What Is Socialism?
Socialism is a populist economic and political system based on collective, common, or public ownership of the means of production. Those means of production include the machinery, tools, and factories used to produce goods that aim to directly satisfy human needs. In contrast to capitalism, whereby business owners control the means of production and pay wages to workers to use those means, socialism envisions shared ownership and control among the laboring class.
In a purely socialist system, all production and distribution decisions are made by the collective, directed by a central planner or government body. Worker cooperatives, however, are also a form of socialized production. Socialist systems tend to have robust welfare systems and social safety net so that individuals rely on the state for everything from food to healthcare. The government determines the output and pricing levels of these goods and services.
Socialists contend that shared ownership of resources and central planning provide a more equal distribution of goods and services and a more equitable society.
- Socialism is an economic and political system based on collective ownership of the means of production.
- All legal production and distribution decisions are made by the government in a socialist system. The government also determines all output and pricing levels and supplies its citizens with everything from food to healthcare.
- Proponents of socialism believe that it leads to a more equal distribution of goods and services and a more equitable society.
- 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.
- Capitalism, with its belief in private ownership and the goal to maximize profits, stands in contrast to socialism, but most capitalist economies today have some socialist aspects.
What is Socialism?
Common ownership under socialism may take shape through technocratic, oligarchic, totalitarian, democratic, or even voluntary rule. A prominent historical example of a socialist country, albeit one run by communists, is the former Union of Soviet Socialist Republics (U.S.S.R.), also known as the Soviet Union.
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. They argue that socialism creates equality and provides security—a worker’s value comes from the amount of time they work, not in the value of what they produce—while capitalism exploits workers for the benefit of the wealthy.
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. Or, as an old socialist slogan describes it, “from each according to ability, to each according to need.”
While socialism calls for collective or shared ownership of the means of production, it does not imply that there is no private ownership of personal property. Thus, corporations and factories would be shared among the members of society, but individuals and households would still own their own personal effects.
History of Socialism
Socialism as a system of shared resources and collective production dates back to the earliest human civilizations. Tribal or clan-based societies would often work for the common good and work together to produce enough food and supplies for the entire population. Collective agriculture persisted for thousands of years. This was replaced in many places by some sort of feudal system, whereby landed nobility (lords) ruled over peasants (serfs) who worked the land without owning it.
Socialism's intellectual roots date back to Plato's "Republic," in which he described a collective society. Centuries later, Thomas More's "Utopia" echoed Platonic ideals in its depiction of an imaginary island where people live and work communally. But socialism was a direct response to the Industrial Revolution, which brought enormous economic and social change to Great Britain and the rest of the world. As industrialists grew wealthy on the labor of workers who increasingly lived in poverty, socialism emerged as an alternative to capitalism, one that could improve life for the working class.
Modern socialism developed in opposition to the excesses and abuses of liberal individualism and capitalism. Under early capitalist economies during the late 18th and 19th centuries, western European countries experienced industrial production and compound economic growth at a rapid pace. Some individuals and families rose to riches quickly, while others sank into poverty, creating income inequality and other social concerns.
The most famous early socialist thinkers were Robert Owen and Henri de Saint-Simon, and later Karl Marx and then 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 1917 Bolshevik Revolution in Russia.
Following the failure of socialist central planning in the former Soviet Union and Maoist China during the 20th century, many modern socialists adjusted to a high regulatory and redistributive system sometimes referred to as market socialism or democratic socialism.
Socialism vs. Capitalism
Capitalist economies (which today is often synonymous with the free-market or market economies) and socialist economies differ by their logical underpinnings of the structures of ownership and production. Socialists and free-market economists tend to agree on fundamental economics—the supply and demand framework, for instance—while disagreeing about its proper adaptation and how commodities should be produced.
Functionally, socialism and free-market capitalism are often divided on two core issues: property rights and control of production. In a capitalist economy, private individuals and enterprises own the means of production and have the right to profit from them; private property rights are taken very seriously and apply to nearly everything. In a purely socialist economy, the collective owns and controls the means of production; personal property is allowed, but in the form of consumer goods. Essential services like healthcare, education, and public transportation are administered for free by the government and funded through taxation.
In a socialist economy, public officials known as central planners may control the behavior of producers, consumers, savers, borrowers, and investors by taking over and regulating trade, the flow of capital, and other resources. In a free-market economy, trade is conducted on a voluntary, or nonregulated, basis. Although this is not necessary - there are many other ways to coordinate production in a collectivist fashion without such dominating control and loss of personal autonomy.
Market economies rely on the separate actions of self-determining individuals to determine production, distribution, and consumption. Decisions about what, when, and how to produce are made privately and coordinated through a spontaneously developed price system, and prices are determined by the laws of supply and demand. Proponents say that freely floating market prices direct resources towards their most efficient ends. Profits are encouraged and drive future production.
