Capitalist Countries vs. Socialist Countries, Explained

In 1776, Scottish philosopher Adam Smith wrote The Wealth of Nations and created modern capitalist theory. In 1848, German philosopher Karl Marx published The Communist Manifesto, which gave rise to modern socialist theory. In the decades since both terms have come to earn high praise and intense criticism across the globe. What does it mean to be a capitalist country, and what does it mean to be a socialist country? While the term “socialist” is often used as an insult in the United States, what does socialism actually mean? Is there any sort of middle ground between capitalism and socialism? A historic and modern exploration of capitalism versus socialism.

In 1776, a Scottish political philosopher named Adam Smith changed the world by publishing The Wealth of Nations, a book introducing the modern concept of capitalism. Smith argued that the greatest economic efficiency (productivity and performance) was enjoyed when individuals were allowed to own capital. As one of the four factors of production (land, labor, capital, and entrepreneurial ability), capital meant factories. Smith also argued that capitalists (owners of capital) should be free to exercise their profit motive, or pursuit of profit.

According to Smith, private ownership of capital and the pursuit of profit would benefit society by allowing for greater production of all things. In pursuit of profit, entrepreneurs (business owners) would compete for customers and sales by making their products high-quality and available for a lower price. Competition, under which the profits were owned by the entrepreneur thanks to private property rights, would bless all citizens with less expensive and higher quality goods. Allegedly, Smith’s popular book even influenced the United States’ Founding Fathers, who enshrined private property rights in the 5th Amendment of the US Bill of Rights, which was ratified in 1791.

Setting the Stage: Karl Marx and The Communist Manifesto

The idea of government control of capital and labor was obviously quite unpopular with wealthy capitalists but enjoyed support among the lower and working classes, especially in Europe. Marx believed that industrialized societies, including Europe, the United States, and Canada, would undergo socialist revolutions as workers rose up to overthrow their exploitative, capitalist employers. Although this did not occur, many European states began adopting some social reforms that could be considered socialistic, such as health care programs and old-age pensions. Allegedly, these programs were adopted to prevent the growing popularity of socialism as a political system.

In October 1917, a communist revolutionary named Vladimir Lenin was sent back to Russia from Germany. Instead of Marx’s prophesied socialist revolution occurring in the United States or England, it erupted in Russia, a less-industrialized nation under the authoritarian rule of a monarch, Tsar Nicholas II. Mired in economic recession and poor public morale due to World War I, in which Russia was faring poorly as one of the Allied Powers, conditions were ripe for revolution. Swiftly, Lenin’s Bolshevik Party took control of the governing apparatuses in Russia’s two largest cities, Moscow and St. Petersburg.

While the Revolution itself was a swift success, the world – and many powerful leaders in Russia – reacted with shock and hostility. Communism was seen as a threat to the private property rights protected in Western Europe, the United States, and Canada. The Russian Civil War erupted in an attempt to defeat the Bolsheviks, with the US and England offering military support for the White (non-communist) Russian forces who were battling the Reds (communists). By the end of 1922, however, the Reds had defeated the Whites across the entirety of Russia. A new nation, the Union of Soviet Socialist Republics (USSR), colloquially known as the Soviet Union, was founded.

1922 – 1985: Centrally Planned Economies

Both the Soviet Union and China, which had gone communist in 1949 at the end of the Chinese Civil War, used central planning to organize their industrial economies. Due to state ownership of all capital, the government had to plan how much of all equipment was manufactured and how that equipment would be distributed. This resulted in a rationing system where individuals were only allotted specific amounts of a good or service. Supporters argued that government control allowed resources to be shifted to ensure equal access to important goods and services, especially medical care and education. Critics argued that this government control was inefficient and often inaccurate, as the lack of flexible market prices meant the government could not easily determine which goods and services were more valuable than others.

Without free market forces, socialist governments had to plan production in advance. Famously, both the Soviet Union and China used five-year plans to organize economic production and goals. This could result in rapid industrialization, with the government quickly transferring tremendous resources toward building new factories and infrastructure. It could also result in famine, with forced industrialization and collectivization (forcing individual farmers to move to large farms to grow food for the state) failing due to unforeseen circumstances. Lack of individual discretion could result in failure for socialist enterprises to adapt to sudden changes, resulting in widespread underproduction due to droughts, supply shortages, or other challenges.

Without the wartime eras of patriotic production (from World War II and the Chinese Civil War), both the USSR and China needed new ways to encourage economic efficiency. In December 1978, the two communist powers diverged. While the USSR retained its rigid central planning under conservative premier Leonid Brezhnev, China decided to open up to the world and allow foreign investment under Premier Deng Xiaoping. Part of the divergence was likely out of necessity: while the USSR was relatively modernized, China was one of the poorest nations. Having suffered from strategic economic errors like the Great Leap Forward (1958-62) and Cultural Revolution (1966-69), it needed to embrace the opportunity for foreign investment far more than did the Soviet Union.

