Capitalism and socialism

Who decides how much rice is grown, what it sells for and who gets to eat it? In some countries the market decides; in others the state plans; in a farming village, custom may decide. Those answers define an economic system.

Learning objectives

By the end of this lesson you should be able to:

• define an economic system
• describe the traditional (subsistence) economy
• describe the features of capitalism and socialism
• state the advantages and disadvantages of each

What is an economic system?

The main systems are capitalism (the free market economy), socialism (the command or planned economy) and the mixed economy. This lesson covers capitalism and socialism, after a look at the oldest system of all; the mixed economy is in the next lesson.

The traditional (subsistence) economy

In a traditional economy, the basic economic questions are answered by custom and tradition: people produce what their parents produced, in the same way, mainly for their own use.

Features:

1. Production is mainly for own consumption (subsistence), with little left over to sell.
2. Simple tools (hoes, cutlasses, canoes) and family labour; little capital.
3. Custom decides who does which work and how output is shared.
4. Exchange is often by barter or within the extended family.
5. Low output and low incomes, and slow change.

Capitalism (the free market economy)

Features of capitalism

1. Private ownership of land, factories and other means of production.
2. Profit motive: firms produce in order to make a profit.
3. The price mechanism decides what is produced: goods that consumers want, and are willing to pay for, earn a profit and are produced.
4. Consumer sovereignty: consumers "vote" with their money for the goods they want.
5. Free enterprise: people are free to start businesses and choose their jobs.
6. Competition among firms for customers.
7. Little government interference in economic activity.

Advantages of capitalism

• Competition encourages efficiency, better quality and lower prices.
• The profit motive encourages hard work, innovation and new products.
• Consumers enjoy a wide variety of goods and services.
• People have freedom to own property, start businesses and choose occupations.
• There is no need for a large, costly planning bureaucracy.

Disadvantages of capitalism

• Inequality of income and wealth: the rich can become richer while the poor fall behind.
• Monopolies may form and exploit consumers with high prices.
• Goods that do not make a profit, such as street lighting or roads in remote villages, may not be provided.
• Firms may neglect the environment or workers' welfare in search of profit.
• Booms and slumps can lead to unemployment.
• Firms may waste resources on advertising and on producing luxuries for the rich.

Socialism (the command economy)

Features of socialism

1. State ownership of land, factories, mines and other means of production.
2. Central planning: a planning authority decides what, how and for whom to produce.
3. Social welfare is the aim, rather than profit.
4. Prices are fixed by the government, not by demand and supply.
5. Little or no competition between producers.
6. More equal distribution of income.

Advantages of socialism

• Less inequality: income and wealth are shared more evenly.
• Essential goods (food, health care, education, housing) can be provided for everyone.
• Resources can be directed to national priorities, such as heavy industry or defence.
• Planning can reduce unemployment and avoid wasteful competition.

Disadvantages of socialism

• Lack of incentive: without profit, workers and managers may not work hard or innovate.
• Bureaucracy and inefficiency: planning everything centrally is slow and costly.
• Limited choice for consumers; shortages and queues may occur.
• Restriction of freedom: people cannot freely start businesses or own property.
• Wrong decisions by planners affect the whole economy.

Comparing the two

WASSCE examination focus

Quick check

1. What decides what is produced in a capitalist economy?
2. Give two advantages of socialism.
3. Why might a capitalist economy fail to provide street lights in a small village?

Answers: 1. The price mechanism (consumers' demand and producers' supply). 2. For example: less inequality; essential goods for all; planning towards national priorities. 3. Because no private firm can make a profit from them: people cannot easily be charged for using street lights.