What is 'Socialism'
Socialism is a populist economic and political system in which the means of production operate under public political ownership, sometimes called common ownership. Common ownership under socialism may take shape through technocratic, oligarchic, totalitarian, democratic or even voluntary rule. All legal production and distribution decisions are made by the ruling class.
BREAKING DOWN 'Socialism'
Prominent historical examples of socialist countries include the Soviet Union and Nazi Germany. Today's examples include Cuba, Venezuela and China. Due to its practical challenges and poor track record, socialism is sometimes referred to as a utopian or “post-scarcity” system, although modern adherents believe it could work if only properly implemented.
An old slogan for socialism is “from each according to ability, to each according to need.” Socialist ideals include production for use, rather than for profit; an equitable distribution of wealth and material resources among all people; no more competitive buying and selling in the market; and free access to goods and services.
Origins and Development
Socialism developed as an objection to liberal individualism and capitalism. Under early capitalist economies during the 17th and 18th centuries, western European countries experienced compound economic growth and industrial production for the first time. Some individuals and families escaped poverty faster than others, creating income inequality and other social concerns.
The most famous early socialist thinkers were Robert Owen, Henri de Saint-Simon, Karl Marx and Vladimir Lenin. It was primarily Lenin who expounded on the ideas of earlier socialists and helped bring socialist planning to the national level after the Bolshevik Revolution in Russia during 1917.
Following the spectacular failure of socialist central planning in Soviet Russia and Maoist China during the 20th century, many modern socialists adjusted to a highly regulatory and redistributive system, sometimes referred to as market socialism or democratic socialism.
Contrast With Capitalism
In market capitalism, individuals and business partners own and control capital privately. Decisions about what, when and how to produce are made privately and coordinated through a spontaneously developed price system. In socialism, all capital is owned by a supreme government, and production decisions are made politically. Legal property rights only extend to consumer goods. Socialist economic thinkers consider many private economic activities to be irrational, such as arbitrage or lending money, because they do not create immediate consumption or “use.”
Incentive and Calculation Problems
Socialist economic and political planning suffers from two major challenges. The first, widely called the “incentive problem,” says nobody wants to be a sanitation worker or wash skyscraper windows. That is, socialist planners cannot incentivize laborers to accept dangerous or uncomfortable jobs without violating the equality of outcomes.
Far more serious is the calculation problem. This stems from economist Ludwig von Mises’ 1920 article “Economic Calculation in the Socialist Commonwealth.” Socialists, said Mises, are unable to perform any real economic calculation without a pricing mechanism. Without accurate factor costs, no true accounting may take place. Without futures markets, capital can never reorganize efficiently over time.