Economic Systems Essay
Socialism is an economic system where all the economic decisions are made by the government or a central authority. There will be no private property rights since the government officially owns all resources. It is also known as a command economy or a planned system. Socialist economics refers to the economic theories, practices, and norms of hypothetical and existing socialist economic systems. A socialist economy is based on some form of social ownership, which includes varieties of public ownership and independent cooperatives, over the means of production, wherein production is carried out to directly produce use-value sometimes, but not always, coordinated through economic planning and a system of accounting based on calculation-in-kind or a direct measure of labor-time.
The term socialist economics may also be applied to analysis of former and existing economic systems that call themselves “socialist”, such as the works of Hungarian economist János Kornai. Socialist economics has been associated with different schools of economic thought, most notably Marxian economics, institutional economics, evolutionary economics and neoclassical economics. Early socialism, like Ricardian socialism, was based on classical economics. During the 20th century, proposals and models for planned economies and market socialism were based heavily on neoclassical economics or a synthesis of neoclassical economics with Marxian or institutional economics.
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1 Public ownership of resources
All the resources are owned and operated by the state or the government in the interest of society as a whole. This is to ensure equal opportunity of all citizens regardless of their income. Public ownership also aims to fully utilize the country’s resources.
2 Central planning authority
The central authority is responsible for making economic decisions for society. The authority plans and allocates resources between current consumption and investment for the future.
3 Price mechanism of lesser importance
Socialism gives less importance to market forces. Prices are fixed by the government and not determined by demand and supply. Private profits are not allowed and public interest is emphasized in the command economy.
4 Central control and ownership
A socialist economy is a fully planned economy where the government intervenes in all aspects of economic activity. The government controls production, consumption, and the distribution of goods and services.
Merits of Socialism
1 Production according to basic needs
Production in a socialist economy is mainly directed at producing the basic needs of the people such as food, clothing and building materials. It is not determined by the purchasing power of the rich in society. The phenomenon of the rich getting richer and the poor getting poorer does not exist in the socialist economy. 2 Equal distribution of income and wealth
There is no difference between the rich and the poor. This system provides equal opportunity for all citizens in earning an income. Wealth is also equally distributed since private enterprise is limited
3 Better allocation of resourses
Under the socialist system, the planning authority will allocate resources between current consumption and future investment.
4 No serious unemployment or recession/ inflation
The unemployment rate and inflation are usually taken care of by the government to ensure economic stability in the country.
5 Rapid economic development
In a socialism system, the economy grows faster. The main factors responsible for the rapic economic growth are the full utilization of resources, planning and quick decisions.
6 Social welfare
The government will provide all citizens of the country with full social security benefits such as pension, accident benefits and others. Since the government is concerned, labour dispute and wastage of resources do not exist in a socialism system.
Economic Decisions in a Socialistic System
What to produce
In Socialism, planning authorities decide what to produce. The Central Planning Authority will collect detailed statistics on the resource availability in the country and link it with national priorities. If the planning authority has a choice of producing computers using more labour or more machinery. How to produce
The Central Planning Authority also decided on the techniques to be used in the production of different goods and services. The choice is between traditional and modern technique of production. For example, the planning authority has a choice of producing computers using more labour or more machinery. For whom to produce
The distribution of the national product is decided by the Central Planning Authority. The distribution of various commodities among citizens is done through a set of administred fixwd processes. Necessity goods are fixed at lower prices, and luxury goods at higher prices. The purpose of these fixed prices is to reduce inequalities in the distribution of income.
Demerits of Socialism
1 Lacks of incentives and initative by individuals
Individuals have no profit motive. This will lead to economic inefficiency since jobs are provided by the government and individuals are not motivated to work harder. 2 Loss of economic freedom and consumer sovereignty
Under a socialist economy, the central planning authority or the government directs all economic activity. There is no choice given to the consumer and they accept whatever public enterprise produce. There is little variety in the goods and services produced and availability is restricted. Limited private organizations exist in a socialist economy.
