Capitalism VS Socialism

Capitalism VS Socialism | Daily Writeups | Opinions

The following article, “Capitalism VS Socialism“, is written by Areeba Fatima, a student of Sir Syed Kazim Ali. Moreover, the article is written on the same pattern, taught by Sir to his students, scoring the highest marks in compulsory subjects for years. Sir Kazim has uploaded his students’ solved past paper questions so other thousands of aspirants can understand how to crack a topic or question, how to write relevantly, what coherence is, and how to include and connect ideas, opinions, and suggestions to score the maximum.

Outline 

1-Introduction 

2-Explaining the Term Capitalism and its Pre-requisites 

• ✓‘From each according to his ability, to each according to his capital.’

3-History of Capitalism

4-Understanding the Term Socialism and its Essential Components 

• ✓‘From each according to his ability, to each according to his contribution.’

5-History of socialism

6-Pre-eminent Differences between Capitalism and Socialism 

• ✓Governmental role 
  • Argument: Minimal role of government in capitalism whereas in socialism, govt. is a sole player.
    • Case in point: According to a report published by Finance and Development IMF magazine, the government has a limited role in a capitalist economy, while socialism relies on social and governmental planning. 
• ✓Ownership of assets 
  • Argument: Capitalism supports privatization whereas socialism supports nationalization.
    • Case in point: According to Boston University’s report, productive assets are primarily privately owned under capitalism while socialism relies mainly on state and social ownership of the means of production.
• ✓Freedom to Compete
  • Argument: Capitalism endorses competition while socialism hinders it.  
    • Case in point: As Isaac Deutscher has aptly stated, competition is an integral part of a capitalist economy while in a socialist economy, there is no competitor to government.
• ✓Decision-making 
  • Argument: Capitalism system underpins centralization whereas socialism promotes decentralization.
    • Case in point: According to Janos Kornai- a Hungarian economist, centralization is a hierarchical and top-down system while decentralization is a more democratic and bottom-up system.
• ✓Efficiency and innovation
  • Argument: In a capitalist system, financial incentives promote innovation and efficiency; however, there are fewer chances of innovation in socialism.
    • Case in point: According to the University of Central Florida, Capitalism provides incentives to make a profit and motivates entities to work hard and innovate. Socialism does not emphasize providing incentives to trigger hard work.
• ✓Social structure 
  • Argument: Capitalism has an increased class divide, whereas socialism advocates equality and fairness.
    • Case in point: According to the National Geographic Society report, few wealthy capitalists hold power at the cost of the working class in a capitalist society. In contrast, in a socialist system, everyone controls the means of production. 
• ✓Consumer prices 
  • Argument: Supply and demand determine the prices in capitalism, while in socialism, govt. determines it.
    • Case in point: According to the International Monetary Fund report, a capitalist economy strives for a market mechanism where supply and demand control consumer prices, but in a socialist economy, the government has the upper hand in determining market prices. 

7-Notable Similarities between Capitalism and Socialism

• ✓Capital as a standard to judge the economy 
  • Case in point: As Alfred Marshall has rightly said, ‘Capital is the pivot around which economic science clusters. And the major part of the subject matter of economics is concerned with the functioning and malfunctioning of money.’
• ✓Emphasis on Labor
  • Case in point: According to David Spencer, Professor of Economics at the Leeds University Business School, capitalism and socialism promote labor as the route to economic success.
• ✓Deal with society and economy 
  • Case in point: According to the Rumi Organization, the economies of capitalist and socialist countries provide a structure for how an economy should be run. 
• ✓Favor Freedom of Religion
  • Case in point: According to the report of the Voice of Capitalism, capitalism and socialism both favor the freedom of religion until it does not violate the rights of others.
• ✓Improve Living Standards and Social Development
  • Case in point: According to Lumen Learning, capitalism and socialism are scientific approaches to solving social problems and achieving a high standard of living for everyone.

8-Critical Analysis 

9-Conclusion 

The substantial scientific developments and technological advancements of the twentieth century have occurred within the core battleground of capitalism and socialism- the rival socio-economic systems shaping the course of nations. The atrocities of feudalism around the 10th century laid the foundations for the development of capitalism, where individuals had the right to own property. However, the 17th-century British Industrial Revolution and the development of the factory system in the 19th century created the mastery of merchants and capitalists who generally abused their workers and exploited young children with miserable working and living conditions. To counter economic inequality and the atrocities of capitalism, Karl Marx predicted the inevitable overthrow of capitalism by the proletariat class of society. Socialism emphasizes the public ownership of means of production and the establishment of a classless society, contrasting sharply with capitalism, based around a free-market system and private ownership. In brief, both socio-economic systems contrast in the ownership of assets, social structure, and primary goals of innovation and efficiency. However, there are also some notable similarities between socialism and capitalism, such as both promoting labour as a route to economic prosperity, favouring freedom of religion, improving living standards, and enhancing social development. To summarize, both theories have influenced the different regions of the contemporary world, shaping their economic and political outlooks.

