Businesses Under Socialist Systems

Socialism and Planned Economies

Socialism is characterized by social ownership of the means of production.

Learning Objectives

Distinguish between economic planning in socialist versus capitalist economic systems

Key Takeaways

Key Points

  • A planned economy is a type of economy consisting of a mixture of public ownership of the means of production and the coordination of production and distribution through state planning.
  • Socialism has many variations, depending on the level of planning versus market power, the organization of management, and the role of the state.
  • In a socialist system, production is geared towards satisfying economic demands and human needs. Distribution of this output is based on individual contribution.
  • Socialists distinguish between a planned economy, such as that of the fomer Soviet Union, and socialist economies. They often compare the former to a top-down bureaucratic capitalist firm.

Key Terms

  • socialism: Any of various economic and political philosophies that support social equality, collective decision-making, distribution of income based on contribution and public ownership of productive capital and natural resources, as advocated by socialists.
  • planned economy: An economic system in which government directly manages supply and demand for goods and services by controlling production, prices, and distribution in accordance with a long-term design and schedule of objectives.

Planned Economy

A planned economy is a type of economy consisting of a mixture of public ownership of the means of production and the coordination of production and distribution through state planning.

Planned Socialist Economy

Economic planning in socialism takes a different form than economic planning in capitalist mixed economies. In socialism, planning refers to production of use-value directly (planning of production), while in capitalist mixed economies, planning refers to the design of capital accumulation in order to stabilize or increase the efficiency of its process. While many socialists advocate for economic planning as an eventual substitute for the market for factors of production, others define economic planning as being based on worker-self management, with production being carried out to directly satisfy human needs. Enrico Barone provided a comprehensive theoretical framework for a planned socialist economy. In his model, assuming perfect computation techniques, simultaneous equations relating inputs and outputs to ratios of equivalence would provide appropriate valuations in order to balance supply and demand.

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Hierarchy of Needs: Worker self-management and production to satisfy human needs are key.

The command economy is distinguished from economic planning. Most notably, a command economy is associated with bureaucratic collectivism, state capitalism, or state socialism.

Socialism

Socialism is an economic system characterized by social ownership, control of the means of production, and cooperative management of the economy. A socialist economic system would consist of an organization of production to directly satisfy economic demands and human needs, so that goods and services would be produced directly for use instead of for private profit driven by the accumulation of capital. Accounting would be based on physical quantities, a common physical magnitude, or a direct measure of labor-time. Distribution of output would be based on the principle of individual contribution.

There are many variations of socialism and as such there is no single definition encapsulating all of socialism. They differ in:

  • The type of social ownership they advocate;
  • The degree to which they rely on markets versus planning;
  • How management is to be organised within economic enterprises; and
  • The role of the state in constructing socialism.

The Benefits of Socialism

Socialism has a number of theoretical benefits, based on the idea of social equality and justice.

Learning Objectives

Demonstrate how the nationalization of key industries, redistribution of wealth, social security schemes and minimum wages are beneficial in socialist economies

Key Takeaways

Key Points

  • Advantages of socialism relating to social equality include a focus on reducing wealth disparities, unemployment and inflation (through price controls).
  • Advantages of socialism related to economic planning include an ability to make good use of land, labor and resources, as well as avoiding excess or insufficient production.
  • Additional benefits of Socialism: Nationalization of key industries, redistribution of wealth, social security schemes, minimum wages, employment protection and trade union recognition rights.

Key Terms

  • Public Benefit: A payment made in accordance with an insurance policy or a public assistance scheme.
  • redistribution: The act of changing the distribution of resources

How Economies Can Benefit From Socialism

Socialist economics entails the following:

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Socialism: A graphical illustration of socialism.

