Compare and contrast the two major economic systems.

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 Identify a shortcoming of each system.

Jun 12th, 2015

The  two major economic systems are capitalism and socialism.



In a capitalist economy, property and businesses are owned and controlled by individuals. In a socialist economy, the state owns and controls the major means of production. In some socialist economic models, worker cooperatives have primacy over production. Other socialist economic models allow individual ownership of enterprise and property, albeit with high taxes and stringent government controls.


The capitalist economy is unconcerned about equity. The argument is that inequality is the driving force that encourages innovation, which then pushes economic development. The primary concern of the socialist model is the redistribution of wealth and resources from the rich to the poor, out of fairness and to ensure equality in opportunity and equality of outcome.


The capitalist argument is that the profit incentive drives corporations to develop innovative new products that are wanted by the consumer and have demand in the marketplace. It is argued that the state ownership of the means of production leads to inefficiency because without the motivation to earn more money, management, workers and developers are less likely to put forth the extra effort to push new ideas or products.


In a capitalist economy, the state does not directly employ the workforce. This can lead to unemployment during times of economic recession. In a socialist economy the state is the primary employer. During times of economic hardship, the socialist state can order hiring, so there is full employment even if workers are not performing tasks that are particularly useful.

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Jun 12th, 2015

The disadvantages of capitalism include:

  • A chance of a monopoly of power - Firms with monopoly power (when a specific person or enterprise is the only supplier of a particular commodity) can abuse their position by charging higher prices.
  • Inequality - A capitalist society is based on the right to pass wealth down to future generations. If a small group of people hold all the wealth and that wealth continues to be passed down to the same groups of people, inequality and social division occur.
  • Recession and unemployment - An economy based on the market of consumers and producers is invariably going to experience growth and decline.
  • Immobility:One of the main problems of capitalism is that a free market is supposed to be able to easily move factors of from an unprofitable sector to a new profitable industry. However, this is much more difficult practically.

  • Inequality creates social division. Societies which are highly unequal create resentment and social division.

Disadvantages of socialism

1. It discourages achievement and working hard. In Socialism, money is equally distributed. So, if you will always make the same money, what is there to force you to work harder? 

2. The Misuse of power. In communist and socialist communities, the government has control of basically your entire life. So, if the gov is in control, there is no one to stop them from creating a Secret Police to kill you in the middle of the night, or worse, install a dictator. 

3. There is no incentive for people to develop entrepreneurship skill as they know it’s of no use, and we all know that entrepreneurs are essential if country wants to grow and compete with other countries of the world.

4. It is impractical. In Socialism, the society requires everyone to be perfect, stupid, mindless, and just like everyone else. Capitalism requires everyone to think for themselves, be smart or cunning or greedy, imperfect, and be different from everyone else. Although Socialism looks better on paper it can't work because no one is perfect, and everyone has a little bit of cunning or greed or trickiness in them. It is just impractical.

Jun 12th, 2015

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