Difference between capitalist and socialist economy :

Capitalist Economy:

(i) It has right of private property, means that productive factors such as land, factories, machinery, mines, etc. are under private ownership. The owners of these factors are free to use them in the manner in which’ they like. The government may, however, put some restrictions for the benefit of the society in general.

(ii) It comprises freedom of enterprise, means that everybody engages in any economic activity which they like.

(iii) It allows freedom of choice to the consumer, means people in a capitalist economy are free to spend their income as they like. This is known as Consumer Sovereignty.

(iv) It is a profit-motive economy which forces or induces people to work and produce.

(v) In this economy, competition prevails among sellers to sell their goods and among buyers to obtain goods to satisfy their wants. Advertisement, price-cutting, discounts, etc. are very common methods of competition in a capitalist economy.

Socialist Economy:

(i) It possesses collective ownership of means of production, except small farms, workshops and trading-firms which may remain in private hands. As a result of social ownership, profit-motive and self-interest are not the driving force of economic activity as it is in the case of market economy.

(ii) It has central authority to establish and accomplish socio-economic goals; that is why it is called Centrally Planned Economy. Major economic decisions, such as what to produce, when and how much to produce, etc. are taken by the central authority.

(iii) In this economy, freedom from hunger is guaranteed but consumers’ sovereignty gets restricted by selective production of goods. The range of choice is limited by planned production. However, within that range, an individual is free to choose what he likes most.

(iv) A relative equality of income is an important feature of this economy. Among other things, differences are narrowed down by lack of opportunities to accumulate private capital. Educational and other facilities are enjoyed more or less equally; thus the basic causes of inequalities are removed.

(v) Pricing mechanism exists in a socialist economy but it has only a secondary role, e.g., to secure disposal of accumulated stocks. Since allocation of productive resources is done according to a pre-determined plan, the pricing mechanism loses its predominant role in economic decisions.