Why Communism Failed
Mrs. Greaves is a member of the senior staff of The Foundation for Economic Education. From 1951 to 1969 she was a regular participant in Ludwig von Mises’ graduate seminar in economic theory at New York University.
Editors’ note: This article, written for FEE’s op-ed program, has been carried by newspapers in Alabama, Arkansas, California, Indiana, Missouri, New Jersey, New York, Pennsylvania, and, in Spanish-language translation, in New Mexico, New York, Mexico, and the Dominican Republic.
Three years after the Russian Revolution, an Austrian economist, Ludwig von Mises, argued that Communism would fail and explained why. Communism, or socialism, couldn’t succeed, Mises wrote in 1920, because it had abolished free markets so that officials had no market prices to guide them in planning production. Mises was relatively unknown when he made his controversial forecast, but he acquired some international renown later as the leading spokesman of the Austrian (free market) school of economics. Since his death in 1973, his theories have gained new adherents, some now even in Eastern Europe.
The Soviet Union was launched with high hopes. Planning was to be done by a central committee, insuring plenty for everyone. The state was to wither away. But things didn’t work out that way. The Soviet state soon became one of the most oppressive in the world. Millions of Russians starved in the 1920s and 1930s.
As Mises pointed out, the raw materials, labor, tools, and machines used in socialist production are outside the market. They are owned by government and controlled by government planners. No one can buy or sell them. No market prices can develop for them because they aren’t exchangeable.
Modern production is time-consuming and complicated. Producers must consider alternatives when deciding what to produce. And they must consider various means of production when deciding how to produce. Raw materials, tools, and machines must be devoted to the most urgent projects and not wasted on less urgent ones.
Consider, for instance, the planning of a new railroad. Should it be built at all? If so, where? And how? Is building the railroad more urgent than constructing a bridge, building a dam to produce electricity, developing oil fields, or cultivating more land? No central planner, even with a staff of statisticians, could master the countless possibilities. Machines might be substituted to some extent for labor; wood, aluminum, or new synthetic materials might be substituted for iron. But how will the planners decide?
To make these decisions, planners must know the relative values—the exchange ratios or market prices—of the countless factors of production involved. But when these factors are government-owned, there are no trades, and thus, no market prices. Without market prices, the planners have no clues as to the relative values of iron, aluminum, lumber, the new synthetics, or of railroads, oil fields, farm land, power plants, bridges, or housing. Without market prices for the factors of production, the planners are at a loss as to how to coordinate and channel production to satisfy the most urgent needs of consumers.
More than 70 years have passed since the Russian Revolution and 45 years since the end of World War n. Why then do the Russian people still lack adequate housing and many everyday items? Why does agricultural produce rot in the fields for lack of equipment to harvest and transport it? Why are factories and oil fields so poorly maintained that production declines? Because the raw materials, tools, machines, factories, and farms are not privately owned. Without the bids and offers of private owners, prices reflecting their relative market values cannot develop. And without market prices, it is impossible to coordinate production activities so that the goods and services consumers need will be available. That is why Communism fails.
In a competitive economy, where factors of production are privately owned, these problems are solved daily as owners calculate the monetary values of the various factors and then buy, sell, and trade them as seems desirable, As Mises wrote in 1920, “Every step that takes us away from private ownership of the means of production and from the use of money also takes us away from rational economics.”
Today, even Communists are coming to recognize that Mises was right. The U.S.S.R., a socialist society without private property and monetary calculation, is still “floundering in the ocean of possible and conceivable economic combinations,” as Mises foresaw in 1920, “without the compass of economic calculation.” Will she now take the important step Mises recommended of introducing private ownership of the means of production?
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Comment by Robin on 6 July 2010:
Good post!
Very informative.
Comment by Gary Gardner on 23 September 2010:
I am sorry that communism has failed. It seems a friendlier way to live but only seems to work in small, tribal societies (and sometimes, not then).
Capitalism seems successful but can be wildly unfair: we are not all created equal, and those that are more equal than the rest of us–those born with money, good looks, brains, and predatory instincts–certainly have an advantage and often use that advantage with a vengeance.
Still, many of us are quite content near the bottom of the economic ladder. So long as we have some income and health insurance, we can lead, quiet, peaceful lives, pursue our interests without being bothered too much.
If you are a reader as I am and live within walking distance of a public library, you are as close to heaven as you’re going to get in this life.
Comment by James Madison Fan on 23 September 2010:
I don’t think it can be declared a failure if it hasn’t actually been attempted. Just because Stalin, Mao, Castro, etc. called their governments “Communist” doesn’t mean they were. These were dictatorships in Communist clothing at best.
