Two Major Economic Systems

641 words | 3 page(s)

There are two major economic systems in the world today which are capitalism and socialism. It is understandable that one feels the temptation to compare them to each other but the right question to ask is not as to which one is perfect but rather which one is better. This is because both capitalism and socialism have demonstrated to have certain shortcomings though to varying degrees. If capitalism was perfect, we would not have the recent financial crisis of 2007, internet bubble bust, and the Great Depression. Similarly, if socialism was perfect, countries would not have collapsed under its weight as former Soviet Union’s example shows. But despite its shortcomings, capitalism is still superior to socialism and is the driving force behind globalization which has been creating new economic powers such as India and China.

Capitalism is better because it provides incentives to individuals to work harder and take risks as they are allowed to own factors of production (Clore). This is in quite a contrast to socialism in which the factors of production are owned by the state (Thompson) and citizens have low incentive to work harder and/or take risks. Thus, it is not a surprise that capitalist countries have demonstrated impressive economic progress over the last two centuries (Thompson) while those with pre-dominantly socialist economic system have little to show. China had been a socialist country for most part of the 20th century but the country has been adopting capitalistic principles in order to real the economic benefits. China understood it cannot reap the benefits of globalization without embracing capitalism even if partially, thus, it joined World Trade Organization (WTO) on 11 December, 2001 (World Trade Organization).

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Capitalism is also a better system than socialism because it does a better job of allocating scarce economic resources. In socialism, the government primarily allocates resources but in capitalism, resources are primarily allocated by the market forces of demand and supply. This also reduces the waste due to smaller size of government bureaucracies.

Another benefit of capitalism over socialism is that capitalism results in higher levels of accountability and, thus, reduces the risk to unethical behavior. The management is accountable to the shareholders who can remove the management if they are not satisfied with the management’s performance. Similarly, politicians are also accountable to the public and can be removed through fair elections. In contrast, public has little if any voice in the affairs of government which tends to deal with iron hand.

A country benefits from the flow of foreign capital. A capitalist market system encourages foreigners to bring their capital into the country and invest in the country’s economic future. In contrast, socialism discourages foreign direct investment to a reasonable degree due to the risk that investors may not even recoup their original investment, let alone profits. The threat of nationalization is also high in socialism, thus, unlike capitalism socialism discourages participation by foreign entities in local economy.

But it is also important to note that capitalism has its shortcomings and market forces cannot do all the work including monitoring and control. Thus, government participation to a certain degree is inevitable. These roles go beyond just creating and implementing laws. It is hard to imagine how U.S. would have survived the recent financial crisis were it not for government assistance. Similarly, government makes laws in order to promote fair competition.

It is clear that capitalism is better than socialism because it results in more efficient allocation of limited resources. In addition, it also gives greater voice to shareholders in the running of the business. Last but not least, it allows citizens to monitor the conduct of their elected political leaders.

  • Clore, Dan. Socialism and Capitalism. 15 July 2008. 16 October 2014 .
  • Thompson, C. Bradley. Socialism vs. Capitalism: Which is the Moral System. October 1993. 16 October 2014 .
  • World Trade Organization. China and the WTO. 16 October 2014 .

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