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Like capitalism, two other “isms” offer ways to organize economic activity: socialism and communism. The older of the two, socialism, dates back to the early nineteenth century. Different socialist groups often disagreed about specific policies to address the excesses of capitalism and the new industrial age but were linked by their support for a more equitable distribution of society's income and wealth. The second, communism, was born with the publication of The Communist Manifesto in 1848. During the twentieth century, communist revolutionaries sought to hasten capitalism's collapse through violent revolutions and the creation of communist states.


Socialism is a type of economic system based on public ownership and control of key factors of production, mainly natural and capital resources. Under socialism the government owns key natural resources such as coal and oil, and capital resources such as large factories and mines. Socialism, in its many forms, also stresses the rights of labor, which include fair compensation and favorable working conditions for workers and a safety net of social programs for the needy.

Modern socialism first appeared in western Europe in the early 1800s, with many of the most influential socialist thinkers hailing from France and Britain. The French philosopher Comte Henri de Saint-Simon (1760–1825), the founder of French socialism, believed that capitalism's reliance on individual self-interest encouraged social disorganization, injustice, and exploitation. As an alternative to capitalism, Saint-Simon favored the creation of a society administered by experts such as scientists, engineers, artists, and industrialists. In Great Britain, Robert Owen (1771–1858) pioneered production methods at his New Lanark Mills that humanized people's workplace and community. Shortly thereafter other British socialists formed the Fabian Society to oppose gross disparities in income and wealth and to challenge other forms of capitalist oppression. In The Decay of Capitalist Civilization (1923), two leading Fabians, Beatrice and Sidney Webb, decried “[t]he outrageous disparity in capitalist countries between one man and another, and between one class and another.”[1]

Socialism in the economically advanced countries adopted a distinctively nonMarxist and gradualist tenor during the post–World War II era. Its stronghold was in Scandinavia, western Europe, and several regions of the British Commonwealth such as Australia, Canada, and New Zealand. Since the late 1940s European socialism has often been referred to as democratic socialism—a type of socialism that embraces limited government ownership and control of the means of production, indicative planning, comprehensive social welfare programs, and democratic political institutions.

Democratic socialists favor limited government ownership and control of productive enterprises through nationalization. Nationalization occurs when the government assumes ownership or control over of an important firm or an entire industry but compensates the previous owners. Most nationalized businesses were structured as public corporations run by a government-appointed board of directors. During the 1950s and 1960s European governments nationalized key industries such as coal, steel, banking, railways, docks and harbors, some public utilities, and health care. By the late 1970s and 1980s, however, many governments moved toward privatization—the sale of state-owned enterprises (SOEs) to private individuals or firms. Since the 1970s privatization has generally helped to restore competitive markets, reduce burdensome government subsidies to SOEs, and put about $2 trillion in new revenues into governments' pockets.[2]

Indicative planning, a second feature of democratic socialism, is an inclusive economic planning process that sets national performance targets for economic growth, investment, inflation and unemployment, government spending, and international trade. This planning involves representatives from the public and private sectors, mainly government officials, business leaders, academicians, and workers. The overriding goal is to improve the standard of living for the people rather than meddle in the business operations of private firms. Most European countries had adopted some form of economic planning by the 1960s. Economic planning diminished in importance during the 1990s and 2000s as countries generally moved away from socialist ideas and toward free market principles.

The third and most visible feature of democratic socialism was the creation of the welfare state. In a welfare state the government plays a major role in ensuring at least a minimal standard of living for the people. To achieve this goal, the state invests heavily in public education, guarantees equal opportunities for success, and provides “cradle to grave” security for its people through a vast array of social programs. Soon after World War II ended, many western European countries embraced the welfare state, with Sweden leading the pack. By the 1990s and early 2000s, however, the pendulum in most European countries had swung decisively against the welfare state and toward the free market.

A second main strand of socialism, third world socialism, also developed after World War II. The road to socialism in the developing world was pitted with a variety of economic and political potholes, however, not least of which were dire poverty, inadequate financial and technical resources, and underdeveloped economic and political institutions. Internal conflicts based on ethnic, racial, or religious differences, and a profound distrust of foreigners who had only recently been their colonial overlords, layered additional burdens on early socialist regimes.

Third world socialism typically involved land reform, the nationalization or expropriation of private businesses, and central economic planning. Land reform involved a change in ownership and control of farmland from a landed aristocracy to village groups. In the 1960s, for example, Tanzanian president Julius Nyerere initiated ujamaa, a bold but largely unsuccessful program to create community-based farming collectives. Third world socialists also seized key industries, sometimes through nationalization and at other times through expropriation. Expropriation occurs when the government seizes property without compensating the previous owners. India's aggressive nationalization policies during the late 1940s and 1950s brought mining, heavy industries, transportation, communications, and financial services under the government's control. Finally, third world socialists relied on central economic planning to speed economic development and equity. The scope and rigidity of economic plans varied, sometimes resembling the indicative planning of the western European democracies and sometimes resembling the more authoritarian planning of the communists.

Socialist economies in the developing world struggled from the 1940s to the 1980s with predictable problems, including poor work incentives, distorted price signals, and a myriad of social, economic, and political ills that plague poorer countries. In short, socialist regimes could not meet the rising expectations of their people. By the 1980s most experiments in third world socialism had petered out in favor of market-driven approaches to economic development.

  • [1] Sidney Webb and Beatrice Webb, The Decay of Capitalist Civilization (New York: Harcourt, Brace and Company, 1923), 17-18.
  • [2] Sunita Kikeri and Matthew Perault, “Privatization Trends,” Viewpoint 322 (May 2010): 1-2; Organization for Economic Cooperation and Development (OECD), Privatization in the 21st Century: Recent Experiences of OECD Countries (Paris: OECD, January 2009), 7; Sergei Guriev and William Megginson, “Privatization: What Have We Learned?”
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