Communism and Socialism as Economic Systems

Previously, capitalism as an economic system in which private individuals with comparative freedom from external restraints are allowed to own all or most of the means of production and distribution (e.g. land, factories, railroads, and shops) was explained. 

Today, let's dig into communism, then socialism....

Communism

Communism is an economic system proposed by 19th century German political philosopher Karl Marx.  He saw the inequality in wealth between the capitalists and the labourers in the 1800s, and advocated for a system of government whereby ownership of all economic resources of a country will be among a community of people (or government), hence the term communism.  In 1848, Marx wrote “The Communist Manifesto”, wherein he outlined the process.  As a result, Marx became known as the father of communism.


Essentially, communist government or state makes all economic decisions, and owns all the major forms of production.  In Marx’s mind, government ownership of resources was to be only temporal until a society is matured, however, communism in practice was different or far from Marx theory.  Communism involves permanent government control of resources; there is no passing back of ownership to the people.  

The former Soviet Union was the first nation to adopt a communist government.  Other examples of countries that have adopted communism include Cuba, People’s Republic of China, Vietnam, and Eastern European Countries (Poland, Hungary, and others).

Under this economic system, a central planning committee decides what to be produced, and this decision does not usually reflect the many and varied wants or demands of the populations.  For example, if a communist government concentrates resources on the production of defence equipment and de-emphasize consumer goods such as food, clothing and radio, most people are compelled to go without these consumer goods even if they want them.  As a result, there is a problem of imbalance due to unmatched supply and demand. 

Communist countries typically emphasize capital equipment and military hardware.  Consequently, consumer goods are in short supply.  Communism, in practise, is no longer a major economic system in the world today.  For example, the People Republic of China has liberalized its economy such that in recent times the Chinese government is embracing the market system.

Beyond capitalism and communism.  We have socialism.

Socialism

Under this economic system, there is government ownership of primary or top industries, while less crucial businesses are left to private individuals.  Socialist governments looked favourably on capitalism because of the wealth it helps creates, but see the government as the central agency that can create a more even distribution of wealth.  As a result, private businesses and individuals pay extremely high taxes so that the government can enhance public welfare or promote social programmes.

Most socialist governments often provide many services including retirement benefits, unemployment benefits, health care, transportation, housing and utilities.

In socialist economies the government may control institutions such as communication, transportation, banking, and heavy industries such as steel, oil and gas.  Under this system, the government employs a large percentage of the population mainly on political patronage or consideration.  As a result, many government concerns are usually inefficient.  Because of this inefficiency, socialist countries such as Sweden, Holland, France, and the United Kingdom have liberalized and deregulated their economies.  For example, Great Britain has privatised its hitherto state-owned utilities-- Power Gen and British Telecom.

Over the years, the experience of the world has been that none of these three basic economic systems has offered optimum economic conditions.  Consequently, the basic economic systems have been merging, such that globally pure forms no longer really exist.  There is a mix of government ownership and private enterprise – mixed economy.

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Capitalism as an Economic System

In Business under Various Economic Systems, some salient issues such as

(1) Who will own the means of production?

(2) What will be produced and how will they be produced?

(3) How will the products be distributed?

were highlighted.  Now, we're taking an in depth examination. We 're looking at the concepts of Capitalism, Socialism, Communism, and Mixed Economy/Free market Economy

Here we go.....

Capitalism

Capitalism is an economic system in which private individuals with comparative freedom from external restraints are allowed to own all or most of the means of production and distribution (e.g. land, factories, railroads, and shops).  Capitalism as an economic system or theory of wealth creation and distribution owes its philosophical origins to 18th century philosophers such as Adam Smith. This Scottish economist is considered the father of capitalism.

In this type of economic system, producers operate under conditions of competition and the forces of demand and supply determine market prices, hence, capitalism is sometimes called the market economy or private enterprise system.  Capitalism in its purest form is referred to as "free market capitalism" or "laissez faire", this means a system without government interference in the conduct of businesses.

However, today, no country is purely capitalistic.  Often the government sets the regulatory frameworks. For example, in Nigeria, we have such regulatory agencies as Standard Organisation of Nigerian (SON), National Food and Drug Administration Control (NAFDAC), Nigerian Deposit Insurance Company (NDIC), National Universities Commission (NUC), Federal Environmental Protection Agency (FEPA), and Directorate of Petroleum Resources (DPR), among others. 

This way, capitalism in which there are increased restraints by government upon business is often called “modified capitalism.”  It is also referred to as a mixed economy.

Fundamentally, private property, private enterprise, and freedom of choice characterize capitalism.  These three factors, collectively, are frequently called the rights in a free enterprise system or basic freedom of capitalism.  By private property, we mean individuals and firms have the right to purchase, own, use, sell, or give away property of all kinds, such as land, buildings, machinery, and equipment.  It also implies that business people have the right to the ownership of the profit they hope to realize in the course of providing goods and services.

Private enterprise, as another basic right of a private enterprise system, or as another basic freedom of capitalism pertains to ownership, and shows that business is own by private individuals as opposed to local, state or federal governments.  Here, the business owners or management make the judgments and decisions that determine the path the business follows.  Under this right, business dealings, if not illegal in nature, are not of public concern.

