Farmers use land to grow things on. Factories are built on land. In a capitalist economy, land is generally owned by individuals or firms that are, in turn, owned by individuals. The income earned by owners of land is called rent. In a planned-socialist state, the land is generally owned by the state and any income that would have gone to owners of land in a capitalist economy goes to the state. By the way, there is considerable state ownership of capital and land even in capitalist economies.
For instance, we have federal, state, and local parks. We have the military services with all their bases and buildings and equipment like aircraft carriers and tanks and canons. But in a capitalist economy, private ownership of capital and land is by far the dominant form of ownership while it is all but nonexistent in a planned-socialist economy. The last resource is entrepreneurship. The entrepreneur is the owner of the firm. He or she contracts with providers of labor, capital, and land and pays them whatever wages, interest, and rent is owed them.
Of course, a firm has to pay for all sort of things they purchase from other firms. For instance, the power company produces electricity, much of which it sells to other firms that produce cars and shirts and corn. An automobile manufacturer buys tires, headlights, upholstery, paint, and all sorts of things that go into its cars. We call these things that firms buy from other firms intermediate products.
So what does the entrepreneur get out of all this? Profit, of course. Note what is different about profit as compared to the income to owners of the other resources. Those who provide labor services know what they will be paid, since the wage is agreed on in advance. So is interest and rent. But the entrepreneur does not know what profit is in advance. It could be a lot, it could be little, it could even be negative. Thus, the entrepreneur is the risk taker in any productive enterprise in a capitalist economy.
It is this risk-taking role of the entrepreneur that we need to focus on here. The entrepreneur may also manage the firm but this activity is a form of labor. He or she may also provide capital and land to the enterprise. In a planned socialist economy, there are no individuals who provide this resource, since there are no private enterprises. To summarize this first dimension over which capitalist and planned socialist economies differ, all productive resources are generally privately owned and controlled in a capitalist economy, while all non-labor productive resources are owned and controlled by the state in a planned-socialist economy with considerable control, though not ownership, of labor.
In the most fully implemented planned-socialist economies, there is no private property. It is true that individuals own clothes, furniture, kitchen appliances, and even tools, like hammers and screw drivers for use around the home as opposed to use in a productive enterprise like a factory or farm where they are forms of capital.
This experiment in pushing the system to extremes did not last long and it did not end well. Tens of millions starved. This kind of great leap forward was tried in Cuba during the mid to late s. That did not go well, either. The second dimension is the decision-making and information structure. The decision-making and information structure is highly decentralized in a capitalist economy but highly centralized in a planned-socialist economy.
In a capitalist economy like we have in the U. Each firm makes its own decisions about what to produce, how to produce, what prices to charge, and how their products will be marketed.
Consumers are all making their own decisions on what to buy, within the constraints of their budgets. No one is telling anyone what to do. If General Motors decides to stop producing cars and start producing bicycles instead, there is no one to tell them they cannot. Thus, decision making is decentralized with individual economic agents, producers and consumers, making their own independent decisions.
These individual decisions are based on information, which flows horizontally between market participants in a capitalist economy. Information is generally of three types. The first is price, which is determined by the forces of supply and demand. When you decide to look into buying a car, say, you are obviously going to be interested in the prices of various models.
Price is a very important form of information in a capitalist economy because price acts as a signal that drives resources. If the price of a good goes up, say because more people want to buy it, that will make producing it more profitable, so firms will devote more resources to producing it. Another way to put this is that price signals a change in scarcity. When a good or service or resource becomes more scarce, either because of an increase in demand or a decrease in supply, the forces of supply and demand drive the price up.
The increased price encourages producers to find ways to supply more and it encourages consumers to buy less, exactly the right responses to an increase in scarcity. Finally, price, as determined in a properly functioning market, is a measure of value. In other words, we use price as a measure of the value of all goods and services. Thus, we can meaningfully talk about how many dollars worth of cars a dealership sold last month even though it sold many different kinds of cars.
It is also meaningful to talk about the value of all cars sold in the U. And it is meaningful to add up all the prices charged for all the goods and services produced in the U. Another type of information is descriptive data.
That car you might be interested in buying has all sorts of characteristics that you would want to know about, like gas mileage, acceleration, leg room, trunk space, and so on. Note that each of these has its own unit of measure. Gas mileage is measured in miles per gallon. Acceleration is usually expressed as the time it takes to reach 60 miles per hour. Leg room in inches. Trunk space in cubic inches.
Unlike dollars, these measures are non-additive. That is, you cannot get meaningful information by adding gas mileage and trunk space, since each is measured in different units.
The third type of information is commands. Commands are common within firms in a capitalist economy and certainly within state structures like the military. However, they are relatively rare between the state and individual firms. The decision-making and information structure is highly centralized in a planned-socialist economy. The state in a fully-implemented planned-socialist economy controls every productive activity from the largest factory to the smallest retail outlet.
