Defining Capitalism and Socialism

Author: Thomas Metcalf
Category: Social and Political Philosophy
Wordcount: 999

Editor’s Note: This essay is the first in a two-part series authored by Tom on the topic of capitalism and socialism. The second essay, on evaluating capitalism and socialism, can be viewed here.

Should our society be capitalist, socialist, or something in between? To adjudicate this debate, we must understand the definitions of ‘capitalism’ and ‘socialism.’

Image of a finger pointing at an entry in a dictionary.
Image of a finger pointing at an entry in a dictionary.

1. Academic definitions

The most fundamental difference between capitalism and socialism is about the ownership and control of capital goods, that is, assets (typically, machinery and buildings, e.g. lawnmowers, computers, and factories) that make labor, or providing goods and services, more productive.[1]

In turn, the academic definitions of ‘capitalism’ and ‘socialism’ as economic systems are as follows:[2]

  • capitalism: a system in which most or all capital goods are privately owned and controlled: owned and controlled by particular individuals, not by society nor the government.[3]
  • socialism: a system in which most or all capital goods are socially owned and controlled: shared in a society and controlled by that society, possibly by a government.[4]

Note that these definitions are about capital goods, or “private property”; consumer goods or personal property, such as top hats and burritos, can be privately owned in most versions of socialism.[5] In contrast, in some versions of communism and anarchism, no one privately “owns” any goods; one merely uses or possesses them.[6]

Note also that both of these definitions are compatible in principle with a society’s having or lacking a government.

Real-life capitalist systems almost always have other features:[7]

  • widespread wage labor: most people work for a set wage or salary (rather than a share of the firm’s profits);
  • widespread absentee ownership: most of the owners of most capital goods don’t work using those capital goods (e.g. most owners of shares of Toyota do not work at designing or assembling Toyota cars); and
  • private-property income: it’s possible to make money just by privately owning property, not by working. (Some people might do “work” in managing their own investment portfolio, but even someone who inherited such a portfolio and never thought about it twice would still be able to collect income from it.)

In contrast, socialist systems contain little-or-no wage labor, absentee ownership, or private-property income.[8] Instead of wage labor and private-property income, people might work for a share of their firm’s profits, or might simply collect a share of dividends from society’s wealth, or there might be no money at all, and people simply take what they need.[9]

2. Free Markets and Regulations

It is common to describe free-market economies as more capitalistic and more-regulated economies as more socialistic.[10] However, it is possible to have a highly-regulated system in which all capital is nevertheless privately owned: there is wage labor, absentee ownership, and private-property income, but there are also many laws governing labor, and high taxes. Similarly, it is possible to have a mostly-unregulated socialist system.

Similarly, socialism is not synonymous with ‘the welfare state,’ because the latter term refers to a system of laws intended to benefit the poor and middle class, and says nothing in particular about who owns most of the capital. A system in which all capital was privately owned but there was a high income tax, one used to buy services for the poor, could still count as “capitalist.”  Indeed, an anarchist socialism arguably contains no “regulations,” nor welfare state, at all.

Therefore, it is not generally misleading to regard regulations and welfare programs as socialistic, but it is not part of the academic definitions of ‘capitalism’ and ‘socialism.’

3. Mistaken definitions

So far, we’ve looked at the academic definitions of ‘capitalism’ and ‘socialism.’ But these words are also used in other ways. So let’s consider two mistaken definitions:

  • capitalism: an evil system that only works to the benefit of the rich; there is extreme, widespread poverty and inequality; almost everyone is consumerist and greedy, and only want to accumulate more wealth; working people are enslaved by their bosses; and no one protects the environment from degradation.
  • socialism: an evil system in which society is a totalitarian dictatorship; everyone is lazy because they know they’ll get free stuff; the economy is in shambles, with waste and corruption everywhere; everyone has to share their toothbrushes; and traditional religion and families are replaced by worship of the State and life in hippie communes.

These definitions are “mistaken” because they are insufficiently neutral; almost no one would explicitly endorse either of the systems described, so it’s usually a waste of time to use these definitions. It’s possible that capitalism (the academic definition) inevitably leads to capitalism (the mistaken definition), or vice-versa for socialism. But that’s an open, empirical question—it doesn’t mean that one should define ‘capitalism’ or ‘socialism’ that way.

