Published in: Economics

Capitalism vs Liberalism Differences and Similarities

Author Blessing Peter Titus

Published on: January 23, 2023

In this article, we are going to compare and contrast capitalism vs liberalism by examining the similarities and differences that exist between the two terms. Before we begin the comparison, let us look at each term individually.

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Capitalism and liberalism explained

The terms capitalism and liberalism are closely related in that they both have to do with certain aspects of how a society is run. We shall look at each term closely below.

Capitalism is closely related to the free enterprise system and has been a dominant economic system in a lot of countries around the globe some of which include the United States, Switzerland, Netherlands, Taiwan, Australia, Ireland, and New Zealand. The various inventions that came about during the industrial revolution and the rise of factories in that era further led to the growth and establishment of capitalism in a lot of communities. This was because most of the inventions made and factories that were established all originated from individual efforts.

Furthermore, the pricing system for goods and services is determined by market forces of demand and supply as well as the cost of production or cost of goods sold.

Key characteristics of capitalism include the recognition of property rights, the existence of competitive markets, voluntary exchange between economic actors, wage labor, the price system, and private property. In simple terms, capitalism is an economic system where pricing is based on market forces and the means of production are privately owned and controlled. Both Adam Smith and Karl Marx have propounded theories of capitalism. Common types of capitalism include laissez-faire and crony capitalism.

In this economic system, competition exists between the various producers of goods and services. This is because private companies exist in all sectors of the economy that has to do with the manufacturing of products or provision of services.

The quest for making profits from the products and services offered further leads to the efficient utilization of resources and a rapid rate of innovation and economic growth. This in turn favors the growth of entrepreneurship and spurs individuals into productively contributing to society so as to derive personal benefits in the form of profits or salaries as a reward for their contribution.

Economic liberalism supports a free market economy where the means of production are privately owned and individuals are at liberty to own property and use their resources for personal gain. It opposes the establishment of trade unions and government intervention in the market. Its propounders argue that liberal economies whose markets were not controlled by the government were more efficient and tend to generate more economic wealth and prosperity than markets that were controlled by the government. They, therefore, advocated that limited government interference and the creation of social services that were funded by the state such as public education, health insurance, and social welfare were necessary for society.

Liberalism is committed to social reforms that expand the rights of individuals and reduce inequality. Economic liberalism only supports government intervention in the economy when it opens new markets, protect private property rights, resolve market failure, and fund market growth. It opposes government intervention when it affects competition between the various producers in the market or inhibits free trade. It further advocates for:

• Restrained fiscal policy.
• Labor market flexibility.
• Minimized government debt.
• Privatization of industries and firms.
• Reduced taxation and tax holidays.
• Free trade.
• Deregulation.
• Reduced government spending.

Characteristics of capitalism vs liberalism

1. Competition exists in capitalism due to the presence of several producers of similar products and services within the market. This competition is supported by liberalism due to the fact that it heightens the level of creativity and innovation in society.
2. In a capitalist economy, individuals and private firms have the right to own and use the property. Thus, all the factors of production such as land, labor, and capital are privately owned and utilized. This right is further protected, controlled, and enforced by the law. This private ownership of property which is often associated with free economies is supported by liberalism
3. Under capitalism, individuals have the freedom of choosing their occupations themselves. They are also at liberty to choose where or whom to work for. Liberalism opposes long-term welfare and encourages the need of equipping individuals to become self-reliant.
4. Companies are at liberty to manufacture products and render services to whomever they please and are at liberty to make profits from their production. Liberalism highlights the liberation of humans from the age of superstition and ignorance into the age of reason and rationality. Thus, it encourages individual freedoms in religious, intellectual, economic, political, and social life.
5. Consumers have the liberty to choose the products or services they want to purchase. In order to benefit from this consumer sovereignty, producers consider the demands of consumers when manufacturing products or rendering services. They do this so as to stay in business and profit from the consumer’s demands. In liberalism, the importance of related values such as bodily integrity, pluralism, consent, and autonomy are well recognized.
6. The market forces of demand and supply are major determinants of the prices of goods and services that are available in societies that practice capitalism. The price, on the other hand, determines the production, distribution, and consumption rate. Thus, the price mechanism serves as a regulator of the market. Liberalism believes in the limited interference of government in everyday society. This is mainly achieved by limiting the government’s power through the separation of powers, the constitution, and the rule of law.
7. Under capitalism, individuals can spend or invest their money in whatever way they deem fit. Hence companies in this kind of economy usually get funding from investors through the sale of stocks or bonds. The individuals who purchase these security instruments do so with the hope of receiving profits through dividend payments. Liberalism regards all individuals as unique and equal, thus it encourages individual liberty which promotes diversity, tolerance, and multiculturalism.

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Capitalism vs liberalism differences and similarities

Capitalism and liberalism share some similarities and differences which we shall discuss hereafter. Before then, let us outline the differences in the table below:

Similarities between liberalism and capitalism

1. Both liberalism and capitalism advocate for a free market with minimal government interference.
2. Both support the protection of private property rights.
3. Both support the presence of several producers of goods and services that foster market competition.
4. Capitalisms and liberalism support private ownership of the means of production.
5. Both support individual freedom which favors entrepreneurship and the growth of the economy.

Liberalism vs capitalism differences

1. Liberalism refers to a political and moral ideology while capitalism refers to a socio-economic system.
2. The term liberalism became popular in the 19th century when liberal governments got established in South America and Europe. The term capitalism became popular in the 18th century.
3. Liberalism is commonly associated with John Locke and Thomas Hobbes while capitalism is associated with Adam Smith and Karl Marx.

Liberalism vs capitalism Venn diagram

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Conclusion

Capitalism vs liberalism share similarities in their support of private ownership of the means of production, protection of private property rights, labor freedom, and minimized government interference in the market. The major difference between liberalism and capitalism lies in the former being a political and economic ideology and the latter being a socio-economic system.

Based on our discussion, we have seen that liberalism and capitalism are closely associated as countries that practice the capitalist system uphold almost all the views held by liberalism such as promoting individual freedom, encouraging rationality, religious tolerance, diversity, multiculturalism, and limited government interference in the economy amongst others. And further opposing oppression, and all government intervention that stifles free trade and competition in the economy.