3 Absence of competition
Since there are limited private enterprises, less research and development
(R&D) activities are carried out. This results in low quality products since there is no competition.
Socialist economies in theory
Robin Hahnel and Michael Albert identify five economic models within the rubric of socialist economics * Public Enterprise Centrally Planned Economy in which all property is owned by the State and all key economic decisions are made centrally by the State, the former Soviet Union.
* Public Enterprise State-Managed Market Economy, one form of market socialism which attempts to use the price mechanism to increase economic efficiency, while all decisive productive assets remain in the ownership of the state, e.g. socialist market economy in China after reform.
* A mixed economy, where public and private ownership are mixed, and where industrial planning is ultimately subordinate to market allocation, the model generally adopted by social democrats e.g. in twentieth century Sweden.
* Public Enterprise Employee Managed Market Economies, another form of market socialism in which publicly owned, employee-managed production units engage in free market exchange of goods and services with one another as well as with final consumers, e.g. mid twentieth century Yugoslavia, Two more theoretical models are Prabhat Ranjan Sarkar’s Progressive Utilization Theory and Economic democracy.
* Public Enterprise Participatory Planning, an economy featuring social ownership of the means of production with allocation based on an integration of decentralized democratic planning, e.g. stateless communism, libertarian socialism. An incipient historical forebear is that of Catalonia during the Spanish revolution. More developed theoretical models include those of Karl Polanyi, Participatory Economics and the negotiated coordination model of Pat Devine, as well as in Cornelius Castoriadis’s pamphlet “Workers’ Councils and the Economics of a Self-Managed Society”.
Additionally, János Kornai identifies five distinct classifications for socialism: * Classical / Marxist conception, where socialism is a stage of economic development in which wage labour, private property in the means of production and monetary relations have been made redundant through the development of the productive forces, so that capital accumulation has been superseded by economic planning. Economic planning in this definition means conscious allocation of economic inputs and the means of production by the associated producers to directly maximise use-values as opposed to exchange-values, in contrast to the “anarchy of production” of capitalism.
* Walrasian / Market Socialist which defines socialism as public-ownership or cooperative-enterprises in a market economy, with prices for producer goods set through a trial-and-error method by a central planning board. In this view, socialism is defined in terms of de jure public property rights over major enterprises.
* Leninist conception, which includes a form of political organisation based on control of the means of production and government by a single political party apparatus that claims to act in the interest of the working class, and an ideology hostile toward markets and political dissent, with coordination of economic activity through centralised economic planning (a “command economy”).
* Social Democratic concept, based on the capitalist mode of production, which defines socialism as a set of values rather than a specific type of social and economic organisation. It includes unconditional support for parliamentary democracy, gradual and reformist attempts to establish socialism, and support for socially progressive causes. Social democrats are not opposed to the market or private property; instead they try to ameliorate the effects of capitalism through a welfare state, which relies on the market as the fundamental coordinating entity in the economy and a degree of public ownership/public provision of public goods in an economy otherwise dominated by private enterprise.
* East Asian model, or socialist market economy, based on a largely free-market, capital accumulation for profit and substantial private ownership along with state-ownership of strategic industries monopolised by a single political party. János Kornai ultimately leaves the classification of this model (as either socialist or capitalist) to the reader.
What are the disadvantages and advantages of socialism?
Advantages of Socialism
* In environments with plentiful resources, socialism provides all members with their survival needs, creating a stable social environment. * Members that cannot participate economically – due to disabilities, age, or periods of poor health – can still impart wisdom, emotional support and continuity of experience to the system. * Freedom from work provides opportunity for some societal members to explore non-economically-productive pursuits, such as pure science, math and non-popular arts.
