# Understanding Socialism: History, Theory, and Modern Examples

## What Is Socialism?

Socialism represents a populist economic and political framework rooted in the [collective](https://www.investopedia.com/terms/e/egalitarianism.asp) ownership of production means—such as machinery, tools, and factories—to satisfy human needs.

Unlike [capitalism](https://www.investopedia.com/terms/c/capitalism.asp), where business owners control production and remunerate workers, socialism promotes shared control and ownership among the working class, envisioning a more equitable society. By examining the historical evolution, theoretical underpinnings, practical challenges, and examples like the former Soviet Union, this article delves into the complex dynamics of socialism in contemporary and historical contexts.  

### Key Takeaways

*   Socialism is an economic system emphasizing collective or public ownership of the means of production, aiming for economic equality and reducing wealth disparities.
*   Socialist systems often feature central planning by the government, robust welfare systems, and social safety nets, providing essential services to citizens.
*   The debate between socialism and capitalism centers on property rights and control of production, with socialism advocating for collective control and capitalism emphasizing private ownership.
*   While few countries practice pure socialism today, many incorporate socialist elements; notable examples include China, Cuba, and North Korea, which blend socialism with varying degrees of market reforms.
*   The transition from socialist to capitalist systems involves privatization, where state-owned assets and functions are transferred to private individuals or entities.

![Socialism](https://www.investopedia.com/thmb/WvGmSmd-bWMo0RQm-UHfHVZRQm8=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/socialism_sourcefile-bbc6e75ce4904886b34aa931b3cea953.jpg)

*— NoNo Flores / Investopedia*

## Key Characteristics of Socialism

In a purely socialist system, all production and distribution decisions are made by the collective, directed by a central planner or government body. Worker cooperatives, however, are also a form of socialized production.

Socialist systems tend to have robust welfare systems and social safety nets so that individuals rely on the state for everything from food to healthcare. The government determines the output and pricing levels of these goods and services.

Socialists contend that shared ownership of resources and central planning provide a more equal distribution of goods and services and a more equitable society.  

## Forms and Governance in Socialist Systems

Common ownership under socialism may take shape through [technocratic](https://www.investopedia.com/terms/t/technocracy.asp), oligarchic, totalitarian, democratic, or even voluntary rule. A prominent historical example of a socialist country, albeit one run by communists, is the former Union of Soviet Socialist Republics (USSR), also known as the Soviet Union.

### Socialist Countries

*   China
*   Cuba
*   Laos
*   North Korea
*   Vietnam

Due to its practical challenges and poor track record, socialism is sometimes referred to as a utopian or “post-[scarcity](https://www.investopedia.com/terms/s/scarcity.asp)” system, although modern adherents believe it could work if only properly implemented.

They argue that socialism creates equality and provides security—a worker’s value comes from the amount of time they work, not in the value of what they produce—while capitalism exploits workers for the benefit of the wealthy.

### Ideals

Socialist ideals include:

*   Production for use, rather than for [profit](https://www.investopedia.com/terms/p/profit.asp)
*   An equitable distribution of [wealth](https://www.investopedia.com/terms/w/wealth.asp) and material resources among all people
*   No more competitive buying and selling in the market
*   Free access to goods and services

As an old socialist slogan describes it, “From each according to ability, to each according to need.”

> **Important**
>
> While socialism calls for collective or shared ownership of the means of production, it does not imply that there is no private ownership of personal property. Thus, corporations and factories would be shared among the members of society, but individuals and households would still own their own personal effects.

## The Evolution of Socialist Thought

![Socialism](https://www.investopedia.com/thmb/gHd5NP_k-_Di76ImJgLIzChMLEc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Socialism_FINAL-c253ea5f4bbc43dfbefa67b382c3c42d.png)

*— Hilary Allison / Investopedia*

Socialism as a system of shared resources and collective production dates back to the earliest human civilizations. Tribal or clan-based societies would often work for the common good and work together to produce enough food and supplies for the entire population.