Capitalism and its prerequisites 

Capitalism is derived from ‘capital’ and comes from the Latin word ‘Cpitale’, initially used in Eastern Europe in the middle Ages for ‘wealth and property.’ In fact, it is a socio-economic system based on recognizing individual rights, where individuals own and manage property according to their interests. In markets, demand and supply freely set prices in a certain way to serve the best interests of society. Moreover, the mantra of capitalism is ‘from each according to his ability, to each according to his capital.’ In a capitalist society, there is less government interference; as Adam Smith has written in his book ‘The Wealth of Nations’ about French policy ‘Lesse Faire’ that govt. should leave alone the economy, and competition is the economy’s invisible hand. Moving further, capitalism is founded on the pillars of private property, self-interest, market mechanism, freedom to choose, and the limited role of government. The extent to which these prerequisites operate distinguishes the various forms of capitalism. In free markets- Lesse Faire economies, markets operate with little or no regulation. In mixed economies- the fusion of government and markets, markets play a dominant role, but government regulate them on a grander scale. Mixed capitalist economies predominate today as the government can intervene to correct market failures such as pollution and traffic congestion and promote social welfare for other reasons like defence and public safety.

History of capitalism 

The routes of capitalism can be traced back to a primitive era when Luca Piccioli- Franciscan Friar- published the first ever book on accounting, Suma de Arithmetica, in 1450 thatremained a crucial capitalist invention till the birth of joint stock company or modern factory. Later on, in 1555, protestant theologian John Calvin emphasized putting surplus income back into business as an investment, fostering the new mindset that would accelerate the progress of capitalism. The Dutch Republic was the world’s explicitly capitalist nation, where lazy aristocrats were looked down upon and hardworking merchants were revered. In 1776, Adam Smith- the founding father of capitalism- wrote his famous book An Inquiry into the Nature and Causes of the Wealth of Nations,demystifying wealth creation. He wrote about the idea of division of labour, and by maximizing one’s profit, individuals can inadvertently benefit society by providing goods that people need. To be sure, the genesis of capitalism can be traced back to the dawn of the 17th-century British Industrial Revolution, when merchants and newly capitalist classes triumphed, abusing their workers, exploiting young children, and transforming labour’s capacity into a commodity. In his book Das Kapital, Karl Marx wrote about the capitalist system, where everyone tries to reach the top, but as soon as they reach the top, they start exploiting others. However, capitalism continued to evolve by 1902 when three giant steel mills merged into a US steel company to stop competitive pricing, creating a monopoly and crushing the customers economically. World War I marked a turning point in the development of capitalism. In the post-war era, international markets shrank, the gold standard was abandoned to manage national currencies, banking supremacy passed from Europe to America, and trade blockades multiplied. By 1929, capitalism received a considerable shock known as the Great Depression when the American stock market was crushed terribly, curtailing employment and jobs at a vast scale. In decades after WW II, the capitalist system restored its confidence, and countries adopted a version of welfare capitalism. Similarly, in the post-war era, industrialist of the global north shifted their machinery and factories to the worldwide south, manipulating residents there. Capitalism again faced a severe economic recession in 1929, raising inflation rates in several major advanced countries to new double-digits. By the end of the twentieth century, almost all the world’s nations had adopted the basic framework of modern capitalism. The twenty-first century unfolds with a discernible international system that can be pretty and squarely categorized as global capitalism, though it is a system fraught with social and political contestation at national and international levels. In 2015, Apple Computers became the largest corporation in the world, facing the harsh challenges of capitalism. It turned out that Apple is indirectly responsible for the suffering and abuse of workers in the supply chain in China. For the past two centuries, capitalism has continued to be viewed in much of the world, particularly impoverished countries, as a system of exploitation rather than a reliable path to economic prosperity.

