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Many historical and proposed forms of socialism would not operate under a profit-and-loss system of accounting. All these forms of socialism give less of a role to competition than does a capitalist economy. According to its supporters, a profit system is a monitoring mechanism which continually evaluates the economic performance of every business enterprise. In theory, at least, under capitalism the firms that are the most efficient and most successful at serving the public interest are rewarded with profits. Firms that operate inefficiently and fail to serve the public interest are penalized with losses.
By rewarding success and penalizing failure, the profit system provides a strong disciplinary mechanism which continually redirects resources away from weak, failing, and inefficient firms toward those firms which are the most efficient and successful at serving the public. A competitive profit system ensures a constant re-optimization of resources and moves the economy toward greater levels of efficiency. Unsuccessful firms cannot escape the strong discipline of the marketplace under a profit/loss system. Competition forces companies to serve the public interest or suffer the consequences.
Under central planning, there is no profit-and-loss system of accounting to accurately measure the success or failure of various programs. Without profits, critics argue, there is no way to discipline firms that fail to serve the public interest and no way to reward firms that do. Therefore, they claim that centrally planned economies do not have an effective incentive structure to coordinate economic activity.
Socialists may respond to these assertions with a variety of counter-arguments. First and foremost, they focus on the role of democracy, rather than competition, as a means of regulating economic activity and increasing efficiency. In other words, if the state runs the economy and the people have democratic control over the state, then the people can reward the state for efficient economic management (by voting for the current leadership in elections) or penalize the state for operating an inefficient economy (by voting against the current leadership in elections). Efficient planning is rewarded, inefficient planning is penalized. Thus, democracy ensures a constant re-optimization of resources and moves the socialist economy toward greater levels of efficiency. A democratic state is forced to serve the public interest or suffer the consequences.
As a corrollary to this argument, socialists claim that inefficient planned economies can only exist for prolonged periods in undemocratic conditions, where the people cannot reward or penalize the state for its performance.
Furthermore, the majority of socialists find the notion that companies serve "the public interest" outright laughable. They argue that the profit/loss motive encourages companies to cut costs and raise profits in ways that do much more harm than good to the public. For example, a company will try to deceive the public in any way it can, and as often as it can. A company will also try to get the maximum work from its employees for the minimum amount of money, keeping wages as low as it can. Finally, since the rich have more money than the poor (and therefore there is more profit to be made in serving the rich rather than the poor), capitalism encourages companies to cater to the interests of the rich and ignore the needs of the poor.
For example, drugs companies have little incentive to produce drugs to cure diseases such as malaria, which primarily affect poor countries that cannot afford to buy them, but those same companies devote huge resources to developing drugs for the relatively trivial complaints of the rich western consumers who can pay. In a nutshell, the profit/loss motive encourages companies to serve the interests of the rich, not the interests of the wider public.
Another argument can be seen in an article published by the Socialist Party (England and Wales), claiming that the profit motive inherently puts capitalism at odds with ecologically sound policy. (http://www.socialismtoday.org/69/green.html).
Another defect of socialism, according to its detractors, is its disregard for the role of private property in creating incentives that foster the sustainable use of resources. This idea is the so-called tragedy of the commons.
The tragedy of the commons, in its narrowest sense, refers to the situation of certain grazing lands communally owned by British villages in the 16th century. These lands were made available for public use (or, more precisely, the use of those with rights in that common land). According to Garrett Hardin and others, because each individual had more of an incentive to maximize his (or her) own benefit from this common land than to be concerned for its sustainability, the land was eventually overgrazed and became worthless. (However, studies by C.J. Dahlman and others have largely refuted the claim that any such tragedy actually occurred. Access to the commons in the 16th century was constrained by a variety of cultural protocols and was far from equal. See Tragedy of the commons for further discussion.)
The line of argument is that when assets are publicly owned, there are no incentives in place to encourage wise stewardship. While private property is said to create incentives for conservation and the responsible use of property, public property is said to encourage irresponsibility and waste. In other words, the argument is that if everyone owns an asset, people act as if no one owns it. And when no one owns it, no one really takes care of it.
There are several socialist counterarguments to this. First they might take a different view of human psychology, a view of motives as depending more on the specifics of nurture and education than on an underlying soulist or genetic nature. In this context they might contend that the "tragedy of the commons" is only the result of the nurturing of children in the present capitalist society, and that the nurturing of children in a future socialist society will lead to a cherishing of public property.
Socialists further point to the free will that they believe is inherent in every human being and to the variety of social structures that have existed in human history, using them to support the claim that no type of behaviour is fixed in stone.
Another socialist counterargument is that some things are almost inevitably commons, notably the quality of the physical environment. While the past and present communist states have an even worse record than capitalist states in this respect, many socialists today would argue that was due more to their non-democratic nature than to their socialist aspects and that, in principle, a democratic system of planning could achieve appropriate shared management of this inevitably shared resource. In actual practice, this is even what many otherwise capitalist societies have chosen to do , imposing government regulations to restrict air and water pollution. (Paul Burkett makes a specifically Marxist case for socialism as being better able to address the issue of managing the environment in an article "Ecology and Marx’s Vision of Communism" in Socialism and Democracy, Vol. 17, No. 2 [6].)
There exists a contrary body of theory on free-market environmentalism, arguing that the most effective direction of reform is continued privatization of the commons [7] On the level of practice, the USA, and some others, have experimented with market solutions in the form of emissions trading. Such trading has certain aspects that are more socialist than capitalist, since it uses an artificially created market in which a government decides the number of emissions credits that will be in circulation and the rules under which they may be traded.
Lastly, there is a body of thought, often linked to cultural anthropology and to modern institutional economics, that recognises that constraints must exist to prevent the private overuse of resources. However, this perspective contends that alternative institutions than private property might well be just as effective or more effective in meeting those goals and better suited to meeting social goals. This was the belief of many early Bolsheviks, particularly Georgi Plekhanov, who evoked this idea to make his case that a socialist state would need regulations. The arguments of Hayek and von Mises target this claim more directly.
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