Definition
Capitalism is an economic system where private entities own the factors of production and profits are driven by the motivation for personal gain. In contrast, Communism is an economic system where all property is publicly owned, and each person works and is paid according to their abilities and needs. The key difference is the ownership and allocation of resources, being privately driven in capitalism and community-oriented in communism.
Key Takeaways
- Capitalism is an economic system where private entities own the factors of production and operate for profit, while Communism is characterized by common ownership where means of production are owned by the state or community.
- In Capitalism, the market determines prices through supply and demand, leading to competition, innovation, and a higher standard of living for some. In contrast, Communism aims at eliminating class distinctions by distributing wealth equally, which can limit incentives for innovation and competition.
- The role of the government in Capitalism is limited, often restricted to enforcing laws and regulations, while in Communism, the government has a lot more control over the economy, including planning and directing production and distribution.
Importance
The finance terms Capitalism and Communism are important because they represent two different types of economic systems that govern how wealth and resources are distributed in society.
Capitalism is characterized by private ownership of property and the means of production, where decisions on pricing, investments, and distribution are determined by competition in free markets.
In contrast, Communism suggests that wealth and resources should be owned collectively and controlled by the state or community, and aims for equality among all individuals by eliminating social classes.
The debate between Capitalism and Communism implicates issues of economic freedom, equality, and social justice, and understanding these terms is critical for making informed decisions about economic policies, business strategies, and social reforms.
Explanation
Capitalism and communism represent two contrasting approaches to economic and political systems, each with its unique purpose. Capitalism, grounded on the principle of individual rights, emphasizes free competition and the role of the market in determining the price, production, and distribution of goods and services. The primary purpose of capitalism is to create an environment that encourages technological innovations, entrepreneurial activities, and economic growth, propelling the standard of living and individual wealth.
The mechanism that drives this system is private ownership where individuals and businesses own and control property and resources in order to create wealth and meet societal demands based on what the market is willing to pay. On the other hand, communism espouses a societal structure where property and the production means are collectively owned, aiming to eliminate the socio-economic gap between different classes. Its ultimate purpose is to achieve social equity, where wealth and resources are redistributed evenly across society, eliminating the disparities often perceived in capitalist economies.
Central planning by the state replaces the market mechanism in a communist system. Here, the state determines the production, distribution, and pricing of goods and services, as it’s used as a tool to achieve equitable distribution of resources, economic stability, and societal welfare. The overarching objective of communism is to ensure the needs of all individuals are met rather than a focus on individual wealth creation.
Examples of Capitalism vs Communism
United States vs. Soviet Union: This is perhaps the most prominent and historical example of capitalism versus communism. The United States operates under a capitalist economy, where individual corporations and businesses are owned by private individuals and compete with each other for profit. Each of these entities is allowed to operate with minimal government intervention. This leads to a competitive atmosphere that promotes efficiency, innovation, and economic growth. Conversely, in the Soviet Union during its existence, the economy operated under a communist system, where all property was collectively owned and each person worked and was paid according to their abilities and needs. The government controlled all aspects of the economy, including planning and distribution.
Germany: A great example was Germany, which, after WW2, was divided into two separate countries, West Germany (capitalist) and East Germany (communist). West Germany developed a free-market economy with high levels of industrial output and high living standards, encouraged by foreign investment and a strong emphasis on individual entrepreneurial liberty. On the contrary, East Germany, with a state-controlled economy, struggled with inefficiency, lower industrial output, and a lower standard of living until reunification.
China and Hong Kong: In the late 20th century, this was another clear example. China, a communist country, had state ownership of land and operated in a centrally planned economy. In contrast, Hong Kong, then a British colony, thrived as a bastion of capitalism and free trade. Post-1997, when Hong Kong was handed over to China, the region has operated under a “one country, two systems” principle, thereby retaining its capitalist economy while being part of communist China. This has, however, lead to numerous economic and political conflicts.
FAQ: Capitalism vs Communism
What is Capitalism?
Capitalism is an economic system where private entities own the factors of production. The four factors are entrepreneurship, capital goods, natural resources, and labor. Ownership is acquired through a free market system.
What is Communism?
Communism is an economic system where the state or the community owns the factors of production. It is aimed to avoid the workers’ exploitation by capitalists, and its goal is to create a classless society.
What are the main differences between Capitalism and Communism?
Capitalism thrives on the free exchange of goods in a competitive market, whereas Communism depends on the state or community making most economic decisions for equality among the population. In the capitalist system, individuals and businesses own and direct most of the resources used to produce goods and services, including land and other natural resources labor, and “capital”. In a communist system, the community or state owns these resources, and a central authority makes all economic decisions.
What are the economic impacts of Capitalism and Communism?
In a capitalist economy, competition and the drive for profit lead to efficient outcomes. Capitalist economies are characterized by high levels of productivity, innovation and strong economic growth. On the downside, it can lead to economic instability and inequality.
In contrast, in a communist economy, there is stability as people are guaranteed employment and a certain level of provision by the state. But, this system often lacks competition and incentives for innovation, which can lead to inefficiencies and slow economic growth. Also, the lack of individual property rights can result in a less than optimal allocation of resources.
What are the social impacts of Capitalism and Communism?
The social impact of Capitalism can be both positive and negative. It can lead to economic disparities, but at the same time, it provides an open environment where individuals and companies are free to innovate.
Communism, however, tends to equalize wealth and end up in a more equitable distribution of wealth. But it significantly limits individual rights and freedoms.
Related Entrepreneurship Terms
- Free Market
- Central Planning
- Private Property
- Common Ownership
- Social Equality
Sources for More Information
- Britannica: This online encyclopedia provides reliable information about various topics, including capitalism and communism.
- Investopedia: This is a website dedicated to financial education and definition of economic terms and theories such as capitalism and communism.
- PBS (Public Broadcasting Service): This U.S.-based public broadcaster has numerous articles and documentaries on historical and modern political-economic systems.
- Cato Institute: This public policy research organization is dedicated to the principles of individual liberty, limited government, free markets, and peace. It often analyzes topics like capitalism and communism.
