Importance of money in socialist economy

 In a socialist economy, the central authority owns and controls the means of production and distribution. All mines, farms, factories, financial institutions, distributing agencies (such as internal and external trade, shops, stores, etc.) means of transport and communications, etc., are owned, controlled and regulated by government departments and state corporations. Therefore, the pricing process in a socialist economy does not operate freely but works under the control and regulation of the central planning authority.

Theoretically, the role of money in a socialist economy is different from that in a capitalist economy.

Features of Socialism:

The main features of this system are detailed below.

(1) Public Ownership:

A socialist economy is characterised by public ownership of the means of production and distribution. There is collective ownership whereby all mines, farms, factories, financial institutions, distributing agencies (internal and external trade, shops, stores, etc.), means of transport and communications, etc. are owned, controlled, and regulated by government departments and state corporations. A small private sector also exists in the form of small business units which are carried on in the villages by local artisans for local consumption.

(2) Central Planning:

A socialist economy is centrally planned which functions under the direction of a central planning authority. It lays down the various objectives and targets to be achieved during the plan period. Central economic planning means “the making of major economic decisions—what and how much is to be produced, how, when and where it is to be produced, and to whom it is to be allocated—by the conscious decision of a determinate authority, on the basis of a comprehensive survey of the economic system as a whole.”

And the central planning authority organises and utilises the economic resources by deliberate direction and control of the economy for the purpose of achieving definite objectives and targets laid down in the plan during a specified period of time.

(3) Definite Objectives:

A socialist economy operates within definite socio-economic objectives. These objectives “may concern aggregate demand, full employment, satisfaction of communal demand, allocation of factors of production, distribution of the national income, the amount of capital accumulation, economic development…and so forth.” For achieving the various objectives laid down in the plan, priorities and bold targets are fixed covering all aspects of the economy.

(4) Freedom of Consumption:

Under socialism, consumers’ sovereignty implies that production in state- owned industries is generally governed by the preferences of consumers, and the available commodities are distributed to the consumers at fixed prices through the state-run department stores. Consumers’ sovereignty under socialism is confined to the choice of socially useful commodities.

(5) Equality of Income Distribution:

In a socialist economy, there is great equality of income distribution as compared with a free market economy. The elimination of private ownership in the means of production, private capital accumulation, and profit motive under socialism prevent the amassing of large wealth in the hands of a few rich persons. The unearned incomes in the form of rent, interest and profit go to the state which utilises them in providing free education, public health facilities, and social security to the masses. “As far as wages and salaries are concerned, most modern socialists do not aim at complete and rigid equality. It is now generally understood that the maintenance offered choice of occupation implies wage differentials.”

(6) Planning and the Pricing Process:

The pricing process under socialism does not operate freely but works under the control and regulation of the central planning authority. There are administered prices which are fixed by the central planning authority. There are also the market prices at which consumer goods are sold. There are also the accountings prices on the basis of which the managers decide about the production of consumer goods and investment goods, and also about the choice of production methods.

Money and Price Mechanism in a Socialist Economy:

The price mechanism has little relevance in a socialist economy because it is regarded as a distinguishing feature of a free market economy. In a socialist economy the various elements of the price mechanism— costs, profits and prices are all planned and calculated by the planning authority in accordance with the objectives and targets of the plan. Thus rational economic calculation or allocation of resources is not possible in a socialist economy. Let us find out how a socialist society solves the central problems of an economy, what, how and for whom to produce.

In a socialist state, it is the central planning authority that performs the functions of the market. Since all the material means of production are owned, controlled and directed by the government, the decisions about what to produce are taken within the framework of a central plan.

The decisions, as to the nature of goods to be produced and their quantities, depend upon the objectives, targets and priorities laid down by the central planning authority. The prices of the various commodities are also fixed by this authority. Prices reflect the social preferences of the common man. Consumer’s choice is limited only to the commodities that the planners decide to produce and offer.

The problem of how to produce is also decided by the central planning authority. “It establishes the rules for combining factors of production and choosing the scale of output of a plant, for determining the output of an industry, for the allocation of resources, and for the parametric use of prices in accounting.” The central planning authority lays down two rules for the guidance of plant managers.

One, that each manager should combine productive goods and services in such a manner that the average cost of producing a given output is the minimum. Two, that each manager should choose that scale of output which equalises marginal cost to price. Since all resources in the economy are owned and regulated by the government, the raw materials, machines and other inputs are also sold at prices which are equal to their marginal cost of production.

If the price of a commodity happens to be above its average cost, the plant managers will earn profits, and if it is below the average cost of production, they will incur losses. In the former case, the industry would expand and in the latter case it would cut down production, and ultimately a position of equilibrium will be reached by the process of trial and error.

The process of trial and error would, however, proceed on the basis of historically given prices which would necessitate relatively small adjustments in prices from time to time. Thus “all decisions of the managers of production and of the productive resources in public ownership and also all decisions of individuals as consumers and as suppliers of labour are made on the basis of these prices.

As a result of these decisions the quantity demanded and supplied of each commodity is determined. If the quantity demanded of a commodity is not equal to the quantity supplied, the price of that commodity has to be changed. It has to be raised if demand exceeds supply and lowered if the reverse is the case. Thus the central planning board fixes a new set of prices which serves as a basis for new decisions, and which results in a new set of quantities demanded and supplied.”

The problem of for whom to produce is also solved by the state in a socialist economy. The central planning authority takes these decisions at the time of deciding what and how much to produce in accordance with the overall objectives of the plan. In making this decision, social preferences are given weightage. In other words, higher weightage is given to the production of those goods and services which are needed by the majority of the people over luxury items.

They are based on the minimum needs of the people, and are sold at fixed prices through government stores. Since goods are produced in anticipation of demand, an increase in demand brings about shortages and this leads to rationing.

Thus in a socialist society the problem of income distribution is automatically solved because all resources are owned by the state and their rewards are also fixed and paid by the state. Economic surpluses are deliberately created and utilised for capital accumulation and growth.

Capital Accumulation:

Besides, capital accumulation is possible through money. It is money that provides liquidity and mobility required for capital accumulation. In a socialist economy the sources of investment funds are basically the same as under a capitalist economy. The turnover tax, planned profits of public enterprises, amortisation quotas and taxation of agricultural produce in kind or in low procurement prices are all expressed in money and help in capital accumulation.

Foreign Trade:

Moreover, socialist economies do not enter into foreign trade on bilateral trade relations based on commodity transactions. Rather, being members of the World Bank and the IMF, they make payments in monetary terms in their international trade relations.

Circular Flow of Money:

There is also circular flow of money in a socialist economy. The producing units receive funds for investment from the state budget as grants or as loans from the state bank to purchase the necessary inputs and for making payments to workers.

The workers spend their wages on consumer goods. The producing units receive revenues from sales, which, in turn, go into tax payments and profit earnings and as repayments of loans to the state bank. These funds again flow from the state budget and the state bank to the producing units. Thus money helps in the circular flow of goods and services in a socialist economy.

To conclude, the role of money in a socialist economy may be less important as compared to a capitalist economy due to state regulation and control. Nevertheless, it helps in fixing prices, wages, incomes and profits. It guides a socialist economy in determining the allocation of its resources equitably, in capital accumulation and flow of resources within and outside the economy.