Socialism vs. Capitalism

Both economies are systems used by countries to manage their economic resources and means of production.

Author: Amish Patel
Amish Patel
Amish Patel
Private Equity | Growth Equity | Venture Capital

A professional in the finance industry with 5 years of experience, Amish has a strong understanding of roles across Private Equity, Growth Equity, and Venture Capital. Currently, he is working as a Private Equity Associate in Apax Partners LLP. Amish began his career as a Private Equity Business Analyst at McKinsey & Company. He holds a degree in Economics from Trinity College, University of Cambridge, in the UK. In his current role, he sources and evaluates global buyout opportunities in the technology sector. He analyzes company performance and market potential, manages external advisors and junior Associates, builds financial models, and supports management teams with value-creation initiatives. (edited) 

Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:November 25, 2023

Socialism vs. Capitalist Economies: An Overview

A capitalist or socialistic economy is a system used by countries to manage their economic resources and means of production.

In capitalism, private actors own and control property by their interests. Market prices are driven by supply and demand in ways that benefit society. One of the essential characteristics is that it is caused by making a profit. 

There is a firm reliance on supply and demand in a free-market economy that is the backbone of capitalism and is one of its main pillars.

Under a socialist regime, the government makes all legal decisions regarding production and distribution. Therefore, all individuals depend on the state of food, employment, and healthcare. 

The government determines the amount and price of goods and services.

Historically, communist countries, such as China, North Korea, and Cuba, have embraced socialism, while Western European countries have preferred capitalism. Both systems have pros and cons regardless of how far apart they are.

Having given a brief overview of both ideologies in the previous section, we will dig a little deeper into each of them in the upcoming sections.

  • A capitalist or socialist economic system is a system of organizing economies so that they can control their economic resources and regulate their means of production.
  • The concept of capitalism is based on individual initiative and favors market mechanisms rather than government intervention. In contrast, socialist ideology is based on government control and limits private property rights.
  • Economies combine elements of both systems when left to their own devices. Capitalism has developed its safety nets, while countries such as China and Vietnam may be on the brink of becoming fully-fledged market economies.

Origins Of Socialism & Capitalism

The idea of a collective society has its roots in Plato's Republic, in which the philosopher described how society functions as a whole. More than a century later, Thomas More's "Utopia," which depicted a fictional paradise island where people live and work communally, echoed Platonic ideals. 

Socialism, however, was directly a reaction to the Industrial Revolution, which led to significant economic and social change in Great Britain and worldwide. It emerged as an alternative to capitalism when industrialists grew rich off the labor of workers who lived in poverty.

Marx and Engels developed it as a counterweight to liberal individualism and capitalism. 

West European countries experienced rapid industrial production and economic growth during the late 18th and 19th centuries. Income inequality and other social concerns arise when some quickly acquire wealth while others sink into poverty.

Henri de Saint-Simon and Robert Owen were the most famous early socialist thinkers, followed by Karl Marx and Vladimir Lenin. Following the 1917 Bolshevik Revolution in Russia, Lenin advanced socialist ideas and brought socialist planning to a national level.

General Collectivism

Privatization of resources and means of production under private enterprise enables individuals to make their own choices. It argues that these features of the capitalist economy led to inequalities in wealth and power and the exploitation of workers. 

Socialists believe that individual freedom and equality are accessible to those who control the means of production. A few capitalists hold power at the expense of the working class. Consequently, it is argued that in a socialist system, everyone controls the means of production.

Democratic Socialism

It can be characterized as a form that places a strong emphasis on the management of both the economy and society democratically to fulfill the needs of all the people, not just the rich few. 

Socialists argue that the government does not have to run everything. 

The workers and consumers directly affected by business institutions should run it. This could be achieved through worker-run cooperatives or publicly owned enterprises managed by workers and consumers.

What Is Socialism?

As an economic and political system, it is characterized by collective ownership (also known as common ownership) of the means of production. This includes machines, tools, and factories that produce goods directly intended to meet human needs.

The term refers to a social and economic doctrine that advocates public ownership and control over property and natural resources rather than private ownership or control. From a socialist point of view, individuals do not live or work in isolation but cooperate to reach their goals.

In a socialist system, the government controls all legal production and distribution, while the individual relies on the state for everything from food to healthcare. As a result, it determines the output and pricing levels of goods and services.

