Economics Explained: Capitalism vs Communism

The world (human race basically) since inception has been divided into different ideologies and basis. Whether it is left versus right, or conservatives versus liberals, there has always been a parallel contrary basis. Amidst climate change and global slowdown, one such issue has taken flight that whether it is time for the world to move from capitalism to communism. Before jumping onto any conclusions, let us dive and understand the two frameworks.


If we go by the definition, communism is the theory or system of social organisation in which all property is owned by the community and each person contributes and receives according to their ability and needs. On the other hand, capitalism is the economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state. Whereas, socialism is the mid-path, a transitional social state between the overthrow of capitalism and the realisation of Communism.

Karl Marx- Father of Communism

Karl Marx was a German philosopher, economist, historian, sociologistpolitical theorist, journalist and socialist revolutionary. He distinguishes one class from another on the basis of two criteria: ownership of the means of production and control of the labour power of others. From this, Marx states "Society as a whole is more and more splitting up into two great hostile camps, into two great classes directly facing each other":
  1. Capitalists, or bourgeoisie, own the means of production and purchase the labour power of others.
  2. Workers, or proletariat, do not own any means of production or the ability to purchase the labour power of others. Rather, they sell their own labour power.

Adam Smith- Father of Capitalism

Adam Smith was a Scottish economist, philosopher and author as well as a moral philosopher, a pioneer of political economy and a key figure during the Scottish Enlightenment. The father of modern economics was a major proponent of laissez-faire economic policies. He proposed the idea of an invisible hand—the tendency of free markets to regulate themselves by means of competition, supply and demand, and self-interest. His theory of compensating wage differentials, meaning that dangerous or undesirable jobs tend to pay higher wages to attract workers to these positions, continues to justify the present markets.

India - Then and Now

The first Prime Minister of India, Jawaharlal Nehru laid the foundation of the free country with the socialist reforms. The wave of socialism was carried forward by the subsequent governments. The 42nd amendment to Constitution of India, officially known as The Constitution Act, 1976, was enacted during the Emergency by Indira Gandhi. It amended Preamble and changed the description of India from "sovereign democratic republic" to a "sovereign, socialist secular democratic republic". The year 1991 proved to be turning point for Indian economy when ‘New Economic Policy’ with the LPG (Liberalisation, Privatisation, Globalisation) model was launched under P.V. Narasimha government. India finally moved on against red tapes and Licence Raj. India is on the ‘bull’ spree since ever then.

Current World Scenario

On practical grounds, there is not even a single nation state following the true sense of communist ideologies. Most of the countries have shifted to the capitalistic approach as more and more focus is being laid on money and capital markets. Here, we list out the three major countries which still have, not a complete, but some trace of communism remaining.

  1. China – During 1949, Mao Tse Tung established the Chinese Communist Party which led the foundation for China being a communist nation. In the late 1970s, China started its journey towards being a mixed economy. It phased out collective farms and allowed private businesses. It follows a five-year economic plan. The government and its policies favour state-owned enterprises in sectors that are vital for its economic growth. 
  2. North Korea – In 1953, the Korean War ended with the help of China and Russia. The post-war era saw the country follow strict central planning with communal farming. After suffering from famine and poor living conditions in the 1990s and 2000s, it allowed semi-private markets to sell some goods.
  3. Vietnam – In 1945, the communist leader Ho Chi Minh declared his country’s independence from France. The French, backed by USA seized southern Vietnam. Ho, backed by China, took the northern part. In 1954, the French agreed to divide Vietnam, but in 1964, Ho led Viet Cong soldiers to reunite the country. In 1986, Vietnam began its transition towards a market-based economy. It still has to reform state-owned enterprises, reduce red tape, and increase financial sector transparency to turn into a capitalistic country.  

Should the World Maintain Status – Quo??

The total inclination towards crony capitalism can backfire. Capitalism, if unchecked can lead to huge income disparity between classes and rampant exploitation of the working class. The liberalised and globalised policies with the pinch of socialist measures is the need of the hour. Though the amount of ‘pinch’ could vary depending on the demographics and past history of the nation state. As the world enters the new decade, it would be interesting to see which path it takes during further courses of development, a more money-oriented capitalism, or the utopian ideology of communism.

- Written by Prateek Bansal

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Economics Explained: Capitalism vs Communism Economics Explained: Capitalism vs Communism Reviewed by EMN on January 31, 2020 Rating: 5

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