Socialism covers a wide range of social and economic systems. With the exception of communism where all ownership resides with the state, this theory is characterized by the social ownership of the means of production for society. Workers have the option to self-manage themselves in the form of cooperative, collective, or public ownership. Citizens can also own equity in these processes under some definitions.
Despite the efforts of some people to characterize socialism in one specific way, there are so many different varieties that no single definition exists that can cover all of them. The one trait that most versions share is the social ownership concept.
You can divide socialism into market and non-market forms, implemented to circumvent inefficiencies or crises that can happen over time with capitalistic accumulation. Some forms still use factor markets and profit motive to encourage the trading of goods and services, but the earnings are controlled directly by the workforce in each agency.
Whether nationalist or internationalist by design, there are several advantages and disadvantages of socialism to consider.
List of the Advantages of Socialism
1. Socialism creates a society that focuses on economic equality.
There is a reduction in the number of hidden taxes that you experience in capitalist societies that focus on a hybrid implementation for services. That means you have more knowledge about what each service or item will be with its final cost. There are constraints put in place to limit spending. That’s why supporters of universal healthcare in the United States point to this advantage of socialism.
Americans pay 17.6% of GDP for their healthcare needs, which is almost double that of most other developed countries.
2. There is a reduction in poverty when socialism has a chance to work.
One of the biggest complaints that capitalists have about socialism is the redistribution of income that occurs. When the very rich are taxed to contribute to the very poor, then the entire society can experience an increase in total utility or happiness. Think about an individual who earns $10 million per year. If that person’s marginal tax rate under socialism is 60%, then they still have $4 million to spend on themselves. The additional $6 million then goes to those in need so they can meet the basics of life that they’d be unable to afford otherwise.
Socialism can work when there are components of capitalism incorporated into the structure of it. That’s why most societies today create a hybrid system that uses both theories in some way, including the United States. When you pay taxes into Medicare or purchase fuel that sends tax funds to maintain roads and infrastructure, then that is a form of income redistribution too.
3. The presence of universal healthcare can improve living standards.
When there is free healthcare available to people at the point of use, then everyone can receive the basic care they need to maintain their health. This advantage of socialism can improve the living standards for those who would be unable to afford the cost of a private doctor. When the health of an entire society improves, then there are additional advantages to consider that include improvements in economic growth.
4. The excesses of the free market come under regulation.
Public ownership creates several benefits for a socialist society. It allows the agency to be run in the best interests of the public instead of trying to create profits for shareholders. That’s why there is public ownership of certain utilities. It allows the businesses involved in the distribution of goods or services to work for the benefit of everyone instead of staying oriented on potential profits.
This advantage makes it easier for businesses and governments to focus on lowering prices for consumers. It also helps them to look for long-term investment opportunities while improving safety so that each person can receive what they need for a happy and productive life.
5. It can improve labor productivity rates when implemented correctly.
Socialism can improve labor productivity rates in both positive and negative ways. When people are healthier and have fewer lost days due to illness or injury. It also reduces the stress of what private healthcare costs can place on a family. There isn’t a standard universal option in the United States, which means uninsured workers pay for the full cost of care. Over 500,000 families file for bankruptcy in the U.S. each year as a direct result of the medical bills they are carrying.
Governments can also take over specific industries to force higher levels of production through fear. Socialism at a more extreme level can still offer plenty of products or services, but the quality of the work can be questionable if each worker is only doing their best to survive.
6. The goal of the socialist society is to promote the common good.
Capitalism is an economic theory that encourages the individual to make a profit at any cost. Even if you must exploit others or damage the environment, these decisions are permissible because you’re earning money. Socialism says that working for the common good is a better option. This advantage makes it possible to create higher levels of social cohesion because the general welfare of everyone is the priority.
That doesn’t mean individuals are unable to grow wealthy under this system. If you make a lot of money, even as an entrepreneur, then you can live comfortably while knowing that the money taken out in taxes is going to help others in your community.
7. More equality often leads to improvements in social cohesion.
When a society has more equality in it for the average person, along with fewer ways for it to grow inequal, then there is more cohesiveness that develops over time. People who perceive that they live in an unequal society that monopolies or oligopolies exploit can lead to high levels of resentment and frustration. This form of governing can help each person to feel like they’ve got a fair stake in their existence, creating more harmony at every level of the society because each person is committed to helping themselves and their neighbors find a better life.