According to socialist theory, shared ownership of resources and central planning enabled an equal distribution of goods and services and a more equitable social order.

Unlike capitalism, it is an economic system that exists independently. A dominated majority (slaves, employees) lives in harmony with a dominant minority class (masters, employers). Slavery and feudal systems fell when the majority recognized their injustice.

Understanding The Concept

It may be technocratic, oligarchic, totalitarian, democratic, or even voluntary common ownership. The former Union of Soviet Socialist Republics (U.S.S.R.) was a notable example of a socialist country, albeit one run by communists.

Due to its challenges and poor track record, it has been branded as a utopian or "post-scarcity" system, even though modern adherents believe it can work if properly enacted. 

Those who support it argue that it creates equality and provides security. However, workers' worth is determined by their effort, not the value of what they produce, while capitalism exploits workers.

According to socialist ideals, production should be for use rather than profit; should distribute wealth equally among all; markets should no longer be competitive, and goods should be freely available to all. "From each according to ability, to each according to need."

What Is Capitalism?

In a capitalist economy, all means of production are owned by private individuals and used for profit. The features of a free market are capital accumulation, competitive markets, price systems, private property, property rights recognition, voluntary exchange, and wage labor. 

Capitalist economies are based on private ownership of capital goods. In a market economy, goods and services are produced by supply and demand rather than central planning.

Laissez-faire, or a free market, is the purest form. An individual's decisions determine where to invest, what to produce or sell, and at what price to exchange goods and services. 

In most countries today, the government regulates businesses and owns specific industries. Laissez-faire markets are unregulated. An unregulated competitive economy is possibly the most widely admired economic theory.

This optimal economy is characterized by individuals acting in their self-interest. According to economists on both the left and right, these fundamental ideas are bound up with our values of freedom and individuality.

Industrial Capitalism

Smith's ideas came at a time when the Industrial Revolution was raging. Gold mining brought prosperity and demand for domestic industries, which led to expansion and mechanization. Due to technological advances, factories could now be built in cities where labor was readily available.

The industrial tycoons were the first to accumulate wealth in their lifetimes, often outpacing the landed nobles and most money lending/banking families.

It was the first time in history that ordinary people could attain wealth. With this newfound wealth, people could build factories, producing more consumer goods.

As prosperity increased, new consumption patterns developed, including purchasing consumer goods like radios, cars, vacuums, beauty products, clothing, etc. The credit expansion also facilitated the sale of more consumer goods and made automobiles more affordable for average Americans.

Industrial Effects

Rather than benefiting just the aristocracy, industrial capitalists benefited all levels of society. Wages increased, thanks to unions.

Mass-produced affordable products increased the standard of living. Growth led to the creation of a middle class and lifted more and more people from the lower classes into its ranks.

Liberal individualism, democracy, and the theory of natural rights accompanied the development of capitalist ideology. However, it does not imply that all capitalist systems are politically free or allow individual liberty. 

Friedman (1962) states that it is necessary but insufficient for political freedom.

Financialization accompanied industrial individualism. Until then, banks were warehouses for valuables, clearinghouses for trade, or lenders to governments and nobles. 

The banks now facilitate long-term investments and everyday commerce. Economic individualism has followed.

Understanding The Concept

Commercialism is one possible way of solving the problems of economic production and resource distribution. Under free enterprise, financial decisions are decentralized and voluntary, unlike socialism or feudalism.

An economy characterized by capitalism allows capital assets such as factories, mines, and railroads to be privately owned and controlled, labor to be waged in money, profits to be earned by owners, and prices to be used to allocate capital between competing users.

  • A capitalist system is characterized by private ownership of the means of production.

 Is it inevitable that the dynamics of private capital accumulation will lead to the concentration of wealth in fewer hands, or are there other factors that reduce inequality, such as growth, competition, and technological progress?

  • The enforcement of private property rights provides incentives for capital investment.

It is characterized by forces that lead to its success but can also lead to its failure. It is only possible for free markets to flourish when governments set the rules that will govern them, such as laws that ensure property rights and provide essential infrastructures, such as roads and highways, for moving goods and people.  

  • Historical feudalism and mercantilism in Europe gave way to free enterprise, revolutionizing industrialization and mass-marketing consumer goods.

