Running head: Socialism and State Intervention

Socialism and State Intervention

Michael Morgan
MBA514PA2016FALL02PS1: Global Economics/Southwestern College
Dr. Joel Light
September 4, 2016

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Planned Socialism

Planned Socialism is an economic system in which the state makes all economic
decisions, what is produced, how much is produced, the distribution of resources, and the
incentives to motivate workers. According to Gregory and Stuart (2014) a planned socialism
economic system is characterized by public ownership of the factors of production, decision
making is centralized and is coordinated be a central plan, which issues binding directives to the
systems participants, both material and moral incentives are used to motivate participants, and
public choices are made by a dictator. Neither definition covers all the factors of the performance
of planned socialism which include, income distribution, efficiency, economic growth, stability,
and viability. These factors must be included when defining planned socialism for without them
one cannot truly understand what planned socialism is and how and why it could work.
Income distribution in a planned socialism economy is controlled by the government. In a
planned economic system, wages, perks, and rewards are dispersed based on the social value of
the service provided (Mfisher, 2012). Many socialist countries have a formal structure of pay
norms across industries with higher rewards for those involving muscle power, such as mining or
heavy engineering, and much lower rewards for activities such as medicine or education which
were physically less demanding and often disproportionately women (Flemming and
Micklewright, 1999). The hierarchies, the upper management and/or owners, also had income
distribution controlled by their qualifications, seniority, and responsibility which is also
applicable to fringe benefits as well as basic pay (Flemming and Micklewright). According to
Kngiht and Song (1990, p. 9) in Chinas socialist economy, job assignments are made normally
without regard to the wished of the employer or employee and without official consent, which is
rarely given, a change in employment is practically impossible (as cited in Flemming and

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Micklewright). According to Atkinson and Micklewirght (1992, pp. 38-39) in the Soviet Unions
socialist economy, employees are allowed to choose their jobs based on their skill or profession,
and are able to quit any time they choose (as cited in Flemming and Micklewright).
Efficiency refers to how well resources are allocated. In a planned economic system a
board or just a dictator would decide on how to allocate the resources of the country. The board
would have to know what and how much of everything everybody would want, when they would
buy, and the approximate prices they would be willing to pay for all sorts of goods and services
(Prentis, 1945). Without such information the objectives of a planned economy could not be
attained; namely, to keep everybody employed at satisfactory wages and to eliminate waste by
producing neither more nor less than was actually needed (Prentis). The board would also be
expected to increase production and development all sorts of new and improved articles at lower
and lower prices so as t raise the standard of living and give everybody more leisure for
recreation (Prentis).
Economic growth cannot be achieved through a planned economic system: socialism.
With the government allocating resources, setting prices on goods and services, and not letting
people work where they want, the economy cannot grow, for the socialist countrys leaders keep
the money for themselves instead of reinvesting it back into the firms for innovation or new ways
of doing things to lower prices and be competitive with other similar businesses.
Planned economies have greater stability than other types of economies. This is due to
investment spending being subject to the control of planners and will probably b maintained at a
fairly stable rate, material balance planning will lead to an approximate balance of labor supplies
and demands, supplies and demands for consumer goods will be subject to a great deal of state

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control, and firms operating under pressure to meet output targets will provide workers with
guaranteed jobs (Gregory and Sturat).
Planned economies have all but disappeared except for a couple of countries; N. Korea
and Cuba (Gregory and Stuart). Most people argue that planned socialism has failed, but a few
would argue that it failed because it was not run by the right people and if they could do it again,
it would work magnificently (Gregory and Stuart).
The performance of a planned economic system is flawed in many ways. No government
planning board could ever predict how much goods or services would be needed by its citizens or
when the goods or services would be needed. With not letting the public work at jobs they are
skilled at and instead appointing workers into positions of authority based on loyalty, the
businesses will eventually go out of business. The leaders of this type of economic system tend
to keep profits for themselves instead of reinvesting in the company thus keeping economic
growth stagnant as new money is not pumped into the economy or innovations are not created to
lower prices.
Cooperative Model
The cooperative model is a form of socialism put forth by Benjamin Ward published in
1958 (Gregory and Stuart, 2014). Resources are owned by the state and will be used by each
firm, for which a fee will be paid to the state (Gregory and Stuart). Prices for both producer
goods and consumer goods will be determined by supply and demand in markets and enterprises
will be managed by the workers who will maximize the dividend per worker in the enterprise
(Gregory and Stuart). Workers through an assembly will employ a managing director and retain
the power to make all the basic decisions of the enterprise (Gasper, n.d.).

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Unfortunately, when coops become large they begin to lose the cooperativeness among its
members meaning that most co-op members have no say in the companys day -to-day
operations, decision making has become highly centralized, thus causing workers to feel as if
they were in fact working for a capitalistic business (Gasper). Co-ops, inevitably bound by
market pressures, are thus pushed to become their own capitalists and so self-exploit (Marcuse,
2015). Co-ops are limited to non-competitive markets such as education, healthcare, police, fire
prevention, small crafts, the arts, and certain public activities such as mass transit, environmental
protection, and regulatory activities (Marcuse).
Co-ops can though illuminate the contradictory role of the state in collective activities
(Marcuse). Co-ops avoid exploitation by others in production and can be lessons in the
possibilities of self-management and immediate participatory democracy in action (Marcuse).
Workers welfare is materially enhanced, since the profits that the capitalist would have made as
a result of ownership of the firm become incomes of the 99%, which are proportionately
increased as that of the 1% is decreased (Marcuse). Since the workers control their own work
and make the decisions, this causes a decrease in alienation from their work and permits them to
flex their intellectual as well as their physical muscle (Marcuse).
State Intervention Monopolies and Stability
One of the roles of government is to intervene in the business world to prevent
monopolies and promote competition among firms (Manier, 2010). According to George Stigler
(2008) a monopoly is an enterprise that is the only seller of a good or service. One of the first
industries to be deemed a natural monopoly was the telecommunications industry, led by
AT&T (Manier). Such monopolies when left to its own accord will most likely choose to produce
at an output level that is much lover and provide their product at a price that is much higher than