8. Environmental protections can be implemented more readily.
When the economy has regulations in place that work toward the long-term welfare of everyone, then there is a higher value placed on concerns that could harm the environment. One of the most common actions taken with this advantage of socialism is a regulatory reduction of pollution. Even though the activities that create the desired result will lower the levels of profit earned, the long-term existence of an industry that can provide excellent jobs is worth the investment to the average worker.
9. Each person still has an opportunity to pursue their goals.
In a genuinely capitalistic economy, only the people with means and opportunity can seek options like regular healthcare or advanced education. In the United States, there’s already a form of socialism in place with the public schools offered in the K-12 grade range for each community.
This form of administering extends the ideas that are already working in a “democratic” society and applies them to other components of it. It allows each person to pursue their own definition of success from an early age.
10. It reduces the risk of price-fixing that can occur in capitalistic societies.
The government either monitors, owns, or controls every organization that provides goods and services under the structures of socialism. Instead of using free-market influences to increase prices or form acquisition and merger opportunities, the community can govern pricing and regulations. This advantage allows access to anyone who might need those items in question. There is no structure available that will enable suppliers to alter prices because there is a high demand for what they have.
11. The economy can become more efficient under the supervision of socialism.
There is no longer a push to sell unwanted goods or services to consumers in the structure of socialism. That means less money is spent on outreach programs and marketing, allowing for more to be directed toward composition, innovation, and wage growth. People still receive what they need for comfort and daily living without the constant messaging demanding to be heard to compete for household funds.
12. There is more flexibility available in socialism to make value judgments.
Products are offered in a society based on socialism based on the available value judgments instead of seeking profit-making decisions only. Even if the possible production in this society creates a loss, the government has the option to subsidize activities so that needed items remain available to everyone. Goods and services are based on profits first and value second when the primary focus of the economy is capitalism.
List of the Disadvantages of Socialism
1. Socialism creates a significantly higher tax burden for individuals.
When an economy has a high rate of progressive taxation, then there are more disincentives than benefits to consider when working or creating a business opportunity. Under the proposed Green New Deal being developed by progressives in the United States, the idea of a 70% tax rate on the highest incomes could generate extra revenues of $12 billion. The only problem is that this figure would reflect just a 0.3% share of the overall tax hike that would be necessary to complete the plan.
It is easier for people who have excessive wealth to live abroad where tax havens exist. They can take a free ride on the others who don’t have the opportunity to pay the tax. That’s why making a rate that’s too high will almost always be a self-defeating effort when trying to establish a socialist society.
2. Entrepreneurs have no motivation to operate since they aren’t true owners.
Socialism can create ownership opportunities, but it is rarely for the individual. That means entrepreneurs are instantly disincentivized from putting in the effort to build up a business from scratch. Even if the government doesn’t demand 100% ownership of the venture, these leaders can feel like their governing officials are taking an unnecessarily high percentage of their profits. That means their work might go overseas somewhere since there could be fewer risks associated with their venture.
3. The creation of a welfare state can lead to industrial disincentives.
When the welfare state of a socialist government is too generous, then there is a disincentive to find a job. That means the society may see a reduction in its labor force as people decide to stay home instead of pursuing a career. That’s why poverty eventually develops. Welfare is supposed to give people just enough to scrape by so that the desire to have more money leads someone to a job.
That’s why governments often counter the results of this disadvantage with mandatory work. This outcome further disincentivizes the individual worker to be productive, so their individual efforts reduce. That leads to the implementation of specific quotas, so there is always a back-and-forth between society and its leadership over how much production is possible.
4. Governments can fail when trying to regulate industries or own businesses.
If we were living in an ideal world, then each government would have success in their business regulation activities. Labor markets and public industries would work like clockwork every day. This disadvantage exists because of the fallible nature of humanity. Government interventions are prone to failure. Even if they are successful, then the structure is prone to a higher risk of failure over time because of inefficiencies that exist in resource allocation.
If there are labor market regulations that call for a low-hour maximum for the working week or a high minimum wage, then there can be a spike in unemployment claims. There would also be a lack of flexibility for agencies if there are sudden increases or decreases in demand. High levels of regulation often discourage investment, which eventually leads to lower levels of economic growth when compared to capitalism.
