In the 1840s a new type of economic theory emerged in the literary circles known as “The Communist Manifesto”. Written by Karl Marx with Fredric Engels it propounded a new and unique concept of an economy of a country. This came to be known as a socialist economy. Let us learn about it some more.
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- Capitalist Economy
- Mixed Economy
In a socialist economy, the setup is exactly opposite to that of a capitalist economy. In such an economy the factors of production are all state-owned. So all the factories, machinery, plants, capital, etc. is owned by a community in control of the State.
All citizens get the benefits from the production of goods and services on the basis of equal rights. Hence this type of economy is also known as the Command Economy.
So basically in a socialist economy, private companies or individuals are not allowed to freely manufacture the goods and services. And the production occurs according to the needs of the society and at the command of the State or the Planning Authorities. The market and the factors of supply and demand will play no role here.
The ultimate aim of a socialist economy is to ensure the maximization of wealth of a whole community, a whole country. It aims to have an equal distribution of wealth amongst all its citizens, not just the welfare of its richest companies and individuals.
Features of a Socialist Economy
1] Collective Ownership of Resources
In a socialist economy, the entire foundation is based on socio-economic objectives. The welfare of the people takes precedence over the profit motive. And so all major factors and resources of production are in the ownership of the state itself. Only small farms and trading firms are kept under private ownership.
2] Central Economic Planning
In a socialist economy, there is always a central planning committee. This is the authority who will decide what is to be produced using the state resources. They will also decide the quantity and the method of production. The ultimate aim of such authority is to fulfill the socio-economic aims of the State.
3] No Choice for Consumers
Every coin has two sides. So in a socialist economy, every citizen is guaranteed basic goods like food, clothing, shelter, etc. But the consumers do not have absolute freedom of choice. They cannot demand the products they wish, they must choose from the products the state manufactures.
Since there is no free market, there is no concept of preference or demand and supply. Also while every citizen will get work, he is not able to freely choose his occupation.
4] Equal Distribution of Income
This is one of the main features of a socialist economy. The setup does not allow one person to accumulate a lot of wealth. So the gap between the rich and the poor is much narrower. And all their citizens enjoy equal opportunities and facilities like education, public healthcare, etc. So there is no discrimination between different classes of people.
5] Absence of Market Forces
The motive here is the welfare of the people. Since there is no profit motive price mechanism will not influence any product decisions. The pricing structure in a socialist economy is ‘administered pricing’ which is set by the planning commission on the basis of their socio-economic objectives.
Learn Mixed Economy here in detail.
Demerits of a Socialist Economy
- Socialism is a breeding ground for corruption, red-tapism, and favouritism. The State and the Central Planning Authority hold too much of the power which they often abuse for their personal gains.
- It essentially restricts the freedom of its citizens. They do not have a choice in the products they wish to buy, or the jobs they want to do. Their freedom is further curtailed by the inability to own any private property.
- Every citizen has the guarantee of a job. So socialism does not promote hard work or any creativity in its citizens.
- Administered prices are not the most efficient. They are not based on market forces. Thus the economic and scientific allocation of resources is impossible in this system.
- Sometimes under socialism, we end up creating state monopolies which can get very dangerous with time.
Solved Questions on Socialist Economy
Q: State some of the advantages of a socialist economy?
Ans: A socialist economy does have certain advantages like,
- Promotes the equitable distribution of wealth and social justice
- It minimizes unemployment
- Ensures that all citizens have the means to achieve a minimum living standard
- It provides comprehensive social security to all its members