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Following the definition of socialism by Oxford dictionary. Socialism

a set of political and economic theories based on the belief that everyone has an equal right to a share of a country’s wealth and that the government should own and control the main industries.

I want to explore the assertion often made by proponents of socialism, that socialism did indeed not work only because it was constrained by capitalism.

I know for example that the US imposed sanctions on Cuba which were devastating to its economy. Similar sanctions were made by the US against the Soviet Union lasting for 50 years.

On the other hand the border between east and west (iron curtain) was built and maintained by the Soviet Union. Furthermore the Soviet Union spanned huge areas and trading with other socialist countries (such as China) was possible.

Is constraint by capitalist countries the main reason why socialism did not work or is the planned economy the main reason for the demise of socialist countries?

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TL;DR:

The premise of the question is somewhat flawed. Embargos & or sanctions are not capitalist policies. Next embargos definitely hurt prosperity of socialist countries, but it is definitely not the only reason why the economic system is not successful in delivering high material standards for its people.

Full Answer:

I want to explore the assertion often made by proponents of socialism, that socialism did indeed not work only because it was constrained by capitalism

  1. I think the premise of this question is somewhat flawed. Capitalism is poorly defined in economics but Pocket Oxford English Dictionary (11ed edited by M. Waite) defines capitalism as followed:

An economic and political system in which a country's trade and industry are controlled by private owners for profit, rather than by the state.

under the dictionary definition of capitalism, trade embargo, such as the embargo of Cuba is literally anti-capitalist policy. Embargos are implemented by government, they are government intervention not result of operation of markets. They are also not done for profit but as geopolitical interventions.

So the premise that it was the capitalism constraining socialism is flawed, if US would be antagonistic power operating socialist economy embargoing Cuba, then the embargo would still isolate Cuba in exactly same way.

  1. However, let us set the flawed premise aside, since we can easily modify your question a question whether socialism was constrained by the non-socialist governments and it would still be reasonable question to ask.

Any country, socialist or not, will be hurt by trade restrictions. Free trade is generally beneficial because it allows countries to specialize in what they can do best, have larger variety of goods and services, take advantage of economies of scales, it has dynamic effect on technology development and so on (see discussion of this in Krugman et al International Economics Theory and Policy pp 35-36,64-77, 250-253). Even in cases where open trade might not be the first best policy, rent seeking, lack of timely information, informational asymmetries and principal agent problems make free trade often the best possible practical policy for country to pursue (see Krugman 1987).

Consequently, being excluded from participation in free trade will definitely significantly hurt country's economy (although it is worth noting many socialist countries deliberately pursued autarky (i.e. no trade) so it is not clear if let's say Cuba would become free trading nation in absence of embargo). For example, USSR explicitly tried to achieve autarky and maximum level of self-sufficiency (Armstrong 1948). In 1985 the exports+ imports share of GDP was estimated to be only 4% for USSR (Keefe et al 1991) which is basically nothing.

Next in your question you specifically ask if these embargos and sanctions are the only or main reason for demise of socialist economies.

That is highly unlikely for numerous reasons.

  • before fall of the USSR in 1980 more than 1/3 of the world (by population) was socialist or socialist aligned, and another 1/3 was unaligned. USSR was also not having sanction put on itself by every democratic country, most of it was USA and UK (see this data by Peterson Institute). Moreover, USSR had its own sanctions against western democratic countries which have mixed but predominantly capitalist economies and they did more or less fine.

    Also, just on a face of it the argument that socialism failed because USA and UK refused to trade with socialist countries seems to be flawed. If every socialist economy needs a capitalist trading partner to sustain itself then socialism is not generally viable economic system. There has to be something else added to the argument to make trade with capitalist nations in that particular time period necessary and not general precondition for success of socialist states that must be present at all times.

    As pointed out by Giskard, in his excellent comments, one could argue here that the problem was relative factor abundance that west had too much capital and socialist countries too much labor. However, this could not be major factor in their demise. While there are certainly gains from trade to be made trade between capital abundant and labor abundant countries, most trade flows cannot be explained simply by different factor abundance (Krugman et al. International Economics pp 128-134). Patterns of trade and gains from trade crucially depend on many other factors such as comparative advantage, network effects etc., so this could not be the primary reason why they would need to trade with USA or UK (although for sure it would help at least a bit). In addition, there were some minor socialist nations that had relatively large capital stocks (see O'Rourke and Williamson (2017) in The Spread of Modern Industry to the Periphery since 1871 ch4). While no substitute for larger nations like USA or UK, it still makes the factor abundance argument weaker.