Socialism and its essential components

Socialism originated from the word ‘society’, and in the 19th century, it was first devised according to the tenets advocated by the French utopian socialists- Charles Fourier and Henri Saint-Simon. In the 1830s, it became common in England at the time of Robert Owen- another early socialist. In fact, socialism is a politico-economic theory of social organization that advocates that the triad of the means of production, such as ownership, distribution, and exchange, should be possessed and controlled by the whole community. The motto of socialism is ‘from each according to his ability, to each according to his contribution.’ In a socialist society, economic equality is the central tenet, insisting that ‘planned social purpose’ should guide, control, and mitigate evils of the system of production and consumption. Moving down, the essential components to build a socialist society are the rule of the working class, collective ownership, social, economic, and political equality, a positive role of government, no competition, and maximum social welfare. Moreover, socialism is divided into two classes- evolutionary socialism and revolutionary socialism- where the former term was used by Karl Marx- the founder of socialism- and Fredrick Angels, endorsing a government controlled by the intellectuals and the proletariat classes and intellectuals. Evolutionary socialism was advocated by Eduard Bernstein, who revised Marxist theory and aspired to seek socialist ends and aims by constitutional means and methods.

History of socialism

The intellectual routes of socialism can be traced back to the socialist ideas of the ancient Greek philosopher Plato, whose Republic depicts a spartan society in which men and women of the dominant guardian class share goods, spouses, and children. Early Christian communities also advocated a simple form of socialism- sharing goods and labour. However, the recognizable tendency to move towards creating a socialist society was seen after the French Revolution of 1789-1799, which brought sweeping economic and social change first to Great Britain and then to the rest of the world. As a response to expanding capitalism, Gracchus Babeuf wrote The Conspiracy of Equals, in which he sets out goals of socialism, such as the abolition of private property and establishment of equality in society, making him a hero to the theorists of the 19th century who has reacted against the emergence and brutalities of industrial capitalism. Early socialists like Henri de Saint-Simon, Robert Owen, and Charles Fourier offered the creation of model villages and societies based on cooperation rather than competition. Saint Simon called for the public control of property through central planning in which scientists and engineers would foresee social needs and direct the energies of societies to meet them. Robert Owen also attracted attention by formulating model villages in Great Britain and the United States that were both highly profitable and remarkably humane. Later on, the ideas of shared ownership, equality, and a simple life were taken up by the French socialist Etienne Cabet. Karl Marx was undoubtedly a prominent theorist of socialism who classified society into different classes, with a particular class controlling the means of production and exploiting the labour class. Marx and Frederick Engels also criticized early socialists in their book ‘The Communist Manifesto’ in 1848, calling them ‘utopian socialists’ for their unrealistic visions. They contrasted it to their own ‘scientific’ approach towards socialism, which could be established only after a revolutionary class struggle with the workers emerging on the top. Marx’s influence on socialist thought grew after his death in 1883. Later, leaders like Vladimir Lenin and Mao Zedong and political parties- the German Social Democratic Party- took up his philosophical ideas and expanded them. Marx emphasized the revolutionary clash between capital and labour, which dominated most socialist thought. However, other forms of socialism, like collective societies, are also formed around Christian religious principles. Social democracy advocated socialist aims could be achieved through gradual political reform rather than revolution. After 1917’s Russian Revolution and the formation of the Soviet Union in the 20th century, social democracy and communism emerged as the two most dominant socialist movements worldwide. By the end of the 1920s, Lenin’s revolution- the focused view of socialism- laid the foundation of the Soviet Union’s Communist Party. In the post-WWII era, the alliance dissolved as the Soviet Union established communist regimes across the strata of Eastern Europe. With the collapse of these regimes in the late 1980s and the ultimate fall of the Soviet Union itself in 1991, communism as a global political force was greatly diminished. Only China, Cuba, North Korea, Laos, and Vietnam remained communist states. Meanwhile, by pursuing a more centrist ideology, social democratic parties won support in many European countries. Their ideas called for a gradual pursuit of social reforms such as public education and universal healthcare through the processes of democratic government within an essentially capitalist system. In 1912, social reform programs like Social Security and Medicare became a well-accepted part of American society. Democratic socialism- the liberal form of socialism- was embraced by some liberal politicians in the United States. This calls for following socialist models in Canada, Scandinavia, Great Britain, and other nations, including free college tuition, single-payer health care, and imposing higher taxes on the wealthy. Till now, socialist parties and ideas continue to master the policies of nations around the world, calling for the establishment of a more egalitarian society.

Pre-eminent Differences between Capitalism and Socialism

Capitalism and socialism are socio-economic systems with harsh differences. They both stand in blunt opposition, and these differences are explained below.