Disadvantages of Socialism
* Since there is no culling and no economic advantage to working harder, socialistic systems provide no inherent incentive to participate. This makes socialism internally unstable. * Due to a lack of incentives, socialistic systems tend not to be competitive, making them externally unstable. * In times of plenty, immigrants are drawn to the free resources offered by socialistic systems, while potentially adding nothing economically productive. * In times of scarcity, resentment of non-economically-productive members of society increases, causing a destabilizing effect on the society and economy
History of socialist economic thought
Values of socialism have roots in pre-capitalist institutions such as the religious communes, reciprocal obligations, and communal charity of Mediaeval Europe, the development of its economic theory primarily reflects and responds to the monumental changes brought about by the dissolution of feudalism and the emergence of specifically capitalist social relations. As such it is commonly regarded as a movement belonging to the modern era. Many socialists have considered their advocacy as the preservation and extension of the radical humanist ideas expressed in Enlightenment doctrine such as Jean-Jacques Rousseau’s Discourse on Inequality, Wilhelm von Humboldt’s Limits of State Action, or Immanuel Kant’s insistent defense of the French Revolution.
Capitalism appeared in mature form as a result of the problems raised when an industrial factory system requiring long-term investment and entailing corresponding risks was introduced into an internationalized commercial (mercantilist) framework. Historically speaking, the most pressing needs of this new system were an assured supply of the elements of industry – land, elaborate machinery, and labour – and these imperatives led to the commodification of these elements. According to influential socialist economic historian Karl Polanyi’s classic account, the forceful transformation of land, money and especially labour into commodities to be allocated by an autonomous market mechanism was an alien and inhuman rupture of the pre-existing social fabric. Marx had viewed the process in a similar light, referring to it as part of the process of “primitive accumulation” whereby enough initial capital is amassed to begin capitalist production.
The dislocation that Polyani and others describe, triggered natural counter-movements in efforts to re-embed the economy in society. These counter-movements, that included, for example, the Luddite rebellions, are the incipient socialist movements. Over time such movements gave birth to or acquired an array of intellectual defenders who attempted to develop their ideas in theory. As Polanyi noted, these counter-movements were mostly reactive and therefore not full-fledged socialist movements. Some demands went no further than a wish to mitigate the capitalist market’s worst effects. Later, a full socialist program developed, arguing for systemic transformation.
Its theorists believed that even if markets and private property could be tamed so as not to be excessively “exploitative”, or crises could be effectively mitigated, capitalist social relations would remain significantly unjust and anti-democratic, suppressing universal human needs for fulfilling, empowering and creative work, diversity and solidarity.
Within this context socialism has undergone four periods: the first in the 19th century was a period of utopian visions (1780s-1850s); then occurred the rise of revolutionary socialist and Communist movements in the 19th century as the primary opposition to the rise of corporations and industrialization (1830–1916); the polarisation of socialism around the question of the Soviet Union, and adoption of socialist or social democratic policies in response (1916–1989) and the response of socialism in the neo-liberal era (1990- ). As socialism developed, so did the socialist system of economics.
The first theories which came to hold the term “socialism” began to be formulated in the late 18th century, and were termed “socialism” early in the 19th century. The central beliefs of the socialism of this period rested on the exploitation of those who labored by those who owned capital or rented land and housing. The abject misery, poverty and disease to which laboring classes seemed destined was the inspiration for a series of schools of thought which argued that life under a class of masters, or “capitalists” as they were then becoming to be called, would consist of working classes being driven down to subsistence wages.
Socialist ideas found expression in utopian movements, which often formed agricultural communes aimed at being self-sufficient on the land. These included many religious movements, such as the Shakers in America. Utopian socialism had little to offer in terms of a systematic theory of economic phenomena. In theory, economic problems were dissolved by a utopian society which had transcended material scarcity. In practice, small communities with a common spirit could sometimes resolve allocation problems.
Socialism and classical political economy
The first organized theories of socialist economics were significantly impacted by classical economic theory, including elements in Adam Smith, Robert Malthus and David Ricardo. In Smith there is a conception of a common good not provided by the market, a class analysis, a concern for the dehumanizing aspects of the factory system, and the concept of rent as being unproductive. Ricardo argued that the renting class was parasitic. This, and the possibility of a “general glut”, an over accumulation of capital to produce goods for sale rather than for use, became the foundation of a rising critique of the concept that free markets with competition would be sufficient to prevent disastrous downturns in the economy, and whether the need for expansion would inevitably lead to war.
