TABLE OF CONTENTS

I. INTRODUCTION

II. EVOLUTION OF THE CONCEPT OF CAPITALISM AND

SOCIALISM:
III. ARGUMENTS FOR CAPITALISM AND SOCIALISM

IV. COMPARISON OF THE TWO SYSTEMS

V. DRAWBACKS OF SOCIALISM
VI. COMPARISON CHART
VII. CONCLUSION
INTRODUCTION
The Macmillan Dictionary of Modern Economics defines capitalism as a: Political, social,
and economic system in which property, including capital assets, is owned and controlled for
the most part by private persons. Capitalism contrasts with an earlier economic system,
feudalism, in that it is characterized by the purchase of labour for money wages as opposed to
the direct labour obtained through custom, duty or command in feudalism. Under capitalism,
the price mechanism is used as a signalling system which allocates resources between uses.
The extent to which the price mechanism is used, the degree of competitiveness in markets,
and the level of government intervention distinguish exact forms of capitalism.1
The definition in the dictionary describes capitalism as an economy which is controlled by
private persons. It has given a comparative meaning with the feudalism. It recognizes the
price mechanism as its key coordinating device instead of command and control, and
suggests that capitalist systems are distinguishable from one another based upon the extent
and nature of governmental interventions and the competitiveness of their markets. However,
it is to be noted that this definition is quite incomplete as it ignores the governmental role and
the factors that form the government.
There have been many definitions of capitalism given by the economists such as Karl Marx,
Max Weber, Joseph A. Schumpeter, etc. However the most recent development in the
meaning of capitalism gives Capitalist logic which defines human beings, not as social
beings, but rather as individuals motivated exclusively by self interest. The rationality is
premised on self-interest, not social obligations, moral commitments, or altruism 2. Thus,
capitalist economy is a self-interest driven economy where the market is a key factor
determining the status of the economy.
Socialism is an economic and political system in which the means of production, distribution
and exchange are owned or regulated by the government. Under socialism, the state owns and
operates all factories, businesses, schools, housing, land, roads, and natural resources.
Government officials determine what products and services to produce, how to produce them,

