Economic to make a profit (Smith, 1910). Though


Economic Systems:
Capitalism & Socialism

Capitalism and Socialism are two of the main
types of economic systems. The ideas at the core of these two systems are very different
from one another. Capitalism, for example, is a market-based economy, where the
free market reigns, and the government has a very limited role. Most
capitalists believe that the main functions of government are limited to
maintaining law and order, providing national security, and protecting the
right to private property (Smith). In a free market, decisions to produce,
invest, distribute, and even the prices of goods and services are guided by
supply and demand. Supply and demand is determined by the interactions between
producers and consumers in the economy. For the most part, consumers always try
to get the best return on their investment (Reisman). Basically, they try to
get the best value for their money. Producers, on the other hand, look for the
best price for their products that will turn over the largest profit for them.

Socialism, on the other hand, is a
central-planned economy, where the government makes decisions for the market,
since the socialist belief is that markets on their own don’t operate in the
interest of the people. In turn, the government decides how much and at what
price goods and services are to be produced (Amadeo). The government bases these
decisions on what they believe would benefit society, but that would not be
addressed by a market economy. A few examples of this would be dealing with
inequality or preserving the environment.

Ownership is key to both capitalism and
socialism. In a Capitalist economy, the means of production, facilities,
technology, land etc., are privately owned. The primary goal is for the owners
to make a profit (Smith, 1910). Though that is not to say that owners are the
only beneficiaries in a capitalist economy. According to George Reisman in his
Treatise on economics, you do not have to own a means of production to receive
their benefits, you merely have to be a consumer in the marketplace. He says
there is a general benefit when consumers can buy the products produced by the Capitalists

In contrast, a Socialist economy is
distinguished by the major means of production being owned collectively, or by
the government. This is meant to remove the class distinction between owners
and the laborers who work for a wage. Laborers do not only work for their own
good, but for the good of everyone else as well (Amadeo). The wealth that they
earn is distributed among everyone in the society, and unlike in a Capitalist
society, any gains in productivity due to automation would lead to lowering the
hours that laborers would be required to work instead of leading to higher
unemployment. Karl Marx himself believed that disposable time, rather than
labor time is the way to measure real wealth (Peffer, 73).

Some of the advantages of a capitalist
system include greater consumer choice in the marketplace. Economic efficiency
as well, since goods and services are produced based on demand, it gives
producers the incentive to cut costs and avoid waste. Fast economic growth is
also possible in a Capitalist system, and when the economy grows, and the GDP
rises, living standards are observed to increase as well (“Merits”). Even
though Capitalism has its advantages, it has some disadvantages as well.

A major disadvantage is the creation of
monopolies. When a business becomes a monopoly they can, and most likely will,
use this power to charge more for their products, even if their production
costs haven’t increased in any way to justify their increases in price.
Businesses trying to make the most profit possible could also tend to exploit
their labor, paying them a low wage that is difficult for them to live on
(“Merits”). Another disadvantage is the prevalence of inequality in society, an
issue that, in a Socialist system, is incredibly important to address and is
one of their main focuses.

One of the benefits of socialism is
greater equality. Socialism reduces wealth disparities by distributing wealth.
Basic needs like healthcare, education, and other necessary items are met in a
Socialist society. Also, in the event of a disaster, the government, being the
owner of the goods and services in this system, should be able to mobilize them
faster and more easily, putting them to use where they are needed (Amadeo). The
disadvantages are somewhat the opposite of what the advantages in a Capitalist system

Where capitalism is generally believed to
be efficient, many believe socialism not to be. The belief being that without
the expectation of increased profits, producers will have little motivation to
innovate or improve their products. Also, Socialism is based on the idea of
people being cooperative, so people that tend not to be will always try to
disrupt the system for their own gain (Amadeo). Since a Socialist system relies
on the government in a lot of its decision making, the problem of it having too
much control and abusing its position of power also comes up.

As stated, Capitalism and Socialism both have their advantages
and disadvantages, which is why most real-life economies are not 100%
Capitalist or Socialist. Most economies tend to be mixed, where the government
doesn’t have complete control over the economy, but plans how some resources
will be used, will intervene to prevent monopolies, and will implement
regulations. Even the United States, which is generally acknowledged as having
a Capitalist economy, has many characteristics of a central-planned system
(State). Social Security and Medicare, for one. Also, the government has
partial control over education with public schools. The U.S. government
provides subsidies to certain industries, for example, the energy and
agriculture sector. Individuals, depending on their profession, must sometimes
acquire a government-approved license to legally work in their field,
real-estate agents are an example. In the U.S. it is also clear that almost
every company is affected in some way by government policies, a major one is
labor laws.

All things
considered, Capitalism and Socialism, both very different economic systems,
have their benefits and their drawbacks. Because of this, it is important that
these are taken into account when discussing either one. Looking at all the
possibilities different systems can offer is a good first step to formulating
policy and making decisions about an economy, and when this is done it is understandable
that most economies are a mix of these two market and central-planned systems.













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