Communism is bad. Discuss.

How Much Does the Market Organization of Economic Life Matter?

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How much does the use of markets as a decentralized social planning mechanism for economic life matter? How much richer are we because we live in a market economy rather than in a command-and-control bureaucratic economy?

We are fortunate–if that is the word–to be able to answer this question because the twentieth century provided us with a natural experiment in the form of High Stalinist central planning. Karl Marx, you see, completely missed the utility of markets as devices for providing decision makers with proper incentives and for achieving allocative efficiency. (Why he missed this is, I think, a result of his crazy metaphysics of value, but I won’t go there today.) He saw markets only as surplus extraction devices–ways to quickly and fully separate the powerless from the value that they had created and that ought to have been theirs.

So when the Communists took over, they followed Marx and said: “we don’t want no stinking markets in our economies.” This naturally raised the question of how they were then to coordinate economic activity. And they hit on the clever plan of attempting to reproduce the Rathenau-Ludendorff Imperial German war economy of World War I. And they did so.

In 1989, the Iron Curtain came down, and we could see what a difference it made as we could examine levels of material well-being on both sides of the Curtain. This is as close to a perfect natural experiment as anyone could wish: the Iron Curtain’s location was determined by where Stalin’s and Mao’s and Giap’s armies marched–which is as exogenous to other determinants of economic well-being as anyone could wish.

Here are the results:

Material Well-Being in 1991: Matched Countries on Both Sides of the Iron Curtain

The Iron Curtain

Eschewing markets robs you of between 80% and 90% of your potential economic productivity.

Now you can argue that the difference in human well-being is less than this gap in material wealth. Cuba, after all, has a high life expectancy and a low level of inequality.

Or you can argue that the difference in human well-being is much, much greater than this gap in material wealth:

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Put me down on the much, much greater side of the argument.

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3 thoughts on “Communism is bad. Discuss.

    1. Indeed, there are different systems which may work well.

      But actually existing communism really was awful.

      As Brad has emphasised above, I don’t think it was the ownership system that ruined actually existing system, more the lack of markets.

  1. Maybe I’m odd, but I never saw Marx as interested in ‘Marxist’ ends, rather as a proponent of oppositional (dialectic) means in order to progress political debate and improve social conditions for the economic groups he sympathised with. I guess the scale of his personal commitment meant the ideology took over.

    Regarding economic organisation therefore he can be quickly dismissed as of limited worth.

    I agree with Derek that the common pool corresponds more closely with an understanding of a communistic outlook, but pretty soon you arrive at the choice between stagnation or collective decision-making – requiring maximimum participation, and which implies coercion.

    Consequently I don’t agree it is realistic for any permanent or universal system.

    Mixed models allow for far greater flexibility and don’t squeeze out dissent, so are far more resilient and progressive.

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