What is a Socialist Economy?

Socialist economies are like an organized potluck…

The person running the potluck plans it out and asks each guest to make a specific dish. This is like the centralized planning that features in socialist economies. When people arrive, they bring food and everyone shares it. If they need a stove or utensils to complete final preparation, they can share them, just as workers share the means of production.

A socialist economy is one that involves collective ownership of the means of production and some degree of central planning.

In a capitalist society, individuals can own the means of production, such as tools, machinery, factories, and raw materials, and use them to earn a profit. In a socialist economy, there’s no private ownership of the means of production. Instead, they’re owned by everyone in common, often in the form of the government owning them on the people’s behalf.

In a market economy, businesses and individuals decide what goods and services to produce and how much to charge for them. The market, through the forces of supply and demand, governs output and prices.

In a socialist economy, the government is heavily involved in economic planning. It directs the production of goods and services and may allocate them to consumers based on their needs. There's no competition among businesses, because the government controls output and the allocation of goods. In theory, this system reduces inequality by making sure that all people have the goods and services that they need.

Today, a pure socialist economy doesn’t exist. Historically, socialist countries such as the Soviet Union also didn’t achieve pure socialism. However, many countries have integrated socialist ideas into their economic systems.

In theory, a socialist economy works based on a democratic process of economic planning. Instead of letting private individuals produce the goods and services they want and letting individuals pay for the things they can afford, society as a whole — through the government — creates an economic plan. In reality, many socialist countries have had more autocratic leadership.

A central plan outlines what goods and services the economy will produce, who will produce them, and how they will be allocated. In theory, the plan ensures that each individual works based on their skills and capabilities and receives goods based on individual need.

Theoretically, the plan aims to maximize efficiency The idea is that the economy will produce exactly the goods required at the lowest possible cost. This enables it to produce more products, at a higher quality, and provide additional leisure time to workers. In practice, socialist economies have not lived up to those ideals.

One of the primary principles of a socialist economy is a lack of social classes. Under capitalism, in broad strokes, there's an ownership class and a working class, divided based on who owns the means of production. In a socialist economy, the ideal is that all people are equal. Because society, rather than individuals, owns the means of production, there is no distinction between owners and laborers.

Socialist economies also don't allow for private ownership of the means of production. All people work according to their skills and capabilities and all people receive the benefit of that labor according to their needs, theoretically creating a society where all people prosper and no one needs to own property. This includes providing things such as housing, health care, food, water, and education to all people. Under socialism, owning private property is largely prohibited.

Some socialist thinkers also propose that a socialist economy must keep an eye toward environmental sustainability, so future generations can benefit from the things that society builds today.

There are many differences between socialist and capitalist economies.

Socialism, in many ways, is both a political and economic system, while capitalism is predominantly an economic system. In a free market economy, goods are distributed based on supply and demand, and the economy is largely free from government control. Meanwhile, socialism by definition needs government involvement, because it requires centralized planning of the economy.

Under socialism, there's no private ownership of the means of production — Society as a whole controls and benefits from them. Within capitalism, individuals and businesses can own the means of production and profit from that ownership, while laborers only profit from their work.

Capitalist economies often create high levels of income inequality, which results in different social classes. The wealthy have access to luxuries that other classes don't. Socialist economies remove distinctions between classes, allocating goods to each person based on individual need. That includes provision of free or subsidized healthcare, education, and other benefits.

In capitalism, production and prices are determined by supply and demand, while under socialism, these are set by the government.

Communism and socialism both advocate for public ownership of the means of production, but there are important differences between the two philosophies.

When Karl Marx published The Communist Manifesto, he criticized early concepts of socialist economies and societies as unrealistically utopian. He argued that the only path toward a socialist-style society was through revolution, which is why communism was sometimes called “revolutionary socialism.” Democratic socialists argue that they can enact socialist ideas through existing political processes.

In a communist society, there's no private property of any kind. Under socialism, the public owns the means of production, including machinery and raw materials, but private ownership of other things may be allowed.

In practice, it is easier for socialist ideas, such as the reduction of income inequality and class distinction, to co-exist with capitalist ideas and economics. Many modern nations use a mixed economic system that combines capitalism with government controls and social programs to prevent many of the potential ills of capitalism, such as monopolies or mistreatment of workers.

In theory, socialist economies promote more equality between people by eliminating private ownership of the means of production. In a capitalist society, owners can profit from both their labor and the fact that they own valuable raw materials, machinery, and businesses, while workers only profit from their labor. In a socialist society, people cannot profit by owning the means of production, placing everyone on more equal footing. Goods are distributed based on need, potentially improving living standards, reducing poverty, and making society more cohesive.

Under socialism, government planning of the economy aims to improve efficiency. In a capitalist economy, if two businesses are rivals, they expend resources and effort to compete. By removing competition, socialist economies can potentially devote all of their resources toward producing goods and services and reducing waste.

Socialism can also encourage environmental sustainability, because businesses don't have an incentive to damage the environment in order to make products at a lower cost to compete with other firms.

A drawback of socialism is that it can discourage innovation and effort from individuals. High taxes might discourage some people from working as hard. People also cannot benefit as much from founding a company or improving business processes and technologies through innovation. By eliminating the profit motive for innovation, socialist economies may not keep up with changing technology.

Another drawback is that overregulation by the government can reduce economic efficiency and discourage people from working. If the state provides strong welfare protections, some argue that people will prefer not to work.

Critics have argued against socialist ideas since economists first began to discuss them.

Detractors often argue that competition is an innate part of human nature and that efforts to eliminate it, in the form of a centrally planned economy and social ownership of the means or production, will fail. They say that, without competition, the economy will stagnate and people will stop working because there's no motivation for them to continue to do so.

Critics also argue that socialism will reduce innovation, because individuals cannot benefit from their ideas, whether that’s new technology, improvements in existing processes, or a new type of business.

Under some forms of socialism (and communism as described by Karl Marx), free trade with other nations is discouraged. Critics of this point out that foreign trade is an important way for countries to access goods they can’t produce or don’t specialize in. It also allows for expansion of the domestic economy through the export of valuable goods that a country has a comparative advantage in producing. Not engaging in foreign trade can also cause socialist economies to lose out on non-economic benefits, such as diplomatic and cultural ties.

Socialist economies rely on central planning of the economy, which critics argue incentivizes the creation of a one-party state that stamps out dissent. Giving the government so much power over the economy gives it too much power over society, they say.

While a few nations, like China and North Korea, openly claim to have communist or socialist societies, none have achieved pure socialism. However, many nations incorporate socialist ideas in running their governments and economies.

Many countries have a mixed economic system that combines capitalism and socialism to certain degrees. For example, the United Kingdom, Norway, Sweden, and even the US have different levels of socialist influence in their economies, from welfare programs to industry regulations.

Nordic countries are commonly used as examples of a successful implementation of democratic socialism. For example, the Norweigan government operates a sovereign wealth fund to benefit all of its citizens, and the vast majority of its economic output comes from state-owned businesses. At the same time, most Norwegians own their homes, and private businesses are permitted to operate.

Despite the fact that the US is known as a haven of capitalism, there are many examples of socialist features in America.

Social insurance programs, such as Social Security and Medicare, are a primary example. Through these programs, the government provides health care and income to people based in part on their need, not their labor.

The government also provides subsidies to different industries. For example, agricultural subsidies encourage farmers to grow certain types of crops. Subsidies are a way that the government interferes in the operation of free markets and influences production.

Other policies designed to protect consumers, such as restrictions on monopolies and minimum wage laws, also involve government intervention in private business.