What Exactly Is A Socialist Economy

3/17/22, 12:16 AM What Exactly Is a Socialist Economy?
INVESTOPEDIA

ECONOMY
What Exactly Is a Socialist Economy?

By
DANIEL KURT
Updated June 28, 2021
Reviewed by
ROBERT C. KELLY
Fact checked by
YARILET PEREZ
One of the traditional arguments for a free market economy is that it provides businesses with
a tangible incentive to offer goods and services that people want. That is, firms that
successfully respond to the needs of the consumer get rewarded with higher profits.
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Nevertheless, some economists and political philosophers have contended that the capitalist
model is inherently flawed. Such a system, they say, necessarily creates clear winners and
losers.
https://www.investopedia.com/articles/investing/082014/what-exactly-socialist-economy.asp 1/11
Because the means of production are in private hands, those who own them not only
accumulate a disproportionate share of wealth but have the power to suppress the rights of
those they employ.
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KEY TAKEAWAYS
Some economists and philosophers believe capitalism is flawed and leads to class
divides.
In capitalism, production is in private hands, and socialists argue that those who own
them accumulate a disproportionate share of wealth and suppress the rights of those
they employ.
In contrast to capitalism, socialists believe the shared ownership of resources and
central planning offer a more equitable distribution of goods and services.
Karl Marx was the most prominent voice of socialism and believed the working class
would rise up against the wealthy when faced with injustices.
Socialism includes the collective ownership of the means of production, central
planning of the economy, and the emphasis on equality and economic security with
the goal of reducing class distinctions.
Most modern nations don't believe in toppling the current capitalistic order but
rather instituting socialist practices.
Socialist Theory
This idea of class conflict lies at the heart of socialism. Its most prominent voice, Karl Marx,
believed low-income workers, faced with these injustices, would inevitably revolt against the
wealthy bourgeoisie. In its place, he envisioned a society where the government—or the
workers themselves—owned and controlled industry.
In contrast to capitalism, socialists believe shared ownership of resources and central

planning offer a more equitable distribution of goods and services. In short, they hold that
workers who contribute to economic output should expect a commensurate reward. This
sentiment is crystallized in the socialist slogan: “From each according to their ability, to each
according to their need.” [1]
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Below are some of the key tenets of socialism:
Public or collective ownership of the means of production

Central planning of the economy
Emphasis on equality and economic security
Goal of reducing class distinctions
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Marx himself thought that toppling the existing capitalist order required a revolution led by
the working class or proletariat. However, many socialist leaders—including influential “social
democrats” in France, Germany, and Scandinavia—advocate reforming, rather than replacing,
capitalism to achieve greater economic equality.
Another source of confusion regarding the term “socialism” stems from the fact that it’s often
used interchangeably with “communism.” In fact, the two words have different meanings.
According to Friedrich Engels, who worked alongside Marx, socialism is the first phase of the
revolution, in which the government plays a prominent role in economic life, and class
differences begin to shrink.
This interim stage ultimately gives way to communism, a classless society where the working
class no longer relies on the state. In practice, however, communism is the name often given
to a revolutionary form of socialism, also known as Marxism-Leninism, which took root in the
Soviet Union and China during the 20th Century.
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What Exactly Is A Socialist Economy?
Socialism in Practice
In a capitalist economy, the market determines prices through the laws of supply and
demand. For example, when demand for coffee increases, a profit-seeking business will boost
prices to increase its profit. If at the same time, society’s appetite for tea diminishes, growers
will face lower prices and aggregate production will decline.
In the long run, some suppliers may even exit the business. Because consumers and suppliers
negotiate a new “market-clearing price” for these goods, the quantity produced more or less
matches the public’s needs.
Under a true socialist system, it’s the government’s role to determine output and pricing
levels. The challenge is synchronizing these decisions with the needs of consumers. Socialist
economists such as Oskar Lange have argued that, by responding to inventory levels, central
planners can avoid major production inefficiencies. So when stores experience a surplus of
tea, it signals the need to cut prices, and vice versa.
One of the critiques of socialism is that, even if government officials can adjust prices, the lack
of competition between different producers reduces the incentive to do so. Opponents also
suggest that public control of production necessarily creates an unwieldy, inefficient
bureaucracy. The same central planning committee could, in theory, be in charge of pricing
thousands of products, making it extremely difficult to react to market cues promptly.
Furthermore, the concentration of power within the government can create an environment
where political motivations override the basic needs of the people. Indeed, at the same time
the Soviet Union was diverting vast resources to build up its military capability, its residents
often had trouble attaining a variety of goods, including food, soap, and even television sets.
One Idea, Multiple Forms

The word “socialism” is perhaps most associated with countries such as the former Soviet
Union and China under Mao Zedong, along with present-day Cuba and North Korea. These
economies conjure the idea of totalitarian leaders and public ownership of virtually all
productive resources.
However, other parts of the world sometimes use the same term to describe very different
systems. For instance, the main Scandinavian economies—Sweden, Denmark, Norway, and
Finland—are often referred to as “social democracies” or simply “socialist.” But rather than
the government running the entire economy, such countries balance market competition with
robust social safety nets. That means nearly universal healthcare and laws that rigorously
protect worker rights.

Important: Socialist movements in the United States have gained in popularity,
primarily seen through the success of Senator Bernie Sanders, a proponent of social
democracy.
Even in decidedly capitalist countries, such as the United States, some services are thought
too important to leave to the marketplace alone. Consequently, the government provides
unemployment benefits, social security, and health insurance for seniors and low-income
earners. It’s also the main provider of elementary and secondary education.
A Complicated Track Record

The most ardent critics of socialism contend that its goal of raising the standard of living for
those in the lower and middle classes is hard to prove historically. By the 1980s, the economic
well-being of most Russians trailed that of Westerners by a wide margin, laying the
groundwork for Soviet disintegration. Meanwhile, China’s growth accelerated only after it
began implementing pro-market reforms in the late 1970s and 80s.
A study of income levels around the globe by the Fraser Institute, a right-leaning think tank,
supports this assessment. [2] Countries with the highest levels of economic freedom have
historically had higher per capita averages. See the map below for an illustration of economic
freedom around the world.
When one looks at European-style socialism—with democratically elected leaders and private
ownership of most industries—the results are quite different. Despite their relatively high
taxes, Norway, Finland, and Switzerland are three of the top five most prosperous nations
according to the 2019 Legatum Prosperity Index.
While in certain respects, these countries have moved farther to the right in recent years,
some argue that Scandinavia is proof that a large welfare state and economic success are not
mutually exclusive.
The Bottom Line

The disintegration of the Soviet Union marked a major setback for the Marxist brand of
socialism. However, more moderate versions of the ideology continue to have a strong
influence throughout the world. Even in most Western democracies, the debate is not about
whether the government should provide a social safety net, but rather how big it should be.
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3/17/22, 12:16 AM What Exactly Is a Socialist Economy?

What Exactly Is a Socialist Economy?

In contrast to capitalism, socialists believe shared ownership of resources and central

Below are some of the key tenets of socialism:

Public or collective ownership of the means of production

What Exactly Is A Socialist Economy?

One Idea, Multiple Forms

A Complicated Track Record

The Bottom Line

What Are the Differences Between Communism and

GOVERNMENT & POLICY

Marxism: Theory, Effects, and Examples

Conflict Theory: A Guide With Examples

Mixed Economic System Definition and Examples

About Us Terms of Use

Dictionary Editorial Policy

Privacy Policy Contact Us

Careers California Privacy Notice

Investopedia is part of the Dotdash Meredith publishing family.

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