Pros and Cons of Socialism

There are different forms of socialism but for this blog will use the form of democratic socialism advocated by Socialist parties in Western Europe. For example, Nordic countries where government spending is between 40-50% of GDP. This brand of socialism believes in:

• Redistribution of income and wealth through a progressive tax system and welfare state.
• Ownership of key public sector utilities, such as gas, electricity, water, railways.
• Private enterprise and private ownership of other industries.
• Free health care and free public education provided by direct taxation.
• Support for trade unions / minimum wages/labour market regulations to protect workers
• Government regulation of monopolies, housing market, environment.

Pros of socialism

1. Reduction of relative poverty. A welfare state which provides a minimum basic income for those who are unemployed, sick or unable to work maintains a basic living standard for the poorest in society and helps to reduce relative poverty.
2. Free health care. Free health care at the point of use means everyone is entitled to basic health care. This increases the living standards of those who cannot afford to pay private doctors. By improving the nation’s health it also contributes towards increased labour productivity and higher economic growth in the long-term. In the US, there is no universal health care and uninsured workers can slip through the net and either not be entitled to health care or go bankrupt trying to pay bills. According to CNBC (2019) ‘[in the US], An estimated 530,000 families turn to bankruptcy each year because of medical issues and bills. According to the CFPB, about 100 million Americans owe over $200 billion in medical debt.
3. Diminishing marginal utility of income. From a utilitarian perspective, a redistribution of income and opportunity from the very rich to the very poor can increase total utility [happiness] in society. A millionaire who pays a marginal income tax rate of 50% still has the ability to buy most goods they need. If an unemployed person gains an extra £50 it leads to a very large increase in utility because they can afford to buy basic necessities. See: diminishing marginal utility of income/wealth
4. A more equal society is more cohesive. A society which has equality of opportunity and limited inequality is likely to be more cohesive. If people perceive they live in a very unequal society – exploited by monopsony employers and earning significantly less than their bosses, it can lead to frustration and resentment. If everyone feels they have a fair stake in society, it can help create a more harmonious society where workers are committed to the success of the firm which they work.
5. Socialist values encourage selflessness rather than selfishness. Capitalism encourages attitudes to make profit – even if it is at the cost of other individuals or the environment. A socialist society does not pursue profit as its highest goal, but social cohesion and the common good.
6. Benefits of public ownership. The benefit of public ownership is that companies can be run in the public interest rather than just for the benefit of shareholders. For example, industries like railways and water have significant externalities, which are ignored in a profit-oriented company. Public ownership of water and the railways allows the companies to target goals such as long-term investment, low prices for the consumer and improved safety.
7. Environment. An economy which is regulated to work towards the long-term welfare will place a higher value on environmental concerns, such as limiting pollution – even if it lowers profit. This can improve quality of life, even if GDP per capita may actually be lower than otherwise.
8. Equality of opportunity. In a capitalist system, wealth inequality can increase over generations because of the ability to inherit family wealth. Therefore, those born in ‘privilege’ gain better opportunities. A progressive tax system can fund, say, universal education, which gives everyone a fair chance.
9. Reduced hidden taxes. An economy with no public health care will have lower tax rates. However, individuals and firms will pay for health care in a different form. In the US both firms and individuals pay significant sums for private insurance. Therefore, although there is less tax, there is the ‘hidden’ tax of private health insurance. Furthermore, because the US health care system is for-profit with fewer constraints to limit spending, the US pay significantly more on health care (17.6% of GDP) than other countries (e.g. UK 9.6% of GDP) (See: Health care spending)
10. Reduce monopoly power. In the late nineteenth century, powerful monopolies dominated the economy. J.P. Morgan Bank, Standard Oil (J.D. Rockefeller) U.S. Steel, (Andrew Carnegie). This led to extreme levels of inequality; high profit for firms, low wages and high prices for consumers. This led to government intervention in splitting up monopoly power and preventing the abusive strategies of monopolies (e.g. price gouging, aggressive takeovers). In the twenty-first century, the challenge will be to moderate the monopoly power of big tech, like Apple, OpenAi, Facebook and Google.

It is worth noting that countries with free health care and extensive welfare state have higher life expectancy than the US, which has a mixture of public and private provision.

