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Introduction The key texts highlighting the differences between capitalism and socialism include Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, Karl Marx and Friedrich Engels’s Communist Manifesto, and the criticisms of socialism offered by Ludwig von Mises in his essay ‘Economic Calculation in the Socialist Commonwealth’ and Friedrich Hayek in his essay ‘The Use of Knowledge in Society’. Definition of key terms The exact definitions of the terms remain contested, but a common distinction between ‘capitalism’ and ‘socialism’ is based on the differences in ownership arrangements: capitalism is defined by private property rights and voluntary exchange; socialism by the collective ownership of the means of production (which the state then manages) (Butgereit and Carden, 2011). Main body Socialism is best defined in contrast with capitalism, as socialism has arisen both as a critical challenge to capitalism, and as a proposal for overcoming and replacing it. Capitalism involves certain relations of production, these comprise certain forms of control over the productive forces—the labor power that workers deploy in production and the means of production such as natural resources, tools, and spaces they employ to yield goods and services—and certain social patterns of economic interaction that typically correlate with that control (Fraser 2014). Fraser (2014) further explains that capitalism displays the following constitutive features: (i) the bulk of the means of production is privately owned and controlled (ii) people legally own their labor power (iii) markets are the main mechanism allocating inputs and outputs of production and determining how societies’ productive surplus is used, including whether and how it is consumed or invested. An additional feature that is typically present wherever (i)–(iii) hold, is that: (iv) there is a class division between capitalists and workers, involving specific relations (for example, whether of bargaining, conflict, or subordination) between those classes, and shaping the labor market, the firm, and the broader political process (ibid).
The existence of wage labor is often seen by socialists as a necessary condition for a society to be counted as capitalist (Schweickart, 2011). Typically, workers (unlike capitalists) must sell their labor power to make a living. They sell it to capitalists, who (unlike the workers) control the means of production. Capitalists typically subordinate workers in the production process, as capitalists have asymmetric decision-making power over what gets produced and how it gets produced. Capitalists also own the output of production and sell it in the market, and they control the predominant bulk of the flow of investment within the economy. The relation between capitalists and workers can involve cooperation, but also relations of conflict (for example, regarding wages and working conditions). This more-or-less antagonistic power relationship between capitalists and workers plays out in a number of areas, within production itself, and in the broader political process, as in both the economic and political domains decisions are made about who does what, and who gets what. There are possible economic systems that would present exceptions, in which (iv) does not hold even if (i), (ii) and (iii) all obtain. Examples here are a society of independent commodity producers or a property-owning democracy (in which individuals or groups of workers own firms). There is debate, however, as to how feasible—accessible and stable— these are in a modern economic environment (O’Neill and Thad, 2012). Another feature that is also typically seen as arising where (i)–(iii) hold is this: (v) production is primarily oriented to capital accumulation (that is, economic production is primarily oriented to profit rather than to the satisfaction of human needs) (Roemer, 2017). In contrast to capitalism, socialism can be defined as a type of society in which, at a minimum, the bulk of the means of production is under social, democratic control (Schweickart, 2011). Changes with regard to features (ii), (iii), and (v) are hotly debated amongst socialists. Regarding (ii), socialists retain the view that workers should control their labor power, but many do not affirm the kind of absolute, libertarian property rights in labor power that would, e.g., prevent taxation or other forms of mandatory contribution to cater for the basic needs of others (Cohen, 2009). Regarding markets are the main mechanism allocating inputs and outputs of production, there is a recent burgeoning literature on “market socialism”, which is discussed below, where proposals are advanced to create an economy that is socialist but nevertheless features extensive markets (Steimer, 2014). Finally, regarding primary production through capital accumulation, although most socialists agree that, due to competitive pressures, capitalists are
