Skip links

Socialism in Economy (Socialist Economic System)

A country’s economic system defines its mechanism for the production, distribution, and allocation of resources, goods, and services. A socialist economy applies the policies of socialism in the economy; this is one of the main types of economic systems that are practiced around the world. Others include capitalism, traditional economy, and mixed economic systems. Nonetheless, in this article, we will be focusing on the socialist economic system; discussing the characteristics, advantages, and disadvantages of socialism in economy as well as the examples of socialist countries in the world.

See also: Is socialism good?

Is socialism an economic system?

Yes, socialism (socialist economic system or socialist economy) is an economic system that is characterized by public ownership and control of property and natural resources rather than private ownership and control.

A socialist economy, therefore, is a political philosophy and movement encompassing a range of economic and social systems that calls for social ownership of the means of production as opposed to private ownership, with an emphasis on democratic control such as workers’ self-management.

Socialism in economy (socialist economic system)
Socialism in economy

According to the socialist view, individuals do not work or live in isolation, rather they live in cooperation with one another. Everything that people produce is in some sense a social product, and therefore everybody that contributes to the production of a good should be entitled to a share in it. Hence, society as a whole should own or at least control property for the benefit of all its members. This is the ideology on which socialism as an economic system is found.

Related: Who gets rich in socialism?

What is a socialist economic system?

A socialist economic system is an economic and political system that is based on collective, common, or public ownership of the means of production (machinery, tools, and factories used to manufacture goods) that aim to directly satisfy societal needs rather than profit. That is, in a socialist economic system, all the decisions on production and distribution are made by the collective, directed by a central planner or government body.

A socialist economy is in contrast with capitalism, whereby business owners control the means of production and pay wages to workers. Socialism in economy, therefore, envisions shared ownership and control among the laboring class. The factors of production are all state-owned, thus, all the plants, factories, machinery, capital, etc. are owned by the community in control of the State. Hence, all citizens get benefits from the production of goods and services on the basis of equal rights.

In a socialist economic system, private companies or individuals are not allowed to freely manufacture goods and services. Also, the production of goods and services takes place according to the needs of society and at the command of the state or the planning authorities. As a result, the market and the factors of supply and demand play no role in a socialist economy. This is one of the prominent characteristics of socialism in economy; goods and services are produced based on usage value which is subject to the needs of the society.

This means that underproduction and overproduction are prevented in a socialist economic system which is entirely different from the common capitalist economic system. In capitalism, goods and services are produced to generate profit and capital accumulation, rather than being based on their usage and value. The main aim of socialism in economy is to ensure the maximization of the wealth of a whole community or country.

Socialism in an economy aims to have an equal distribution of wealth amongst all its citizens, not just the welfare of its richest individuals and companies. Hence, socialism tends to affect the wealthy in the sense that their wealth will be reduced as a result of the socialistic ideals of equality in income and wealth. Also, the policy of communal ownership of the means of production in a socialist economic system doesn’t give room for the accumulation of wealth from profits generated from the sale of goods or services.

A very good historical example of socialist economic system, though run by communists, is the former Union of Soviet Socialist Republics (U.S.S.R.), which is also known as the Soviet Union. Even though no modern-day countries are considered to have a pure socialist economic system, China, Cuba, and North Korea have strong elements of socialism in their economies.

Who controls the economy in socialism?

The ownership of the means of production and control of the economy in socialism varies in different socialist theories. A socialist economy can either be based on common ownership by all of society with management and control delegated to those who operate or use the means of production, or it can be based on public ownership by a state apparatus. It can also be based on direct ownership by the users of the productive property through worker cooperatives.

In a socialist economy, common ownership may take shape through democratic, technocratic, oligarchic, totalitarian, or even voluntary rule. Nonetheless, in an absolute socialist system, all legal production and distribution decisions are made by the government. That is, in a socialist economic system the government determines all output and pricing levels and supplies its citizens with virtually everything; from food to healthcare.

Hence, a socialist economy relies on either the government or worker cooperatives to drive production and distribution. There is always a central planning committee, an authority that decides what is to be produced using the state resources and also decides the quantity and method of production. The state determines how the main resources are used and taxes wealth for redistributive efforts. Hence, in a socialist economic system, consumption is regulated even though it is still partially left up to individuals.

Related: What is a Socialist Government? Examples and Meaning

History of socialism in economy

The socialist economic system of shared resources and collective production dates back to the earliest human civilizations. In those days, tribal or clan-based societies would usually work for the common good and work together to produce food and supplies that would be enough for the entire population. For thousands of years, collective agriculture persisted and was later replaced in many places by some sort of feudal system. In a feudal system, landed nobility (lords) ruled over peasants (serfs) who worked the land without owning it.

The intellectual roots of socialism in economy date back to Plato’s ‘Republic’, in which he described a collective society. Centuries later, Thomas More’s ‘Utopia’ echoed Platonic ideals in its depiction of a fictitious island where people work and live communally. Socialism, however, was a direct response to the industrial revolution that brought about huge economic and social change in Great Britain and the rest of the globe.