Cons of socialism

1. Lack of incentives. If an economy has high rates of progressive taxation, it could cause disincentives to work and setting up business. Entrepreneurs may feel that if the government is taking a high percentage of their profits, they would prefer not to take the risk or work abroad. In the modern world, it is easier for the super-rich to live abroad in tax havens and free-ride on others who pay tax. If tax rates are too high, they can be self-defeating and fail to significantly increase tax revenues. The Economist states that:
   • “Ms Ocasio-Cortez has floated a tax rate of 70% on the highest incomes, but one plausible estimate puts the extra revenue at just $12bn, or 0.3% of the total tax take” – Millenial socialism, (2019)
   • Another example is the experiment of French President Hollande, who imposed a top rate of income tax of 75% on incomes over €1m, however, the tax raised only meagre sums as many sought to avoid paying and it was later dropped (1).
2. Wealth taxes don’t work. Socialists often argue for wealth taxes on the rich, but the problem is that they tend to raise relatively little money and can have the effect of discouraging people from living in that country. (Wealth taxes)
3. Government failure. In an ideal world, the government would be successful in regulating firms, labour markets and running public industries. However, government intervention is prone to government failure and an inefficient allocation of resources. For example, labour market regulations such as high minimum wages or maximum working week could lead to unemployment and a lack of flexibility which firms need to deal with a sudden increase in demand. If firms are highly regulated, it is an extra cost which may discourage investment and lead to lower economic growth.
4. Welfare state can cause disincentives. If a welfare state is too generous, it is argued it may create a disincentive to get a job and therefore it can reduce the labour force and individual effort. See more: Poverty trap
5. Powerful unions can cause labour market antagonism. Ideally, socialism aims at a more harmonious society. However, if the socialist policies are geared towards strengthening trade unions and aiming for perfect equality, it can lead to antagonistic labour relations with a ‘them and us’ mentality – workers against owners. This attitude can cause time lost to strikes and unproductive factories. For example, in the 1970s, the UK labour market was characterised by poor labour relations due to distrust between unions and the owners of companies. Even public ownership is not guaranteed to solve industrial relations. The ownership doesn’t matter to workers if they feel they are getting a bad deal from their government employers.
6. Rationing of health care. In a publicly-funded health care system like the UK, doctors usually face greater financial constraints, some non-urgent operations will be rationed, and there are longer waiting lists than in a private system.
7. Difficult to remove subsidies/government benefits. Milton Friedman argued that “nothing was so permanent as a temporary government subsidy”. A good example is farming subsidies. In the late 1920s and 1930s, US agriculture was in crisis so the Federal government agreed to give temporary support. However, over the years, government subsidies to farming in US has continued to grow. In 2019, US farmers got a record $22.4 bn in subsidies (NPR) Farming subsidies are not really seen as ‘socialism’ but it is a form of big government intervention giving money to a certain group.
8. No Creative Destruction. One of the big failures of the Soviet Union was that there was never a cost for failure and inefficiency. The government want to ‘protect’ jobs, even if the industry is not productive, so therefore resources get stuck in unproductive areas. In capitalism failure means the firm closes down, but this enables resources to move to new industries and firms.
9. Venezuela Example. Venezuela has one of the world’s largest oil reserves. A socialist government increased welfare spending to its supporters, but they spent more than tax revenues and this led to runaway inflation and a massive drop in GDP. A socialist government which prioritises spending, even when economy cannot afford it, can damage its own economy. See: Venezuela

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Conclusion

There are some aspects of the economy that the government can do better. For example, the provision of public goods like the justice system, public transport and health care. Progressive taxation and regulations can also help moderate the levels of inequality that can occur in a capitalist society. Ultimately, some degree of redistribution and provision of universal education and health care can benefit everyone in society. However, the big question is what is the optimal level of government intervention? When governments intervene in managing industry and the economy, it can often lead to inefficiencies and bureaucracy.

Which Countries are Socialist?

If we look at government spending as a share of GDP, we can clearly see that some European countries Greece, Italy and France have more than 50% of GDP (national income) spent by the state. Ironically, some French governments would not consider themselves to be socialist, but it is a big difference to say the United States where government spend 36% of GDP. China nominally a Communist country has just 33% of GDP.

If you look at the welfare state of Denmark, Norway and Sweden, it is quite extensive, with free health care, extensive pensions and benefits. However, the private sector still has quite a large role to play, and in this aspect of the economy, it is not socialist because the government does not own and manage key industries.

Does Bigger Government Lead to higher GDP per capita?

This shows that countries with higher tax share as a % of GDP tend to have higher GDP per capita. There are two ways of interpreting this. Higher tax and higher spending, helps to promote higher living standards. Or countries with higher real GDP per capita are able to collect more tax and spend on public services such as health and education.

Also, worth bearing in mind, GDP per capita doesn’t necessarily translate to higher living standards.

Related

• Socialism vs Communism
• Capitalism vs Socialism
• Different types of socialism
• Branches of economics

Tejvan Pettinger, Oxford, UK, www.economicshelp.org, 13 Sep 2019. Updated 9 Nov 2025

About The Author

Tejvan Pettinger

Tejvan Pettinger. Author of “Cracking Economics” “What Would Keynes Do?” – studied PPE Oxford University (1995-99) and works as an economics teacher and writer.

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