Are you thinking about asking an economist out for coffee, but cannot for the life of
you figure out an appropriate conversation starter?
Well, the age-old debate of capitalism versus socialism could work perfectly; but only if
you understand what these two systems are about and how they affect the economy of a
country and its social structure.
This is what today’s video is all about.
Some of the questions we attempt to answer are is capitalism as evil as it has been peddled
to be?
Will socialism solve all our problems?
What is pragmatic capitalism?
Stick around and we just might get you that second date.
A society is made up of some fundamental pillars.
There is trade, which is the exchange of goods and services for money, or in the case of
barter trade, for other goods and services, as needed in the economy, such as maybe trading
corn for meat as an example.
In order to meet demand, capital goods are used to provide these products.
An example of capital goods are the equipment and the human labour needed in a company that
prints notebooks.
Most societies appreciate and acknowledge the need for an education, whether formal
or informal.
Education is meant to equip the coming generation with the skills needed to survive in the environment
they are growing up.
The systems of capitalism and socialism present different ways in which a society can be arranged
so as to meet the needs of the individuals who live in it.
The main distinguishing factor between these two systems is in the entity that has control
over the major means of production.
My friend Chad’s favorite breakfast is egg toast.
The two main ingredients he needs to start his day with a smile are eggs and bread.
There are different ways through which his bread and eggs get to him.
In a capitalist society, a local farmer who owns 300 chickens and employs two farmhands
supplies the eggs.
The bread is transported to the grocery store from the state capital, where the national
bread supplier is headquartered.
It is at this grocery store that Chad gets his ingredients.
As you can see here, the major means of production are owned by private individuals; the farmer
and the shareholders of the company, who are the public citizens.
These individuals aim to make a profit for their own personal gains, like the farmer
who is saving up for his child college education and the shareholders of the bread company
who want to receive dividends at the end of the year.
These private means of production are also the source of most of the country’s employment.
The farmer employs two hands to help him manage all those chickens.
On the other hand, the bread company employs a driver, chefs, accountants, a CEO, among
others.
These employees depend on the bread company for their economic livelihoods.
In socialist societies, the government is the major employer and owns the main means
of production, while in communist societies, these are owned collectively by the people
in the society as there is no employer.
We will get to these in a bit.
A common trait in capitalistic societies is high inequality in income distribution.
The people who own the means of production get more value for their efforts and time
than those who work under them.
For instance, the farmer and his hands may put in the same amount of time in rearing
the chicken, but the farmer earns more for his time than his hands.
The same can be said of a driver working for the bread company, compared to the biggest
shareholder who owns 43% of the company.
Education also plays a big part in income distribution.
The more educated earn more money as they have highly-marketable skills.
And Since quality education, in capitalistic societies are mainly in private institutions
which are often expensive for all, (just look at the farmer who is saving up for his kid’s
fees) only a few are able to afford it.
Thus the people who have lower incomes are also unable to get the highly-marketable skills.
All these factors and more contribute to the huge wealth gap between the rich and the poor.
Just look at the United States; the top 7% of the country’s citizens owns about 80%
of Americas wealth.
To learn more about this wealth gap, watch our video on The Growing Wealth Inequality
in the World and America; the link is in the description box below.
This high inequality between the rich and the poor is one of the main problems that
critics of capitalism point out.
The wealth of the rich is growing more by the day, only to later be inherited by their
children and then their children’s children.
Imagine, if the wealth of a company worth billions is growing at a rate higher than
the GDP of a country, how much will it be worth after several generations?
How would it compare to the bigger economy?
In capitalistic society, the prices of goods and services that are circulating in the economy
are a factor in their cost of production and consumption habits.
High price of goods is often due to high cost of production and high demand.
For instance, if more people start buying the bread from the national supplier, the
company may raise its prices to enjoy more profit.
Chad, however, likes his bread cheap and when this happens, he may decide to switch to a
local bakery or start his own bread business to fight the corporation!
This is the economic freedom that is enjoyed by capitalist societies.
There is an ease of doing businesses, as long as you have an idea and the means to fund
it, and its legal, no one will stop you.
Consumers also enjoy a variety of goods and services at varying prices, which is why Chad
could easily switch his bread guy from the national supplier to the local bakery.
Capitalism fosters innovation, because businesses are always looking for ways to cut down costs
and increase sales.
New technological inventions also aid in increasing the quality of the product being manufactured,
though it is likely that the aim would be to out-sell their competitors.
Quality is a good selling point, but only if it is something that the consumer wants.
Finally, when the economy is under stress, capitalist economies react differently from
socialist ones.
In socialistic societies, the government attempts to buffer its citizens during bad economic
times through massive employment, even if the pay is not equivalent to the amount of
work that these workers are doing.
Capitalist economies self-regulate unless the government steps in.
Self-regulation means that companies will lay off people and take other measures to
cut down costs, and this leads to massive unemployment.
Now, let us see what a socialist society looks like.
The main aim of socialism is to foster equality among members of its citizens.
The social and institutional structure of this society is very different from a capitalistic
society, in that the major means of production are owned by the government.
For instance, there may be a single corporation that produces a bulk of the clothes that are
consumed by the countries citizens.
This corporation would be owned by the government, which then employs the individuals that are
working there, making them the employer and controller of capital.
Private individuals can start and run businesses in this system.
However, they will face difficulties in setting up due to stringent regulations and high taxes
that are meant to discourage new enterprises.
Due to the government being the biggest employer, the socialist government is able to do massive
employment during economic hardships.
They do this to foster equality in income among all the members of the society.
This equality is further fostered by providing its citizens with free healthcare and education.
The main disadvantage of socialist countries is that it makes them susceptible to authoritarians
who are unwilling to let go of power.
This is because all economic and social power is concentrated in one place making it easy
to control a whole country.
However, most countries do not have a completely socialist or capitalist society.
Even in self-declared socialist countries like Venezuela, have capitalist elements.
Similarly, there is some aspect of socialism in a strongly capitalist country like the
United States.
As great as socialism sounds, capitalism fosters technological inventions and it’s a fact
that people genuinely work harder when they know they are directly benefitting.
Socialism in capitalist economies is usually intended to counter the inequality effect.
For instance, free education and universal health care.
My hope is that you have enjoyed this economy crash course on socialism and capitalism and
that you are more knowledgeable because you watched it.
Talk to us about it in the comment section below.
Till next week!