How would you explain systemic flaws of communism?

Question

I recently encountered a discussion where a portion of participants presented anti-capitalist and pro-communist views. As someone who grew up in a communist country, I tried to explain the systemic flaws of communism but I failed. Maybe because the personal experience made some basic assumptions seem so obvious to me that I did not include them in my argumentation - I don't know.

My thesis: Countries labeled "communist" (USSR and Eastern Bloc) did not fail because they were 'doing communism wrong' or for some other unrelated reasons. They failed because the ideology itself has fundamental flaws that inevitably make the system unsustainable. I focused on the flaws related to human motivation.

Some things I considered self-evident: people care about themselves, their families and friends. They work to improve the lives of this 'inner circle'. Some people might care about strangers too, but usually not at the expense of the inner circle and not when they dislike those strangers and consider them undeserving/freeloaders.

When the results of your work are not funneled to your inner circle but put into a 'common bucket' and split equally, it decreases your motivation to work, especially when you see that people who contribute the bare minimum get to take from the common bucket just as much as you. That creates the incentive to work less because your reward from the common bucket will not get smaller if instead of working hard you do the bare minimum to avoid punishment and save the energy for your family or use it in a black market.

When work is disincentivized, the total amount of work in the system decreases and the result is that the system underperforms in comparison to systems where people can follow their self-interest. It also creates an incentive for the system to oppress people, because when self-interest as a motivation to work is removed (or severely reduced), people have to be forced to work and tightly controlled to produce output necessary to avoid economic collapse.

I was encountering counterarguments such as "but I was happy to take a pay cut to work for people I like", "I would be happy to be taxed more so people don't starve" and "we were doing the project together and it was quite popular". I don't see how these are relevant to the point I was trying to get across but obviously, I did not make myself understood.

It was not a first discussion like that, so if I fail to get my point across to multiple people/groups, it is probably my fault. I would like to see what that fault is.

What flaws do you see in my argumentation? How would you explain it?

I would appreciate input from anyone, but especially someone with actual knowledge from the field of economics, which I do not have. Thank you.

EDIT: Valuable answers so far, thank you. However, I want to clarify my motivation - I encounter surprisingly many youngsters who label themselves as communists. That scares me. I want to be able to explain to them how it "worked" in a country that tried to implement this ideology in practice, but I would not be able to use things like "comparative analysis based on statistics".

Answer 1

What flaws do you see in my argumentation?

There are several flaws in your thesis.

First, I know USSR and eastern block are commonly labeled 'communist countries', but they were not communist technically speaking so you cannot really use them as an example of failure of communism. USSR and eastern block were by definition socialist country (it was even in the name Union of Socialist Republics, Czechoslovak Socialist Republic etc.). These countries had an official stated goal to become communist in future, but none of them did. Hence if you want to discuss flaws of USSR and eastern block you should focus on socialism, which is the system they had.

This is not just nitpicking terms. A country is a socialist country (at least economically) when majority of means of production is communally owned, either by state or through coops (Nove 2017). Communism was supposed to be the final stage of revolution after socialism, when state would 'die out' and society would be completely stateless, moneyless and classless. You can criticize both systems but there are clearly huge differences between them so it is important to be clear what you are talking about. For example, in communism (as defined by let's say Marx) there is no state to redistribute resources anymore so your critique would not apply.

Second, you are right that most people derive utility primarily from their own or their close relatives and friends consumption, so when their income, which enables consumption of goods or leisure, is not tied to their own performance but collective performance, they will not have the incentives to provide optimal level of work effort. However, you seem to focus on this point too much, as if it would be the main or full explanation for economic failures of socialism.

This point alone is not really sufficient, because you can, and many socialist country did, replace market incentives with incentives based on threats of violence, and that can motivate people to work too. You can even argue that threat to be sent to a gulag is similar motivator to efficiency wages under capitalism (e.g. see Miller & Smith 2015). You can criticize this on moral grounds but it is certainly a way how to provide strong incentives to work. You could even argue that threat of having you and your family sent to gulag is greater incentive to work than simply getting resources proportional to your effort as in market system. So this alone simply cannot explain failure of socialism.

The critique you got was also flawed because they do not pertain to either communism or socialism. Rawlsian Max-Min tax design that taxes rich to redistribute to poor is neither communist, nor socialist. Under socialism primary tool of redistribution was forcing everyone who was able-bodied to work and state simply set wages and/or imposed restrictions on how much output person can get. Under communism there isn't even state to set wages or to tax people so using that as a defence for communism is absurd.

How would you explain it?

This is not my personal explanation, but the general explanation in literature. The two major systemic flaws of socialism are as follows;

1. Economic Calculation Problem

Socialism, with a small exception of market socialism (which would be organized around private coops rather than state ownership), necessarily has to rely on central planning due to state ownership means of production. In turn centrally planed economies lack price mechanism that is necessary for economic calculation and that provides people with incentives to be economical.

