Let us make an in-depth study of the Socialism:- 1. Meaning of Socialism 2. Main Features of Socialism 3. Merits of Socialism 4. Demerits of Socialism.

Meaning of Socialism:

Meaning and Definition:

Socialism as an alternative to capitalism, has the widest appeal.

A Swedish king once said to his council of ministers that – “if one is not a socialist up to the age of twenty five, it shows that he has no heart; but if he continues to be a socialist after the age of 25, he has no head.”


At present socialism seems to have caught the imagination of the youth all over the world.


1. The word socialism has been defined as “such type of socialist economy under which economic system is not only regulated by the government to ensure, welfare equity of opportunity and social justice to the people.”

2. According to Mr. Webb:


“A socialised industry is one in which the national instruments of production are owned by public authority or voluntary association and operated not with a view to profiting by sale to other people but for the direct service of those whom the authority or association represents.”

This definition does not correspond to the present notion of socialism, because it does not imply any idea of planning.

3. Prof. Dickinson has defined socialism as such:

“Socialism is an economic organisation of society in which the material means of production are owned by the whole community and operated by representatives of the people, who are responsible to the community according to a general plan, all the members of community being entitled to the benefits from results of such socialised, planned production, on the basis of equal rights.”


There is no complete agreement as to what exactly socialism is. But the definition given by Prof. Dikinson seems to be better. Economist have compared socialism as a hat which has lost its shape because everybody wears it. It has been aptly remarked that “socialism has been called many things and many things have been called socialism”.

Main Features of Socialism:

A socialist economy has the following features:

1. Socialism is Social or Collective Ownership of Resources:

In such an economy, all the means of production are owned and operated by the state in the interest of society as a whole. This is to ensure equality of opportunity to all the citizens with regard to earning of income. This is also aimed at full and efficient utilisation of the country’s resources.

2. It is a Fully Planned Economy:

A socialist economy is necessarily a fully planned economy otherwise the economic system cannot run. There is a choice between centralised and decentralised planning. All socialist economics were fully planned economics.

3. It is the Responsibility of the Central Planning Authority:

Planning is the responsibility of an authority at the centre. It may be known as the Planning Commission in India or the Gos plan in the U.S.S.R. The main task given to this body is to formulate long-term and short-term plans for the economy.

4. It has Definite Aims and Objectives:

Socialist economy has specified aims or objectives. Generally, they are included in the constitution itself but these are given specific shape by the planners. As far as possible the objectives are clearly and quantitatively defined. The competitiveness on complementary among these objectives is explicitly noted. This is meant to bring planning nearer to reality.

5. Specific Long-Term Plans:

The Central Planning authority is given the respon­sibility to chalk out specific long-term plans for the country. These long-term plans are called “Perspective Plans”. These may range from twenty to thirty years. These are in the nature of a blue-print of the path the economies have to follow in the near future. These perspective plans may be modified with changes in basic structure and objectives of the economy. This requires the use of input and output and activity analysis.

6. Central Control and Ownership:

A fully planned economy is by implication a controlled economy. Government controls the main aspects of all economic activity. There are controls on production through licensing. Consumption is also controlled indirectly through controlled production. There are existing controls generally operated through the Central Bank of the economy.

Then there are controls on distribution. Government may have a public distribution system. It may have direct procurement and sale of essential commodities through fair price shops. However, the nature of controls and their intensity shall depend upon the economic conditions in the economy.

7. Much Less Importance of Price Mechanism:


A socialist economy gives much less importance to market forces and therefore, the price mechanism is given a minor role in resource allocation. A specific plan based on social needs guides the process of resource allocation. Private profit is not allowed. Public interest is given more importance. The means of production are directed by the Government and are used in promoting the general welfare of the people.

8. People’s Co-operation is Essential:

A socialist economy is run with the active co-operation of the people in the fulfillment of plan targets. No plan can possibly succeed without people’s participation. The plan is prepared and implemented by the Government but the main target’s of the different activities in the plan are fixed by taking into account the resources which people will be able to mobilise. To encourage the people to participate in plan implementation, the Government may provide special incentives.

In short, a socialist economy is not run by the impersonal forces of supply and demand. It is a scientifically planned economy. As such its main features are quite different from those of capitalistic economy.

Merits of Socialism:

A socialist economy has many alternative features. These have made socialism more and more popular.