• Governmental role 

To begin with, there is a fundamental difference between the governmental roles in both politico-economic systems. Capitalism advocates for little to no governmental role in the economy, as Adam Smith has written in his theory Lesse Faire, which states that the government should leave the economy alone. It emphasizes that the government should not intervene in financial affairs, such as controlling goods’ production and production rate and regulating prices. There should be a free market economy, and the market itself should decide the prices and rates of goods. Whereas socialism relies on the governmental and social role in the economy, there is no right for a few people to decide and set the prices of goods in the market. As per the report published by Finance and Development IMF magazine, in a capitalist economy, there is a limited role of government, while socialism relies on social and governmental planning. This shows that both politico-economic systems differ in governmental interference in economic affairs.

• Ownership of assets

Likewise, capitalism and socialism differ vastly in the ownership of assets. A capitalist economy allows private ownership through the relative autonomy of ownership, possession, and management. On the other hand, socialism prohibits the private ownership of means of production, like land, factories, and natural resources. It supports the social ownership of productive assets, promoting egalitarian values and the equal sharing of resources among the society. According to Boston University’s report, productive assets are primarily privately owned by capitalism, while socialism relies mainly on the state and social ownership of the means of production. In summary, the ownership of assets and resources is significantly different in both economic systems.

• Freedom to compete

Moreover, these systems also clash in their approach towards competition. In capitalism, competition has a significant role in the market, forcing businesses to offer their products at the lowest prices and maximize efficiency. Adam Smith, the father of capitalism, wrote in his book The Wealth of Nations that competition is the free market’s invisible hand. On the contrary, socialism prohibits competition, and people work for the welfare of society and the collective good. In a socialist state, everyone can work harmoniously without stepping on each other’s toes. As Isaac Deutscher has aptly stated, competition is an integral part of a capitalist economy, while in a socialist economy, there is no competitor to the government. In brief, both systems differ in their approach towards market economy.

• Decision-making 

Besides, decision-making power is also a conflicting point between capitalism and socialism. Capitalism supports centralization, where decision-making is controlled by top-level management. In a centralized economy, a single leader or leadership team conduct tactical planning, goal setting, budgeting, and talent deployment. In contrast, socialism advocates decentralization, where most planning and decisions are disseminated to mid to lower-level management. In decentralization, no individual ownership exists, but multiple individuals or teams make decisions and strategic plans. According to Janos Kornai- a Hungarian economist, centralization is a hierarchical and top-down system while decentralization is a more democratic and bottom-up system. This shows that both economies clash in their decision-making processes.

• Efficiency and innovation

In addition, both economic systems contradict the primary goals of promoting efficiency and innovation. In a capitalist system, individuals’ production motive is to earn profit. It gives people-entrepreneurs, investors, and workers- fair incentives to create products and services that people appraise, augmenting efficiency and innovation. On the other side, the socialist system does not support the dull tools of capitalism, such as material incentives. It uses the feelings of goodwill, sociability and brotherhood to motivate individuals rather than giving them the right incentives. According to the University of Central Florida, Capitalism provides incentives for making a profit and encourages entities to work hard and innovate. Socialism does not emphasize providing incentives to trigger hard work. In a word, capitalism and socialism clash in their production motives to trigger efficiency and innovation.

• Social structure

Both capitalist and socialist systems show divergence in society’s social structure. Capitalism divides society into a minority dominant class and a majority subordinate class, deepening the class divide. To illustrate, capitalist society is depicted by the split between two distinct classes of masses: the capitalist class, which holds the means for producing and distributing goods, and the working class, which sells their labour power to the capitalist class in return for wages. On the contrary, socialism aspires to create a classless society where all individuals enjoy equal rights regardless of their financial and educational differences. In fact, a socialist society aims to eliminate class divisions and create a more egalitarian society through shared ownership and democratic control of industry. As per the report of National Geographic Society, a few wealthy capitalists hold power at the cost of the working class in a capitalist society. Meanwhile, in a socialist system, everyone controls the means of production. All in all, capitalism and socialism differ in their social structure and class divisions.

• Consumer prices 

Next to it, capitalism and socialism also clash in the affairs of the determination of market prices.In a capitalist system, supply and demand determine the cost of goods and services produced, encouraging capitalist businesses to make quality products as inexpensive and efficient as possible. Moreover, the capitalist system does not allow governmental interference in market prices. Meanwhile, in socialist economies, the democratically elected government owns and controls the market prices of businesses and industries, and the production is controlled by worker cooperatives. As per the report of the International Monetary Fund, a capitalist economy strives for a market mechanism where supply and demand control consumer prices, but in a socialist economy, the government has the upper say in the determination of market prices. This illustrates that capitalist and socialist economies are very contradictory in setting consumer prices.

