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Defining Characteristics of Capitalism and Socialism
Capitalism is an economic system in which private property owns the means of production. Capitalism is built on a free-market economy, which distributes commodities and services according to supply and demand rules. The development of wealth under the capitalist economic model is based on free market circumstances. The general market determines the supply and demand for products and services. A market economy is the name given to this economic system. On the other hand, socialism is an economic system in which the means of production are jointly held by the government. The most essential objective of socialism is to labor for the common good rather than for personal gain: the needs of society are prioritized over the needs of individuals (Xu, 2017). Individuals do not compete for profit because of this viewpoint; instead, they work together for the greater welfare of everyone.
How do these systems compare in terms of:
a) Overall productivity
People are strongly motivated to work hard, enhance efficiency, and generate superior products in capitalist economies. The market maximizes economic progress and individual prosperity by rewarding inventiveness and innovation while also supplying customers with a diverse range of goods and services. The marketplace self-regulates, leaving less space for government meddling and mismanagement, by promoting the creation of desired goods and services and discouraging the development of undesirable or unneeded ones. People have less to strive for under socialism, and they feel disconnected from the rewards of their labors. They have fewer incentives to innovate and improve efficiency since their fundamental requirements have already been met. As a result, economic growth engines have weakened.
b) Level of economic inequality
In principle, economic inequality and insecurity are decreased under capitalism. The bare minimum is supplied. Even if the government does not make a profit, it can provide the commodities people require to satisfy their needs. However, under socialism, there are no guarantees that each person’s fundamental requirements would be satisfied because market systems are mechanical, rather than normative, and agnostic in terms of social implications. Socialism, in principle, makes everyone equal (Bate & Child, 2017). In practice, hierarchies form, with party leaders and well-connected individuals receiving preferential treatment.
c) Extent of political freedom
While effective capitalism relies on the state’s ability to restrict private actors from abusing their rights to join, compete in, and exit markets, it also relies on the private actors’ ability to enter, compete in, and exit markets. Private economic players must be bound by the rule of law in order to be legitimate and productive, and the rule of law must be supported by the state’s coercive capabilities. The state’s authorities are used to keep private actors from violating the norms and, if necessary, to resolve conflicts (Holcombe, 2018). A state monopoly of coercive powers is essential to the success of capitalism. With socialism, there is much freedom that the people can choose what they want or feel like having as long as they can afford. It is the type of approach that aims at promoting equality and fairness amongst the citizens such that not only those of a particular class can benefit from it.
Welfare capitalism is a pro-business philosophy that thinks the private sector can deliver social welfare services more efficiently than the government. The welfare state is frequently contrasted with welfare capitalism. A good example of how capitalism and socialism combines is where companies have a two-fold incentive in delivering services under welfare capitalism (Hicks, 2018). First, corporations are paternalistic, offering employees what their management believe is best for them. Second, the businesses realize that offering modest advantages to employees can help prevent complaints about broader structural concerns like hazardous working conditions and excessive hours.
Bate, P., & Child, J. (2017). 1. Paradigms and Understandings in Comparative Organizational Research. In Organization of Innovation (pp. 19-50). De Gruyter.
Hicks, A. (2018). Social democracy and welfare capitalism. Cornell University Press.
Holcombe, R. G. (2018). Political capitalism: How political influence is made and maintained. Cambridge University Press.
Xu, C. (2017). Capitalism and Socialism: A Review of Kornai’s Dynamism, Rivalry, and the Surplus Economy. Journal of Economic Literature, 55(1), 191-208.