The main merits of the socialist economy are as under:

1. Social Justice is Assured:

The chief merit of socialism is that it assures of social justice. Under socialism the inequalities of income are reduced to the minimum and the national income is more equitably and evenly distributed. The socialist principle provides for a fair share for all. No one is permitted to have unearned income. Exploitation of man by man to put an end to. Every individual is assured of equal opportunities, irrespective of caste, creed and religion. Every child whether he is born in a poor family or in a rich family is given an equal opportunity to develop his latent faculties through proper education and training.

2. Rapid Economic Development:

A socialist economy is likely to grow much faster than a capitalist economy. The experience of the U.S.S.R. and other socialist countries amply proved this. The main factors making for the fast growth rate is the full use of resources, scientific planning and quick decisions.

3. Production According to Basic Needs:

In this economy the production is directed to satisfy the basic needs of the people first. As far as possible, the production of food, clothing or building materials is guided by the basic needs of the people and is not according to the purchasing power of the rich section of the society. Therefore, the phenomenon of the poor going hungry while the rich feast cannot be seen in the socialist economy.

4. Balanced Economic Development:


Economic planning is meant to carry out balanced development of the economy. All the regions of the country are taken care of. Development of the backward areas is also given a priority. Similarly, agriculture and industry, heavy and small industry develops side by side. As a result there is no lop-sided development of the economy.

5. It has Economic Stability:

Another important merit is the economic stability which a socialist economy has. A capitalist economy is often suffering from economic fluctuations resulting in lot of unemployment and wastage of resources. There is a good deal of misery among the working classes in periods of depression in a socialist economy.

A socialist economy is able to control economic instability due to the planned nature of the economy. Pure changes are taken care of under a perspective plan. Private investment is given a minor role. Therefore, there are no economic fluctuations.

6. It has More Flexibility:

A socialist economy is much more flexible than a capitalist economy because of the control on market forces. The socialist economy can be geared to war times as early as it is operated during peace-time. Rather the state having ownership of means of production can meet the needed changes much better than the slow moving market mechanism of the capitalist economy.

7. Conservation of Natural Resources:

A socialist economy has a great advantage of planning for the future. Wasteful use of the country’s natural resources is a common problem in all the capitalistic economies. Private enterprise does not care for the future. A planning authority can take the interest of future generations into account by preparing plans for conservation of the country’s non-renewable resources like coal, petroleum, forests and soil.

8. Equitable Distribution of Wealth and Income:

A socialist economy is operated with the aim of providing equal opportunity for all citizens in earning incomes. Generally, private property is restricted to some basic needs. There is no amassing of wealth by a few. Wealth is also equitably distributed because private enterprise is given a limited role.

9. No Exploitation and Class Struggle:


A socialist economy can also get rid of the basic maladies of the capitalist economy. There is no question of exploitation in as much as the state determines the distribution pattern of country’s income. Further the whole society is the common aim of all planning. No sections are discriminated against. There is not special favour at any class. Therefore, there is no scope for anything like the class struggle which is a characteristic of the capitalist economy.

10. Social Welfare Activities:

A Socialist Economy is oriented to the social needs. The government provides for full security. There is automatic care for the children of those who meet accidents while performing their duties. There is provision for old age pension for all. The slogan is “to each according to his needs, from each according to his capacity.”

Therefore, the employees in state enterprises can work without much worry. Their productivity is higher. There are no labour disputes and no wastage of resources resulting there from as is the case in a capitalist economy.

11. There is no Wastage of Competitive Advertisement:

A capitalist economy is not always able to achieve productive efficiency through competition. There is a good deal of wastage through competitive advertisement of different varieties. The consumer has to pay the price of the useless advertising. Prof. Chamberlin has tried “to show that capitalism leads to excess capacity when there is differentiation of the products.”

In a socialist economy, there is no such wastage. In the first place only those goods and services are produced which are preferred by the consumers. Secondly, if at all there is any advertising, it is only meant for information about different products to consumers.

12. Foresightedness:

A socialist economy can prepare for the future much better than a capitalist economy. Future is always uncertain. The planners take full note of the uncertainties while formulating the plan. Flexibility in planning is meant to provide for immediate changes in the plan as conditions change. Planners can anticipate some of the future changes and prepare for them so that the nation is not suddenly caught unawareness.

Demerits of Socialism:

The merits of socialism given above should not lead us to the conclusion that socialist economy is all virtue.