Collective agriculture persisted for thousands of years. This was replaced in many places by a sort of feudal system, whereby landed nobility (lords) ruled over peasants (serfs) who worked the land without owning it.

### Historical Foundations of Socialism

Socialism’s intellectual roots date back to “Plato’s Republic,” in which he described a collective society. Centuries later, Thomas More’s “Utopia” echoed Platonic ideals in its depiction of an imaginary island where people live and work communally.

Socialism was a direct response to the Industrial Revolution, which brought enormous economic and social change to Great Britain and the rest of the world. As industrialists grew wealthy on the labor of workers who increasingly lived in poverty, socialism emerged as an alternative to capitalism, one that could improve life for the working class.

### Socialism in Contemporary Context

Modern socialism developed in opposition to the excesses and abuses of liberal individualism and capitalism.

In the late 18th and 19th centuries, early capitalist economies in Western Europe saw rapid industrial production and economic growth. Some individuals and families rose to riches quickly, while others sank into poverty. Capitalism created income inequality and spurred other social concerns.

The most famous early socialist thinkers were Robert Owen and Henri de Saint-Simon, and later [Karl Marx](https://www.investopedia.com/terms/k/karl-marx.asp) and then [Vladimir Lenin](https://www.investopedia.com/terms/v/vladimir-lenin.asp). It was primarily Lenin who expounded on the ideas of earlier socialists and helped bring socialist planning to the national level after the 1917 Bolshevik Revolution in Russia.

Following the failure of socialist central planning in the former Soviet Union and Maoist China during the 20th century, many modern socialists adjusted to a high regulatory and redistributive system sometimes referred to as market socialism or democratic socialism.

> **Fast Fact**
>
> Critics of socialism contend that it is based on faulty principles and ignores human nature.

## Comparing Socialism and Capitalism

Capitalist economies (which today are often synonymous with the [free-market](https://www.investopedia.com/terms/f/freemarket.asp) or [market economies](https://www.investopedia.com/terms/m/marketeconomy.asp)) and socialist economies differ by their logical underpinnings of the structures of ownership and production.

Socialists and free-market economists tend to agree on fundamental [economics](https://www.investopedia.com/terms/e/economics.asp)—the supply and demand framework, for instance—while disagreeing about its proper adaptation and how commodities should be produced.  

Functionally, socialism and free-market capitalism are often divided on two core issues: [property rights](https://www.investopedia.com/terms/p/property_rights.asp) and [control of production](https://www.investopedia.com/terms/f/factors-production.asp). In a capitalist economy, private individuals and enterprises own the means of production and have the right to profit from them. Private property rights are taken very seriously and apply to nearly everything.

In a purely socialist economy, the collective owns and controls the means of production; personal property is allowed, but in the form of consumer goods. Essential services like healthcare, education, and public transportation are administered for free by the government and funded through taxation.

### How Power is Distributed Under Socialism

In a socialist economy, public officials known as central planners may control the behavior of producers, consumers, savers, borrowers, and [investors](https://www.investopedia.com/terms/i/investor.asp) by taking over and regulating trade, the flow of capital, and other resources. In a free-market economy, trade is conducted on a voluntary, or nonregulated, basis. However, there are many other ways to coordinate production in a collectivist fashion without such dominating control and loss of personal autonomy.

### Individual Autonomy and Central Planning in Socialism

Market economies rely on the separate actions of self-determining individuals to determine production, distribution, and consumption. Decisions about what, when, and how to produce are made privately and coordinated through a spontaneously developed price system, and prices are determined by the [laws of supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp).

Proponents say that freely floating market prices direct resources toward their most efficient ends. Profits are encouraged and drive future production.

Socialist economies rely on either the government or worker cooperatives to drive production and distribution. Consumption is regulated, but it is still partially left up to individuals. The state determines how main resources are used and taxes wealth for redistributive efforts.