There are no individual firms or farms or shops. All are part of a single entity, the state. Thus, a factory producing gloves in Vladivostok and the grocery store in Kaliningrad eight time zones apart!
The state decided how many gloves that Vladivostok factory would produce, what resources it would get to produce those gloves, where the factory would send the gloves it produced, what price it would get for its gloves, and what prices it would pay for the resources and intermediate goods it used to produce its gloves.
At the same time, the state decided what that grocery store in Kaliningrad would sell, how much it would sell, and the prices it would receive for everything it sold. Thus, decision making on the production side of a planned-socialist economy is highly centralized.
Even on the consumption side, there is little decision-making autonomy for individuals relative to the autonomy individuals enjoy in a capitalist economy. Since the state decides what will be produced, it can give consumers very limited choices. In fact, consumption goods have always been very low on production priorities in these economies.
Further, for various reasons, the system results in shortages of most consumer products and services, including basic needs like housing. If the state planners detected the wait time getting shorter, they would order fewer apartments be constructed.
If the wait time got longer they would order more. So consumers have few choices to make and whenever they did go shopping, they would be confronted by empty shelves. Here is a picture I took in the shoe department of a Soviet department store. If you look closely at the picture, you will notice that there is exactly one shoe to choose from, perhaps in various sizes.
Finally, the state provides for free or at highly subsidized prices much of what consumers in a capitalist economy would have to purchase at market prices, including education K through Ph.
Workers in a planned-socialist economy receive very low wages. This works because there is almost nothing to buy. Instead, the state provides and, therefore, the state decides.
Information flows in a centralized decision-making structure such as this are primarily vertical. Commands flow down through the hierarchy to each enterprise and descriptive information flows back up as enterprises report on their progress in meeting these commands. There is little horizontal communication, and prices, which are set by the planners and not by markets, are of little importance because they convey little useful information, though consumers do have to take prices into account as they make their buying decisions, however constrained those decisions might be.
To summarize the differences in decision-making and information structures, capitalism has a relatively decentralized structure with individual economic agents producers and consumers making their own decisions based, in part, on horizontal flows of information between buyers and sellers in the form of prices and descriptive information.
I should point out, though, that even in the most free-market capitalist economies, there are some vertical flows of commands. I mentioned, for instance, that no one can tell General Motors that it cannot stop making cars tomorrow. Planned-socialist economies have relatively centralized decision-making and information structures with all productive units following the decisions of the state administrative hierarchy with mostly vertical flows of information in the form of commands flowing from the center to individual enterprises and descriptive information flowing from enterprises to the center.
Our third dimension is the motivation structure. There are two types of incentives that motivate us: material and non-material or moral. What is it that motivates economic actors to make economic decisions? For instance, what motivates us to work? Is it the wage we get paid? Wage is an example of a material incentive. So is a bonus.
Interest, rent, and profit from supplying non-labor factors of production are material incentives. Perhaps you are also motivated by a sense of duty to others. Or you may seek praise from your superiors. Or status. These are non-material or moral incentives. All economic systems rely primarily on material incentives. The difference is that there is relatively little use of moral incentives in capitalism and a whole lot in planned socialism. The final dimension is coordination.
In a capitalist economy like the U. And each consumer and each producer is making independent decisions without any guidance from a central authority. What coordinates all these independent decisions? By what miracle, for instance, do we go to the supermarket looking for apples and always find there a large selection of apples from which to choose but with plenty of room for all sorts of other products we might also want? In a capitalist economy, the market coordinates economic activity.
If producers supply more of a good or service than consumers are willing to buy, the excess supply drives the price down. As price falls, consumers become willing to buy more and producers find it less profitable to supply so much. This process continues until the quantity that producers bring to market is exactly matched by the quantity that consumers are buying.
If consumers want to buy more than producers are supplying, the price gets bid up making it more profitable for producers to supply to the market but, at the same time, discouraging consumption.
There are, of course, many consumers and many producers in a planned-socialist economy though all producers are mere branches of a single entity, the state , but there are no markets to coordinate activity. In other words, the market forces of supply and demand that determine what will be produced and how much of them to produce and the best way to produce them and what prices to charge are absent in a planned-socialist economy.
The plan takes close to a year to construct and requires a huge bureaucracy. It begins with a highly aggregated set of basic economic goals for the year and ends with a highly detailed set of instructions for every state enterprise factories, farms, hospitals, construction enterprises, transportation enterprises, shops on what to produce, how much to produce, how to produce, what resources it will be allocated, and what prices it will pay for resources and intermediate products, what prices it will pay for its products, and where to send its products.
