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Are Socialist Economies Doomed to Fail?

Updated: Apr 5, 2023

The socialist movement has been a controversial topic for many years, with proponents arguing back and forth on its merits and drawbacks. One of the most common criticisms of socialism is that it is doomed to fail as an economic system; being left behind by modern capitalist economies that thrive with high levels of competition and growing incentives for both consumers and firms. The utilisation of the ‘price mechanism’ and allowing the forces of supply and demand to balance markets is what makes capitalism so favourable over its counterpart, but is this criticism of socialism fair? Are socialist economies really doomed to fail? Before we answer this question, we need to define socialism and evaluate the main characteristics of a socialist economy alongside reasons for economic failure.

Socialism, in essence, is a stage in transition to communism, where the means of production are state owned and controlled or regulated by the community as a whole. A huge emphasis is placed upon opposing an economic system based on inequality and the exploitation of the majority, that neglects satisfying the needs of all. In a socialist economy, resources are distributed according to the needs of the population through statistics influencing state-decision, rather than for profit. The socialist movement can be seen as a direct contrast to ‘Laissez-Faire’ capitalism, where the means of production are privately owned and operated for profit without government intervention. The first thing to note is that, in practice, a purely socialist or purely capitalist economy is unattainable, and all economies are mixed; with elements of socialism and capitalism. For example, most economies have some form of government regulation of markets, such as labour laws or environmental regulations.

Likewise, even functioning socialist economies such as Cuba and China have elements of capitalism, like private property and foreign investment. In fact, in 2021, Cuba - a very useful case study for the analysis of modern socialist economies - announced a very prominent step and a slight shift towards capitalism in allowing private businesses to operate in most sectors. So, in reality, we are not comparing socialist economies and capitalist economies, but the differences between allowing one side of the ideological and political spectrum to influence economic activity more than another. With that said, let us examine some of the common arguments against impure socialist economies and whether they hold up to scrutiny…

The first argument we can set forward is that being an economy that ignores incentives leads to a lack of innovation, competition, and efficiency. Incentives within a free-market economy are provided by the price, or market mechanism, which determines the way resources are allocated to tackle the ‘basic economic problem’ of scarcity in a market.

The incentive for firms to make a profit or consumers to take risks by creating or developing new products is ever-present in a capitalist economy and hence it is a driving force for competition. In a competitive economic climate, innovation is essential to adapt, survive, and thrive. Through this chain of argument, we can conclude that competition stimulates economic growth and prosperity. Therefore, the absence of incentives leads to the opposite: a lack of innovation, competition, and a misallocation of resources due to ignoring the desires of consumers in different markets of which the price mechanism signals for.

Ultimately, this can cause economic stagnation through detrimentally slow economic growth. While it is true that socialist economies struggle with innovation and efficiency, it is unclear that this is inherent to socialism itself. One case study we can introduce to oppose this view on lack of innovation is the Soviet Union’s monumental contributions to advancements in space travel. In 1957, the Soviet Union, one of the most successful socialist economies, launched the first artificial satellite into orbit. Not long after, in 1961, a Soviet cosmonaut called Yuri Gagarin became the first man in space. While there are other examples of socialist success, these events alone can be seen as a clear indictor of innovation through technological advancement within a socialist economy. The next argument posed is that socialist economies lead to shortages and low-quality goods. This problem, again, stems from the absence of the market mechanism causing an inefficient allocation of resources and leads to goods and services that are often in short supply and of poor quality. In recent years, many socialist economies have struggled with shortages of basic goods, such as food or consumer goods.

For example, Cuba is currently ‘facing its worst shortage of food since the 1990s and other basic goods in recent years, which illustrates the consequences of a struggling socialist economy. However, the food shortages are not the only factor alluding to a broader discontent on the island; with the World Economic Freedom Index ranking Cuba 175th and a score of 24.37 – making them the least free country in Latin America. However, it is again unclear whether socialism is inherently to blame for these problems that Cuba are facing as there are several other factors that can contribute to shortages such as poor management, corruption, and external economic factors. In Cuba’s case, poor management is a leading factor, with bungled policy responses further destabilising the economy. It is worth noting that capitalist economies can also struggle with shortages and poor-quality goods, showing that the reason these problems occur is not necessarily due to the structure of an economy, but the stability in a more general sense. As one of the least free countries in the world, Cuba is a strong case study to reflect the third argument: socialist economies lead to authoritarianism and lack of individual freedom. The argument goes that when a state controls the means of production and distribution of resources, it controls the lives of its people. The complexity of this argument is far greater, as it raises questions about the relationship between economic and political systems.

Cuba is built on utilitarianism, which serves the “common” people and ostracises the minorities to agree to one set of beliefs for the betterment of society. It begs the question: how can one force, without being authoritative? In many socialist countries – past and present - there are restrictions in place on freedom of speech and political dissent. In the ever-growing modern world that we live in today, where the well-being of citizens is becoming increasingly more important, from an economic point of view as well as socially, this lack of freedom may factor into the inefficiency and low productivity levels in socialist economies. With an unhappy and suppressed labour force, their output will deteriorate as time passes. So, are socialist economies doomed to fail? Well, based on the above arguments, it is clear to see that there are many benefits and drawbacks to socialism as an economic system. While it is true that socialist economies struggle with innovation, efficiency, and shortages, it is unclear whether this is inherent to socialism itself. However, as time passes by, cracks within the socialist economic structure begin to show, and the ‘fundamental deficiencies of central planning emerge’.

Ultimately, whether a socialist economy succeeds or fails depends on a variety of factors including management, corruption, external economic factors, and political stability. Hence, despite valid criticisms of socialist economies, it is not accurate to say that they are doomed to fail. As we continue to debate the merits of different economic systems, it is important to keep an open mind and consider the evidence carefully before reaching any conclusions.



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