Socialist democracy is a political system that aligns with principles of both socialism and democracy. It includes ideologies such as council communism, social democracy, democratic socialism, and soviet democracy, as well as Marxist democracy like the dictatorship of the proletariat. It was embodied in the Soviet system (1922–1991). It can also denote a system of political party organization like democratic centralism, or a form of democracy espoused by Marxist–Leninist political parties or groups that support one-party states. The Socialist Federal Republic of Yugoslavia (1945–1992) styled itself a socialist democracy, as did the People's Republic of Bulgaria (1946–1990) and the Socialist Republic of Romania (1947–1989).

On the other hand, Trotskyist groups have interpreted socialist democracy to be synonymous with multi-party socialist representation, autonomous union organizations, worker's control of production, internal party democracy and the mass participation of the working masses. Several parties or groups that tend to have a connection to the reunified Fourth International use this label.

In the modern world, parties include Socialist Democracy in Australia, Socialist Democracy in Brazil, Socialist Democracy in Ireland, the Socialist Democracy Group in England, Parti de la Democratie Socialiste in Canada, and the Socialist Democracy Party in Turkey. The Chinese Communist Party (CCP) claims to maintain principles of socialist democracy. CCP Chairman Mao Zedong advocated the people's democratic dictatorship, which emphasizes the importance of dictatorship of the proletariat in the democratic process. In the reform and opening-up period, Deng Xiaoping said that democracy is the essential element of socialism, as there will be no socialism and modernization without democracy. Under CCP General Secretary Xi Jinping, the CCP continues labeling itself a socialist democracy, under which the National People's Congress selects state leaders.

One of the major scholars who have argued that socialism and democracy are compatible is the Austrian-born American economist Joseph Schumpeter, who was hostile to socialism. In his book Capitalism, Socialism and Democracy (1942), Schumpeter emphasised that "political democracy was thoroughly compatible with socialism in its fullest sense", although it has been noted that he did not believe that democracy was a good political system and advocated republican values.

In a 1963 address to the All India Congress Committee, Indian Prime Minister Jawaharlal Nehru stated: "Political democracy has no meaning if it does not embrace economic democracy. And economic democracy is nothing but socialism." Political historian Theodore Draper wrote: "I know of no political group which has resisted totalitarianism in all its guises more steadfastly than democratic socialists." Historian and economist Robert Heilbroner argued that "[t]here is, of course, no conflict between such a socialism and freedom as we have described it; indeed, this conception of socialism is the very epitome of these freedoms", referring to open association of individuals in political and social life; the democratization and humanization of work; and the cultivation of personal talents and creativity.

Bayard Rustin, long-time member of the Socialist Party of America and National Chairman of the Social Democrats, USA, wrote: "For me, socialism has meaning only if it is democratic. Of the many claimants to socialism only one has a valid title—that socialism which views democracy as valuable per se, which stands for democracy unequivocally, and which continually modifies socialist ideas and programs in the light of democratic experience. This is the socialism of the labor, social-democratic, and socialist parties of Western Europe."

Economist and political theorist Kenneth Arrow argued: "We cannot be sure that the principles of democracy and socialism are compatible until we can observe a viable society following both principles. But there is no convincing evidence or reasoning which would argue that a democratic-socialist movement is inherently self-contradictory. Nor need we fear that gradual moves in the direction of increasing government intervention will lead to an irreversible move to 'serfdom.'" Journalist William Pfaff wrote: "It might be argued that socialism ineluctably breeds state bureaucracy, which then imposes its own kinds of restrictions upon individual liberties. This is what the Scandinavians complain about. But Italy's champion bureaucracy owes nothing to socialism. American bureaucracy grows as luxuriantly and behaves as officiously as any other."

Marxist theorist Leon Trotsky had proposed the election of a new Soviet presidium with other socialist parties on the basis of proportional representation in 1917. In his work, The Revolution Betrayed: What Is the Soviet Union and Where Is It Going? (1936), Trotsky argued that the excessive authoritarianism under Stalin had undermined the implementation of the First five-year plan. He noted that several engineers and economists who had created the plan were themselves later put on trial as "conscious wreckers who had acted on the instructions of a foreign power".