Socialism has become a buzzword on one side of our political divide. People banter it about as the end-all and cure-all for all of our ills, real and imagined. Proponents paint a vague but inspirational picture of a utopia of equality and abundance. They espouse totally free and available health care, child care, and education. There’s no competition and no discrimination.

The way it’s presented, it seems as if it’s too good to be true. But what really is this “socialism” and what might it do — or not do — for Americans’ financial well-being?

Looking to Reach Your Financial Goals? Start Saving Today >>

What Is Socialism?

What Would Socialism Mean for Americans’ Pockets? Socialism has become a buzzword on one side of our political divide. Check out this comparison of socialism vs. capitalism. #socialism #financialliteracyexpertsSocialism is a system where society is the owner, and benefactor, of the means or factors of production. These include labor, facilities, and raw materials. Theoretically, people cooperate in a noncompetitive fashion to produce society’s goods and services, sharing in the fruits of their labor.

The system is controlled by a central government that makes decisions as to what and how things are produced. They determine the best use of scarce resources for the good of the whole.

Workers are rewarded based on their contribution. The value of their input determines what they get in remuneration, but no one is left behind.

In this theoretical utopia, those who have needs are provided sufficient resources to meet those needs.

There is no poverty. There are no marginalized people.

Socialism removes social class structure. There are no rich, and no one goes without. It’s supposed to be a level playing field. In the view of some of its strongest adherents, this is a primary aim: the reduction in the disparity between the haves and the have-nots, the removal of income and wealth inequalities.

Certainly, this isn’t how things presently work in our capitalist society.

What, Really, Is Capitalism?

In a capitalist society, individuals own the means of production. Even corporations themselves are owned by individuals — perhaps very many individuals, but individuals nonetheless. People compete to bring and sell goods and services in a free market. The prices of goods and services fluctuate according to the laws of supply and demand.

Build and Personalize Your Investing Portfolio — Get Your Stock Advisor Offer >>

The value of labor also fluctuates in the free market. Individuals can sell their services to the organization that will compensate them the most. Since each achieves to the degree he or she is both willing and able to achieve, those who are neither willing nor able are theoretically left behind.

Power swings somewhat like a pendulum. During periods of high unemployment, power accrues to corporations, who can use this power to exploit workers desperate for jobs. During periods of low unemployment, power accrues to workers, who can take advantage of the scarcity of their resource to command a higher value.

Socialism in Practice

There are no major economies that are purely socialist. Those touted as socialistic havens, such as Norway, Sweden, and Denmark, have highly skewed wealth distributions, with the top 10 percent holding over 65 percent of the wealth in each country. The citizens don't own the means of production, and none of these three countries are anywhere close to actually being socialist.

Argentina is currently one of the world’s more notable socialistic countries. But no one would hold Argentina up as a socialistic success. No country has successfully implemented socialism. More on that later.

Socialism vs. Capitalism: Pros and Cons of Each

Socialism is characterized by a very large governmental structure making centralized decisions. This is a massive expense, as are the wide array of services that the government provides.

Capitalism requires far less government. The necessity for government is at least for common services, such as national defense. Likewise, there are protections provided to ensure smooth trade between the states, as well as regulation of critical national industries.

In America, the government is involved in far more than the minimum, providing an array of goods and services, a portion of which is an attempt to provide a safety net for citizens in need.

There are actually many things in the United States that don’t have to exist in capitalism and that are actually quite socialistic in nature.

One example is Social Security. There’s nothing capitalistic about it. It is a social program that removes at least some of the burden of retirement provision from the worker and shifts that burden to the state.

Need a Business Loan? Get Your Free Quote >>

There’s an abundance of entrepreneurship in America. Many people chose to place all they have at risk in an attempt to improve their lot in life. They recognize they have an opportunity to realize whatever they are willing to put in the effort to achieve. Innovation flourishes in such an environment, as people seek better and faster ways to do more and make more.

Socialism has no such reward mechanism. You don’t get rich by inventing the next hot thing. You might get a little more, but not that much. There’s no incentive to improve the existing systems, since there’s nothing in it for you. Changing things just means more work. And no one needs that!

Two Sides of Fairness

An overriding issue is a difference in the concept of fairness. Socialists see fairness as equality of outcomes. Your rewards are guaranteed to exceed a baseline, but you’re limited in your potential on the upside. After all, excess production is necessary to provide for others’ needs, not to accrue to you like you were some sort of capitalist.

Capitalists view fairness quite differently. Capitalism rewards those who seek and obtain rewards. In this system, fairness means equality of opportunity. Everyone should be able to pursue as much as they want.

There’s no baseline income. There’s no guarantee that you will meet your needs. But your upside is theoretically unlimited. Our society is full of people who have demonstrated that it is possible to start from scratch and reach the pinnacle of wealth accumulation.

The Human Nature Problem

Socialism requires cooperation, and that cooperation is supposed to materialize once socialism is in place. Competitiveness will allegedly fall by the wayside once everyone sees the benefits of a completely shared economy.

But big central government means big central power. If you think we have power problems in Washington, try magnifying that by a factor of 10.

Socialism gravitates toward a two-class structure: You have rulers and you have everyone else. The rulers make the rules. That includes what they keep for themselves. The ones who do very well in socialism are the politicians. They’ll have mansions; they’ll have wealth.

But society slowly gets less and less. There’s no significant incentive to innovate. There’s not much of an incentive to improve anything. There slowly becomes not even an incentive to make things efficient.

You go to work every day and work hard. Your co-worker goes to work every day and plays on his phone. You get the same paychecks, the same everything. Sooner or later, you won’t work as hard. A few might — most won’t. Not for long.

Production moves to single products; there’s no reason for brands. Everyone gets the same. There’s no reason for anyone to have excess. After all, that could be used for someone else.

Human nature is to not fight when there’s nothing to fight for. People strive to make things better. There’s no reason to strive if there’s no ability to make things better.

When you put control into an unwieldy bureaucracy, things don’t just get better. The wheels turn slowly. And there’s no incentive to make them better. You get nothing extra for your efforts. You can’t make any noticeable improvement. Eventually, you stop trying.

Choices for the People

Socialism is the economy’s death knell. It’s a downward spiral where production slowly declines until the people are fighting in the streets for bread. In the end, the citizens aren’t sharing wealth, they’re sharing poverty. No socialistic economy has thrived for any length of time. Capitalism has produced the greatest wealth the world has ever seen.

Capitalism is far from perfect. There are inequities, and there are inequalities. But socialism has never fixed that. It makes a different grotesquely wealthy class: the rulers.

Start Managing Your Finances — Download This Personal Finance App >>

The choice for the nation is whether to move toward socialism, in which incentives are removed and the system at best survives a slow and stagnant existence, or to continue with a system that has produced an unequaled abundance. That system can be tweaked, and policy can be improved to level the playing field. That’s very doable.

There will never be a purity of equal production, as we are all gifted with varying talents and abilities. But we can maximize the good only in a system that encourages and rewards utilizing those talents and abilities.