As a result of firms' freedom to enter and exit markets, competition maximizes social welfare for the common welfare of producers and consumers.

  • Comparable to pure socialism (where all means of production are collectively owned or controlled by the state), mixed economies lie on a continuum between the free market and government-controlled systems.

A mixed economy is one in which markets play a significant role. Still, the government also plays an active role by correcting market failures, such as pollution and traffic congestion, promoting social welfare, defense, and public safety. 

The dominant economic system today is mixed capitalism.  

  • As a result of business demands for favorable government intervention, real-world commercialism generally involves some degree of "crony capitalism."

Economic Growth

Free enterprise has proven highly effective in driving economic growth by encouraging entrepreneurs to reallocate resources from unprofitable channels to areas where consumers value them more.

Conquest and resource extraction from occupied lands were major factors in rapid economic growth in the 19th and 18th centuries. However, this was a localized, zero-sum process. 

Between the rise of agricultural societies and the first Industrial Revolution, global per capita income remained unchanged.

Capitalist production processes have enhanced productivity in subsequent centuries. As a result, people could afford more and better goods, which raised living standards. Thus, most political theorists and economists believe private enterprise to be the most efficient and productive exchange system.

Private Property

Private property rights are central to free enterprise. According to Locke's homesteading theory, humans acquire property by mixing their labor with unclaimed resources. 

Once owned, property may only be transferred through voluntary exchange, gifts, inheritance, or re-homesteading.

The owner of private property is incentivized to maximize their resource's value. Therefore, the more valuable the resource, the more trading power it provides. Therefore, any matter associated with a property belongs to its owner.

To deploy capital goods confidently, a system must protect its legal rights to own or transfer private property. In a capitalist society, private property rights are protected by contracts, fair dealing, and tort law.

Having a property that is not privately owned creates the tragedy of the commons. There is no incentive for conservation or reinvestment in a resource shared by all users. 

The problem could also be solved by privatizing the resource or employing voluntary or involuntary collective action. 

Profits And Losses

Profits and private property go hand-in-hand. Individuals only make voluntary exchanges of private property when they believe the deal will benefit them somehow. As a result, each party gains extra subjective value from the transaction.

In a capitalist system, voluntary trade drives activity. Resource owners compete with each other over consumers, who, in turn, compete with other consumers over goods and services. This activity is built into the price system, which balances supply and demand.

A capital good is most efficiently used when it produces the most significant value. A capitalist's good or service is sold at the price another individual decides to buy it. Profits signal more valuable outputs from less valuable inputs. 

Free Enterprise 

The capitalist economy is often associated with free enterprise. Individualism can exist without free enterprise, and a free market can exist without individualism. Free enterprise is based on the principle that freedom from state coercion is the central principle of private enterprise.

When private individuals control factors of production, any economy is capitalist. However, government laws can still regulate capitalist economies, and profits can still be heavily taxed.

An economic exchange devoid of government influence can be understood as free enterprise. 

A society where all property rights are owned is possible but unlikely. While private property rights remain in a free enterprise system, it is possible to have communal rights without a government mandate.

Within a broader capitalist economic family, clubs, co-ops, and joint-stock business firms like partnerships and corporations, all fall under the common property umbrella.

Socialism Vs. Capitalism

Political economy often pits capitalist and socialist ideologies against each other. This is because they differ fundamentally in who controls and owns the means of production.

Capitalist economies are owned and controlled by individuals. In socialist economies, the state owns and manages all vital production means. 

Other differences include equity, efficiency, and employment. Maximizing economic efficiency and maximizing society's equity (or fairness) are at odds when there is a tradeoff between the two. 

In the event of such a tradeoff, economists or policymakers may choose to sacrifice some economic efficiency to attain a more just or equitable society.


A capitalist economy is unconcerned with equity. On the contrary, according to this argument, inequality encourages innovation, which promotes economic development. 

The socialist model aims to redistribute wealth and resources from the wealthy to the poor to ensure equal opportunities and outcomes. The collective good is valued above individual success, and equality is valued above high achievement.

Material inequalities must be reduced or eliminated between individuals or households to achieve identical results in society, 

This usually involves a transfer of income or wealth from wealthier to poorer individuals or adopting other measures intended to promote equality between these two groups.


It is the capitalist argument that profit incentives lead corporations to create products desired by consumers and in demand. 

