The Collapse of Communism

After 1989, the Soviet Union and the other European countries with "planned" economies (that is, the Soviet-Type Economies) experienced a period of troubles of various kinds, and largely abandoned both the planned economy and the aims that define socialism and communism. It seems to be widely believed that this proves that a planned economy cannot succeed. However, a careful look at the evidence suggests that this view is oversimple.

Figure 7 below shows the economic performance of four groups of countries for 1960-1989, the generation just before the collapse of the Soviet-type countries. Each curve shows gross domestic product per person (GDP per capita), adjusted for inflation and international differences in purchasing power, as a proportion of the country's gross domestic product per capita in 1960. Thus, they all begin at one in 1960 and rise as the country's GDP per capita increases relative to the starting point. These data are taken from the Penn World Tables and represent the best estimates of production from the neoclassical economic point of view. The red line shows the average for four countries with Communist governments : the USSR, Czechoslovakia, Romania, and Yugoslavia.[5] These are the only four for which the Penn World Tables have data for the full period. The blue line shows the average for four very successful industrialized capitalist countries: the U.S.A, West Germany, Japan and Britain. We see that, by the standard of economic growth, the Soviet-type countries did better than the capitalist ones. On the whole, the Soviet-type countries increased their GDP per person by 3.3 times, while the capitalist countries increased their performance by 2.74 times. If the cause of the collapse of the Soviet-type countries was their economic performance, we might suppose that the capitalist countries would have collapsed too; but they did not.

The green line shows the performance of the "four tigers:" South Korea, Taiwan, Hong Kong and Singapore. Their performance is clearly a good deal better than the others -- they doubled the growth of the Soviet-type countries (actually growing 2.08 times as much in the period) and much more than doubled the performance of the four large capitalist countries (growing 2.61 times as much in the period). This group of countries, however, was very unusual. Two (Hong Kong and Singapore) were city-states. Had they included the surrounding agricultural regions, they would not have done as well. The other two were the beneficiaries of very large amounts of American economic and political assistance. This is not to detract from their performance. They were among the most successful countries in the world -- thus not representative of either capitalist or Soviet-type countries.

The magenta line at the bottom shows the average growth performance for four less-developed countries: Algeria, Zaire, Brazil, and Indonesia. This group includes one of the worst performers in the world: Zaire. However, 1) even without Zaire, the other three countries do not quite double their per capita income over the period, coming in solidly last, and 2) Brazil and Indonesia are strong performers, for their group, that have been mentioned as emerging industrial countries in the 1990's. Over the period, Algeria did about as well as Indonesia did. Thus, except for Zaire, these countries would hardly be considered economic failures, by the standards of less-developed countries. But the Soviet-type countries easily tripled the performance of the LDC's, with or without Zaire.

Figure 7

This does not really disprove the view that the planned economies were economic failures. A more careful examination of the evidence might show up a different kind of evidence that could support that view. But there is another hypothesis about their collapse that fits this (and other) evidence better: that the collapse of the communist countries was a result of the failure of their political systems, and that it was political failure that caused the economic problems, and not vice versa.

Indeed, why would this be a surprise? Absolute and totalitarian governments have been collapsing throughout the twentieth century. The great lesson of the twentieth century is that, in modern conditions, democracies endure and authoritarian governments eventually fail. However, it does seem that a political collapse can cause even greater problems when the economy is planned than when it is a market economy. This is a major weakness of economic planning.

The key fact is that the Communist countries did fail, and they failed in several different ways:

• The overall statistics conceal the fact that some kinds of production were very unsuccessful. For example, agriculture in the Soviet-type countries clearly failed, and failed because of the collective and state farms and nonmarket systems the government imposed on the farmers. Ironically, it is agriculture that has remained least affected by the so-called market reforms of the 1990's, and agriculture is still dismally unsuccessful in the post-Soviet countries. (The Chinese People's Republic, more wisely, began its market reforms by turning agriculture over to the farmers, and this smart move gave them the boom they have enjoyed in the generation since.) Similarly, the collapse of human services, such as health and child welfare, in the Soviet republics and Romania is notorious.
• They failed as planned economies. As we have seen, the Communist countries never really tried to put an optimal plan into effect. In addition, neoclassical economics tells us that there are some problems that a planned economy could do better with than a market economy. These are problems based on externalities -- which includes environmental problems. But the Soviet-Type economies did even worse on these problems than the market economies did.
• They failed as socialists. Just as the critics of "socialist dictatorship" predicted, the political groups associated with the dictatorship became a new exploiting class and re-introduced capitalism, with "privatization programs" designed to make themselves the new capitalists. But, in the Russian Republic, they found the gangsters had gotten there before them. The struggle between the former Communists and the gangsters for control of the Russian economy has not yet been decided.[6]
• They failed as communists, since their dictatorship did not eliminate competition, but replaced market competition with bureaucratic competition, which is at least as bad. There is no evidence that they were setting the stage for a new generation that had learned not to be greedy and aggressive, and, if anything, it appears that they had done just the contrary -- taught their leaders to be even greedier and more aggressive than capitalists are!

Thus, while it is not so clear that the planned economies failed in terms of neoclassical economics, it is quite clear that they failed according to their own values -- and this seems to be the most important thing.

Summary