A socialist (socialism) economy is an economic organization in which the means of production are owned and regulated by the state. The production and distribution of goods and factors of production are done by the state under the direction of the planning commission. The decisions on how much to produce, which methods of production to employ and for whom to produce are taken by the planning authority. Examples of such economies are China, Cuba, Vietnam and North Korea.
FEATURES OF SOCIALISM
1) Public Ownership: In a socialist economy the means of production and distribution are owned by the state. Government own the mines, farms, factories, financial institutions, distributing agencies, means of transport and communication. Some small private business units operate in the villages by local artisans for local consumption.
2) Central Planning: The decision as to what to produce, how it should be produced and for whom to produce are taken centrally by the planning authority. The authority lays down the various objectives and targets to be achieved during the plan period.
3) Equality of Income Distribution: In a socialist economy, there is great equality of income distribution compared to a capitalist economy. This is achieved through elimination of private property, interest on capital, rent on land and profit goes to the state authority for reallocation.
4) Definite Objectives: The objective could be full employment, allocation of factors of production, aggregate demand or as the authority may deem fit.
5) Planning and the Pricing Process: The pricing of goods and services are done by the central planning authority.
ADVANTAGES OF SOCIALISM
1) Greater Economic Efficiency: Economic efficiency under socialism is greater than capitalism. The central planning authority makes an exhaustive survey of resources and utilizes them in the most efficient manner.
2) Greater Welfare Due to Less Inequality of Income: The absence of private property brings about less inequality of income. All citizens work for the welfare of the state and each is paid his remuneration according to his ability, education and training. In addition, all rents, interests and profits from various sources go to the state which in turn spends them to provide free education, public health amenities, cheap housing and social security for the people.
3) Absence of Monopolistic Practices: Under socialism all means of production are owned by the state, both competition and monopoly are eliminated. Exploitation by monopolists is absent.
4) Absence of Business Fluctuations: A socialist economy is free of business fluctuation. There is economic stability because production and consumption of goods and services are regulated by the central planning authority. In this way overproduction is guided against.
DISADVANTAGES OF SOCIALISM
1) Loss of Consumers’ Sovereignty: Consumers do not have freedom to buy whatever commodities they want. They can consume only those commodities which are available in department stores. Mostly the quantities which they can buy are fixed by the state.
2) No Freedom of Occupation: Every person is provided job by the state. He cannot leave or change job. All occupational movements are sanctioned by the state.
3) Misallocation of Resources: There is arbitrary allocation of resources under socialism. The central planning authority often commits mistakes in resource allocation because the entire work is done on trial and error basis.
4) Bureaucracy: A socialist economy is said to be bureaucratic, it does not provide the necessary initiative for the people to work hard. People work due to the fear of higher authorities and not for any personal gain or self interest.