23 Things They Don't Tell You About Capitalism

In the 1970s, many Western diplomats called the Soviet Union ‘Upper Volta with rockets’. What an insult – that is, to Upper Volta (renamed Burkina Faso in 1984), which was being branded the quintessential poor country, when it wasn’t even near the bottom of the world poverty league. The nickname, however, succinctly summarized what was wrong with the Soviet economy.

Here was a country that could send men into space but had people queuing up for basic foodstuffs such as bread and sugar. The country had no problem churning out intercontinental ballistic missiles and nuclear submarines, but could not manufacture a decent TV. It is reported that in the 1980s the second-biggest cause of fires in Moscow was – believe it or not – exploding TVs. The top Russian scientists were as inventive as their counterparts in capitalist countries, but the rest of the country did not seem able to live up to the same standard. What was going on?

In pursuit of the communist vision of a classless society based on collective ownership of the ‘means of production’ (e.g., machines, factory buildings, roads), the Soviet Union and its communist allies aimed for full employment and a high degree of equality. Since no one was allowed to own any means of production, virtually all enterprises were run by professional managers (with minor exceptions such as small restaurants and hairdressers), preventing the emergence of visionary entrepreneurs, like Henry Ford or Bill Gates. Given the political commitment to high equality, there was a clear cap on how much a business manager, however successful, could get. This meant that there was only a limited incentive for business managers to turn the advanced technologies that the system was clearly capable of producing into products that consumers actually wanted. The policy of full employment at all costs meant that managers could not use the ultimate threat – that of sacking – to discipline workers. This contributed to sloppy work and absenteeism; when he was trying to reform the Soviet economy, Gorbachev frequently spoke of the problem of labour discipline.

Of course, all this did not mean that no one in communist countries was motivated to work hard or to run a good business. Even in capitalist economies, we don’t do things just for the money (see Thing 5), but communist countries relied, with some success, much more on the less selfish sides of human nature. Especially in the early days of communism, there was a lot of idealism about building a new society. In the Soviet Union, there was also a huge surge of patriotism during and shortly after the Second World War. In all communist countries there were many dedicated managers and workers who did things well out of professionalism and self-respect. Moreover, by the 1960s, the ideal egalitarianism of early communism had given way to realism and performance-related pay had become the norm, mitigating (although by no means eliminating) the incentive problem.

Despite this, the system still failed to function well because of the inefficiency of the communist central planning system, which was supposed to be a more efficient alternative to the market system.

The communist justification of central planning was based on some quite sound logic. Karl Marx and his followers argued that the fundamental problem with capitalism was the contradiction between the social nature of the production process and the private nature of ownership of the means of production. With economic development – or the development of productive forces, in Marxist jargon – the division of labour between firms develops further and as a result the firms become increasingly more dependent on each other – or the social nature of the production process is intensified. However, despite the growing interdependence among firms, the Marxists argued, ownership of the firms firmly remains in separate private hands, making it impossible to coordinate the actions of those interdependent firms. Of course, price changes ensure that there is some ex postcoordination of firm decisions, but its extent is limited and the imbalance between demand and supply, created by such (in non-Marxist terms) ‘coordination failures’, accumulates into periodic economic crises. During an economic crisis, the argument went, a lot of valuable resources are wasted. Many unsold products are thrown away, machines that used to produce now-unwanted things are scrapped, and workers who are capable and willing to work are laid off due to the lack of demand. With the development of capitalism, the Marxists predicted, this systemic contradiction would become larger and consequently economic crises would become more and more violent, finally bringing the whole system down.