Socialism & Centrally Planned Economy

Alternative Economic System Socialism Versus Capitalism As observed early in the book, nations differ greatly in the rules and institutions that they use to organize economic activity and to distribute goods and services among individuals and alternative uses. An economic system is an accepted way of organizing production, establishing rights to ownership and use of productive resources, and governing economic transactions in a society. The evaluation of alternative economic systems is often closely tied to political and moral views. The ideology, or opinions, regarding human rights often influences our ideas about the desirability of one economic system compared to another. We discuss ideological issues only briefly in this chapter. Instead our emphasis is on understanding the way modern socialist economies, particularly that of the Soviet Union, have operated and how their operation may change in the future. The two basic alternative economic systems are capitalism and socialism. Capitalism is generally associated with private ownership of economic resources, free enter-prise, and exchange of goods and services in markets. Socialism is usually associated with government and ownership of productive resources and central planning to determine prices and resource use. However, at least some free enterprise and market exchange exist in many economies that define themselves as socialist systems. At the same time many so-called capitalist systems, including those of the United States and Canada, have extensive government sectors that provide goods and services such as pensions, run railroads and other enterprises, and account for over one third of GNP, and employ over one fifth of the labor force. The Ideas of Karl Marx Modern socialism has much of its roots in the ideas of Karl Marx (1818-1883), whose classic work Das Kapital, first published in 1867, emphasized the conflict between economic classes. (See Economic Thinkers box.) Marx and other economists of his era were convinced that the capitalist system of the nineteenth century would generate labor market forces that would keep factory wages at the subsistence level; that is, workers would be paid wages that barely allowed them to survive. In the early days of industrialization, Marx's theory would have been confirmed. Working conditions in factories were abominable, and wages were extremely low. The "iron law of wages"' formulated by the nineteenth-century classical economist David Ricardo argued that if wages were to increase above the subsistence level, forces would be set up to push wages down. Ricardo hypothesized that population would increase because of improved health of the working class as wages rose above the subsistence level. The increase in population would then increase the supply of labor, which in turn would put downward pressure on wages until they returned to equilibrium at the subsistence level. Much of Marx's work was based on the labor theory of value, which maintained that only labor could produce something worth paying for. Capitalists treated labor like any other commodity and paid wages that just allowed labor to survive. However, because workers did, in fact, produce more than the value of the resources necessary for their survival (the subsistence wage), capitalists were able to lay claim to a surplus value from the labor used in production. Surplus value was defined by Marx as the difference between a worker's subsistence wage and the value of the worker's production over a period. The surplus value was the source of capitalist profit, which, in Marx's view, was obtained merely by exploiting workers. In Marx's opinion capitalists were completely unproductive. The capital equipment with which they provided their workers merely represented the value created by other workers, who, in turn, were exploited by other capitalists. In Marx's analysis, surplus value represented the sum of earnings paid out in the form of interest, rent, and profit that actually were generated by the productivity of labor. Marx argued that the capitalist system he observed in his lifetime would not survive. He believed that increases in demand for goods associated with population growth would encourage capital accumulation, but that competition among capitalists would keep profits from increasing. Despite capitalists' attempts to continually exploit workers, Marx believed that profit would decline in the long run. As more capital was used in place of labor, the reduction in labor use would reduce profits. (Remember that Marx believed that all profits were derived from the exploitation of workers. Less employment meant less profits.) Capitalists, who owned the factories and other capital equipment, were viewed as a separate and distinct class from workers, who owned virtually nothing. Capitalists survived as parasites, in Marx's view, exploiting the workers by paying them less than the value of their production. Capitalists were seen as attempting to increase profits by accumulating more capital and by investing in better technology and equipment. Marx believed that workers would not gain from capital accumulation because their wages would remain close to the subsistence level. In fact, many would lose their jobs as capital was substituted for labor in production. He expected a vast "reserve army of the unemployed to spring into existence, aggravating the labor supply problem and putting still further downward pressure on wages. Eventually there would be a deficiency in aggregate demand as a result of unemployment, and Marx expected this to cause the collapse of capitalism. As the size of the work force declined because of increased use of capital, profits would decline, thus contributing to the collapse of the system. Eventually the working class would revolt and establish a socialist system.