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Understanding Socialist Economy

In a socialist economy, the means of production are owned and operated by the State. All decisions regarding production and distribution are taken by the central planning authority. Hence the socialist economy is also called as planned economy or command economy.

The government plays an active role. Social welfare is given importance; hence equal opportunity is given to all. All such advantages have delivered high level of human development. Some of the most successful socialist economies are China, Cuba, Vietnam and North Korea. The following are the basic characteristic features of socialism.

  • Social Welfare Motive: In socialist economies, social or collective welfare will be the prime motive. Unlike capitalism, profit will not be the aim of policy making. The decisions will be taken keeping the maximum welfare of the people in mind. Thus social well-being of people will be the purpose of development.
  • Limited Right to Private Property: The right to private property is limited. All properties of the country will be owned by the State. That is, the ownership is collective in nature. Hence no individual can accumulate too much property as in the case of capitalism.
  • Central Planning: Most of the economic policy decisions will be taken by a centralized planning authority. Each and every sector of the economy will be directed by well designed planning. No Market Forces: In a centralized planned system of development, market forces have only a limited role to play. Production, commodity and factor prices, consumption and distribution will be governed by development planning with welfare motive.

Merits/Benefits of Socialist Economy

  • Efficient use of resources: The resources are utilized efficiently to produce socially useful goods without taking the profit margin into account. Production is increased by avoiding wastes of competition.
  • Economic Stability: Economy is free from business fluctuations. Government plans well and everything is well coordinated to avoid over-production or unemployment. There is stability because the production and consumption of goods and services are well regulated.
  • Maximization of Social Welfare: All citizens work for the welfare of the State. Everybody receives his or her remuneration. The State concentrates on the production of basic necessaries instead of luxury goods. The State provides free education, cheap and congenial housing, public health amenities and social security for the people.
  • Absence of Monopoly: The elements of corporation and monopoly are eliminated since there is absence of private ownership. The state is a monopoly but produces quality goods at reasonable price.
  • Basic needs are met: In socialist economies, basic human needs like water, education, health, social security, etc, are provided. Human development is more in socialist countries.
  • No extreme inequality: As social welfare is the ultimate goal, there is no concentration of wealth. Extreme inequality is prevented in socialist system.

Disadvantages of Socialism

  • Bureaucratic Expansion: A socialist economy is operated under a centralized command and control system. People here work out of fear of higher authorities. It does not give any initiative for the people to work hard.
  • No Freedom: There is no freedom of occupation. Allocation of factors of production is not done rationally. Jobs are provided by the State. Place of work is also provided by the State. The consumer’s choice is very limited.
  • Absence of Technology: Work is monotonous and no freedom is given. Any change in the production process will alter the entire plan. Hence any innovation cannot be easily enforced. Everything is rigid and technological changes are limited.
  • Absence of competition makes the system inefficient.


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