1 Macmillan Dictionary of Modern Economics, 3rd Ed., 1986, p. 57. https://books.google.co.in , last visited on 6
April 2019
2 On the Definition of Capitalism and Its Implications for the Current Global Political-Economic Crisis ,
Ronald Edsforth, The International Conference on Cultural Diplomacy & the UN. “Cultural Diplomacy and
Soft Power in an Interdependent World: The Opportunities for Global Governance”, February 21, 2012 available
at, http://culturaldiplomacy.org/academy/content/pdf/participant-papers/2012-02-
unccd/On_the_Definition_of_Capitalism_-_Prof_Ronald_Edsforth.pdf last visited on 8 April 2019
and what to charge for them. If a given factory is profitable, the money goes to the
government, which distributes it to the people. If a given factory is not profitable, the loss is
absorbed by government. In general, wealth and income under this system is distributed to
individuals relatively equally, with need as an important factor.
The resources are distributed among the people equally to the extent it is possible. This
economy is based on the principle of equity, justice and these nations are called as welfare
nations as the development is done keeping in view the welfare of every aspect of the society.
EVOLUTION OF THE CONCEPT OF CAPITALISM AND SOCIALISM:
The capitalism dates back to the 15th century when the mercantilism came into existence, but
in this phase due to the monarchy the control was more in the hands of the king or the queen.
However, the capitalist society was first formed in the England where the monarch ruled
according to the behaviour of the market and the industrialised.
Later, in the Middle Ages i.e., during the period of 17 th and 18th century when the cloth
industry flourished due to the use of excess production over consumption to enlarge
productive capacity, the gap between the workers and the owners increased rapidly and this
gap was justified on the grounds that the wealthy were more virtuous than the poor. The rich
earned more and more, because they focused on profits rather than to invest it in
economically unproductive enterprises so that the development of the society will be parallel
to the growth of the industries as well.
Another contributing factor was the increase in Europe’s supply of precious metals and the
resulting inflation in prices. Wages did not rise as fast as prices in this period, and the main
beneficiaries of the inflation were the capitalists. The early capitalists (1500–1750) also
enjoyed the benefits of the rise of strong national states during the mercantilist era. The
policies of national power followed by the states succeeded in providing the basic social
conditions, such as uniform monetary systems and legal codes, necessary for economic
development and eventually made possible the shift from public to private initiative3.
The beginning of the 18th century marked industrial revolution as the focus from
commercialisation was shifted to industrialisation, this resulted major changes in the
economies. Scottish economist and philosopher Adam Smith, recommended leaving
economic decisions to the free play of self-regulating market forces. After the French
Revolution and the Napoleonic Wars had swept the remnants of feudalism into oblivion,
Smith’s policies were increasingly put into practice 4. This created new differences in the
3Capitalism, Britannica encyclopaedia, available at, https://www.britannica.com/topic/capitalism
last visited on 6 April 2019
4 Capitalism, Britannica encyclopaedia, available at, https://www.britannica.com/topic/capitalism
classes of the society and wealth distribution making the conditions of the working class even
more miserable.
The two world wars brought major changes in the capitalist nations. Most of them adopted
welfare nation status while others made liberated policies. However, the capitalism drifted to
the United States, later with economic disruptions in the 1930s and the status in the Unites
States also changed its policy of lasses-faire.
Socialism is the doctrine that calls for public rather than private ownership or control
of property and natural resources. According to the socialist view, individuals do not live
or work in isolation but live in cooperation with one another. Furthermore, everything that
people produce is in some sense a social product, and everyone who contributes to the
production of a good is entitled to a share in it. Socialism is a moral view according to which
all must live in harmony, the resources must be owned by all, attributes to the policy of equal
work equal pay and identifies workers as human beings not machines as it was in the
capitalism. A socialist economy is a well-planned economy.
Socialism came into existence quite lately and slowly. Many economist and observers
suggested a economy which respects all, however it was only in the books because it seemed
quite impossible to live in a society which is publically owned. But somehow in the 1917,
this concept was accepted and widely discussed as the Russian revolution advocated the idea
of socialism. However, the socialism in Russia was half capitalised, later in the 1930s this
was fully socialised i.e., fully planned. In the period of 1917-1930, the Russian economy
faced lot of problems and internal disturbances. The idea of pure socialism was concerned to
be utopian by the great Karl Marx. He adopted the more natural concept of socialism and
many nations such as Germany attributed to the Marxist view5.
During the world war, the socialism got its grip in the society, labour unions were formed and
the guilds in the society came up. Lately, after the world war(s) the scenario changed, tie-ups
of the communist and socialist were seen, most important of which was USSR, which
however dissolved after the World War II. This split was because of the fact that both the
parties were not on the same page and had different opinions. The caused another type of
economy known as mixed economy, which is however another concept. But it is true that
most of the nations today have adopted this new concept of the mixed economy. Countries
such as India, Cuba, North Korea, etc. are adopting or have adopted the idea of socialism

last visited on 6 April 2019

5 Types of economies of the world, Britannica encyclopaedia, available at

https://www.britannica.com/topic/socialism/Postwar-socialism , last visited on 6 April 2019
with innovative changes which make them the nations of mixed economy where the welfare
of everyone is the moral duty of all. The concept of “deep pocket theory”, “welfare to all by
all” has evolved from here.
ARGUMENTS FOR CAPITALISM AND SOCIALISM
Fundamental arguments by advocates of both capitalism and socialism were developed in the
nineteenth century. The experience of the twentieth century led to an adaptation and a
strengthening of these arguments. Advocates of capitalism, which is understood as a system
based on private ownership, market allocation and entrepreneurship, have generally stressed
the efficiency and rationality of the capitalist development process. In their view, private
interests may spontaneously fall in line with the common good, and the population’s standard
of living may systematically be improved on a long-term basis through the virtues of
competition. Distribution based on the market process is approximately fair, as individuals
get, in principle, revenues proportional to their productive contributions. Hypothetical or
existing socialism is considered economically irrational and inefficient as it destroys the
institutional and spiritual bases of the “good economy”. Moreover, it is contrary not only to
economic, but also to political liberty and also known to be more bureaucratic. It is
considered as a utopian concept which suppresses the reality of the contemporary world.
Advocates of socialism, which is defined as a system based on social ownership and planned
coordination of the economy, have often used similar normative criteria as their opponents,
but with opposite conclusions about historical realities. They view capitalism as an irrational
system resulting from market anarchy, which leads to high social waste and suffering
(notably through crises and unemployment). It produces large inequalities and works in
favour of a wealthy minority, both within capitalist societies and at the level of the capitalist
world economy. Ideal or existing socialism, on the other hand, is seen as allowing
consciously planned rational development, which does away with such capitalist flaws as
recurring crises, waste and unemployment; it fosters social equality and may promote a
higher form of liberty where a united society comes to master its own progress. It is
considered a society which works for the welfare of the people, not of the certain specified
group of individuals6.

