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What is Capitalism, Socialism, & Communism Explained In Plain English

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Socialism, communism, and capitalism are hot-button words right now. But what do these words – or ideals – really mean for you, your rights, and the structure of your government and economy? If you’re like most people, you probably don’t know.

But you probably do know there’s some serious negative stigma behind all three of these words.

Today we’re going to dive right in, so you can decide for yourself if the stigmas are justified. No opinion, no flourish, just facts.


What Is Capitalism

I’ll start with capitalism since it’s the structure you’re probably the most familiar with. For starters, the US is a capitalist country. I doubt that surprised you, but what does that mean, exactly?

Speaking broadly, this means that the market is the principal driver of the economy. 

The market is the driving force, in part, because the manufacturers, producers, and suppliers of goods and services control their businesses. They also control the prices, production, and distribution of their products or services.

This just means that the government (or state) doesn’t own or control these for-profit businesses. This can only happen because of private property rights. 

Without private property rights, the owner of the property would have little incentive to invest capital into their property. But, with these rights, the incentive to invest and get a return on your investment is high.

With private property rights, the owners of property compete with one another over buyers. These buyers compete with other consumers over goods and services. All of this activity balances supply and demand. 

Now, it’s important to remember that “property” in this case doesn’t mean land or houses – though it could. It could be anything you own, sell, or could trade or barter with. 

So, in short: those who have the means, have access. 

Obviously the US is a capitalist country, but so is Germany, the UK, Canda, Denmark, and Sweden. However, all of those but the US embrace some parts of the Nordic model of capitalism. 


How Did Capitalism Start?

Capitalism was born from European feudalism. Up until the 12th century in Europe, most people received their “keep” from feudal lords and nobles. Most of these lords and nobles were property owners or landlords.

So most workers never received an actual wage. 

However, at some point in the 12th century, most people had the incentive to move out of cities dominated with housing from feudal lords and nobles, into the surrounding areas. Most of which was, up to this point, not inhabited. And certainly not predominantly owned by lords and nobles.

At which point, earning money versus a living (there is a difference in this context) became important. As a result, feudalism slowly turned to merchantism

Marchantism started as trades between towns, as most towns had vastly different products or resources to trade. Since the products differed drastically, the trading wasn’t competitive. However, the market grew.

What was once being traded from town to town, started being traded between nation to nation. Once too many nations started offering similar products, competitive trading started to emerge. 

It wasn’t until the turn of Colonialism that things started to get… tricky. Established countries with well-worn trade routes were able to trade goods to other nations in exchange for goods. 

Colonies, however, weren’t included in this, as they were being forced to purchase the goods with currencies that weren’t recognized or valued outside of their colonies. 

Around the time of the industrial revolution, Adam Smith coined had his idea for a free market. Which was ever-so-slightly before the gold rush, when America happened to stumble blindly onto its wealth. 

With this in play, it was possible for common people – not noble or born into their life of wealth – to have hope that they could create their wealth.

And, so, capitalism (in its infancy) was born. 


Capitalism Criticism & Pitfalls

Capitalism was born from the idea that people operated best when they were looking out and providing for themselves. This opened up the first opportunities to work your way to wealth. Which had previously been all but impossible if you weren’t born into it.

But, of course, it’s not without its pitfalls and criticism. 

For one, crony capitalism. This is when a capitalist society is based on relationships between businesses and the state. The favoritism comes in the form of tax breaks, government incentives, grants, and other incentives or rewards. 

And additional pitfall is the competition and invitation to amass wealth invites greed. And that can lead to anything from shoddy products to exploitation of workers or unjust treatment of the lower class. 

Capitalism also opens the door to models such as private monopolies, monosomies, and duopolies. Though, to be fair, socialism and communism aren’t completely clean on the state-run monopolies part, either.

On the last note, the capitalist structure leaves a good deal of economic crisis. From boon to bust, the capitalist economy is much more volatile than a socialist or communist one since the economy is solely supported by the market.