Socialist economic thinkers consider many private economic activities to be irrational, such as [arbitrage](https://www.investopedia.com/terms/a/arbitrage.asp) or [leverage](https://www.investopedia.com/terms/l/leverage.asp), because they do not create immediate consumption or use. Still, Marx saw that capitalism was rife with contradictions, class conflict, and self-destructive competition. As a result, he saw socialism as the logical next phase of human political economy.

> **Fast Fact**
>
> Several philosophical questions also lie at the heart of the debate between socialism and capitalism: What is the role of government? What constitutes a human right? What roles should equality and justice play in society?

## Socialism vs. Communism

### Similarities

[Communism](https://www.investopedia.com/terms/c/communism.asp) and socialism are umbrella terms referring to two left-wing schools of economic thought. Both oppose capitalism, but socialism predates the “Communist Manifesto,” an 1848 pamphlet by Marx and [Friedrich Engels](https://www.investopedia.com/terms/f/friedrich-engels.asp), by a few decades.

They are both economic philosophies that advocate for public ownership, particularly over the means of production and the distribution and exchange of goods in a society.

And both philosophies run contrary to free-market capitalism, which, they contend, exploits workers and creates a widening gap between rich and poor.

### Differences

There are differences between socialism and communism, however. In fact, communism can be thought of as a strict and all-encompassing version of socialism.

Under communism, all property is communally owned; private property doesn’t exist. Under socialism, individuals can still own private property.

Marx predicted that a violent worker uprising against the middle and upper classes would bring about the communist state, whereas socialists tend to seek change and reform without overthrowing the prevailing social and political structure.

And, according to communist theory, workers should be given what they need, while under socialist theory, they are to be compensated for their level of contribution to the [economy](https://www.investopedia.com/terms/e/economy.asp).  

## Debating the Merits of Socialism vs. Capitalism

### Socialist Claims

There are many points of contention between socialists and capitalists. Socialists consider capitalism and the free market to be unfair and possibly unsustainable. Most socialists contend that market capitalism is incapable of providing enough subsistence to the lower classes. They contend that greedy owners suppress wages and seek to retain profits for themselves.

### Capitalist Claims

Proponents of market capitalism counter that it is impossible for socialist economies to allocate scarce resources efficiently without real market prices. They claim that the resultant shortages, surpluses, and political corruption will lead to more poverty, not less. Overall, they say, socialism is impractical and inefficient, suffering in particular from two major challenges.

A main challenge for socialism, known as the "incentive problem," is that few want to take on unappealing jobs like sanitation work. That is, socialist planners cannot incentivize laborers to accept dangerous or uncomfortable jobs without violating the equality of outcomes.

More critical is the calculation problem, from Ludwig von Mises' 1920 article, which argues socialism can't perform economic calculations without market prices. Socialists, wrote Mises, are unable to perform any real economic calculation without a pricing mechanism. Without accurate factor costs, no true accounting may take place. Without [futures markets](https://www.investopedia.com/terms/f/futuresmarket.asp), capital can never reorganize efficiently over time.

## Can a Country Be Both Socialist and Capitalist?

While socialism and capitalism seem diametrically opposed, most capitalist economies today have some [socialist aspects](https://www.investopedia.com/articles/retirement/122916/are-social-security-benefits-form-socialism.asp). Elements of a market economy and a socialist economy can be combined into a [mixed economy](https://www.investopedia.com/terms/m/mixed-economic-system.asp).

In fact, most modern countries operate with a mixed economic system; government and private individuals both influence production and distribution.

Economist Hans-Hermann Hoppe stated there are two economic archetypes: socialism and capitalism, and real systems combine both.

But because of the archetypes’ differences, there is an inherent challenge in the philosophy of a mixed economy and it becomes a never-ending balancing act between predictable obedience to the state and the unpredictable consequences of individual behavior.