5. Excessive labor market regulations can lead to fewer employment opportunities.
Socialist governments can institute severe regulations on various industries to the extent that the efforts restrict the number of available employment opportunities. Requiring workers to be available for a specific shift or to work for a particular wage can limit the number of open positions a business can support. Higher levels of market regulations can support a better environment or lead to cheaper goods or services, but it is a disadvantage that can also discourage investments if they are severe enough.
6. Socialist regulations can cause problems with structural employment.
Structural unemployment is a form of involuntary unemployment. It occurs because there is a mismatch between the skills of the workers in the economy with what an employer demands. This gap in ability if often brought about by technology changes that tend to make repetitive skills obsolete. If a large company in the only employer for a given industry, then workers have no competition that can use their experience to their advantage. The local educational system encounters a burden as well since massive levels of career retraining becomes necessary.
Under some forms of socialism, the government is the only employer for the economy. If leaders decide that certain industries are no longer necessary, then there may not be any options for work for some individuals.
7. Unions can exist in socialist countries to create divides between workers and owners.
The overall goal of socialism is to create a society that offers more equality and harmony to the average worker. If the policies implemented by the government are geared toward the strengthening of trade unions or perfect equality, then it can lead to an antagonistic relationship between owners and workers. An attitude of “us vs. them” develops that can lead to significant levels of lost time.
During the 1970s, the UK labor market experienced severe shortages because of the high levels of distrust between the unions and company owners. Public ownership can’t stop this disadvantage in its entirety because no one at the management level really cares if everyone gets a bad deal.
8. It reduces innovation opportunities for the society.
There may be an advantage in socialism structures in the fact that people with a specific skill or talent receive placement into employment positions that directly benefit the society from that experience.
Production within a socialism-style government structure tends to focus on internal needs instead of new possibilities. That limits the options for innovation because there is little engagement with the government to develop new concepts. Over time, that means the socialist society can fall behind the ones that decide to incentivize innovation.
9. Socialism creates higher levels of bureaucracy to navigate.
All governments have high levels of bureaucracy that cause everyone to waste time and money. The difference between socialism and capitalism is that the latter offers an economic benefit that can supply revenues to other industries.
The government will want to determine who is eligible to receive specific benefits when socialism is the primary emphasis of the society. Applicants must fill out paperwork to prove their eligibility. Continuous renewals must go through processing. The goal of socialism may be to streamline the culture and equalize access to services, but more bureaucracy is created in doing so. That means it could take much more time to make services available to those who need them.
10. It forces the government to do all of the spending.
If an economy is going to have an opportunity to grow, then there must be a balance in trade between foreign and internal sources. When there are declines in innovation, then manufacturing grows stagnant in every industry. That means there are fewer purchasing opportunities for everyone except the government. This disadvantage means that more imports may become necessary to maintain the status quo. If this issue continues for some time, then trade deficits can lead to high levels of debt.
This issue causes the socialist government to spend more than it would over the long-term than if it had allowed capitalistic innovation to have some investments.
Socialism can offer households access to a society where public ownership leads to a rising tide where all boats can rise. Although this benefit comes at the cost of income redistribution that targets the very rich, this switch in monetary access can reduce poverty without completely destroying the motivation to earn more money.
The problem that socialism tends to create is an increase in financial constraints. Rationing is common with this economic approach, especially when looking at severe forms of it like communism. This disadvantage can lead to a rejection of goods or services to the point where there might not be enough supplies to manage the daily needs of life. Cuban rationing in 2000 was six pounds of rice, 20 ounces of beans, and six pounds of sugar.
When we look at the socialism structures of the Nordic countries of Europe where government spending can be as high as 50% of the GDP, there are private and public ownership opportunities that work together in a hybrid system. The U.S. even incorporates some elements of this economic idea into its society. That’s why a careful evaluation of each key point is necessary instead of making assumptions about what socialism is or is not.
Keith Miller has over 25 years of experience as a CEO and serial entrepreneur. As an entrepreneur, he has founded several multi-million dollar companies. As a writer, Keith's work has been mentioned in CIO Magazine, Workable, BizTech, and The Charlotte Observer. If you have any questions about the content of this blog post, then please send our content editing team a message here.