Plan fulfillment is rewarded with bonuses about a third of total household income in the Soviet Union came from bonuses. Enterprise managers who do a good job fulfilling their plan were also rewarded with promotions. Failure to fulfill planned requirements means the loss of the bonus and possible demotions for managers. In the s, Cuba was a middle-income developing capitalist country. In all of Latin America and the Caribbean, only Uruguay, Argentina, and Venezuela had higher per capita incomes and then only by a small amount.
In other words, Cuba was a fairly well-off country, at least by Latin American and Caribbean standards. Other measures of living standard are even more impressive. In , Cuba had a car-ownership rate two and a half times that of the Latin American average. TV ownership was nearly seven times the Latin American average in Life expectancy was 64 years, 14 years higher than the Latin American average.
The number of doctors per capita was about on par with Europe and two and a half times the Latin American average. Finally, literacy was 79 percent while the Latin American average was 58 percent. Why, if Cuba was so prosperous, was there a revolution? A complete answer to this question would take us somewhat far from the main topic of this essay. A few observations will suffice for our purposes here. First, Cuba was relatively prosperous in the s because it had been even more prosperous in the s, according to Ward and Devereux During that time, Cuba had a fairly free-market environment and world sugar prices were high.
However, starting in the late s, a series of labor and product market regulations were imposed with the result that, by the s, markets had become badly distorted and inefficient. Also, the Great Depression caused world sugar prices to fall, which had a devastating impact on the Cuban economy, since sugar production was a mainstay of the economy.
Thus, from the late s through the s until , the Cuban economy, especially in terms of household consumption, stagnated and may have even shrunk. Another cause of discontent was that the distribution of income and wealth was extremely unequal.
Most of the wealth and income-earning opportunities were in Havana and a few other urban centers, and even in the cities there was substantial unemployment. Most of the people in the countryside depended on seasonal work in the sugarcane fields and whatever they could scrape from subsistence farming. While overall literacy was high relative to Latin American standards, in the rural areas literacy was very low. Finally, the Cuban people were suffering under a repressive and corrupt dictatorship since when Fulgencio Batitsta staged a military coup and suspended the constitution and all its guarantees of human rights.
By , Havana had become a mafia-dominated mecca for gambling and prostitution and much of the economy was dominated by U. There was widespread support from all classes to get rid of Batista.
There was not, however, widespread support for a socialist economy but Fidel Castro did not announce the socialist character of the Revolution until Since these were his stated goals, it would seem fair to evaluate the Revolution by reference to them.
Mesa-Lago divides the early socialist period into five stages, with the first four occurring in the first decade or so. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice.
Popular Courses. Key Takeaways Contrary to capitalism, socialist market economies produce goods based on usage values, with collective ownership shared by the entire country. In socialist economies, governments are charged with redistributing wealth and narrowing the gap between the poor and the rich. While no modern-day countries are considered to have a "pure" socialist system, Cuba, China, and North Korea have strong elements of socialist market economies.
Cuba's economy has also suffered greatly from U. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.
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Economics What are the main differences between a mixed economic system and pure capitalism? Economics Production in Command Economies. Socialist Economies: What's The Difference? Socialism: What's the Difference? Partner Links. Related Terms Marxism: Theory, Effects, and Examples Marxism is a set of social, political, and economic theories created and espoused by Karl Marx that became a prominent school of socialist thought.
Socialism Socialism is an economic and political system based on public or collective ownership of the means of production that emphasizes economic equality.
What Is an Administered Price? An administered price is the price of a good or service as dictated by a government, as opposed to market forces. What Is a Command Economy? A command economy is a system in which a central governmental authority dictates the levels of production that are permitted. Capitalism Capitalism is an economic system whereby monetary goods are owned by individuals or companies.
The purest form of capitalism is free market or laissez-faire capitalism. Here, private individuals are unrestrained in determining where to invest, what to produce, and at which prices to exchange goods and services. Centrally Planned Economy A centrally planned economy is an economic system in which decisions are made by a central authority rather than by market participants. Investopedia is part of the Dotdash publishing family.
On the heels of the announcement of the restoration of U. Read more about Cuba here. The easing of diplomatic hostilities between the United States and Cuba may work to lessen Cuban dependence on the Venezuelan regime, Ted Piccone notes. While there is little publicly available data regarding individual incomes, Richard Feinberg concludes , using a variety of indicators, that 40 percent of the Cuban labor force falls within a broadly defined middle class, though consumption remains depressed due to low government wages.
The first step in this process came in early February, according to Darrell West , when Netflix announced it would begin streaming in the island nation.
Audrey Singer explains how these demographic distributions play a key role in normalizing relations with Cuba. Currently, a visa lottery system allows 20, Cubans to emigrate every year to the United States, while others try to make the trek by sea—the U.
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