    Trade is two way street capital abundant countries benefit from trading with labor abundant countries (see Krugmant et al, International Economics Ch 5). So by putting the sanctions on trade with USSR, USA and UK harmed themselves as well. This being said one could still say, they might not suffered equally. It is hard to estimate counterfactual gains from trade between USSR and USA for each party, but a priori there is no reason to even think that USSR suffered more from USA not willing to trade with it. It might well be other way around.

  • Core economic characteristic of socialist economies such as state ownership of all factors of production itself is economically inefficient. In economics, it is accepted that countries with good 'inclusive' institutions, such as strong property rights, are more productive and able to develop faster (or even develop at all) than countries with bad 'extractive' institutions, such as forced labor (see Acemoglu 2008, Acemoglu & Robinson 2000a, 2000b, 2001, 2006, 2008; Olson 1984, Bates 1981, 1983, 1989 and sources cited therein)

    Strong property rights, free access to labor markets, free enterprise are all examples of very important inclusive institutions that help economies to prosper and grow. Some of these institutions are not compatible with socialist economies (e.g. free enterprise, strong property rights).

  • Historically most socialist countries implement price controls instead of letting prices be determined by market. This in itself is not core feature of socialism (like autraky which is also not in definition of socialism), but for some reason its popular policy omnipresent in all socialist economies.

    Both historically and in the present price controls are generally speaking (there might be few rare exceptions) unmitigated disaster (see Guenette 2020 for more recent overview, or Schuettinger and Butler 2011 for some historical perspective). Non-market prices lead to chronic shortages or waste for goods and services.

For example, China itself started experiencing strong robust growth and economic progress only once it eschewed, direct government ownership of most of the factors of production, price controls, opened itself to foreign investment etc (see Wang and Coase, 2012).

Thus while various sanctions and embargos from democratic countries definitively did not help socialist countries, they are hardly the major factor disrupting socialist economies, generally speaking. The effect is of course heterogenous Cuba likely suffered from sanctions more than USSR, but the socialist economic system as implemented in USSR was effectively imposing economic self-isolation anyway. It also had wider institutional and policy problems that hardly can be ascribed to the sanctions (e.g. I doubt one could show there is any relationship between USA sanctions and USSR having price controls).

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  • $\begingroup$ 1.Does China with it's immense growth have "strong property rights"? $\endgroup$
    – Giskard
    Dec 20, 2021 at 21:38
  • $\begingroup$ 2. Seems like the socialist aligned third of the world had much less accumulated capital than the other third to start with. Surely this matters? $\endgroup$
    – Giskard
    Dec 20, 2021 at 21:40
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    $\begingroup$ In the past I occasionally cited INET publications in my answers as well, never saw anyone complaining about that. Mises Institute is libertarian version of left wing INET, sure often they publish sub-par heterodox scholarship like all these non-academic think thanks with ideological bent but even blind man occasionally hits the target. The book does not have much if any heterodox economics in it and its rather mainstream and it is mostly historical account of price controls $\endgroup$
    – 1muflon1
    Dec 21, 2021 at 8:57
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    $\begingroup$ @Giskard I am not trying to argue in bad faith, but that seems to be implication of the argument that Western countries not wanting to trade with socialist countries was part of their demise $\endgroup$
    – 1muflon1
    Dec 21, 2021 at 16:35
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    $\begingroup$ @Giskard I am going to edit it per your suggestion, but just to clarify factor abundance is not primary factor that even determines patterns of trade. Sure there are gains from trade from trading with a party that has different factor abundance, but already countries exhibit Leontief paradox where they ofthen simply dont for various reasons like networks new trade theory stuff comparative advantage etc. So i dont think this is something that qualitatively changes the answer, but more nuance cant hurt, and again thanks for all the remarks $\endgroup$
    – 1muflon1
    Dec 21, 2021 at 16:38

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