Advantages and Disadvantages of Socialistic Economy

Advantages of Socialistic Economy

The following are some of the advantages of Socialistic Economy.

Advantages and Disadvantages of Socialistic Economy
Advantages and Disadvantages of Socialistic Economy

1. Best Utilization of Resources

Socialistic economy can bring about efficient and best utilization of resources, because of

  1. centrally directed planning;
  2. absence of private property:
  3. absence of profit motive and
  4. well defined objective.

Planning is done methodically after studying comprehensively the available resources and the basic needs of the economy. So there will be no question of mis-using the resources in the production of unwanted and unwarranted commodities. Within the framework of the objective defined, the planning would aim to produce and distribute to all the citizens. Absence of private property and profit motive would deter the economy in producing remunerative goods or luxury goods wasting the resources. Since it is a planned economy over-production, underproduction, wastage of resources, misallocation of resources can be completely avoided. There will not be business uncertainties, fluctuations, depressions, etc.

2. Elimination of Unemployment

Since the economy is a planned one, it can reduce the forces causing instability and unemployment. The system eliminates cyclical fluctuations in the economy and tries to attain stability.

During the ‘Great Depression’ in the early Thirties, when all countries of the world were under the grip of depression and unemployment, Russia was markedly unaffected by the worldwide depression; the reason being the socialistic type of economy which protected against business end economic instability.

There are elaborate procedures in capitalist economies too to fight cyclical fluctuations. This will be done through public expenditure, monetary policies, etc. In spite of all these measures, capitalism can only mitigate the severity of depression; but under socialism this can be altogether eliminated.

Further, there will be frictional unemployment in capitalist economies. Any technological changes take place, the trained workers would be displaced causing unemployment for a temporary period. But in the case of socialism these technological changes would not cause frictional unemployment as methods of production and different activities will be well coordinated.

3. Economic Equality

The most important merit of Socialism is its attempt to bring about a far greater degree of economic equality than what is possible under capitalistic enterprise. Inequality cannot be justified under any circumstances; morally, socially, politically and economically.

Economic Inequality leads to suffering and degradation. It denies equality of opportunity and prevents the poor with ability to rise to a full stature. Though attempts are made to reduce inequalities even in capitalistic economies, it cannot go or succeed beyond a certain stage.

In capitalism heavy taxation and other fiscal measures to reduce inequalities will have their limitations as these measures would discourage savings and productive effort and capital formation would be seriously hampered. In a socialistic economy there is no such fear, as capital formation is undertaken directly by the state through planning.

4. Maximum Social Welfare

Socialistic economy tries to ensure maximum social welfare through maximization of satisfaction. This means that in socialistic economy maximum number of people will have maximum satisfaction. In a capitalistic economy, because of profit motive, things will be produced for consumers who are willing to pay.

Because of inequalities, only rich people can get the commodities wanted by them. The rich alone, who are minorities in the community will get maximum satisfaction. The poor will not get even the basic necessities of life. But in socialism, commodities needed by the poor will be produced Hence the satisfaction will be maximum for the large number of people.

Defects, Difficulties and Dangers of Socialism

The following are some of the disadvantages of Socialistic Economy.

1. Absence of Price Mechanism and Misallocation of Resources

Th guiding mechanism, allocation of resources between different uses will be made arbitrarily.

Improper calculation of costs and determination of prices arises in socialist economy because:

  1. the factors of production are entirely owned by the government and hence they do not have a price;
  2. in the absence of free pricing of factors, the cost of a commodity cannot be calculated; and therefore
  3. it becomes very difficult to decide what to produce and in what quantities.

So production and pricing under socialism will be done arbitrarily without taking into consideration of the ‘needs’ of the people, nor is there any mechanism to ascertain the consumers needs or choices. In the absence of these, there will be misallocation of resources and socialist production will be inefficient.