Socialist political economy before Marx
Charles Fourier, influential early French socialist thinker
A key early socialist theorist of political economy was Pierre-Joseph Proudhon. He was the most well-known of nineteenth century mutualist theorists and the first thinker to refer to himself as an anarchist. Others were: Technocrats like Henri de Saint Simon, agrarian radicals like Thomas Spence, William Ogilvie and William Cobbett; anti-capitalists like Thomas Hodgskin; communitarian and utopian socialists like Robert Owen, William Thompson and Charles Fourier; anti-market socialists like John Gray and John Francis Bray; the Christian mutualist William Batchelder Greene; as well as the theorists of the Chartist movement and early proponents of syndicalism. The first advocates of socialism promoted social leveling in order to create a meritocratic or technocratic society based upon individual talent.
Count Henri de Saint-Simon was the first individual to coin the term “socialism”. Simon was fascinated by the enormous potential of science and technology, which led him to advocate a socialist society that would eliminate the disorderly aspects of capitalism and which would be based upon equal opportunities. Simon advocated a society in which each person was ranked according to his or her capacities and rewarded according to his or her work.
This was accompanied by a desire to implement a rationally organized economy based on planning and geared towards large-scale scientific and material progress, which embodied a desire for a semi-planned economy. Other early socialist thinkers were influenced by the classical economists. The Ricardian socialists, such as Thomas Hodgskin and Charles Hall, were based on the work of David Ricardo and reasoned that the equilibrium value of commodities approximated producer prices when those commodities were in elastic supply, and that these producer prices corresponded to the embodied labor. The Ricardian socialists viewed profit, interest and rent as deductions from this exchange-value.
Karl Marx employed systematic analysis in an ambitious attempt to elucidate capitalism’s contradictory laws of motion, as well as to expose the specific mechanisms by which it exploits and alienates. He radically modified classical political economic theories. Notably, the labor theory of value that had been worked upon by Adam Smith and David Ricardo, was transformed into his characteristic “law of value” and used for the purpose of revealing how commodity fetishism obscures the reality of capitalist society. His approach, which Engels would call “scientific socialism”, would stand as the branching point in economic theory: in one direction went those who rejected the capitalist system as fundamentally anti-social, arguing that it could never be harnessed to effectively realize the fullest development of human potentialities wherein “the free development of each is the condition for the free development of all.”.
Das Kapital is one of the many famous incomplete works of economic theory: Marx had planned four volumes, completed two, and left his collaborator Engels to complete the third. In many ways the work is modelled on Adam Smith’s Wealth of Nations, seeking to be a comprehensive logical description of production, consumption and finance in relation to morality and the state. It is a work of philosophy, anthropology and sociology as much as one of economics. However, it has several important statements: * The Law of Value Capitalist production is the production of “an immense multitude of commodities” or generalised commodity production.
A commodity has two essential qualities firstly, they are useful, they satisfy some human want, “the nature of such wants, whether, for instance, they spring from the stomach or from fancy, makes no difference,” and secondly they are sold on a market or exchanged. Critically the exchange value of a commodity “is independent of the amount of labour required to appropriate its useful qualities.” But rather depends on the amount of socially necessary labour required to produce it. All commodities are sold at their value, so the origin of the capitalist profit is not in cheating or theft but in the fact that the cost of reproduction of labour power, or the worker’s wage, is less than the value created during their time at work, enabling the capitalists to yield a surplus value or profit on their investments.
* Historical Property Relations Historical capitalism represents a process of momentous social upheaval where rural masses were separated from the land and ownership of the means of production by force, deprivation, and legal manipulation, creating an urban proletariat based on the institution of wage-labour. Moreover, capitalist property relations aggravated the artificial separation between city and country, which is a key factor in accounting for the metabolic rift between human beings in capitalism and their natural environment, which is at the root of our current ecological dilemmas.