6 On the Definition of Capitalism and Its Implications for the Current Global Political-Economic Crisis ,
Ronald Edsforth, The International Conference on Cultural Diplomacy & the UN. “Cultural Diplomacy and
Soft Power in an Interdependent World: The Opportunities for Global Governance”, February 21, 2012 available
at, http://culturaldiplomacy.org/academy/content/pdf/participant-papers/2012-02-
unccd/On_the_Definition_of_Capitalism_-_Prof_Ronald_Edsforth.pdf last visited on 8 April 2019
COMPARISON OF THE TWO SYSTEMS
Many of the interpretations of capitalism and socialism as economic systems were based on a
model which emphasized their contrasting features. However, on a general historical and
theoretical level, there were important similarities, pointing to a kind of fraternity, or even
twin character of both families of the system, that obtained throughout the process of their co-
evolution. Capitalism and socialism are highly diversified monetary and wage-labour
systems, based on an extended division of labour within the economy and within large
organizations. They both face the problem of finding sustainable forms or regimes of capital
accumulation and income distribution. Coordination of the division of labour in a complex
and monetary economy, and reproduction of the wage-labour nexus – that presupposes
structural tensions in production and distribution – need to find proper and consistent
institutional mediations. Such mediations would allow growth and development as conditions
of systemic sustainability, and provide legitimacy for social domination. As national
economic systems represent complex configurations of numerous interdependent institutions
– some designed and others evolved (and, most often, a combination of both design and
evolution) – they are faced, in a dynamic perspective, with the contrasting necessity of
coherence and stability, on one hand, and of flexibility and adaptability, on the other.
Conclusions based on the actual historical experiences of the national systems belonging to
each of the two families seemed less sharp than in those delineated within the general
contrasting models of each system. While some positive features of the preferred system
seemed enhanced in particular periods or in specific countries, some flaws also became
visible in different periods or countries. Significant regularities observed in countries
belonging to each of the really existing systemic families led to a comparative assessment
where favourable and adverse trends were mixed on both sides, making objective economic
comparison more difficult7.
WHY SOCAILISM?
Socialist society is a well planned society where the resources are distributed equally. As per
the definition of the socialism there are many positives attached to it. The following are the
facts which make socialist a better economy than capitalist economy.
 Wealth distribution: Socialism leads to more equality because, by definition, the
country’s wealth is shared across all citizens. To the extent that any vestiges of

7 The Historical Conflict Of Socialism And Capitalism, And The Post-Socialist Transformation, Bernard
Chavance, United Nations Conference On Trade And Development, 12 February 2000, Available At,
https://unctad.org/en/Docs/ux_tdxrt1d3.en.pdf last visited on 9 April 2019
 inequality persist (or somehow arise), they are rectified through Karl Marx’s
distributive principle of “From each according to his ability, to each according to his
needs.”8 This ensures that no person is left behind, no matter how poor or unskilled he
is. Countries that redistribute wealth create better opportunities for people who would
otherwise find themselves in the lower classes. Robust social security programs,
generous old age/retirement programs, free or state-subsidized college, public
housing, and free health care ensure that every citizen gets a fair start in life.
However, according to a report issued by the United Nations, "Social justice is not
possible without strong and coherent redistributive policies conceived and
implemented by public agencies.”9 The ratio of difference between the rich and poor
is less as compared to the capitalist nations.
 Market failures: Market arises in a number of ways. Failure to provide efficient public
places, basic public facilities, healthy lifestyle, healthy environment etc. is some of
the examples where the capitalist countries failed. Since the motto of capitalist
countries is to earn profits, their input in providing public utilities is negligible or in
some of the cases it is zero. But in the socialist nations the public welfare is the
priority and therefore these basic facilities of the public are provided with ease. The
people of such nations are provided with health-aid, education support and subsidised
basic facilities which promote welfare. Market failures are not much big issue in the
socialist economy, the government plans to overcome market failures.
 Protection against exploitation: Socialism humanizes and democratizes work by
putting workers in control and by making them a part of the ownership structure. Pure
models of socialism would eliminate wage labour, directly providing housing, food,
education, and other social benefits in exchange for work done. Humans are social
and naturally arrange themselves to live in collective groups. Even the nuclear family
represents a social arrangement in which family members contribute based on their
ability and receive benefits based on their need. The cooperative approach of
socialism, not the competitive and exploitative model of capitalism, is closer to the
natural harmonious state of people living together. Thus, providing a more natural
environment to the people of the nation.
 Financial security and stability: The survivals of the unemployed persons or the
people who lose their jobs are vulnerable to the capitalist environment as it is majorly