There are certain demerits of this system which are as follows:

1. No Suitable Basis of Cost Calculation:

Von Hayek and Bobbins have pointed out that there is not proper basis of cost calculation in a socialist economy. They say that the means of production being owned by the government, there is no market price for the factors of production. In the absence of market mechanism there is no standard way of calculating costs of production for different goods and services.

2. Choice of Working Incentives:

The most difficult problem in this system is the choice and working of incentives in the absence of profit motive. The Russian Government has been using the policy of “Carrot and the Stick”. Some national honours are given to those showing outstanding results. Those shirking work or proving irresponsible are punished.

There is decentralisation of authority along-with responsibility. This ensures freedom at the lower level and scope for initiatives. However, there is no comparable system of incentives and dis-incentives to the profit motive in a capitalist economy.

3. It Becomes Lack of Incentives:

In this system, it has also been seen that incentive of hard work and inclination to self-improvement will dis-appear together when personal gain or self-interest is eliminated. People will not give their best. Incentive, ability, enterprising spirit and the go-ahead attitude will languish and creative work will become impossible. It is said that “a Government could print a good edition of Shakespeare’s work but it could not get them written.”

4. There is Loss of Economic Freedom:


A very important charge against socialism is that, when freedom to enterprise dis-appears, even the free choice of occupation will go. Workers will be assigned certain jobs and they cannot change them without the consent of the planning authority. Every workers will have to do work what he will be asked to do.

5. Lack of Data, Experts and Administrators for Planning:

Operating a socialist economy as a planned economy requires huge data, a good number of experts and an equal number of administrators at different levels for administering the plan. No doubt machine can help to process the data and experts can advise but there has to be decision-making at different levels of government. It is difficult to find out enough data with the result that decisions are delayed, mis-carried or wrongly implemented. Ultimately, the common people have to pay the price for these mistakes.

6. Loss of Economic Freedom and Consumer Sovereignty:

Under socialism all economic activity is directed by the central planning authority. There is no significant role given to private investment and initiative. Consumers are compelled to accept whatever public enterprises produce for them. Generally, there is limited variety of goods and restricted available choice. Prices are fixed by the government and consumers just cannot do anything about them. Consumer’s preferences are just guessed by the planners who have no compulsion to study the people’s preferences deeper.

7. Imperfections in Planning Lead to Dis-satisfaction on a Big Scale:

Imperfection may creep in the formulations of the plan, its assumptions, statistics or analysis. Further, imperfection may enter at the stage of implementation of the plan. Further, there may be lack of adjustment between prices and wages. As a result of these imperfections there is lot of wastages of resources, slowing down of work, shortfalls in targets and the dis-satisfaction resulting there-from.

Mistakes made by individuals harm them only. National mistakes are costly for the common man. In fact, this has been the cause of dis-integration of the U.S.S.R., when the other economics of Europe were booming the U.S.S.R. could not provide the minimum comforts of life.

8. Too Much Power is Concentrated in the State:

Under socialism the state is not merely a political authority but it also exercises unlimited authority in the economic sphere. In this, all power is concentrated in the state. It means the state is everything and individual nothing. He is reduced to a cypher. After all the human institutions are for man and not man for these institutions.

9. There is Loss of Personal Liberty:


In socialism there is no unemployment. But the critics retort by saying that there is also no unemployment in a jail. They regard a socialist state as one big prison-house and they do not think that employment is any compensation for the loss of liberty.

10. Bureaucracy and Red-Tapism:

A socialist economy is a state enterprise economy. Every bit of the plan is to be cleared by bureaucrats. This often leads to red-tapism. Even simple state forward jobs may take unduly long-time to be done. The work of Government departments or even autonomous bodies is slow moving. As a result inefficiency creeps in through bureaucracy. In many countries where socialism had been brought about hastily, work came to a stand-still leaders had to revert to liberal policies containing elements of the capitalist economy.


Whatever the difficulties of running a socialist economy, the appeal for socialism was great especially, in less developed countries. For over populated countries having national problems, socialism seemed to be the only hope of the masses. Free market economy in its pure form is a thing of the past.

Mixed Capitalist Economy is already the order in all the western countries. In the Less Developed Asian Countries Government has not only to regulate economic activity but positively direct it by active participation for the fast development of the country. As for the difficulties, they exist and can be eliminated through co-operation between the administration and the people. As the country develops economic planning gets a stronghold and difficulties wear away.