Prices in market economy provide both information about relative scarcity of goods, services or factors of production, as well as incentives to act on that information. For example, if you have an economic problem like should I expand pin production in factory A or B you can solve it by looking at prices (e.g. in which location price of pin is highest, where the price of capital and labor is lowest etc). This means that the production is expanded when the pins are dearest and where the capital and labor is less scarce, and factory owner has incentives to get it right by earning more profit if they act on these prices. However, centrally planned system does not have such mechanism and thus simple economic problems such as should I expand production line in pin factory A or pin factory B becomes unmanageable. Even if market incentives can be replaced by threat of violence, it becomes extremely difficult if not impossible to judge relative scarcity of pins, labor and capital when there are no genuine market prices. You can't simply poll people as stated preferences generally do not correspond to true revealed preference. Capital and effective labor are extremely difficult to measure so you can't easily know their relative scarcity just by counting machines (since different machines contain different amounts of capital and different people different amounts of 'effective labor').

If you wan't to learn more about this issue you can read Hayek's essays (1935) and (1945), the latter on market mechanism was even what earned him Nobel Prize in economics, so this point is widely accepted in profession.

2. Common Ownership & Other Bad Institutions

Core economic characteristic of socialist economies such as common 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).

There are various reasons for this. For example, even in absence of the problem of economic calculation (e.g. under market socialism), common ownership of factory would not yield optimal levels investment into the factory, because workers are considered to be more risk averse than entrepreneurs (which is why they choose the security of wage as opposed to uncertainty of profit i.e. due to self selection). This is only one example, of problem of common ownership one could provide more, but this answer is already too long you can read the sources I gave you in previous paragraphs for more detailed discussion.

Free labor markets are important because there is fundamental informational asymmetry between you and state. You know best your own qualities and strengths and weaknesses and preferences. Moreover, people do not generally have incentive to reveal their true nature to state, especially not under centrally planned economy (e.g. if you are more productive but wages in an industry are fixed you would not reveal your productive nature to the state). Hence, it is nearly impossible for state that centrally plans economy to optimally utilize labor. Such informational asymmetries exist even in market economies between works and companies but in market system these can be solved through price mechanism (i.e. different wages linked to performance), or in some industries company using sole proprietors for some tasks (since the proprietor gets profit proportional to effort not fixed wage there is no reason to hide his type).

The above are just few examples. This is too broad topic to explore fully on Q&A site.

Answer 2

What flaws do you see in my argumentation? How would you explain it?

There are no flaws in your argumentation in regard to that debate.

Your explanation mostly summarizes the concept of utility in a thorough, clear way. Incorporating terminology from Economics not only would contribute nothing to the substance and intelligibility of your position, but it also would be futile because the counterarguments reflect an interlocutors' state of mind that precludes a rational debate. Addressing the shortcomings of those counterarguments is [just a bit] likelier to disentangle the controversy.

A counterargument of the sort "I was happy to take a pay cut to work for people I like" (emphasis added) inadvertently reinforces your point about an individual's priorities and motivation for working: the well-being of those who I choose to favor. The opportunities for exercising personal preferences are more prevalent under capitalism than under socialism/communism.

The actual counterargument in the linked discussion reads "I'd happily vote for tax increases for myself if it meant people in my society didn't go hungry" (emphasis added). There are at least three issues with that statement:

1. Tax increases most likely would apply to many more people than just that voter. His preference to curtail everyones' purchase power (and hence their freedom) is at odds with his ostensible freedom to work for whom he prefers (in his case, "for the people [rather] than for a corporation").

2. His premise "if it meant people in my society didn't go hungry" reiterates his bias for some group of people. In this case he didn't even define what that group is: By "society" does he mean people who posses attributes similar to his? or people from his village? province? country? Given the ongoing, worldwide waves of massive migration, has he considered how porous demographics renders "my society" a mutable --if not meaningless-- concept? At what point would he concede the utopic nature of his premise?

3. The aforementioned premise is simplistic. It ignores that economic agents already are heavily taxed under pretexts which are less pressing than that of averting hunger. Instead of worsening the tax burden, why not repurpose taxes that were enacted for needs that are shallower than averting hunger?

One of the points I like about the other answer is the uselessness of "simply poll[ing] people[,] as stated preferences generally do not correspond to true revealed preference". This fact debunks people's recurrent, illusory committals to all-encompassing appearance of altruism. Debates of that sort are another form of polling.

Another pattern among proponents of communism/socialism is their appeal to emotions in an attempt to elude the inconsistencies of their ideology. One of Vladimir Putin's most renown phrases is that those who do not regret the collapse of the Soviet Union have no heart, and those that do regret it have no brain (other sources quote "those who want to restore it have no brain"; I wish I could locate the original phrase in Russian).