During the industrial revolution, industrialists, under capitalism grew wealthy on the labor of workers who increasingly lived in poverty. During the late 18th and 19th centuries, under early capitalist economies, western European countries experienced industrial production and compound economic growth at a rapid pace. As a result, some families and individuals rose to riches quickly, while others sank into poverty, which caused income inequality and other social concerns. In regard to this, socialism emerged as an alternative to capitalism, in order to improve life for the working class.

Modern socialism further developed in opposition to the abuses and excesses of liberal individualism and capitalism. Robert Owen and Henri de Saint-Simon were the most famous early socialist thinkers, followed by Karl Marx and then Vladimir Lenin. It was mainly Vladimir Lenin who gave a detailed explanation of the ideas of earlier socialists and helped bring socialist planning to the national level after the 1917 Bolshevik Revolution in Russia.

The Soviet Union (Union of Soviet Socialist Republics U.S.S.R.) is a historical example of a socialist economic system. It was a transcontinental country which was the largest country in the world, that spanned much of Eurasia from 1922 to 1991. The Soviet Union was a flagship communist state and was nominally a federal union of fifteen national republics. In practice, both its economy and government were highly centralized until its final years.

The dissolution of the Soviet Union was a result of internal disintegration within the Soviet Union (USSR) which caused the end of the country’s and its federal government’s existence as a sovereign state. Hence, its constituent republics gained full sovereignty on 26 December 1991.

By late 1991, in the middle of a catastrophic political crisis, with several republics already leaving the Union and the waning of centralized power, the leaders of three of its founding members declared that the Soviet Union no longer existed. Shortly after, eight more republics joined their declaration and Gorbachev (the last Soviet leader) resigned in December 1991. Then, what was left of the Soviet parliament voted to end itself.

After the failure of the socialist central planning in the Soviet Union and Maoist China, during the 20th century, many modern socialists adjusted to a high regulatory and redistributive system sometimes referred to as democratic socialism or market socialism.

Check out: Arguments Against Capitalism

Characteristics of socialist economic system

  1. Collective ownership of resources
  2. Central economic planning
  3. Equal distribution of income
  4. No market forces
  5. Maximum social welfare
  6. No freedom of choice for consumers

Here are some characteristics of socialism in economy:

Collective ownership of resources

The collective ownership of resources is one of the features of socialism. A socialist economic system is based on socio-economic objectives, thus, the people’s welfare takes precedence over the profit motive.

In a socialist economy, all the major factors and resources of production are owned by the community, i.e., the government, and no individual can hold private property beyond a certain limit. Only trading firms and small farms are kept under private ownership. Therefore, it is the socialist government that utilizes the resources in the interest of social welfare.

Central economic planning

In a socialist economic system, the government fixes certain objectives and in order to achieve them, the government adopts economic planning. All kinds of decisions regarding the central problems of an economy are taken in the economic plans and there is usually a Central Planning Authority that plans for the economy.

Hence, one of the major characteristics of socialist economic system is that there is always a central planning committee. This is the authority that will decide what is to be produced using the state resources as well as the quantity and method of production. The main function of such authority is to fulfill the socioeconomic aims and plans of the State.

Equal distribution of income

There is economic, social, and political equality in a socialist economic system as all the citizens enjoy equal opportunities and facilities like public healthcare, education, food, etc. Hence, there is no discrimination between different classes of people due to the equal distribution of income. This is one of the main characteristics of socialism in economy.

The way a socialist economy is set up does not allow one individual to accumulate a lot of wealth. Due to this, the gap between the poor and rich is much narrower. Hence, there is almost equality between the rich and poor in a socialist economy and as a result, there is no problem of class struggle.

No market forces

Market forces are economic factors that affect the price, demand, and availability of goods or services in the market. It occurs naturally in a free market economy and determines the price and quantity of a commodity in a market. The actions of buyers and sellers can cause the prices of goods and services to change without being controlled by the government.

However, in a socialist economic system, there are no market forces as the motive is the welfare of the people. Because there is no profit motive, the price mechanisms will not influence any product decisions. Hence, in a socialist economy, the pricing structure is ‘administered pricing’ which is set by the central planning committee on the basis of their socioeconomic objectives. That is, the market and the factors of supply and demand play no role in socialism.

Maximum social welfare

Maximum social welfare is one of the characteristics of socialist economic system. The main objective of socialism in an economy is the maximum social welfare of society. Hence, there is no scope for exploitation of the labor class in a socialist economy. A socialist government tends to keep a close eye on the needs of the poor masses while formulating plans.

No freedom of choice for consumers

The government plays a significant role in decision-making in a socialist economy. Hence, they have complete control over economic activities like distribution, production, consumption, investment, foreign trade, etc. Hence, under socialism, there is no freedom of choice for consumers.

Every citizen is guaranteed basic goods like clothing, food, healthcare, shelter, etc, but they do not have absolute freedom of choice. Consumers cannot demand the products they desire as they must choose from the products that the state produces. Because there is no free market in a socialist economic system, there is no concept of preference or demand and supply.