The third outstanding characteristic of capitalism is freedom of choice.  This pertains to the freedom of the individual as a consumer, a worker, and an owner of resources.  As business owner, one is free to choose the field of business one will invest, and to manipulate the factors of production to one’s best advantage in the light of the highest measure of profit.  As a worker, the individual is at liberty to choose whatever career choice that offers one the best returns for one’s efforts.  As a consumer, one is free to make whatever purchase choice, as long as the product is legal.

Capitalism, like any other economic systems, relies on certain inputs to operate effectively.  Collectively, these inputs are called the factors of production.  They are the resources businesses use to create wealth.

A corollary of capitalism (as a form of economic systems) is communism.

Karl Marx saw the inequality in wealth between the capitalists and the labourers in the 1800s, and advocated for a system of government whereby ownership of all economic resources of a country will be among a community of people (or government), hence the term communism.

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4 Factors Affecting Economic Systems

The three economic sytems, capitalism, communism, and socialism have been considered, some what succinctly.
 The associated defects of capitalism,communism, and socialism were described.

A number of factors affect the economic system in any given economy.  These factors include the following:

1. The Historical Background of the People: This factor pertains to the historical antecedents of the people of a given region or country in terms of their origins, ethics, norms and values as well as their customs and traditions.  Any economic system that remarkably impinges on these basic beliefs is very likely to be resisted.  For example, the Nigerian people as a result of their circumstances of    colonialism, among others, have imbibed, nurtured, and sustained the mindset that one’s position in life is a function of one’s own energy, courage and resourcefulness. That is, one’s level of entrepreneurialism.  Based on this economic philosophy, successful businesspeople are regarded highly in their communities.  As a result, any economic system that will negate or undermine this    economic thinking will be   highly rejected by the citizens.

2. The Extent of Wealth and Natural Resources in an Economy:  Another factor affecting economic systems is the level of wealth and natural resources in a given economy.  Nations rich in timber, mineral deposits, and fertile farmland, among others, naturally support an agricultural and industrial population. This promotes entrepreneurial activities and the accompanying economic system (capitalism).  On the other hand, nations possessing inadequate natural endowments pose unique challenges to the government, and in a bid to cater for the general welfare of their citizens, such nations might embrace a more welfaristic system, as the case might be.

3. The Political will of the People: This factor stems from the people’s historical backgrounds.  If an economic system is insensitive to the citizens’ political consciousness and sensibilities, dissatisfaction about it might alter the existing economic system, and bring in the process a more welfaristic one.

4.  Instability in the Mode of Governance: This factor refers to short-term and frequent transitions among heads of government such that long-term planning and policy implementation in the given economy gets disrupted.  As a result, the larger populations might agitate for a change in the existing economic systems.

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3 Defects of Communism

A number of defects are noteworthy in a communist economy. 

1.   Problem of Unmatched Supply:  Because the decision as to what will be produced is not based on the market mechanism, communist government has no way of knowing what to produce.  This situation leads to unmatched supply and demand. 

2.   Too Much Emphasis on Capital Goals:    Communist countries promote national goals which might not reflect the wishes and aspirations of the larger populations.  For example, most communist economies typically emphasize capital equipment and military hardware as opposed to basic commodities such as food and clothing that touch on the lives of the ordinary citizens.  This way, there is the likelihood of short supply of consumer goods, and attendant poverty.

3.   Near Absence of Incentives for Hard Work: The workings of this economic system (communism) do not inspire hard work among the working class because the government takes most of the earnings.

      

So far, communism and capitalism have been examined as the two major economic systems on the opposite extremes of a continuum.  The third basic economic system, socialism, combines elements of capitalism and communism.

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Business under Various Economic Systems

Today we are considering an exciting issue in business:  Business under Various Economic Systems.

Yep, Business under Various Economic Systems!


The success of any business is due in part to the economic and political climate under which the business operates, and this in turn, is governed by the prevailing economic system in the given economy or society.  When we talk of business under various economic systems,certain salient issues such as

• Who owns the means of production;

• How the products will be distributed;

• How the the scarce resources of a given economy or country are being allocated among the various needs and wants, demand some considerations.

How the scarce resources of a given economy or country are being allocated among the many and varied needs and wants:  Along this line, there is a system operating on the market mechanism alone, while at the other, there is a central planning agency.  The former is called a market economy, while the latter is referred to as a planned economy.  However, a thorough analysis of real world economic systems reveals that there is no pure example of either of these two examples.  Most economies, therefore, are mixed.  


Who owns the means of production:  Is it owned individually, by different corporations, by workers collectively, or by the central government?  Here, again, there is no pure example.


Another way to consider the economic systems is to provide answers to these basic economic questions:


(1) Who will own the means of production?

(2) What will be produced and how will they be produced?

(3) How will the products be distributed?    


Providing answers to these pertinent questions, understandably, reveals that there are three basic economic systems.  These are capitalism, communism and socialism.  However, it is worthy of note that, in practice, there is no pure form of any of these basic economic systems.


Interestingly, in the context of the aforestated basic economic questions, an economic system can be seen as a basic guiding rules for allocating a society’s resources to satisfy its citizens’ needs (and wants). Importantly, the economic system in operation in any country depends both on the prevailing circumstances and the historical background of the country. 

The next section presents an overview of the economic systems, highlighting, among others, their distinguishing features.  It also describes the inputs required by the private enterprise systems (i.e. market economy), and concludes with factors affecting the economic systems.

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