Socialism and the Centrally Economy: Socialism Versus Capitalism

Socialism Versus Capitalism After reading this chapter and this book, you undoubtedly realize that basic economic problems and challenges respect no cultural, geographic, or political boundaries. The principles of economics you have studied are relevant to all societies that must cope with the problems of producing goods and services to satisfy the often conflicting desires of their members. By now you also understand that differences among economic systems often boil down to differences in the degree to which economic decisions are made politically or individually. Economic rights are intertwined with human rights. The differences between ideology and economics are often difficult to separate. Political control of economic affairs at the extreme means collective ownership of economic resources and a command economy where resources are allocated according to political goals. The command economy has come to grips with the fact that human beings respond positively to incentives that allow them to enjoy increases in net benefits. A pure command economy is unlikely to have a productive labor force. Ideological commitment is often a poor substitute for material rewards in motivating the average worker. Productivity growth and innovation, while they may come from ideologically committed people, tend to increase when material rewards are possible. The fundamental view of human beings as maximizing the net benefits of their actions given the constraints under which they must operate is no less relevant to people working in socialist systems than it is to those working in capitalist systems. With these observations in mind, it's possible to outline some of the main distine-tions between capitalism and socialism as two opposing economic systems. Keep in mind throughout our discussion that pure socialism and pure capitalism are rarely found in practice, and that most economic systems are actually a mix. However, political conflict between the two systems rages in less developed countries, where it often threatens revolution, insurgency, and wider conflict. The two systems are studied and often supported by opposing politicians as they seek the best way to deal with economic and social problems in their particular countries. Among the important issues to consider in looking at the pros and cons of the two systems are the following: 1. The extent to which pursuit of self-interest and market exchange of goods and services produce results that coincide with a general political consensus regarding national goals. It can be argued that narrow self-interest will result in the failure of an economic system to provide many goods and services that are essential for the survival of a society. There are public goods, such as national defense, that cannot be provided in markets. This shortcoming requires the intervention of government authorities to ensure provision of basic public goods. At the extreme, the command economy is based on distrust of the profit motive and other pursuit of self-interest. As a result, the command economy resorts to central planning and full government control of productive resources to achieve national objectives. 2. The way an economic system distributes well-being among members of a society. The distribution of material well-being is a prime consideration for many people in evaluating alternative economic systems. Socialism is, after all, founded on the Marxist notion of class conflict and exploitation of workers by capitalists. In a socialist economy, profit, in effect, is earned by the state and redistributed to workers in the form of government services or wages and subsidies. In modern mixed economies, the issue of distribution of well-being is addressed through government transfer programs that use tax revenues to increase the incomes of the poor. In some nations with mixed economies (Norway, Sweden, and New Zealand are good examples), transfer programs and government provision of health and other services result in less income inequality than is observed in centrally planned socialist economies. 3. The achievement of technological efficiency. Technological efficiency is achieved when output is produced at minimum possible cost. The equity-efficiency trade-off, which you have encountered many times in this book, also holds for economic systems. While private enterprise in markets is not perfect in achieving technological efficiency, competitive markets provide incentives for producers to keep their costs as low as possible. Changes in prices of inputs and in technology evoke a quick response in a competitive system. In a command economy, such changes often require a complete revision of the plan that can be very costly and time consuming. Also, the strict objectives of a plan frequently put pressures on managers in a planned economy and provide little reward for innovation. Critics of the market system, however, argue that monopoly power often stifles incentives to achieve cost reductions necessary for technological efficiency. 4. Freedom of choice and responsiveness to consumer demands. In a market system, prices and supply respond to changes in consumers' willingness and ability to pay for goods and services. In a centrally planned economy, individual freedom of choice is subordinated to the political goals of the planners. In such a system, little effort is devoted to matching supplies of consumer goods with demand, nor are market prices used as a signal to produce more or less of particular items. 5. Economic growth and fluctuations. In much of this book we've been concerned with the causes and costs of economic fluctuations in nonplanned economies. The wastes associated with unemployment are considerable. In addition, inflation creates serious problems in resource allocation and income distribution. A command economy can control both aggregate demand and aggregate supply to achieve greater economic stability. However, even in the command economy, control is not perfect. Inflation and unemployment are less of a problem in planned econo-mies, but they can still occur. However, both inflation and unemployment are most likely to be the result of supplyside rather than demand-side shocks in planned economies where aggregate demand is strictly controlled. Both the Soviet Union and the United States over time have shown the ability to achieve remarkable growth in real GNP per capita. However, in recent years productivity gains and economic growth have lagged in both nations. The challenge of the twenty-first century will be to maintain economic growth and encourage improvements in all nations. Ultimately the material well-being of the world's population depends on the benefits that can be squeezed from the limited resources available on this earth.