Socialist economies rely on either the government or worker cooperatives to drive production and distribution. Consumption is regulated, but it is still partially left up to individuals. The state determines how main resources are used and taxes wealth for redistributive efforts. Socialist economic thinkers consider many private economic activities to be irrational, such as arbitrage or leverage, because they do not create immediate consumption or “use.” Still, Marx saw that capitalism was rife with contradictions, class conflict, and self-destructive competition. As a result, he saw that socialism was the logical next phase of human political economy.
Several philosophical questions also lie at the heart of the debate between socialism and capitalism: What is the role of government? What constitutes a human right? What roles should equality and justice play in society?
Socialism vs. Communism
Communism and socialism are umbrella terms referring to two left-wing schools of economic thought; both oppose capitalism, but socialism predates the "Communist Manifesto," an 1848 pamphlet by Karl Marx and Friedrich Engels, by a few decades. These are both economic philosophies that advocate for public ownership, particularly over the means of production and the distribution and exchange of goods in a society. Both philosophies run contrary to free market capitalism, which, they contend, exploits workers and creates a widening gap between rich and poor.
There are differences between socialism and communism, however. In fact, communism can be thought of as a strict and all-encompassing version of socialism. Under communism, all property is communally owned; private property doesn't exist. Under socialism, individuals can still own private property. Karl Marx predicted that a violent worker uprising against the middle and upper classes would bring about the communist state, whereas socialists tend to seek change and reform without overthrowing the prevailing social and political structure. And according to communist theory, workers should be given what they need, while under socialist theory, they are to be compensated for their level of contribution to the economy.
Bones of Contention
There are many points of contention between socialists and capitalists. Socialists consider capitalism and the free market to be unfair and possibly unsustainable. Most socialists contend that market capitalism is incapable of providing enough subsistence to the lower classes. They contend that greedy owners suppress wages and seek to retain profits for themselves.
Proponents of market capitalism counter that it is impossible for socialist economies to allocate scarce resources efficiently without real market prices. They claim that the resultant shortages, surpluses, and political corruption will lead to more poverty, not less. Overall, they say, socialism is impractical and inefficient, suffering in particular from two major challenges.
The first challenge, widely called the “incentive problem,” says no one 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, a concept originating from economist Ludwig von Mises’ 1920 article "Economic Calculation in the Socialist Commonwealth". Socialists, wrote 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.
Can a Country Be Both Socialist and Capitalist?
While socialism and capitalism seem diametrically opposed, most capitalist economies today have some socialist aspects. Elements of a market economy and a socialist economy can be combined into a mixed economy. And in fact, most modern countries operate with a mixed economic system; government and private individuals both influence production and distribution.
Economist and social theorist Hans-Hermann Hoppe wrote that there are only two archetypes in economic affairs—socialism and capitalism—and that every real system is a combination of these archetypes. But because of the archetypes' differences, there is an inherent challenge in the philosophy of a mixed economy and it becomes a never-ending balancing act between predictable obedience to the state and the unpredictable consequences of individual behavior.
The Great Recession and the coronavirus pandemic have increased interest in the government creating more opportunities and increasing the social safety net for all Americans, which are hallmarks of socialist policy, but not everyone agrees with these ideas.
How Mixed Economies Develop
Mixed economies are still relatively young and theories around them have only recently been codified. "The Wealth of Nations," Adam Smith's pioneering economic treatise, argued that markets were spontaneous and that the state could not direct them, or the economy. Later economists, including John-Baptiste Say, F.A. Hayek, Milton Friedman, and Joseph Schumpeter, would expand on this idea.
However, in 1985, political economy theorists Wolfgang Streeck and Philippe C. Schmitter introduced the term "economic governance" to describe markets that are not spontaneous but have to be created and maintained by institutions. The state, to pursue its objectives, needs to create a market that follows its rules.
Historically, mixed economies have followed two types of trajectories. The first type assumes that private individuals have the right to own property, produce, and trade. State intervention has developed gradually, usually in the name of protecting consumers, supporting industries crucial to the public good (in fields like energy or communications), providing welfare, or other aspects of the social safety net. Most western democracies, such as the United States, follow this model.
The second trajectory involves states that evolved from pure collectivist or totalitarian regimes. Individuals' interests are considered a distant second to state interests, but elements of capitalism are adopted to promote economic growth. China and Russia are examples of the second model.
Today, very few countries are close to pure socialism. Perhaps China is the most prominent example, with a communist government that effectively nationalizes many of the nation's key industries. State-owned enterprises are a key feature of the Chinese economy, although several steps toward capitalism and liberalization have created certain economic zones (e.g., in Shanghai) where private corporations can co-exist and earn profit. Private businesses now produce more than half of China’s GDP and most of its exports.
Cuba remained closer to a Marxist-Leninist socialist economy, following its communist revolution in 1959 and the installation of Fidel Castro as its leader. After Castro's death, however, Cuba, too, saw some liberalization. In 2019, Cubans voted for a new constitution that granted private property rights and greater access to free markets, while preserving the socialist political system.
The last remaining Marxist-Leninist socialist economy that has not seen any reforms is that of North Korea. N. Korea remains ruled by a communist dictatorship and a closed command economy governed by strict central planning. Laos, another country in Asia, is also a socialist state, but is more open than N. Korea.
