Capitalism vs Socialism
The main difference between capitalism and socialism is the extent of government intervention in the economy. There are also different aims of the economic systems.
Capitalism is unconcerned about equity. It is argued that inequality is essential to encourage innovation and economic development.
Socialism is concerned with redistributing resources from the rich to the poor. This is to ensure everyone has both equal opportunities and equal outcomes.
Businesses will be owned by private individuals and shareholders.
The State will own and control the main means of production. In some models of socialism, ownership would not be by the government but worker cooperatives.
It is argued that the profit incentive in capitalism encourages firms to be more efficient, cut costs and innovate new products that people want. Hence capitalism is more productively and allocatively efficient.
It is argued that state ownership often leads to inefficiency because workers and managers lack any incentive to cut costs. Also state planning may lead to over-production or under production of different goods.
In capitalist economic systems, the state doesn’t directly provide jobs. Therefore in times of recession, unemployment in capitalist economic systems can rise to very high levels .
Employment is often directed by the state. Therefore, the state can provide full employment, even if workers are not doing anything particularly essential.
Prices are determined by market forces. Firms with monopoly power may be able to exploit their position and charge much higher prices.
In a state managed economy prices are usually set by the government this can lead to shortages and surpluses
Socialism is most often associated with Soviet style planning we saw in the Soviet Union and Eastern Europe 1945-1990.
During the 1930s, the Soviet Union made great advances. But, by the late 1980s, it was apparent that Eastern Europe had lagged behind their more ‘capitalist’ western counterparts.
The Central planning of the Soviet system led to significant levels of bureaucracy and there was a lack of incentives to be efficient and respond to different pressures.
In reality, most economies are some form of mixed economy. Even in ‘capitalist’ economies, such as the UK and US, there is a significant degree of government intervention to overcome inequality and provide a more equitable outcome. However, most firms are run by private companies.