Javatpoint Logo
Javatpoint Logo

Difference between Capitalism and Socialism

The nation is made up of several smaller systems. Different nations have different systems. For instance, we can see several economies that are capitalist or socialist. There are mixed economies as well. Capitalist and social economies are essential as they help in making the country stable. Well, one must not confuse themselves between the two terms. They have separate meanings, and they also differ in several aspects. So, let us begin by discussing the primary meaning.


Capitalism is defined as an economic system wherein the trade of the country and other industry-related decisions are taken by the owners. The state government has nothing to do with it. The profits made are taken by the owners of the trade and industries. One of the significant examples of capitalism includes Singapore, which is a capitalist economy. The taxes charged on people are low, and they have the necessary freedom to operate their business and trade nationally or internationally.

Difference between Capitalism and Socialism


Socialism is a political and economic concept that focuses on one thing, i.e., communism. Socialism lays emphasis on the fact that the profit earned and the wealth made must be distributed equally among the workers. The profits made belong to the workers who make the products, rather than the owners of the trade and business. Some examples of socialist countries include the Soviet Union, Cuba, Vietnam, the Republic of Mozambique, etc. Now, you must be wondering as to what are the differences between capitalism and socialism. The points of contrast between them are given below.

1. Capitalism is defined as an economic system in which the profit earned by the trade and business is distributed among the business owners rather than the state government. On the other hand, socialism is defined as a political and economic concept in which the profit earned is distributed among the community as a whole.
2. In capitalism, the profit is not evenly divided, which leads to inequality among the workers. In socialism, the profits are equally divided among the workers and owners irrespective of being rich or poor.
3. The trade and business are owned by the industrialists or businessmen. The businesses and trades are handled by the state government.
4. In capitalism, the motivation to earn an incentive encourages the owners to be efficient in all the areas of the economy. In socialism, no incentives are provided to the workers that make the business inefficient in work and production.
5. In capitalism, jobs are not readily provided to people. Instead, in times of recession, the unemployment level goes up rapidly. One of the significant examples of unemployment includes the Great Depression. On the other hand, in socialism, the jobs are provided by the government. Therefore, the government can employ as many people as it wants.
6. The prices of the products are set by the market forces. For instance, the owners of trade and business can charge a high amount for a product based on its demand. The prices of the products are determined by the government.
7. The taxes charged in capitalist economies are limited. In socialism, the taxes charged are high because the government spends more on providing services to the customers.
8. The prices of the products are based on their supply and demand. On the other hand, the prices are controlled by the government irrespective of demand and supply.
9. The wealth distribution is set up by the owners of the trade and business. The profit distribution is determined by the state government.

So, these are some of the basic points of contrast between capitalism and socialism. Capitalism and socialism are practiced by different economies. Well, there are certain advantages and disadvantages attached to both the terms. So, let us discuss them one by one.

Advantages of Capitalism

  1. Efficiency: The people working in capitalist industries are more efficient as they are motivated by the incentives provided to them. The workers produce the goods that are in demand.
  2. Innovation: People working in capitalist industries are efficient and produce the products that are in demand. However, the owners do not stick to only one kind of production; instead, they invest in various new products. This leads to growth in demand for the products.
  3. Growth of the Economy: When the workers are provided with incentives, they are motivated to work efficiently. This, in turn, leads to the economic growth of the country. This helps in increasing the GDP, thereby improving the standard of living of people.

Disadvantages of Capitalism

  1. Monopoly: The business and trade owned by the people create a sense of monopoly in the market. They can charge high rates for the products that they are offering.
  2. No Social Benefit: There is no social benefit of the workers in capitalism. The externalities are ignored, which leads to the poor living standard of the people. These externalities include pollution, poor health conditions, transport, etc.
  3. Inequality: The people working in capitalist industries often face inequality when it comes to profit distribution. The owners of the industries take a big chunk of the wealth earned.

Advantages of Socialism

  1. Equality: The profit earned is distributed evenly among the workers and the owners leading to equality among the people. The people are motivated, and this, in turn, leads to a higher standard of living.
  2. Public Interest: The companies are owned by the government, so the profits earned and the services offered are in response to the public interest rather than the business owners. The government focuses on providing good services to the people.
  3. Environment: A socialist economy takes care of the environment as well. It focuses on having the least pollution for making products that don't harm the environment much.

Disadvantages of Socialism

  1. Fewer Incentives: There are very few, or negligible incentives offered to the people. This, in turn, leads to inefficiency among the workers as they are not motivated enough.
  2. Poor Health Care: People working in socialist economies have poor healthcare facilities. The government faces a financial crisis that affects the healthcare systems of the nation.

So, these are the pros and cons regarding capitalism and socialism. Capitalism and socialism are essential for the economies. Different economies follow different political and economic concepts. The major difference between them is of incentives provided to the workers. The workers are motivated in capitalism and vice-versa. Thus, both capitalism and socialism are practiced by different economies.

Next TopicDifference Between

Youtube For Videos Join Our Youtube Channel: Join Now


Help Others, Please Share

facebook twitter pinterest

Learn Latest Tutorials


Trending Technologies

B.Tech / MCA