> **Fast Fact**
>
> The Great Recession and the COVID-19 pandemic have increased interest in the government creating more opportunities and increasing the social safety net for all Americans. These are hallmarks of socialist policy, and not everyone agrees with such ideas.

## How Mixed Economies Develop

Mixed economies are still relatively young, and theories around them have only recently been codified. “The Wealth of Nations,” [Adam Smith](https://www.investopedia.com/updates/adam-smith-economics/)’s pioneering economic treatise, argued that markets were spontaneous and that the state could not direct them or the economy.

Later economists, including [Jean-Baptiste Say](https://www.investopedia.com/terms/j/jean-baptiste-say.asp), F.A. Hayek, [Milton Friedman](https://www.investopedia.com/terms/m/milton-friedman.asp), and [Joseph Schumpeter](https://www.investopedia.com/terms/j/joseph-schumpeter.asp), would expand on this idea.

However, in 1985, political economy theorists Wolfgang Streeck and Philippe C. Schmitter introduced the term “economic governance” to describe markets that are not spontaneous but have to be created and maintained by institutions. To pursue its objectives, the state needs to create a market that follows its rules.

### Frameworks for Mixed Economies

Historically, mixed economies have followed two trajectories:

The first trajectory assumes that private individuals have the right to own property, produce, and trade. State intervention has developed gradually, usually in the name of protecting consumers, supporting industries crucial to the public good (in fields like energy or communications), providing welfare, or other aspects of the social safety net. Most Western democracies, such as the United States, follow this model.

The second trajectory relates to states that evolved from pure collectivist or totalitarian regimes. Individuals’ interests are considered a distant second in importance to state interests, but elements of capitalism are adopted to promote economic growth. China and Russia are examples of the second model.

> **Fast Fact**
>
> Private businesses now produce more than half of China’s gross domestic product (GDP) and most of its exports.

## Examples of Socialist Nations

### China

Today, very [few countries are close to pure socialism](https://www.investopedia.com/articles/investing/081514/socialist-economies-how-china-cuba-and-north-korea-work.asp). Perhaps China is the most prominent example, with a communist government that effectively [nationalizes](https://www.investopedia.com/terms/n/nationalization.asp) many of the nation’s key industries.

State-owned enterprises dominate China's economy, but capitalist steps like Shanghai's zones allow private companies to compete.

### Cuba

Cuba remained closer to a Marxist-Leninist socialist economy, following its communist revolution in 1959 and the installation of Fidel Castro as its leader. After Castro’s death, however, Cuba, too, saw some liberalization.

In 2019, Cubans voted for a new constitution that granted private property rights and greater access to free markets, while preserving the socialist political system.

### North Korea

The last remaining Marxist-Leninist socialist economy that has not seen any reforms is that of North Korea. The country remains ruled by a communist dictatorship and a closed [command economy](https://www.investopedia.com/terms/c/command-economy.asp) governed by strict central planning.

Laos, another country in Asia, is also a socialist state, but is more open than North Korea.

## Transitioning From Socialism

A nation needs to transfer the means of production to transition from socialism to free markets. The process of transferring functions and assets from central authorities to private individuals is known as [privatization](https://www.investopedia.com/terms/p/privatization.asp).

Privatization occurs whenever ownership rights transfer from a coercive public authority to a private actor, whether it is a company or an individual.

Different forms of privatization include contracting out to private firms, awarding franchises, and the outright sale of government [assets](https://www.investopedia.com/terms/a/asset.asp), or [divestiture](https://www.investopedia.com/terms/d/divestiture.asp).

### Contracting Government Control

Sometimes, privatization isn't true privatization. Case in point: private prisons. Rather than completely ceding a service to competitive markets and the influence of supply and demand, private prisons in the United States are actually just a contracted-out government [monopoly](https://www.investopedia.com/terms/m/monopoly.asp).

The scope of functions that form the prison is largely controlled by government laws and executed by government policy. It is important to remember that not all transfers of government control result in a free market.

