Capitalism and Socialism

Capitalism

• With the coming of the Industrial Revolution, the new production methods required large amounts of capital —economic wealth usually thought of as money. • Capital was necessary to build factories, purchase machines, secure raw materials, and pay workers —all before any goods were sold.

• Consequently the capitalist, who risked money by investing in a business, controlled the entire process of production. • This economic system, based on private capital, is known as

capitalism.

Wealth of Nations

•

The Wealth of Nations

precursor to the modern academic discipline of economics. was a • In this and other works, Smith expounded how rational self interest and competition can lead to economic prosperity. • Smith was controversial in his own day and his general approach and writing style were often satirized by other writers of the time.

Principles of Capitalism

(a) Private ownership.

Individuals (persons and corporations) own the means of production and distribution of goods.

(b)Free enterprise.

Individuals are free to enter any business and run it as they wish.

(c)Profit motive.

Business leaders direct their affairs to avoid loss and make profit. Profit is income minus expenses. If it costs you $20 to make a product and you sell it for $50, there is a profit of $30.

(d) Competition.

To excel all rivals, each producer strives to improve the quality and lower the cost of goods.

(e) Market economy.

Supply and demand, operating under conditions of free competition in the marketplace, determine the price of goods.

Supply

is the amount of physical resources available.

Demand

is the desire and wants for these resources. When the demand for a resource is high and the supply of the resource is low, the price of the resource goes up. When the demand for a resource is low and the supply of the resource is high, the price of the resource goes price. This is called the law of supply and demand.

(f)

laissez-faire

Opposed to restrictions on production and trade, capitalists wanted to manufacture and sell their goods free from government interference. They favored advocated by the economist Adam Smith in his book “The Wealth of Nations”

laissez-faire

(leave business alone), a principle

Socialism

1.

The government

stores).

as

representative of the people

owns and operates the means of production (farms, mines, and factories) and distribution (transportation and retail 2. The government determines the needs of the people and provides goods and services for the people's use.

3. The government plans the economy, determining which new industries to start, and which existing ones to contract or expand. According to its master plan, the government allocates capital, directs the flow of raw materials, and supplies the workers. These economic functions performed by the government under socialism, are summed up by the terms state planning and centralized planning.

Karl Marx

(1818-1883),

German writer and economist, founded modern socialism and whose principles were the basis for communism.

A learned man, Marx was familiar with the writings of west European philosophers Although he lived in poverty, Marx persevered to complete his studies and publicize his ideas.

Marx wrote the following important works: (1) The

Communist Manifesto

(co-authored by

Friedrich Engels), 1848,

was a pamphlet outlining his socialist ideas in a simple, propagandistic style. (Marx used the term "communist" to distinguish his views from those of the Utopian Socialists, whom he scorned as dreamers.)

(2) Das Kapital

was a detailed study containing Marx's critical analysis of the mid 19th-century capitalist system and expounding his theories of socialism. These works present the basic ideas of

Marxian socialism,

or

Marxism.

Principles of Marxism

1. Economic Interpretation of History.

power factories Marx argued that economic conditions determine the course of history. The class that possesses economic —whether through ownership of land, merchant ships, banks, or —controls the government and social institutions.

2. Class Struggle.

Marx also viewed history as a "class struggle" between economic groups: the "have-nots" against the "haves." Under the guilds apprentices and journeymen resisted master craftsmen; under private enterprise workers, or the

proletariat (have nots),

clash with capitalists, or the

bourgeoisie

(

haves).

The "class struggle," Marx believed, was international since workers in each nation faced the same problems and battled the same capitalist oppressors. Marx concluded that "the proletarians have nothing to lose but their chains," and he coined the slogan "workingmen of all countries, unite."

3. Surplus Value.

Capitalists exploit, or take advantage of, workers by paying them just enough wages to keep them alive, that is, just above the subsistence level. According to Marx the difference between their wages and the price of the goods the workers produce is called

surplus value.

Although the

capitalists

(owners) contribute nothing to production, according to Marx, they take the surplus value as profit. Consequently workers lack sufficient income to purchase all the goods produced, and this in turn, Marx claimed, leads to depression.

Principles of Marxism 2

4. Inevitability of Socialism.

means or by violence. Marx predicted that capitalism would destroy itself as depressions became more and more severe. In time, he said, wealth would concentrate in fewer and fewer hands, while workers' conditions would steadily deteriorate. Eventually the workers would be driven to overthrow the capitalists and establish a socialist state. Marx did not make clear whether the overthrow of capitalism would come by peaceful

5. Ultimate Communist Society.

With the triumph of socialism, Marx predicted that eventually the proletariat would establish an equalitarian, or "classless," society and that the state would tend to wither away. Also, eventually under socialism the production of goods and the availability of services would be so great, Marx believed, that society would apply the principle "from each according to his ability, to each according to his needs.“ However, he was certain that socialism would first come not to agricultural but to industrial nations. (He also felt his ideas would first take place in Germany and Great Britain because of their industrial ability. Marx never thought his ideas would ever take place in Russia. There industry was so backward.)