If the market crashes, wages get lost, production falters, or any other hitch in the supply, demand, or distribution portion of the system brings it down. This is true for both the supplier side as well as the consumer sides of the economy. 


What Is Socialism

Socialism, on the other hand, operates on public ownership. Which is sometimes referred to as collective or common ownership. You might be somewhat familiar with this if you’re familiar with commonwealth states.

Commonwealth states aren’t considered to be either capitalist or socialist in the eyes of economists or politicians. They’re a watered-down middle-ground version of both.

In a socialist country, all production and distribution decisions are handled by the government. The prices of goods or services are also determined by the government. Not the manufacturers, suppliers, or distributors. 

In a purely socialist economy, the citizens rely on the government for everything from food to education to healthcare. Let me stop you before you get argument ideas to try to impress your friends with. 

I know what you’re thinking, okay?

Just because healthcare and education are provided, regulated, and distributed by the government doesn’t make them free. It means they provide, regulate, distribute, and set the prices

Additionally, you can get both for free or an insanely low cost from a capitalist country. Just not the US. In fact, most capitalist countries offer not just universal healthcare but ridiculously low education costs (by US standards) as well.  

I’ll get to the part about purity and hybridization in a bit. But, for now, proceed with regularly scheduled socialism info. 

Of course, Nazi Germany and the USSR were both considered to be socialist structures. So the stigma is strong. However, China (post-communist China, that is), Cuba, and Venezuela are all socialist countries as well. Though less publicized than the former.

The ideals are production for use rather than profit with the goal to distribute based on need rather than ability to access. In ideal conditions, this removes the competitive buying and selling practices that capitalism relies on. 

An important note here is that under socialist ideals, individuals still have private property rights, businesses do not. 


How Did Socialism Start?

Socialism has much more shallow roots than capitalism. Predominantly because it started as a rebuff to the pitfalls of capitalism. 

In the late 18th and 19th centuries, western European countries experienced industrial production and economic growth at breakneck speeds. 

As a result, some garnered massive amounts of wealth that were previously inaccessible to them while others fell into poverty. This created income inequality and other social concerns. 

Namely, that the economic groups were becoming increasingly divided. 

The most famous early socialist thinkers were Robert Owen, Henri de Saint-Simon, Karl Marx, and Vladimir Lenin. Lenin was predominantly responsible for bringing socialism to a national level. 


Socialism Criticism & Pitfalls

The low-hanging fruit here is, of course, the USSR and everything that came with it. But the issues within the USSR weren’t predominantly issues with the structure of socialism, so forget about that for now.

Capitalists claim that it’s impossible for socialists to appropriately allocate scarce resources without a market price. The argument is that this creates shortages and surpluses, which results in more poverty, not less. 

Which we have seen in parts of socialist countries, but we can’t directly tie that to socialism, either because that’s also an issue capitalist countries face. Only capitalists don’t claim responsibility for it since it’s the job of the people to supply themselves. 

Okay, so what can we tie to socialism as an issue? 

Under the socialist structure, there is a bit of an incentive issue. No one wants to pick up trash, dispose of hazardous materials, or work in a nuclear plant without some sort of incentive. The incentive for capitalist countries is, of course, the cash. 

For socialist countries, there isn’t an incentive. Aside from working towards the greater good for all. Which is a bit optimistic of people, according to capitalist societies. 

So the issue becomes that socialist planners can’t force people to take uncomfortable to dangerous jobs without the incentive for something. Or else they threaten to violate equality issues. 

Ludwig von Mises’ 1920 article Economic Calculation in the Socialist Commonwealth points to more serious issues, however. “Socialists are unable to perform any real economic calculation without a pricing mechanism. 

Without accurate factor costs, no true accounting may take place. Without futures markets, capital can never reorganize efficiently over time.”

Suffice it to say, Mises’ argument can be distilled as such: socialist economies are functioning by the seat of their pants.


What Is Communism

Socialism and communism agree on a lot of things, but communism is viewed as more rigid than socialism. So, for sake of simplicity, I’ll compare communism to socialism since you’re familiar with socialism now. 