> **Fast Fact**
>
> Cuba has moved toward privatizing many aspects of its economy, incorporating more capitalism into its society. In early 2021, it began allowing people to work in jobs in over 2,000 private sectors, up from 127.

## Privatizing a Socialist Economy

Some nationwide privatization efforts have been relatively mild, while others have been dramatic. The most striking examples include the former satellite nations of the Soviet Bloc after the collapse of the USSR and the modernization of the post-Mao Chinese government.

### Required Reforms

The privatization process involves several different kinds of reforms, not all of them completely economic.

*   Enterprises need to be deregulated and prices need to be allowed to flow based on [microeconomic](https://www.investopedia.com/terms/m/microeconomics.asp) considerations.
*   Tariffs and import/export barriers need to be removed.
*   [State-owned enterprises](https://www.investopedia.com/terms/s/soe.asp) need to be sold.
*   [Investment](https://www.investopedia.com/terms/i/investment.asp) restrictions must be relaxed.
*   State authorities must relinquish their individual interests in the means of production.

The logistical problems associated with these actions have not been fully resolved, and several different theories and practices have been offered throughout history.

### Pitfalls of Change

Should these transfers be gradual or immediate? What are the impacts of shocking an economy built around central control? Can firms be effectively depoliticized?

As the struggles in Eastern Europe in the 1990s show, it can be very difficult for a population to adjust from complete state control to suddenly having political and economic freedoms.

In Romania, for example, the National Agency for Privatization was charged with the goal of privatizing commercial activity in a controlled manner. Private ownership funds, or POFs, were created in 1991.

The state ownership fund, or SOF, was given the responsibility of selling 10% of the state’s shares each year to the POFs, allowing prices and markets to adjust to a new economic process.

But initial efforts failed as progress was slow and politicization compromised many transitions. Further control was given to more government agencies and, over the course of the next decade, a [bureaucracy](https://www.investopedia.com/terms/b/bureaucracy.asp) took over what should have been a private market.

These failures are indicative of the primary problem with gradual transitions. When political actors control the process, economic decisions continue to be based on noneconomic justifications.

A quick transition may result in the greatest initial shock and the most initial displacement, but it results in the fastest reallocation of resources toward the most valued, market-based ends.

## Is There Socialism in the U.S. Today?

Yes. Social welfare programs such as food stamps, unemployment compensation, and housing assistance can be described as socialist. It can also be argued that government programs like Medicare and Social Security are, too. There are also socialist organizations in the U.S., such as the Democratic Socialists of America, which counts among its members Reps. Alexandria Ocasio-Cortez (D-N.Y.), Rashida Tlaib (D-Mich.), Cori Bush (D-Mo.), and Jamaal Bowman (D-N.Y.) of the House of Representatives. And Sen. Bernie Sanders (I-Vt.) is a self-described democratic socialist.

Other examples of socialism in the U.S. include organizations like worker co-ops, [credit unions](https://www.investopedia.com/terms/c/creditunion.asp), public libraries, and public schools.

## What’s the Difference Between Social Democracy and Democratic Socialism?

Social democracy is based on maintaining a capitalist economic system but blunting its excesses via regulation and addressing inequality with government-run social programs—in a sense, humanizing capitalism. Social democracies exist today in [Denmark, Finland, Norway, and Sweden](https://www.investopedia.com/articles/investing/100714/nordic-model-pros-and-cons.asp).

Democratic socialism has a vision of a society and economy that is democratic, not authoritarian, in which individuals have more of a say than large corporations in how the economy is run. It is committed to finding ways to transform an economy from capitalism to socialism. As the [website](https://www.dsausa.org/about-us/what-is-democratic-socialism/) of the Democratic Socialists of America notes, “Our vision pushes further than historic social democracy and leaves behind authoritarian visions of socialism in the dustbin of history....We want to collectively own the key economic drivers that dominate our lives, such as energy production and transportation.”