* Commodity Fetishism Marx adapted previous value-theory to show that in capitalism phenomena involved with the price system (markets, competition, supply and demand) constitute a powerful ideology that obscures the underlying social relations of capitalist society. “Commodity fetishism” refers to this distortion of appearance. The underlying social reality is one of economic exploitation.
* Economic Exploitation Workers are the fundamental creative source of new value. Property relations affording the right of usufruct and despotic control of the workplace to capitalists are the devices by which the surplus value created by workers is appropriated by the capitalists. * Accumulation Inherent to capitalism is the incessant drive to accumulate as a response to the competitive forces acting upon all capitalists. In such a context the accumulated wealth which is the source of the capitalist’s social power derives itself from being able to repeat the circuit of Money–>Commodity–>Money’, where the capitalist receives an increment or “surplus value” higher than their initial investment, as rapidly and efficiently as possible. Moreover this driving imperative leads capitalism to its expansion on a worldwide scale.
* Crises Marx identified natural and historically specific (i.e. structural) barriers to accumulation that were interrelated and interpenetrated one another in times of crises. Different types of crises, such as realization crises and overproduction crises, are expressions of capitalism’s inability to constructively overcome such barriers. Moreover, the upshot of crises is increased centralization, the expropriation of the many capitalists by the few.
* Centralization The interacting forces of competition, endemic crises, intensive and extensive expansion of the scale of production, and a growing interdependency with the state apparatus, all promote a strong developmental tendency towards the centralization of capital.
* Material Development As a result of its constant drive to optimize profitability by increasing the productivity of labour, typically by revolutionizing technology and production techniques, capitalism develops so as to progressively reduce the objective need for work, suggesting the potential for a new era of creative forms of work and expanded scope for leisure.
* Socialization, and the pre-conditions for Revolution By socializing the labour process, concentrating workers into urban settings in large-scale production processes and linking them in a worldwide market, the agents of a potential revolutionary change are created. Thus Marx felt that in the course of its development capitalism was at the same time developing the preconditions for its own negation. However, although the objective conditions for change are generated by the capitalist system itself, the subjective conditions for social revolution can only come about through the apprehension of the objective circumstances by the agents themselves and the transformation of such understanding into an effective revolutionary program
Anarchist economics is the set of theories and practices of economics and economic activity within the political philosophy of anarchism. Pierre Joseph Proudhon was involved with the Lyons mutualists and later adopted the name to describe his own teachings. Mutualism is an anarchist school of thought that originates in the writings of Pierre-Joseph Proudhon, who envisioned a society where each person might possess a means of production, either individually or collectively, with trade representing equivalent amounts of labor in the free market. Integral to the scheme was the establishment of a mutual-credit bank that would lend to producers at a minimal interest rate, just high enough to cover administration. Mutualism is based on a labor theory of value that holds that when labor or its product is sold, in exchange, it ought to receive goods or services embodying “the amount of labor necessary to produce an article of exactly similar and equal utility”.
Receiving anything less would be considered exploitation, theft of labor, or usury. Collectivist anarchism (also known as anarcho-collectivism) is a revolutionary doctrine that advocates the abolition of the state and private ownership of the means of production. Instead, it envisions the means of production being owned collectively and controlled and managed by the producers themselves. Once collectivization takes place, workers’ salaries would be determined in democratic organizations based on the amount of time they contributed to production. These salaries would be used to purchase goods in a communal market. Collectivist anarchism is most commonly associated with Mikhail Bakunin, the anti-authoritarian sections of the First International, and the early Spanish anarchist movement.
