Definition: Socialism or Socialistic Economy is an economic system wherein the whole society owns the factors of production, and its operation is in the hands of public authority. Here, the government takes major economic decisions taking into account the overall well-being of the society. Hence, all areas of the economy, be it industry, agriculture, transport or business, are governed by the state only.
The alternative term for socialism is a centrally planned economy.
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Russia was the first nation to implement a socialist economy. However, after the second world war, a maximum number of East European countries established this system.
Examples of Socialism
- Soviet Union
Features of Socialism
- Society owns productive resources: In a socialistic economy, there is collective ownership of productive resources, such as land, mines, factories, banks, mills etc. Hence, the state owns and runs these resources.
- Economic Planning: In socialism, there is planning in place of the price mechanism. For the purpose of planning, there exists a central planning authority which allocates productive resources on the basis of a specific plan which takes into account the economic goals. All the decisions relating to what to produce, how to produce, for whom to produce, how much to produce, and how to allocate resources are taken by the central planning authority.
- Social Welfare: The primary motivation in a socialist economy is social welfare. This implies that it seeks to maximize the interest and welfare of the whole society. Hence, in this economic system, individual interest is subordinate to societal interest.
- Economic Equalities: Egalitarianism is the basic principle of a socialist economy. As per this principle, all people are regarded as equal and deserve equal rights and opportunities. It attempts to make an equitable distribution of income and wealth. Further, it aims to give equal opportunities to all the members of the society. But it does not mean that this system gives rise to absolute equality. It believes that difference in income is necessary, to some extent, to indicate the difference in skill, efficiency and talent.
- Classless Society: In socialism, people are not divided on the basis of class. This happens because it is the state which owns and runs all the productive resources. Hence, all the people work for the state directly. Therefore, the income they receive is in the form of wages.
- Elimination of Competition: Socialist Economy puts an end to all kinds of competition. This happens because the government is the sole owner of all the productive resources. Hence, it has the monopoly to produce all kinds of goods, which eliminates the competition.
- Optimum utilization of resources: As the production is carried out with the aim of maximizing social welfare and the planning authority allocates the resources, there is the best possible utilization of the resources.
- Removes economic instability: A central planning authority takes all the economic decisions after conducting a thorough survey of the needs and resources of the economy. Therefore, there are low chances of overproduction and underproduction. Further, the state regulates the prices of goods and services.
- Equitable distribution of income: It leads to equitable distribution of income by setting up an egalitarian society. It provides equal opportunities to all people, regardless of gender, caste, creed and race. Here, all the income is earned income.
- End of class struggle: Because a socialist economy is a classless society, there is no scope for class struggle. Here, the state is the employer who works for society-wide welfare. So, there is no reason to exploit workers.
- Production of useful commodities: This economy does not produce luxuries at the cost of necessities. Keeping social welfare in mind, the state prefers the production of basic necessities and commodities of mass consumption like food, clothing, housing etc.
- Loss of efficiency: Because a socialistic economy is based on equitable distribution of income, there is a lack of a proper incentive system. In the same way, there is no incentive to innovate new production methods. However, there are office bearers who manage all the industries and economic activities, so they are less efficient in comparison to private entrepreneurs.
- Lack of Incentive. Here, workers are government servants, so job security is always there whether they work efficiently or not. Hence, there are lack of incentives to work harder.
- Lack of Consumer Sovereignty: In a socialist economy, consumers are not kings, so the production of goods is not based on the consumers’ preferences. Hence, goods and services are produced in a limited variety, which is also decided by the central planning authority.
- Lack of freedom: There is a lack of freedom to choose an occupation. They are bound to do the work allotted to them by the state. Due to the absence of economic freedom, they can also not enjoy civil and political freedom. There is an absence of freedom of speech and expression in socialist economies.
- Concentration of Power: The economic and political powers are centralised, i.e. they lie in the hands of the government. As said earlier, the government owns the resources and runs the enterprises. This makes the government more and more powerful. Thus, the office bearers and ministers use this power for personal gain.
A word from Business Jargons
Above all, the socialistic economy is autocratic in nature, which is one of the main reasons for its fall over the years.