Notable Similarities between Capitalism and Socialism

The arguments mentioned above highlight the pre-eminent differences between capitalism and socialism. Nonetheless, both economic systems have much in common. A few of these similarities are discussed as follows.

• Capital as a standard to judge the economy

First, both economic systems use capital as a standard to judge economic prosperity or disaster. In a capitalist society, money plays a significant role in production, consumption, exchange, and distribution. In fact, the entire structure of a capitalistic economy would collapse if one withdraws money. Similarly, a socialist society, being under a governmental role, is also dependent on cash for the operation of the economy. To be sure, people are paid monetary wages for the service they provide, and these wages are used to buy things that the government produce, making it a monetary-dependent economy. As Alfred Marshall has rightly said, ‘Capital is the pivot around which economic science clusters. And the major part of the subject matter of economics is concerned with the functioning and malfunctioning of money.’ In brief, the use of money is not only necessary for a capitalistic economy but also for a socialistic economy, as it is indispensable for both economies.

• Emphasis on Labor

In the same way, both economic systems are labor-centric in a particular way. In a capitalist economy, individuals are paid incentives and profit on the basis of the hard work and labour they put in the work. In truth, capitalism brought about an increasing focus on the virtues of hard work and is often regarded as a unique economic system that fully recognizes the importance and need for labour. Likewise, in a socialist society, workers own the means of production together; therefore, they own the surplus generated by these means. In particular, the mantra of socialism- to each according to his contribution – well elaborates that in a socialist society, each worker receives benefits and compensation according to the value and quantity of the labour they provide. According to David Spencer, Professor of Economics and Political Economy at the Leeds University Business School, capitalism and socialism promote labor as the route to economic success. In summary, capitalism and socialism accentuate hard work and labor.   

• Deal with society and the economy. 

Similarly, capitalism and socialism are the socio-economic systems that dwell upon society and economy. To illustrate, capitalists own the resources in the capitalist system and use the labour force to strengthen the economy. However, a socialist society is run by the labour forces, and everything is planned by the government or workers, from production to setting the prices of goods. The operation of both economies in terms of economic planning can differ, but both deal with the elements of society and economy. According to the Rumi Organization, the economies of capitalist and socialist countries provide a structure for how an economy should be run. This shows that capitalist and socialist economies are linked to society and economic planning. 

• Favour Freedom of Religion

Further, capitalism and socialism are unbiased and indifferent towards religion. Both systems are purely economic and have nothing to say about religious activities and preachings. In capitalist society, the state neither supports religion nor opposes it as long as these activities do not harm the rights of others. It provides freedom from religion, as religion has no privileged status in a capitalist state. Likewise, socialism tends to support religious freedom and secularism. In fact, a socialist state has no religion, and it allows its masses to preach or advocate their religious beliefs. As per the Voice of Capitalism report, capitalism and socialism favour the freedom of religion until it does not violate the rights of others. In brief, both systems are impartial towards religion and support the right to preach or advocate religious beliefs.

• Improve Living Standards and Social Development

In addition to the above, both economic systems aim to elevate living standards and social development, leading towards a developed society. To explain, the capitalist system benefits society by enhancing innovation and efficiency, creating goods and services for the benefit of humanity, and alleviating living standards. Similarly, socialism contributes to social development through the equal distribution of resources among individuals, creating a classless society where everyone can have a better quality of life. According to Lumen Learning, capitalism and socialism are the scientific approaches to solving social problems and achieving a high standard of living for every person. This illustrates that the end goal of both economic systems is to improve living standards and put society on the path of development. 

Critical Analysis

Critically evaluating, despite the zeal and zest capitalism and socialism have received in the past, both economic systems cannot meet contemporary world challenges. Capitalism comes with its flaws of inherent class divide, exploitation at a vast scale, and unwanted environmental pollution and climate change, impairing global hierarchy. On the contrary, socialism advocates the utopian idea of economic equality, over-dependence on cooperative pooling, and the lack of efficiency and innovation, shrinking economic growth and prosperity. To counter these swords of flaws and demerits of both economic systems, it is pertinent to adopt a mixed economic system that can cater to the 21st century’s challenges and innate shortcomings of capitalism and socialism.

Conclusion 

Capitalism and socialism are the politico-economic systems that deal with society, the economy, and the nation-state. Both economic systems contradict their approaches towards competition and innovation, social structure and class division, and the ownership of means of production. Nonetheless, both socio-economic systems also possess some noteworthy similarities, such as enhancing social development, focusing on the virtues of hard work and labour, and advocating the freedom of religion. In short, both economic systems have diverse perquisites and drawbacks that have shaped the trajectories of the contemporary world.  

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