It could be argued that a failure of a Communist government is the tendency of the collective to be subverted by a power hungry individual or group. I’m not sure if there is any way to validate this criticism especially since a similar criticism could be applied to most democracies as well.
From an economic stand point it requires certain behavior on the part of people that I think is contrary to human nature (i.e. selflessness versus selfishness) which is why Capitalism is so effective.
Comment by Benjamin Pearl on 13 October 2010:
I agree that communism could have worked if humans were not so selfish; however, one can’t automatially claim that Capitalism uses selfishness. There are plenty of selfless people in Capitalistic markets. And, even if one can prove that Capitalism does use the selfishness of man, Capitalism is still a good system. America uses this system and happens to be one of the riches nations in the world. And, unlike some countries, the wealth is not all contained in a few. How many Americans starve to death vs. Cubans, Russians (of the USSR), Germans (under Hitler), Chinese? I’m not saying these are bad countries, but, simply, the economic system of America–capitalism–brings forth wealth better than any other known system.
Comment by James Madison Fan on 13 October 2010:
Mr. Pearl,
I’m not making a value judgment. I’m saying greed runs Capitalism. Some would offer this turns a vice into a virtue.
Socialism and Communism assume a “communal greed” where we all work together to make each other equally richer. That’s a nice fantasy but people constantly compare what they do to what the other guy is doing and how long and hard they work relative so a brain surgeon isn’t going to be happy making as much as his nurse and his nurse isn’t going to be happy is she’s making as much as the secretary.
Marx would likely offer that the secretary’s work make their work possible. In fact many secretaries work harder and longer hours than the doctors and nurses they service but their skill set isn’t as difficult to learn. Touch typing and filing skills are easy to learn but Inorganic and Organic Chemistry Anatomy, Neurology, and other topics that are a required part of cracking someone’s skull require fairly robust curricula.
In Capitalism this investment is rewarded with a larger paycheck. In Marxism this investment is rewarded by an increase in the public good. The first is tangible. The other isn’t at least not as obviously.
Moreover in Capitalism sloth is punished with poverty and hunger whereas it is rewarded in Marxism. A worker that make 50% of quota gets the same as the worker that makes 100% and they both get the same as the worker that makes 200%. Where is the incentive to make quota or more than quota if earnings and promotions are based on something other than work ethic?
The only way I can see Marxism working is if we completely abandon the concept of “Self” and make it subordinate to “State” as outlined in Orwell’s ”1984” or Huxley’s “Brave New World.” I find it frightening that the utopian futures outlined in these books actually excite rather than repel some people. I can’t imagine thinking that way anymore than I can imagine flying to the Moon on a teacup.
Comment by John Fraze on 6 November 2010:
Benjamin, you surely must be joking. The wealth is not all contained in a few in America? Are you blind? The middle class is disappearing which means there are more working class and less ruling class. The ruling class have most of the money. Wealth in this country is severely out of balance. Capitalism is selfish friend: Where is the money and how can I make it; This is concern with the self.
Your observation of how many Americans starve to death versus other countries is also absurd. I’ll tell you how many: too many. This isn’t a competition on who has less poverty.
America is one of the richest countries in the world yet there are people out there right now who have not had breakfast today nor will they have dinner. Conversely there are those who had a breakfast that is worth more than my car and their dinner with drinks could pay my mother’s house mortgage.
Comment by Benjamin Pearl on 10 January 2011:
To an extent I agree. The middle class is definately waning. And, yes, capitalism can very much be selfish, but that tends to the people, not the system itself. But, before I continue, I must define selfishness, so we lose some possible confusion. Selfishness is the thought of fulfilling oneself with no regard for others. Yes, capitalism generally allows selfishness to grow but only because the people are free to act that way. Selfishness is by no means exclusive or even primary in capitalism. Socialism, Communism, mixed economies, and whatever other economic system I know not of all have selfishness. Unless you are asserting that somehow selfishness can be completely wiped from anyone human.
Wanting gain is not selfishness. Is it selfish for a husband to want the comfort of his family? Or for one to bless friend with a gift? Or heck just to have a nice home and a usable car? That’s a good number of people right there. And also, people who would like to get a better car or a bigger home. All of these require work in a capitalistic environment. The most efficient and generally profitably way is to find the best job possible and work as hard as possible to earn money. Most people in America do specifically that. Since when was work wrong? Capitalism is not the cause of selfishness, nor the cause of despotism, nor the cause of a large gap between the have’s and the have-not’s.
And, in honesty, the United States has become more socialistic over the last 100 years. FDR’s New Deal sparked a lot of social programs. Now we have Medicade, Medicare, and Social Security, along with the new Health Care plan from Obama (at least for now). We grow more socialistic and you claim that capitalism is the cause of the recent vanishing of the middle class. I’m not saying that socialism is the cause, but how can capitalism cause anything when it is slowly disappearing?