Also, being that the state is the sole entrepreneur, there is no cut-throat competition unlike in a capitalist economy. Additionally, in a socialist economic system, every citizen gets a job but is not able to freely choose their occupation.

See also: Capitalism vs Liberalism Differences and Similarities

Countries with socialist economic system

  1. People’s Republic of China
  2. Lao People’s Democratic Republic
  3. Republic of Cuba
  4. Socialist Republic of Vietnam
  5. People’s Democratic Republic of Algeria
  6. State of Eritrea
  7. Co-operative Republic of Guyana
  8. Portuguese Republic
  9. Republic of Guinea-Bissau
  10. People’s Republic of Bangladesh
  11. Nepal
  12. Democratic Socialist Republic of Sri Lanka
  13. Republic of Nicaragua
  14. United Republic of Tanzania
  15. Democratic People’s Republic of Korea
  16. Sahrawi Arab Democratic Republic
  17. Republic of India

It is important to note that self-identification is the only criterion used for the list of socialist countries mentioned above. This means that the examples of countries with socialist economic systems listed above include countries that have claimed to be socialist, regardless of whether their claims are disputed. The list, therefore, includes socialist countries in the world that assert in their constitutions that they are based on socialism, regardless of their economic or political system.

The socialist economic system examples listed include countries that maintain constitutional references to socialism, even when they are governed by non-socialist parties. Hence, the mentioned examples are best described as a list of countries that explicitly claim to be socialist economies.

Table: socialist economic system examples

CountrySinceForm of governmentParty
Marxist–Leninist states
1People’s Republic of China 1 October 1949Unitary one-party socialist republicCommunist Party of China
2Lao People’s Democratic Republic2 December 1975Unitary one-party socialist republic Lao People’s Revolutionary Party
3Republic of Cuba24 February 1976Unitary one-party socialist republic Communist Party of Cuba
4Socialist Republic of Vietnam 2 September 1945Unitary one-party socialist republicCommunist Party of Vietnam
Non-Marxist–Leninist states
1People’s Democratic Republic of Algeria 3 July 1962Multi-party semi-presidential republic_
2State of Eritrea24 May 1991One-party presidential republicPeople’s Front for Democracy and Justice
3Co-operative Republic of Guyana 6 October 1980Multi-party presidential republic_
4Portuguese Republic25 April 1976Unitary semi-presidential constitutional republic_
5Republic of Guinea-Bissau 24 September 1973Multi-party semi-presidential republic_
6People’s Republic of Bangladesh 11 April 1971Multi-party parliamentary republic_
7Nepal20 September 2015Multi-party parliamentary republic_
8Democratic Socialist Republic of Sri Lanka7 September 1978Multi-party semi-presidential republic_
9Republic of Nicaragua 18 July 1979Dominant-party presidential republic_
10United Republic of Tanzania 26 April 1964Dominant-party semi-presidential republic_
11Democratic People’s Republic of Korea9 September 1948One-party socialist republicWorkers’ Party of Korea
12Sahrawi Arab Democratic Republic26 February 1976One-party semi-presidential republicPolisario Front
13Republic of India18 December 1976Multi-party parliamentary republic_
Socialist economic system countries

So many present and past countries have declared themselves socialist states or are in the process of building socialism. As shown in the table above, there are two categories of socialist states listed.

The first category is the Marxist–Leninist states. The majority of self-declared socialist countries have been Marxist–Leninist or inspired by it, which followed the model of the Soviet Union or some form of national or people’s democracy. These countries share a common definition of socialism and refer to themselves as socialist states that are on the road to communism with a leading vanguard party structure. Hence, they are usually called communist states.

The non-Marxist–Leninist states category, on the other hand, represents a wide variety of different interpretations of socialism and in many cases, the countries do not define what they mean by it.

Read also: Economic Liberalism vs Capitalism Differences and Similarities

Advantages and disadvantages of socialism in economy

Like every other economic system, there are several advantages and disadvantages of socialism in an economy. One of the major advantages of socialist economic system is that the system brings about equitable distribution of wealth and material resources among all people as production is done for use rather than for profit.

The shared ownership of resources and central planning in a socialist economy provides a more equal distribution of goods and services and a more equitable society. The socialist government determines the output and pricing levels of these goods and services and this is one of the prominent benefits of socialism. The system tends to have robust welfare systems and social safety nets so that individuals rely on the state for everything.

On the flip side, there are also disadvantages to a socialist economic system. Socialism in economy can be a breeding ground for corruption, red-tapism, and favoritism. The State and the Central Planning Authority hold too much of the power and can abuse it for their personal gains.

Also, under socialism, the freedom of citizens is restricted as they do not have a choice in the products they wish to buy or the jobs they want to do. The freedom of citizens is further curtailed by the inability to own any private property. Socialism in economy does not promote hard work or any creativity in its citizens because every citizen is guaranteed a job.

Furthermore, the administered prices in a socialist economy are not the most efficient because they are not based on market forces. As a result, the economic and scientific allocation of resources is impossible in this system. Sometimes, under a socialist economic system, state monopolies are created which can get very dangerous with time.