8 Marx, Karl. Critique of the Gotha Program. 1875

9 Social justice in an open world: the role of the united nations, 20 august 2015 available at https://www.un.org
 regulated by the working capabilities of the working class. On the contrary, this is not
the scenario in the socialist nations. The strong socialist policies such as instituting a
universal basic income to everyone would reduce the risk that unemployed citizens
become marginalised part of the society . Thereby reducing the efficiency of the
economy and hampering the growth of the nation.
DRAWBACKS OF SOCIALISM:
Socialism may seem to be a perfect type of economy, providing status of equality to all
and in distribution of resources. It is a type of society wherein the individuals are treated
as humans not machines who are paid as per their working hours and capacity. However,
there are certain drawbacks of such society as it leads to inefficient use of human
resource, poverty and slow economic growth. Some of the key drawbacks are listed
below:
 Socialism leads to poverty, tyranny, and mass oppression: Socialism has led to
disastrous consequences for people. Central planners, with their limited
knowledge and inherent inability to set rational prices, inevitably fail to allocate
resources efficiently, thus destroying wealth rather than creating it. A more recent
example of socialist collapse is present day Venezuela, which set out on a path of
socialism starting in the late 1990s. Today poverty in Venezuela is increasing, and
at an alarming rate (see chart below). In 2017, 87% were in poverty – that’s
basically everyone. Furthermore, basic health indicators such as infant mortality,
maternal mortality, and cases of malaria are on the rise10.
 Capitalism produces unparalleled material prosperity, which benefits everyone in
society: Wherever markets have been allowed to function relatively free from the
heavy hand of government, material wealth and prosperity have followed. It was
the relatively free markets of the United States in the late 1800s and early 1900s
that turned America into a world superpower. Free markets also turned Hong
Kong from a small, barren rock into one of the world’s most powerful centers of
global finance and trade. Whenever the world has had natural experiments in this,
such as with North Korea and South Korea, or East Germany and West Germany,
it is the country that is freer and more market-oriented that prospers while the
other one fails. Over the past 25 years, the average country that became more
10 The Historical Conflict Of Socialism And Capitalism, And The Post-Socialist Transformation, Bernard
Chavance, United Nations Conference On Trade And Development, 12 February 2000, Available At,
https://unctad.org/en/Docs/ux_tdxrt1d3.en.pdf last visited on 9 April 2019
 capitalist experienced an increase in Gross Domestic Product (GDP) per person
from about $7,600 to $11,800, an increase of 43%. Moreover, the average citizen
in these countries gained almost five years in added life expectancy. Meanwhile,
in countries that became less capitalist over the same 25-year period saw their life
expectancy drop and their income growth stagnate.11
 Socialism discourages hard work: Capitalist countries encourage innovative
companies; socialist countries do not. Entrepreneurship is a concept emerged in
the capitalist countries as the socialism does not encourage it. Capitalist provide
incentives to those who work hard and serve others while there is no such
provisions in the socialist society. All the major big companies such as Google,
Amazon, Microsoft, Volkswagen etc., emerged in the capitalist nation showing the
trend that these countries have a better response to the hard work of their people.
None of the socialist countries have emerged to be the nations which have
liberated policies for the new businesses or start-ups.
 Low standard of living: Capitalism is the superior system for raising the absolute
standard of living for everyone, including the poor, although the gap between the
rich and poor is quite high but in all it secures high standard of living to the
people. The chart of the high standards is high in the capitalist nations. It is
because of the fact that, socialised countries focus on providing basic facilities to
its entire citizen ensuring social equality. This reduces the high earning and
spending capacities of its citizens causing low standard of living.