wisely or whether they are being wasted. To paraphrase Mises, there is no way that the socialist planners can tell us whether we are satisfying society’s most urgently-felt wants. Hayek granted the socialists the assumption that economic calculation might be feasible if by ‘economic calculation’ we meant ‘solving systems of equations’, but then noted that the economic problem is not one of simple calculation. Hayek (1945, p. 20) shows that the fundamental problem any economic order faces ‘is a problem of the utilization of knowledge not given to anyone in its totality’. To put it another way, economic structures must find a way to ‘secure the best use of resources known by any member of society, for ends whose relative importance only these individuals know’ (Hayek, 1945, p. 520). Therefore, even if rational economic calculation is possible when factors of production are commonly owned, the economic problem is still one that can only be solved by private ownership of the means of production. Hayek focuses on ‘knowledge of the particular circumstances of time and place’ (Hayek, 1945, p. 521). This knowledge is composed of tacit knowledge (which is knowledge that is wholly or partially inexplicable, such as the knowledge employed by one’s nervous system when he or she walks across a room) and local knowledge (which is information about a specific location in a specific time, such as knowledge about traffic patterns in Memphis during rush hour). Planners external to the individual cannot know the former, whereas planners external to a particular region cannot know the latter. Hayek further remarks that diffused knowledge ‘is knowledge of the kind which by its nature cannot enter into statistics and therefore cannot be conveyed to any central authority in statistical form’ (Hayek, 1945, p. 524). And even if diffused knowledge could be measured, collected and transported to a central authority, it would be impossible for that central board to analyse the information and provide feedback about production line changes necessary for improvement. Parameters change rapidly. There simply would not be enough time for any central planner to continually adjust the plan to changing wants, ideas, cultures, institutions and organisations. Socialism cannot solve Hayek’s fundamental problem. Capitalism, which generates prices, can. It is not perfect, but the market is able to transmit large amounts of diffused knowledge to individuals who seek only to improve their own well-being. The individual consumer hardly needs to know what happens anywhere in the world that might affect his decision- making. He does not need to know why certain goods are more available than others are or how difficult the factors of production were to acquire. His only concern is ‘how much more
or less difficult to procure’ some things are compared with others (Hayek, 1945, p. 525). Though imperfect, prices will address his concern and the result is a large number of individuals engaging in transactions without having to repeatedly turn to a third party and ask if their trade is ‘fair’. Conclusion Socialism and capitalism are different on many aspects has been highlighted in this essay. This essay attempted to compare and contrast capitalism and socialism by first defining, describing, explaining and finding differences between these two aspects. References Butgereit, B., & Carden, A. (2011). Capitalism, Socialism and Calculation. Economic Affairs , 31(3), 41-45. Cohen, G.A. (2009). Why Not Socialism? Princeton: Princeton University Press. Dardot, P., & Laval, C. (2019). Common: On revolution in the 21st century. Bloomsbury Publishing. Fraser, N. (2014), Behind Marx’s Hidden Abode: For an Expanded Conception of Capitalism, New Left Review , 86(3): 55– Hayek, F. A. (1945) ‘The Use of Knowledge in Society’, American Economic Review , 35, 4, 519–530. Mises, L. von (1990) ‘A Hundred Years of Marxian Socialism’, in R. M. Ebeling (ed.) Money, Method, and the Market Process: Essays by Ludwig von Mises , Norwell, MA: Kluwer Academic Publishers with Praxeology Press of the Ludwig von Mises Institute, pp. 215–231. O’Neill, M. and Thad, W. (2012. Property-Owning Democracy: Rawls and Beyond , Oxford: Wiley-Blackwell. Roemer, J.A. (2017). Socialism Revised, Philosophy & Public Affairs , 45(3): 261–315. Schweickart, D. (2011). After Capitalism. Second edition. Lantham, MD: Rowman & Littlefield. Steiner, H. (2014). Greed and Fear, Politics, Philosophy & Economics , 13(2): 140–150. Wright, E.O. (2010). Envisioning Real Utopias , London: Verso.
