The two predominant economic systems today are capitalism and socialism. Between these two opposite extremes lies a continuum of variations on the models.
Three key principles define the economic system of capitalism:
- Private ownership of production and distribution of goods and services
- Competition, or the laws of supply and demand directing the economy
- Profit‐seeking, or selling goods and services for more than their cost of production
Laissez‐faire (French for “hands off”) capitalism represents a pure form of capitalism not practiced by any nation today. The ideology driving today's capitalism says that competition is in the best interest of consumers. Companies in competition for profit will make better products cheaper and faster to gain a larger share of the market. In this system, the market—what people buy and the laws of supply and demand—dictates what companies make, and how much of it they make. Workers are motivated to work harder so they can afford more of the products they want.
Supporters of a capitalist system point to the higher production, greater wealth, and higher standard of living displayed by capitalist countries such as the United States. Critics, however, charge that while the standard of living may be higher, greater social inequity remains. They also denounce greed, exploitation, and high concentration of wealth and power held by a few.
Three key principles also define the economic system of socialism:
- State ownership of production and distribution of goods and services
- Central economy
- Production without profit
The ideology of socialism directly rejects the ideology of capitalism. In a socialist economic system, the state determines what to produce and at what price to sell it. Socialism eliminates competition and profit, and focuses upon social equality—supplying people with what they need, whether or not they can pay. The ideals driving socialism come from Karl Marx who saw all profit as money taken away from workers. He reasoned that the labor used to produce a product determined the value of that product. The only way for a company to arrive at profit is to pay workers less than the value of the product. Thus, wherever profit exists, workers are not receiving the true value of their labor.
Just as nations do not adhere to pure capitalism, neither do nations adhere to pure socialism. In pure socialism, all workers would earn exactly the same wage. Most Socialist countries do pay managers and professionals such as doctors a higher wage. But, because the state employs all members of the society, thereby controlling the wages, far less disparity exists between highest and lowest wage earners.
Supporters of socialism, then, point to its success at achieving social equality and full employment. Critics counter that with central planning's gross inefficiency, the economy cannot produce wealth and all people are poorer. They also object to what they see as unnecessary control of personal lives and limited rights—exploitation.
Democratic socialism and state capitalism
Ironically, critics of both capitalism and socialism accuse each system of exploitation. Consequently, some nations have carved out systems more in the middle of the continuum between the two.
One hybrid is democratic socialism, which is an economic system where the government maintains strict economic controls while maintaining personal freedom. Scandinavian nations, Canada, England, and Italy all practice democratic socialism. Sweden provides the most common example in which high taxation provides extensive social programs.
State capitalism is another economic hybrid. In this economic system, large corporations work closely with the government, and the government protects their interests with import restrictions, investment capital, and other assistance. This economic system commonly exists in Asian countries such as Japan and South Korea.