Capitalism Versus Socialism
Today, traditional economies are few and far between, command economies are waning, and pure market economies are nonexistent. What does exist throughout much of the world are varying combinations of command and market systems; in effect, economic hybrids. The two most common economic hybrids are socialism and capitalism. Imagine an economic continuum with a pure command economic system on the left and a pure market system on the right. If you were to arrange modern nations along this continuum, towards the far left would be places like North Korea and Iran, in the middle would appear many western European and Latin American nations, and to the right would appear many former British colonies, such as the United States, Australia, and Hong Kong. For all practical purposes, those nations on the left were described in the discussion on command economies. However, the middle and the right of the continuum represent the dichotomy of socialism and capitalism.
Do not confuse capitalism with democracy. The two do not necessarily go together. India is the world's largest democracy, but it is considered a socialist economy. Hong Kong has never really experienced democracy and yet it is the epitome of capitalism.
The difference between these two systems lies in the degree of government influence and state ownership of the factors of production. Countries that are capitalist rely on market prices for efficient product allocation, promote the private ownership of economic resources, and leave most economic decisions to individuals. They do, however, permit for government to regulate markets, preserve competition, subsidize and tax firms, enforce private contracts, and redistribute income from workers to nonworkers. For example, the United States government creates rules for the labor market, breaks up monopolies, subsidizes corn growers, taxes polluters, hears cases involving breaches of contract, and collects social security taxes.
In socialism, the government takes a much more active role in the economy. Although individuals are allowed private property, the state may own firms in key industries and regulate even more economic decisions than in capitalism. In France it is not uncommon for the government to take a major stake in French companies, if not outright own them. The French labor market is more heavily regulated than its American counterpart. In 2006, French students poured into the streets, protesting the fact that the government was being pressured by French firms for the right to fire employees at will during their first two years of employment. Compare this to the United States where there is no guarantee of employment.
British Prime Minister Margaret Thatcher is credited with reversing the United Kingdom's drift towards socialism. With the end of World War II, the British had moved towards socialism with the nationalization of several key industries. While in office, she began the process of privatization where state-owned companies were sold to private shareholders.
More often than not, socialist countries manage the prices of many goods and services. The EU manages prices on such things as pharmaceuticals, cell telephone service, and food. Also, socialist countries are more active in taxing in order to redistribute income from workers to nonworkers. Germany is well known for its generous cradle-to-grave social welfare system that promises care for its citizens. The German welfare state is financed by a redistributive tax system that many Americans would find intolerable. As of 2008, the highest marginal tax rate on personal income in Germany was 45% compared to the United States rate of 33%.