Firstly, to clear things up, market socialism can be democratic. The major difference between the systems is that in the welfare state the state pays for poor people and that rich people can invest in companies to get richer. In market socialism, companies are owned by workers, so workers get payed by how hard they work. The harder you work the more you get payed. Moreover, people can't simply get rich by investment- they actually have to produce goods and services. Well, how do companies get funding, you ask? Simple, from private banks just like they do today. OK, but what about the poor people? Well if they want to earn more, they should work more- or borrow money from banks at a good interest rate to sustain them until they learn the necessary skills to work and pay back their money.
This is the phrase of the original socialism as proposed by the Ricardians. Socialism is an economic theory which proposes that capital should be publicly owned. Market socialism is a variation which combines this with free market exchanges. Market socialism is a pure meritocracy, where you are rewarded according to how much your labor contributed to the social product, and then you can go spend that. It is socialism without big government, central planning or lack of calculation.
Capitalism and social democracy are both economies where capital is privately owned and managed, and therefore bosses and managers, the owning class, are rewarded according to THEIR WORKER'S labor, along with the capital they, the owning class, invested, with a small portion of this reward is given to the workers through wages.
This is unmeritocratic, as it means that money may be used to make more money, rather than work and toil. Social democracy treats the symptoms, not the disease.
Capitalism is not a natural consequence of the free market, it is a distortion, an aberration.
I would be in favour more of social democracy, but the kind used in the Scandinavian countries. You can have a balanced budget and a welfare state. The most optimum, IMHO, would be guild-payer. In guild-payer, the certifying agency that licenses occupations would also receive guild fees from members who conduct the occupation (teachers, doctors, janitors, etc) and provide basic food and housing, utilities, and medical. The company or the person themself if self-employed, would provide regular income. Due to the guild paying, the govt taxes should be much much lower.