The terms capitalism and socialism are both used to describe economic and political systems. On a theoretical level, both of these terms also describe specific schools of economic thought. One of the most fundamental differences between the systems of capitalism and socialism lies in the scope of government intervention within an economy. The capitalist economic model relies on free market conditions for the creation of wealth. The production of goods and services is based on supply and demand in the general market.
What is Socialism?
In socialist economies, the government owns and manages the economic resources such as money and other forms of capital. The citizens of the country work to generate wealth, which is then distributed to everyone. It is characterized by worker’s self-management of the means of production and is based on the premise that what is good for one citizen is good for all of them. Everything that the people produce is a social product, and it is distributed to all citizens that participated in the production process.
How Socialism Works?
A socialist economy ensures that the basic needs of the people are met. The basic needs include things like shelter, education, healthcare, economic security, etc. The government manages the use of resources and the production of products or services that the people need, which is referred to as central planning. Even though the population under socialism is taken care of, it does come with some shortcomings. For example, the workers see few incentives to work hard to generate more income and wealth.
Advantages of Socialism.
- The government treats the citizens as equals, and the wealth generated by employees is distributed equally to everyone.
- The government manages the means of production, which ensures that there is fairness in resource utilization and distribution. Private enterprises are not allowed to exploit the means of production for their personal gains.
- It diminishes class distinctions between the poor and the rich since wealth is distributed to everyone.
What is Capitalism?
Capitalism is an economic system where individuals or private corporations own and operate the resources and means of production. The owners in the economy make the decisions on how the resources will be utilized, while the prices of goods and services are determined by competition in the free market economy. Unlike in a socialist economy, the government exerts minimal control over what private enterprises produce, when the product is produced, and the quantity to produce. The only role that the government plays in a capitalistic market is to enforce laws and regulations with the aim of creating a level playing field for businesses to operate.
How Capitalism Works?
Private enterprises own the means of production, and they operate them for a profit. They incur costs in manufacturing commodities that are sold in the market at a higher price than the cost of production. The profit they earn from the business allows them to purchase new raw materials, pay operational expenses and salaries, and still retain some earnings for reinvestment and expansion. For large corporations, the management assumes the greater role of maximizing the shareholder value by investing in portfolios that earn the investors a high return on their investments. Corporations in capitalist economies are also treated the same way as individuals, and they can perform the same activities such as trading and suing as individuals. Also, capitalism gives businesses more incentives to work hard since they enjoy all the profits and wealth they generate from the economy.
Advantages of Capitalism.
• Consumers enjoy a wider choice of products and services since the system allows firms to compete with other companies in the economy.
• Businesses are given a greater incentive to work hard since they get to enjoy the profits they generate by determining the means of production.
• Greater market efficiencies since businesses are encouraged to find innovative ways of cutting costs while retaining the quality of products.
Disadvantages of Capitalism.
Class distinction between the rich and the poor. The rich enjoy most of the profits generated by the business while the poor are paid salaries and wages for working for the rich. It allows firms to create monopolies in the supply of products or services. The monopolies can abuse their powers by charging higher prices at the expense of the consumer.