Socialism (Economics)

A system of production and allocation of resources in which the means of production are considered to be collectively owned and equity or fairness in distribution of income is given a lot of consideration by policymakers. The common denominator of socialist regimes is that the state has a considerable responsibility to plan macroeconomic policies and intervene in market operations. State planning includes price determination, monitoring of output levels, and resource allocation.

The primary objective of state regulation is to determine the availability of goods, the prices at which they should be sold, and employment and rewards for the use of factor inputs.

There are theoretical advantages that have made socialism attractive for some governments. Socialism [Page 478]tends to minimize the problem or magnitude of market failure associated with free-market operations, and the distributive role of government tends to provide for those who will otherwise be priced out of markets.

The substitution of market outcomes with government wisdom may not necessarily provide optimal results. Excess demand creates shortages at suboptimal market prices, which generates rationing policies and stringent enforcement laws. Firms that do not maximize private profits are less motivated to innovate, and innovation as an integral part of growth may be compromised.

In the process of implementing socialism, it is not uncommon for individual rights to be violated or for resources to be inefficiently allocated because of the government's inability to make timely corrections to errors in decisions. Some governments in under developed countries have ostensibly used the theory of socialism to prolong their stay in power and show zero tolerance for opposition to questionable economic policies; this is particularly true of some of the formerly nascent African economies in the postindependence era of the 1960s.

In the post-World War II period, the former Soviet Union and several eastern European countries adopted the socialist system. Changes in the world economy, which became much more apparent since the 1980s, have made the pristine form of socialism less viable today. The desire for political and economic freedom as well as the advent of globalization provoked insurrections and revolutions in countries such as Poland, Germany, and the Soviet Union, leading to political and economic reforms and the breaking up of the former Soviet Union. China has opened up its economy to become a member of the World Trade Organization. Socialism, like capitalism, is an economic theory that shows that no system can be comprehensive enough to disregard the mixture of market outcomes and policy intervention. Consequently, economic systems all over the world can best be characterized as “mixed,” with varying degrees of intervention in the market. Prosocialist regimes tend to show more vigorous intervention relative to market-based capitalist regimes. The theory of social market is also an indicator of a market-policy compromise.