the examples of countries that currently practice the communist economy are China, Cuba and Vietnam. Even if these countries sill embrace the system, the popularity has greatly reduced. During the time of introduction, the appealing nature of the system made it look decent and was highly appreciated and adopted in many countries with high population being working class. Things have however really changed and most of the countries are now going for different economies and combining them other than going for the communist economy.




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