COMPARISON CHART
Basis of difference Capitalism Socialism

11 The Historical Conflict Of Socialism And Capitalism, And The Post-Socialist Transformation, Bernard
Chavance, United Nations Conference On Trade And Development, 12 February 2000, Available At,
https://unctad.org/en/Docs/ux_tdxrt1d3.en.pdf last visited on 9 April 2019
Philosophy Capital (or the "means of
production") is owned,
operated, and traded in order
to generate profits for private
owners or shareholders.
Emphasis on individual profit
rather than on workers or
society as a whole. No
restriction on who may own
capital.
Definition A theory or system of social
organization based around a
free market and privatization
in which ownership is
ascribed to the individual
persons. Voluntary co-
ownership
is also permitted.
Ideas Laissez-faire means to "let it
be"; opposed to government
intervention in economics
because capitalists believe it
introduces inefficiencies. A
free market produces the best
economic outcome for
society. Government should
not pick winners and losers
Economic System Market based economy
combined with private or
corporate ownership of the
means of production. Goods
and services are produced to
make a profit, and this profit
is reinvested into the
economy to fuel economic
growth.
Political System Can coexist with a variety of
political systems, including
dictatorship, democratic
republic , anarchism, and
direct democracy . Most
capitalists advocate a
democratic republic
From each according to his
ability, to each according to
his contribution. Emphasis on
profit being distributed
among the society or
workforce to complement
individual wages/salaries.
A theory or system of social
organization based on the
holding of most property in
common, with actual
ownership ascribed to the
workers.
All individuals should have
access to basic articles of
consumption and public
goods to allow for self
actualization. Large scale
industries are collective
efforts and thus the
returns from these industries
must benefit society as a
whole.
The means of production are
owned by public enterprises
or cooperatives, and
individuals are compensated
based on the principle of
individual contribution.
Production may variously be
coordinated through either
economic planning or
markets.
Can coexist with different
political systems. Most
socialists advocate
participatory democracy ,
some (Social Democrats)
advocate parliamentary
democracy, and
Marxist Leninists
Advocate "Democratic
centralism."
Ownership The means of production are
Structure Privately owned and operated
for a private profit. This
drives incentives for
producers to engage in
economic activity. Firms can
be owned by individuals,
worker coops,
or shareholders.
Way of Change Fast change within the
system. In theory, consumer
demand is what drives
production choices.
Government can change the
rules of conduct
and/or business practices
through regulation or ease of
regulations.
The means of production are
Socially owned
with the surplus value
produced accruing to either
all of society (in Public
ownership models) or to all
the employee members
of the enterprise (in
Cooperative ownership
models).
Workers in a socialist state
are the nominal agent of
change rather than any
market or desire on the part
of consumers. Change by the
State on behalf of workers
can be swift or slow,
depending on change in
ideology or even whim.

CONCLUSION
Capitalism and socialism are somewhat opposing schools of thought in economics. The
central arguments in the socialism vs. capitalism debate are about economic equality and the
role of government. Socialists believe economic inequality is bad for society, and the
government is responsible for reducing it via programs that benefit the poor (e.g., free public
education, free or subsidized healthcare, social security for the elderly, higher taxes on the
rich). On the other hand, capitalists believe that the government does not use economic
resources as efficiently as private enterprises do, and therefore society is better off with the
free market determining economic winners and losers.
The world has rarely, if ever, seen either capitalism or socialism implemented fully and
consistently. Most countries are mixed economies that feature some elements borrowed from
each system. It is common for European countries (e.g., France, Belgium, Germany) to have
relatively free markets but large and expensive systems of social welfare.
Measuring exactly how capitalist or socialist a country is can be difficult. On the capitalist
side, perhaps the best current examples are the United States, Hong Kong, Singapore,
Switzerland, Chile, Estonia, and New Zealand. These countries have competitive markets,
and have relatively unregulated industries, low taxes, low public spending, or some
combination of all these things.
On the socialist side, the picture is a little more complicated. Over the past century there have
been socialist states that have devolved into murderous and oppressive dictatorships. These
include the Soviet Union, China, Venezuela, Cuba, North Korea, and Cambodia. Advocates
of socialism rarely try to defend those regimes. More commonly, advocates of socialism hold
up examples of more peaceful nations that combine government control of the economy with
political democracy. Today, such countries include Denmark, Sweden, England, Canada,
Netherlands, Finland, Norway, and Portugal. They are said to be examples of “democratic
socialism,” and sometimes earn that label mainly due to their high tax rates, large spending
on public services and safety net programs, and by providing universal healthcare.
However, these two very different ideas emerged, and supporters of each have been in
conflict and disagreement ever since their birth.