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20.4 Review and Practice


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.

Concept Problems

  1. There is a gap between what workers receive and the value of what workers produce in a market capitalist system. Why? Does this constitute exploitation? Does it create the kinds of crises Marx anticipated? Why or why not?
  2. What is meant by the labor theory of value? What are the shortcomings of the theory?
  3. What would you say is the theory of value offered in this book? How does it differ from the labor theory of value?
  4. In what ways does reliance on the labor theory of value create a problem for the allocation of natural resources?
  5. What do you think would be the advantages of labor-managed firms of the kind that operated in the former Yugoslavia? The disadvantages?
  6. Suppose you were the manager of a Soviet enterprise under the old command system. You have been given a quota and the promise of a big bonus if your firm meets it. How might your production choices differ from those of the management of a profit-maximizing firm in a market capitalist economy?
  7. What are some government-operated enterprises in the United States? Do you see any parallels between the problems command economies faced with the production of goods and services and problems in the United States with state-run enterprises?
  8. A Chinese firm operating as a state-owned enterprise had an incentive to produce the efficient level of output, even though some of its output was claimed by the state at state-determined prices. Why is that the case?
  9. Given that market capitalist systems generate much higher standards of living than do command socialist systems, why do you think many Russian government officials have opposed the adoption of a market system?
  10. How does widespread criminal activity sap economic growth?