Question

As socialist economies transition toward capitalist systems, the government commonly sells publicly controlled companies and privatizes these state-owned enterprises. Which type of economy is expected to generate higher values for the privatized assets, a planned socialist economy or a market socialist economy? Please explain your response.

Answer 1

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Economic activities are those that involve ‘money’. These activities are undertaken to fulfil an endless list of ‘wants’ with the help of limited resources which are , given ( meaning fixed ) at any point of time. The basic economic problem faced by economic systems across the world , though centuries , is that of alternating the resource use from satisfying one want or another—this leads to the need for decision making or the concept of ‘opportunity cost’. A resource , for example land may have many uses—agricultural, commercial, can be used as a public park and so on. If the resource owner decides to put it to agricultural use the next best alternative foregone could be commercial use ( all other alternatives are not considered).

The decision should be taken keeping in mind that the economic system present allows the resource to take the liberty to take such decisions. If the system is controlled by a public approved association of people who take decisions in the interest of the community as a whole, then the individual resource owner has little power to take decisions. On the other hand if the decision is taken in a system where individual rights are recognised then the resource owner decides the best use for his resource.

An economic system is composed of various sectors – primary (dealing with nature—agriculture), secondary (dealing with industries ) and tertiary (that deals with services like transport, finance ). The economic activities of these sectors like consumption, production, exchange and distribution determine the total output produced in the economy and these act as the contributors to GDP of the economy. Higher and more consistent is the GDP , higher is the growth rate. The development of nation depends largely upon the contribution of these sectors to the economic growth.

There are three types of economic systems- 1. Capitalism. 2. Socialism 3. Mixed Economy.

Capitalism consists of the operation of free market forces of demand and supply where there is a right to own resources ( private property ) and the right to inherit the resources from the earlier generation – right to inheritance , it is also the system which is governed by profit motive and ruled by ‘consumer needs and want satisfaction’. The sellers are guided by the low cost-high profit adage and consumer are guided by the variety of choice available as well as by the market demand and supply for various goods and services. Resource owners can freely utilise their resources form one use to another use. This give them freedom of enterprise and free to choice any occupation they prefer—guided by price mechanism. However , absolute ownership of resources is only found theoretically, practically some resources are owned by government .

Socialism is an economic system where the resources are owned by the ‘state’ or the authority acting on behalf of the people of the country. ‘Planning’ is the principle on which socialism is based. The uses of resources are controlled and coordinated in away to maximise the community welfare rather than individual welfare. The central authority governs the uses of the resources and ensures they are put to use efficiently such that the ‘social welfare’ is gained rather than private welfare. Hence all sectors—primary , secondary and tertiary, are given targets and objectives that they have to fulfil. Inequalities in income distribution is sought to be reduced through an active system of ‘equality ‘ for all in terms of ‘pay according to work’ programme. Long term planning is the tool though which the state seeks to maintain a consistent level growth for the economy and a rise in GDP.

Mixed economy is an system where the private sector –guided by the profit motive and the public sector—guided by social welfare coordinate to ensure the working of the economy. However, the private sector is regulated by the government. This type of economic system is found in most world economies .

Transition from Socialism to Capitalism:

   Economies sometimes prefer a change of the economic systems—the most notable being a shift from the centrally systematised socialist set up to the market oriented , decentralised capitalist system. This could stem from the inherent structural problems of the socialist system which inhibits the growth of the individual vis a vis the community. This has led to class differences and a monopolist like governing body emerged that started taking undue advantage of community welfare . As also, the market based capitalist system is more efficient in raising the value of private assets than the socialistic set up.

If the government were to handle all the sectors, control and coordinate the activities it would only add to the burden of governance and slow down the economic growth.

In a liberalised set up when transition is taking place the government privatises industries , disinvests ( selling off of public sector shares to private sector) and even undertakes total privatisation of hitherto publicly held—governmental enterprises in a bid to bring in efficiency in resource use, competitiveness , as well as to raise revenues—the proceeds that it gets from such privatisation programmes.

However, a change is not easy, there could be situations of open unemployment due to privatisation, this may lead to loss in welfare for the community as a whole. Certain fiscal policy measures like progressive taxation, have to be adopted such that the entrepreneurial class that might benefit from such a move does not make undue profits at the cost of the underprovided, vulnerable classes who may lose out in such a move .

The private sector with its chief goal of profit motive will lead to efficiency in allocating the available resources from non-beneficial to commercially profitable uses thus increasing the value of the assets. The profitability of the asset makes it more attractive for further investment since investment in capitalist economy is more in the form of induced—based on expected rate of return. A transition allows for greater flow of funds both within the domestic capital market as well as the foreign sector, it will reduce the burden on state and brings in greater tax revenue for government. This also allows the state to perform important functions like defence, administration, law and order, provision of public goods and so on with greater efficiency since a major pert of the economy is now vested in the hands of the private sector which is guided by efficiency, competitiveness and price mechanism.