Socialist Economy – Meaning, Types, Advantages, and Limitations

What is a Socialist Economy?

A Socialist economy or Socialism is an economic system where the state owns and manages the means of production. The state is responsible for the production and distribution of goods. Generally, the state works on the recommendations from the planning commission.

In simple words, we can say that the state decides what to produce, how to produce, how much to produce, for whom to produce, and what factors of production to use. In a socialistic system, each individual gets and works as per their ability. This is the reason why people tend to work harder in this system.

Karl Marx was the first to introduce this term in his “communist manifesto.” He is known as the father of socialism. Another name for this economic system is the planned economy. China, Vietnam, and North Korea are good examples of such an economic system. 

Features of Socialist Economy

Following are the features of a socialist economy:

  • Ownership is collective. It means all the factors of production belong to the state and not to any individual.
  • This economic system strives to achieve equality between rich and poor. Also, it works to do away with discrimination on the basis of class, caste, and skin color.
  • The state sets the goals and creates plans to achieve them.
  • There is no competition in this economic system as earning profit is not the motive.
  • Government plays a crucial role in all economic activities. Thus, it is important that the government doesn’t misuse its power.
  • The state delegates the work depending on the people’s abilities and skills. In return, people get wages as per their work and need.
  • Social welfare is at the core of socialism. It means all members should work towards the growth of society, especially the poor people.
  • There is no price mechanism; instead, the central planning commission controls and regulates the prices.
  • Since there is no competition, this economic system has no place for marketing and advertising.
  • This system strives to achieve equal distribution of income among all the people. This helps to reduce income imbalances.

Types of Socialist Economy

There are many types of socialism, and each type focuses on one or more aspects of socialism. Discussed below are the different types of socialism:

Democratic Socialism

Elected management has control over all the factors of production. Also, crucial goods and services, such as energy and housing, are managed through centralized planning. And a free market system is used to distribute all other consumer goods and services.

Revolutionary Socialism

This socialism believes in a purely socialistic system. In this economic system, workers own and manage factors of production through a well-developed and centralized system.

Libertarian Socialism

This system assumes that people are always rational, self-determining, and autonomous. It implies that people should be treated equally, i.e., no color, caste, or creed discrimination. Also, people are treated economically, socially, and politically equal.

Fabian Socialism

It refers to practicing socialism in a totally non-violent method or adapting socialism through peace.

Market Socialism

Workers control the production process, i.e., they decide on the distribution of the resources. Workers sell the excess resources or give them to the members of society. The members then distribute those resources on the basis of a free market system.

Green Socialism

As the word suggests, this type of socialism aims to achieve its objectives while protecting natural resources.

Utopian Socialism

Equality is the primary motto of this socialism. Also, this system gives priority to high-scale industrialization.

Christian Socialism

Christianity implies brotherhood, and this socialism encourages the same values as well.

Advantages of Socialist Economy

These are the advantages of a socialist economy:

  • There is no exploitation of workers. This is because everyone has a say in the use of resources, and an individual receives and works as per their ability.
  • There is no discrimination as well. This is because each individual does what he is best at or what he enjoys doing. And if there is no one to do a specific job, then the state offers higher remuneration to whoever does this work. Moreover, everyone has access to basic goods, health care, education, and other necessities.
  • It leads to rational allocation of resources. This is because the central planning authority makes a plan to allocate the resources efficiently.
  • Since the planning commission manages the production and distribution of products, it could help avoid economic fluctuations. This leads to economic stability.
  • Planning commission plan to satisfy the basic needs of the people first.
  • Such a system focuses on a balance economic development of all regions, including backward areas, agriculture, small industry, etc.
  • Since the state takes all the decisions, it results in more flexibility than a capitalist economy.
  • Unlike capitalism, socialism can work towards the conservation of natural resources.

Disadvantages of Socialist Economy

These are the disadvantages of this economic system:

  • This system relies too much on cooperative pooling.
  • People who are competitive don’t get the importance. This is because the state expects cooperation and not competition—socialism view competition as a cause of social unrest for personal interest.
  • Lack of competition and no extra reward for entrepreneurial ventures blocks innovation.
  • Such a system could give rise to red-tapism and bureaucracy.
  • This system doesn’t provide any incentive for being efficient.
  • Consumers don’t get the freedom of choice as the state decides the goods that will be produced.
  • Since the state has all the power, there are chances of misuse of this power.
  • There is no proper system to calculate the cost. Since the state owns all the factors of production, there isn’t any market price. Due to this, there is no standard way to know the cost of producing goods and services.
  • This system could lead to the loss of economic freedom, including enterprise and occupation. The state decides what needs to be produced and who will produce it. Similarly, the state assigns jobs to workers on the basis of their ability and skills.

Final Words

A Socialist economy depends on the contribution of all members of the community. These members manage the factors of production and share the proceeds equally. Even those who can’t work are taken care of. Such an economic system has given very good results, and China is a good example of this. However, abuse of power is possible in this system as the state has all the power.



Sanjay Borad

Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

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