Capitalism and Socialism are both economic schools of thought that don’t exist in their pure form. Most countries have some free market principles, some government run entities, and some social programs in place. The larger the government versus private industry the more control the government exerts over the economy and changes the performance benchmark from profits to pleasing the government official to whom you report. Let’s examine the different economic systems.
Capitalism is based on the principles of supply and demand and the ability of buyers and sellers to make the best decisions for themselves. Resources and means of production are owned by private individuals and markets are relatively free of government intervention. There is an emphasis on individual profit versus making decisions to benefit society as a whole. Capitalism generates efficient but not necessarily fair economic activity.
The US is probably the best example in the world of an economic system that is primarily free market and capitalistic but has established social programs for lower income and older Americans like Medicaid, food stamps, and welfare. Social Security and Medicare are social programs which are based primarily on recipient payments into the system, but the payments in 2018 were short of the expenditures by $600 billion. There are also numerous federal, state, and local regulations that put limits on the free market. The size of the US government and its intrusion into the free market has grown to the point where it limits the excesses of capitalism (monopolies) but also slows the growth of the economy.
The beauty of the free market system is that decisions on what products to make and what to charge for those products are made by a wide variety of individuals who are risking their own money on those decisions. This gives consumers the unbridled opportunity to purchase a wide variety of products based on their sole judgment on what product gives them the best value for their money. Both the producer and consumer are making economic decisions without the interference of the government except for safety concerns.
Socialism is based on the principle that individuals should have access to what they need, not necessarily what they can pay for. In most countries identified as socialist/communist (Venezuela, China, Russia, Cuba) resources and means of production are owned by both the government and private individuals and markets are to one degree or another controlled by the government for the benefit of society as a whole. There is a centralized authority that controls a significant portion of the economic structure. This authority ultimately decides what types of products are produced, the price they are sold for and what quantity of goods should be made available.
Social democracies like Sweden, Finland and Germany identify themselves as capitalist but with stricter regulations, some government ownership of industries and government programs to distribute resources more evenly. Sweden, for example, offers tuition free college, free daycare and preschool, government run healthcare, pensions with small employee contributions, housing subsidies for low income individuals, 480 days paid maternity leave, and four to seven weeks paid vacation. In 2018, Sweden’s taxes and social insurance contributions as a percentage their total economy was 43.9% This compares to the United States where the percentage was 24.3%. The higher the percentage, the more money is spent by government instead of by private individuals. Several Presidential candidates are proposing programs like Sweden’s for the US. According to the Washington Post, these programs would cost, depending on the different proposals from $4 trillion to $50 trillion over 10 years. They have proposed a VAT tax (national sales tax), a carbon tax, a wealth tax, and increased taxes on payroll, corporate, and high wage earners to pay for these programs.
The US projected spending for 2020 is $4.7 trillion, with a deficit of $1.1 trillion, and a national debt of over $24 trillion. If we spent 43.9% of our total economy on social programs like Sweden, that would increase our annual spending by $4.3 trillion to $9.0 trillion. Currently, 5% of the top wage earners pay 65% of all income taxes. To raise the additional $4.3 trillion, middle and lower wage earners’ taxes would have to be increased exponentially.
