Why does Communism Fail? – Incentives

The most common and simple explanation for why communism failed is that people are greedy. This is a gross simplification but does contain some truth. Communism failed to provide incentives for workers and citizens to work hard and be productive. While there are many benefits from equality, if pushed to an extreme it robs people of an incentive to make an effort. There was little if any reward for hard work or innovation and a lack of punishment for poor or inefficient work. The lack of incentives was a major reason for the poor performance of Eastern Europe economies. Why bother working hard if the reward was the same as doing the bare minimal?

The lack of incentives was system wide. Employees had little incentive to work hard as they would be paid the same regardless. While egalitarianism has many merits, under Communism it was taken to an extreme. There was too little difference in pay between professions to encourage workers to improve their skills and work harder. As there was no unemployment, there was no threat of firing, so people were guaranteed a job no matter how badly they worked (if at all). With neither a credible threat nor promise of reward to motivate staff, productivity in Communist countries stagnated.

This problem affected management too. Under Communism managers were not incentivised to be economically efficient, but to fulfil the plan. This meant there was a huge emphasis on quantity even if the quality was very poor. Managers often resorted to lying to meet unrealistic quotas. They suffered from perverse incentives that placed fulfilling political goals ahead of efficiency. Firms in general had little incentive to be efficient or control costs. They could easily access credit and further state funding to cover their costs. Financial losses meant little to managers as there was no chance of the firm going bankrupt. No matter what the difficulties, the state would pay to bail the business out. The state guarantee of a job has meant everyone must be employed even if they add little to the factory.

One of the greatest failings of communism was its inability to innovate. Eastern Europe failed to develop new technologies or adopt more efficient processes, instead remaining with obsolete methods. This was especially apparent in the 1980s when the West prospered and made advances in IT while the Communist Bloc stagnated with the same technology it had been using for decades. This isn’t to say there were no innovations under Communism, just that there were very few of them and they were mainly concentrated in the field of military and space. Of all the main inventions and technological advances of the late 20th century, almost none of them were made in communist countries and almost all were made in the USA.

This was mainly due to the lack of incentives to innovate. This is because capitalist firms can profit from new inventions or suffer losses for being technologically backward. A communist firm gains no reward for innovation and suffers no loss for backwardness or even stagnation. Capitalism is more flexible and allows new businesses to enter with new ideas, whereas communism is rigid and slow to adopt to change. Due to the repressive atmosphere of Communism, creativity was discouraged and treated with suspicion. Ideas had to conform to the party line; dissent was neither wise nor rewarding. The heavy levels of bureaucracy stifled attempts at innovation and the rigidity of the central plan made it exceptionally difficult for new innovations to be put into practice.

Communism greatest weakness was its failure to adapt. Whatever the merits of Communism’s Five Year Plan during the 1930s, the world changed and Communism failed to keep up. It couldn’t create new and more efficient methods of production and as a result it stagnated. It never moved on past the heavy steel mills even after these ceased to be competitive. By the 1980s the economic system was bankrupt of fresh ideas, with preference still being given to the stale old methods. This lack of innovation (especially in the IT sector) was crippling and one of the fatal flaws of Communism. This coupled with an inability to incentivise workers to work hard and efficiently, meant Communism did not succeed as an economic system.

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