4. Real-life examples?

All large-scale societies have had mixed economies: some capitalistic and some socialistic elements.[11]

Consequently, it’s difficult to look at real-life societies and argue that something about them is good or bad because of capitalism or socialism. We don’t always know which feature to credit or blame. For example, some have argued that the primary cause of the Great Recession in the United States was insufficient regulation;[12] others have said it was too much government intervention in the housing market.[13]

Similarly, people might blame capitalism or socialism for some harm, when the system in question was generally capitalistic but the harm was caused by a socialistic feature, or vice-versa. For example, if a socialist argues that capitalism is bad because the criminal-justice system is unfair or inefficient, the supporter of capitalism can reply that the criminal-justice system is socially controlled. On the other side, if a supporter of capitalism argues that socialism is bad because many officials in socialist systems used their private property to enrich themselves, the socialist can reply that that only occurred because the system was insufficiently socialistic.

5. Conclusion

When important terms are subject to disputed definitions, it’s best to specify explicitly which definitions we are referring to. Since the defining feature of this debate is the question of whether or not people should be able to privately own capital, we should start with the academic definitions.  It’s fair to both sides to employ maximally neutral and widely-used definitions, and then try to answer the ethical and social-justice question of which arrangement is better.[14]


[1] Oxford English Dictionary n.d. a.

[2] Virtually all major lay and academic sources define these essentially in the manner above or very similarly. Lay examples include popular dictionaries and encyclopedias: Dagger and Ball 2019; n.d.; Oxford English Dictionary n.d. b and d.; Merriam-Webster n.d.; Wiktionary n.d.; and Wikipedia n.d. Academic sources include the Internet Encyclopedia of Philosophy (Arnold n.d.: § 1), the Stanford Encyclopedia of Philosophy (Gilabert and O’Neill n.d.: § 1 and Herzog 2019: § 1), philosophy textbooks (e.g. Gaus 2010: 75 ff., which draws the distinction between capitalism and socialism in part based on whether capital goods can be owned), academic histories of capitalism (e.g. Scott 2011: 27, 31, ff.), the foundational documents of this debate, such as Marx 2009 [1932] and Mill 1965 [1848]: bk. 2, ch. 1, and recent, semi-popular works (Bhaskara 2016). The historical origins of the words also match these definitions: The term ‘capitalist’ appeared before ‘capitalism,’ but it referred to owners of capital, so capitalism is best-defined as a system in which there are such owners. See e.g. Oxford English Dictionary n.d. a. Similarly, ‘socialism’ originally referred to sharing or centrally controlling society’s assets and resources, rather than privately owning them; see e.g. The Editors of Encyclopædia Britannica 2019 and Dagger and Ball 2019.

[3] It’s not always easy to define what “private” ownership is. In rough terms, in capitalist systems, for most capital goods, someone or some group can say to most other people in the society, ‘This is mine and it isn’t yours, and you have no claim on it at all, nor any claim on profits derived from using it.’ In contrast, in socialist systems, for most capital goods, everyone in society can say ‘This is mine, and everyone else’s as well, although I may not have been appointed to manage it. I still have a claim on the profits generated from using it.’

[4] Although some individuals may be democratically appointed as managers of those goods. However, these managers are normally not considered “owners” of those goods; those goods are still owned by society. For example, the managers aren’t permitted to sell off the capital goods and pocket the proceeds. See Schweickart 2011: Chapter 3 for further description of how this might work. Bruenig’s (n.d.) social-wealth fund system would also mean that society owns the social wealth, but some proper subset of society manages it.

[5] Sunkara 2016.

[6] See e.g. Berkman 2003 [1937]: 217 and Maggs 1961.

[7] See e.g. Scott 2011: 166 and Arnold n.d. It is a complex question why capitalist systems tend to have these features. A brief answer would be that people generally like leisure time and so if they can be absentee owners who make private-property income, they will be. (Both of these are rare or impossible in standard socialist systems.) As for wage labor, this is a question for labor economics, but my suspicion is that it has to do with the considerations in Coase 1937.

[8] See Oxford English Dictionary n.d. c.

[9] See n. 3 above and Berkman 2003 [1937].

[10] Gilabert and O’Neill (n.d.: § 3.2.4) hold that the presence of regulations can be understood as introducing a more socialistic element to a capitalistic society.

[11] See Oxford English Dictionary n.d. c.; Dahl 1992; and Investopedia 2019. For example, in the United States, several corporations (e.g. the police forces, the military, regulatory agencies, and the postal service) are socially controlled. And even in the USSR, citizens could collect property income (Maggs 1961).

[12] See e.g. Financial Crisis Inquiry Commission 2011 for an overview of some of these arguments.

[13] Ibid.

[14] To try to answer this question, see e.g. my Arguments for Capitalism and Socialism.


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About the Author

Tom is an assistant professor at Spring Hill College in Mobile, AL. He received his PhD in philosophy from the University of Colorado, Boulder. He specializes in ethics, metaethics, epistemology, and the philosophy of religion. Tom has two cats whose names are Hesperus and Phosphorus.

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