The Rise and Flaws of Communism

February 21, 1884 economists and philosophers Karl Marx and Friedrich Engels publish The Communist Manifesto. A new economic system built on a classless society where the government runs all sectors of the economy and everything is shared among the people.

Communism begins to gain popularity during the global depression where capitalism has thrown many countries into a severe recession. By this time many people are wondering if a government controlled economy could allocate better than the free market. Along with this communism has also started taking hold in Russia and China. And with World War II it spreads into Vietnam, North Korea, Germany, Poland, and many other eastern countries.

The appeal of a government controlled economy is that everyone is equal and without large gaps in wealth and class. However, in practice this is not what happens. When implemented communism removes price signals and erases any incentive for productivity leading to mass poverty and starvation.

Let's make an example, you have just been appointed Grand Czar of baking soda tasked with the most virtuous responsibility of allocating baking soda for various uses throughout Russia. At the time of your appointment Russia is producing 20 million units of baking soda and 10 million are being allocated towards baking apple strudels and the other 10 million towards antacids that alleviate stomach pain. Research has already proven this split to be the most efficient allocation possible. On day two of your new job you wake to discover that half of Russia's baking soda production has been turned into a giant croissant after a nefarious baker dumped 5 million kilos of flour and yeast onto Siberia, Russia's capital of baking soda production. With only 10 million units of baking soda left it is your job to allocate the remaining baking soda to the production of apple strudels and pain relievers. What do you do?

If you answered 5 million to each then you are wrong, a failure and disgrace to your sacred position. Although a 50% split was most efficient before it turns out that antacids, with a little work, can use aluminum hydroxide instead of baking soda whereas apple strudels require baking soda and only baking soda. The most efficient split was 8 million to strudels and 2 million to antacids because antacids could fill their remaining production quotas with aluminum hydroxide. How were you supposed to know this? You weren't. The only people who know this are the producers themselves and the invisible hand. Could you have asked the producers which one had substitutes for baking soda that they could fall back on in case of a giant croissant? Yes, but they each would have told you no. After all aluminum hydroxide is much rarer and harder to work with than baking soda.

However, there is another solution, the free market. In a free market society if a disaster were to wipe out half the baking soda then the price of baking soda would rise (based on elasticity). Strudel bakers would grumble but pay the higher price because they have no alternatives while antacid makers would turn to the now cheaper aluminum hydroxide resulting in the most efficient split without anyone needing to do any work (in terms of allocation). This is how price signals create the most efficient outcome without anybody knowing or even understanding how they work. Even if, hypothetically, you were an omnipotent super being with infinite knowledge on the uses and substitutes of baking soda, sitting at a desk all day allocating sodium bicarbonate presents an opportunity cost because you could be doing something productive, like shoveling coal. Whereas the invisible hand could do that same job for free (even with implicit costs (the uses of an ideological unseen appendage are not all that fungible)).

This example is just one of the many economic flaws of communism. Without prices to signal all the costs, implicit and explicit, to buyers there will be inefficiencies as low surplus consumers buy high cost goods because there was no high price to drive them away. Along with the incentive problem, nobody wants to bake strudels if 90% of them are given away to other people, communism fosters an environment where nobody is productive either because they were not given the resources or their productivity doesn't get them anything.

Sources:
https://www.history.com/topics/russia/communism-timeline

basic logic and economics