Socialist writers have recognized this difficulty and some have attempted to work out the basis of costs and prices under socialism. Yet this difficulty could not be solved satisfactorily. The best way of argumentative escape of socialists is that in large scale enterprises there is no substantial difference between capitalistic and socialistic economies as in both cases the large scale enterprises are managed by the government officials. Hence the argument is that socialistic pricing need not be inferior to capitalistic pricing.

Lange and Taylor have argued that there can be a pricing process under socialism and the resources can be allocated rationally according to consumer preferences by a process of trial and error. According to Pigou, it is possible only in theory to allocate resources under socialism on the basis of accounting costs; and in practice it will require a body of supermen to do it.

2. Loss of Efficiency and Productivity

Efficiency and productivity in an economy depend on powerful incentives. Hope of gain an fear of loss are the powerful motives which sustain efficiency and productivity in a capitalistic economy. But in socialism these two motives are absent. Where private property and profit motive are absent, there is the danger of fall in efficiency as well as production in the economy leading to serious decrease in national income.

Socialism involves management by public officials who can never be efficient as private entrepreneurs. The bread and butter of the public officials does not depend on their efficiency and success. Their jobs are safe and their promotions depend on seniority.

Permanent government officials suffer from lacy of initiative, inability to take quick decisions, nepotism and corruption. Socialism creates a bureaucracy of inefficient, lethargic, corrupt government officials who have little interest in their work. Inefficiency, bureaucracy, loss of incentive would ultimately drive to poor productivity, shortage and scarcity.

Securing labour efficiency is a problem in socialistic countries. The workers income will not depend on their productivity but on the principle of distribution adopted by the State. If every worker gets the same reward, there is no reason why anybody should work more or hard.

Wage differentials are not possible or permissible as it would be against the basic principle of socialism. Hence in U.S.S.R. this problem of securing labour efficiency has been attempted to be solved by twin methods. viz.,

  1. by providing non-monetary incentives to work, e.g. awarding medals, certificates or giving official recognition or honoring, etc., and
  2. by punishing, severely the workers who fail to perform the minimum standard of work established.

3. Complexities of Administration

The burden of administration in socialism is very heavy. Because of government interference in every activity of the people, there should be some authority for deciding all problems relating to the economy.

Under capitalism the quantity and quality of output, rate of capital formation and other problems relating to the economy are decided automatically through the price-profit mechanism. But under socialism all these problems have to be determined by the demi-gods of the departments after getting the orders from the archangels running the state.

4. Loss of Liberty

One of the main dangers of socialism is that it not only curtails individual liberty but also take away freedom completely. Under socialism there is no scope for consumers sovereignty; the workers will have no choice of occupation, and labour, just like any other economic resource, will be under planned management.

The consumers should take what is given and workers should work in such places as the authorities will decide. Of course, there will be no unemployment, but this is hardly an advantage because the terms of employment (hours, wages etc.,) will be fixed by the central authorities. Security of employment is no compensation for loss of liberty. There is no unemployment even in prison.

Curtailment of individual freedom and liberty would even go the extent of exploitation of the individual. In socialism there is the concentration of ‘economic’ and ‘political’ power with the state. The state directs resources and men into particular channels and the state’s authority is final and absolute.

It is true that in socialism exploitation of individual by another is prohibited. But the ‘state’ being the strongest, it can exploit the individual and this is easier as the political and economic powers are vested with one single authority. The Government controls the entire life of the community.

In a country where the sole employer is the state, opposition means death-by slow starvation. The old principle; those who do not work shall not eat, has been replaced by a new one: those who do not obey shall not eat.

Another danger is that when such wide powers are wielded by the state, there may be scramble for the control of the government and people in the ‘higher strata’ will be itching for power. In such a scramble, it is possible. that unscrupulous men will succeed.

When men or a body of men who can make means subservient to their ends and who can create support for themselves by a show of power and by incitement among the people of hatred against a common enemy, real or imaginary, then, equality, stability and liberty will have no meaning at all in socialism.

This dictatorial and totalitarian outcome of socialism is a serious danger and when once this type of socialism takes root firmly, the individual loses liberty — economic, political and even intellectual.