WHAT IS SOCIALISM ECONOMY?

Socialism (also planned system or command economy) 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.
A primary goal of socialism is social equality and a distribution of
Wealth based on ones contribution to society and an economic
arrangement that would serve the interests of society as a whole.
Difference between socialism and communism is that communists
directly oppose the concept of capitalism, an economic system in which
production is controlled by private interests. Socialists, on the other
hand, believe socialism can exist within a capitalist society.
The decisions as to how much to produce, which methods of production
to employ and for whom to produce are taken by the planning authority.

CHARACTERISTICS OF SOCIALISM
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 countrys resources.
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.
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.
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.
Classless society
In a capitalist economic system there are different living standards like
upper, middle and lower class. Structure of capitalist society is
determined through financial and economic position of members.
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However in a true socialist society everyone is equal as far as economic

status is concerned.

ECONOMIC DECISIONS IN SOCIALISM

What are the main economic decisions in socialism? They can described
as follows.
1. 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 feels that the nation needs more computers for current
and future consumption, more resources will be allocated for the
production of computers over other products.
2. How to produce
The Central Planning Authority also decides on the techniques to be
used in the production of different goods and services. The choice is
between traditional and modern techniques of production. For example,
the planning authority has a choice of producing computers using more
labour or more machinery.
3. 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 administered fixed 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.

FEATURES OF SOCIALISM
1. Public Ownership
A socialist economy is characterized by public ownership of the means
of production and distribution. There is collective ownership whereby all
mines, farms, factories, financial institutions, distributing agencies
(internal and external trade, shops, stores, etc.), means of transport and
communications, etc. are owned, controlled, and regulated by
government departments and state corporations. A small private sector
also exists in the form of small business units which are carried on in the
villages by local artisans for local consumption.
2. Central Planning
A socialist economy is centrally planned which functions under the
direction of a central planning authority. It lays down the various
objectives and targets to be achieved during the plan period. Central
economic planning means the making of major economic decisions
what and how much is to be produced, how, when and where it is to be
produced, and to whom it is to be allocatedby the conscious decision
of a determinate authority, on the basis of a comprehensive survey of the
economic system as a whole.
And the central planning authority organizes and utilizes the economic
resources by deliberate direction and control of the economy for the
purpose of achieving definite objectives and targets laid down in the
plan during a specified period of time.

3. Definite Objectives
A socialist economy operates within definite socio-economic objectives.
These objectives may concern aggregate demand, full employment,
satisfaction of communal demand, allocation of factors of production,
distribution of the national income, the amount of capital accumulation,
economic developmentand so forth. For achieving the various
objectives laid down in the plan, priorities and bold targets are fixed
covering all aspects of the economy.
4. Freedom of Consumption
Under socialism, consumers sovereignty implies that production in
state- owned industries is generally governed by the preferences of
consumers, and the available commodities are distributed to the
consumers at fixed prices through the state-run department stores.
Consumers sovereignty under socialism is confined to the choice of
socially useful commodities.
5. Equality of Income Distribution
In a socialist economy, there is great equality of income distribution as
compared with a free market economy. The elimination of private
ownership in the means of production, private capital accumulation, and
profit motive under socialism prevent the amassing of large wealth in the
hands of a few rich persons. The unearned incomes in the form of rent,
interest and profit go to the state which utilizes them in providing free
education, public health facilities, and social security to the masses. As
far as wages and salaries are concerned, most modern socialists do not
aim at complete and rigid equality. It is now generally understood that

the maintenance offered choice of occupation implies wage

differentials.
6. Planning and the Pricing Process
The pricing process under socialism does not operate freely but works
under the control and regulation of the central planning authority. There
are administered prices which are fixed by the central planning authority.
There are also the market prices at which consumer goods are sold.
There are also the accountings prices on the basis of which the managers
decide about the production of consumer goods and investment goods,
and also about the choice of production methods.

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 resources
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 rapid 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, labor dispute and wastage of resources do not
exist in a socialism system.

DEMERITS OF SOCIALISM
1. Lack of incentives and initiative 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 enterprises 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.
4. Waste of economic resources
The government may be induced to produce goods and services that are
not required by the people such as military equipment. This will lead to
an overproduction of certain goods and an underproduction of others.

REFERENCE
1. http://www.yourarticlelibrary.com/economics/socialism-featuresmerits-and-demerits-of-socialism-economics/10542/
2. http://www.studylecturenotes.com/managementsciences/economics/381-characteristics-of-socialism
3. http://www.slideshare.net/amitkishoresinha/capitalism-socialismmixed-economy
4. Textbook: Oxford, Principles Of Economics, Third Edition, Page
18-19.

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