The Conquest of Bread by Peter Kropotkin, influential work which presents the economic vision ofanarcho-communism
Anarchist communism is a theory of anarchism which advocates the abolition of the state, private property, and capitalism in favor of common ownership of the means of production, direct democracy and a horizontal network of voluntary associations and workers’ councils with production and consumption based on the guiding principle: “from each according to ability, to each according to need”. Unlike mutualism, collectivist anarchism and marxism, anarcho-communism as defended by Peter Kropotkin and Errico Malatesta rejected the labor theory of value altogether, instead advocating a gift economy and to base distribution on need.
Anarchist communism as a coherent, modern economic-political philosophy was first formulated in the Italian section of the First International by Carlo Cafiero, Emilio Covelli, Errico Malatesta, Andrea Costa and other ex-Mazzinian Republicans. Out of respect for Mikhail Bakunin, they did not make their differences with collectivist anarchism explicit until after Bakunin’s death. By the early 1880s, most of the European anarchist movement had adopted an anarchist communist position, advocating the abolition of wage labour and distribution according to need. Ironically, the “collectivist” label then became more commonly associated with Marxist state socialists who advocated the retention of some sort of wage system during the transition to full communism.
Marx’s work sharpened the existing differences between the revolutionary and non-revolutionary socialists. Non-revolutionary socialists took inspiration from the work of John Stuart Mill, and later Keynes and the Keynesians, who provided theoretical justification for (potentially very extensive) state involvement in an existing market economy. According to the Keynesians, if the business cycle could be solved by national ownership of key industries and state direction of their investment, class antagonism would be effectively tamed a compact would be formed between labour and the capitalists. There would be no need for revolution; instead Keynes looked to the eventual “euthanasia of the rentier” sometime in the far future. Joan Robinson and Michael Kalecki employed Keynesian insights to form the basis of a critical post-Keynesian economics that at times went well beyond liberal reformism.
Many original socialist economic ideas would also emerge out of the trade union movement In the wake of Marx, “Marxist” economists developed many different, sometimes contradictory tendencies. Some of these tendencies were based on internal disputes about the meaning of some of Marx’s ideas, including the ‘Law of Value’ and his crisis theory. Other variations were elaborations that subsequent theorists made in light of real world developments. For example the monopoly capitalist school saw Paul A. Baran and Paul Sweezy attempt to modify Marx’s theory of capitalist development, which was based upon the assumption of price competition, to reflect the evolution to a stage where both economy and state were subject to the dominating influence of giant corporations. World-systems analysis, would restate Marx’s ideas about the worldwide division of labour and the drive to accumulate from the holistic perspective of capitalism’s historical development as a global system.
Accordingly, Immanuel Wallerstein, writing in 1979, maintained that “There are today no socialist systems in the world-economy any more than there are feudal systems because there is only one world-system. It is a world-economy and it is by definition capitalist in form. Socialism involves the creation of a new kind of world-system, neither a redistributive world-empire nor a capitalist world-economy but a socialist world-government. I don’t see this projection as being in the least utopian but I also don’t feel its institution is imminent. It will be the outcome of a long social struggle in forms that may be familiar and perhaps in very few forms, that will take place in all the areas of the world-economy.”
Meanwhile other notable strands of reformist and revolutionary socialist economics sprung up that were either only loosely associated with Marxism or wholly independent. Thorsten Veblen is widely credited as the founder of critical institutionalism. His idiosyncratic theorizing included acidic critiques of the inefficiency of capitalism, monopolies, advertising, and the utility of conspicuous consumption. Some institutionalists have addressed the incentive problems experienced by the Soviet Union. Critical institutionalists have worked on the specification of incentive-compatible institutions, usually based on forms of participatory democracy, as a resolution superior to allocation by an autonomous market mechanism.
Another key socialist, closely related to Marx, Keynes, and Gramsci, was Piero Sraffa. He mined classical political economy, particularly Ricardo, in an attempt to erect a value theory that was at the same time an explanation of the normal distribution of prices in an economy, as well that of income and economic growth. A key finding was that the net product or surplus in the sphere of production was determined by the balance of bargaining power between workers and capitalists, which was in turn subject to the influence of non-economic, presumably social and political factors.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 22 November 2016
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