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Socialism Vs. Capitalism

Aastha Dogra
A layman might think that socialism is a 'people-centric' social system while capitalism is more of a 'profit-centric' one. Tap through for more...
They are two opposing schools of thought, they raise varied emotions in people, from a complacent ignorance to militant hatred, both these ideologies have their share of adherents and opponents. Countries have gone to war over them, and many others have adopted them as socio-economic systems for progress.
It remains to be seen, however, which of the two will have the last laugh in the changing dynamics of the 21st century.
Capitalism, these days, is a word that brings to mind images of sleek, silk liveried business tycoons ensconced in their towers of steel, sipping champagne and supping on caviar, while their tentacles of greed spread out to cover the globe and suppress free men everywhere.
Yet, capitalism started out as a system that allowed its members to be free, to trade on equal terms, to resist control and progress in life by virtue of merit and ability, and not subsides and dole-outs. Why then are there two such distinct views on what is essentially a very simple idea?
The concept of Socialism, in the United States, is often confused with Communism or Marxism. It does not evoke images of warm hearts, laughing children, and happily-employed people, a vision promoted by the erstwhile regimes of communism in the world.
Socialism has a negative connotation in America, being identified with increasing government control, the loss of private property, and the ability to trade freely on the open market, among several others. Interestingly, none of these fears are in any way unjustified or misconstrued, as socialism does advocate these very same things.
However, the idea behind such regulation and control is of an intellectual, rather than pragmatic nature.

The Evolution of Socialism


Socialism, if isolated from its affiliations with political theory, is essentially an economic ideology. Its roots can be found in ideas first put forth by classical economists in the 18th and 19th centuries.
The social thinker and aristocrat most often credited with using the term Socialism is the Frenchman Henri de Saint-Simon, although other notable economists like Robert Owen and Pierre Leroux have also used the term in their theories on economic development and the arguments against the exploitative nature of capitalism.
The ideas of socialism and equality gained ground in the years following the industrial revolution, as the common people realized that they had been cheated, first by the feudal lords and then by the industrialists that took their place.
Notable revolutions in the 18th century, such as the French Revolution and the American War of Independence, were clear indications of a people rebelling against exploitation. In more recent times, the revolutions in Russia, Cuba, and China heralded the birth of socialist orders in those countries.
The revolutionary ideas of Karl Marx and Frederick Engels, revealed to the world in epic treatises like Das Capital and The Communist Manifesto, gave the necessary ideological basis for this economic theory.
It was also the reason for socialism becoming part of political theory, as many leaders thought of it as a convenient tool to instill brotherhood, nationalism, and obedience in the populace.


Socialism essentially states that capitalism, or in fact any other form of social governance and economic practice, tends to seize the factors of production from the rightful owners - the people.
It maintains that a capitalist system is exploitative and dehumanizing to the workers who are made to produce the goods for their own consumption, but never compensated enough to be able to enjoy the fruits of their labor. The profits are hoarded by a select group of elites, who keep the system running, fueled by greed and caprice.
Against this, the socialist economy would have state-ownership of the factors of production, or ownership by the public, with appointed representatives from the workers.
In an ideal socialist system, the need for economic metrics like money, interest, and capital would cease, as the production and distribution of goods and services would happen according to the contribution of the workers themselves, and would not be decided by the Owner or Lord of the business.
The businesses would be run on a principle of self-management and self-governance, and there would be no rigid bureaucratic hierarchy, as only technically accomplished persons would be put in positions which required their requisite skill and experience.

A Transitory Phase?

According to the classical economists of times past, socialism can also be considered to be a phase between the economic stages of capitalism and communism.
This reasoning comes about from the fact that once the exploitative practices of the capitalists reach a tipping point, the collectivist majority of the populace will rise up against tyranny, and take control of the government, businesses, and other institutions previously serving the needs of the capitalists.
They would then go about transforming the society along socialist lines, and bring about equality and justice for all its members.
This is still a transitory phase, as socialism will eventually evolve into communism, where everything is state-owned, and the people are provided for according to their needs and not their contribution.
It should be noted, therefore, that capitalism as an economic system can exist side by side with socialist values, however, socialism will gradually take over and lead to the establishment of communism.
However, this is not what the real world has experienced in the past 100 years. There are certain aspects of capitalism which make it a far more pragmatic system than socialism could ever be.

