Defining Capitalism and Socialism

Defining Capitalism and Socialism, From Capitalism to Socialism

The words capitalism and socialism have general but not precise meanings. They combine characteristics of an economy with ideology; to some they mean good and bad, and to others bad and good. One could theoretically define these words with some precision; but if one did so, any given society (e.g., England) might not fit enough of the criteria to be said to be described by one term or the other. On the one hand, we have a theoretical idea of what capitalism and socialism are; on the other hand, we have existing systems that contain elements of both theoretical capitalism and theoretical socialism. This last point becomes relevant when advocates of each system structure their arguments for the system of their choice in theoretical terms but structure evidence against their opponent's in terms of an existing society. We will frame our discussion in this chapter largely in theoretical terms.

In capitalism, economic decision making is done by individuals largely in their roles as consumers, owners of factors of production, and managers of firms; most economic resources are privately owned. In socialism, economic decision making is done by individuals largely in their roles as voters, politicians, and managers of firms; economic resources may be privately or publicly owned, but the control over resource allocation is by government, not by the owners of the resources.

These definitions center on economic criteria, but they inevitably interrelate with political and social issues. Freedom (economic and political) and democracy can be highly developed or retarded under either system. Advocates of capitalism often assert that freedom is possible only under capitalism (read "theoretical capitalism") and does not exist in a significant way under socialism (read "actual socialism"). Defenders of socialism often maintain that true freedom is not possible under capitalism (read "existing capitalism") and is truly attainable only under socialism (read "theoretical socialism"). We will return to this issue of capitalism, socialism, and freedom, because recently it has been extensively discussed.

The two social systems are quite different in terms of their origins. Capitalism is a system that developed historically and then, as economists tried to explain the workings of that system, became an intellectual or theoretical structure. Socialism, in contrast, developed first intellectually as an alternative theoretical structure to existing systems and later began to be tried as an existing system.

Both systems have been continually evolving in their theoretical and, espe­cially, in their actual forms. Part of the evolution has occurred because our theoretical understanding of the two systems as ideal types has advanced. Another part has occurred because existing systems change over time. Because of change, capitalism and socialism today are quite different from what they were fifty years ago; these changes complicate analysis.

From the 1930s through the 1960s, it was capitalism that was changing— theoretically and in practice. The definition of capitalism became more and more compatible with positions of government control of capitalism and separation of ownership and control, because of either managerial control of firms or governmental regulation. In the 1980s through the early 2000s, it has been socialism that has been changing; markets and private ownership in theory and in practice are now seen as consistent with socialism. Thus, there has been a movement in both theoretical and actual socialism toward greater use of the institutions of capitalism, and a shift in both theoretical and actual capitalism toward greater use of the institutions of socialism. These observations have led some to speculate that the two systems are converging, each shedding the faults of its pure form and moving toward a common denominator.