Answer 3

The easiest way to understand why socialist and communist economies trend toward failure is explained by F.A. Hayek in his article The Use of Knowledge in Society. To sum it up: there are limits on any single human's ability to know enough to correctly set market prices economy-wide so that resources are efficiently allocated to their most desired uses; the process of free price adjustment in the market creates an accurate, efficient, and extremely low-cost signal to broadly convey such resource-availability and product-desirability information that no single person can know.

Because socialist and communist governments tend to suppress such price signaling through their economic policies, their economies inherently become less efficient in their processes of production and allocation. To an extent, socialist and communist economies try to stave off the inefficiencies by mirroring price signals produced in foreign free market economies, but the longer they persist in policies squelching domestic price signals, the farther behind their economies will eventually lag.

Also, Hayek's thesis, combined with other theses from his mentor Ludwig von Mises, lead to what is known the Socialist Calculation Debate. Over the past 90 years, Hayek and Mises have been shown to have won this debate. If you want to read about it much more detail, I would refer you to the book The Clash of Economic Ideas by Lawrence H. White.

Answer 4

All economic problems have two fundamental variables: price and quantity. These variables can possibly be declined in space and time.

Depending on the type of control that economic agents exercise over these two variablees, distinct economic problems arise.

Let's look at the types of control in detail. · Agents have no control: price and quantity are not fixed, but are both free to change. · The agents have partial control: the quantity presents itself in the problem as a parameter, that is, the quantity is fixed and it is the price that constitutes the only free variable. Conversely, the price presents itself in the problem as a parameter: the price is fixed and then the quantity remains the only variable in play. · Agents have total control: both price and quantities are set on command. Agents plan the quantities to be produced and establish the prices of goods/services. Economic problems are classified on the basis of which quantities between price and quantity are assumed as unknown variables, while the economic equilibrium is defined as the equality between the quantities demanded and those supplied.

The Capitalist Economy is based on the free market where prices and quantities, both free and unknown, constitute the variables. General equilibrium in the sense of Walras, for example, requires mathematically determining the price and quantity to be produced of both resources and consumer goods. Leaving resource prices undetermined (in the sense of not being fixed). It is the free market, characterized by the mechanism of free competition, which "establishes" the price of resources: the quantity of consumer goods is established independently of individual companies (based on their availability of capital). The price of consumer goods is therefore determined both accounting (balancing costs and revenues) and through continuous adjustments (tatonnement) on the market. Adjustments are triggered by firms competing on price. In this context appears the adage of Adam Smith's invisible hand which would act as a self-regulating mechanism bringing the system towards economic equilibrium i.e. equalizing total demand to total supply through tatonnement.

In the Planned Economy, agents consider both prices and quantities as fixed. The central authority plans the quantities to be produced and sets the relative prices of the resources. The price of each good ( scarce resource) is made to correspond to its shadow price (purchase cost), while the total supply of goods equals the total demand for the goods requested by society.

In the semi-planned Economy: the price of goods is indeed a free parameter (agents are price-takers as they cannot influence the price), however the price of goods does not constitute the unknown of the problem. The agents determine in unison the optimal quantities of consumer goods to be produced according to the logic of maximum profit (rationality of homo economicus): the optimal quantities are those that maximize revenues in correspondence with the value of the selling price assigned as a parameter. In general, it is not certain that the optimal quantity produced and supplied is in equilibrium: part of the total demand for consumer goods may remain unmet. The cost efficiency pursued by agents is effective only if the cost incurred to purchase the resources used to create the consumer goods is not higher than the price of the resources themselves (extra-margin or saving). The aggregate supply of goods will be able to converge from below the aggregate demand for goods (economic growth) as long as the extra margin remains higher than the cost of additional resources and at the same time the extra margin is invested to increase production, i.e. supply. As an alternative to quantity as a variable, one can consider price as a variable and consider quantity as a parameter. If, by hypothesis, the supply (cumulative of the quantities offered) is known for each price level, i.e. the supply profile is assigned and in addition the demand profile is also known (cumulative of the quantity demanded), an Auctioneer determines the optimal auction price of the resource according to the logic of the maximum allocated quantity. The optimal price is the minimum price capable of determining the maximum number of trades between buyers and sellers. In general, it is not certain that the maximum quantity exchanged is equilibrium in the sense that it occurs in correspondence with a value of total demand equal to the value of total supply: simply the cumulations of supply (increasing curve) and demand (decreasing curve ) intersect.

The planned economy occurs when investment and production decisions are established by central planners who draw up integrated economic plans at the state level. The mechanism for allocating resources among economic agents is based neither on bargaining nor on competition, but on planning. The effectiveness of the planned economy depends on the ability of the central authority to collect and process accurate information on future needs, then sharing the data with the various production units. To determine the prices of goods/services and production factors outside the competitive mechanism typical of the free market, planners use accounting prices (shadow prices) as an alternative to market prices. Accounting prices are the indicators suitable for guiding the central authority in the rational allocation of resources and economic planning.