Capitalist and socialist economies can be analyzed from three aspects:

1. The creation of value
2. The determination of prices
3. Investment in new production

This article covers the creation of value – money and wealth that can be used for social services, redistribution and growth. This is the foundation of production in today’s industrial world, and is broadly similar for all economies.

The other two aspects of socialism, how prices are set and how investment decisions are made, are much more complex, and go to the heart of socialist planning. These will be analyzed in future articles.

Profits and surplus

The essence of socialism is the collective ownership of productive enterprises. Companies, industries, mines, banks and all other enterprises are owned, not by private individuals and shareholders, but by some form of collective entity, be it a national state, municipality, public board or something similar.

The consequence of this ownership is that the public entity that owns the enterprise decides on where to spend that money that it accumulates.

Under capitalism, the money remaining in a business after covering costs and paying workers is profit. This money is then:

• paid to shareholders/owners
• retained by the company for reinvestment, and/or
• given to the executives and managers as bonuses.

By contrast, the “profit” or surplus in a socialist system does not get paid to shareholders or given to bosses as bonuses. The surplus is all reinvested.

Capitalist states collect money through taxes which is used to fund state departments. Socialist states use part of the surplus from productive enterprises to fund its operations, and could also collect taxes.

Competition and productivity

A common question about socialism is the lack of incentives that come with the profit motive. Is competition not essential for efficiency and keeping prices reasonable?

The simple answer to this is that there are many examples of either state owned enterprises or monopolies with no competition that have been very effective:

4. The big and extremely profitable tech companies such as Google, Amazon and Microsoft are virtually monopolies.
5. In China, strong state intervention has created an economy to rival that of the US. Several huge metal and power companies are state-owned.
6. Across the world, railways are usually state-owned. In the UK, the privatisation of rail has been disastrous for the industry, and rail companies are being taken back into state ownership.
7. The health system in the US, which is largely private, is by far the most expensive in the world, and providers terrible service for US citizens.

In 1966, the Marxist economists Paul Baran and Paul A. Sweezy wrote “Monopoly Capital: An Essay on the American Economic and Social Order”. This was an incisive analysis of monopolistic tendencies of American capitalism, and the wasteful and destructive practices of the monopolies and oligopolies. The book describes how the innate tendency of capitalism is for large companies to squeeze out competitors and smaller companies in the value chain (as is seen with the example of Google and other companies above).

Incentives

The second frequent doubt about efficiency is whether workers in a self-managed enterprise will have the incentive to work effectively. If there is no-one in authority the work, will this not blunt workers’ diligence?

In real life, there are many examples of successful self-management in cooperatives in many parts of the world. There is little evidence that cooperatives are inherently less efficient than conventional profit driven companies. Cooperatives quite often fail, just as businesses do, but they also often succeed. This article examines the benefits of cooperatives https://emoryeconomicsreview.org/articles/2022/11/16/a-democratic-workplace-an-evaluation-of-worker-cooperatives , while this one analyses why some succeed and others fail. https://geo.coop/story/why-some-worker-co-ops-succeed-while-others-fail . Reasons for failure are generally related to a lack of a supportive environment – often an overtly hostile environment.

Small businesses

Another common query is the fate of small businesses. Will every private entity be nationalized? The most plausible answer is that it is extremely unlikely that small businesses will be nationalized immediately. The size at which enterprises will be socialized will depend very much on how society changes from capitalism to socialism. There is no blueprint, and there could be huge differences from one country to the next.

The enormous task facing any socialist government will be to take the monopolies, major banks and large strategic entities into social ownership. There would be no reason to risk the inevitable chaos of trying to nationalize every business.

Why has socialism never worked?

The most common criticism of socialism is that it has always failed. The Soviet Union ended after the economy stagnated, Cuba has always struggled economically, and Venezuela has suffered an economic collapse.

However each of these examples have their own particular circumstances. The Soviet Union, born out of a catastrophic civil war, suffered from an authoritarian top-down political system, with highly centralized economic decision-making – not the type of “socialism” that democratic socialists advocate. Cuba and Venezuela’s economies were targeted by US sanctions, and were too small and isolated to withstand the US onslaught. The government of Venezuela under Hugo Chavez embarked on massive spending when the price of oil was high, which led to economic disaster when the price declined.

China, on the other hand, while being far from a democratic socialist state, has shown that huge state intervention can succeed in transforming a poor rural economy into a world superpower.

Overthrowing capitalism

The examples above, and an appreciation of the globalized nature of capitalism, make it clear that for socialism to succeed, it has to be first established in a major economy such as the US, a major European country, India, or a group of countries with a critical combined size.

But there is no doubt that a socialist economy can work, and that it would remove the worst aspects of capitalism. The real problem is how to achieve it.