The Evolution of Capitalism

Origins in Mercantilism

Capitalism, as a defined economic system, evolved in during the 16th and 17th centuries, with the rise of merchant capitalism and mercantilism. This was an era when colonial powers such as Britain, France, Spain, and Portugal sent their explorers out into the world to discover new sea routes, and new lands which could be traded with.
The discovery of America and the New World was a big boost to trade and the promulgation of industrial and technological progress across the globe. Feudal lords were being rapidly replaced by the merchants and traders sprouting up everywhere, from London, to Bombay, to the African continent.
Intensive trade between colonies became common, and business travel began in earnest. However, this era is still considered a precursor to true capitalism, as the labor and land market all over the world was still unregulated.
This changed in the mid 19th century, when land and labor also began to be considered factors of production under state laws of large capitalist countries, such as the United Kingdom.

The Factory System

Capitalism, as we know it today, owes its origins to industrial boom of the mid 18th century. During this time, the various inventions and innovations in machinery, and the buildup of capital over the past 100 years, gave rise to a new form of business; the factory system. The factory system guaranteed mass production, mass employment, and massive profits.
The merchant of yesteryear, sailing with his ships full of spices and textiles, was replaced by the industrialist, with his monolithic buildings and ruthless business practices.
Also, around this time, the laissez-fair theories of economists such as Adam Smith and David Ricardo gained a wide following for their commitment to the accumulation of wealth and comparative advantages.
Capital accumulation and expansion became the prime focus of business everywhere. This was the era of the charter companies, such as the British East India Company and the Dutch East India Company, which became the world's first multinational corporations.

Modern Form

The 19th century saw the rise of American capitalism, as the country expanded infrastructure networks, and business magnates such as J.P Morgan and J.D Rockefeller established giant corporations like US Steel and Standard Oil.
Capitalism, however, was given its greatest push after World War II, when American industry, coupled with the resurgence in Europe, began the mass production of both industrial and consumer products. The banking industry also expanded considerably in this era.
This was also the time when socialism and communism gained a foothold in several parts of the world, and the struggle for dominance began between the two powerful ideologies. It became a political battlefield between capitalist America and the communist controlled Soviet Russia.
The proponents of capitalism call it the Light of the Free World, a system which allows the individual to decide his own fate, without government or societal oppression and control. Capitalism grants opportunities for free trade and association between men, unlike socialism, which takes away the right of man to create and own things.

Capitalism vs Socialism: The Balancing Act

The Soviet Experiment

The year 1917 was a seminal one for what was to become the largest country on earth; Russia. The October Revolution caused the overthrow of the Tsar and the establishment of a socialist regime under the leadership of Lenin.
Under the command of Joseph Stalin, there was mass nationalization of resources, and a policy of heavy industrial expansion, which ultimately led to catastrophic famines and the loss of millions of lives.
However, there was also state-sponsored progress, which resulted in militarization and the establishment of large national corporations, which ran everything under strict government control. The Soviet experiment in socialism and later communism was based on the principles of the father of the ideology, Karl Marx.
His book, the Communist Manifesto, laid down the foundations of socialist and communist thought in the modern world, examining the failings of capitalism, and calling for a change in the way men lived their lives.
Under the socialist system, the Soviet state attempted to create a perfect society, where the government looked after the people, there would be adequate housing and employment opportunities, and social security for all.
To do this, they isolated themselves from the rest of the world, by putting up the infamous Iron Curtain to separate the socialist states of Soviet Russia from the evil capitalist empires of the west.

