What is difference between capitalism and communism? 

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Lorraine Caplan eNotes educator| Certified Educator

Capitalism is an economic form. But communism is a form of governance and an economic form. When we are discussing the economic aspect of communism, we usually refer to this as a command economy.  There are substantial differences between capitalistic economies and command economies. 

In a capitalist economy, what is produced, how much is produced, and who will produce are decided upon by individuals and companies, while in a command economy, the government decides what will be produced, how much of it will be produced, and who will produce it.  Let's take cars as an example.  In a capitalistic economy, various car manufacturers decide what cars they want to make and how many of them they will make. No one is telling them they have to do this. If a company chooses to no longer manufacture automobiles, that is its choice. If a new company chooses to do so, that is its choice as well.  In a command economy, the government decides who will make the cars, what kind of cars will be made, and how many, too.  The capitalistic economy is far more efficient, since the government in a command economy is notoriously bad at predicting the needs of consumers.

And consumption is very different as well in these economies.  In a capitalist economy, consumers buy what they choose to buy, deciding what their own needs and wants are. In a command economy, goods are limited and sometimes rationed, just one to a customer, for example. The government has decided what consumers should have, and goods are distributed in keeping with the government's thoughts about this.  Again, this is quite inefficient, leaving many people without all they need or want and providing more than others would otherwise acquire. 

Pricing is determined by supply and demand in a capitalist economy.  When there is too much of a good, companies reduce their prices.  When there is a shortage and higher demand, prices rise.  All of this creates an efficient distribution of goods.  In a command economy, prices can be set by the government, failing to take into account demand or even the costs of production. 

There are probably very few economies in the world that are purely capitalistic or purely command.  Communist countries such as China or previously communist countries such as Russia are now hybrids of capitalism and communism.  Cuba is probably about to become more capitalistic with the thawing of the freeze between it and the United States.  I would imagine that North Korea might be the only economy in the world that is close to a pure command economy.