Both principles seek to eradicate issues with competitive buying and selling, worker exploitation, and distribution of goods based on need rather than access.

Communism doesn’t allow for any private property rights, while socialism does. Another part that differs substantially is that under communism, a violent worker uprising against the upper and middle classes is seen as inevitable.

And, if you’re familiar with H.G. Wells’ The Time Machine, this probably doesn’t surprise you. 

Socialism, however, doesn’t share that viewpoint in their structure. They believe in consistent progress towards an ideal through democratic reform and people’s opinions being heard. 

Socialism also rewards innovation and individual effort. Which is something capitalism also focuses on rewarding, though a bit more heavy-handedly. However, communism doesn’t give any incentive or reward for effort or innovation.


How Did Communism Start?

Karl Marx and Friedrich Engels’ “Communist Manifesto,” was published in 1848. Karl Marx, if you remember, was also partly responsible for the ideals behind socialism. However, this time, he claimed to see the trajectory of the human race post-socialism.

The manifesto, proponents claimed, was a scientific analysis of the history and future trajectory of society. It also claimed that a global worker and laborer revolution would take place. 

The revolution would usher in first an era of socialism, then later, communism. This final stage of human development would mark the end of the class struggle.

Everyone would live as equals, without class, family structures, religion, or property. The economy would be “from each according to his ability, to each according to his needs.”  

And, if you were wondering, this is where the idea of a “commune” was born. 


Communism Criticism & Pitfalls

After the crash of the USSR and China, as well as the Cold War, the previous failures of communism were scrutinized. However, there are two things that seem to be more important than others:

The first being the lack of incentive, which we see in socialism as well, but to a much greater extent in communism. Incentive leads to effort, innovation, and growth in capitalist societies. This growth benefits the individual as well as the market. 

And, of course, the market benefits the economy.

But, in a communist society, the ideal citizen is hard-working, selfless, always devoted to the cause of the greater good, and never stops to think about their welfare.

Liu Shaoqi, the second chairman of the People’s Republic of China, wrote “At all times and all questions a party member should give first consideration to the interests of the Party as a whole and put them in the foremost and place personal matters and interests second.”

The second was just that the planning was insufficient. Particularly when it came to centralized planning. Centralized planning requires enormous amounts of data at a granular level. This type of planning was also complex and, as such, error-prone. 

As we saw in the USSR, data was made up and propagated to create an illusion of progress. Both to citizens, as well as the outside world. And, as many historians have pointed out, this made-up Russia was the strongest Russia we’ve ever seen. 


But Nothing’s Pure, Anyway

Before you make up your mind on these hot-button topics, I want to give you one final bit for consideration: nothing is pure. 

We have yet to see a pure communist society, a pure socialist society, or a pure capitalist society. All are tinged with something else. For example, communist China is also capitalist. The Capitalist US has been accused of crony capitalism (which I have my own thoughts on, but I’ll leave you to make up your own.)

And socialist Venezuela is also tinged with a bit of nordic capitalism. And had Nazi German not brought the massive tragedy it had, we don’t know what would’ve happened to it economically or how it would’ve evolved. 

Additionally, while current Germany, the UK, Canda, Denmark, and Sweden are all capitalist, they also have varying degrees of nordic capitalism as well. 

Which brings me to our final talking point. Currently, some of the most progressive and prosperous countries are currently operating as Nordic Capitalists. 


The Nordic Model Of Capitalism

Sweden, Norway, Finland, and Denmark have a combination of high living standards and little income disparity. They have free universal healthcare, long paid paternal leaves, free access to a world-renowned education system, and generous and guaranteed pension payments for retirees. 

So no 401ks where you invest in your own future and hope you make it. 

Not only these countries have captured the hearts of nearly every American citizen as the ideal, but they’ve also captured the attention of the world. Canada and Germany are adopting similar models in the hopes that they’ll gain the same benefits. 

But what is it?

It combines the incentive, innovation, and property rights of the free market as well as the social benefits provided by socialism. 

