Capitalism vs Socialism

Capitalism vs Socialism


Capitalism or socialism? With Francis Fukuyama’s proclamations of history ending looking increasingly premature, this age-old question has found renewed salience. In a pattern seen across the world, people are being faced with a distinct choice - an unusual thing in modern politics - which can crudely be reduced to: do you want more capitalism or would you like to try a bit of socialism? Simple sounding it may be, but the question is, in fact, a tough one. One must actually grasp what is meant by each term. And in the current polarised political climate, where both are thrown about with reckless abandon that can be tricky. Deplorable in the eyes of some, the roadmap to utopia to others. Many are understandably confused. How should one feel if called a capitalist pig? What’s the appropriate response to being branded a champagne-sipping socialist? To help answer these pressing queries we look at what the terms really entail.

Before embarking on that task, though, a quick caveat. Given both systems come in countless different forms, have disputed histories, and little agreed upon theory, we’ll stick to the generally accepted commonalities that bind them and give them their coherent(ish) basis.

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Of the myriad differences that distinguish capitalism from socialism it’s the level of government involvement in the economy that’s most fundamental. The capitalist model is premised on the private ownership of the means of production and property. The economy relies on open, free markets whose forces - the so-called ‘invisible hand’ - determine prices, incomes, wealth and the distribution of goods. In theory, unencumbered competition then drives innovation - in technology and practice - and encourages companies to make the best products they can as cheaply as possible. Over time, therefore, products improve in quality, while becoming cheaper. ‘Inefficient’ companies that fail to keep up in this inexorable march, as in, their products are relatively expensive or poor in quality, are quickly usurped and go out of business. This allows resources to flow to other, more ‘efficient’ areas - a process Joseph Schumpeter called ‘creative destruction’. Meanwhile, the consumer is ensured maximum choice at the minimum price - again, in theory at least. 

And this is what lies at capitalism’s heart: the promise of meritocracy, of efficiency winning out. It underpins the whole system. It also segways neatly to another key distinction from socialism: equality, or, in capitalism’s case, the lack thereof. Under capitalism, inequality is essential. It serves as a driving force, incentivising work with the lure of what could be. The spoils are there, you just need to work hard enough and have the right ideas. And who will cast judgement as to the quality of your idea? The market. It’s this cold, unbiased mechanism of relentless wheat-from-chaff-separation that drives economic development.Capitalism vs Socialism 


A socialist economy, on the other hand, is completely different, and driven by a vastly different logic. Through greater governmental intervention, it seeks to (re) allocate resources in a more egalitarian way. To this end, it’s the state rather than individuals that owns/controls the major means of production. As the main employer, the state can then determine wages, working hours, and preserve a certain standard of working conditions as it sees fit. Employment rates, thus, are not vulnerable to spasms of the market, meaning full employment can be guaranteed - in some socialist societies that is. In others, individual ownership of property and enterprise is permitted, but is normally accompanied by high taxes, especially on the rich, and tighter, more stringent government control, to help avoid exploitative practices from developing. To purists, this is no longer socialism, but rather a form of social democracy.

Where capitalism favours efficiency, socialism focuses on equality, a channeling of wealth from the rich to the poor, and the establishment and preservation of an even playing field - definitely in opportunity, and occasionally in outcome. This is achieved by various means including the state-led provision of healthcare, free at the point of use, price controls, higher taxes and far more spending on public services.

In practice

In reality, most countries - even the US, the paragon of capitalist life - operate mixed economies, that is with economic elements of both capitalism and socialism. Therefore, the question playing out around the world is less a choice of one or the other, but much more nuanced. It’s the pitting of greater public provision, in the form of healthcare, education and social security, typically funded by higher taxes (i.e socialist inclined policy), against tax cuts and a general retreat of the state out of the individual’s life (i.e free-market capitalist inclined policy). It's also notable that in the majority of cases these proposals are made while accepting an overarching capitalist system - its fundamentals rarely questioned.