## Is Socialism Better Than Capitalism?

This question is a matter of debate and political ideology.

Capitalism has seen the greatest rise in wealth and standards of living in human history, accompanied by innovation and invention. However, capitalism—driven by fierce competition for profits and market share—has also been blamed for rising wealth disparities, social inequalities, alienation, exploitation, and the misery of the working class.

Socialism, on the other hand, promises egalitarianism by returning the means of production to the laboring class. In doing so, wealth disparities are greatly minimized and society as a whole may flourish. However, collective ownership and less competition might put a damper on innovation and technological progress. Furthermore, people are often wary of giving up personal freedom (although it may benefit the greater good) as governments direct production and consumption choices.  

## Which Countries Are Socialist?

Today, most countries in the world feature some aspects of socialism—even in the United States, but especially in countries found in Europe and Asia. Only a few are full-blown pure socialist (Marxist-Leninist communist) economies: the People’s Republic of China, Cuba, Laos, Vietnam, and North Korea. (The USSR also was, but the Soviet Union collapsed in the 1990s.)

## The Bottom Line

The economic and political system of socialism has been a part of human existence, in theory or practice, for many centuries. It espouses the collective ownership of the means of production and places the importance of state control above that of the individual.

Proponents believe that it creates equality and provides workers with security. Critics claim that it neglects essential human behavior. Socialism contrasts with capitalism, a system based on a free-market economy and private ownership.

> **Article Sources**
>
> 1.  Luc Bovens and Adrien Lutz, via SSRN. “[‘From Each According to Ability; To Each According to Needs’ Origin, Meaning, and Development of Socialist Slogans](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3312190).” _History of Political Economy_, Vol. 51, No. 2 (2019), Pages 237–257.
>     
> 2.  History.com. “[Socialism](https://www.history.com/topics/industrial-revolution/socialism).”
>     
> 3.  History.com. “[How Are Socialism and Communism Different?](https://www.history.com/news/socialism-communism-differences)”
>     
> 4.  Mises Institute. “[Economic Calculation in the Socialist Commonwealth](https://mises.org/library/book/economic-calculation-socialist-commonwealth).”
>     
> 5.  Mises Institute. “[A Theory of Socialism & Capitalism](https://cdn.mises.org/Theory%20of%20Socialism%20and%20Capitalism,%20A_4.pdf).”
>     
> 6.  Encyclopœdia Britannica. “[The Wealth of Nations](https://www.britannica.com/biography/Adam-Smith/The-Wealth-of-Nations).”
>     
> 7.  Wolfgang Streeck and Philippe C. Schmitter, via JSTOR. “[Community, Market, State—and Associations? The Prospective Contribution of Interest Governance to Social Order](https://www.jstor.org/stable/522410).” _European Sociological Review_, Vol. 1, No. 2 (September 1985), Pages 119–138.
>     
> 8.  Asialink Business. “[China’s Economy](https://asialinkbusiness.com.au/china/getting-started-in-china/chinas-economy?doNothing=1).”
>     
> 9.  Reuters. “[What Is Old and New in Cuba’s Proposed Constitution](https://www.reuters.com/article/us-cuba-constitution-explainer/explainer-what-is-old-and-new-in-cubas-proposed-constitution-idUSKCN1QA273).”
>     
> 10.  The Borgen Project. “[The Opening of Cuba’s Private Sector](https://borgenproject.org/cubas-private-sector/).”
>      
> 11.  International Monetary Fund eLibrary. “[The Romanian Economic Reform Program](https://www.elibrary.imf.org/view/journals/001/1991/080/article-A001-en.xml).”
>      
> 12.  World Population Review. “[Democratic Socialist Countries 2024](https://worldpopulationreview.com/country-rankings/democratic-socialist-countries).”
>      
> 13.  Democratic Socialists of America. “[What Is Democratic Socialism?](https://www.dsausa.org/about-us/what-is-democratic-socialism/)”