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would result from a purely competitive industry, meaning a monopolist will produce where its
price is greater than its marginal cost indicating an under-allocation of resources towards the
product which assures the monopolist maximum profits, but at the cost to society of less overall
consumer surplus or welfare (Welker, 2013).
One of the ways the United States government responded to monopolies was by creating
the Sherman Antitrust Act of 1890. This Act made it illegal for any person or business to
monopolize trade, or to contract, combine or conspire to restrict trade (University of Groningen,
1991). In 1914 Congress passed the Clayton Act which gave more enforcement teeth to the
Sherman Antitrust Act (Gima, n.d.). The purpose of the Clayton Act was to prohibit price
discrimination, regulate exclusive dealing contracts, tying agreements, mergers and acquisitions,
and interlocking directorates (Gima).
According to John Maynard Keynes macroeconomic stability can only happen with
government intervention during economic downturns (as cited in Gregory and Stuart, 2014). It is
the responsibility of government to raise or lower spending and taxes or control investment
spending to ensure full employment (Gregory and Stuart).
Government intervention is a necessity when a business forms a monopoly. A monopoly
in a capitalistic economic system does not promote competition and growth and that is what
drives a capitalistic system. A monopoly takes advantage of the public to maximize its profits
and does not care what the consequences are to society. During a downturn in the economy, the
government needs to intervene to halt the downturn and to stimulate the economy in order to
create more jobs and promote growth.
State Intervention Public Goods and Income Distribution

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Public goods are goods such as national defense, police and fire protection, a legal
system, dams, flood control projects, and the like, in efficient quantities that everyone uses and
nobody can be excluded (Gregory and Stuart, 2014). Gregory and Stuart (2014) state that
logrolling and vote trading, which is when one group favors a public-expenditure and offers their
support to another group if in turn that group will form a coalition to get the public-expenditure
passed, and rational ignorance, the public being ignorant of public choice issues such as police
and fire protection, cause governments to authorize public programs that are not economically
efficient.
Public choice theory is the use of economic analysis to scrutinize the political process and
treats political actors as if they were consumers in a free market seeking to maximize their own
utility, rather than the public welfare (Larkin, n.d.). Public choice theory assumes everyone is
selfish, egoistical, and out solely for himself, regardless of the effect on others that his actions
may have (Larkin).
Income distribution is how fairly an economic system distributes income among
households (Gregory and Stuart, 2014). According to Janet Yellen (2014) the distribution of
income and wealth in the United States has been widening more or less steadily for several
decades, to a greater extent than in most advanced countries. By some estimates, income and
wealth inequality are near their highest levels in the past hundred years, much higher than the
average during that time span and probably higher than for much of American history before
then (Yellen). The past few decades of widening inequality can be summed up as significant
income and wealth gains for those living at the top and stagnant living standards for the majority
(Yellen).

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There is no such thing as the 99% and the 1%, as shown by a study by Thomas Hirshl of
Cornell University and Mark Rank of Washington University which shows that (as cited in
Mathews, 2015):
1. 70% of the population will have experienced at least one year within the top 20th
percentile of income.
2. 53% of the population will have experienced at least one year within the top 10th
percentile of income.\
3. 11.1% of the population will find themselves in the much-maligned 1% of earners for at
least one year of their lives.
This fluidity cuts both ways as more than half of American will experience a year of poverty by
the age of 60 (Mathews).
Public goods and public choice are necessary in any country. Unlike other countries, our
votes do matter in the United States, and even if the politicians go along with special interest
groups and pass laws, regulations, policies, or create new public goods, the public by voting can
certainly sway how the politician will vote on the issue for they want to stay in office and have
that power over how the country operates. Public goods are needed and will always be needed,
and the public hopes the government will somewhat do what is right and beneficial to the public.
The distribution of wealth may be widening, but if so, then the poverty stricken need to make
different choices and raise themselves out of poverty. I dont think the government needs to fix
anything, This is a capitalistic country and anyone can do anything they want to and make as
much money as they wish, it just takes hard work, motivation, and passion.

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References

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Courtneidge, J. (2014, January 22). Co-operative Socialism. Retrieved September 04, 2016, from
http://occupylondon.org.uk/co-operative-socialism-by-john-courtneidge/
Gasper, P. (n.d.). Are workers' cooperatives the alternative to capitalism? Retrieved September
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Gima, P. (n.d.). What Is the Sherman Anti-Trust Act and the Clayton Act? Retrieved September
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Mfisher. (2012, September 30). Income distribution in each type of economic system | eDisc.
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Prentis, H. (1945). Competitive Enterprise Versus Planned Economy (1st ed.). Retrieved from
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Welker, J. (2013, March 4). Monopoly prices to regulate or not to regulate, that is the question!
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