Economic Systems WRITTEN BY: The Editors of Encyclopaedia Britannica
Socialism
Socialism, social and economic 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. Society as a whole, therefore, should own or at least control property for the benefit of all its members.
This conviction puts socialism in opposition to capitalism, which is based on private ownership of the means of production and allows individual choices in a free market to determine how goods and services are distributed. Socialists complain that capitalism necessarily leads to unfair and exploitative concentrations of wealth and power in the hands of the relative few who emerge victorious from free-market competition—people who then use their wealth and power to reinforce their dominance in society. Because such people are rich, they may choose where and how to live, and their choices in turn limit the options of the poor. As a result, terms such as individual freedom and equality of opportunity may be meaningful for capitalists but can only ring hollow for working people, who must do the capitalists’ bidding if they are to survive. As socialists see it, true freedom and true equality require social control of the resources that provide the basis for prosperity in any society. Karl Marx and Friedrich Engelsmade this point in Manifesto of the Communist Party (1848) when they proclaimed that in a socialist society “the condition for the free development of each is the free development of all.”
This fundamental conviction nevertheless leaves room for socialists to disagree among themselves with regard to two key points. The first concerns the extent and the kind of property that society should own or control. Some socialists have thought that almost everything except personal items such as clothing should be public property; this is true, for example, of the society envisioned by the English humanist Sir Thomas More in his Utopia(1516). Other socialists, however, have been willing to accept or even welcome private ownership of farms, shops, and other small or medium-sized businesses.
The second disagreement concerns the way in which society is to exercise its control of property and other resources. In this case the main camps consist of loosely defined groups of centralists and decentralists. On the centralist side are socialists who want to invest public control of property in some central authority, such as the state—or the state under the guidance of a political party, as was the case in the Soviet Union. Those in the decentralist camp believe that decisions about the use of public property and resources should be made at the local, or lowest-possible, level by the people who will be most directly affected by those decisions. This conflict has persisted throughout the history of socialism as a political movement.
Capitalism, also called free market economy or free enterprise economy, economic system, dominant in the Western world since the breakup of feudalism, in which most of the means of production are privately owned and production is guided and income distributed largely through the operation of markets.
Although the continuous development of capitalism as a system dates only from the 16th century, antecedents of capitalist institutions existed in the ancient world, and flourishing pockets of capitalism were present during the later European Middle Ages. The development of capitalism was spearheaded by the growth of the English cloth industry during the 16th, 17th, and 18th centuries. The feature of this development that distinguished capitalism from previous systems was the use of the excess of production over consumption to enlarge productive capacity rather than to invest in economically unproductive enterprises, such as pyramids and cathedrals. This characteristic was encouraged by several historical events.
In the ethic fostered by the Protestant Reformation of the 16th century, traditional disdain for acquisitive effort was diminished, while hard work and frugality were given a stronger religious sanction. Economic inequality was justified on the grounds that the wealthy were more virtuous than the poor.
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 these 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 initiative.
Beginning in the 18th century in England, the focus of capitalist development shifted from commerce to industry. The steady capital accumulation of the preceding centuries was invested in the practical application of technical knowledge during the Industrial Revolution. The ideology of classical capitalism was expressed in An Inquiry into the Nature and Causes of the Wealth of Nations(1776), by the Scottish economist and philosopher Adam Smith, which 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. The policies of 19th-century political liberalism included free trade, sound money (the gold standard), balanced budgets, and minimum levels of poor relief. The growth of industrial capitalism and the development of the factory system in the 19th century also created a vast new class of industrial workers whose generally miserable conditions inspired the revolutionary philosophy of Karl Marx (see also Marxism).
Communism, political and economic doctrine that aims to replace private property and a profit-based economy with public ownership and communal control of at least the major means of production (e.g., mines, mills, and factories) and the natural resources of a society. Communism is thus a form of socialism—a higher and more advanced form, according to its advocates. Exactly how communism differs from socialism has long been a matter of debate, but the distinction rests largely on the communists’ adherence to the revolutionary socialism of Karl Marx. Communism is a political and economic system that seeks to create a classless society in which the major means of production, such as mines and factories, are owned and controlled by the public. There is no government or private property or currency, and the wealth is divided among citizens equally or according to individual need. Many of communism’s tenets derive from the works of German revolutionary Karl Marx, who (with Friedrich Engels) wrote The Communist Manifesto (1848). However, over the years others have made contributions—or corruptions, depending on one’s perspective—to Marxist thought. Perhaps the most influential changes were proposed by Soviet leader Vladimir Lenin, who notably supported authoritarianism.