This is “Review and Practice”, section 20.4 from the book Macroeconomics Principles (v. 2.0).
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Socialism, a system in which factors of production are owned in common or by the public sector, is a very old idea. The impetus for installing it as a national economic system came from the writings of Karl Marx.
Marx argued that capitalism would inevitably collapse and give way to socialism. He argued that under capitalism workers would receive only a subsistence wage. Capitalists would extract the difference between what workers receive and what they produce as surplus value, a concept roughly equivalent to profit. As capitalists struggled to maintain surplus value, the degree and extent of exploitation of workers would rise. Capitalist systems would suffer through a series of crises in which firms cut back their output. The suffering of workers would increase, and the capitalist class would be weakened. Ultimately, workers would overthrow the market capitalist system and establish socialism in its place.
Marx’s predictions about capitalist development have not come to fruition, but his ideas have been enormously influential. By the 1980s, roughly one-third of the world’s people lived in economies built on the basis of his ideas.
The most important command socialist economy was the Soviet Union. In this economy, central planners determined what would be produced and at what price. Quotas were given to each state-owned firm. The system, which was emulated in most socialist nations, failed to deliver living standards on a par with those achieved by market economies. This failure ultimately brought down the system.
A very different approach to socialism was pioneered by Yugoslavia. State-owned firms were managed by their workers, who shared in their profits. Yugoslavia’s economic system fell apart as the country broke up and suffered from ethnic strife and civil war.
As the governments of command socialist nations fell in 1989 and early in the 1990s, new governments launched efforts to achieve transition to market capitalism. We examined two cases of transition. China’s gradual strategy has produced rapid growth, but in a politically repressive regime. As this book went to press, China continued to be one of the fastest growing economies in the world.
Russia’s transition has been much more difficult. Although its growth rate has improved in the last decade, there is still concern over the coherence of its reform efforts and the sustainability of recent improvements.