The results were disastrous, to say the least.
The Soviets invested way more money into their space programs and military expansion than they did for the welfare of the people. This was done to maintain an image of prosperity and power for their American rivals in the heat of the Cold War years. Yet, the economy was collapsing at home. The USSR could never achieve socialism, let alone communism.
It merely established a system of state-sponsored capitalism, which carried on the cycles of businesses like in any other socialist-market driven economy. They were forced to trade with other countries like China and India to keep their economy functioning, or the currency devaluation and inflation would be so great that the economy would collapse.
The good that did come from the socialist experiment in Russia was that a predominantly agrarian, feudal society was transformed into a superpower, with the help of centralized planning and state control. However, socialism in Russia failed ultimately.
The balance between rigid control and flexible innovation became too much by the end of the 1980s, their constant warring with Afghanistan didn't help either. The USSR collapsed due to the government's bureaucratic ineptness, corruption, and an apathy toward the poverty-stricken inhabitants of the nation.
The concept of pure socialism does not work, period. It sounds nice to collectivist thinkers who want the world to wear the same colors, but forget that if it does, it risks losing all semblance of humanity.

The American Way

Capitalism, on the other hand, bloomed in America much after it had overtaken Europe in the 16th and 17th centuries. Before American independence from Britain, the economy was mostly driven by agriculture, and small industries like handicraft.
The only form of capitalism in terms of ownership was in the tobacco plantations down south. Capitalism in America has been almost exclusively ownership-driven, it is also highly individualistic in nature.
The major push to American capitalism in the 19th century came from taking forcible possession of the lands of the native Indians, something which the British had been reluctant to do. American capitalists, on the other hand, had no such qualms.
They violently seized large swathes of land from the Native Americans, put them in reserves, and distributed their land among the rich and powerful of the country. This was one of the key sources of wealth of the industrialists and robber barons. The country was rich in natural resources, and was exploited to the hilt in the 18th and 19th centuries.
Even the possession of men became prevalent and even encouraged. Moreover, there were practically no laws against such indiscriminate plundering of the country by a select group of elite businessmen. In fact the government encouraged westward exploration, and signed numerous laws which gave full reign to the capitalists.
Soon, the industrial revolution brought railroads, factories, and gold rushes all over the country. Inventions like the radio and telegraph were used extensively for business as innovative tools for communication.
This is how the capitalist dream in America was realized in the closing years of the 19th century, increasing income disparities and class barriers like never before. It brought in untold riches, but also great suffering, especially for the disenfranchised and the poor.
After World War II, things steadily changed in the socio-economic condition of the nation, as social welfare and equality gained in importance. Laws were enacted against power-hungry corporations, wage laws and factory laws were strengthened.
Does this still sound like pure capitalism? Or more like socialism in a capitalist economy? The truth is, America has steadily turned into a mixed economy over the last 50-odd years, as the government is contributing more and more to the welfare of the state.
A definition of Welfare Capitalism would be much more suitable for the state of the American economy today.
Capitalism as a system, works, not because it is a good and just system, God knows it has its faults which have shown themselves over the years. It works because it's based on principles of transaction and value.
There is a price for the produce, a compensation for its production, and an opportunity for unbridled innovation in the capitalist system. Every individual with the courage to go out into the world and do business will be given a chance.
Success in a capitalist system depends upon merit and adaptability to changing conditions, for a capitalist economy is ruled by the market forces and not by government policies.
To survive, one must learn to thrive in the market. Today, this definition of capitalism is all but obsolete, as even America, the last and greatest bastion of capitalism, is struggling to cover her finances with government stimulus packages and taxes.
The conflict between socialism and capitalism is not about which is the better theory. Socialism may sound just and equitable on paper, but it's capitalism that works in the real world.
Socialist countries have decayed over the years as a result of human greed and corruption, yet this same philosophy has pumped lifeblood through the capitalist economies for centuries. The way forward is through a combination of the two, laws to check the exploitative nature of capitalism, along with the freedom to trade and live productive lives.
To own things but not at the expense of others, to do business as one desires but with benefits and social security for the workers. To have the government as a guiding hand for the economy and society, but not present in the living room dictating terms to its citizens.
Most modern economies in the world today are mixed economies. Even the socialist or communist ones like China, have turned social capitalist, with the state allowing business and trade to flourish.
It is perhaps a fitting tribute to both capitalism and socialism, that the world today has found what works about both of them, and tried to imbibe these values in their functioning.