However, cracks in the Soviet economy began to appear shortly afterward. After Mikhail Gorbachev became the new Soviet premier in 1985, he soon embarked on economic liberalization, known as perestroika. In 1987, some degree of private enterprise began to emerge for the first time since the 1920s. Individuals could make consumer goods and perform services, while the production of capital goods like equipment remained monopolized by government-controlled enterprises. However, while China’s communist government maintained strict control during its liberalizing economic reforms, the Soviet Union crumbled just four years after private enterprise returned to the USSR.

1910s – Present: Government Interventions in Market Economies

Despite “socialism” and “communism” being reviled terms in the United States, especially during the tensest periods of the Cold War, plenty of market interventions occurred beginning in the Progressive Era of US history. Prior to the Great Depression and the resulting New Deal, many of these market interventions were conducted by state governments. A key example were compulsory attendance laws, which limited child labor by requiring children and teenagers to attend school. These became actively enforced only in the 1930s, during the Great Depression, when there was increased public demand to prevent adults from having to compete with teenagers for scarce jobs.

Beginning with the New Deal in 1933, a slew of additional market interventions began: overtime laws, minimum wage laws, family leave laws, and other job protections. In the 1960s, additional requirements for employers were created by the Civil Rights Act of 1964. The Americans With Disabilities Act of 1990 placed additional requirements on employers in regard to workers with disabilities. Most recently, the Affordable Care Act, often known as Obamacare, requires many privately-owned businesses to offer health insurance plans for full-time employees. Collectively, these laws and regulations restrict the freedoms of business owners and are sometimes criticized as “socialism.”

Officially, market interventions, often called government regulations, are not socialist because they do not involve state ownership or control of the means of production. Businesses are still privately owned, but are required to follow various laws that limit their ability to hire and terminate employees, pay below a certain amount, or produce or sell certain goods. A true “socialist country” would, therefore, feature a significant portion–if not an outright majority–of its economic output directly controlled by the state. Therefore, many of the European nations that critics call “socialist” states are actually not true socialist states.

In the United States, the strictest market interventions occurred during World War II, when the rationing of certain goods was enforced to ensure sufficient supplies for the war effort. Auto manufacturers were also directed to produce trucks and tanks rather than cars for the civilian market. However, the government did not nationalize these industries, and they returned to civilian production after the war concluded. Restrictions on the production and distribution of goods are also not socialist because the ownership of the production remains private.

Government Stimulus vs. Socialism

Another area of confusion involves government spending. Government spending on infrastructure projects or subsidizing the production of goods and services is sometimes derided as “socialism.” Examples include the vast New Deal infrastructure projects of the 1930s, which ranged from the construction of parks and trails by the Civilian Conservation Corps (CCC) to dams and power plants built by the Tennessee Valley Authority (TVA). Although the government hired the labor to complete these projects, it is difficult to call them traditionally socialist because they created public goods (government services available to all at no point-of-service cost).

The New Deal created infrastructure, as did 1950s spending on the Interstate Highway System. Although the New Deal had many Americans hired directly by new government agencies, later infrastructure projects as part of economic stimulus involved hiring contractors. Roads and government facilities are actually built mostly by private companies, not government employees themselves. Under economic stimulus spending, production is still owned by the private sector. The situation is the same for subsidies: although the government is paying the producer to produce more of a good or service, the producer remains private.

Even in market economies like the United States, some elements of centralized socialism do exist. Most prominently, this is seen in public K-12 education. Over 91 percent of all American children between kindergarten and 12th grade attend a public school. Public schools use government employees to provide services directly to citizens. Because the labor and capital of education are controlled by the government, public schools are indeed socialist. Another example of a socialist institution in the United States is its large military, which provides service members with its own housing, health care, and courts.

“Pure” socialism is relatively rare among all possible industries, and most nations allow some private sector competition to exist for some socialist institutions. For example, parents in the United States are allowed to send their children to private schools or homeschool them. Individuals and businesses can also hire private security in addition to the government services of law enforcement and military protection. In recent decades, a hybrid form of socialism called state capitalism has become more common, where governments own controlling shares of corporations that produce goods and services. This makes it increasingly difficult to determine exactly when means of production are owned by the government or private entities, like individual shareholders.

Present Socialism Debate: Single-Payer Healthcare

Since 2015, a debate over single-payer healthcare has existed in America’s political environment. US Senator Bernie Sanders (I-VT), while pursuing the Democratic presidential nomination for the 2016 election, argued in favor of such a system. The plan, commonly known as Medicare for All, would involve the federal government paying all basic healthcare costs for citizens under a national healthcare plan, replacing most private health insurance. Critics immediately derided this as “socialist,” and the term “socialized medicine” is often used when critiquing single-payer healthcare.

However, single-payer healthcare would not be pure socialism in the fact that doctors would remain private contractors. Although virtually all payments would come through the Medicare for All plan, doctors would not be government employees. In Britain, the National Health Service (NHS) is a single-provider system where the government directly owns and operates most clinics and hospitals. A single-provider system, akin to the NHS or the Veterans Affairs (VA) health system in the United States, would be socialist. Medicare for All would work similarly to existing programs in the US, like Medicare and Social Security, where the government distributes funds but allows recipients some discretion in determining which services are purchased.