  1. Nationalization of key industries, such as mining, oil, steel, energy and transportation. A common model includes a sector being taken over by the state, followed by one or more publicly owned corporations arranging its day-to-day running. Advantages of nationalization include: the ability of the state to direct investment in key industries, distribute state profits from nationalized industries for the overall national good, direct producers to social rather than market goals, and better control the industries both by and for the workers. Additionally, nationalization enables the benefits and burdens of publicly funded research and development to be extended to the wider populace.
  2. Redistribution of wealth, through tax and spending policies that aim to reduce economic inequalities. Social democracies typically employ various forms of progressive taxation regarding wage and business income, wealth, inheritance, capital gains and property. On the spending side, a set of social policies typically provides free access to public services such as education, health care and child care. Additionally, subsidized access to housing, food, pharmaceutical goods, water supply, waste management and electricity is common.
  3. Social security schemes in which workers contribute to a mandatory public insurance program. The insurance typically includes monetary provisions for retirement pensions and survivor benefits, permanent and temporary disabilities, unemployment and parental leave. Unlike private insurance, governmental schemes are based on public statutes rather than contracts; therefore, contributions and benefits may change in time, and are based on solidarity among participants. Its funding is done on an ongoing basis, without direct relationship to future liabilities.
  4. Minimum wages, employment protection and trade union recognition rights for the benefit of workers. These policies aim to guarantee living wages and help produce full employment. While a number of different models of trade union protection have evolved throughout the world over time, they all guarantee the right of workers to form unions, negotiate benefits and participate in strikes. Germany, for instance, appointed union representatives at high levels in all corporations, and as a result, endured much less industrial strife than the UK, whose laws encouraged strikes rather than negotiation.

The benefits of socialism also include the following:

  • In theory, based on public benefits, socialism has the greatest goal of common wealth;
  • Since the government controls almost all of society’s functions, it can make better use of resources, labors and lands;
  • Socialism reduces disparity in wealth, not only in different areas, but also in all societal ranks and classes. Those who suffer from illnesses or are too old to work are still provided for and valued in by the government, assuming that the government is more compassionate that the individual’s family;
  • Excess or insufficient production can be avoided;
  • Prices can be controlled in a proper extent;
  • Socialism can tackle unemployment to a great extent.

The Disadvantages of Socialism

Despite the theoretical benefits of socialist economic systems, there are also disadvantages that may arise in application.

Learning Objectives

Evaluate how key components of socialism, such as state ownership of the means of production and the centralization of capital, can be disadvantageous to an economy

Key Takeaways

Key Points

  • Disadvantages of socialism include slow economic growth, less entrepreneurial opportunity and competition, and a potential lack of motivation by individuals due to lesser rewards.
  • Critics of socialism claims that it creates distorted or absent price signals, results in reduced incentives, causes reduced prosperity, has low feasibility, and that it has negative social and political effects.
  • Economic liberals and pro-capitalist libertarians see private ownership of the means of production and the market exchange as natural entities or moral rights, which are central to their conceptions of freedom and liberty.

Key Terms

  • economy: The system of production and distribution and consumption. The overall measure of a currency system.
  • socialism: Any of various economic and political philosophies that support social equality, collective decision-making, distribution of income based on contribution and public ownership of productive capital and natural resources, as advocated by socialists.

The Disadvantages of Socialism

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Socialism: Some of the primary criticisms of socialism are claims that it creates distorted or absent price signals, results in reduced incentives, causes reduced prosperity, has low feasibility, and that it has negative social and political effects.

Economic liberals and pro-capitalist libertarians see private ownership of the means of production and the market exchange as natural entities or moral rights which are central to their conceptions of freedom and liberty. They, therefore, perceive public ownership of the means of production, cooperatives and economic planning as infringements upon liberty. Some of the primary criticisms of socialism are claims that it creates distorted or absent price signals, results in reduced incentives, causes reduced prosperity, has low feasibility, and that it has negative social and political effects.

Critics from the neoclassical school of economics criticize state-ownership and centralization of capital on the grounds that there is a lack of incentive in state institutions to act on information as efficiently as capitalist firms because they lack hard budget constraints, resulting in reduced overall economic welfare for society. Economists of the Austrian school argue that socialist systems based on economic planning are unfeasible because they lack the information to perform economic calculations in the first place, due to a lack of price signals and a free-price system, which they argue are required for rational economic calculation.

Thus, Socialism can have several disadvantages:

  • The national economy develops relatively slowly;
  • There is an inability to obtain the upmost profit from the use of resources, labors and land;
  • Places that have a geographical advantage lose chances to develop better and people who have intelligence and wealth lose chances to make their businesses become bigger and more powerful; and
  • People lose initiative to work and enthusiasm to study as doing more isn’t rewarded.