These benefits are funded by taxpayers and dispersed by the government. The citizens have a high degree of trust in their government and a history of working together to reach compromises.

Their mixed economic system reduces the gap between the rich and the poor through redistributive taxation. In addition, they preserve the benefits of capitalism.

The result is a system that treats all citizens equally while still encouraging and rewarding effort and participation. 

Gender equality is a hallmark trait of the culture that not only results in a high degree of workplace participation by women but also a high level of parental engagement by men. They’re also constantly surveyed as some of the happiest people in the world.


So What’s The Hitch?

The question I suspect you’re asking is, “Why isn’t the US on this?”

A few reasons. Predominantly that history has proven Nordic citizens can trust their government. Which is something, historically, Americans aren’t huge on. Nordic citizens also have a long history of working together to solve issues.

Both between fellow citizens and between the government and the citizens. They collaborate, communicate, and tackle issues together. In contrast, Americans tend to rally behind or rail against. Which is neither collaboration nor communication. 

Additionally, unlike most capitalist countries that were developed around massive businesses funding, sponsoring, and paying for influence in the government, most Nordic countries are family-owned agricultural businesses. 

The result is a nation of small entrepreneurial enterprises directed by citizens. Most citizens face the same set of challenges. Solutions that benefit one member are likely to benefit all members.

And, as a result, everyone is willing to pay more in taxes to help benefit everyone. Which ties closely into gamification theories about people and relationships within societies. 


Gamification In Society

You don’t know me. We’re not competing against each other, but we’re not working together either. We both have a chance to win a free education for someone of our choosing. You’re going to lose either way, but I have a chance of winning. 

Would you be willing to help me win? Or would you watch and see what happens? Most participants choose the latter if presented the opportunity in a real-life scenario.

But, if the only way you win is if I win, would you be willing to help me? The answer there is obvious, and that’s what we see in Nordic countries. 

In the US, we see a modified version of this game playing out. We could both win, but we would need to trust each other. So let’s set this up.

You won the free education. You can walk away with that, or you can bet on me being trustworthy.

You could offer me your free education, and I could take it and you get nothing. Or I could raise you, say, free education for you and all your children and give it back to you. You could keep that prize, or give it back to me again so I could raise it a second time. Or so I could potentially take it.

We need to do this back and forth until round ten where both of us win. Do you trust me enough to even attempt this exchange? I could walk away with the prize and leave you with nothing.

If you do attempt it, you’re presented with a second issue. As the stakes rise, either one of us could be more tempted to keep it. At what point do you stop trusting me and keep it for yourself? Or I, you, and keep it myself?

Could we even make it to round ten trusting each other so we both win?


Pitfalls Of Nordic Capitalism

American-style capitalism is a winner-takes-all game. And some critics of Nordic capitalism claim the high taxes, high degree of government intervention, and relatively low domestic productivity limit economic growth. 

Additionally, the Nordic Model redistributes assets, limits the amount of money available for personal spending, and encourages reliance on government-subsidized programs.

Outside of American-style capitalist criticism, the nordic model does face some sustainability challenges. 

The first issue facing Nordic countries is their population is aging. For a while, their worker to retiree ratio was high. Which is an ideal outcome since taxpayers pay for social benefits. However, the scales are slowly tipping the other way.

The workforce is shrinking while the retiree pool is growing. 

However, they have a long history of working collaboratively to solve these kinds of problems. And this will likely not tip the scales over for them. If it wasn’t for these countries gaining notable attention from other countries, that is.

As a result of its notoriety, immigrants have been flooding these countries. 

These immigrants don’t have the long history and shared beliefs that nordic nationals do. This means they aren’t used to making decisions for the common good and typically don’t have a high level of trust in governments.

This could quickly tip the democratic balance they rely so heavily on. They also present a significant burden as they came for the benefits rather than to benefit all. And they could potentially not pull their weight in the workforce, which would put a sizable burden on their economy.

And with the current issue of their workforce aging, this presents a serious problem.

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