Too many people starve to death. You are absolutely right. Even one death from starvation is far too much. However, you infer that there is a system that destroys poverty completely. Maybe that was intended, but, to be fair, nothing can end complete poverty, unless somehow everyone becomes saints and lose all selfishness. Man needs to become perfect before poverty can end completely.
One final thing. You say that wealth is severely out of proportion in this country. I can see that; however, America was set up and existed for hundreds of years so that anyone who was willing to work could get their wealth. Wealth was not a fact. In that, I mean, getting rich quick could happen, but just as much as losing all riches. No guarantee exists for the rich to stay rich or the poor to stay poor. Or at least, no guarantee existed. Many things have caused the cementing of classes, but capitalism was the very thing to kill that cementing in the first place.
Comment by Benjamin Pearl on 10 January 2011:
*Maybe that was -not- intended, but, to be fair…*
Sorry for the mistake.
Comment by Jerry on 12 September 2011:
The Systems are made to serve human. It is not human to serve the systems.
In other words, it will never be human’s fault to be selfish. It is the system’s fault if it can not keep up with our selfishness and survivability.
That’s why we work with experience, not fantasy.
Comment by vlad on 17 October 2011:
Excelent!!!
Now do one on why capitalism has failed
Comment by Borgus on 18 October 2011:
@vlad I support that motion.
Comment by Joe B on 16 January 2012:
The type of selfishness that caused the current financial crisis is only a symptom of the problem which is no regulation of the markets. Now, there were regulating bodies in place, but they too were heavily invested in the markets. Complete conflict of interest.
This latest crash in the financial sector was a prominent example of the failure of self-regulation. Would it be practical to let criminals regulate jails? What wall street did to the financial system is undoubtedly criminal. Brokers sold investments that they knew would fail. How many people can honestly say they wouldn’t take out a six figure insurance policy on property they knew would burn to the ground?
Yes, capitalism has proven to be a very successful financial model, but as greed, deception and selfishness cannot be trusted, a neutral party must be in place to protect the rest of us from those innate human traits. If those controls are not put into place, our kids will have to read about our current standard of living in history books.
Comment by mike on 21 January 2012:
I don’t think socialism can thrive while a capitalist system runs along side her. Socialism is like a union on strike and the capitalist system is like the scab walking across the union strike line to take their jobs.
So long as the scab will cross the strike lines and be willing to give more and take less from the MAN for a short term $ fix – then the scab will enjoy temporary riches at the expense of justice and his fellow man.
Why would a company that produces equipment stay in a nation where the profits will be MUCH less? Why not move over to a scab nation and pay what they want and take what they want – which is MUCH, MUCH more? The socialism model described above failed for this reason so I must say that the failure was inflicted by the scab and not the system. You can’t call the strike a failure if every unemployed person in town takes the job for less. All you can call that is betrayal.
I see now why the socialists hate us – but why do we hate them?
Comment by mudtoe on 5 February 2012:
A poster earlier had it right, communism can never work because of man himself. Communism works for insects like ants, bees, and termites because the individuals are willing to work selflessly for the good of the whole (It’s also interesting to note that in all of the social insect world where communism works, only the queen has the right to reproduce. All the selfless workers have given up their personal genetic heritage and therefore can realize no evolutionary benefit in being selfish).
Man however, is inherently selfish, and therefore communism, which concentrates the economic power of an entire society into the person at the top, due to the centralized management and control of all of the resources in the society, invariably results in a situation where the only goal of the person at the top is to remain at the top.
In a capitalistic society the power is split between a number of people, and between government and the private sector. The government sector controls the use of force, and the private sector controls the means of production. Each sector requires something from the other in order to continue to exist. The private sector needs protection and stability from government, and the government sector needs the goods and wealth produced by the private sector. The people in government, who control the use of force, can be influenced and put out of office by those with wealth in the private sector who can use their wealth to influence elections; so their power is not unlimited. The wealthy in the private sector are held in check by the rest of the voters who could vote into office people who could use government force (e.g. taxes and regulations) to curtail their wealth and power. It is far, far, more difficult for one individual under such a system to obtain enough power in order to become a dictator.
Additionally, because in a capitalistic system there is a right of private property, the individuals are incented to work hard because they get to keep most of what they earn. This results in far greater economic output and efficiency than in a system where the worker is producing for the state and not for themselves (There was a saying in the old Soviet Union among the workers that summed up the economic reality nicely: “We pretend to work, and the State pretends to pay us.”).
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