State ownership leads to inefficiency because, without the motivation to earn more money, management, workers, and developers may not put forth the extra effort to push new ideas.

Even though capitalism is the basis of nearly all economies today, it was one of only two major approaches to economic organization for most of the last century. Socialism, on the other hand, involves the state-owning production means and state-owned enterprises maximizing social good.

During state-guided capitalism, the government chooses which sectors will grow. Initiated as a means of stimulating growth, this type of capitalism comes with several pitfalls: excessive investment, picking the wrong winners, vulnerability to corruption, and difficulty withdrawing support once it is no longer needed.  


In a capitalist economy, the government does not directly hire its employees. During economic recessions and depressions, this lack of government-controlled employment can result in unemployment. 

The state is the primary employer in a socialist economy. In times of economic hardship, the socialist state can order hiring, ensuring full employment. Socialist systems also tend to have stronger "safety nets" for injured workers. 

Capitalist societies offer fewer options to help those who cannot work. In a capitalist economy, the government does not directly hire its employees. 

The state is the primary employer in a socialist economy. In times of economic hardship, the socialist state can order hiring, ensuring full employment. Socialist systems also tend to have stronger "safety nets" for injured workers. Capitalist societies offer fewer options to help those who cannot work.

Can an Economy Be Both Capitalist and Socialist?

Capitalist economies usually have some socialist aspects, even though they seem opposed. Mixed economies combine elements of the market and socialist economies. 

Governments and private individuals are involved in most modern countries' production and distribution of goods.

Economic theorist Hans-Hermann Hoppe stated that there are only two archetypes in economic affairs, socialism and capitalism. Every natural system combines these archetypes. 

Due to the differences between the two, the philosophy of a mixed economy becomes a never-ending balancing act between predictable obedience to the state and unpredictable consequences of individual behavior.

1. A Yearning for something better

It is an awareness of employees that their sufferings result from the capitalist system rather than their employers. It generates endless struggles and the employees' realization that system change is the only way forward. 

2. Not a single, unified theory

It was interpreted and implemented around the globe based on different contexts. 

Socialists developed and debated solutions ranging from top-down hierarchies to democratic cooperatives. 

According to socialists, capitalism is a system that causes ever-deepening racial and economic inequality, recurrent cycles of unemployment, and depression. Moreover, it undermines human efforts to build democratic politics and inclusive cultures.

3. The Soviet Union and Chinese economic ideologies

Lenin once said socialism was a goal, not yet a reality. As opposed to private enterprise, the Soviet system had achieved "state capitalism." A socialist party had control of the state, and the state became the industrial capitalist. 

Despite the Soviet revolution, the employer/employee relationship did not end. In that sense, it was capitalist.

Chinese socialism, comprising communist and social-democratic streams, grew faster than any capitalist economy. As a result, China switched its development strategy from copying the Soviet model to adopting a state-supervised mix of state and private ownership.

4. The U.S., Soviet Union, and China

During the 19th century, capitalism emerged from European feudalism, advocating liberty, equality, fraternity, and democracy. Many became anti-capitalists and found their way to socialism when these promises failed to materialize.

The Soviet Union and China, among others, tried to build post-capitalist, socialist systems during the 20th century. However, critics claimed those systems had more in common with commercialism than either side realized. 

5. Fascism

Fascism and socialism aim to strengthen the government and its intervention in society. However, they do this in different ways and for entirely different reasons. Fascist economics combines capitalist principles with heavy government involvement. 

The government supports, reinforces, and sustains private capitalist workplaces in fascism. It rigidly enforces the employer/employee dichotomy fundamental to capitalist enterprises. 

During social upheavals, private capitalists support fascism if they fear losing their positions as employers. 

6. It has been, and still is, evolving

Two alternative notions dominated the second half of the 20th century:

  • Changing from private to state-owned and operated workplaces, from market-based distribution of resources and products to centralized distribution, as in the Soviet Union.
  • Welfare-state governments that regulate markets are still composed of private capitalist firms and provide government-funded socialized benefits, such as healthcare and higher education.

7. Worker co-ops

The key to new socialism lies in worker cooperatives. Their critique of the past is accompanied by a vision of a more just and humane society. Moreover, due to the new emphasis on workplace democracy, socialists are well-positioned to contest the 21st century's economic systems debate.

Researched and Authored by Saif

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