Transitioning From Socialism
A nation needs to transfer the means of production to transition from socialism to free markets. The process of transferring functions and assets from central authorities to private individuals is known as privatization.
Privatization occurs whenever ownership rights transfer from a coercive public authority to a private actor, whether it is a company or an individual. Different forms of privatization include contracting out to private firms, awarding franchises, and the outright sale of government assets, or divestiture.
In some cases, privatization is not really privatization. Case in point: private prisons. Rather than completely ceding a service to competitive markets and the influence of supply and demand, private prisons in the United States are actually just a contracted-out government monopoly. The scope of functions that form the prison is largely controlled by government laws and executed by government policy. It is important to remember that not all transfers of government control result in a free market.
Over the last few years, Cuba has moved towards privatizing many aspects of its economy, incorporating more capitalism into its society. In early 2021, it approved the ability for people to work in jobs in over 2,000 private sectors, up from 127.
Privatizing a Socialist Economy
Some nationwide privatization efforts have been relatively mild, while others have been dramatic. The most striking examples include the former satellite nations of the Soviet Bloc after the collapse of the U.S.S.R. and the modernization of the post-Mao Chinese government.
The privatization process involves several different kinds of reforms, not all of them completely economic. Enterprises need to be deregulated and prices need to be allowed to flow based on microeconomic considerations; tariffs and import/export barriers need to be removed; state-owned enterprises need to be sold; investment restrictions must be relaxed; and the state authorities must relinquish their individual interests in the means of production. The logistical problems associated with these actions have not been fully resolved and several different theories and practices have been offered throughout history.
Should these transfers be gradual or immediate? What are the impacts of shocking an economy built around central control? Can firms be effectively depoliticized? As the struggles in Eastern Europe in the 1990s show, it can be very difficult for a population to adjust from complete state control to suddenly having political and economic freedoms.
In Romania, for example, the National Agency for Privatization was charged with the goal of privatizing commercial activity in a controlled manner. Private ownership funds, or POFs, were created in 1991. The state ownership fund, or SOF, was given the responsibility of selling 10% of the state's shares each year to the POFs, allowing prices and markets to adjust to a new economic process. But initial efforts failed as progress was slow and politicization compromised many transitions. Further control was given to more government agencies and, over the course of the next decade, bureaucracy took over what should have been a private market.
These failures are indicative of the primary problem with gradual transitions: when political actors control the process, economic decisions continue to be made based on noneconomic justifications. A quick transition may result in the greatest initial shock and the most initial displacement, but it results in the fastest reallocation of resources toward the most valued, market-based ends.
Is There Socialism in the U.S. Today?
Yes. Social welfare programs such as food stamps, unemployment compensation, and housing assistance can be described as socialist. It can also be argued that government programs like Medicare and Social Security are too. There are also socialist organizations in the U.S., such as the Democratic Socialists of America, which counts among its members Alexandria Ocasio-Cortez (D-N.Y.), Rashida Tlaib (D-Mich.), Cori Bush (D-Mo.), and Jamaal Bowman (D-N.Y.), all members of the House of Representatives. And Senator Bernie Sanders (D-Vt) is a self-described democratic socialist.
Other examples of socialism in the U.S. include organizations like worker co-ops, credit unions, public libraries, and public schools.
What's the Difference Between Social Democracy and Democratic Socialism?
Social democracy is based on maintaining a capitalist economic system but blunting its excesses via regulation and addressing inequality with government-run social programs—in a sense, humanizing capitalism. Social democracies exist today in Denmark, Finland, Norway, and Sweden.
Democratic socialism has a vision of a society and economy that is democratic, not authoritarian, but in which individuals have more of a say than large corporations in how the economy is run. It is committed to finding ways to transform an economy from capitalism to socialism. As the website of the Democratic Socialists of America notes, "Our vision pushes further than historic social democracy and leaves behind authoritarian visions of socialism in the dustbin of history... We want to collectively own the key economic drivers that dominate our lives, such as energy production and transportation."
Is Socialism Better than Capitalism?
This question is a matter of debate and political ideology. Capitalism has seen the greatest rise in wealth and standards of living in human history, accompanied by innovation and invention. However, capitalism, driven by fierce competition for profits and market share, has also been blamed for rising wealth disparities, social inequalities, alienation, exploitation, and the misery of the working class. Socialism, on the other hand, promises egalitarianism by returning the means of production to the laboring class. In doing so, wealth disparities are greatly minimized and society as a whole may flourish. However, collective ownership and less competition might put a damper on innovation and technological progress. Furthermore, people are often wary of giving up personal freedom (although it may benefit the greater good) as governments direct production and consumption choices.
Which Countries Are Socialist?
Today, most countries in the world feature some aspects of socialism. Even in the United States, but especially in countries found in Europe and Asia. Only a few are full-blown pure socialist (Marxist-Leninist communist) economies: The Peoples' Republic of China, Cuba, Laos, Vietnam, and North Korea (the U.S.S.R. also was, but the Soviet Union collapsed in the 1990s).