Provided by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
The key to the distinction between Capitalism, Socialism, and Communism is the profit motive as indicated in the illustration below. The models at the top of the wheel represent maximum government ownership of capital and land, while the models at the bottom of the wheel represent the absence of government. The models on the left-hand side exclude the profit motive, while the models on the right-hand side include the profit motive. On the lower right-hand side, free enterprise capitalism represents the maximum individual freedom within a capitalist system, while state capitalism represents the minimum individual freedom. On the left-hand side, communism represents the maximum individual freedom for a socialist system, while state socialism represents the least individual freedom. Notice that both communitarian capitalism and individualistic capitalism fall into the same category on the larger economic system wheel. Both systems include a mixture of state (i.e., government) regulation and private enterprise. In terms of the whole scheme of possible economic systems, the two models are very close together. These two models mainly differ in terms of the amount of emphasis placed on individual freedom. It is important to understand that while individual freedom represents the greatest strength of capitalism, it also represents the greatest potential weakness. Finding the optimum mix of individual freedom and cooperation within a larger community is the goal of both systems.
* This illustration and explanation is adapted from Chapter 1 of MAAW's Textbook.