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A number of thinkers, economists and historians have raised some issues with socialist theory. These individuals include Milton Friedman, Ayn Rand, Ludwig von Mises, Friedrich Hayek, and Joshua Muravchik, to name a few. Most of their objections and critiques seem directed more at a centrally planned economy (not a part of all proposed socialisms), some at socialism and Marxism in general, but because these distinctions are relatively difficult to tease out of their writings, it is probably useful to take them up in a single context.
These objections and critiques usually fall into the following categories:
According to the critics of socialism, under socialism incentives either play a minimal role or are ignored totally. A centrally planned economy without market prices or profits, where property is owned by the state, is a system without an effective incentive mechanism to direct economic activity. Socialism, say the critics, is based on the theory that incentives don't matter.
There are two ways of taking this critique. On the one hand, profit and loss, including the increase or decrease of property values, gave incentive effects on the productive population as a whole, and the critique suggests that the loss of those effects would be disastrous. On the other hand, the critique has sometimes been posed in a way that takes account specifically of the incentives of central planners. The latter was essentially the point made by Slavenka Drakulic in How We Survived Communism & Even Laughed (BooksEnthsiast.com), where she argued that a major contributor to the fall of state communism was the failure to produce the basic consumer goods that its people desired. She argues that, because of the makeup of the leadership of these regimes, the concerns of women got particularly short shrift. She illustrates this, in particular, by the system's failure to produce washing machines.
In reponse, most socialists will explain that the incentives in a socialist planned economy come from the democratic nature of the system. Economic planners have an interest in doing a good job and delivering what the people need because that ensures the people will keep voting for them in elections. If the planners are doing a bad job and the economy is stagnating, the people will vote them out of office and elect a new government with a new economic plan. If they are doing a good job, then part of that good job will involve putting or keeping the right incentive effects in place for productive people.
The kind of system that Slavenka Drakulic and others lived under was not a democratic one, so the planners had no incentive to cater to the needs of the people. Some socialists do not even consider such an undemocratic system to be socialist at all. Of course, democracy itself is open to criticism, as is the related notion of sovereignty -- those are different, although related, inquiries.
Those socialists who advocate democracy make a careful distinction between human rights (which they see as vital to socialism and which they would preserve, even against majoritarian pressures) and property rights (which they see as illegitimate privileges, subject to majoritarian revision). Many would contend, for example, that freedom of contract is not a form of liberty but a form of privilege, and that equality requires some way to prevent or restrict the accumulation of wealth in private hands (note, however, that different socialists often hold different views on how economic equality is to be achieved: some wish to correct inequality after it develops, by using redistributive measures, while others wish to prevent inequality from developing in the first place, by emphasizing communal property).
As far as the issue of majority rule is concerned, socialists will often agree to put certain restraints on it in order to protect freedom of expression or other similar personal rights, but not in order to protect the economic "privileges" (or the "rights" -- the correct word depends on one's view of the merits) of the members of affluent minorities. Going back to the original incentive issue, it should be noted that an interesting form of socialism called Participatory Economics ( Parecon) addresses the matter of incentive through other means. Parecon envisions an iterative process to match what consumers want with what producers are ready to offer, while keeping personal consumption requests anonymous. [1]
According to the critics of socialism, the price system in a market economy guides economic activity so flawlessly that most people don't appreciate its importance or see its effect. Adam Smith dubbed this effect the "unseen hand" of the market. Market prices transmit information about relative scarcity and then efficiently coordinate economic activity. The economic content of prices provides incentives that promote economic efficiency.
Some forms of socialism propose to abolish markets entirely. All, or nearly all, advocate some form of governmental or other "social" interference with market prices. Free-market economists argue that a controlled or fixed price always transmits misleading information about relative scarcity and that inappropriate behavior results from a controlled price, because false information has been transmitted by an artificial price.
Socialists opposed to the market generally argue that markets don't work nearly as well as thought. They point out that some people struggle to survive in capitalism while others have mansions. To them, this is hardly a characteristic of a system that distributes effectively.
Obviously, a command economy tries to replace the invisible hand with a highly visible (and, according to socialists, more efficient) one. The claim is that a more rational result can be achieved by the efforts of economic coordinators rather than by market forces. While some socialists oppose a centrally planned economy, all advocate the overt inclusion of non-economic factors in determining economic decisions.
Socialists are sharply divided on the claim that market pricing produces allocative efficiency. There are market socialists who believe it is both possible and imperative that socialistic systems take this point into account. David Schweickart , a philosophy professor in the US, has said that socialists must endorse the market because otherwise "everything in the economy is subject to political debate -- every price, every product, every technology" and he says only two possible outcomes can result from this, "either anarchy or, more likely, the subtle or not so subtle shutting down of democratic input."
On the other hand, a Hungarian economist, Jonas Kornai , once a market socialist himself, modified his views subsequent to the fall of the Soviet system and its eastern European variants. Kornai has written that "the attempt to realize market socialism...produces an incoherent system, in which there are elements that repel each other: the dominance of public ownership and the operation of the market are not compatible."
A capitalist opponent of socialism would argue that both Schweickart and Kornai are right -- that markets are both a necessity and an impossibility for a socialism that would be humane, sustainable, and allocatively efficient.
On the other hand, socialists who do reject the market mechanism of pricing make the following points:
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