Socialism – Definition

Cite this article as:"Socialism – Definition," in The Business Professor, updated September 12, 2019, last accessed October 20, 2020,


Socialism Definition

Socialism is an economic and political theory that advocates collective ownership of the means of production, distribution and exchange. Collective ownership is otherwise called public or common ownership. The means of production, distribution and exchange will be held in a central system and they are owned collectively or the government maintains their ownership.

In an absolute socialist system, the means of production, distribution and exchange are controlled by the government. Decisions pertaining output and prices of goods and services are made by the government. Socialism aims to achieve an equitable society in which goods and services are equally distributed.

A Little More on What is Socialism

Socialism had been in existence, much earlier than communist, countries that practiced socialism include Germany, former Soviet Union and Nazi. According to the proponents of socialism, socialism is an economic theory that can drive social equality when it is effectively implemented.

More recently, countries that practise socialism include Cuba, Venezuela and China. Socialism is the opposite of capitalism, in capitalism, workers work

for the benefit of a few wealthy individuals, there is private ownership in this kind of economy. Socialism eradicates competition in the market, it also limits free market. Rather, there is an equitable distribution of wealth and resources.

Origins and Development of Socialism

Due to the excesses of capitalism and individualism in the early centuries, socialism emerged. When capitalism was the practise, the distribution of material resources and wealth benefitted only a few and this led to a few individuals rising to wealth quickly while the workers and others in the society wallowed in abject poverty. To tackle this inequality in the distribution of wealth and material resources, the concept of socialism was brought forward.

Socialism was developed in the 19th century. The early thinkers that developed socialism included Vladimir Lenin, Robert Owen, Karl Marx and Henri de Saint-Simon. However, the early socialism encountered some challenges and recorded failure in the 20th century. The modern socialists having learnt from the shortcomings of the early socialism introduced more regulation in the system and regarded socialism and democratic socialism or market socialism.

Socialism vs. Capitalism

One major central advocacy of capitalism is the free market and this contributed significantly to inequality in the distribution of wealth and resources. Socialism, on the other hand, pitched it tenets on the basis that there should be a central holding of wealth and resources, including the means of production, distribution and exchange.

In capitalist societies, private individuals and entities control the means of production, distribution, and exchange. This gives them a chance to amass wealth often at the detriment of workers and disadvantaged individuals. In socialist societies, government or the public owns the means of production. Since there is no free market in socialism, means of trade, production and exchange are controlled by the public.

In socialist societies, decisions regarding goods produced, how they are distributed and the means of exchange are decided by the government, but all these decisions are made private individuals in capitalist societies. Freely floating market prices is one of the major concepts in capitalist societies which allows for pricing system to be decided privately.

There is high regulation in the socialist societies, price systems, distribution and production are regulated by the government but can be influenced by private individuals.

Bones of Contention

There are many disputes of disagreements between socialism and capitalism, they major ones are highlighted below;

  • Free market system in capitalism is regarded as unfair to the proponents of socialism. They argued that it causes inequitable distribution of wealth.
  • The capitalist system is unsustainable because the lower classes do not benefit from the resources and wealth of the society. Rather, a few individuals, usually the upper class amass wealth for themselves.
  • Inefficiency of equal allocation  of wealth and resources by socialists was contended by the capitalists.
  • Impracticality of the socialist system was also argued. Owing to political corruption that exist in socialism, the capitalists argued that there would be more poverty.
  • Lack of incentives for workers is another point argued in socialism.

Can a Country be Both?

Although, capitalism and socialism are two opposing concepts, both can be adopted and practiced by countries. In fact, in many economies of the world, both capitalism and socialism exist, this is called a mixed economy.

In a mixed economy, the government and private entities control the means of production, distribution and exchange, causing a combination of the elements of capitalism and socialism. Hans Herman Hoppe, a social theorist opined that every real system has both capitalism and socialism.

How Mixed Economies Develop

In mixed economies, a segment of the economy is controlled and owned by private individuals while the government also manages and controls the other segment. The concept of mixed economy was codified and advanced by economists such as Adam Smith, Milton Friedman, John-Baptiste Say, Joseph Schumpeter and F.A. Hayek.

One crucial direction in mixed economies is that private persons are entitled to own properties, make productions and engage in exchange of goods and services. Despite that private ownership exists, government regulations and intervention is also present in mixed economies.

Another direction in mixed economies is the position that the interests of the state congress first before those of private individuals can be considered. This means private interests are second to state interests.

Transitioning from Socialism

The process of changing from a socialist economy to a capitalist economy or free markets is called privatization. This is the process through which the means of production are transferred from the government or central authority to private persons. When publicly owned companies are changed to private entities, it is also called privatization.

However, in some cases, despite the fact that the ownership of companies and means of production has been transferred to private individuals, the government still has a bit on influence of decisions made or a bit of regulatory rights. Hence, in a situation like this, transfer of ownership or control does not necessarily mean a transition into free markets.

Privatizing a Socialist Economy

There have been instances where there are attempts to private a socialist economy, this was common after the U.S.S.R collapsed. The privatization of socialist economy requires certain processes and considerations which include the following:

  • There must be a deregulation of companies, firms and enterprises.
  • A free flow of prices must be enabled. This means prices will be controlled by economic factors and not rigidly set by the government.
  • There must be a transfer of ownership from the state to private individuals.

It is important to know that there are certain problems associated with privatizing a socialist economy. Diverse theories, concepts and practises have been developed to proffer solution to these problems. The effects of privatizing socialist economy and what approaches should be taken for this privatization is also crucial.

References for “Socialism › Investing › Financial Analysis

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