Reading: The Disadvantages of Socialism

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

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 moralrights, which are central to their conceptions of freedom and liberty.

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.

Examples

  • Austrian school economists, such as Friedrich Hayek and Ludwig Von Mises, have argued that the elimination of private ownership of the means of production would inevitably create worse economic conditions for the general populace than those that would be found in market economies. Without the price signals of the market, they state that it is impossible to calculate rationally how to allocate resources.

The Disadvantages of Socialism

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:

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.
  • 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;
  • People lose initiative to work and enthusiasm to study as doing more isn’t rewarded.

GLOSSARY

Benefit

An advantage, help or aid from something. Employee benefits and (especially in British English) benefits in kind (also called fringe benefits, perquisites, perqs or perks) are various non-wage compensations provided to employees in addition to their normal wages or salaries.

Budget

An itemized summary of intended expenditure; usually coupled with expected revenue. The amount of money or resources earmarked for a particular institution, activity, or time-frame.

Capital

Money and wealth. The means to acquire goods and services, especially in a non-barter system. Already-produced durable goods available for use as a factor of production, such as steam shovels (equipment) and office buildings (structures).

Centralization

The act or process of centralizing, or the state of being centralized; the act or process of combining or reducing several parts into a whole like the centralization of power in the general government or the centralization of commerce in a city.

Cooperative

A type of company that is owned partially or wholly by its employees, customers, or tenants. Abbreviation: co-op.

Economic System

An economic system is the combination of the various agencies, entities (or even sectors as described by some authors) that provide the economic structure that defines the social community.

Incentive

Something that motivates, rouses, or encourages. It is used to motivate individuals (often, employees) for better performance by providing financial or other types of rewards. An anticipated reward or aversive event available in the environment. Something that motivates an individual to perform an action.

Market

A group of potential customers for one’s product. One of the many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange.

Motivation

Willingness of action, especially in behavior. An incentive or reason for doing something. The psychological feature that arouses an organism to action toward a desired goal and elicits, controls, and sustains certain goal directed behaviors.

Planning

The act of formulating a course of action, or of drawing up plans.

Potential

Currently unrealized ability. A curve describing the situation where the difference in the potential energies of an object in two different positions depends only on those positions.

Price

The price is the amount a customer pays for the product. The quantity of payment or compensation given by one party to another in return for goods or services. The cost required to gain possession of something.

Profits

Collective form of profit.

Resource

Something that one uses to achieve an objective, e.g. raw materials or personnel.

Right

A legal or moral entitlement.

System

A whole composed of relationships among the members. The part of the universe being studied, arbitrarily defined to any size desired.